Daily Insight
Group Economics Macro & Financial Markets Research
06 September 2016
Is the Brexit shock already over? Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
UK Macro: Services PMI erases post Brexit losses – The UK services PMI rose to 52.9 in August, up sharply from its post-Brexit low of 47.4. Together with the jump in its manufacturing counterpart, this took the composite PMI above its June level (to 53.6 in August from 47.6 in July and 52.4 in June). Although one should not put too much weight on anyone indicator, the PMI is probably the most reliable indicator of UK economic growth out there. At current levels it is consistent with economic growth of around 0.3% qoq. So although still consistent with sub-trend economic growth, it casts doubts on our base case of a moderate recession, further BoE easing and a further sharp weakening of sterling. Therefore we are reviewing our scenario. The bounce in the composite PMI may reflect that Brexit now looks further away (it may not happen until 2020) and the cushioning impact of the fall in sterling. Indeed, it looks as if the near term Brexit shock has been less severe and more short-lived than feared. The Brexit shock could return later on when the negotiations are at an advanced stage and exit looms, if it becomes clear that the UK’s trade relationship with the EU will be significantly restricted, but that moment looks some way away. (Nick Kounis) Euro Macro: Votes in Germany and Spain underline political risks – In Spain, caretaker Prime Minister Mariano Rajoy failed to get sufficient support in parliament to start a new coalition government with the centrist party Ciudadanos (Cs) last Friday. All parties now have until the end of October to try and form a new coalition. The chances of this succeeding seem slim though. Following the election of December 2015, the parties on the left side of the political spectrum (Podemos and the Socialist Party - together 156 of the 350 seats in parliament) tried to form a coalition with Cs, without success. Moreover, following the June election, Cs have shifted to the right and supported Mr Rajoy. All in all, it seems likely that Spain is heading for yet another election in December. Turning to Germany, the result of a regional election on Sunday, are widely seen as a test case for the General Election that is due in the autumn of 2017. The right-wing Eurosceptic AfD became second after the Social Democrats, while Mrs Merkel’s CDU became third. Although this probably came as a blow to Mrs Merkel’s party, Germany’s regional elections do not always represent the nationwide results. In the current polls for the nationwide election the current coalition of CDU/CSU and SPD (around 55% of the votes) still has a wide lead over the AfD (around 11%). (Aline Schuiling) Euro government bonds: ECB to announce extension and recalibration of QE programme – The ECB will convene coming Thursday and it will publish its new forecasts for eurozone growth and inflation. We expect that the new forecasts will signal a further undershoot of the inflation target over the medium term as the pace of economic growth has continued to be sluggish. We therefore think that a step up of monetary easing is justified and we expect that the ECB will announce a formal extension of its QE programme by 6 months (to September 2017). We also expect that the ECB will announce a recalibration of its self-imposed QE purchasing rules, as speculation has increased that because of the extremely low yield, there are not enough bonds left to buy. The ECB could announce (a combination of) different tweaks, with each having different degrees of effectiveness. Arguably the most effective yet the most political controversial is to abandon the ECB capital
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Daily Insight - Is the Brexit shock already over? - 06 September 2016
key for the distribution of the QE purchases. We do not think that the ECB will choose for this modification but instead will opt for less controversial options. We assign a higher likelihood to the removal of the purchase floor, an increase of the issue limit and change in the upper and lower maturity limits. We do not expect that the ECB will announce that it will buy other types of assets, like ETFs or financial bonds. (Kim Liu)
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Daily Insight - Is the Brexit shock already over? - 06 September 2016