What to expect this week (September 30 – October 6)


> The most important data of the week will be the US ISM survey for the manufacturing sector (October 1). It was at 49.1 in August down below the 50 threshold for the first time since 2016 (January). This is an important data as it may affect investors ‘ expectations on the downside if it remains below 50. The ISM profile is consistent with the YoY change of the industrial production index. The current consensus for September is above 50. This suggests that it follows the Markit index profile for the manufacturing sector which has rebounded in September (flash estimate).

> The Markit indices for the manufacturing sector will also be important but we already know (flash estimates) that Japan was weaker in September as was the euro area index with a very weak number in Germany This latter would be consistent with a strong negative number for the GDP growth in Q3 in Germany.
The world index was up in August (but remaining in negative territory at 49.5.
Chinese indices will be out on Monday 30 September.
The services indices for the Markit and ISM surveys will be released on October the 3rd.
On October the 1st, the Tankan survey will be released in Japan.

> The US employment for September will be released on Friday 4. The number was weak in August and we do not expect a strong rebound as households’ perception of the labor market was weaker in September (through the conference board consumer confidence survey). One remarks, the private sector momentum is the lowest since 2010. It’s probably the consequence of the 2018 surge but it can also reflect weaker expectations on companies’ side.
In August, the number of public jobs was particularly high due to the 2020 Census. This may still be the case in September.

> Spanish growth second estimate for Q2 will be released on September 30 (the first was at 0.5% non annualized). The Bank of Spain has revised down its growth profile for 2019, 2020 and 2021. It now expects 2% in 2019, 1.7% in 2020 and 1.6% in 2021.

> The Euro Area inflation rate for September (October 1). It may be close to 1% for both the headline and the core. The convergence to 2% is not there yet.
Inflation rates in Spain, in Germany and in Italy are also expected (September 30)

> Unemployment rate for August in the Euro area (September 30), German retail sales for August (September 30). Industrial production index for Japan for August (September 30). Retail sales in the Euro Area (October 3)

On a more political ground, the 70th anniversary of the People’s Republic of China (October 1st) will be a ceremonial event on the Tienanmen square in Beijing. Xi Jinping will give an address to the nation.

The ECB will be unable to normalize its monetary policy soon

The ECB will not start the normalization of its monetary policy in 2019. The interest rate level will remain stable, my bet is that the refi rate and the deposit rate will remain at the current level in 2019.
The lack of external impulse, the slower momentum in the manufacturing sector and the convergence of the headline inflation rate to the core inflation rate are three reasons that suggest that the ECB will not take risks in the management of its monetary policy. The monetary policy normalization, even the expectation of it, may weaken economic activity. Therefore it’s not the good policy when the inflation rate is way below the ECB target with no convergence to the target in a foreseeable future.

The framework I have in mind is the following: Due to more heterogeneous behaviors and uncertainty at the political level, global growth will become, in 2019, weaker than in 2017 and in 2018. Inside the Euro Area, there are no coordinated policies that may boost growth, therefore growth trajectories will converge to potential growth. This framework is not a source of monetary policy normalization. But we can add that the dramatic oil price drop in recent weeks (due to excess supply in the US and in Arabia) will push the headline inflation rate to the core inflation rate which has been close to 1% for months. It’s still way below the ECB target and therefore not a source of monetary policy normalization.  Continue reading

Italy – The crisis is coming

The adjustment on the upside is not over on Italian rates. The 10 year bond’s rate is converging to 3%. The spread with the German 10-year rate is now circa 270 bp. This also reflects a safe heaven effect for German bonds.

With a rate at 3% % while the inflation is at 0.5% (in April), the real rate is way too high in Italy compared to real growth prospects. But such a level on the real rate (2.5%) would be just above the average seen since the beginning of the Euro Area (2.2%). It’s too high when the GDP trend is close to 1%. This has deterred investment and it will continue limiting the capacity to grow. We have to expect a slowdown in the economic activity in coming months. It will come from the real rate level but also from the uncertainty in the Italian economy. An austerity program that can be expected from a transition government is not good news for Italy but also for the rest of the Eurozone.

British inflation eases

Economists said after the referendum on Brexit that a temporary spike in the inflation rate could be expected due notably to the British currency depreciation.
That’s what has happened with a peak in November 2017 at 3.1%. After this date, the inflation rate is receding at less than 2.5% in March 2018. The core inflation rate has followed the same profile with a current rate at less than 2.3%.
uk inflation rate.png Continue reading

Inflation on the upside in the United Kingdom

The current acceleration of the inflation rate creates a complex situation in the United Kingdom as it weighs on households’ purchasing power.
In April the inflation rate was at 2.7% and the core inflation rate was at 2.5%. The inflation rate has not been so high since the fall of 2013 and november 2012 for the core rate. This is mainly the impact of the depreciation of the currency after last june referendum on Brexit.
A year ago the inflation rate was at 0.3% and the core inflation rate was at 1.2%. This latter magnitude is worrisome as the economy is not growing more rapidly.
The main issue is that wages momentum will not follow the inflation profile.  Continue reading

Euro Area – Inflation rate at 2% but the ECB will not move

The inflation rate was at 2% in February after 1.8% in January. It’s the highest record since January 2013. The core inflation is stable at 0.9%. It means that energy is the main driver for the higher inflation rate.
The first graph shows that the core inflation rate is stable since 2014 and the volatility of the inflation rate is associated with the oil price yearly change.
The oil price effect has started to diminish. The second graph shows the consistency between the yearly change in oil price (blue) and the energy contribution to the inflation rate (purple). We see that the oil price change has peaked in January and will follow the red line which shows the oil price yearly change when the oil price is at 55USD and the exchange rate at 1.06.(the last point is June 2017)
The oil price impact will be transitory and the energy contribution will start decreasing in April probably as there is persistence and delay between the oil price and contribution.
In other words, after the current peak, the inflation rate will converge to the core inflation rate (circa 1%).
This temporary effect of oil price on inflation is a strong incentive for the ECB to keep its monetary policy stance unchanged.