Group Economics
Macro Weekly Back on track after Black Monday?
Nick Kounis +31 20 343 5616
28 August 2015 US and European equities shook off Black Monday to end the week higher, though the mood remained nervous against the background of worries about China and emerging markets. Two key positives are helping to turn the tide. First of all, policymakers are ready to respond. China eased monetary policy this week and the Fed and ECB have made it clear they are ready to adjust course if need be. Indeed, the risk that the Fed delays hiking rates further, and the ECB steps up QE have increased significantly. In addition, economic fundamentals are more positive than suggested by the extreme worries about the global economy seen earlier in the week. Black Monday
Investor risk sentiment has improved, but still ‘nervy’
The week started off with what has been dubbed ‘Black
Equity volatility indexes
Monday’. Investor risk appetite deteriorated sharply and equity markets collapsed around the world. Emerging market currencies and commodities nose-dived. What happened? The weakness seemed to reflect the fear of a China hard landing and vulnerabilities of emerging markets once the Fed raises
45 40 35 30
interest rates. This combination could provide quite a jolt to
25
global growth. The lack of a response from the Chinese
20
authorities over the weekend seemed to add fuel to the fire.
15
The rebound
10 Jan-15
Mar-15
V Stoxx
During the course of the week, sentiment improved and equity prices rebounded. US and European equities are above their
May-15
Jul-15
Sep-15
VIX
Source: Bloomberg
start of the week levels. Commodities and emerging market currencies have also recovered on the week.
Better fundamentals Markets also received strong support from better economic
Policymakers ready to respond What drove the recovery? Policymakers responded. The People’s Bank of China finally eased monetary policy, cutting its lending rate and reserve requirements for banks, and hinting that more would come in its accompanying statement. Indeed, we expect another 50bp cut in reserve requirement ratios and a 25bp reduction in lending rates going forward.
data, which served as a reminder that fundamentals in the run up to the turmoil were not so bad, easing worries about a global downturn. There were no notable reports out of China, but numbers out of the US and eurozone were impressive. The headline grabber was US GDP growth for Q2, which was revised up to 3.7% from 2.3% previously, with the components pointing to broad-based economic growth. Meanwhile, consumer confidence surged in August. This reflected
Meanwhile, Fed and ECB policymakers made it clear that they are ready to adjust course if need be. New York Fed President
increased optimism on the job outlook, though admittedly it did not cover the most recent period of market weakness.
William Dudley suggested that the FOMC could delay the policy rate hike, saying that the market turmoil had reduced the case for a rate hike next month. Furthermore, ECB Chief Economist Peter Praet hinted at the possibility of a stepping up of the central bank’s QE programme if needed. He asserted that downside risks to the central bank’s inflation goal had risen.
In the eurozone, the bellwether German Ifo business climate indicator rose in August, against expectations of a small decline. The same was the case for the economic sentiment indicator for the eurozone as a whole. In addition, eurozone money supply and bank lending growth accelerated convincingly in July, which is also consistent with an ongoing economic recovery (see chart below).
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Macro Weekly - Back on track after Black Monday? – 28 August 2015
Mood still nervous
even be reduced once the first step is out of the way and the
Given the recovery in financial markets over recent days, it
world doesn’t end. Fed commentary at Jackson Hole,
looks like the week that began with Black Monday has had a
especially from FOMC Vice Chairman Stanley Fischer this
positive ending. However, it must also be noted that investors
weekend should tell us more.
still seem to be nervous. For instance, even though equity volatility indexes have come down, they still remain above their
Eurozone money supply signals recovery
long-term historical averages. So it is too early to say that we
% yoy
are out of the woods, though we do expect investor sentiment to receive support from evidence that the global recovery is back on track. Upturn likely in coming months There are downside risks to the global economic outlook from a China hard landing and from emerging market growth more widely. However, we continue to think that the global economy
Index
65
13 11 9 7 5 3 1 -1 -3 -5
will gain pace in the coming months after a weak start to the
60 55 50 45 40 35 00
year. The advanced economies look to be on a good track,
02
04
06
08
Real M1 money supply (lhs)
10
12
14
Composite PMI (rhs)
with domestic demand firming. China not waving the white flag
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
We do not think that the Chinese authorities are waving the white flag in terms of supporting economic growth. Their aim in
Risk of ECB stepping up QE rising
our view remains to foster a gradual slowdown. Signs that
At the same time, the risk of the ECB stepping up or extending
momentum is deteriorating more sharply has always triggered
its QE programmes have risen significantly given the
action to support the economy. They also have a lot of
comments of Executive Board member Peter Praet. Usually
ammunition they can fire. We therefore think the Chinese
when a central banker says that downside risks have
authorities will do what it takes to get economic growth back
‘increased’ it’s a signal that policy action will follow.
towards their growth target going forward.
Nevertheless, we are cautious in this case, as that message has not been repeated by other officials. So we will be
Lower trend
watching the tone of ECB Vice President Vitor Constancio’s
Of course, global trend growth has come down since the
speech at Jackson Hole with great interest in this respect.
financial crisis. So even though we see a cyclical upturn, with economic growth likely to be above trend rates, the overall
Is more QE really necessary? In our view not at this point.
pace will be nothing to write home about.
China risks, the drop in commodity prices and somewhat higher euro do point in this direction. However, more
Fed: still September but rising risk of a delay
importantly, core inflation has bottomed out and the eurozone
Our base case is that the Fed will hike interest rates next
economic recovery is continuing.
month. However, the risks of a delay have increased further since the market turmoil. Nevertheless, the US economic data continue to be consistent with a rate hike and uncertainty could
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3
Macro Weekly - Back on track after Black Monday? – 28 August 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.7
3.1
United States
-0.3
0.9
1.5
2.2
Eurozone
Japan
1.6
-0.1
1.0
1.2
United Kingdom
1.7
3.0
2.8
2.6
China
United States Eurozone
3M interbank rate
20/08/2015 27/08/2015
+3M
+12M
2015e
0.33
0.32
0.7
1.5
0.7
2016e 1.7
-0.03
-0.03
0.00
0.00
0.00
0.10
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.59
0.59
0.7
1.5
0.7
1.7
20/08/2015 27/08/2015
2016e
7.7
7.4
7.0
7.0
World Inflation (%)
3.1 2013
3.3 2014
3.1 2015e
3.8 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.4
2.4
US Treasury
2.07
2.19
2.8
3.0
2.8
3.0
Eurozone
1.3
0.4
0.2
1.5
German Bund
0.59
0.74
0.9
1.7
0.9
1.8
Japan
0.3
2.8
0.7
1.4
Euro sw ap rate
0.93
1.06
1.2
2.0
1.2
2.0
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.36
0.39
0.7
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
1.76
1.98
2.0
2.6
2.0
2.7
World Key policy rate
4.3 27/08/2015
3.9 +3M
3.8 2015e
3.8 2016e
20/08/2015 27/08/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.75
0.75
1.75
EUR/USD
1.12
1.12
1.00
1.10
1.00
1.15
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
123.4
121.0
128
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.57
1.54
1.49
1.51
1.49
1.51
Bank of England
0.50
0.50
0.50
1.50
EUR/GBP
0.71
0.73
0.67
0.73
0.67
0.76
People's Bank of China
4.60
4.35
4.35
4.35
USD/CNY
6.39
6.41
6.55
6.70
6.55
6.75
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Key Macro Events Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Monday Monday Monday Monday Monday Monday Monday Monday
31/08/2015 31/08/2015 31/08/2015 31/08/2015 31/08/2015 31/08/2015 31/08/2015 31/08/2015
01:50:00 09:00:00 11:00:00 11:00:00 14:00:00 15:00:00 15:45:00 15:45:00
JP CH EC EC IN BE US EC
Industrial production - % mom Total sight deposits in bn CHF Core inflation - % yoy CPI - % yoy GDP - % yoy GDP - % qoq Chicago Fed - business confidence - index ECB announces weekly QE details
Jul P 21-Aug Aug A Aug P 2Q 2Q F Aug
1.1 463 1.0 0.2 6.1 0.4 54.7
-0.1
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015 01/09/2015
03:00:00 00:00:00 03:45:00 03:45:00 09:30:00 09:55:00 09:55:00 10:00:00 10:30:00 11:00:00 15:45:00 16:00:00
CN CN CN CN NL DE DE EC GB EC US US
PMI manufacturing - index (official) PMI non-manufacturing - index (official) PMI manufacturing - index (Caixin) PMI services - index (Caixin) PMI manufacturing - index Unemployment - % Unemployment change - thousands PMI manufacturing - index PMI manufacturing - index Unemployment - % Markit - Flash PMI ISM manufacturing - index
Aug Aug Aug F Aug Aug Aug Aug Aug F Aug Jul Aug F Aug
50.0 53.9 47.1 53.8 56.0 6.4 9.0 52.4 51.9 11.1 52.9 52.7
49.7
Wednesday Wednesday Wednesday Wednesday
02/09/2015 02/09/2015 02/09/2015 02/09/2015
14:15:00 14:30:00
US US BR PL
ADP nat. employment report - thousands Output per hour nonfarm business sector - % qoq Policy rate - % Reference rate - %
Aug 2Q F Sep 2 Sep 2
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015
07:30:00 09:30:00 10:00:00 10:00:00 10:30:00 11:00:00 13:45:00 13:45:00 14:30:00 16:00:00
FR SE EC EC GB EC EC EC US US
Unemployment (mainland France) - % Policy rate - % PMI services - index Composite PMI output PMI services - index Retail sales - % mom ECB refi rate - % ECB deposit rate - % Trade balance - USD bn ISM non-manufacturing, index
Friday Friday Friday Friday
04/09/2015 04/09/2015 04/09/2015 04/09/2015
08:00:00 14:30:00 14:30:00 14:30:00
DE US US US
Manufacturing orders - % mom Change in employment private employment - thousands Change in employment total - thousands Unemployment - %
0.1 7.0
ABN AMRO
0.1
54.0
47.2 55.8
52.4 51.9 11.0
52.5 11.0
52.7
53.0
185.4 1.3 14.3 1.5
196.2 2.4 14.3 1.5
195
2Q Sep 3 Aug F Aug F Aug Jul Sep 3 Sep 3 Jul Aug
10.0 -0.4 54.3 54.1 57.4 -0.6 0.05 -0.20 -43.8 60.3
54.3 54.0 57.4 0.6 0.05 -0.20 -44.2 58.5
58.0 0.5 0.05 -0.20
Jul Aug Aug Aug
2.0 210 215 5.3
-0.6 186 203 5.3
-0.4 200 210 5.3
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
1.5