Macro Weekly Shock adjustment
Group Economics
Han de Jong +31 20 628 4201
11 May 2015 Financial markets have shown violent moves during the last two weeks or so. And these moves have, to a large extent, been in tandem. Bond yields have risen sharply, particularly in Europe, the euro has strengthened and equities have sold off (especially in Europe). To be frank, I did not see this coming, so I can offer only post-mortem commentary. Such dramatic moves demand a verdict. Is this just a temporary correction or is it the beginning of a much longer and bigger move in markets? Taking economic fundamentals as my lead, I conclude that it is most likely temporary, although that does not necessarily mean that we will see a rebound in all markets concerned in the near future. Meanwhile, interpreting economic data is also becoming something of a challenge. How, for example, do disappointing US growth numbers and a steadily strengthening labour market add up? Well, they don't, really. Economics first
Perhaps expectations have adjusted upwards a little and
The European Commission updated its forecasts for the
maybe we are actually starting to see slightly more mixed data.
eurozone economy last week and did what most others have
I am not sure what is behind it. We have long highlighted the
done in the recent past. They raised the forecast for the
three major tailwinds for the eurozone economy: the euro, the
current year. GDP is now expected to grow by 1.5% this year
oil price and borrowing costs. The first two have reversed
while the Commission was previously forecasting 1.3%. They
somewhat in recent months and perhaps that has had an
left their 2016 forecast for growth unchanged at 1.9%. These
immediate impact. More likely, this is noise.
numbers, obviously, do not sound particularly impressive. We must bear in mind, though, that potential growth is even lower.
Last week's data on German industrial production was soft as
The Commission currently estimates that trend growth is only
output fell 0.5% mom in March. Eurozone retail sales were
0.8%. As a result, unemployment is projected to continue its
also weak in March, falling 0.8% mom. There is, however,
downward sloping trajectory. In fact, unemployment started to
always volatility in numbers of this nature, and recent trends
come down in Q2 of 2013 and has continued its gentle decline.
have been favourable. In addition, March data on industrial
As we now expect the eurozone to produce better growth
output in Spain and Italy surprised on the upside last week.
numbers, the pace of decline in unemployment should accelerate.
Our overall assessment of the eurozone economy does not change. Growth has picked up and is currently above trend.
Eurozone unemployment vs real GDP
That is not going to alter any time soon.
13
2.1
US more of a puzzle According to the GDP data, the US economy expanded at a
12 2.2 11 10
2.3
snail's pace in Q1. More recent data makes it likely that the number will be revised down into negative territory. Yet, the labour market appears to be completely ignoring this
9 2.4 8 7
2.5 02
04
06
Unemployment (%, lhs)
08
10
12
14
Real GDP in bn EUR (reverse scale, rhs)
development and decent employment growth is continuing. This is an odd combination that cannot last. Either GDP growth will pick up, or employment growth will weaken. The combination of weak GDP growth and continued improvement in the labour market led to an annualised increase in unit
Source: Bloomberg
labour costs in Q1 of 5.0%. This is the sort of number that freaks people out as they think it points to rising inflation
European economic data has consistently beaten expectations
pressures and downward pressure on corporate earnings. The
in recent months, but that pattern is now disappearing.
truth is that unit labour costs is a very volatile series. Over the
2
Macro Weekly - Shock adjustment - 11 May 2015
last five years it has ranged from +12% to -12%. The Q1 result
consumers to spend this money, although some argue that
was a mere 1.1% up on a yoy basis. The 5.0% annualised qoq
households will use the money to strengthen their balance
does show that corporate profits were struggling but tells us
sheets and, thus, keep the savings rate permanently at a
what we already knew: either GDP growth will accelerate or
higher level.
jobs growth will slow.
ISM mfg and non-mfg since 2014 % yoy
It is possible that the GDP data is actually wrong. Some commentators argue that there may be something wrong with
65
how the statisticians calculate GDP in the first part of the year as it seems to be consistently weak that time of the year.
60
If, on the other hand, there is nothing wrong with GDP numbers and they continue to disappoint, then we must, at
55
some stage, see a sharp deterioration of the labour market as the labour market then adjusts to 'economic reality'.
50 Jan-14
Jul-14 ISM mfg
Mind the gap One interesting development is the gap that is opening up
Jan-15 ISM non-mfg
Source: Bloomberg
between the ISM manufacturing and the ISM nonmanufacturing. This gap suggests that weakness is
Weakness induced by dollar strength and the low oil price is
concentrated in manufacturing and that growth momentum in
consistent with the gap between business confidence in
the (more domestically oriented) services sector is holding up
manufacturing and the services sector.
very well. So where do we go from here? I think the question as to what
ISM mfg and non-mfg since 2002
has caused the slowdown is a typical case of 'a bit of both'.
index
Part of the slowdown in the US is caused by temporary factors
70
that are behind us and part by factors that may ultimately also be temporary, but that are certainly not behind us yet. The
60
most likely result then is that US growth will gain some momentum in the period ahead, but not hugely.
50
Goldilocks
40
I think this is actually an excellent scenario. Stronger growth 30 05
06
07
08 ISM mfg
09
10
11
12
13
14
15
ISM non-mfg
will boost employment and allow companies to grow their profits while it is unlikely to cause significant inflation risks and should keep the Fed moving cautiously. This is what we used
Source: Bloomberg
to call the Goldilocks scenario.
We have repeatedly argued that cyclical weakness in the US is
No Goldilocks
largely due to temporary factors: adverse weather, strikes, the
Market participants do not see Goldilocks. As mentioned in the
dollar and the initial effect of lower oil prices. The weather and
introduction above, recent weeks have seen violent moves: a
the strikes are behind us. The effects from the strong dollar are
sharp rise in European, and to a lesser extent US bond yields
likely to drag on for some time yet. The same is true for the
(10yr Bund yields rose some 50bps in just over a fortnight) and
effects of the oil price. Oil companies have aggressively
a painful correction on the equity markets (the Dax lost 8.5%
slashed investment spending and the consumer has not yet
over a three-week period). The reversal of oil prices (up some
spent his windfall. The savings rate has recently gone up as a
40% from the January low) and the euro (up 7% from its March
result. Experience suggests that one can rely on US
low) have lasted a little longer.
3
Macro Weekly - Shock adjustment - 11 May 2015
seems a recovery of equities to me as I think that the It is hard to assess what has caused these sharp moves.
Goldilocks scenario described above is conducive to
Some argue that is the market's sudden realisation that
favourable trends on equity markets.
deflation fears in the eurozone are overblown. It is true that inflation expectations have risen, but they are strongly linked to the oil price. In addition, it must have been obvious for longer than the last two or three weeks that painful deflation is not likely in the near term in Europe. It seems to me that we are more likely looking at corrections that are driven by technicals and positioning. In addition, as yields in Europe were increasingly in negative territory, investors probably decided that there is little point holding them. And speculative investors who had tried to front-run the ECB had little better to do than to sell their positions as yields had no more further downside. Something similar can perhaps be said about equities. Over the same period when the Dax lost 8.5%, the S&P500 lost less than 1%, although the euro gained 6%. This means that in a common currency the performance of both equity markets is much closer. Nevertheless, recent trends in corporate earnings news in Europe has been much more favourable than in the US. So it seems a little odd that European stock markets should underperform so suddenly and significantly. Profit taking on the prior rally and outperformance seems a more compelling explanation than a fundamental shift in underlying conditions. As a result, I think the most likely explanation for the recent dramatic market moves is that they represent technical factors, profit taking etc. They do not seem caused by shifts in economic fundamentals to me. As a result, I would expect them to be temporary. That does not necessarily mean that bond yields will quickly fall again to previous lows, or that the euro will quickly move back towards parity and equity markets will rally strongly from here. The most likely of these actually
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Macro Weekly - Shock adjustment - 11 May 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
2.2
2.4
3.1
3.1
United States
-0.4
0.9
1.8
2.3
Eurozone
Japan
1.6
-0.1
1.1
1.2
United Kingdom
1.7
2.8
2.8
2.6
China
United States Eurozone
3M interbank rate
01/05/2015 08/05/2015
+3M
+12M
2015e
0.28
0.28
0.4
1.2
0.9
2016e 2.4
-0.01
-0.01
0.00
0.00
0.00
0.10
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.57
0.57
0.6
1.2
1.0
2.0
01/05/2015 08/05/2015
2016e
7.7
7.4
7.0
7.0
World Inflation (%)
3.2 2013
3.3 2014
3.3 2015e
3.8 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.2
2.5
US Treasury
2.12
2.14
1.8
2.2
2.1
2.9
Eurozone
1.3
0.4
0.4
1.7
German Bund
0.36
0.55
0.1
1.0
0.3
1.4
Japan
0.3
2.8
0.8
1.4
Euro sw ap rate
0.65
0.84
0.6
1.0
0.9
1.3
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.37
0.42
0.6
1.0
0.7
1.0
China
2.6
2.0
2.0
2.5
UK gilts
1.84
1.88
1.6
2.3
2.0
2.7
World Key policy rate
4.3 08/05/2015
4.0 +3M
3.7 2015e
3.8 2016e
01/05/2015 08/05/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.25
0.75
2.25
EUR/USD
1.12
1.12
1.05
1.00
0.95
1.10
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
120.2
119.8
122
130
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.52
1.54
1.44
1.47
1.40
1.45
Bank of England
0.50
0.50
0.75
1.75
EUR/GBP
0.74
0.73
0.73
0.68
0.68
0.76
People's Bank of China
5.10
5.10
5.10
5.10
USD/CNY
6.20
6.21
6.25
6.40
6.35
6.45
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
KEY MACRO EVENTS Day
Date
Time
Country
Saturday
09/05/2015
03:30:00
CN
Sunday Sunday Sunday
10/05/2015 10/05/2015 10/05/2015
Monday Monday
11/05/2015 11/05/2015
Tuesday Tuesday Tuesday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
CPI - % yoy
Apr
1.4
1.6
CN CN CN
M2 money growth - % yoy Aggregate financing - CNY bn New loans - CNY bn
Apr Apr Apr
11.6 1181.6 1180
12.1 1300.0 860
13:00:00 13:00:00
GB GB
Policy rate - % BoE size of asset purchase programme - GBP bn
May 11 May
0.5 375.0
0.5
12/05/2015 12/05/2015 12/05/2015
14:00:00 15:00:00 16:00:00
IN US US
CPI - % yoy NFIB small business optimisme - index US Job Openings by Industry
Apr Apr Mar
5.2 95.2 5133
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015
07:30:00 07:30:00 07:30:00 07:30:00 08:00:00 08:00:00 09:30:00 10:30:00 10:30:00 11:00:00 11:00:00 14:30:00 16:00:00
CN CN CN FR DE DE NL GB GB EC EC US US
Fixed investments - % yoy Industrial production - % yoy Retail sales - % yoy GDP - % qoq CPI - % yoy GDP - %qoq GDP - % qoq Claimant count unemployment rate - % Change in claimant count - thousands Industrial production - % mom GDP - % qoq Retail sales - % mom Business inventories - % mom
Apr Apr Apr 1Q P Apr F 1Q P 1Q P Apr Apr Mar 1Q A Apr Mar
13.5 5.6 10.2 0.1 0.4 0.7 0.8 2.3 -20.7 1.1 0.3 0.9 0.3
Thursday Thursday Thursday
14/05/2015 14/05/2015 14/05/2015
08:30:00 14:30:00 14:30:00
IN US US
Wholesale price index - % yoy Prod. prices index - % mom Prod. prices index excl food and energy - % mom
Apr Apr Apr
-2.3 0.2 0.2
Friday Friday Friday Friday
15/05/2015 15/05/2015 15/05/2015 15/05/2015
14:30:00 15:15:00
US US KR RU
Empire State PMI - Manuf. general business conditions - index May Industrial production - % mom Apr Policy rate - % May 15 GDP - % yoy 1Q A
-1.2 -0.6 1.75 0.4
ABN AMRO
4.9
13.5 5.8 10.4 0.4 0.4 0.6
0.1 0.5
0.4 0.6 0.7
-0.4 0.6 0.3
-2.3
-1.0
-2.5
-3.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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