This post is available in pdf format My Wedenesday Column – November 7
US job growth is buoyant, but is it all down to the Trump effect?
The US economy created 250,000 jobs in October, which is a bit higher than the average of 213,000 witnessed since the start of the year. However, October is usually a fairly good month for new job creation, with 271,000 in October 2017, and an average of 246,000 in the month of October since 2013 as compared to an average of 206,000 for other months.
The labor market is buoyant overall, reflecting a solid pace of economic growth although nothing to write home about with 2.25% per year on average since 2011. Continue reading
This post is available in pdf format Federal Reserve – My monday Column
The Federal Reserve meets on September 25 and 26, and a 25bps hike to the fed funds rate is expected, putting the effective rate in a range of between 2% and 2.25%, with another hike expected in December. The Fed now seems to agree on these four monetary tightening moves for 2018, so the next big question is 2019. During the latest update of economic and financial projections from the members of the Federal Open Markets Committee (FOMC) in June, three interest rate hikes were expected in 2019. How can we get a clearer idea of what’s to come?
Four interest rates are now confirmed by the Fed. I had mentioned this scenario at the start of the year due to the White House’s implementation of expansionary fiscal policy and I have not changed my mind: the hike to the fed funds rate is just a way to iron out the imbalances caused by this policy that seeks to fuel domestic demand.
This domestic momentum reflects the impact of two factors: the first is the direct effect of tax cuts and rising public spending, and we can see the positive effects of this twofold approach for demand; the other component is trade policy that aims to use domestic production to replace imports, thereby sharply driving up demand for companies’ goods and services.
So the White House has adopted a two-pronged approach: on the one hand it bolsters domestic demand and the other it directs this additional demand towards US companies rather than imports.
This internal momentum will have at least two direct consequences: the first is the risk of inflation because demand is strong and because of higher import duties. Continue reading
This post is available in pdf format My weekly Column – Italy Standpoint – PW
What were last week’s major changes?
The main change was in Italy with a strong and rapid drop in the interest spread with Germany.
Since the new coalition government came to office, fears have emerged on exactly how the campaign-trail program would translate into the forthcoming budget – an answer to this question is expected on September 27.
The government’s stance so far has been to be fairly relaxed, especially on the 3% threshold (of budget deficit as % of GDP), which explains why the yield spread with Germany widened considerably over recent weeks.
This was a source of concern as the Italian economy would soon have run up against financing difficulties due to the reluctance of non-resident investors – who hold around 35% of the country’s debt – to revisit the Italian market after withdrawing their investment in the country all summer. Italians cannot and do not want to leave the euro area, so additional pressure on liquidity and interest rates could have hampered funding for Europe as a whole.
However, the economic situation is swiftly changing in Italy, as economic activity slowed sharply over the summer months, Continue reading
Oil prices are soaring out of control to slightly above $75/bbl, while the greenback is gaining ground again, and now stands at under 1.2 to the euro with its effective exchange rate rising swiftly and triggering uncertainty on the markets, particularly emergings.
Meanwhile, wages are still not rising in the US, despite unemployment falling below the 4% mark for the first time since December 2000: at the time, the reference wage was up 3.8% vs. an increase of merely 2.6% in April 2018.
Is the French economy becoming virtuous? With the public deficit falling below the 3% mark, it is tempting to think so… 2.6% for the full year 2017 and 2.1% for the last quarter of the year, so it is really very tempting.
But yet if we look at the figures and the consistency of public accounts with the acceleration in growth in 2017, our bubble bursts as the public deficit profile perfectly follows the trend in growth, which virtually doubled between 2016 and 2017, surging from 1.1% to 2%, so public finances naturally improved. We can see on the chart the strong consistency between the public deficit profile and the pace of real growth with a two-quarter lead. The deficit improves alongside economic growth but it is still difficult to stay on course when growth slows.
Inflation figures at 1.1% in February do not trigger expectations of a fast and sharp change in the ECB’s monetary policy, and Mario Draghi and Peter Praet did not indicate that they were in any hurry to implement swift or sudden change in their comments at the end of last week.
The ECB’s monetary strategy is dependent on reaching inflation in line with its medium-term objectives: the 1.1% figure does not point in this direction.
The chart below shows the contribution from each of the three main sectors to the rise in inflation, and we can see that none of them display a marked uptrend. Continue reading
The hefty fiscal stimulus in the US involving a rise in spending (1% of GDP in 2018 and 2019) and the implementation of tax cuts should be seen as a shock for the international economy. The uniformity of economic policy across developed countries, which acted as the driver for the growth recovery witnessed since 2017, is now just a distant memory.
Fiscal policy in the US will clearly trigger an adjustment between economic blocks and particularly between the US and the euro area and this will necessarily involve the exchange rate. The greenback has so far tended to lose value, regardless of whether we look at the effective exchange rate (nominal or real) or the dollar/euro rate.
The big question now is the dollar’s trend over the months ahead. Will the greenback gain value or must it inevitably fall as a result of the imbalances triggered by policy from the White House and Congress?
There has been something of a logic in the trend between monetary policy expectations in the US and the euro area, and the euro/dollar exchange rate since 2007. Expectations of more restrictive monetary policy in the US led to gains for the dollar right throughout this period, as shown by the chart below. However, we can see that since the Fall of 2017 there has been a clear divergence between the two indicators. The exchange rate stands at 1.24 while monetary policy expectations put it more towards parity.
It is important to understand this point at a time when economic policy is changing in the US.
It is worth looking back to the start of the 1980’s when the greenback gained considerably as a result of much higher real interest rates in the US than in other developed countries, reflecting the impact of Paul Volcker’s very restrictive policy when he chaired the Fed at the very start of the 1980s and then the effects of Reagan’s very expansionary fiscal policy, which led to a long-lasting deterioration in the fiscal balance and the current account balance. Continue reading