Global daily insight 24 november 2016

Daily Insight

Group Economics Macro & Financial Markets Research

24 November 2016

Improving euro growth momentum Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Euro Macro: Jump in eurozone PMIs signal stronger growth in Q4 - The eurozone PMIs for November were stronger than expected. The manufacturing PMI increased to 53.7, up from 53.5 in October, while the services sector PMI rose to 54.1 from 52.8. As a result, the composite index staged its second consecutive monthly improvement, jumping to 54.1 from 53.3 and reaching its highest level since the end of 2015. The rises in the composite index in October-November clearly signals that growth in the eurozone picked up in Q4 after it was stable at 0.3% qoq in both Q2 and Q3. Indeed, we have pencilled in a rise by 0.4%, but the risks to this forecast seem to be to the upside. We think exports benefited from the global economy gaining traction in Q4, while domestic demand probably grew robustly.

Private consumption is supported by a combination of still low inflation and modest rises in wages and employment, while fixed investment is benefiting from healthy corporate profitability and rebounding business confidence after the Brexit related drop this summer.

In any case, with political risks rising ahead of the 4 December constitutional referendum in Italy, the eurozone economy seems to be on a solid footing. Looking forward, consumer spending will likely slow as rising headline inflation hits purchasing power. This will keep the economic recovery moderate. (Aline Schuiling) Eurozone government bonds: ECB to consider easing criteria for bond lending Reuters reported that the ECB could consider easing the criteria it uses for its bond lending programme. The ECB’s bond lending programme was enacted to prevent a liquidity squeeze as banks could temporarily borrow bonds the ECB is buying under its QE programme. According to the article, the ECB could tweak its lending criteria by reducing the charges for banks that fail to return the bonds they borrowed, by accepting new types of collateral, and by extending the duration of the loan period. In addition, the article states that tweaks to the bond lending facility will depend on other changes the ECB will announce at the December meeting. We expect the ECB to announce an extension of QE by 6 months to September 2017 and that it will remove the deposit rate floor for its purchases. These decisions should lead to more buying, especially of bonds with shorter maturities, which should lead to more pressure in the repo and cash market. The timing of the article is interesting as prices of bonds with shorter maturities outperformed other bonds while overall borrowing costs became more expensive due to year end related balance sheet constraints for banks and lower liquidity in general. Since the publication of the article, prices have made an U-turn as the tweaks could give some breathing space for the market. We think that a relaxation of the lending criteria makes sense and would mitigate the negative side effects of a deposit rate floor removal. (Kim Liu) UK Macro: Government cuts back on austerity – The UK government announced its Autumn Statement on Wednesday, where it updates its forecasts and announces new fiscal policy measures. The government announced a number of stimulus measures, but these are modest, and the overall fiscal stance will still tighten in the coming years. Total new policy initiates in the statement amount to around 0.5% GDP over the next two years. This leaves the structural deficit (a measure of the fiscal stance) coming down (denoting fiscal tightening) by 0.7% GDP in FY 2017 and 0.8% GDP in FY 2018. The government’s choice

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Daily Insight - Improving euro growth momentum - 24 November 2016

not to be more aggressive in easing policy probably reflects a number of considerations.

First of all, the public finances have deteriorated primarily due to lower growth and the debt ratio is set to rise further next year (to 88.7% GDP). Indeed, the resulting higher debt issuance plan saw a sell-off in gilts, with the curve steepening. These trends would have been more significant if the Chancellor decided for a more marked loosening of the purse strings. Second, given the prospective rise in inflation, a more substantial fiscal stimulus would have increased the chances that the BoE would need to tighten monetary policy.

(Nick Kounis)

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Daily Insight - Improving euro growth momentum - 24 November 2016