Macro Weekly
Group Economics
8 July 2016
Brexit confidence shock Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
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First data showing post-Brexit slump in UK confidence emerge… …we expect economy to enter recession in coming months Pre-Brexit reports in US and Europe holding up well Government bond yields collapse leading to rise in negative yield club… …reflecting investor concern and increasing likelihood of more QE Government bond investors appear complacent about political and banking risk in Italy
Brexit confidence shock emerging in the UK The first post-referendum surveys in the UK recorded sharp falls. The GfK consumer confidence indicator fell to -9 (taken 30 June – 5 July) from -1 earlier in June. This marked the biggest monthly drop since December 1994. Meanwhile, the Lloyds Business barometer fell to +6 after the vote from +32 in May, taking it to its lowest level since December 2011. Furthermore, the National Institute of Economic and Social Research reported that its monthly GDP estimate for June showed ‘an intensifying contraction across the board’. All this provides early evidence that the UK economy is heading for a recession. Pre-Brexit data elsewhere holding up Elsewhere in the world, there is hardly any economic data recorded post-Brexit, but the pre-Brexit data still look decent. In the US, nonfarm payrolls bounced back in June (+287K) after a very weak May outcome (+11K). The truth is somewhere in between the two, with headline payrolls trending around the 150K mark over the last three months, and private payrolls a bit below that. This represents a slowdown from a trend in payrolls of around 250K earlier this year. So the labour market is certainly cooling, in line with moderate growth and falling profits, but it is certainly not collapsing. At the same time, there is not much sign of inflationary pressure building in the labour market. Hourly wages were up only 0.1% mom and 2.6% yoy in June. The unemployment rate rose to 4.9% from 4.7% on higher labour supply. Apart from the blip in May, the unemployment rate has been moving sideways at 4.9-5% over the last nine months suggesting the labour market is not tightening further. We stick to the view that the Fed will remain on hold this year. A moderate recovery looks on the cards going forward.
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