Macro weekly 2 october 2015

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Macro Weekly More inflation please

Group Economics

Nick Kounis +31 20 343 5616

2 October 2015 Eurozone inflation turned negative, while inflation is low in most big economies even outside of energy prices. The eurozone in particular could do with more inflation and QE is the only tool the ECB has. Higher inflation targets would give central backs more room to employ conventional monetary policy as it would allow them to slash real interest rates. Eurozone inflation back in the red

The downside of lowflation

This week was marked by figures showing that eurozone

The 2% targets have not provided central banks with enough

inflation turned negative again in September. Headline inflation

of a buffer on the downside against the background of various

fell to -0.1% yoy from +0.1% in August. That was mainly due to

shocks. In particular, it is real interest rates that matter for the

a hefty drop in energy prices. It would be difficult to complain

economy and the lower the level of inflation, the high the level

about that, given it means a windfall gain for consumers.

of real interest rates. This becomes a problem especially given

Having said that, inflation is too low outside of volatile food and

the limited room that central bankers generally see for taking

energy prices. Core inflation stood at just 0.9% yoy, basically

nominal rates below zero. The problem may have become

less than half the level the ECB targets over the medium term

more acute recently as lower trend growth means that neutral

for overall inflation.

interest rates are also lower.

Lowflation everywhere

Challenges for monetary policy

Low inflation is a world-wide phenomenon. Headline inflation in

Take the example of the eurozone. Trend growth may have

Japan also recently turned negative, with the ex-food measure

come down by around 1% over recent years, from just over 2%

that the BoJ targets at -0.1% yoy in August. Ex food and

in the years before the crisis to just over 1% currently. The

energy inflation firmed, but to a still low 0.8%. Inflation is also

neutral rate may also have come down by around the same

low even in economies further ahead in the cycle. In the US,

amount, from around 3.5% pre-crisis to around 2.5% now.

the core PCE deflator, targeted by the Fed to be 2%, stood at

Given the inflation goal of the ECB, that means the real neutral

1.3% in August. UK inflation was 0% in August, while the core

rate is now at just 0.5%. This means that to get conventional

was at 1%. Even in many emerging markets, inflation is

monetary policy stimulative, real interest rates need to become

relatively low. China's consumer price inflation stood at 2% yoy

deeply negative. However, that is not possible given current

in August, while producer prices were down by a breath-taking

low levels of inflation and an effectively zero nominal bound.

5.9% yoy. Indian CPI inflation was running at 3.7% yoy in

Some notable economists - including Larry Summers and

August, while wholesale prices were down by 5% yoy. Only in

Olivier Blanchard - have made the case for higher inflation

Brazil and Russia is inflation high among bigger economies,

targets over recent years because of this dilemma. For

partly reflecting a slump in their currencies.

instance, a 4% inflation target would given much more room for real rates to drop.

The death of inflation Central bankers spent the 1980s and part of the 1990s trying

For now QE is the only game in town

to slay inflation. Legendary Fed Chairman Paul Volker raised

Given where we are now, QE is the only option the ECB has to

interest rates sharply to push down inflation. More generally

ease monetary conditions and that comes with its own

central banks introduced implicit and eventually explicit

problems. A stepping up of asset purchases seems likely in the

inflation goals. Helped by the entry of China in to the global

coming months. To get inflation back up, it needs to generate

trade system as a low cost manufacturing powerhouse, these

domestic inflationary pressures to offset external disinflationary

efforts proved remarkably successful. It can be argued that

forces. This week data showed the unemployment rate stable

they were too successful. All the major central banks in

at 11% in September. Still unemployment remains on a

advanced economies have adopted inflation goals of 2%. This

downward trend, and wages seem to be firming. Still there is a

seemed a reasonable level in the past, but it can and should

long way to go to generate significant domestic inflationary

be questioned today.

forces in the eurozone. In the meantime, the risk is that the inflation expectations of households, companies and investors decline, making it even more difficult for the ECB to meet its


2

Macro Weekly - More inflation please – 25 September 2015

inflation goal. In essence, low inflation could become a self-

generating a new downward leg for the euro. The eurozone

fulfilling prophesy.

could do with some extra upward pressures on inflation given that it is further away from generating significant domestic

US and UK labour markets closer to generating inflation

inflationary pressure than the UK or the US. If the Fed

The US and UK are further ahead in this process of course.

(December) and the BoE (February 2016) start to raise rates

The US labour market continues to improve. This week’s data

as we expect that should also be helpful in triggering further

showed that growth in non-farm payrolls disappointed in

euro weakness.

September (142K, following 136K in August), but we still think the recovery of the US labour market remains on track,

Manufacturing weak, services better

although the pace of the recovery seems to have shifted down

The dichotomy between external and domestic developments

a touch recently. Meanwhile, the UK labour market looks to be

is also visible in the difference in the trends between activity in

already starting to push up inflation. Unit labour costs rose by

manufacturing and services. The eurozone manufacturing PMI

2.2% in Q2 up from 0.3% in Q1. The tightening labour market

was down to 52 in September from 52.3 in August. The

finally seems to be pushing up wages. We expect this to

services PMI also declined but remained at a more healthy

develop in the US as well in the coming months.

level of 54. Similarly, German factory orders declined in August. Although domestic orders and orders from the rest of

US economy adds 142K jobs

the eurozone rose, there was a slump in orders from outside of

000’s

%

600 400 200 0 -200 -400 -600 -800 -1000

12 10

the eurozone. The US ISM manufacturing index fell to 50.2 in September from 51.1 in August, taking it to the lowest level since May 2013. Weaker global demand, dollar strength and cut backs in oil sector investment have hurt industry. On the

8

other hand, most indicators suggest that domestic demand

6

remains strong.

4

06

07

09

10

Non farm payrolls (lhs)

12

13

2

China and EM risks

0

The PMI reports out of China were rather mixed, but in general

15

Unemployment (rhs)

Source: Thomson Reuters Datastream

External disinflationary forces The global economy is currently a source of significant disinflationary pressure. It is not only commodity prices that are falling. Global manufactured goods prices have also been falling sharply. This partly reflects over-capacity in China's industrial sector. However, falling commodity prices also seem to be feeding through into producer prices, while manufacturing activity has also been weak. The global manufacturing PMI fell to 50.6 in September from 50.7 in August, taking it to its lowest level since July 2013. The output price index fell further below the 50-mark last month. For the US, the strength of the dollar is adding to these disinflationary forces. Another round of euro weakness would help In the case of the eurozone, euro weakness had been offsetting weakness in global prices. However, the euro's levelling out over recent months means that this is no longer the case. Eurozone producer prices excluding energy fell by 0.5% yoy in August. Another round of QE would be helpful in

emphasised the downside risks to the economy. The Caixin and official NBS manufacturing PMIs were roughly steady in September, but that left them at low levels consistent with weak industrial sector growth. Although the NBS services PMI remained at decent levels, its Caixin counterpart showed a sharp slowdown. The latter raises the risk that the weakness in the economy is broadening. Still we continue to think that policymakers have the tools to keep the slowdown gradual and that they will employ them. Wider emerging market risks were also emphasised this week. Emerging market PMIs remained soft in September. At the same time the Institute of International Finance warned that emerging markets would see a net capital outflow of USD 540 bn this year. This would be the first net outflow since 1988. EMs generally have higher FX reserves than in the past, which should allow them to avoid a systemic crisis. However capital outflows lead to a tightening of financial conditions, which is weighing on growth. Overall, our base case scenario is for continued but moderate global economic growth as waning EM growth is offset by a gradual recovery in the advanced economies.


3

Macro Weekly - More inflation please – 25 September 2015

Main economic/financial forecasts GDP grow th (%)

2013

2014

2015e

2016e

1.5

2.4

2.7

2.9

United States

-0.2

0.9

1.6

2.0

Eurozone

Japan

1.6

-0.1

0.7

1.2

United Kingdom

2.2

2.9

2.8

2.6

China

United States Eurozone

3M interbank rate

24/09/2015 01/10/2015

+3M

+12M

2015e

0.33

0.32

0.6

1.3

0.6

2016e 1.6

-0.04

-0.04

0.00

0.00

0.00

0.00

Japan

0.17

0.17

0.2

0.2

0.2

0.2

United Kingdom

0.58

0.58

0.7

1.5

0.7

1.7

24/09/2015 01/10/2015

2016e

7.7

7.3

7.0

6.5

World Inflation (%)

3.1 2013

3.2 2014

3.0 2015e

3.5 2016e

+3M

+12M

2015e

United States

1.5

1.6

0.2

2.1

US Treasury

2.13

2.04

2.3

2.7

2.3

2.7

Eurozone

1.3

0.4

0.1

1.4

German Bund

0.59

0.55

0.5

1.3

0.5

1.4

Japan

0.3

2.8

0.7

1.0

Euro sw ap rate

0.98

0.93

0.8

1.6

0.8

1.6

United Kingdom

2.6

1.5

1.1

1.9

Japanese gov. bonds

0.33

0.33

0.7

1.0

0.7

1.0

China

2.6

2.0

1.5

2.0

UK gilts

1.76

1.74

2.0

2.6

2.0

2.7

World Key policy rate

4.3 01/10/2015

3.9 +3M

3.7 2015e

3.8 2016e

24/09/2015 01/10/2015

+3M

+12M

2015e

2016e

Federal Reserve

0.25

0.50

0.50

1.50

EUR/USD

1.13

1.12

1.00

1.05

1.00

1.10

European Central Bank

0.05

0.05

0.05

0.05

USD/JPY

120.1

119.9

128

135

128

135

Bank of Japan

0.10

0.10

0.10

0.10

GBP/USD

1.53

1.52

1.49

1.50

1.49

1.49

Bank of England

0.50

0.50

0.50

1.50

EUR/GBP

0.74

0.74

0.67

0.70

0.67

0.74

People's Bank of China

4.60

4.35

4.35

4.35

USD/CNY

6.38

6.36

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

ABN AMRO

Monday Monday Monday Monday Monday Monday Monday

05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015 05/10/2015

09:00:00 10:00:00 10:00:00 10:30:00 11:00:00 15:45:00 16:00:00

CH EC EC GB EC EC US

Total Sight Deposits bn PMI services - index Composite PMI output PMI services - index Retail sales - % mom ECB announces weekly QE details ISM non-manufacturing, index

Sep F Sep F Sep Aug

465 54.0 53.9 55.6 0.4

54.0 53.9 56.7 0.0

54.0 53.9

Sep

59.0

58.1

Tuesday Tuesday Tuesday

06/10/2015 06/10/2015 06/10/2015

08:00:00 14:30:00

DE US PL

Manufacturing orders - % mom Trade balance - USD bn Reference rate - %

Aug Aug Oct 6

-1.4 -41.9 1.5

0.3 -43.4 1.5

-0.2

Wednesday Wednesday Wednesday Wednesday

07/10/2015 07/10/2015 07/10/2015 07/10/2015

08:00:00 09:00:00 21:00:00

DE CH US JP

Industrial production - % mom Foreign currency reserves - CHF mln Fed Reserve consumer credit - USD bn Policy rate - %

Aug Sep Aug Oct 7

0.7 540031.4 19.1 80.0

0.0

-0.1

Thursday Thursday Thursday Thursday Thursday Thursday

08/10/2015 08/10/2015 08/10/2015 08/10/2015 08/10/2015 08/10/2015

01:50:00 13:00:00 13:00:00 13:25:00 13:30:00 20:00:00

JP GB GB NL EC US

Machinery orders private sector - % mom Policy rate - % BoE size of asset purchase programme - GBP bn CPI - % yoy ECB account of the monetary policy meeting of 3 September FOMC minutes Sept. 16-17

Aug Oct 8 Oct Sep

-3.6 0.5 375.0 0.8

2.8 0.5

Friday

09/10/2015

10:30:00

GB

Trade balance - GDP mln

Aug

-3371.0

-2066.7

-0.1

1.5

19.1 80.0

Sep

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)

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