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1105 matches for "ez":
The EZ's current account surplus is solid as ever, despite falling slightly in February to €35.1B, from an upwardly-revised €39.0B in January.
Production in the EZ construction sector slumped at the end of Q4. Data yesterday showed that output slid by 3.1% month-to-month in December, comfortably reversing the 0.7% increase in November.
Commodity prices have started the year under further downward pressure. This is yet more negative news for LatAm, as most of the countries have failed to diversify, instead relying on oil or copper for a large share of exports and, critically, tax revenue. Venezuela is the biggest loser in the region from the oil hit, and, together with the worsening political and economic crisis, it has pushed the country even closer to the verge of collapse, threatening its debt payments. Venezuela's central bank last week released economic data for the first time since 2014, showing that inflation spiralled to 141% and that the economy shrank 4.5% in the first nine months of last year.
Judging by interactions with readers in the past few weeks, fiscal policy is one of the most important topics for EZ investors as we move into the final stretch of the year.
Data on EZ consumption were soft while we were enjoying our Christmas break. The advance EC consumer confidence index slipped to a three-year low of -8.1 in December, from -7.2 in November, breaking its recent tight range.
Data today will show that the EZ construction sector finished 2017 on a decent note.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
Yesterday's EZ construction data confirmed that capex in the building sector plunged in the second quarter. Construction output fell 0.5% month-to-month in May, pushing the year-over-year rate up trivially to -0.8%, from a revised -1.0% in April. Our forecast for construction investment in Q2 is not pretty, even after including our assumption that production rebounded by 0.5% month-to-month in June.
Venezuela is on the brink o f economic and social collapse. Looting, food scarcity, power rationing, and other problems have become rampant. This week, Venezuela's government allowed citizens to flock across the Colombian border to shop for food and medicine, for the second time this month. Last year, Venezuela's President Maduro shut the border in a bid to crack down on smuggling of subsidized products.
The year so far in EZ equities has been just as odd as in the global market as a whole.
To imagine an unstoppable macroeconomic policy disaster and desperate improvisation, just think of Venezuela.
The risk of political change in Venezuela is coming to a boil, following President Maduro's plans for a new constituent assembly that has the power to rewrite the constitution and scrap the existing National Assembly.
We think this week's main economic surveys in the Eurozone will take a step back following a steady rise since the end of Q3. Today's composite PMI in the Eurozone likely slipped to 54.0 in February, from 54.4 in January, mainly due to a dip in the manufacturing component. Even if we're right about slightly weaker survey data in February, though, it is unlikely to change the story of a stable and solid cyclical expansion in the EZ.
Yesterday's economic data added further evidence that GDP growth in the EZ will slow in Q2.
We still don't have the complete picture of what happened to the EZ construction sector in Q2, but we have enough evidence to suggest that it rolled over.
Venezuela's fundamentals continue to deteriorate, economic chaos is increasing and the social/political situation remains fragile.
Media reports allege that the Chancellor's Budget pared back the fiscal squeeze planned for the next couple of years. The Director of the Office for Budget Responsibility, Robert Chote, even compared the Chancellor to Saint Augustine, who supposedly said "make me pure, but not yet."
The Eurozone labour market is slowly healing following two severe recessions since 2008. Unemployment fell to a two-year low of 10.3% in January, and yesterday's quarterly labour force survey was upbeat. Fourth quarter employment rose 1.2% year-over-year, up from 1.1% in Q3, pushing total EZ employment to a new post-crisis high of 152 million.
Yesterday's data in the EZ provided a little more evidence on what happened in Q1.
Yesterday's GDP reports confirmed that growth was stable at 0.3% quarter-on-quarter in the Eurozone, leaving the year-over-year rate unchanged at 1.5%. Rebounding growth outside Germany, which has been a main driver of EZ GDP growth in this cycle, was the key story.
Judging by the solid advance data in the major economies, yesterday's EZ industrial production report should have hit desks with a bang, but it was a whimper in the end.
Increasingly, we are hearing equity strategists argue that investors should rebalance their portfolios toward EZ equities. On the surface, this looks like sound advice. Commodity prices have exited their depression, factory gate inflation pressures are rising, and global manufacturing output is picking up. These factors tell a bullish story for margins and earnings at large cap industrial and materials equities in the euro area.
Yesterday's second Q3 GDP estimate confirmed that the EZ economy expanded by 0.2% quarter-on- quarter in Q3, the same pace as in Q2, leaving the year-over-year rate unchanged at 1.2%.
Momentum in new EZ car sales improved slightly in the middle of Q3. New registrations in the euro area rose 6.8% year-over-year in August, accelerating marginally from a 5.3% increase in July.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
A strong finish to the fourth quarter spared the EZ auto sector the embarrassment of posting an outright fall in domestic sales through 2019 as a whole.
Yesterday's economic data provided further evidence that GDP growth in the EZ economy slowed in Q2.
Growth in new EZ car registrations slowed last month, but the data continue to tell a story of strong consumer demand for new cars. New registrations in the euro area rose 6.9% y/y in June, down from a 16.9% jump in May, mainly due to slowing growth in France. New registrations in the euro area's second largest economy rose a mere 0.8% year-over-year, after a 22% surge in May.
Momentum in the EZ auto sector rebounded at the end of the second quarter.
Yesterday's November EZ construction data offered little respite to the gloomy outlook for the Q4 GDP headline.
We are still waiting for the promised rebound in EZ car sales.
The outlook for growth in the EZ economy is currently both stable and relatively uncomplicated, at least based on the most widely-watched leading indicators.
Yesterday's ZEW investor sentiment in Germany shows showed no signs that uncertainty over the U.K. referendum is taking its toll on EZ investors. The expectations index surged to 19.2 in June, from 6.4 in May, the biggest month-to-month jump since January last year, when investors were eagerly expecting the ECB's QE announcement.
The slowdown in the EZ economy is well publicised.
We have spent the past few weeks shifting our story on the EZ economy from one focused on slowing growth and downside risks to a more balanced outlook. It seems that markets are starting to agree with us.
Survey data in EZ manufacturing remain soft. Yesterday's final PMI report for August confirmed that the index dipped to 54.6 in August, from 55.1 in July, reaching its lowest point since the end of 2016.
Friday's detailed Q2 growth data in the EZ broadly confirmed the advance numbers.
In one line: Solid EZ retail sales and German new orders; and upward revisions to the PMIs.
In one line: More poor Q2 data; EZ core inflation rebounds, but it is not going anywhere fast.
Yesterday's PMI data confirmed that the EZ manufacturing sector is in rude health. The manufacturing PMI in the euro area rose to a cyclical high of 57.4 in June, from 57.0 in May, slightly above the first estimate. New orders and output growth are robust, pushing work backlogs higher and helping to sustain employment growth.
In one line: Saved by the decimals; the EZ economy all but stalled at the end of 2019.
A plunge in imports saved the EZ economy from a contraction in second quarter GDP. Yesterday's final data showed that real GDP growth rose 0.3% quarter- on-quarter, slowing from a 0.5% jump in Q1. A 0.4 percentage points boost from net exports was the key driving force.
Data while we were away have intensified fears that the global, and by extension EZ, economy is slipping into recession.
Macroeconomic and financial conditions in Venezuela are deteriorating at an accelerating pace.
Friday's early EZ CPI data for December were red hot. Headline HICP inflation in Germany jumped to 1.5%, from 1.3% in November, while the headline rate in France increased by 0.4pp, to 1.6%.
At the start of the year, consensus forecasts expected Eurozone equities to outperform their global peers this year, on the back of a strengthening cyclical recovery and an increase in earnings growth. Both of these conditions have been met, and yesterday's sentiment data suggest that EZ equity investors remain constructive.
Data yesterday showed that EZ consumers' spending was off to a bad start in the third quarter.
Yesterday's EZ consumers' spending data were mixed. Retail sales in the euro area fell by 0.3% month-to-month in May, extending the slide from a revised 0.1% dip in April.
Yesterday's EZ PMI data surprised to the downside. The composite PMI in the euro area dipped to 52.9 in August, from 53.2 in July, below the initial estimate 53.3. The headline was marred by weakness in the German services PMI, which crashed to a 40-month low of 51.7, from 54.4 in July.
The near-term performance for EZ manufacturing will be a tug-of-war between positive technical factors, and a still-poor fundamental outlook.
Today will be an incredibly busy day for EZ investors with no fewer than eight major economic reports. Overall, we think the data will tell a story of a stable business cycle upturn and rising inflation. Markets will focus on advance Q4 GDP data in France and in the euro area as a whole. Our mo dels, and survey data, indicate that the EZ economy strengthened at the end of 2016, and we expect the headline data to beat the consensus.
The PMIs are telling an increasingly upbeat story for the EZ economy in Q4. The composite PMI in the euro area rose to an 11-month high of 54.1 in November, from 53.3 in October. The uptick was driven by strong new business growth across all private sectors, and employment also increased in response to higher work backlogs.
Broadly speaking, yesterday's headline EZ survey data recounted the same story they've told all year; namely that manufacturing is suffering amid resilience in services.
Yesterday's barrage of survey data were a mixed bag. The composite EZ PMI edged higher in May to 51.6, from 51.5 in April, but the details were less upbeat, and also slightly confusing.
2016 has been another terrible year for Venezuela, and we have no hope that the country's economic and political situation will improve in the near-term. Economic mismanagement, authoritarianism, corruption, violent looting and social unrest are the norm.
Today's market attention will be focused on the advance August PMI data in the major EZ economies. We think the composite PMI in the euro area was unchanged at 53.2 in August, consistent with stable GDP growth of 0.3%-to-0.4% quarter-on-quarter in Q3. The signal of "stability" in the Eurozone business cycle has been consistently relayed by the PMI since the beginning of the year.
Venezuela's beleaguered government announced on Tuesday that it had begun the pre-sale of 82.4M coins of a virtual currency, called the "petro", backed by the nation's vast petroleum reserves.
Venezuelan bond markets have been on a rollercoaster ride this year, with yields rising significantly in response to heightened political uncertainty and then declining when the government pays its obligations or when protests ease.
The headline in yesterday's EZ money supply report gave the illusion that monetary conditions are stable, but the details tell a different story. M3 growth accelerated marginally to 5.0% year-over-year in June, from 4.9%, but momentum in narrow money fell further. M1 growth slowed to 8.5% year-over-year, from 9.0% in May due to a fall in overnight deposits and currency in circulation.
Manufacturing in the Eurozone remained a strong driver of GDP growth in the third quarter. The headline EZ manufacturing PMI rose to 58.1 in September, from 57.4 in August, only a tenth below the initial estimate 58.2.
Advance country data indicate that headline EZ inflation fell slightly in June; we think the rate dipped to 1.3% year-over-year, from 1.4% in May.
Yesterday's advance Q1 GDP data in the EZ confirmed that growth slowed at the start of the year.
The presumption in markets is that the French presidential election is the last hurdle to be overcome in the EZ economy. As long as Marine Le Pen is kept out of l'Élysée, animal spirits will be released in the economy and financial markets. We concede that a Le Pen victory would result in chaos, at least in the short run. Bond spreads would widen, equities would crash and the euro would plummet. But we also suspect that such volatility would be short-lived, similar to the convulsions after Brexit.
This year has been a story of two halves for EZ equities. The MSCI EU ex-UK jumped 11% in the first five months of 2017, but has since struggled to push higher.
The EZ economic survey data for April were disappointing in our absence.
Last week's horrible manufacturing data in the major EZ economies had already warned investors that yesterday's industrial production report for the zone as a whole would be one to forget.
Yesterday's final May manufacturing PMIs confirmed that the EZ industrial sector is in fine form. The PMI for the euro area was unchanged at a cyclical high of 57.0 in May, in line with the initial estimate.
The EZ government bond market has been in a holding pattern for most of 2017. The euro area 10- year yield--German and French benchmark--is little changed from a year ago, though it is at the lower end of its range.
A Slowing EZ Economy and Treacherous Markets...Neither Probably Will Stop the ECB From Ending QE Next Month
Yesterday's Sentix investor sentiment survey provided the first glimpse of conditions on the ground in the EZ economy in the wake of the coronavirus scare.
The renewed decline in bond EZ bond yields has raised the question of whether inflation expectations will recover at all in this cycle. We think they will, and we also believe 10-year yields will rise towards 1%-to-1.2% towards the end of the year. But two factors will keep inflation expectations and yields in check in the near term.
Judging by the headline performance metrics, EZ equity investors have little cause for worry.
Yesterday's EZ industrial production data for January confirmed the string of positive advance numbers from most of the individual economies.
Glimmers of Hope in the EZ Macro Data...But the Economy is not out of the Woods Yet
Yesterday's EZ CPI report points to a dovish backdrop for next week's ECB meeting. Advance data show that inflation was unchanged at 0.2% year-overyear in August, lower than the consensus, 0.3%. The headline was held back by a dip in the core rate to 0.8%, from 0.9% in July; this offset a lower deflationary drag from energy prices.
The consensus view that the recovery won't lose more momentum this year seems to assume that the U.K. economy is better placed to deal with the intensification of the fiscal squeeze than earlier this decade. We do not share this optimism.
EZ investors remain depressed. The headline Sentix confidence index fell to 12.0 in September, from 14.7 in August, and the expectations gauge slid by three points to -8.8.
The EZ Economy has rarely been in better from...but external risks and policy uncertainty loom.
The EZ calendar has been extremely busy in the first few weeks of the year, making it virtually impossible to see the forest for the trees.
2015 is set to be another grim year for Venezuela, and we have no hope things will improve further down the road, barring huge changes in policy.
A Fog of Political and External Risks in the EZ...and Recent Economic Data Have Been Soft Too
Today's industrial production data will confirm that EZ manufacturing suffered a slow start to Q4. Advance country data signal a 0.2% month-to-month fall in October, slightly worse than the consensus, 0.0%.
Friday's data deluge suggests that EZ economic growth slowed less than we expected in the second quarter. The advance estimate indicates that real GDP in the euro area rose 0.3% quarter-on-quarter in Q2, down from a 0.6% jump in the first quarter. This was in line with the consensus, but it likely doesn't tell the whole story.
Yesterday's advance EZ CPI report bolstered the ECB doves' case for only marginal adjustments to the language on forward guidance at next week's meeting. Inflation in the euro area fell to 1.4% in May, from 1.9% in April, constrained by almost all the key components.
Yesterday's EZ producer price data showed that deflationary pressures in the manufacturing sector are fading. The headline PPI index fell 0.2% month- to-month in August, pushing the year-over-year up to -2.1%, from a revised -2.6% July.
Has Christmas been Cancelled in the EZ Economy?...Both Survey and Hard Data Point to Another Soft Quarter in Q4
EZ GDP Growth Is Set To Remain Weak In Q4...But We're Still Betting On A Pick-Up Next Year, Eventually
Q2 slowdown in the EZ economy confirmed...Now we wait for the ECB's response next month
The EZ economic data have stabilised...But what about tail-risks?
The EZ economy finally stretches its legs...but it won't sustain Q1 and Q2 momentum for long
The EZ Q4 GDP data narrowly avoided a downward revision in yesterday's second estimate.
EZ GDP growth is slowing, gently, to 2%...with political uncertainty looming, as ever
The EZ economy enters 2018 in fine form...but markets are beginning to look tricky
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
The EZ Economy Is In The Twilight Zone...Near-Term Weakness Eventually Will Give Way To A Modest Upturn
Yesterday's survey data tell a story of resilient manufacturing in the Eurozone. The headline EZ PMI rose to 52.6 in September, from 51.7 in August, lifted by a rise in new orders to a three-month high.
The R-Word is Once Again Being Spoken in the EZ...But it Probably Won't be that Bad, at Least not in H1
A Poor Q4 In The EZ, But Not Uniformly Horrible...All Eyes Are Now On The Q1 Numbers For Signs Of A Rebound
The EZ Economy is in a good Cyclical Shape.. But Can It Shrug off Political Changes in 2017?
Today's employment report in the euro area should extend the run of positive labour market data. We think employment rose 1.4% year-over-year in Q1, accelerating marginally from a 1.2% increase in Q4.
The outlook for private investment in the Eurozone has deteriorated this year, especially in manufacturing.
Households remain the key driver of the cyclical recovery in the Eurozone. We have seen, so far, little sign that investment will be able convincingly to take over the baton if momentum in consumers' spending slows. The average rate of growth of investment since 2013 has been 0.5%, about two-thirds of the pace seen in previous cyclical upturns. Weakness in construction--about 50% of total euro area investment--has been one of the key factors behind of the under performance.
Storm clouds gathered over Eurozone financial markets last week. The sell-off in equities accelerated, pushing the MSCI EU ex-UK to an 11-month low.
In one line: Solid overall; but an investment slowdown looms.
The economic data were mixed while we were away. The final PMI data showed that the composite PMI in the euro area fell to 53.1 in October, from 54.1 in September, somewhat better than the initial estimate, 52.7.
Today's industrial production report in the Eurozone will be poor.
It is by now a familiar story that the Eurozone has become a supplier of liquidity to the global economy in the wake of the sovereign debt crisis.
Last week's detailed GDP data in the Eurozone confirmed that the economy is benefiting from an investment cycle for the first time since before the financial crisis.
Activity in the Eurozone industrial sector cooled at the end of the first quarter. Manufacturing production declined 0.8% month-to-month in March, pushing the year-over-year rate down to 0.2% from a revised 1.0% in February. Over Q1 as a whole, though, the story was positive.
The Eurozone economy will have a bright start to 2017, but we think growth over the year as a whole will slow modestly compared with 2016.....
Yesterday's economic reports confirmed that the Eurozone economy had a strong start to 2017. Real GDP rose 0.5% quarter-on-quarter in Q1, similar to the pace in Q4, and consistent with the first estimate. The year-over-year rate fell marginally to 1.7%, from 1.8% in Q4, mainly due to base effects.
Final German inflation data for May confirm that price pressures are gradually recovering in the Eurozone. Inflation rose to 0.7% in May, up from 0.5% in April, in line with the initial estimate. Headline inflation continues to move higher, a trend which will continue in the second half of the year as base effects push up energy inflation.
The euro area's trade surplus slipped further mid- way through the second quarter; falling to a 15-month low of €16.9B in May, from a downwardly-revised €18.0B in April, and extending its descent from last year's peak of nearly €24.0B.
Data today likely will show that the seasonally adjusted trade surplus in the Eurozone jumped to €23.0B in March, from €20.2B in February. The headline was boosted, though, by sharp month-to-month falls in German and French imports, partly due to the early Easter.
Final October inflation data surprised to the upside yesterday, consistent with our view that inflation will rise faster than the market and ECB expect in coming months. Inflation rose to 0.1% year-over-year in from -0.1% in September, lifted mainly by higher food inflation due to surging prices for fruits and vegetables. This won't last, but base effects will push the year-over-year rate in energy prices sharply higher into the first quarter, and core inflation is climbing too. Core inflation rose to 1.1% in October from 0.9% in September, higher than the consensus forecast, 1.0%.
Last week's comments by Mr. Draghi--see here-- indicate that the ECB is increasingly confident that core inflation will continue to move slowly towards the target of "below, but close to 2%", despite elevated external risks, and marginally tighter monetary policy.
From a macroeconomic perspective, the main shift in the ECB's policy stance last week was the change in forward guidance.
Bond market volatility and political turmoil in Greece have been the key drivers of an abysmal second quarter for Eurozone equities. Recent panic in Chinese markets has further increased the pressure, adding to the wall of worry for investors. A correction in stocks is not alarming, though, following the surge in Q1 from the lows in October. The total return-- year-to-date in euros--for the benchmark MSCI EU ex-UK index remains a respectable 11.4%.
We're sticking to our call that the Eurozone PMIs have bottomed, though we concede that the picture so far is more one of stabilisation than an outright rebound.
Last week's policy announcement by the ECB and Mr. Draghi's plea to EU politicians to deliver a fiscal boost, indicate that we're living in extraordinary economic times.
Yesterday's second batch of Q3 GDP data in the euro area provided further evidence of a strong and stable cyclical upturn in the economy.
Based on key economic indicators, the Eurozone economy is doing splendidly, relative to its performance in recent years. Real GDP has been growing at 1.6%-to-1.7% year-over-year since the first quarter of last year, bank credit has expanded, and the unemployment rate is declining.
In one line: Disappointingly unchanged.
Yesterday's second estimate of GDP confirmed that Eurozone growth slowed significantly in Q3.
A bad year is threatening to become a catastrophic one for Eurozone equity investors.
Financial assets of all stripes are, by most metrics, expensive as we head into year-end, but for some markets, valuations matter less than in others. The market for non-financial corporate bonds in the euro area is a case in point.
Economic data in the Eurozone auto sector remain under the influence of the aftershock from the EU's new emissions regulation--WLTP-- introduced in September.
Manufacturers in the Eurozone stood tall mid-way through Q2, despite still-subdued leading indicators.
The more headline hard data we see in the Eurozone, the more we are getting the impression that 2019 is the year of stabilisation, rather than a precursor to recession.
The Eurozone economy is slowing...will the ECB care?
The Eurozone Economy is doing fine...but recent soft data provide a much needed reality check
Mr. Draghi will end his ECB tenure with a rate cut...but the economy probably doesn't need one
In one line: Hit by jump in imports.
Markets are still cheering the solid Q1 GDP data...but we are worried about a setback in Q2
GDP Growth In The Euro Area Has Stabilised....But The Surveys Still Warn That Worse Is To Come
Accelerating GDP growth and low inflation...It's the perfect combination, but will it last?
A dovish tightening of Monetary Policy...QE will end this year, nut no rate hike in H1 2019
Eurozone GDP growth likely slowed in Q2...teeing up a deposit rate cut in September
In one line: Solid production data in Q1, but setback looms in Q2.
In one line: Weakness in imports lifted the surplus; ZEW is still depressed.
In one line: Old news, but spectacular details all the same.
The Bifurcated Eurozone Economy: Manufacturing Is Terrible, But Services Look Decent
A Christmas present to markets from the ECB...Low core inflation and sizzling GDP growth in 2018
Strong and stable growth in the Eurozone...but now comes the increase in yields and inflation
In one line: Dovish, but slight doubts now linger over the reaction function.
The Eurozone economy is in rare good form...So what should investors worry about?
Poor Q3 GDP Data and Volatile BTPS Ahead...But Markets Already Have Priced-In A Lot Of Pain
Gloom and uncertainty are spreading across the global economy as we head into the final stretch of the year.
Friday's data provided the first bit of evidence that manufacturing in the Eurozone is headed for a slowdown in Q2, partly reversing the strength in Q1.
The ECB will be satisfied, and a bit relieved, with yesterday's economic data in the Eurozone.
In one line: Domestic demand to the rescue, but inventories will be a drag in Q2.
Economic data in the euro area are still slipping and sliding.
Today's Q4 GDP report in the Eurozone likely will show that growth slowed again at the end of last year. We think GDP growth dipped to 0.2% quarter-on-quarter in Q4, down from 0.3% in Q3, and risks to our forecast are firmly tilted to the downside. The initial release does not contain details, but we think a slowdown in consumers' spending and a drag from net exports were the main drivers of the softening.
Friday's manufacturing data in the Eurozone were mixed.
In one line: Solid export headline, but net trade probably fell in Q1.
Money supply data in the euro area disappointed yesterday. Growth in M3 fell to 4.6% year-over-year in April, from 5.0% in March, due to an accelerated fall in the pace of narrow money growth. M1 rose 9.7% year-over-year, down from 10.1% in March. It was hit by lower growth in both overnight deposits and currency in circulation.
Inflation in the euro area edged higher in November, but our prediction of a rebound in the core proved to be wrong. Headline inflation increased to 1.5% in November, from 1.4% in October.
The ECB is doubling down on its inflation target...QE and negative rates are here to stay
Brace For Grim Q3 GDP Data In The Eurozone....But Don't Miss The Upturn In Real M1 Growth
Inflation in the Eurozone rose modestly last month. Yesterday's advance CPI report showed the headline rate rising to 0.6% year-over-year in November, from 0.5% in October, mainly because of a jump in fresh food inflation. Energy prices fell 1.1% year-over-year, slightly more than the 0.9% decline in October, but we expect a sharp increase over the next six months.
Yesterday's advance Q4 GDP data in the Eurozone confirmed that growth slowed significantly in the second half of 2018.
The Eurozone escaped deflation last month, and we doubt it will return in this business cycle. Inflation rose to 0.1% year-over-year in June, up from -0.1% in May; it was lifted chiefly by the gradual recovery in oil and other global commodity prices. Energy prices fell 6.5% in June, up from a 8.4% fall in May, and we think the recovery will accelerate in coming months.
Friday's inflation data in the Eurozone were a mixed bag.
In one line: Stabilisation at best; details remain depressing reading.
Talks between the EU and the U.K. Prime Minister David Cameron are expected to culminate with a deal today, but we doubt this week's summit will be the final word. A detailed re-negotiation of the U.K.'s relationship with the EU is the last thing the large continental economies need at the moment.
On a headline level, the key message from the Eurozone PMIs was little changed on Friday.
Friday's July PMI reports presented investors with a rather confusing story. The composite PMI in the Eurozone fell trivially to 52.9 in July, from 53.1 in June, despite rising PMIs in Germany and France. The final data on 3 August will give the full story, but Markit noted that private sector growth outside the core slowed to its weakest pace since December 2014.
Yesterday's first batch of Q3 survey data in the Eurozone suggest that economic growth eased further, albeit it slightly, at the start of the quarter.
Global monetary policy divergence has returned with a vengeance. In the U.S., despite recent soft CPI data, a resolute Fed has prompted markets to reprice rates across the curve.
The PMIs in the Eurozone are still warning that the economy is in much worse shape than implied by remarkably stable GDP growth so far this year.
The Eurozone PMIs stumbled at the end of Q2. The composite index slipped to a five-month low of 55.7 in June, from 56.8 in May, constrained by a fall in the services index. This offset a marginal rise in the manufacturing index to a new cyclical high. The dip in the headline does not alter the survey's upbeat short- term outlook for the economy.
The slide in global long-term bond yields, and flattening curves, have spooked markets this year, sparking fears among investors of an impending global economic recession.
Short-term interest rates in the Eurozone continue to imply that the ECB will lower rates further this year. Two-year yields have been stuck in a very tight range around -0.5% since March, indicating that investors expect the central bank again to reduce its deposit rate from its current level of -0.4%. This is not our base case, though, and we think that investors focused on deflation and a dovish ECB will be caught out by higher inflation.
We have warned that the ECB' decision to add corporate bonds to QE would lead to unprecedented market distortions. Evidence of this is now abundantly clear. The central bank has bought €82B-worth of corporate bonds in the past 11 months, and now holds more than 6% of the market. Assuming the central bank continues its purchases until the middle of next year, it will end up owning 13%-to-14% of the whole Eurozone corporate bond market.
The news-flow in the Eurozone was almost unequivocally bad over the summer.
Yesterday's data showed that the euro area PMIs were a bit stronger than initially estimated in November.
Eurozone PMI data yesterday presented investors with a confusing message. The composite index fell marginally to 52.9 in May, from 53.0 in April, despite separate data that showed that the composite PMIs rose in both Germany and France. Markit said that weakness outside the core was the key driver, but we have to wait for the final data to see the full story.
All the evidence indicates that growth in Eurozone consumers' spending is slowing. We think data today will show that the advance GfK consumer sentiment index in Germany was unchanged at 9.5 in April, but the headline index does not correlate well with spending. The "business expectations" index is better, and while it likely will increase slightly, our first chart shows that it continues to signal a slowdown in consumers' spending growth.
Eurozone consumer confidence remained at its low for the year at the start of Q3.
Eurozone consumers' spending jumped in Q2, but we are pretty certain that a slowdown in retail sales constrained growth in Q3.
It will take months, and perhaps years, before markets have any clarity on the U.K.'s new relationship with the EU. In the U.K., the main parties remain shell-shocked. Both leading candidates for the Tory leadership, and, hence, the post of Prime Minister, have said that they would wait before triggering Article 50.
Headline Eurozone PMI data have declined steadily since the beginning of the year, but the June numbers stopped the rot.
Yesterday was a watershed moment for investors.
Yesterday's PMI data were an open goal for those with a bearish outlook on the euro area economy.
Friday's PMI data were a mixed bag.
For some economists and political analysts the surprising result of the U.K.'s EU referendum symbolises one of the biggest threats to the structure of the post-war social-liberal market economy. To this school of thought, the vote proved that the discontent of a pressured and disenfranchised working/middle class is rising, threatening to topple economies and political institutions.
Producer price inflation in the euro area almost surely peaked over the summer.
Friday's advance GDP data provided the first solid evidence of a Q1 slowdown in the euro area economy.
Leading economic indicators in the Eurozone continue to send contradictory signals. Most of the headline surveys indicate that a further slowdown, and perhaps even recession, are imminent, while the money supply data suggest that GDP growth is about to re-accelerate.
Money supply dynamics in the Eurozone were broadly stable last month. M3 rose 5.0% year-over-year in May, accelerating slightly from a 4.9% increase in April, in line with the trend since the middle of 2015.
Manufacturers in the Eurozone are still suffering, but yesterday's final PMI data for April offered a few bright spots.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
Survey data point to a very strong headline, 0.6%-to-0.7% quarter-on-quarter, in today's Q1 advance Eurozone GDP report. But the hard data have been less ebullient than the surveys. A GDP regression using retail sales, industrial production and construction points to a more modest 0.4% increase, implying a slowdown from the upwardly-revised 0.5% gain in Q4.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
Friday's inflation and labour market data in the Eurozone were dovish.
In the last few weeks markets have been treated to the news that euro area industrial production crashed towards the end of Q4, warning that GDP growth failed to rebound at the end of 2018 from an already weak Q3.
Yesterday's economic reports in the euro area were mixed.
Yesterday's November inflation reports from Germany and Spain suggest that today's data for the Eurozone as a whole will undershoot the consensus.
Money supply data are sending an increasingly contrarian, and bullish, signal for the euro area economy.
Data yesterday showed that German inflation roared higher at the start of the year, but the devil is in the detail.
Momentum in the euro area's money supply slowed last month. M3 growth dipped to 4.7% year-over-year in February, from a downwardly-revised 4.8% in January. The headline was mainly constrained by the broad money components. The stock of repurchase agreements slumped 24.3% year-over-year and growth in money market fund shares also slowed sharply.
Bond yields in the Eurozone took another leg lower yesterday.
Yesterday's money supply data in the Eurozone were solid across the board.
As we go to press, it appears that politicians in Italy have agreed on a 2019 budget deficit of 2.4% of GDP.
Yesterday's money supply data in the Eurozone were solid across the board. Growth in headline M3 rose to 5.1% year-over-year in August, up from a 4.9% increase in July. A rebound in narrow money growth was the key driver of the gain, with seasonally- and calendar-adjusted M1 rising 8.9% year-over-year, up from July's 8.4%.
Margins for German manufacturing firms remained depressed at the start of the second quarter. The headline PPI rose 0.1% month-to-month in April, pushing the year-over-year rate down marginally to -3.1% from a revised -3.0% in March. Falling energy prices are the key driver of the overall decline in the PPI.
The Eurozone's external surplus rebounded over the summer, reversing its sharp decline at the start of Q3.
We suspect that euro area investors have one question on their mind as we step into 2019.
Yesterday's final PMI data for February confirmed the story from the advance reports.
We struggle to find much wrong with the near-term outlook for Eurozone manufacturing. The headline PMI fell marginally to 59.6 in January, from 60.6 in December, but it continues to signal robust growth at the start of the year.
Industrial sector activity in the euro area was broadly stable at the beginning of the third quarter, despite the headline dip in the July manufacturing PMI. The Eurozone index fell to 52.0 in July, from 52.8 in June, but if it holds at this level it will be unchanged in Q3 compared with the second quarter.
Yesterday's economic data point to a sea of calm in the Eurozone economy. The composite PMI was unchanged at 53.1 in June, a slight upward revision from the initial estimate, 52.8. The index suggests real GDP growth was stable at 1.5%-to-1.6% year-overyear in Q2, though the quarter-on-quarter rate likely slowed markedly, following the jump in Q1.
Yesterday's economic data in the Eurozone were soft.
Yesterday's surprising decline in the Eurozone unemployment rate adds further evidence to the story of a slowly healing economy. The rate of joblessness fell to 10.9% in July from 11.1% in June, the lowest since the beginning of 2012, mainly driven by a 0.5 percentage point fall in Italy, and improvement in Spain, where unemployment fell 0.2 pp to 22.2%.
A few ECB governors has attempted to lean against dovish expectations in the past week.
Yesterday's final PMI data in the Eurozone were better than we expected.
Yesterday's detailed CPI data for August confirmed that inflation in the Eurozone stayed subdued over the summer.
Car sales continue to offer solid support for consumption spending in the Eurozone. Growth of new car registrations in the euro area fell trivially to 10.6% year-over-year in September, from 10.8% in August, consistent with a stable trend. Surging sales in the periphery are the key driver of the impressive performance, with new registrations rising 22.1% and 17.1% in Spain and Italy respectively, and surging 30% in Portugal. Favorable base effects mean that rapid growth rates will continue in Q4, supporting consumers' spending.
Eurozone inflation pressures remained subdued in April. Today's final data likely will show that inflation fell to -0.2% year-over-year in April, from 0.0% in March. The main story in this report will be the reversal in services inflation from the March surge, which was due to the early Easter.
Data on Friday confirmed that headline inflation in the Eurozone rose a bit last month, to 1.5% from 1.4% in January, but also that the core rate dipped by 0.1 percentage points, to 1.0%.
Core inflation--a long lagging indicator in the euro area-- will rise next year, in response to surging consumers' spending. Our first chart shows that services inflation likely will be a key theme in this story. Even allowing for a structural drag on inflation due to high unemployment outside Germany, cyclical risks to services inflation are tilted firmly to the upside.
Our colleagues have been telling some unpleasant stories recently.
Last week's EU summit was an exercise in political pragmatism rather than the bold step forward on reforms that investors had been hoping for.
Today's ZEW investor sentiment report in Germany will kick off a busy week for Eurozone economic survey data, which likely will be tainted by the U.K. referendum result. We think the headline ZEW expectations index fell to about five in July, from 19.2 in June, below the consensus forecast, 9.2. Our forecastis based on the experience from recent "unexpected" shocks to investors' sentiment.
The Spanish economy remains the star performer among the majors in the Eurozone.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
Inflation in the Eurozone eased at the start of Q3.
This year has been sobering for Eurozone equity investors.
The Eurozone's current account surplus almost surely fell further in Q4.
The Eurozone's external surplus rebounded slightly at the start of Q3.
The current account surplus in the Eurozone is well on its way to stabilising above 3% of GDP this year. The seasonally adjusted surplus rose to €29.4B in September from a revised €18.7B in August, lifted by a higher trade surplus, thanks to rebounding German exports. The services balance was unchanged at €4.5B in September, while the primary income balance edged higher to €4.8B from €4.0B. The improving external balance has been driven mostly by a surging trade surplus with the U.S. and the U.K., as our first chart shows.
Yesterday's headline economic data in the euro area were solid across the board, though the details were mixed.
Global current account imbalances are back on the agenda. In the U.S., economic policies threaten to blow out the twin deficit, while external surpluses in the euro area and Asia are rising.
The perfect world for equities is one in which earnings and valuations are rising at the same time, but in the Eurozone it seems as if investors have to make do with one or the other.
Today's economic calendar in the Eurozone is filled to the rafters.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
The Eurozone's external surplus fell further at the end of Q1, and has now fully reversed the jump at the start of the year.
The euro area's trade advantage with the rest of the world slipped at the start of the year.
A year can make a big difference for the equity market. At this point last year, holders of the MSCI EU ex-UK were looking at a meaty gain of 21% year-to-date. The corresponding number this year is a sobering -12%. This is a remarkable shift, given stable GDP growth, close to cyclical highs, and additional easing by the ECB.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
The Eurozone's external accounts were extremely volatile at the end of Q4.
Yesterday's final PMI data in the euro area for November broadly confirmed the initial estimates.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
Markets tend to take an eclectic view on macroeconomic data in the Eurozone.
We continue to see signs of a strengthening upturn in Eurozone construction. Output in construction rose 0.3% month-to-month in April, pushing the year-over-year rate down to 3.2%, from an upwardly revised 3.8% in March.
Inflation in the Eurozone tumbled last month, increasing the pressure on Mr. Draghi to deliver another dovish message when the central bank meets on Thursday.
Final inflation data yesterday confirmed Eurozone inflation pressures are still low. Inflation rose to 0.2% year-over-year in December from 0.1% in November, lifted by easing deflation in energy prices. Base effects likely will lift energy price inflation in January and February, but the year-over-year rate will dip in Q2, if the oil price remains depressed. Food inflation fell in December due to a decline in unprocessed food prices, and we see further downside in Q1. Core inflation was unchanged, with the key surprise that services inflation fell to 1.1% from 1.2% in November. We think this dip will be temporary, however, and our first chart shows that risks to services inflation are tilted to the upside.
The euro area's external surplus dipped at the start of Q4.
As expected, the Chancellor kept his powder dry in the Spring Statement, preferring instead to wait for the Budget in the autumn to deploy the funds technically available to him to support the economy.
The hard data now point to a horrendous Q3 GDP print in Germany, which almost surely will constrain the advance EZ GDP print released on October 30.
Yesterday's advance CPI data for the major EZ economies suggest that today's report for the euro area as a whole will undershoot the consensus slightly.
The German statistical office will supply a confidential estimate to Eurostat for this week's advance euro area Q2 GDP data. Our analysis suggests this number will be grim, and weigh on the aggregate EZ estimate. Our GDP model, which includes data for retail sales, industrial production and net exports, forecasts that real GDP in Germany contracted 0.1% quarter-on-quarter in the second quarter, after a 0.7% jump in Q1.
This remains a tumultuous time for EZ bond investors. The twists and turns of the French presidential election campaign continue to shove markets around. Marine Le Pen's steady rise in thepolls has pushed French yields higher this year.
Yesterday's PMIs kicked off a busy week for Eurozone data on a downbeat note. The composite EZ PMI fell to a five-month low of 55.8 in July, from 56.3 in June; it was constrained by a 0.6 point dip in the manufacturing index to 56.8.
On a headline level, the Spanish economy conformed to its image as the star performer in the EZ in Q4.
Investors are busily fitting narratives to the sudden reversal in global bond markets. We think a correction was long overdue, but a combination of three factors provides a plausible rationale for the rout, from an EZ perspective.
Economic sentiment data, which rebounded in March, continue to suggest slight downside risk to EZ GDP growth in Q1. The composite Eurozone PMI in March rose modestly to 53.7 from 53.0 in February, only partially erasing the weakness in recent months. The PMI dipped slightly over the quarter as a whole, although not enough to change the EZ GDP forecast in a statistically meaningful way.
The EZ national accounts were updated and rebased in 2015--from ESA 1995 to ESA 2010--in the name of timeliness and precision.
The strengthening EZ economy increasingly looks like the tide that lifts all boats. The Greek economy is still a laggard, but recent news hints at a brightening outlook. Last week, S&P affirmed the country's debt rating, but revised the outlook to "positive" from "stable."
Yesterday's sole economic report in the EZ showed that consumer sentiment in Germany improved mid-way through the fourth quarter.
Friday's advance Q4 growth numbers in the EZ were a bit of a dumpster fire.
A bullish EZ money supply report was the key highlight while we were away over the holidays. M3 growth in the euro area accelerated to 4.8% year-over-year in November from 4.4% in October.
Last week's May CPI data in the major EZ economies all but confirmed the story for this week's advance estimate for the euro area as a whole.
We are all for ambitious economic targets, but the ECB's pledge to drive EZ core inflation in the Eurozone up to "below, but close to" 2% is particularly fanciful.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
The slowdown in GDP growth in Q1 reflects more than just Brexit risk. The intensifying fiscal squeeze, the uncompetitiveness of U.K. exports, and the lack of spare labour suggest that the U.K.'s recovery now is stuck in a lower gear.
Yesterday's January EZ money supply data offered support for investors betting on a further dovish shift by the ECB at next month's meeting.
The relatively upbeat message from a plethora of Eurozone data this week remains firmly sidelined by chaos in equity and credit markets. EZ Equities struggled towards the end of last year in the aftermath of the disappointing ECB stimulus package, and now, renewed weakness in oil prices and further Chinese currency devaluation have added pressure, by refocusing attention on already weak areas in the global economy.
Many economists describe the EZ as the sick man of the global economy, thanks to its incomplete monetary union, low productivity growth and a rapidly ageing population.
Last week's evidence of still-strong wage growth in the EZ at the start of the year almost surely has gone unnoticed as markets focus on the prospect of rate cuts, not to mention more QE, by the ECB.
Yesterday's ECB bank lending survey suggests that credit conditions remain favourable for the EZ economy. Credit standards eased slightly for business and mortgage lending and were unchanged for consumer credit.
It is a known axiom among EZ economists that the ECB never pre-commits, but yesterday's speech by Mr. Draghi in Sintra--see here--is as close as it gets.
Brazil's government announced on Monday spending cuts and new tax increases, aiming to generate a 0.7% of GDP primary surplus, and so restore market confidence and avoid further credit rating downgrades. The plan is to reduce expenditure by BRL26B next year--or 0.4% of GDP--mainly through freezing public sector salaries and slashing social projects. These measures, especially the latter, will likely meet strong resistance in Congress. The salary freeze has more of a chance of passing, but reducing or closing some Ministries is a cost-cutting exercise with an extremely high political price.
The second round of EZ GDP data on Friday confirmed the resilience of cyclical upturn. Real GDP in the euro area rose 0.5% quarter-on-quarter in Q1, up from 0.3% in Q4, and the fastest pace since the first quarter of last year. But the headline was slightly lower than the initial estimate, 0.6%, and consistent with our forecast before Friday's data.
The beleaguered EZ car sector finally enjoyed some relief at the end of Q3, though base effects were the major driver of yesterday's strong headline.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
"Disappointing" is probably the word that most EZ equity investors would use to describe their market so far this year.
Headline inflation in the EZ remained elevated in September, rising by 0.1 percentage point to 2.1%, while the core rate was unchanged at 0.9% in August; both numbers are in line with the initial estimates.
Inflation data are known to defy economists' forecasts, but it should in principle b e straightforward to predict the cyclical path of EZ core inflation. It is the longest lagging indicator in the economy, and leading indicators currently signal that core inflation pressures are rising.
Mr. Macron will be in Berlin today with the message that France wants a strong Eurozone and a tight relationship with Germany. Friendly overtures between Paris and Berlin are good news for investors; they reduce political uncertainty while increasing the chance that the economic recovery will continue. But it is too early to get excited about closer fiscal coordination, let alone a common EZ fiscal policy and bond issuance.
The EZ's current account surplus was stung at the end of Q3, falling to a three-year low of €16.9B in September, from a revised €23.9B in August.
Yesterday's second EZ Q2 GDP report was slightly more upbeat than the advance estimate.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
President Nicolás Maduro has "won' another six-year term, as expected, even as millions of Venezuelans boycotted the election.
The French economy has suffered from weakness in manufacturing this year, alongside the other major EZ economies.
"Is EZ fiscal stimulus on the way?" is a question that we receive a lot these days.
Today's advance EZ PMIs will be watched more closely than usual.
Today's data dump will deliver the advance PMIs and the French INSEE business sentiment indices for February, all of which will be examined closely for signs of stabilisation in the wake of recent evidence that EZ growth is slowing quicker than markets and the ECB have been expecting.
Swoons in EZ investor sentiment are not always reliable leading indicators for the economic surveys, but it is fair to say that risks for today's advance PMIs are tilted to the downside, following the dreadful Sentix and ZEW headlines earlier this month.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
The most positive thing to say about the EZ manufacturing PMI at the moment is that it has stopped falling.
Political certainty is at a premium in the EZ......But Economic data remain resilient
Markets initially applauded the ECB for its bold actions, but the tune has changed recently. Negative interest rates, in particular, have been vilified for their margin destroying effect in the banking sector. Our first chart shows that the relative performance of financials in the EZ equity market has dwindled steadily in line with the plunge in yields.
Yesterday's final PMI data added to the evidence that the EZ economy was firing on all cylinders at the end of last year. The composite PMI in the euro area rose to an 11-year high of 58.5 in December, from 57.5 in November, in line with the initial estimate.
Friday's final EZ CPI data for July confirm the advance report.
Construction in the EZ stumbled at the start of the year.
In one line: The EZ labour market remains resilient; the trade surplus is still rising.
The external surplus in the EZ economy slipped in July. The seasonally-adjusted current account surplus dropped to €21.0B, from a revised €29.5B in June, hit by an increase in the current transfers deficit, and a falling trade surplus. The recent increase in the transfers deficit partly is due to the migrant deal with Turkey, and we expect it to remain elevated.
Data yesterday suggest that EZ investor sentiment is on track for a modest recovery in Q3.
In one line: Portfolio flows are shooting higher; foreigners suddenly like EZ equities.
In one line: Don't extrapolate low EZ inflation; both the headline and core will rise into year-end.
EZ investors hoping for a quiet session yesterday due to the U.K. bank holiday were left disappointed.
In one line: EZ services are still holding up.
In one line: Early EZ inflation data for December coming in hot.
Recent polls in Argentina suggest that Alberto Fernández, from the opposition platform Frente de Todos, has comfortably beaten Mauricio Macri, to become Argentina's president.
Momentum in EZ money supply slipped marginally in September. Headline M3 growth slowed to 5.0%, from 5.1%, mainly due to a slowdown in narrow money. Overnight deposit growth slowed to 9.4%, from 9.9% in August, offsetting a slight rise in growth of currency in circulation.
Last week's final barrage of data showed that EZ headline inflation rose slightly last month, by 0.1 percentage points to 1.5%, driven mainly by increases in the unprocessed food energy components.
In one line: EZ GDP growth held up by consumers' and government spending.
Yesterday's consumer sentiment data in the two major euro area economies were mixed, but they still support our view that a rebound in EZ consumption growth is underway.
In one line: Solid; the EZ's external surplus is now firmly above 3% of GDP.
Yesterday was a good day for headline EZ economic data. GDP growth accelerated, inflation rose and unemployment fell further. Advance Q4 data showed that real GDP in the Eurozone rose 0.5% quarter-on-quarter in Q4, marginally faster than the upwardly revised 0.4% in Q3. Full-year growth in 2016 slowed slightly to 1.7% from 2.0% in 2015.
In one line: Still miserable in EZ manufacturing, but an impressive jump in the Sentix.
Last week's advance PMI data suggest that economic activity in the Eurozone was stable at the beginning of Q2. The composite EZ PMI fell trivially to 53.0 in April, from 53.1 in March, because a dip in manufacturing offset a small rise in the services index.
The conventional wisdom that the U.K. economy will comfortably weather the coming fiscal squeeze is misplaced. The planned adjustment is large, designed to minimise its political, not economic, impact, and based on overly optimistic assumptions. What's more, the economy is in many respects less well-placed to cope with the tightening than when the previous government applied the fiscal brakes. And when the recovery slows, the Chancellor is less likely to change tack and ease the squeeze this time.
In one line: EZ inflation is picking up; retail sales look misleadingly strong given base effects in Q4.
Today's EZ calendar is a busy one.
The monthly data for industrial production and retail sales, and the advance GDP headline, already paint a grim picture of what happened in the EZ economy at the end of 2018.
Yesterday's data showed that growth in the EZ slowed in the second quarter.
We still don't have the complete picture of what happened to EZ consumers' spending in Q1, but the initial details suggest that growth acceleretated slightly at the start of the year.
November data for most of the major EZ business and consumer surveys arrive this week. We doubt the reports will change our view that EZ GDP growth likely will remain steady at about 1.6% year-over-year in Q4. But appearances matter, and risks are tilted to the downside in some of the main surveys, after jumps in October.
Soft September data in Germany and Italy suggest that today's industrial production report in the Eurozone will be poor. Our first chart shows that data from the major EZ economies point to a 0.8% month-to- month fall in September.
Yesterday's advance EZ PMI data were virtually unchanged from previous months, yet again. The composite PMI rose trivially to 53.3 in August from 53.2 in July; this means that the index has been almost stable since February. The headline was lifted by a small increase in services, which offset a slight decline in manufacturing.
Consensus forecasts expect further gains in this week's key EZ business surveys, but the data will struggle to live up to expectations. The headline EZ PMIs, the IFO in Germany, and French manufacturing sentiment have increased almost uninterruptedly since August, and we think the consensus is getting ahead of itself expecting further gains. Our first chart shows that macroeconomic surprise indices in the euro area have jumped to levels which usually have been followed by mean-reversion.
The two major EZ economic reports released while we were away conformed to the consensus. Advance data suggest that real GDP in the euro area rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2, and the year-over-year rate was similarly unchanged at 1.6%.
The new Argentinian president, Alberto Fernández, will have to make a quick start on the titanic task of cleaning up the economic and social mess left by his predecessor, Mauricio Macri.
The industrial sector in the EZ slowed further at the end of Q3.
In one line: EZ construction is stalling.
Investors face a busy EZ calendar today, but the second estimate of Q3 GDP, and the advance GDP data in Germany, likely will receive most attention. Yesterday's industrial production report in the Eurozone was soft, but it won't force a downward GDP revision, as we had feared.
Yesterday EZ industrial production report confirmed the message from advance country data that manufacturing rebounded towards the end of summer. Output, ex-construction, jumped 1.6% month-to-month in August, and the July data were revised up by 0.4 percentage points.
Data on Friday showed that the EZ current account surplus fell to €25.3B in September, from a revised €29.2B in August. The trade and services surpluses were unchanged, but the income balance slipped after rising in the previous months.
It is often argued that the average weekly earnings--AWE--figures exaggerate the severity of the squeeze on households' incomes.
The Eurozone economy is in fine shape, according to the latest PMI data. The composite EZ PMI fell trivially to 54.3 in January, but remains strong. A marginal dip in the services index offset a small increase in the manufacturing PMI to a cyclical high of 55.1. These data tell a story of a strong private sector that continues to support GDP growth.
Lending conditions in the EZ economy continued to improve in Q1, according to the ECB's bank lending survey. Business and consumer credit supply conditions eased, but mortgage lending became more difficult to come by as standards tightened sharply in Germany, France, and the Netherlands. Demand for new loans also rose, but the increase was due entirely to gains in the mortgage and consumer credit components.
Yesterday's detailed EZ GDP report showed that real output rose 0.3% quarter-on-quarter in Q3, the same pace as in Q2. The year-over-over rate rose marginally to 1.7% from 1.6%, trivially higher than the first estimate, 1.6%. The details showed that consumers' spending and public consumption were the key drivers of growth in Q3, offsetting a slowdown in net trade.
Demand for new cars in the Eurozone has climbed a long way since the last recession, but growth is slowing. Overall, new car registrations in the EZ rose a solid 15.2% in 2016 as a whole. But momen tum slowed in the second half, and sales likely will remain comparatively muted this year. In December, registrations in the euro area rose 2.1% year-over-year in December, down from 5.8% in November. The headline was depressed by plunging growth in some of the smaller countries, offsetting better numbers in the major four economies.
Net exports in the euro area likely rebounded in Q4. The headline EZ trade surplus rose to €22.7B in November from €19.7B in October. Exports jumped 3.3% month-to-month, primarily as a result of strong data in Germany and France, offsetting a 1.8% rise in imports. Over Q4 as a whole, we are confident that net exports gave a slight boost to eurozone GDP growth, adding 0.1 percentage points to quarter-on-quarter growth.
Yesterday's sole economic report showed that the EZ trade surplus rebounded slightly at the start of the year, rising to €17.0B in January, from a revised €16.0B in February, lifted by a 0.8% increase in exports, which offset a 0.3% rise in imports.
In recent Monitors, we have highlighted the upturn in Q4 survey data pointing to a strong end of the year for the EZ economy. This story has not changed, but yesterday's money supply data tell a story of downside risks.
The new fiscal year began on April 6, marking the post-election intensification of the fiscal squeeze for many households. The Office for Budget Responsibility estimates net tax and benefit changes will subtract 1.2 percentage points from year-over-year growth in households' disposable incomes in 2016.
The EZ manufacturing data have shown signs of a rebound in the auto sector recently.
Survey data signal that Eurozone manufacturing retained momentum at the start of Q4. Yesterday's final PMI reports showed that the EZ manufacturing index rose to 58.5 in October from 58.1 in September, trivially below the first estimate.
Yesterday's final EZ CPI data for March confirmed the message from the advance report that inflation pressures eased last month.
Survey data continue to suggest that GDP growth will accelerate in Q1. The final PMI reports on Friday showed that the headline EZ composite index rose to 56.0 in February, from 54.4 in January, in line with the first estimate.
German inflation surged in December, pointing to an upside surprise in today's advance EZ report. The headline inflation rate rose to a three-year high of 1.7% year-over-year in December, from 0.8% in November. This was the biggest increase in the year- over-year rate since 1993.
Yesterday's inflation data in the major euro area economies force us to mark down slightly our prediction for today's headline EZ number.
In one line: A further rebound in investor sentiment, and a robust Q1 for the EZ consumer.
We previewed today's advance EZ Q1 GDP number in our Monitor on April 30--see here--and the data since have not changed our outlook.
Today's Eurozone data schedule is very hectic, but attention likely will focus on advance Q2 GDP data. France, Austria and Spain will report advance data separately ahead of the EZ aggregate estimate, which is released 11.00 CET. This report will include a confidential number from Germany.
In one line: EZ labour costs are accelerating.
The final EZ PMI data for November yesterday confirmed that the composite index in the Eurozone rose to an 11-month high of 53.9, from 53.3 in October. The key driver was an improvement in services, boosted by stronger data in all the major economies. Manufacturing activity also improved, though, and the details showed that new business growth was robust in both sectors.
We think the EZ construction industry stuttered in August, following a strong start to Q3. Advance data from Germany, France and Spain suggest that output fell 1.4% month-to-month, pushing the year-over- year rate down to 1.8%, from a revised 3.1% in July.
Yesterday's data on EZ car sales added to the evidence that consumers' spending is slowing. We now reckon sales will rise by 1% quarter-on-quarter in the third quarter, after gains averaging 2.6% in the first half of the year.
EZ households' demand for new cars was off to a strong start in 2017. Car registrations in the euro area jumped 10.9% year-over-year in January, accelerating from a 2.1% rise in December. We have to discount the headline level of sales by about a fifth to account for dealers' own registrations. Even with this provision, though, the January report was solid. Growth rebounded in France and Germany, and a 27.1% surge in Dutch car registrations also lifted the headline. We think car registrations will rise about 1.5% quarter-onquarter in Q1, rebounding from a weak Q4. But this does not change the story of downside risks to private spending.
EZ consumers' spending slowed at the start of Q3. Retail sales slipped 0.3% month-to-month in July, pushing the year-over-year rate down to 2.6% from an upwardly revised 3.3% in June.
The Eurozone economy is in fine form...but this is likely as good as it gets
The Eurozone Economy Is In Fine Form.. But Don't Believe Everything the ECB is Telling You
Interview with Andres Abadia on cancellation of 100-bolivar notes in Venezuela
The Eurozone optimists are out in numbers...But don't expect economic miracles just yet
Chief U.K. Economist Samuel Tombs on UK Government Borrowing
Data yesterday added further evidence of a slow recovery in Eurozone auto sales.
The idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
German factory orders struggled in the second quarter. New orders were unchanged month-to-month in May, a poor headline following the revised 1.9% plunge in April. The year-over-year rate rose to -0.2%, from a revised -0.4% in April. The month-to-month rate was depressed by a big fall in domestic orders, which offset a rise in export orders.
The PMI survey points to a slight loss of momentum in Eurozone growth towards the end of Q3. The composite index fell to 53.6 in September from 54.3 in August, trivially lower than the initial estimate of 53.9. This is not enough to move the needle on the survey's signal for Q3 GDP growth, though; our first chart shows it pointing to stable growth of 0.4% quarter-on-quarter.
Inflation pressures in the Eurozone edged lower last month.
Yesterday's economic headlines in the Eurozone were pleasant reading.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
Recent polls in the U.K. have reminded markets that the vote is too close to call at this point, but investors in the Eurozone appear unfazed, so far. The headline Sentix index rose to 9.9 in June, from 6.2 in May, lifted by the expectations index, which increased to a six-month high of 10.0 from 5.5 in May.
Friday's CPI data in the euro area confirmed our expectation that inflation jumped last month.
Today's economic data will add to the evidence that construction in the Eurozone slowed in the first quarter.
Headline inflation in the Eurozone eased at the start of the year, but leading indicators suggest that the dip will be short-lived.
The Eurozone economy finished last week with a horrendous set of economic data.
Predicting which way markets would move in response to potential general election outcomes has been relatively straightforward in the past. But the usual rules of thumb will not apply when the election results filter through after polling stations close on Thursday evening.
Bond investors in Italy voted with their feet on Friday with news that the government has agreed a 2019 budget deficit of 2.4%.
The winds of global politics are changing, and the major Eurozone countries could be forced to take heed. Donald Trump's foreign policy position remains highly uncertain. Our Chief Economist, Ian Shepherdson, expects the U.S. to increase defence spending next year; see the U.S. Monitor of October 20.
The final and detailed April CPI data confirmed that inflation pressures in the Eurozone eased last month. Headline inflation slipped to 1.2%, from 1.3% in March.
The presidential election in Argentina is only four months away and the race is heating up.
Inflation in the Eurozone fell significantly last month, and probably will ease further in Q1.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
Yesterday's economic reports in the Eurozone were solid across the board.
We are fairly sanguine that government bond markets in the Eurozone will take the end of QE in their stride.
Demand for German manufacturing goods remained subdued at the end of Q4.
Demand for new cars in the Eurozone bounced back strongly last month. Accelerating growth in the major economies lifted new registrations by 14.6% year-over-year in February, up from a 6.8% increase in January. Surging growth in Italy was a key driver, with new registrations jumping 27.3%, up from an already sizzling 17.4% in January.
Yesterday's economic reports showed that the German economy firmed at the end of Q1, but this doesn't change the story for a poor quarter overall.
The market for new cars in the Eurozone remained red-hot last month. New registrations surged 18.4% year-over-year in May, up from a 9.4% rise in April, and pushing the 12-month average level of registrations to a post-crisis high of 843K units. Accelerating growth in Italy and France was the key driver.
Market-implied expectations of negative rates through 2021, and bund yields plunging below -0.1%, are an accident waiting to happen, but the main story is clear as rain.
Consumers' demand for cars slowed in the Eurozone at the end of the second quarter. New car registrations in the euro area rose 3.0% year-over-year in June, slowing dramatically from a 10.3% rise in May.
Political risks have been making an unwelcome comeback in the Eurozone in the past month. In Germany, last month's parliamentary elections--see here--has left Mrs. Merkel with a tricky coalition- building exercise.
The February activity report in Colombia showed a modest pick-up in manufacturing activity and strength in the retail sales numbers.
Unemployment in the Eurozone fell to a 22-month low of 10.3% in January, from 10.4% in December, helped by a continued fall in Spain but underpinned by low unemployment in Germany.
Disappointing inflation data remain a critical dark spot in the context of otherwise solid evidence of a firming cyclical recovery. Advance data indicate that inflation was unchanged at a mere 0.2% year-over-year in December, with falling food inflation and a dip in services inflation offsetting easing deflation in energy prices. Headline inflation likely will be volatile in coming months. Base effects will push up the year-over-year rate in energy price inflation further in Q1, but we are wary that continued declines in food inflation could offset this effect.
The Eurozone's trade surplus rebounded slightly over the summer, rising to €16.6B in August from €12.6B in July, helped mainly by a 2.0% month-to- month jump in exports.
Yesterday's ECB policy decision was a carbon copy of the announcement in July. The central bank maintained its key refinancing rate at 0.00%, and also kept its deposit and marginal lending facility rates unchanged at -0.4% and 0.25% respectively. The ECB also kept the pace of QE unchanged at €80B per month. Finally, the central bank refrained from formally extending QE.
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Sterling weakened further yesterday as anxiety grew that PM Theresa May will indicate she is seeking a "clean and hard Brexit" in a speech today. This could mean the U.K. leaves the EU's single market and customs union, in order to control immigration, shake off the jurisdiction of the European Court and have a free hand in trade negotiations with other countries.
The ECB's negative interest rate policy--NIRP--has come under the spotlight following the violent selloff in Eurozone bank equities. Mr. Draghi reassured markets and the EU parliament earlier this week that new regulation, stronger capital buffers, and common recognition of non-performing loans have made Eurozone banks stronger.
The Budget on March 16 is set to mark the end of Chancellor George Osborne's lucky streak. Without corrective action, his self-imposed debt rule-- one of the two specified in the 'legally-binding' Charter for Budget Responsibility--looks set to be breached.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
Manufacturing in France remained on the front foot at the start of Q4.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
The ECB made no changes to its policy stance yesterday.
The political situation in Spain remains an odd example of how complete gridlock can be a source of relative stability.
Inflation in Germany rebounded last month, rising to plus 0.1% year-over-year in May, from minus 0.1% in April. We think the economy has escaped the claws of deflation, for now. Household energy prices fell 5.7% year-over-year in May, up from a 6.3% decline in April, and the rate will rise further. Base effects and higher oil prices point to a surge in energy inflation in the next three-to-six months.
The French manufacturing data delivered another upside surprise last week, following the solid numbers in Germany; see here. French industrial production rose slightly in November, by 0.3% month-to-month, extending the gains from an upwardly-revised 0.5% rise in October.
In her inaugural Monitor, our Chief Asia Economist Freya Beamish plots three scenarios for the Chinese economy. The best-case scenario is that China makes a smooth transition to consumer-led growth.
Eurozone industrial production data today will confirm that economic growth likely accelerated in the first quarter. We think output rose 0.7% month-to-month in February, equivalent to a 0.8% increase year-over-year.
Mr. Macron's victory in France answers two questions for markets, at least in the short run. Firstly, France will stay in the Eurozone, and Mr. Macron will not call a referendum on EU membership. Mr. Macron has come to power with a mandate to strengthen economic integration and co-operation between Eurozone economies.
Barring a gigantic shock from the Fed this week--we expect a 25bp hike--Eurozone equities will end the year with a solid return for investors, who have been overweight. Total return of the MSCI EU ex-UK should come in around 10%, which compares to a likely flat return for the MSCI World, reflecting the boost from the ECB's QE driving out performance. Our first chart shows the index has been mainly lifted by consumer sector, healthcare and IT stocks, comfortably making up for weakness in materials and energy. The year has been a story of two halves, however, and global headwinds have intensified since the summer, partly offsetting the surge in the Q1 as markets celebrated the arrival of QE and negative interest rates.
The broad strokes of yesterday's ECB meeting were in line with markets' expectations. The central bank left its main refinancing and deposit rates unchanged, at 0.00% and -0.4% respectively, and maintained the same forward guidance.
We've already raised a red flag for today's second Q4 GDP estimate in the Eurozone, but for good measure, we repeat the argument here.
The German manufacturing sector appears to have settled into an equilibrium of sustained misery.
The upturn in German manufacturing orders waned slightly towards the end of 2017; factory orders fell 0.4% month-to-month in November.
German inflation data are more noise than signal at the moment.
Peru's central bank left its policy interest rate unchanged at 3.75% last week, but signalled that further easing is on the way. According to the press release accompanying the decision, policymakers noted that inflation expectations are within their target range and still falling.
We will be paying special attention to the sentiment surveys for Argentina over the coming weeks.
The fact that Italy's economy is in poor shape will not surprise anyone following the euro area, but the advance Q4 GDP headline was astonishingly poor all the same.
Yesterday's German trade data showed that the external surplus recovered in August, following its poor start to Q3. The seasonally-adjusted trade surplus rose to €22.2B, from €19.4B in July.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
The U.K. general election is the main event in today's European calendar, but the first official ECB meeting and press conference under the leadership of Ms. Lagarde also deserves attention.
Friday's data force us to walk back our recession call for Germany. The seasonally adjusted trade surplus rose in September, to €19.2B from €18.7B in August, lifted by a 1.5% month-to-month jump in exports, and the previous months' numbers were revised up significantly.
Inflation in the Andes remains in check and the near term will be benign, suggesting that central banks will remain on hold over the coming months.
The border security agreement between the U.S. and Mexico has strengthened hopes that the Sino- U.S. trade war will end soon.
The big story in financial markets at the moment is the idea that major global central banks are about to embark on a policy easing cycle.
France is solidifying its position as one of the Eurozone's best-performing economies.
Our suggestion that the ECB could still raise the deposit rate later this year, by 20bp to -0.4%, has met with strong scepticism in recent conversations with readers.
Emmanuel Macron's victory in France has lifted investors' hopes that the good times in the Eurozone economy and equity markets are here to stay. On the face of it, we share markets' optimism. Mr. Macron and his opposite number in Germany--our base case is that Ms. Merkel will remain Chancellor--will form a strong pro-EU axis in the core of the Eurozone.
Oil prices remain sticky, poised to hover close to a four-year high for the rest of the year.
Friday's industrial production headlines in the Eurozone were weak, but the details tell a more nuanced story.
Brazil and Argentina, South America's biggest economies are going through a metamorphosis. Brazil is emerging from its recession and a modest recovery is on the horizon. Exports have rebounded, thanks to the lagged effect of the BRL's sharp sell-off last year, and confidence has improved significantly in recent months. The likelihood that interim President Michel Temer will stay on as head of Brazil's government has also helped to boost sentiment.
The debate about the ECB's policy trajectory is bifurcated at the moment. Markets are increasingly convinced that a rapidly strengthening economy will force the central bank to make a hawkish adjustment in its stance.
It would take nothing short of a catastrophe in coming months for the ECB to alter its plan to end QE via a three-month taper between September and December.
Legislative and presidential elections in Colombia will be held on March 11 and May 27, respectively, with a run-off presidential election on June 17 if no candidate secures more than half the votes.
Today's Eurozone data will provide further details on what happened in Q4. Advance data suggest that industrial production rose a modest 0.1% month- to-month, lifting the year-over-year rate to 4.3% in December, from 3.9% in November.
On a headline level, the ECB conformed to expectations yesterday.
As we head to press, investors are holding their breath over whether today's trade talks between the U.S. and China will be enough for Mr. Trump to step back from his pledge to increase tariffs on $200B of Chinese goods to 25%.
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
Yesterday's factory orders report in German was grim reading. New orders fell 1.8% month-to-month in August, following a downwardly revised 2.2% plunge in July. Weakness in export demand and mean reversion in domestic orders were the key culprits. Domestic orders fell 2.6% month-to-month; nothing to worry about after a near-4% jump in July.
German GDP growth jumped in the first quarter, but monthly economic data suggest the economy all but stalled in Q2. Yesterday's industrial production data are a case in point. Output slid 1.3% month-tomonth in May, pushing the year-over-year rate down to -0.4% from a revised 0.8% gain in April. Adding insult to injury, the month-to-month number for April was revised down by 0.3 percentage points
Yesterday's detailed Q3 GDP data in the Eurozone confirmed that the economy has gone from strength to strength this year.
Yesterday's State of the Union address by EC president Jean-Claude Juncker commanded more attention than usual, but contained little news on the key talking points for investors.
Yesterday's industrial production report in Germany was much better than implied by the poor new orders data--see here--released earlier this week.
Colombia's Q1 GDP report confirms that the economy is improving. Leading indicators and survey data suggest that the recovery will continue over the second half of the year.
Yesterday's final inflation data in France for September were misleadingly soft.
The sovereign debt crisis in the euro area was a macroeconomic horror story
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
The French labour market improved much more than we expected in Q4. The headline unemployment rate plunged to 8.9%, from a downwardly-revised 9.6% in Q3.
Friday's sole economic report showed that wage growth in France remained robust mid-way through the year. The non-seasonally adjusted private wage index, ex-agriculture and public sector workers, published by the Labour Ministry, rose by 0.3% quarter-on-quarter in Q3.
Yesterday's economic reports in the Eurozone were mostly positive.
Yesterday's second estimate of Q4 Eurozone GDP confirmed the upbeat story from the advance report, despite the dip in headline growth.
Eurozone GDP data last Friday suggest the cyclical recovery continued at the end of last year. Real GDP in euro area rose 0.3% quarter-on-quarter in Q4, the same as in Q3, lifted by growth in all the major economies. This was in line with the consensus forecast, but noticeably higher than implied by monthly industrial production and retail sales data.
We remain confident--see here--that today's Q3 GDP report in Germany will be a shocker, but this already is priced-in by markets.
Friday's data added further colour to the September CPI data for the Eurozone.
German inflation pressures are rising. Yesterday's final September CPI report showed that inflation rose to 0.7% year-over-year, from 0.4% in August, chiefly as a result of continued easing of deflation in energy prices.
Andres Abadia authors our Latin American service. Andres is a native of Colombia and has many years' experience covering the global economy, with a particular focus on Latin America. In 2017, he won the Thomson Reuters Starmine Top Forecaster Award for Latam FX. Andres's research covers Brazil, Mexico, Argentina, Chile, Colombia, Peru and Venezuela, focusing on economic, political and financial developments. The countries of Latin America differ substantially in terms of structure, business cycle and politics, and Andres' researchhighlights the impact of these differences on currencies, interest rates and equity markets. He believes that most LatAm economies are heavily influenced by cyclical forces in the U.S. and China, as well as domestic policy shocks and local politics. He keeps a close eye on both external and domestic developments to forecast their effects on LatAm economies, monetary policy, and financial markets. Before starting to work at Pantheon Macroeconomics in 2013, Dr. Abadia was the Head of Research for Arcalia/Bancaja (now Bankia) in Madrid, and formerly Chief Economist for the same institution. Previously, he worked at Ahorro Coporacion Financiera, as an Economist. Andres earned a PhD in Applied Economics, and a Masters Degree in Economics and International Business Administration from Universidad Autónoma de Madrid, and a BSc in Economics from the Universidad Externado de Colombia.
The hard data in Germany took a turn for the worse at the start of Q4. The outlook for consumers' spending was dented by the October plunge in retail sales--see here-- and on Friday, the misery spilled over into manufacturing.
Bond investors in the Eurozone are licking their wounds following a 40 basis point backup in 10-year yields since the end of last month. Nothing goes up in a straight line, but we doubt that inflation data will provide much comfort for bond markets in the short term.
Data today likely will show that manufacturing in the Eurozone was off to a strong start to the second quarter. Advance country data suggest that industrial production jumped 1.1% month-to-month in April, pushing the year-over-year rate up to 1.9% from 0.1% in March. The rise in output was driven mainly by Germany and France, but decent month-to-month gains in Ireland, Portugal and Greece also helped.
Manufacturing in the Eurozone had a slow start to the third quarter. Industrial production rose only 0.1% month-to-month in July, though the year-over-year rate was pushed up to 3.2% from a revised 2.8% in June.
It's probably happening a decade too late, but the EU is now moving in leaps and bounds to restructure the continent's weakest banks. Yesterday, the Monte dei Paschi saga reached an interim conclusion when the Commission agreed to allow the Italian government to take a 70% stake in the ailing lender.
The ECB did its utmost not to say or do anything remotely novel today. The central bank kept its main refinancing and deposit rates unchanged at 0.00% and -0.40%, respectively, and reiterated its plan for QE next year.
LatAm economies are being battered by high inflation triggered by currency sell-offs and El Niño supply shocks, so rates have had to rise despite the challenging global environment. Peru's central bank, the BCRP, was forced to increase interest rates by 25bp to 4.25% last Thursday, the fourth hike in six months, as inflation is far above the central bank's 1-to-3% target range.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
Industrial production in Eurozone had a decent start to the fourth quarter. Output ex-construction rose 0.6% month-to-month in October, pushing the year-over-year rate up to 1.9% from a revised 1.3% in September. Production was lifted by gains in the major economies, and surging output in the Netherlands, Portugal and Lithuania. Across sectors, increases in production of capital and consumer goods were the main drivers, but energy output also helped, due to a cold spell lifting demand and production in France.
Manufacturers in Germany endured another miserable quarter in Q3.
We have set out in recent Monitors the differences in the economic and political environment across Latin America, but the plunge in oil prices adds a new element to the analysis.
The early Q4 hard data in Germany recovered a bit of ground yesterday.
Our hope for a year-end jump in German factory orders was laughably optimistic.
The ECB won't make any changes to its policy settings today.
Data released this week in Brazil, coupled with the message from President Bolsonaro at the World Economic Forum, vowing to meet the country's fiscal targets and reduce distortions, support our benign inflation view and monetary policy forecasts for this year.
Today's Sentix survey of Eurozone investor sentiment likely will remain downbeat. We think the headline index rose only trivially, to 6.0 in April from 5.5 in March, and that the expectations index was unchanged at 2.8. Weakness in equities due to global growth fears and negative earnings revisions likely is the key driver of below-par investor sentiment.
Advance PMI data indicate a slow start to the first quarter for the Eurozone economy. The composite index fell to 53.5 in January from 54.3 in December, due to weakness in both services and manufacturing. The correlation between month-to-month changes in the PMI and MSCI EU ex-UK is a decent 0.4, and we can't rule out the ide a that the horrible equity market performance has dented sentiment. The sudden swoon in markets, however, has also led to fears of an imminent recession. But it would be a major overreaction to extrapolate three weeks' worth of price action in equities to the real economy.
Economic activity in Mexico during the past few months has been stronger than most observers expected. Growth has certainly moderated from the relatively strong pace recorded during the second half of last year, but data for January and February show that it is still quite strong.
EU negotiations tend to go down to the wire; and last week's summit in Salzburg, and Theresa May's statement on Friday, suggest that the Brexit negotiations will do just that.
Theresa May doubled down on her Brexit stance last week, despite European Council President Donald Tusk stating clearly that her proposed framework for economic cooperation "will not work" because it risks undermining the single market.
Last week's debt-relief agreement between Greece and its European creditors goes somewhat further than previous instances when the EU has kicked the can down the road.
Markets cheered soaring business surveys in the Eurozone earlier this week, and recent consumer sentiment data also have been cause for celebration. The advance GfK consumer confidence index in Germany rose to a record high of 10.4 in June, from 10.2 in May.
Today's preliminary estimate of GDP likely will show that the economy continued to struggle in response to high inflation, further fiscal austerity and Brexit uncertainty.
Markets were all over the place yesterday in response to the messages from the ECB.
The November IFO report suggests that the headline indices are on track for a tepid recovery in Q4 as a whole, but the central message is still one of downside risks to growth
Many investors probably glossed over yesterday's barrage of data in the Eurozone, for fear of being caught out by another swoon in Italian bond yields. Don't worry, we are here to help.
Yesterday's barrage of economic data in the Eurozone offered a good snapshot of the grand narrative.
The ECB made no changes to policy yesterday, leaving its key refinancing and deposit rates unchanged, at 0.00% and -0.5%, and confirmed that it will restart QE in November at €20B per month.
The ECB will leave its main refinancing and deposit rates at 0.00% and -0.4% unchanged today, and it will also maintain the pace of QE at €30B per month.
LatAm, particularly Mexico, has dealt with Donald Trump's presidency better than expected thus far. Indeed, the MXN rose 10.7% against the USD in Q1, the stock market has recovered after its initial post-Trump plunge, and risk metrics have eased significantly.
Today's ECB meeting will mainly be a victory lap for Mr. Draghi--it is the president's last meeting before Ms. Lagarde takes over--rather than the scene of any major new policy decisions.
The labour market in Germany tightened further at the end of last year. The headline unemployment rate--unemployment claims as a share of the labour force--fell to 5.5% in December, from 5.6% in November, driven by a 29K plunge in claims.
Friday's PMIs were supposed to provide the first reliable piece of evidence of the coronavirus on euro area businesses, but they didn't. Instead, they left economists dazed, confused and scrambling for a suitable narrative.
Yesterday's IFO survey sent a clear signal that the German economy's engine is stuttering. The business climate index fell to a 14-month low of 105.7 in February from 107.3 in January, and the expectations index slumped to 98.8 from 102.3. The weakness was driven by weaker sentiment in manufacturing, which plunged at its fastest rate since November 2008.
Growth appears to have accelerated in the first quarter in Mexico, as NAFTA-related uncertainty abated, inflation started to fall, and the MXN rebounded.
Eurozone investors will be drawing a sigh of relief after yesterday's PMI data. The alarming plunge in February and March made way for stabilisation, with the composite PMI in the euro area unchanged at 55.2 in April.
Money supply growth in the euro area eased further towards the end of Q4.
The prospect of fiscal stimulus in the euro area-- ostensibly to "help" the ECB reach its inflation target-- remains a hot topic for investors and economists.
The days of +2% inflation in the Eurozone are long gone. Data on Friday showed that the headline rate slipped to 1.4% year-over-year in January, from 1.6% in December, thanks to a 2.9 percentage point plunge in energy inflation to 2.6%.
The ECB conformed to expectations today, at least on a headline level.
The two polls suggesting the U.K. would remain in the EU yesterday proved to be a noose for investors to hang themselves with, as the results pointed to a vote for Brexit. Markets already are in disarray, and the direction is as we expected and feared. EUR/GBP is up 7%, and the DAX 30 in Germany is indicated by futures to plunge a hefty 7%-to-8% at the open. Bund yields will collapse too, and all eyes will be on the spread between Germany and the rest of the periphery.
Implied volatility on the euro is now so low that we're compelled to write about it, mainly because we think the macroeconomic data are hinting where the euro goes next.
Yesterday's data in the Eurozone did little to calm investors' nerves amid rising political uncertainty in Italy and tremors in emerging markets.
The 90-day truce in the trade wars between the U.S. and China, brokered on Saturday at the G20 meeting in Argentina, is a big deal for financial markets in the euro area, at least in the near term.
The headline in yesterday's ECB Q2 bank lending survey seemed almost tailor-made for the central bank to deliver a dovish message to markets this week.
The ECB will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
The tailwinds that have propelled Eurozone equities higher since the middle of last year remain place, in principle. In the economy, political uncertainty in the euro area has turned into an opportunity for further integration and reforms, and cyclical momentum in has picked up. And closer to the ground, fundamentals also have improved.
The Chancellor used the Autumn Statement to shift the composition of the fiscal consolidation slightly away from spending cuts and towards tax hikes. But in overall macroeconomic terms, he changed little. The fiscal stance is still set to be extremely tight in 2016 and 2017, ensuring that the economic recovery will lose more momentum.
Friday's economic reports delivered more sobering news for the euro area economy.
French consumers remained in great spirits midway through the fourth quarter. The headline INSEE consumer confidence index jumped to a 28-month high in November, from 104 in October, extending its v-shaped recovery from last year's plunge on the back of the yellow vest protests.
Survey data in Germany showed few signs of picking up from their depressed level at the start of Q4.
Our ECB-story since Ms. Lagarde took the helm as president has been that the central bank will do as little as possible through 2020, at least in terms of shifting its major policy tools.
U.K. manufacturers are benefiting from rapid growth in the Eurozone, but increasingly they are being held back by weak domestic demand.
Last week's capsized European Council summit added to our suspicions that uncertainty over the EU's top jobs will linger over the summer.
Yesterday's IFO data reversed the good vibes sent by last week's upbeat German PMIs.
The Eurozone construction sector took a step back at the end of Q1, but only temporarily. Construction output fell 1.1% month-to-month in March, after a revised 5.5% jump in February. The year-over-year rate slipped to +3.6%, from a two-year high of 5.5% in February.
Headline money supply growth in the Eurozone has averaged 5% year-over-year since the beginning of 2015; yesterday's October data did not change that story.
It is fair to say that the economic debate on fiscal policy has shifted dramatically in the last 12-to-18 months.
Yesterday's sole economic report in the Eurozone confirmed that the economy slowed further at the end of 2018.
Mixed comments last week by members of the governing council raised doubts over the ECB's resolve to add further stimulus next month. But the message from senior figures and Mr. Draghi remains that the Central Bank intends to "re-assess" its monetary policy tools in December. Our main reading of last month's meeting is that Mr. Draghi effectively pre-committed to further easing. This raises downside risks in the event of no action, but the President normally doesn't disappoint the market in these instances.
The ECB stood pat yesterday, keeping its key refinancing and deposit rates unchanged at zero and -0.4%, respectively. The marginal lending facility rate was also left at 0.25%, and the monthly pace of QE was maintained at €80B, with a preliminary end-date in the first quarter of 2017. Purchases of corporate bonds will begin June 8, and the first new TLTRO auction will take place June 22.
The Eurozone manufacturing sector finished 2017 on a strong note. The headline PMI increased to a cyclical high of 60.6 in December, from 60.1 in November, in line with the initial estimate.
In our Monitor on January 27 we speculated that the new U.S. administration would see Germany's booming trade surplus as a bone of contention. We were right. Earlier this week, Peter Navarro, the head of Mr. Trump's new National Trade Council, fired a broadside against Germany, accusing Berlin for using the weak euro to gain an unfair trade advantage visa-vis the U.S.
Colombia's Central Bank is facing a short-term test. The recent fall in inflation was interrupted in August--data due on Thursday will show another increase in September--while economic growth, particularly consumption, is struggling, at least for now.
Both the E.U. and the U.K. government have been keen to emphasise, since the Withdrawal Agreement was provisionally signed off, that March 29 is a hard deadline for Brexit.
The fall in the Markit/CIPS manufacturing PMI to 47.4 in August--its lowest level since July 2012--from 48.0 in July suggests that pre-Brexit stockpiling isn't countering the hit to demand from Brexit uncertainty and the global industrial slowdown.
Monetary dynamics in the Eurozone were virtually unchanged last month. M3 growth rose trivially to 5.0% year-over-year in March from a revised 4.9% in February. It was lifted by stronger growth in medium-term deposits and issuance of short-term debt.
The ECB's statement following the panic on Friday was brief and offered few details. The central bank said that it is closely monitoring markets, and that it is ready to provide additional liquidity in both euros and foreign currency, if needed. It also said that it is in close coordination with other central banks.
Friday's advance Eurozone PMI reports capped a fine quarter for the survey. The composite PMI jumped to a 80-month high of 56.7 in March, from 56.1 in February, rising to a cyclical high over Q1 as a whole.
Yesterday's advance data from Germany and Spain suggest that today's Eurozone inflation report will undershoot the consensus. In Germany, headline inflation slipped to 1.6% in March from 2.2% in February, and in Spain the headline rate plunged to 2.3% from 3.0%.
Global economic growth continues to fall short of expectations, and the call for aggressive fiscal stimulus is growing in many countries. This is partly a function of the realisation that monetary policy has been stretched to a breaking point. But it is also because of record low interest rates, which offer governments a golden and cheap opportunity to kickstart the economy. One of the main arguments for stronger fiscal stimulus is based on classic Keynesian macroeconomic theory.
Brazil's external accounts are well under control, despite the wider deficit in January, mainly driven by seasonal deterioration on the trade account.
Friday's PMIs gave the first hint of Q4 growth in the Eurozone, and continue to tell a story of a stable cyclical recovery. The composite PMI in the Eurozone rose 54.0 in October from 53.6 in September, mainly due to a rise in the services index, to 54.2 from 53.7. Assuming the PMI remains unchanged over the remainder of the quarter, the survey indicates solid GDP growth of 0.4%-to-0.5% quarter-on-quarter in Q4.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
The upward trend in German inflation stalled temporarily in August, with an unchanged 0.4% year-over-year reading in August. A dip in core inflation likely offset a continued increase in energy price inflation. The detailed final report next month will give the full story, but state data suggest that the core rate was depressed by a dip in price increases of household appliances, restaurant services, as well as "other goods and services."
French consumer confidence and consumption have been among the main bright spots in the euro area economy so far this year.
Yesterday's economic news in the French economy was solid.
Argentina's financial markets and embattled currency have been under severe pressure in recent weeks, with the ARS hitting a new record low against the USD and government bonds sinking to distress levels.
Money supply data in the euro point to a cyclical peak in GDP growth this year. Headline M3 growth fell to 4.8% year-over-year in July, from 5.0% in June, chiefly due to a slowdown in narrow money. M1 growth declined to 8.4%, from 8.7%, as a result of weaker momentum in overnight deposits and currency in circulation.
Recently released data in Colombia signal that the economy ended last year quite strongly.
Fiscal stimulus, partly financed by a border adjustment tax, and Fed rate hikes, were supposed to be a powerful cocktail driving a stronger dollar in 2017. But so far only the Fed has delivered--we expect another rate hike next month--while Mr. Trump has disappointed in the White House.
Leaders of the major Eurozone economies were in no mood to give concessions as they met with outgoing U.K. Prime Minister David Cameron this week for the first time since the referendum. German Chancellor Angela Merkel said that she sees "no way back from the Brexit vote." This followed comments that the U.K. couldn't be expected to "cherry-pick" the EU rules that it would like to follow after a new deal.
Europe's political leaders finally made a breakthrough this week in nominating candidates for the top jobs in the EU.
Money supply growth in the Eurozone rebounded slightly last month, reversing some of the weakness at the start of the year.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
Evidence of slowing growth in Eurozone consumers' spending continues to mount. Retail sales in the euro area fell 0.5% month-to-month in March, pushing the year-over-rate down to 2.1% from a revised 2.7% in February. The headline likely was depressed by the early Easter. March had one trading day less than February, which was not picked up the seasonals.
Brazil's September industrial production report, released yesterday, confirmed the message from survey data that the sector stabilized towards the end of summer. Output rose 0.5 month-to-month, and August output was revised up by 0.3 percentage points.
Earlier this week the New York Times bleakly suggested--see here--that people in Italy are too depressed to care about this weekend's parliamentary elections.
Yesterday's final manufacturing PMIs for October were grim, but they told investors nothing they don't already know.
The manufacturing sector appears to have started the new year on a weaker note. The Markit/CIPS manufacturing PMI dropped to 55.3 in January--its lowest level since June--from 56.2 in December.
Factory orders in Germany probably jumped in September, following a string of losses in the beginning of Q3. We think new orders rose 1.0% month-to-month, pushing the year-over-year rate slightly lower, to 1.8% from 2.0% in August. A rebound in non- Eurozone export orders likely will be the key driver of the monthly gain, following a 14.8% cumulative plunge in the previous two months. The rise will be concentrated in capital and consumer goods, and should be enough to offset a fall in export orders within the euro area. Our forecast is consistent with new orders falling 2.0% quarter-on-quarter in Q3, partly reversing the 3.0% surge in the second quarter, and raising downside risks for production in Q4.
Argentina's economic and financial situation has deteriorated significantly in recent weeks and the outlook is becoming increasingly bleak.
Friday's economic data in Germany suggest that households had a slow start to the year.
The opening gambits in the post-Brexit trade negotiations were played earlier this week, in speeches from U.K. Prime Minister Boris Johnson and EU chief negotiator, Michel Barnier.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
The euro area's current account surplus stumbled at the end of 2017, falling to €29.9B in December from an upwardly-revised €35.0B in November.
Colombia's BanRep stuck to the script on Thursday by leaving the policy rate on hold at 4.25%.
Youth unemployment remains a blemish on the Eurozone economy, despite an increasingly resilient cyclical recovery. The unemployment rate for young workers aged 15-to-24 years stood at 18.4% at the end of April, chiefly due to high joblessness in the periphery.
The INSEE business sentiment data in France continue to tell a story of a robust economy.
German survey data did something out of character yesterday; they fell. The IFO business climate index declined to 117.2 in December from a revised 117.6 in November.
Inflation in the Eurozone stumbled at the end of Q3.
The face-off is intensifying between Madrid and the pro-independent local government in Catalonia. A referendum on independence in the northeastern state has been rejected by the Spanish government and has been declared constitutionally illegal by the high court.
Taken at face value, the retail sales data in the euro area suggest that consumers' spending hit a brick wall at the end of 2018.
For sterling traders, no election news is good news.
Argentinians are heading to the polls on Sunday October 27 and will likely turn their backs on the current president, Mauricio Macri.
The recovery in the French economy since the sovereign debt crisis has been lukewarm. Growth in domestic demand, excluding inventories, has averaged 0.4% quarter-on-quarter since 2012. This comp ares with 0.8%-to-1.1% in the two major business cycle upturns in the 1990s and from 2000s before the crisis.
Chilean GDP growth hit bottom in August, but activity is now picking up and will gather speed over the coming quarters. The tailwinds from lower oil prices and fiscal stimulus will soon be visible in the activity data.
he ECB governing council gathered last week under the leadership of Ms. Lagarde for the first time to lay a battle plan for the course ahead.
Brazil's monetary authority adopted a neutral tone and kept its main rate on hold at 6.5% at its monetary policy meeting on Wednesday, surprising investors.
Our first impression of the proposed Brexit deal between the EU and the U.K. is that it is sufficiently opaque for both sides to claim that they have stuck to their guns, even if in reality, they have both made concessions.
While we were away, EM growth prospects and risk appetite deteriorated significantly, due mainly to rising geopolitical risks, weaker economic prospects for DM, and, in particular, the most recent chapter of the global trade war.
Mexico's economic and financial outlook is deteriorating rapidly and hopes of a gradual recovery over the next three-to-six months are fading away after AMLO's missteps in recent months.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
Investors in the euro area demand to know whether their equities can climb--in local currency terms-- even as the euro appreciates.
Judging by the monthly production data, construction in the Eurozone slowed sharply in the second half of 2018.
The Eurozone economy all but stalled at the start of Q4.
We would sum up the final stages of the Brexit negotiations as follows: Both sides have an interest in a deal with minimal disruptions, but we probably have to get a lot closer to the cliff- edge for the final settlement.
Mr. Draghi's speech to the European Banking Congress on Friday--see here--was a timely reminder to markets that the ECB is in no hurry to make any changes to its policy setting.
Chile's central bank left its main interest rate unchanged last week at 3.0%, for the ninth month in a row. But policymakers adopted a hawkish bias in the press release, signalling that rates will rise later this year.
Yesterday's barrage of survey data in France suggests that business sentiment in the industrial sector remained soft mid-way through Q4, but the numbers are more uncertain than usual this month.
Next July, Mexico will hold presidential elections, an event that will gradually take centre stage as the date approaches. The pre-campaign will start on December 14, but the official campaign opening will take place in late March, when the three main candidates will begin to lay out their platforms.
We recommend that investors take yesterday's inflation data in the Eurozone with a pinch of salt. The headline rate slipped to 1.2% in April, from 1.4% in March, hit by a slide in core inflation to 0.7%, from 1.0%.
Eurozone manufacturing selling prices remain under pressure from deflationary headwinds. The PPI index, ex-construction, in the euro area fell 4.2% year-over-year in March, matching February's drop. Weakness in oil prices continues to drive the headline.
Final October PMI data today will confirm the Eurozone's recovery remains on track. We think the composite PMI rose to 54.0 from 53.6 in September, in line with the consensus and initial estimate. Data on Monday showed that manufacturing performed better than expected in October, and the composite index likely will enjoy a further boost from solid services. The PMIs currently point to a trend in GDP growth of 0.4%-to-0.5% quarter-on-quarter, the strongest performance since the last recession.
Yesterday's February PMI data sent a clear message to markets.
Recent global developments lead us to intensify our focus on trade in LatAm.
Yesterday's barrage of economic data in the Eurozone added to the evidence that economic momentum is slowing.
The euro area's record-high external surplus has prompted commentators to suggest that the zone has room to loosen fiscal policy to support growth, or at least relax the deficit reduction rules.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
Mr. Trump fired the shot everyone was expecting this week with a 10% tariff on $200B-worth of Chinese goods, and a pledge to lift the rate to 25% on January 1.
Colombia's GDP growth hit a relatively solid 2.8% year-over-year in Q4, up from 2.7% in Q3, helped by improving domestic fundamentals, which offset the drag from weaker terms of trade.
People across Europe are growing wary over the failure of governments to foster economic security since the 2008 crisis. Their conclusion increasingly is that the EU is to blame, so their support for EU-sceptic, and even right-wing nationalist, parties has increased accordingly.
We tend to keep a close eye on monetary policy initiatives in Japan, as the BOJ's fight to spur inflation in a rapidly ageing economy resembles the challenge faced by the ECB.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
The rapidity with which the BoJ's QE programme has been scaled back is dramatic. Growth in the monetary base slowed to 15.6% year-over-year in September from 16.3% in August.
As widely expected, the ECB held fire yesterday. The central bank left its main refi rate unchanged at zero, and also kept the pace of QE unchanged at €80B a month. The deposit and marginal lending facility rates were also left unchanged at -0.4% and 0.25% respectively. The formal end-date of QE is still Q1 2017, but the press release repeated the message that QE can continue "beyond [Q1 2017], if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim."
Political uncertainty in the Eurozone is the story that won't die. Coalition talks in Germany collapsed yesterday when the centre-right FDP walked out of the negotiations.
The sharp downtrend in commodity prices in recent months is alarming from a LatAm perspective.
Yesterday's data presented Eurozone investors with an unfamiliar sight; a big downside surprise in the survey data.
Chile's Q1 GDP report, released yesterday, confirmed that the economy weakened sharply at the beginning of the year, due mainly to temporary shocks, including adverse weather conditions.
Labour costs growth accelerated modestly last year in the Eurozone. Data on Friday showed that Q4 nominal labour costs in the Eurozone rose 1.3% year-over-year, slightly higher than the 1.1% increase in Q3. The modest acceleration was mainly due to a rise in "non-business" labour costs, which rose 1.6% year-over-year, up from a 0.9% increase in Q3.
Economists refer to two different types of forward rate guidance by central banks: Delphic and Odyssean. The former describes a "normal" situation, in which the central bank follows a transparent rate-setting rule allowing markets to forecast what it will do, based on the flow of economic data.
Last week's ECB meeting--see here--made it clear that the central bank does not intend to jump the gun on rate hikes next year, even as QE is scheduled to end in Q4 2018.
The forecasts compiled by Bloomberg for today's June German factory orders data look too timid to us. The consensus is pencilling in a 0.5% month-to month rise, which would push the year-over-year rate down to -2.1%, from zero in May. But survey data point to an increase in year-over-year growth, which would require a large month-to-month rise due to base effects from last year.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Colombia's central bank, BanRep, increased the monetary policy rate by 25bp to 6.25% on Friday, as expected, and also announced budget cuts and a new FX strategy to try to protect the COP. These measures are similar to those taken by Banxico on Wednesday. The press release, and the tone of the conference after the decision, suggest that more hikes are coming.
Long term benchmark yields in the Eurozone almost fell to zero towards the end of the first quarter as investors were carried away in their celebration of QE. The counter-reaction to this move, though, was violent with 10-year yields surging from 0.2% to 0.9% in the space of two months from April to June, and we think a similar tantrum could be waiting in the wings for investors. We are particularly wary that upside surprises in inflation data--mainly in Germany--could push yields up sharply in the next few months.
The Eurozone's external surplus remains solid, despite hitting a wall in August. The seasonally adjusted current account surplus fell to €17.7B in August from €25.6B in July, due to a €7B fall in the goods component. A 5.2% month-to-month collapse in German exports -- the biggest fall since 2009 -- was the key driver, but we expect a rebound next month. The 12-month trend in the Eurozone's external surplus continues to edge higher, rising to 3% of GDP up from 2.1% in August last year.
The ECB held fire yesterday. The central bank kept its main refinancing rate unchanged at 0.0%, and also maintained the deposit and marginal lending facility rates at -0.4% and 0.25% respectively.
The sharp drop in commodity prices, especially oil prices, has dampened the growth prospects for most countries in Latin America. But the most damage, so far, is in the currencies, which have dropped sharply.
Economic survey data this week will give the first clear evidence on whether recent market volatility has dented Eurozone confidence. The key business and consumer surveys dipped in January, and we now expect further declines, starting with today's PMI data. We think the composite index fell slightly to 53.0 in February from 53.6 in January.
We sympathise if readers are sceptical of our opening gambit in this Monitor.
In one line: Outstanding.
In one line: Decent, but we think production slipped in December.
In one line: Not terrible, but Q4 as a whole will be soft.
In one line: Back to reality?
In one line: Decent, but Q3 as a whole doesn't look good.
In one line: The next few months will be better, but Q4 as a whole looks grim.
In one line: Great, but probably not enough to salvage the Q2 number.
In one line: We'll take any increase here, but the trend still looks grim.
In one line: Stung by weakness in output of electronics and pharmaceuticals.
In one line: Soft, and the outlook for Q2 isn't great.
In one line: A bit better, but Q3 as a whole was weak.
In one line: Much better than the PMIs.
In one line: Not bad at all.
In one line: Grim, but the details are more encouraging.
In one line: Relief; but manufacturing is not out of the woods yet.
In one line: Another poor performance is underway in Q3.
In one line: Upwards and onwards.
In one line: What strikes?
In one line: Old news in the CPI data, weak trade, and a horrible ZEW.
In one line: Not pretty, but light at the end of the tunnel; we hope.
In one line: Ugly, German manufacturing can't catch a break.
In one line: Core inflation will fall back this month; construction jumped in Q1, but a setback looms in Q2.
In one line: Consumers on track for a solid Q2; services inflation on the rebound?
In one line: Great, but it won't last.
In one line: A bit of relief, but still grim overall.
In one line: Lukewarm ... but still consistent with decent growth in spending.
In one line: Encouraging, but the details were mixed.
In one line: The French consumer looks o.k.; in Germany, surveys now point to slower growth.
In one line: Rebound confirmed, we think.
In one line: Bafflingly weak; but note the jump in manufacturing sentiment.
In one line: Decent, but backward-looking given current events.
In one line: Soft, but still consistent with solid growth in consumption.
In one line: The downtrend resumes, but take the headline with a pinch of salt.
In one line: Mixed, but overall further evidence of stabilisation.
In one line: Still overall robust.
In one line: No letup for Germany.
In one line: No virus here.
In one line: Decent headline, even better details.
In one line: Is Germany in recession? Yes, if you ask the IFO survey.
In one line: Still stuck at a depressed level.
In one line: So-so, but downside risks to the Q2 GDP headline linger.
In one line: The perfect storm; weak manufacturing and a crash in construction.
In one line: A bit better in German manufacturing; the setback in exports was expected.
In one line: Not terrible, but outlook for Q2 as a whole is grim.
In one line: Not bad, but Q3 as a whole likely was soft.
In one line: Horrible manufacturing data, but an upward revision to Q4 net trade looms.
In one line: Robust, but base effects are challenging for manufacturing in Q2.
In one line: Still grim.
In one line: A rebound, but the overall message is still one of acute recession risk.
In one line: Manufacturing output has stalled; trade data point to downward Q3 GDP revision.
In one line: Germany's recession all but confirmed.
In one line: Soft; blame Ireland and the Netherlands.
In one line: Terrible; Q4 GDP growth set for downward revision later this week.
In one line: Grim trade data, but decent labour costs headline.
In one line: Solid; net exports on track for a Q4 rebound.
In one line: Très bien; boosted by exports of transport goods and pharmaceuticals.
In one line: Not pretty, but partly mean reversion from the previous month.
In one line: A Q3 rebound in net exports underway?
In one line: Excellent, but clouds are gathering in some countries.
In one line: Robust; the Q2/Q3 recession call is now even more difficult to sustain.
In one line: Lifted by a robust export growth.
In one line: French net exports likely fell sharply in Q3.
In one line: A welcome rebound, but investors' bogeymen remain.
In one line: Moods are souring again at the start of Q4.
In one line: Solid start to Q4 for net trade; wage growth dipped, slightly, in Q4.
In one line: Hit by slowing exports, but trend looks stable.
In one line: Soaring; probably lifted by pre-Brexit stock building in the U.K.
In one line: The positive trend is petering out.
In one line: German unemployment is now rising; about that fiscal stimulus?
In one line: Upwards and onwards.
In one line: ZEW, Germany, February
In one line: Looks great, but does it matter for the economic surveys?
In one line: Soft, but likely still boosted by trade and Brexit deal optimism.
In one line: Encouraging.
In one line: Robust.
In one line: Horrible.
In one line: Stationary, rather than in outright decline.
In one line: Back to reality.
In one line: Mean-reversion from last month, but claims likely are now rising a bit.
In one line: Yikes! Jump in claims is partly a statistical quirk, but the trend is turning for the worse.
In one line: Solid, but the trend in claims is probably still rising.
In one line: Dreadful.
In one line: Ouch.
In one line: Mr. Draghi just talked himself into cutting rates before he steps down.
In one line: Soft, but trend is still firm.
In one line: Disappointing, but online sales will rebound next month.
In one line: Grim, but not representative of the trend.
In one line: Blame Germany; the data were decent elsewhere.
In one line: Not pretty, but mostly due to crazy volatility in Germany.
In one line: A good start to Q4; note the rebound in M1 growth.
In one line: Steady, and still solid.
In one line: Robust, despite marginal dip in M1 growth.
In one line: A setback within a slowly rising trend.
In one line: Any more or this, and we'll have to upgrade our 2020 GDP growth forecasts.
In one line: Ugly headline, but the details were a bit better.
In one line: No recession here.
In one line: Ouch; but these data often swoon.
In one line: Horrible, but it will be revised higher.
In one line: Still depressed by deflation in energy prices; the core looks robust.
In one line: Coming in hot; lifted by higher food and core inflation.
In one line: Surprisingly solid.
In one line: What virus?
In one line: Looking strong, but the recent jump in geopolitical risk is not fully factored-in.
In one line: Hot, but core inflation eased.
In one line: Back to trend?
In one line: Just a dip; Q1 was excellent overall.
In one line: A German recession edges ever closer.
In one line: Not pretty; sales fell over Q2 as a whole.
In one line: Barnstorming, but a setback looms in the December report.
In one line: Horrible, but the consensus was always too optimistic.
In one line: Wage growth is firming in the Eurozone, but the ECB is focused elsewhere.
The third estimate of euro area growth in the first quarter provides clear evidence that measuring GDP is not an exact science. Real GDP rose 0.6% quarter-on-quarter in Q1, accelerating from 0.4% in Q4. This latest estimate is higher than the previous estimate, 0.5%, but in line with the first calculation. Eurostat and all the large Eurozone economies now provide early estimates of GDP, before data for the full quarter is available.
Yesterday's money supply report provided further relief for investors doubtful over the cyclical recovery following the market turmoil. Broad money growth, M3, accelerated to 5.3% year-over-year in July, up from 4.9% in June, and within touching distance of a new post-crisis high. Narrow money continued to surge too, rising 12.1% year-over-year, up from 11.1% in June, sending a bullish message on the Eurozone economy.
German data yesterday indicate that inflation pressures have, so far, been resilient in the face of the recent collapse in oil prices. Inflation rose to 0.5% year-over-year in January from 0.3% in December, partly due to base effects pushing up the year-over-year rate in energy prices, but core inflation rose too. The detailed state data indicate that almost all key components of the core index contributed positively, lead by leisure and recreation and healthcare.
Volatility in commodities and emerging markets has intensified since the beginning of July, with the stock market drama in China taking centre stage. The bubble in Chinese equities inflated without much ado elsewhere, and can probably deflate in isolation too. But the accelerating economic slowdown in EM is becoming an issue for policy makers in the Eurozone.
Data today will likely show that consumer sentiment in the Eurozone remains firm. In Germany, we expect a slight dip in the advance headline GFK confidence index to 9.8 in June, from an all-time high of 10.1 in May.
Friday's PMI data in the Eurozone added to the evidence that GDP growth is slowing, after a cyclical peak last year. The composite PMI in the euro area slipped to a 21-month low of 52.6 in September, from 52.9 in August.
As expected, the ECB made no changes to its policy stance today. The refi and deposit rates were left at 0.00% and -0.4%, respectively, and the pace of purchases under QE was maintained at €30B per month.
In one line: Stabilisation, not recession.
Headline money supply growth in the Eurozone accelerated further at the start of Q2.
Money supply growth in the Eurozone quickened last month, by 0.3 percentage points to 3.9% year- over-year, but the details were less upbeat.
Yesterday's advance inflation data in Germany fell short of forecasts--ours and the consensus--for a further increase. Inflation was unchanged at 0.8% year-over-year in November, but we think this pause will be temporary.
Japan's headline jobless rate edged up to 2.8% in December, from 2.7% in November, but the increase was negligible, with the rate moving to 2.76% from 2.74%.
The French economy performed better than we expected in the third quarter.
Inflation pressures in the Eurozone are building rapidly, setting up an "interesting" ECB meeting next week. Yesterday's advance CPI report showed that inflation edged up further in February to 2.0%, from 1.8% in January. The headline rate is now in line with the ECB's target, and up sharply from the average of 0.2% last year.
Debt issuance by Eurozone non-financial firms is soaring, consistent with the ECB's hope that adding private debt to QE would boost supply. Our first chart shows that the three-month sum of net debt sold in the euro area jumped to a new record of €60.3B in May. A short-term decline in issuance is a good bet after the initial euphoria in firms' treasury departments.
Consumer sentiment data yesterday from the major economies were mixed, signalling that support to Eurozone GDP growth from surging German household consumption is waning. The key "business outlook" index--which correlates best with spending--plunged to a 30-month low in October, while the advance GfK sentiment index dipped to 9.4 in November from 9.6 in October. We see little signs in retail sales data of slowing momentum, and also think consumers' spending rebounded in Q3. But our first chart shows that the fall in the GfK index implies clear downside risks in coming quarters.
The defeat in the House of Lords of the Government's plans to cut spending on tax credits by £4.4B next year is not a barrier to their implementation. But it has prompted speculation that the Chancellor will reduce the size of the fiscal consolidation planned for next year. The plans may be tweaked in the Autumn Statement on 25 November, but we think the economy will still endure a major fiscal tightening next year.
Friday's final CPI report in the Eurozone confirmed that inflation dipped marginally in January, by 0.1 percentage points, to 1.3%.
Yesterday's IFO survey in Germany was a nasty downside surprise for markets. The business climate index slipped to 106.2 in August, from 108.3 in July, well below the consensus forecast for a modest rise. In addition, the expectations index slid ominously to 100.1, from a revised 102.1 in July.
The Eurozone economy is becoming increasingly service-oriented. The private services sector has contributed just over 50% of gross value added-- GVA -- in the past three years, up from 44% in the seven years before the crash of 2008.
Yesterday's public finance figures brought more good news for the Chancellor.
Yesterday's advance consumer sentiment index in the Eurozone confirmed the upside risks for consumers' spending in Q4. The headline index rose to a 17- year high of +0.1 in November, from -1.0 in October.
The public finances continue to heal rapidly, suggesting that the Chancellor should have scope to soften his fiscal plans substantially in the Autumn Budget.
Advance PMI data yesterday supported our suspicion that Q1 economic survey data will paint a picture of slowing growth in the Eurozone economy. The composite PMI in the Eurozone fell to a 13-month low of 52.7 in February from 53.6 in January, driven by declines in both the French and German advance data.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
The composite PMI in the Eurozone continues to edge slightly lower, falling to 53.4 in May from 53.9 in April. A fall in the services index to 53.3, from 54.1 last month offset a modest increase in manufacturing to 52.3 from 52.0 in April.
The Chancellor was bolder than widely expected yesterday and scaled back the fiscal consolidation planned for the next two years significantly, even though his borrowing forecast was boosted by the OBR's gloomier prognosis for the economy.
The Eurozone's external surplus rebounded further over the summer.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the year.
Yesterday's advance PMI reports in the euro area signal that economic momentum slowed slightly at the start of Q4.
PMI data in the Eurozone rebounded convincingly in October, as the composite index rose to a 10-month high of 53.7, from 52.6 in September. The gain fully reversed the weakness at the end of Q3.
The PMI survey yesterday painted a more upbeat picture on the Eurozone economy than we expected. The composite index rose to 54.1 in June from 53.6 in May, taking the quarterly average to its highest level since Q2 2011.
Friday's advance PMI data for the Eurozone added further evidence of stabilisation in the economy after the sharp slowdown in GDP growth since the beginning of last year.
At the halfway mark of the fiscal year, public borrowing has been significantly lower than the OBR forecast in the March Budget.
Expectations that the ECB will respond to weakening growth in China with Additional stimulus mean that survey data will be under particular scrutiny this week. The consensus thinks the Chinese manufacturing PMI--released overnight--will remain weak, but advance PMIs in the Eurozone should confirm that the cyclical recovery remained firm in Q3. We think the composite PMI edged slightly lower to 54.0 in September from 54.3 in August, consistent with real GDP growth of about 0.4% quarter-on-quarter in Q3.
Yesterday's data kicked off the release of Eurozone Q3 growth numbers with a robust Spanish headline. Real GDP in Spain rose 0.8% quarter-on-quarter, slowing slightly from 0.9% in Q2, and le aving the year-over-year rate unchanged at 3.1%.
Yesterday's economic reports added to the evidence the euro area economy as a whole is showing signs of resilience in the face of still-terrible conditions in manufacturing.
In one line: Robust.
In one line: Soft, but not a major shift in the key story.
In one line: The bottom in German inflation is in, at least in the near term.
In one line: Marginally better in manufacturing; upturn in consumer sentiment halted, for now.
Eurozone H1 2019 Outlook
The trade-off between the timeliness and accuracy of the data is fundamental to macroeconomic analysis. Coincident data such as GDP, industrial production and retail sales are the most direct measures of economic activity, but their first estimates don't always tell the full story.
Eurozone investors will be looking anxiously across the pond overnight as the results of U.S. elections come in. Our assumption is that Hillary Clinton will be elected president and that risk assets will celebrate accordingly today.
In one line: Solid, but the rounding is very favourable.
In one line: Merde; a slump in net investment and inventories ruined Q4.
In one line: Core inflation is flirting with a break into a new, and higher, range.
In one line: Easter distortions drove services inflation higher; the core goods CPI is still subdued
In one line: Big rebound in services inflation; non-energy goods inflation is flat-lining.
In one line: Soft CPI data, but temporary distortions are depressing the core.
In one line: Poor, but better than we had feared.
In one line: Germany edges closer to recession.
In one line: Technical recession averted for now; but growth has stalled.
The housing market perhaps is where the adverse impact of Brexit uncertainty can be seen most clearly.
The MPC's interest rate cut in August, and the continued willingness of banks to lend, bolstered the housing market immediately after the referendum. But the latest indicators suggest that the market is slowing again, as the financial pressures on households' incomes intensify.
Data yesterday showed that consumers in the euro area increased their spending in February, following recent weakness. Retail sales rose 0.7% month-to-month in February, reversing the cumulative 0.4% decline since November. The year-over-year rate was pushed higher to 1.8% from an upwardly revised 1.5% in January.
Inflation pressures in the Eurozone edged higher last month, reversing weakness at the start of the year.
Yesterday's advance CPI report in the Eurozone showed that inflation pressures are rising rapidly. Inflation rose to 1.1% year-over-year in December, from 0.6% in November. Surging energy inflation was the key driver, and this component likely will continue to rise in the next few months. Core inflation, however, stayed subdued, rising only slightly to 0.9%, from 0.8% in November.
Corporate bonds will not be included in the ECB's monthly QE purchases until the end of Q2, but markets are already preparing. The sale of non-financial corporate debt jumped to €49.4B in March, from about €25B in February, within touching distance of the record set in Q1 last year.
Eurozone manufacturing boosted GDP growth in the first half of the year, and survey data suggest that momentum will be maintained in Q3.
The upside to manufacturing survey data in the Eurozone appears endless.
The Eurozone enjoyed a strong start to 2017. Yesterday's advance data showed that real GDP rose 0.5% quarter-on-quarter in Q1, a similar pace to Q4, which was revised up by 0.1 percentage points. The year-over-year rate dipped to 1.7%, from an upwardly revised 1.8% in Q4.
Brazil's Monetary Policy Committee--Copom--increased the Selic rate by 50bp to 13.75% on Wednesday, as widely expected. The short statement was unchanged from the previous four meetings, indicating the decision was unanimous and without bias, maintaining uncertainty about the next steps. Many Copom members, especially its President, Alexandre Tombini, have signaled that they intend to persevere in their attempt to bring the inflation rate down to 4.5% by the end of 2016.
The economic slowdown in China is old news for Eurozone investors.
As we go to press, equities in the Eurozone are having a bad day following the collapse in U.S. and Asian equities earlier.
Last week's heavy snowfall, which blighted the entire country, will depress GDP growth in Q1, making it harder for the MPC to read the economy.
Consumers' spending in the euro area weakened at the end of Q4, but we think households will continue to boost GDP growth in the first quarter. Data on Friday showed that retail sales fell 0.3% month-to-month in December, pushing the year-over-year rate down to 1.1%, from a revised 2.8% in November.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
Readers have asked us about the availability of flow-of-funds data in the Eurozone similar to the detailed U.S. reports. The ECB's sector accounts come close and cover a lot of ground, but are also released with a lag. We can't cover all sectors in one Monitor, but the investment data for non-financial firms, excluding construction, suggest that investment growth slowed last year.
Consumers' spending in the Eurozone slowed in the second half of 2017, providing a favourable base for growth in H1 2018.
Financial markets in the Eurozone will be pushed around by global events today. The Bank of Japan kicks off the party in the early hours CET, and the spectrum of investors' expectations is wide.
Our new Chief U.K. economist, Samuel Tombs, initiated his coverage yesterday with a sombre, non-consensus, message on the economy. Headwinds from fiscal tightening and net trade will weigh on GDP growth next year, but the BoE will likely have to look through such cyclical weakness, and hike as inflation creeps higher. An intensified drag from net trade in the U.K. will, other things equal, benefit the Eurozone. But a slowdown in U.K. GDP growth still poses a notable risk to euro area headline export growth, especially in the latter part of next year.
Eurozone capital markets have been split across the main asset classes this year. Equity investors have had a nightmare. The MSCI EU ex-UK index is down 10.6% year-to-date, a remarkably poor performance given additional QE from the ECB and stable GDP growth. Corporate bonds, on the other hand, are sizzling.
One of the main conclusions we drew from last week's ECB meeting was that the QE program is here to stay for a while. If the economy improves, the central bank could reduce the pace of purchases further. But we struggle to come up with a forecast for growth and inflation next year that would allow the ECB to signal that QE is coming to an end.
Manufacturing in the Eurozone rebounded midway through the second quarter.
The outlook for the French economy is changing on a daily basis these days.
Investors in euro-denominated corporate debt will be listening closely to Mr. Draghi this week for hints on how the ECB intends to balance QE between public and private debt next year.
Friday was a busy day in the Eurozone economy. The third detailed GDP estimate confirmed that growth was unchanged at 0.4% quarter-on-quarter in Q2, pushing the year-over-year rate down by 0.4 percentage points to 2.1%, marginally below the first estimate,2.2%.
The plunge in Russia's financial markets, in response to targeted U.S. sanctions--see here--against Russian oligarchs and government officials, was the main EU news story yesterday.
Today's labour market report likely will show that employment continued to grow briskly over the summer, but that wage gains still are lagging well behind inflation.
While we were away, the advance Q2 GDP report in the Eurozone confirmed our expectations of a strong first half of the year for the economy. Real GDP rose 0.6% quarter-on-quarter, the same pace as in Q1, lifting the year-over-year rate to a cyclical high of 2.1%.
Friday's detailed October CPI report in Germany confirmed that inflation pressures are steadily rising. Inflation rose to 0.8% year-over-year in October, from 0.7% in September, lifted mostly by a continuing increase in energy prices.
Eurozone manufacturers had an underwhelming start to Q4. Data yesterday showed that production fell 0.1% month-to-month in October, pushing the year-over-year rate down to 0.6%, from a revised 1.3% in September. Output was constrained mostly by weakness in France and a big month-to-month fall in Ireland, which offset marginal gains in Germany and Spain.
The Eurozone economy was resilient at the end of last year, but yesterday's reports indicated that growth was less buoyant than markets expected. Real GDP in the euro area rose 0.4% quarter-on-quarter in Q4, the same pace as in Q3, but slightly less than the initial estimate 0.5%.
The benchmark MSCI EU ex-UK equity index was down a startling 17% year-over-year at the end of February. A disappointing policy package from the ECB in December initially put Eurozone equities on the back foot, and the awful start to the year for global risk assets has since piled on the misery.
CPI inflation increased to 2.9% in May, from 2.7% in April, exceeding the no-change expectation of both the consensus and the MPC, as well as our own 2.8% forecast.
All eyes in the Eurozone will be on the second estimate of Q4 GDP today, and the report likely will confirm that growth accelerated in Q4. We think real GDP rose 0.5% quarter-on-quarter, up from a 0.3% increase in Q3, in line with the first estimate. If this forecast is correct, the year-over-year rate will be unchanged at 1.8%. Risks to the headline, however, are tilted to the downside.
Data yesterday showed that industrial production in the Eurozone stumbled in May. Production fell 1.2% month-to-month, driven by weakness in all major economies and falling output in all sub-industries. The poor headline follows an upwardly revised 1.4% jump in April, which means that production rose marginally in the first two months of the second quarter.
Workers in the euro area remain scarred by the zone's repeated crises, but the strengthening cyclical recovery is slowly starting to spread to the labour market. The unemployment rate fell to a three-year low of 10.9% in July, and employment has edged higher after hitting a low in the middle of 2013. Germany's outperformance is a key story, with employment increasing uninterruptedly since 2009, and the unemployment rate declining to an all-time low of 6.4%. Among the other major economies, the unemployment rate in Spain and Italy remains higher than in France. But employment in Spain has outperformed in the cyclical recovery since 2013.
The euro has been one of the main "beneficiaries" of the pound's relentless decline, which took on ridiculous dimensions as the GBP crashed almost 10% in the early hours of Friday. EURGBP briefly touched 0.94, before settling at 0.9, up just shy of 30% since November.
Eurozone manufacturing is showing signs of stabilisation. Final PMI data showed the headline gauge falling trivially to 52.4 in July from 52.5 in June, slightly above the initial estimate of 52.2. New orders slowed, though, with companies reporting weakness in export business amid firm domestic demand.
Data yesterday suggest Eurozone consumers' spending rebounded towards the end of Q4. Retail sales rose 0.3% month-to-month in December, pushing the year-over-year rate down to 1.4%, from a revised 1.6% in November. A +0.3 percentage point net revision to the month-to-month data added to the optimism, but was not enough to prevent a slowdown over the quarter as a whole.
Strong real M1 growth suggests the cyclical recovery is in good shape. But recent economic data indicate GDP growth slowed in Q4, and survey evidence deteriorated in January. This slightly downbeat message, however, is a far cry from the horror story told by financial markets. The recent collapse in stock-to-bond returns extends the decline which began in Q2 last year, signalling the Eurozone is on the brink of recession.
Distinguishing between the structural and cyclical story is crucial to understanding the inflation picture in the Eurozone. Nobel laureate Paul Krugman recently lamented--New York Times, March 1st--that the Eurozone economy appears to be stalling. We doubt the outlook for GDP growth this year is that dire.
Data yesterday showed that the downward trend in Eurozone unemployment continued towards the end of last year. The unemployment rate fell to 10.4% in December from 10.5% in November, extending an almost uninterrupted decline which began in the first quarter of 2013.
The Eurozone is back in headline deflation, increasing the pressure on the ECB to deliver further easing when it meets next week. Inflation fell to -0.2% in February, from +0.3% in January, depressed by energy and food prices.
Economic theory tells us that government spending should be counter-cyclical, but recent experience in the Eurozone tells a slightly different story. The contribution to GDP growth from government spending rose during the boom from 2004 to 2007, and remained expansionary as the economy fell off the cliff in 2008. As the economy slowed again following the initial recovery, the sovereign debt crisis hit, driving a severe pro-cyclical fiscal hit to the economy.
This is the final report before your Eurozone correspondent dials down for the summer, and heads for the beach. Advance Q2 GDP data next week is the key release while we are away, with the latest Bloomberg consensus--published July 20th--looking for a 0.4% increase quarter-on-quarter. Everything we look at suggests the consensus is right on this one, with risks tilted to the upside due to strong net exports in Germany.
Increased volatility has given equity investors a torrid start to the year, but economic reports have been strong, and yesterday's PMIs were no exception. The composite index in the Eurozone rose marginally to 54.3 in December from 54.2 in November, slightly higher than the initial estimate of 54.0. This is consistent with a continuing cyclical recovery, and real GDP growth of 0.4%-to-0.5% in Q4, modestly higher than the 0.3% rise in the third quarter.
Friday was a busy day in the Eurozone. The final and detailed GDP report confirmed that growth in the euro area slowed to 0.2% quarter-on-quarter in Q3, from 0.4% in Q2, with the year-over-year rate slipping by 0.6 percentage points to 1.6%, just 0.1pp below the first estimate.
It has been mostly doom and gloom for euro area investors in equities and credit this year.
Yesterday's aggregate economic data for the euro area showed that inflation rose slightly in August. The headline rate rose to a four-month high of 1.5% in August from 1.3% in July. The rate was lifted mainly by energy inflation, rising to 4.6% from 2.2% in July, but we think the rebound will be short-lived.
Yesterday's money supply data in the Eurozone were alarmingly poor.
Even though Greece managed to avert default yesterday by paying €200M in interest to the IMF, our assumption is that the country remains on the brink of running out of money. Our view is supported by the government's decision to expropriate local authority funds, and reports that the government's domestic liabilities, excluding wages and pensions, are not being met.
Inflation data last week confirmed that the spectre of deflation is slowly but surely encroaching on the euro area. In Germany, inflation slipped to 0.6% year-over- year in November, from 0.8% in October, and in the Eurozone as a whole the he adline rate declined to 0.3%, from 0.4% in September.
Industrial production data yesterday indicate manufacturers in the Eurozone enjoyed a decent start to Q3, thanks to strength in Germany, Italy and Spain, which offset weakness in France. Production ex-construction rose 0.6% month-to-month in July, boosted in part by a 3% jump in energy output. If production is unchanged in August and September, output will rise 0.3% quarter-on-quarter in Q3, but this estimate is uncertain, and we look for an increase of about 0.4%-to-0.5%.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
The construction sector in the Eurozone probably stumbled in March. Advance data for the major economies suggest that output fell 1.2% month-to-month, pushing the year-over-year rate down to 1.6% from 2.4% in February.
The upturn in the Eurozone construction sector likely paused in Q3. Yesterday's August report showed that output fell 0.2% month-to-month, pushing the year-over-year rate down to +1.6%, from a revised +2.8% in July.
Construction data in the Eurozone usually don't attract much attention, but today's July report will provide encouraging news, compared with recent poor manufacturing data. We think construction output leapt 2.1% month-to-month, pushing the year-over-year rate up to 2.3%, from 0.7% in June. This strong start to the third quarter was due mainly to a jump in non-residential building activity in France and Germany.
Friday's data confirmed that inflation in the Eurozone slipped to a 14-month low of 1.1%, from 1.3% in January, 0.1 percentage points below the first estimate.
Due to a technical quirk, Eurostat was not able to publish seasonally adjusted January trade numbers yesterday, so the report is of limited use. The unadjusted trade surplus in the Eurozone plunged to €7.9B in January, from €24.3B in December, driven in part by a collapse in Italy's surplus.
Inflation pressures in the Eurozone have been building in recent months, but we think the headline is close to a peak for the year.
Demand for new cars in the Eurozone rebounded last month. New car registrations jumped 10.3% year-over-year in May, reversing the 5.1% decline in April. The headline was boosted by solid growth in all the major economies.
The Greek economy escaped recession in the second half of last year. Real GDP rose a cumulative 1.2% in Q2 and Q3, following a 0.6% fall in Q1. And industrial production and retail sales data suggest that the advance GDP report released later this month will show that the momentum was sustained in Q4. Headline survey data, however, indicate that downside risks to the economy remain.
Inflation pressures are slowly, but surely, rising in the Eurozone. Advance data indicate that inflation in Germany rose to 0.7% year-over-year in May, up from 0.5% in April. Reduced drag from the non-core components is the main driver, with energy prices rebounding, and food prices now rising steadily at 1.4% year-over-year.
Friday's CPI data for April provided the final piece of evidence for the significant Easter distortions in this year's data.
Markets have responded strongly to the ECB's announcement that it will be buying corporate bonds as part of QE. Net corporate debt issuance of non-financial firms jumped €16B in March, the biggest monthly increase since January 2014. The 12-month average, however, was stable at €3.6B, and a sustained increase in net debt supply partly depends on firms' appetite for financial engineering
Chancellor Hammond likely will broadly stick to the current plans for the fiscal consolidation to intensify next year when he delivers his second Budget on Thursday.
The Eurozone construction sector ground to a halt at the start of 2017. Data on Friday showed that output plunged 2.3% month-to-month in January, pushing the year-over-year rate down to -6.0%, from a revised +3.0% in December. The weakness was broad-based across the major economies, but it was concentrated in France and Spain where output fell by 3.5% and 3.8%, respectively.
The Eurozone's current account surplus slipped at the start of Q2, falling to €28.4B in April from an upwardly-revised €32.8B in March.
Eurozone inflation pressures snapped back in April. Friday's advance report showed that headline inflation rose to 1.9% year-over-year, from 1.5% in March, lifted by a jump in the cor e rate to 1.2% from 0.7% the month before.
Last month was sobering month for equity investors in the Eurozone, and indeed in the global economy as a whole.
The ECB's communication to markets has been clear this year. In Q1, the central bank changed its stance on the economy towards an emphasis on "downside risks to the outlook".
In September last year, headline CPI inflation stood at exactly zero. Today, we expect to see a 1.5% print, thanks mostly to the fading impact of falling energy prices.
Final May CPI data in the Eurozone today likely will confirm that inflation pressures edged marginally higher last month. We think inflation increased to -0.1% year-over-year, from -0.2% in April, as a result of slightly higher services inflation, and a reduced drag from falling energy prices.
The Eurozone's trade surplus remained subdued at the end of the second quarter; it dipped to €16.7B in June from €16.9B in May.
The Chancellor chose in his Budget to increase the total size of the forthcoming fiscal consolidation, to ensure that the Office for Budget Responsibility continues to forecast that a budget surplus will be obtained in 2019/20.
Net exports should come roaring back as a driver of Eurozone GDP growth in the second quarter. The euro area trade surplus leapt to €24.3B in April, a new all-time high, up from a revised €19.9B in March. A 1.7% month-to-month fall in imports--mean-reversion from a 3.9% increase in March--was a big contributor to the higher surplus.
It's hard for a central bank presiding over an ageing economy to achieve a core inflation target of close to 2%. In yesterday's Monitor, we showed that German core inflation has averaged a modest 1.3% in this business cycle, despite solid GDP growth. The picture isn't much better for the ECB if we look at France.
Demand for new cars rebounded strongly last month, following the dip in October. Registrations in the EU27 rose 13.7% year-over-year in November, up from 2.9% in October, lifted mainly by buoyant growth in the periphery. New registrations surged 25.4% and 23.4% year-over-year in Spain and Italy respectively, while growth in the core was a more modest 10%. We also see few signs of the VW emissions scandal hitting the aggregate data. VW group sales have weakened, but were still up a respectable 4.1% year-over-year. This pushed the company's market share down marginally compared to last year. But sizzling growth rates for other manufacturers indicate that consumers are simply choosing different brands.
Inflation in the Eurozone jumped in December, and will surge further in Q1 as base effects from last year's crash in oil prices push energy inflation higher. Higher inflation in the U.S. and surging Chinese factory gate prices indicate that this isn't just a Eurozone story.
Yesterday's CPI report in the Eurozone confirmed that inflation pressures remain subdued, even as GDP growth is accelerating.
Yesterday's sole economic report showed that the Eurozone's external surplus recovered ground over the summer, but we don't think the rebound will last long.
Historical evidence suggests that we should be worried about the relative weakness in the Eurozone's manufacturing sector. Industrial production ex-construction has historically been a key indicator of the business cycle, despite accounting for a comparatively modest 19% of total value-added in the euro area. In all three previous major downturns, underperformance in the manufacturing sector sounded the alarm six-to-nine months in advance that the economy was about to slip into recession.
Yesterday's final CPI report in the Eurozone confirmed that headline inflation was unchanged at 1.5% in September.
As we go to press, Mr. Draghi is set to give the opening remarks for the 2019 ECB central banking forum in Sintra, and later today, at 09:00 CET, the president delivers his introductory speech.
Friday's data in the Eurozone confirmed that inflation rose sharply last month. Headline inflation increased to 1.9%, from 1.2% in April, and core inflation also rose, by 0.4 percentage points to 1.1%.
Growth in Eurozone car sales slowed slightly at the end of the first quarter. New car registrations in the euro area rose 5.8% year-over-year in March, down from a 14.4% increase in February. But the 12-month average level of new registrations jumped to new cyclical highs of 440,000 and 252,000 in the core and periphery respectively.
As warned--see our Monitor April 7--economic data in the Eurozone disappointed while we were away. Industrial production, ex-construction, in the euro area slipped 0.3% month-to-month in February, and the January month-to-month gain was revised down by 0.6 percentage point to +0.3%.
In one line: Stable, but the core rate probably fell a bit.
The impasse between Greece and its creditors has roiled Eurozone bond markets, but the ECB is likely ready to restore calm, if necessary. We think a further widening of short-term interest rate spreads would especially worry the central bank, as it would represent a challenge to forward guidance. For now, spreads remain well below the average since the birth of the Eurozone, even after the latest increase.
In one line: A repeat of the key message sent in September; loose policy is here to stay.
In one line: The ECB is all in; buckle up!
In one line: Surprisingly strong, but too soon to cheer.
In one line: The market speaks, and the ECB listens.
In one line: The ECB is loading its bazooka, but with what?
In one line: Steady and dovish.
In one line: Unchanged and dovish; policy-review time table and details to be revealed later.
In one line: Who are the new women, and man, at the top of the EU's hierarchy?
In one line: Stabilisation in the m/m data, but trend still points to slower output growth.
In one line: Dreadful.
In one line: No relief; these data are still horrible.
In one line: Still stuck in the mud.
In one line: Not much to cheer about; the trend is still falling.
In one line: Normal, and poor, services resumed.
In one line: Not pretty; the slowdown intensified in Q3.
In one line: Stung by volatility in major orders, but still unequivocally grim.
In one line: The end of an era.
In one line: A rate cut and QE are on the way.
In one line: Net trade offset a crash in inventories; but consumption also picked up.
In one line: Solid, but risks loom for the Q2 numbers.
In one line: Rebound in the CPI confirmed; the rebound in construction will be short-lived, but Q4 now looks solid overall.
In one line: Hit by crash in net exports and slower growth in consumers' spending.
In one line: Colour us confused; is the inventory correction over already?
In one line: Solid, but probably not sustainable; portfolio flows are accelerating.
In one line: Hit by slowdown in net trade and consumers' spending.
In one line: A further rise in sentiment and falling unemployment; not bad.
In one line: The ECB is all in; buckle up!
In one line: Ms. Lagarde is off to a good start.
In one line: Unchanged and still-dovish; in short, mission accomplished.
In one line: Positive, but the trend is still down.
In one line: Hold the press; we have an increase in the EC sentiment index.
In one line: Decent, but more upside is needed in Q1 to tell a positive story overall.
In one line: Disappointing given last month's rebound.
In one line: Energy inflation is back above zero; the core rate likely will ease a bit further in Q1.
In one line: Hit by lower energy and services inflation.
In one line: Promising, but a coronavirus hit looms in the next few months.
In one line: Not pretty; downside risks remain for industrial production in Q2.
In one line: Still grim, but the rate of contraction is easing.
In one line: A bad finish to a bad year.
In one line: Small rebound confirmed, but still overall weak.
In one line: Grim manufacturing, mixed money supply data.
In one line: Still weak, but a few signs of improvement.
In one line: Core inflation is overshooting; construction set to remain soft in Q4.
In one line: The headline CPI has bottomed for the year.
In one line: Stability; thanks to solid services.
In one line: Soft, but also resilient overall.
In one line: Slowdown confirmed; budget surplus stronger than expected, again.
In one line: A stable headline with resilience in services and depressed manufacturing
In one line: Better than expected.
In one line: Ugly services PMIs in Spain and Italy, but they should recover next month.
In one line: An altogether more positive picture.
In one line: Hit by slower inflation in energy and food; the core rate rose, but the details were soft.
In one line: German (HICP) core inflation is rising.
In one line: Rising food inflation offset plunge in energy inflation; core stable.
In one line: Boosted by sharp rebound in services inflation.
In one line: Very soft, but services inflation should rebound soon.
In one line: Energy inflation rose, but the core rate dipped.
In one line: Soaring, but stabilisation beckons in Q1.
In one line: Core inflation remains subdued, but it will rise soon.
In one line: Deflation in manufactured goods is still a big drag.
In one line: French core inflation is now back to its previous trend; further upside?
In one line: French core inflation is rebounding.
In one line: Soft; we still don't know what is going on with the core rate.
In one line: Leisure services are throwing the core rate around.
In one line: All over the place.
In one line: Driven higher by energy inflation; the core rate eased.
In one line: Core firmer in both countries, but they're probably now stabilising.
In one line: Hit by lower inflation in energy and clothing.
In one line: Holding on to recent gains, but we still look for a setback in H1.
In one line: The HICP core rate appears to be returning to its trend of about 1.5%
In one line: Still grim in manufacturing, but services look ok.
In one line: Weak, but not recessionary.
In one line: Spared complete embarrassment by resilient services.
In one line: A setback, but the composite PMI rose over Q3 as a whole.
In one line: A strong rebound from the September swoon.
In one line: Robust, but not a reliable indicator for GDP growth.
In one line: Still holding up better than the rest.
In one line: Great headlines, but the details paint a more negative picture.
In one line: The road to recovery begins; we hope.
In one line: Recession all but confirmed; over to you Berlin.
In one line: Disappointingly slow GDP growth at the end of 2019, but in line with surveys and hard data.
In one line: Decent July means net foreign trade unlikely to be a big drag on Q3 GDP growth.
In one line: The new sick man of Europe.
In one line: Still ugly.
In one line: Ugly; manufacturing is sinking without a trace.
In one line: Manufacturing still looks terrible, but the remaining headlines are decent.
In one line: Soft, but decent overall.
In one line: Saved by robust services.
In one line: Trust the national core rate, and the HICP headline rate.
In one line: Not pretty PMIs; money supply details better than the headline.
In one line: Settling.
In one line: Hit by the unwinding of Easter-distortions, but still a big dip.
In one line: Forget the headline; the core rate fell sharply.
In one line: Are capital flows pointing to a stronger euro?
In one line: Boosted by a jump in energy inflation; more upside ahead in Q1.
In one line: Stuck in neutral.
In one line: Solid headlines, but can we trust them?
In one line: Amber alert.
In one line: The French economy is bucking the trend, to the upside.
In one line: No relief at the start of Q4.
In one line: Sinking without a trace, but still not recessionary.
In one line: Soft; strength in France and Germany offset by weakness elsewhere.
In one line: Stabilisation complete; now an upturn?
In one line: Soft, but still consistent with decent GDP growth.
In one line: Solid; manufacturing index likely hit by pension reform strikes.
In one line: Another soft headline at the start of Q4.
In one line: The trend in goods spending is now rising; energy inflation rose further, but the core rate dipped.
In one line: Only a modest Q3 rebound for consumption in France?
In one line: Like watching paint dry.
In one line: Biggest m/m increase since mid-2017; no kidding! No coronavirus here.
In one line: Solid, but the coronavirus is a threat for the rest of Q1.
No change; overall robust.
In one line: A slow start to Q4 for the consumer; headline inflation is now rising.
In one line: A good start to Q3 for French consumers; German inflation likely fell in August.
In one line: Stung by weakness across the board, but expect a rebound next month.
In one line: Not pretty in manufacturing; the remaining details were robust.
In one line: Core inflation will fall back this month; construction jumped in Q1, but a setback looms in Q2.
In one line: A modest rebound; net portfolio outflows are still subdued, but that should change soon.
In one line: Solid!
In one line: Robust spending in France through Q3; the German labour market is rolling over.
In one line: Hit by fall in the trade surplus; portfolio outflows remain modest.
In one line: French households are doing great.
In one line: A solid start to Q2 for French consumers.
In one line: Solid, but base effects flatter the headline.
In one line: Solid numbers in Germany, but grim elsewhere.
In one line: Weak, and Q2 as a whole likely will be bleak.
In one line: A slow recovery is underway
In one line: Ugly, but mostly mean reversion from a leap in December.
In one line: The Eurozone was a bit better than the EU 28, but still poor overall.
In one line: Slightly confusing manufacturing data; but overall picture is robust.
In one line: Great headline, great details.
In one line: Ugly, but it was well telegraphed by the advance data.
In one line: Solid, but boosted by base effects.
In one line: Ouch; not the best send-off for the Christmas holiday.
In one line: Still rising...
In one line: Don't panic over the dip in consumer sentiment; net trade likely lifted Q4 GDP growth.
In one line: Still improving.
In one line: Flatlining at the end of a weak quarter.
In one line: Strong finish to Q3, but the quarter as a whole was poor.
Growth in EZ car sales slowed further at the beginning of Q4. New registrations in the euro area fell 1.2% year-over-year in October, down from a 7.2% increase in September.
Yesterday's final CPI report confirmed that inflation in the EZ fell marginally in August, by 0.1 percentage points to 2.0%.
The Eurozone has a productivity problem. Between 1997 and 2007, labour productivity rose an average 1.2% year-over-year, but this rate has slowed to a crawl--a mere 0.5%--since the crisis. These data tell an important story about the peaks in EZ GDP growth over the business cycle. Before the financial crisis in 2008, cyclical peaks in Eurozone GDP growth were as high as 3%-to-4% year-over-year.
No subject in the EZ economy is a source of more dispute than Germany's ballooning current account surplus. The Economist recently identified he German surplus as a problem for the world economy.
Output in EZ construction rebounded sharply in February, erasing a slip at the start of the year.
Today's Monitor is a good opportunity to remind readers about one of the most important rules of EZ business cycle analysis.
The new Argentinian president has started to clean up the mess left by his predecessor, Cristina Fernandez de Kirchner. President Mauricio Macri lifted capital controls, and let the ARS float freely yesterday. The peso tumbled about 30%, getting close to 14 ARS per USD, where it had been trading in the black market. The government also announced that it is on track to receive about USD 12-to-15B, to build up the battered foreign reserves, and to contain any overshooting. This money will come through many channels, for example, grain producers have announced that they will sell about USD400M a day over the coming weeks.
Growth in new EZ car sales remained brisk last month, growth slowed in Q3. New registrations rose 9.4% year-over-year in September, marginally lower than the 9.6% increase in August. Growth in France fell most, sliding to 2.5% from 6.7% in August, but sales in Germany picked up to 9.4%, from 8.3%.
The stubbornly slow rate of decline of public borrowing casts doubt on whether the Chancellor will run a budget surplus before the end of this parliament, as his fiscal rule stipulates. But downward revisions to debt interest forecasts by the Office for Budget Responsibility are likely to absolve him again from intensifying the impending fiscal squeeze in the Budget on March 16.
Mexican president-elect Andrés Manuel López Obrador, known as AMLO, has set out the first points of his austerity plan, two weeks after his overwhelming victory at the polls.
Surveys suggest that today's retail sales figures will show that sales volumes increased by around 1% month-to-month in June, significantly exceeding the consensus, 0.4%. But the pickup in June likely will be just a blip; the further intensification of the squeeze on real wages and a tightening of unsecured lending standards will keep retail sales on a flat path in the second half of 2017.
The Spanish economy has been punching above its weight in the current business cycle. Real GDP growth has trended at about 0.8% quarter-on-quarter since 2015, far outpacing the other major EZ economies.
Growth in new EZ car sales slipped last month, following a strong start to the year. New registrations rose 4.4% year-over-year in February, slowing from a 8.7% rise in January.
Our view that EZ survey data would take a step back in February was severely challenged by yesterday's PMI reports. The composite index in the Eurozone rose to 56.0 in February, from 54.4 in January, lifted by a jump in the services index and a small rise in the manufacturing index.
Markets tend to ignore Eurozone construction data, but we suspect today's report will be an exception to that rule. Our first chart shows that we're forecasting a 8.5% month-to-month leap in February EZ construction output, and we also expect an upward revision to January's numbers.
Yesterday's final EZ PMIs imply that growth in manufacturing slowed marginally in August. The PMI fell to 51.7, from 52.0 in July, trivially below the initial estimate, 51.8. Output and new orders growth declined, pushing down the pace of new job growth. But we think the hard data for industrial production in Q3 as a whole will be decent.
April's retail sales figures, released today, likely will show only a partial reversal of the sharp 1.3% month-to-month fall in sales volumes in March. This would reinforce the impression that the recovery in consumer spending has been becalmed by slower job growth, the intensification of the fiscal squeeze and heightened uncertainty about the economic and political outlook.
Yesterday's retail sales data in Brazil surprised to the downside. Consumers are still being squeezed by high interest rates and a deteriorating labour market. Retail sales declined 0.6% month-to-month in August, leaving the year-over-year rate little changed at -5.5%.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
It would be a serious mistake to conclude from July's retail sales figures that consumers' spending will be immune to the fallout of the Brexit vote. Households have yet to endure the hiring freeze and pay squeeze indicated by surveys of employers, or the price surge signalled by sterling's sharp depreciation. The real test for consumers' spending lies ahead.
The EZ economy powered ahead in 2016...and is so far oblivious to political risks
Investors were presented with a barrage of mixed EZ economic data on Friday, fighting for attention amid markets celebrating the arrival of negative interest rates in Japan. Advance Eurozone CPI data gave some respite to the ECB, with inflation rising to 0.4% year-over-year in January from 0.2% in December.
The revival in the construction sector is slowing on all fronts as the fiscal squeeze intensifies, business confidence fades and the recovery in housebuilding loses momentum. These headwinds are likely to ensure that construction output only holds steady this year, thereby contributing to the broader economic slowdown.
November's money and credit figures brought welcome news that the recovery in bank lending is strengthening. This revival should continue, now that banks have completed most of the work required to improve their capital positions. But we doubt lending will recover quickly enough to prevent the economic recovery slowing in 2016, as the downward pressure on growth from the fiscal squeeze and the strong pound builds.
EZ bond markets were stung earlier this week by a Bloomberg story suggesting that the ECB, in principle, has agreed on a QE exit strategy which involves "tapering" purchases by €10B per month. The story also specified, though, that the central bank has not discussed when tapering will begin.
The EZ Economy entered Q4 on a solid footing...But the Political Uncertainty Looms
The EZ economy will finish 2016 strongly...but political risks continue to simmer
The story in EZ capital markets this year has been downbeat.
Will EZ services hold their own amid weakness in manufacturing?
Why is the EZ current account surplus rising and net exports falling at the same time?
Friday's economic data added to the evidence of a Q1 rebound in EZ consumption growth.
EZ equity futures predictably fell out of bed as the news of the Trump victory gradually became clear overnight yesterday. The reaction was less violent than after the U.K. Brexit referendum, though, and Mr. Trump's balanced victory speech appears to have calmed nerves for now.
Today's advance Q2 GDP report in Germany will add evidence that the EZ economy performed strongly in the first half of 2017. We can be pretty sure that the headline will be robust. The German statistical office reports a confidential number to Eurostat for the first estimate of EZ GDP--two weeks ahead of today's data--which was a solid 0.6%.
The FTSE 100 fell further yesterday, briefly to levels not seen since November 2012, but its drop over recent months is not a convincing signal of impending economic disaster. The economic recovery is likely to slow further, but this will reflect the building fiscal squeeze and the sterling-related export hit much more than the wobble in market sentiment.
The German inflation rate soared at the start of 2017, but it likely will fall in the next few months. Final February data yesterday showed that inflation rose to 2.2% in February, from 1.9% in January, consistent with the initial estimate. Since December, headline inflation in Germany, and in the EZ as a whole, has been lifted by two factors. Base effects from the 2016 crash in oil prices have pushed energy inflation higher, and a supply shock in fresh produce--due to heavy snowfall in southern Europe--has lifted food inflation.
EZ survey data were solid in the fourth quarter, pointing to robust GDP growth, but numbers from the real economy have so far not lived up to the rosy expectations. Data yesterday showed that industrial production fell 0.7% month-to-month in November, pushing the year-over-year rate down to 1.1% from a revised 2.0% in October. Italian data today likely will force marginal revisions to the headline next month, but they are unlikely to change the big picture.
The worst phase of the squeeze on real wages is nearly over; CPI inflation looks set to peak at slightly above 3% in October, before falling back steadily to about 2% by the end of 2018.
The escalation in the U.S.-Chinese trade wars has understandably pushed EZ economic data firmly into the background while we have been resting on the beach.
The recent cyclical upturn in the EZ began in the first quarter of 2013. GDP growth has accelerated almost uninterruptedly for the last two years to 1.5% year-over-year in Q3, despite the Greek debt crisis and slower growth in emerging markets. Overall we think the recovery will continue with full-year GDP growth of about 1.6%. But we also think the business cycle is maturing, characterised by stable GDP growth and higher inflation, and we see the economy slowing next year.
On all accounts, growth in France has been modest in the past six-to-12 months, but in relative terms, the French economy is slowly but surely asserting itself as one of the key engines of growth in the EZ.
Inflation pressures in France eased in February, in contrast to the story in the rest of the EZ. Yesterday's report confirmed the initial estimate that inflation fell to 1.2% year-over-year in February, from 1.3% in January. The headline was hit by a crash in the core rate to a two-year low of 0.2%, from 0.7% in January.
Companies' profit margins have fared relatively well during this recovery, and on many measures, they are back to pre-crisis levels. But looking ahead, corporate profitability is set to be squeezed as labour takes a larger share of national income and the Government gets to grips with the budget deficit by increasing corporate taxation.
The EZ retail sector slowed at the start of Q3, though only slightly.
The tepid recovery in German manufacturing continued in at the start of Q4. Factory orders edged higher by 0.3% month-to-month in October, boosted by a 2.9% month-to-month increase in export orders, primarily for capital and intermediate goods in other EZ economies.
Yesterday's national surveys in the EZ confirmed the downbeat message from the PMIs and consumer sentiment data earlier this week.
It says a lot about investor expectations that markets' reaction to yesterday's policy announcement by the ECB was marked by slight "disappointment," with EURUSD rallying and EZ bond yields rising.
The violence of recent bond market weakness likely has been driven mainly by reduced liquidity, and a squeeze in crowded positions. But we also think that it can be partly explained by an adjustment to higher inflation expectations. The latest ECB staff projections assume the average HICP inflation will be 0.3% this year, up from the zero predicted in March. Allowing for a smooth increase over the remainder of the year, this implies a year-end inflation rate of 0.8%.
We have been telling an upbeat story about the EZ economy in recent Monitors, emphasizing solid services and consumers' spending data.
Yesterday's data dump in the EZ delivered something investors haven't seen for a while, namely, positive surprises.
Data yesterday showed that Momentum in the EZ retail sector stumbled through middle of Q2.
At the start of the year, #euroboom was the moniker used in financial media to describe the EZ economy.
The Italian economy slowed at the end 2017, and it continues to underperform other major EZ economies. Real GDP rose 0.2% quarter-on-quarter in Q4, a bit slower than the 0.3% gain in Q3, pushing full-year growth up to a modest 1.0%. This compares poorly, though, with growth of 1.6% in the euro area as a whole.
As recently as late 2008, the share of employee compensation in GDP was slightly higher than the average for the previous 20 years. But it would be wrong to argue, therefore, that the squeeze on labor is a phenomenon only of the past few years. It's certainly true that labor's share dropped precipitously from 2009 through 2011, and has risen only marginally since then.
A complicated year ahead for EZ investors...but the economy still looks robust
The Economic Slowdown in the EZ: Temporary or Something More Sinister?
In one line: Fernández victory presages dramatic change in Argentina; but a balanced Congress gives slight room for optimism.
We can't find much wrong with the EZ Economy...and that is probably worrying
Brazil's central bank is in a very delicate situation. The economy is on the verge of another recession, but at the same time the BRL is falling, inflation expectations are rising and the inflation rate is overshooting. Fiscal policy is also tightening to restore macro stability magnifying the squeeze on growth.
Friday's final EZ inflation report of 2017 sent a dovish signal to bond markets.
Demand for German manufacturing goods slipped at the end of Q3. Yesterday's report showed that factory orders fell 0.6% month-to-month in September, constrained by weakness in domestic demand and falling export orders to other EZ economies.
The slew of EZ economic data on Friday supports our view that the economy ended 2016. The Commission's economic sentiment index jumped to 107.8 in December from a revised 106.6 in November. The headline strength was due to a big increase in "business climate indicator" and higher consumer sentiment. In individual countries, solid numbers for German construction and French services sentiment were the stand-out details.
Inflation pressures in the Eurozone probably firmed slightly in August. Data yesterday showed that inflation in Germany and Spain rose by 0.1 percentage points to 1.8% and 1.6% year-over-year respectively, and we are also pencilling-in an increase in French inflation today, ahead of the aggregate EZ report.
German manufacturing is in good shape, but probably is not as strong as implied by yesterday's surge in new orders. Factory orders jumped 5.2% month-to-month in December, rebounding strongly after a downwardly revised 3.6% fall in November. December's jump was the biggest monthly increase in two years, but it was flattered by a leap in bulk investment goods orders, mainly in the domestic market and other EZ economies.
Yesterday's business confidence data in the EZ core were mixed.
China has undoubtedly been through a credit tightening, commonly explained as the PBoC attempting to engineer a squeeze, to spur on corporate deleveraging.
The trend of consensus-beating EZ economic data was brought to a halt yesterday. The IFO business climate index in Germany slipped to a five-month low of 109.8 in January, from 111.0 in December, mainly due to a fall in the expectations index. But we are not alarmed. The dip in the headline comes after a run of strong data, and the IFO remains consistent with GDP growth of about 1.6% year-over-year.
The squeeze on real wages has just ended and GfK's consumer confidence index hit a 11-month high in March.
The EZ doom-and-gloom crew has come crawling out of the woodwork again this year. Earlier this month, Nobel laureate Joseph Stiglitz told a German newspaper that Italy and other euro area countries likely will leave the currency union soon.
The recent run of grim sales and earnings numbers from major national retailers, including Kohl's, Nordstrom, and Macy's, reflects two major trends. The first is obvious; the rising market share of internet sales is squeezing brick and mortar retailers, as our first chart shows. We have no idea how far this trend has yet to run but it shows no signs yet of peaking.
Today's data likely will show that EZ households' sentiment remained close to a record high at the start of the year.
Robust demand in the ECB's final TLTRO auction was the main story in EZ financial markets yesterday. Euro area banks--474 in total-- took up €233.5B in the March TLTRO, well above the consensus forecast €110B. To us, this strong demand is a sign that EZ banks are taking advantage of the TLTROs' incredibly generous conditions.
Today's advance CPI data will show that EZ inflation pressures rose further at the end of Q3. The headline number likely will exceed the consensus. We think inflation rose to 0.5% year-over-year in September from 0.2% in August, slightly higher than the 0.4% consensus.
In the financial crisis, a squeeze in short-term dollar markets forced banks to sell assets, which were then exposed as soured.
Today's preliminary estimate of Q4 GDP likely will show that the Brexit vote has not caused the economy to slow yet. But growth at the end of last year appears to have relied excessively on household spending, which has been increasingly financed by debt. GDP growth likely will slow decisively in Q1 as the squeeze on households' real incomes intensifies.
Mr. Draghi's speech yesterday in Portugal, at the ECB forum on Central Banking, pushed the euro and EZ government bond yields higher. The markets' hawkish interpretation was linked to the president's comment that "The threat of deflation is gone and reflationary forces are at play."
Today's data in the Eurozone will provide the first glimpse of what happened in Q4. We think Eurostat's advance estimate will show that EZ real GDP rose 0.6% quarter-on-quarter, down slightly from an upwardly-revised 0.7% in Q3.
The big news in the EZ yesterday was the announcement by German chancellor Angela Merkel that she will step down as party leader for CDU later this year, and that she will hand over the chancellorship when her term ends in 2021.
Last week's advance EZ GDP data for the first quarter suggest the economy shrugged off the volatility in financial markets. Eurostat's first estimate indicates that real GDP in the euro area rose 0.6% quarter-on-quarter in Q1, up from 0.3% in Q4, and above the consensus, 0.4%.
Yesterday's final EZ manufacturing PMIs for August provided little in the way of relief for the beleaguered industrial sector.
Early results project that Andrés Manuel López Obrador--AMLO--will become the new Mexican president with 53.4% of the votes, against Ricardo Anaya's 22.6%, and José Antonio Meade's 15.7%. AMLO has declared victory and thanked his opponents, who recognized his triumph.
In recent Monitors--see here and here--we have made a case for decent growth in the EZ's largest economies in the second half of the year, though we remain confident that full-year growth will be a good deal slower, about 2.0%, than the 2.5% in 2017.
Friday's euro area inflation reported capped a difficult week for EZ bondholders, although most of the damage was done beforehand by the advance German data.
We fear that private spending in the EZ slowed in Q1, despite rocketing survey data. This fits our view that household consumption will slow in 2017 after sustained above-trend growth in the beginning of this business cycle.
Senior International Economist Andres Abadia appeared on "Counting the Cost" to discuss Venezuela's Petro launch (9:15 - 12:00)
Why is the EZ current account surplus rising and net exports falling at the same time?
Payroll growth rebounded to 223K in May, after two sub-200K readings, and we're expecting today's June ADP report to signal that labor demand remains strong.
Chief U.K. Economist Samuel Tombs on U.K. house prices
Chief U.K. Economist Samuel Tombs on U.K. Inflation
Chief LatAm Economist Andres Abadia on the Argentina Election
Ian Shepherdson on the U.K
Chief U.K. Economist Samuel Tombs on the U.K PMIs
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