What to expect this week (October 28 – November 3)


> The Fed’s meeting with a press conference and a press release on Wednesday. Two questions: are disagreements between FOMC members remain as high as in September ? Will the Fed cut its target rate ? The dots graph suggests a third cut this year.

Christine Lagarde will replace Mario Draghi as president of the ECB next Friday. The balance between politics and economics will be different than in the current mandate. The main task for Christine Lagarde will be to maintain the cohesion of the ECB members at a moment where the monetary policy is already very accommodative and the impact of a change will be questioned and lower than in the past.

On the Brexit side, a vote is expected today on the possibility of general elections on December the 12th  Boris Johnson will probably not have the qualified majority for it.
The EU, in a draft, has proposed an extension of the Brexit until the end of next January.

> GDP figures will be released this week in the US and in France (30) and in the Euro Area, Italy and Spain (31). Expectations are on lower figures than in the second quarter. This would be consistent with the business surveys seen during this third quarter.

> ISM index for the manufacturing sector (November 1) will be key to anticipate the business cycle profile in the US. The index was below the 50 threshold in August and September.

> The Chinese official PMI index (31) and the Markit index for the manufacturing sector (1st )

> The Markit indices for the manufacturing sector will be released on November the 1sr except on Continental Europe.

The US employment report next Friday. The momentum is lower than in the first part of the year even with a very low unemployment rate

Inflation flash estimates will be released in Europe this week. (Euro Area 31). As the oil price is on average lower than in September (53.7 € in October vs 56.7€ in September )  and has to be compared with a high level in October 2018 (70.3€). The energy contribution will be strongly negative and the inflation rate will be probably below the 0.8% seen in September.

The document is available here


What to expect this week (21 October – 27 October 2019)


> The ECB meeting (October 24) will be the most important event of the week.
During last meeting, the ECB adopted a very accommodative monetary policy stance. This led to important discussions notably on the resumption of the QE and on the forward guidance as these measures will remain until the EA inflation converges to the ECB target. Nothing new is expected?

> This meeting will be the last for Mario Draghi. He will quit the ECB at the end of this month and be replaced by Christine Lagarde. Draghi has given to the ECB the soul and the instruments that are necessary for an independent and influential central bank (more details on Draghi’s impact on the ECB in the document).

> Many corporate surveys for October will be released during the week. The French “climat des affaires” (23), the German Ifo (25), the Markit flash estimate (24) and CBR orders in the UK (21)
The current mood in developed countries is pessimistic and this will not reverse rapidly. The IMF forecasts was a synthetic view of this backdrop.
A Brexit deal would have had a positive impact but the Parliament has not allowed for it. BoJo has ask for a new delay until the end of next January. This increases uncertainty as we don’t know what will happen in the next three months. Do we converge to a new referendum ? Will Bojo force the Brexit before the end of next January ? Will there be general elections ? No one knows. Many would like to write the future but the recent past has shown that the foreseeable future is not predictable.
There are uncertainties also coming from the discussions between China and the US. Discussions, last week was mainly on agriculture as there is a necessity for the US to reverse the trend coming from the trade war. China now buys soybean in Brazil rather than in the US. This weakens Trump future presidential campaign. The risk associated with this negotiations’ failure is a source of supplementary weakness. The uncertainty for the future is still high and is a constraint for the economic activity.

> Durable goods orders in the US for September (24).
These numbers have not been strong recently and could reflect a weakness in corporate investment in coming months.
> Existing homes sales in the US for September (22)
This statistic is important as it reflects a kind of wealth effect. Thera are more house owners in the US than people having a large portfolio of risky assets. Movement in the real estate has therefore more impact on consumers’ behavior than the stock market can have. The existing home sales is for me the most important statistic that shows this wealth effect. Recent improvement was supportive for consumers’ expenditures.

The detailed document is available here

The German saving rate doesn’t depend on the ECB interest rates

There is a lot of talks about the German savings rate, which is supposed to have increased recently in response to the drop in interest rates, notably the ECB rates. The anxiety caused by the fall in interest rates would encourage Germans to save more to counteract this uncertain environment.
It does not work. Germans do not vote against the ECB by increasing their savings as savings rates are stable.
This story about the Germans’ behavior is supposed to show the frustration of our neighbors and the inability of the ECB to manage monetary policy. Very Smart People are still alive and in action.
I have looked at the series of the household savings rate (savings on disposable income) and the global saving rate (Total income minus private consumption minus public consumption as a% of total income). These are the two relevant series for measuring the savings rate, in Germany or elsewhere.These two series, in recent years are flat like the back of the hand.
The household savings rate has fluctuated between 9% and 11.2% since the first quarter of 2009 and stands at 10.8% in the second quarter of 2019. It can even be said that since the start of the euro area, the German household savings rate is stable on these same levels.
Yet since 2009 the refi rate has declined by 250 basis points, same for the deposit facility rate.
There is no impact of the ECB rate on the behavior of the savings rate.
We can also look at the overall saving rate, that of the German economy as a whole. As the households’ saving rate, this one is stable. Since 1991, it has been slightly above 25% of GDP. It is not an additional saving behavior that explains the increase in the German external balance but the decline in the investment rate (the difference between the savings rate and the investment rate is the current account balance as a% of GDP). For the overall saving rate also, the impact of the Bundesbank rate and then the ECB rate does not seem to exist.

Brexit after the deal

The Brexit deal takes all its flavor by looking at the situation in Northern Ireland. It will be in the United Kingdom and the single market. The UK will therefore have a border with one of its provinces and Northern Ireland will be in a customs union with the EU. Let’s not doubt that UK products or products going through the UK will not find it very difficult to end up in the single market.

Once again the British get what they want and have an exorbitant power over the European law. The Europeans accept this situation with a smile. Since 1973, discussions and negotiations between the EU and the the UK are usually in favor of the UK. With this deal this also the case. What a scandal. How, under these conditions, can we, one day, imagine a political Europe that does not disintegrate when the pressure is rising?

The deal must now go before the British Parliament. The Conservatives do not have the majority, as this balance of strength of Parliament shows.

Central Banks and the IMF – The world economy as at October 14*

Monetary policy has been at the heart of recent market trends once more. The minutes from the US Federal Reserve’s meeting on September 17 and 18 as well as from the ECB meeting on September 12 reveal that central bankers’ views can be fairly diverse. In other news, the Fed announced that it would be buying T-bills to tackle liquidity risk, such as the situation witnessed after September 17 on the US money market. These various factors led to uncertainty and more divergent projections for the financial markets, with interest rates surging as a result.

In the US, the Fed decided to lower the target range for the federal funds rate by 25bps at its September 18 meeting, from a range of 2.00-2.25% to a range of 1.75-2.00%. The dot plot also points to a further likely cut in December.

However, James Bullard, President and CEO of the Federal Reserve Bank of Saint Louis, was in favor of a 50bps cut to help growth take an uptick more quickly and promote a more rapid return of inflation. At the same time, Esther George, President and CEO of the Federal Reserve Bank of Kansas City, wanted to keep interest rates steady as she believes that greater monetary accommodation is not yet necessary given the current state of the economy. Meanwhile, Eric Rosengren, President and CEO of the Federal Reserve Bank of Boston, believes that monetary policy is already sufficiently accommodative judging by the pace of the economy, and that further moves are not necessary. The various central bankers in the US do not share the same view of how the Fed should act, and this could lead to uncertainty for investors.

In the euro area, the ECB’s decisions at its September 12 meeting did not all meet with the same enthusiasm. The decision on banks’ role in financing the real economy via the TLTRO program was approved easily – it is vital to facilitate funding for the economy to ensure strong renewed growth.
The two-tier system for reserve remuneration was also agreed, and banks’ reserves will no longer be entirely subject to the negative deposit facility rate, which was cut to -0.5%. As much as six times banks’ mandatory reserves may now be exempt from the deposit facility rate, and this means a hefty transfer of financing from the Eurosystem to the banking system. The aim here is to safeguard a robust banking system to ensure that monetary policy moves feed through to the real economy. However, there were discussions as to whether these measures were compatible with an easing in the terms of the TLTRO program.
There was even more dissent on the issue of forward guidance. Interest rate and quantitative easing measures will be maintained until inflation converges to a level sufficiently close to, but below, 2% on a structural basis. Should the bank have kept this measure time-specific or should it make moves dependent on achieving the inflation target? Was this the focus for debates?

The most hotly debated issue was the resumption in the quantitative easing program. The ECB will resume its asset purchase program on November 1 at a pace of €20bn per month. This will round out reinvestment of principal payments from maturing securities in the ECB’s portfolio of around €10bn. The new-look QE program is expected to end shortly before the ECB starts raising its key interest rates, while reinvestment will continue past the date that the Governing Council starts raising key ECB interest rates.
There are questions as to the need for this move, although the ECB believes that it is necessary and that previous programs had promoted both growth and inflation. However, some critics of this policy feel that it is not necessary, while other opponents think that QE is not the right policy instrument in this situation. Interest rates surged in the euro area as a result of these various aspects, and with the Bundesbank and the Bank of France opposed to this move, investors felt that there may be some change to come. However, the governor of the Bank of France has since stated that they must now turn the page.

The important point here is that Christine Lagarde’s hands are now tied and she must follow the ECB’s decisions.

In the US, the Fed decided to inject massive liquidity into the money market. The US money market came under pressure on September 17, and the Federal Reserve Bank of New York intervened over the space of several days to inject significant cash into the system to tackle this liquidity risk, as shown by the chart on the size of the Fed’s balance sheet.
The Fed is also set to intervene by buying $60bn in T-bills between mid-October and mid-November and will then adjust this amount depending on market conditions until the second quarter of 2020. It will also continue its overnight repo operation until January 2020 to support the market’s adjustment.

The Fed does not want to call this program quantitative easing, but rather it is a way to provide the liquidity that the money market needs to avoid a shock on financial assets having any knock-on effect. This is a vital point: the central banks – and the Fed in particular – want to make sure they can address any potential financial shock very quickly and avoid any danger of it spreading. This can be seen as a transitional phase as the Fed has only set out plans until next spring, but it can also be viewed as an indication of fears that the situation could get out of hand, so every effort must be made to avoid any negative impact for the markets and the economy.

Indicators issued during week of October 7
We particularly note fairly robust industrial production figures in the euro area, apart from France where industrial output plummeted 0.9% and manufacturing output dropped 0.8% in August. Sound figures from Germany and Spain drove a 0.4% increase in production for the euro area as a whole in August.

The US labor market continues to adjust. Despite a dip in jobless numbers to hit a low of 3.5% in September, survey data show that momentum on job openings is much less robust. The labor market remains solid, but is not as buoyant as before, and this is also reflected in monthly figures on new jobs created, with both private sector and total job creations over the month at their lowest since 2010.

Looking across the globe, Chinese external trade continued to deteriorate, with exports contracting slightly and imports continuing to decline hastily. The Chinese government does not want to embark on aggressive economic stimulus: the economy is not undergoing a shock, but rather domestic demand is sluggish, as reflected by investment as well as imports. We also note the 22% collapse in exports to the US in September yoy, and this downtrend is gathering speed after a 16% drop in August. China is shifting its external trade to make it less dependent on the US, but this change could turn out to be tricky, so a more ambitious domestic policy may be needed to offset this external shock. US-China trade talks are making no progress, despite what the White House says.

Three key points to watch over the week ahead
The first is an ongoing but crucial issue – Brexit. The European summit on October 17 and 18 must address this issue and settle the final position on the matter. BoJo’s proposals for dealing with the Irish border issue are still not convincing, so if a deal is not reached at the summit the Prime Minister will have to ask for an extension, unless the 27 push the UK out of the bloc with no deal, but that seems unlikely.

The second major piece of news this week will be the US Fed’s Beige Book. These figures may clear up Esther George’s and Eric Rosengren’s doubts on the need for the Fed to cut interest rates.

The third event is the World Bank and IMF annual meetings. The IMF will give its outlook on the world economy and issue fresh projections. July’s figures indicated that we had hit the cycle peak in 2017, with a low in 2019 to be followed by a recovery in 2020, mainly on the back of a more robust economy and a rebound for emerging markets. However, doubts may emerge on this trend to an improvement.

But it’s not all doom and gloom. The good news is that Esther Duflo, Abhijit Banerjee and Michael Kremer have been awarded the Nobel prize for economics for their work on tackling poverty using ground-breaking methodology. Esther Duflo and Abhijit Banerjee published the book “Poor economics: a radical rethinking of the way to fight global poverty”, available in paperback.
So why not read this enjoyable and interesting book to find out more.

Have a good week!

This column was posted in French on Monday the 14th (See here)

An enduring crisis (part 1)

The world was thrown into disarray by the financial crisis in 2008 as it was forcibly pushed out of its previous very definite state, with its own momentum and its own very effective endogenous systems of control. This previous world order drove the economic success of western countries, but the world must now find a new stable framework with a new dynamic and different systems of control. The structure for this new order still remains very unclear and while there are a number of potential options, the transition from this previous – and very familiar – state to the new ill-defined set-up makes for a time of crisis.

The certainties of the past are now being called into question, and the new world order is only just emerging, so the certainties of tomorrow are not yet fully formed. This situation makes for a crisis as the past world has gone, while the world of the future is struggling with seemingly – and sometimes actually – contradictory signs.

The world as we know it in 2019 is nothing like the pre-crisis world of 2007. Our reference points have all completely changed and this is highly disconcerting. So it comes as no surprise that more radical political movements have developed and are all very similar in that they hark back to the past to try to find their bearings. Our ability to imagine these changes creating an ultimately coherent environment where we can see ourselves living comfortably is shaped by anxiety and uncertainty, which drive our behavior.

Today’s crisis is multidimensional. It is obviously a source of disruption, but contrary to common belief, it is not necessarily characterized by financial watershed. The financial aspect is merely just another source of uncertainty and while it is probably the most impressive at the time, it is actually not the most difficult aspect to address. Rather it is our changing world that lies at the heart of everyone’s gloom – and this scaremongering is excessive and contrived.

We are witnessing a very diverse and extensive range of changes that have taken place in a fairly short space of time, and it is this vast array of change that can seem frightening.

Phenomenally fast technological change is creating a new and unprecedented situation, e.g. visual recognition, which impinges on personal freedom, and feelings of being just another anonymous user, useful only as a target for personalized in-app advertising. An incredible revolution is taking place at unparalleled speed, yet this transformation does not feel like it provides a major or sustainable improvement in our wellbeing. What recent innovation has contributed more to our comfort than the refrigerator? None.

The world is also changing massively for the middle classes. Polarization of the labor market means that work for highly educated and for unqualified workers is increasing – albeit in very different ways – while intermediate jobs for those with few or poor qualifications are decreasing, with innovation primarily driving this trend. This middle class played the lead role in economic growth during the three post-war decades of boom in France, but now they just feel like bit players. This feeling is further aggravated when these employees live far from large cities with less access to healthcare, education and other public services. Here again the context has changed and the future looks much more bleak for this group. However, this situation is not just specific to France, as the Deaton review in the UK also reveals startling inequalities. This does not mean that the situation is the same across the board, but rather we must entirely overhaul some of our projections as past trends will not continue into the future.

The world balance is also changing dramatically. The same manufacturing methods are now being used in both developed and emerging countries, so the size of the world labor market has increased considerably, and this is another factor fueling difficulties for the middle classes.

Yet there are other aspects to this change in scale for the world economy. Tension between the US and China was inevitable as the real issue at stake here is political leadership, pursued via technological domination. China very quickly and relentlessly made up its previous lag as a result of vast efforts in the country, and also perhaps because of inadequate public investment in the US. This now casts doubt over US leadership in innovation: given China’s size and its increasing contribution to world growth, the balance of power in this battle of wills is fairly even. China is also developing a new way of managing its dealings with the rest of the world via its Belt and Road Initiative for example, which harbors a highly political dimension. The country’s expansion does not depend on Washington, unlike the situation in the west since the end of the Second World War.

This situation means a reallocation of resources for the US – and all to the detriment of Europe. So Europe must now stand united: the UK’s current ill-judged move is set to have drastic consequences. The world will not go back to its pre-globalization state, unless walls are built between countries around the globe. China is powerful, making it a key partner in future choices on global systems of control, whether in terms of people, goods, services or capital. Three-party communication between Europe, the US and China is vital, and a Europe that fails to stand united cannot have any influence in this trio, which would be highly damaging.

Another aspect of China’s rise is the fracture in the world’s historical dynamics. The industrial revolution took place in Europe and then extended naturally to America, so the shift towards China marks a huge swing in the world balance. French historian Fernand Braudel’s economic history went from the Mediterranean to Flanders via the Champagne fairs before making it to London and then New York – maybe China will be the last stop on this trip.

This all makes for a radical shift in the world’s reference points, with the feeling of losing our bearings and our grip on the future. America was easily seen as a natural successor to Europe, with a full range of virtues, but the same cannot be said of China.

To be followed…

This column was posted on the French Forbes’ website. You can retrieve it here