Macro Weekly Turbulent markets, indicating what?
Group Economics
Han de Jong +31 20 628 4201
1 May 2015 Financial market have been relatively volatile in recent days. Core eurozone bond yields have risen sharply and equities, European ones in particular, have lost ground. Investors need to think what has caused this and what the implications are. I fail to see a clear connection with recent or future developments in the real economy. Yes, the US economy has made a very slow start to the year, but is expected to gain momentum in the period ahead. The Fed did not give clear hints about what it might do next. Eurozone data continues to confirm that the economy is recovering and the sidelining of Greece's finance minister appears to be giving the negotiations between the country and its partners a boost.
The message
clearer is not obvious. Some commentators are saying that
I am a great believer in the collective intellect of financial
weak US growth has driven equities down. However, that
markets, though I sometimes, arrogantly, think that the three of
seems to be at odds with the fact that European equities are
us (I, me and myself) know better than all the market
losing more ground than US equities. I suspect that there is a
participants together. Recent market action is a bit of a puzzle:
big element of 'taking a breather' in all of this. The Euro Stoxx
despite continued ECB bond buying and increasing scarcity in
50 index rose more than 21% between the end of last year and
some segments of the eurozone bond market, yields on core
the peak in mid April. Despite recent losses, the market is still
bonds have risen relatively sharply over a short period of time.
up almost 15% for the year. Some profit taking in bonds was
Meanwhile, spreads of Spanish and Italian bonds over
perhaps also overdue as the 10yr Bund yield was heading for
Germany did not widen. Spreads of Greek bonds, on the other
zero yield at an impressive pace.
hand, actually tightened significantly. This has coincided with a strengthening of the euro. Such a combination points to an
Arrogant?
easing of fear for something. Core eurozone bonds have
Perhaps I am arrogant, but I do not believe that market action
benefitted in the past not just from ECB buying, but also from
is signalling economic problems ahead. Yes, the US economy
safe-haven flows as the negotiations between Greece and its
slowed significantly in the early months of the year. It is clear,
partners failed to make substantive progress. The dollar may
however, that weaker growth was at least partly caused by
also have benefitted from the Greek saga and is now losing
temporary factors. A rebound in growth is on the cards, it is
ground.
just a question of how much. Recent US data was broadly supportive of our optimistic view. Private consumption rose a
10yr Bund vs EUR/USD
relatively robust 1.9% in Q1. House prices continue to rise modestly, the Chicago PMI recovered in April to 52.3 from 46.3
0.6
1.25
in March, the nationwide ISM stabilised at 51.5 in April,
0.5
1.20
personal spending rose 0.4% mom in March while initial
0.4
1.15
jobless claims fell to their lowest level since 2000 last week.
0.3
1.10
0.2
1.05
0.1
1.00
0 01-Jan
01-Feb
01-Mar
10Y Bund (%, lhs)
01-Apr
0.95 01-May
EUR/USD (rhs)
The FOMC met this week and released a statement that gave something to everybody. Clearly, the economy was weak early in the year; clearly this was partly due to 'transitory' factors; clearly the exceptionally low interest rates are, or will soon be, unwarranted by domestic economic conditions. The FOMC omitted from its statement a phrase from the previous
Source: Bloomberg
statement that ruled out a rate hike at the following meeting. Does that mean they will raise rates in June? Not necessarily.
Why equities should sell off sharply just when confidence
My reading is that, despite the FOMC's unanimity at the April
about the economic future of Greece seems to be getting
meeting, the committee is extremely divided. This makes
2
Macro Weekly - Turbulent markets, indicating what? - 1 May 2015
policy very unpredictable. Our view remains that rates will not
Eurozone real M1 vs GDP % yoy
be raised in June, but in September. And even that requires an improvement in growth momentum for the economy along the
15
6
lines we are expecting. And even then, doves may argue that there is little harm in holding off a little longer. Apart from the fact that the Fed is relatively unpredictable due to internal differences of views, I cannot see what the markets should worry much about. True, the first rate hike in almost ten years
4 10
2 0
5
-2 -4
0
-6
creates uncertainty, but it is not as though the Fed will hike aggressively or that we will be taken by surprise.
-8
-5 05
06
07
08
09
10
11
Real M1 (12m fwd, lhs)
12
13
14
15
16
GDP (rhs)
Eurozone credit channel improving We have highlighted for some time that the credit channel in
Source: Bloomberg
the eurozone is healing. The March monetary statistics confirm this view. Broad money growth, as measured by M3 growth,
From Grexit and Voodoofakis to Varoufexit
accelerated to 4.6% yoy, up from 4.0% in February, 3.6% in
Yanis Varoufakis, the Greek finance minister was sidelined
January and a trough for this cycle of 0.8% in April last year.
regarding the negotiations between Greece and its partners.
M1 growth, which is actually a better guide to overall economic
This seems to have led to a material improvement in the
growth than M3, accelerated to 10.0% yoy, up from 9.1% in
progress made at these talks, although we have to wait and
February. Bank lending details were also encouraging. Bank
see if Varoufakis' successor in this role, Euclid Tsakalotos, can
lending growth in many market segments is now entering
keep momentum going. Opinion polls are suggesting that the
positive growth territory on a yoy basis. This should not be
Greek electorate has become less supportive of the
mistaken for feeble growth. What we measure as credit growth
confrontational approach the Greek negotiators took under
is, in fact, the difference between new loans and the expiration
Varoufakis. The electorate seems determined that Greece
of old ones. This measure lags the business cycle as a whole
stays in the euro and an increasing part of the electorate is
and tends to underestimate the strength of the economic
starting to realise that that can only be achieved through
recovery following periods of contraction and weak growth.
compromise. The outlook here is a good deal better than it has been in months.
Particularly encouraging data came from Spain this week. GDP growth in Q1 exceeded expectations. On yoy basis, GDP was up 2.6%, well ahead of the 2.0% in Q4 and the best since 2008. Deflation fears are receding in the eurozone, one could say almost as quickly as they appeared last year. Eurozone headline inflation moved back to 0.0% yoy in April, having spent four months in negative territory. Stronger economic growth, higher oil prices and the weaker euro are making an early return to the deflation scare unlikely.
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3
Macro Weekly - Turbulent markets, indicating what? - 1 May 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
+3M
+12M
2015e
2.2
2.4
3.1
3.1
United States
0.28
0.28
0.4
1.2
0.9
2.4
-0.4
0.9
1.8
2.3
Eurozone
0.00
-0.01
0.00
0.00
0.00
0.10
Japan
1.6
-0.1
1.1
1.2
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
1.7
2.8
2.8
2.6
United Kingdom
0.57
0.57
0.6
1.2
1.0
2.0
China
23/04/2015 30/04/2015
2016e
United States Eurozone
3M interbank rate
23/04/2015 30/04/2015
2016e
7.7
7.4
7.0
7.0
World Inflation (%)
3.2 2013
3.2 2014
3.3 2015e
3.9 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.2
2.5
US Treasury
1.95
2.04
1.8
2.2
2.1
2.9
Eurozone
1.3
0.4
0.4
1.7
German Bund
0.16
0.36
0.1
1.0
0.3
1.4
Japan
0.3
2.8
0.8
1.4
Euro sw ap rate
0.52
0.65
0.6
1.0
0.9
1.3
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.32
0.33
0.6
1.0
0.7
1.0
China
2.6
2.0
2.0
2.5
UK gilts
1.69
1.84
1.6
2.3
2.0
2.7
World Key policy rate
4.3 30/04/2015
4.0 +3M
3.7 2015e
3.8 2016e
23/04/2015 30/04/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.25
0.75
2.25
EUR/USD
1.08
1.12
1.05
1.00
0.95
1.10
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
119.6
119.4
122
130
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.51
1.54
1.44
1.47
1.40
1.45
Bank of England
0.50
0.50
0.75
1.75
EUR/GBP
0.72
0.73
0.73
0.68
0.68
0.76
People's Bank of China
5.35
5.10
5.10
5.10
USD/CNY
6.20
6.20
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
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Monday Monday
04/05/2015 04/05/2015
03:45:00 10:00:00
CN EC
PMI manufacturing - index (HSBC) PMI manufacturing - index
Apr F Apr F
49.2 51.9
49.4 51.9
Tuesday Tuesday Tuesday
05/05/2015 05/05/2015 05/05/2015
14:30:00 16:00:00
US US EC
Trade balance - USD bn ISM non-manufacturing, index European Comission Economic Forecasts
Mar Apr
-35.4 56.5
-40.2 56.1
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015
03:45:00 10:00:00 10:00:00 10:30:00 11:00:00 14:15:00 14:30:00
CN EC EC GB EC US US PL
PMI services - index (HSBC) PMI services - index Composite PMI output PMI services - index Retail sales - % mom ADP nat. employment report - thousands Output per hour nonfarm business sector - % qoq Reference rate - %
Apr Apr F Apr F Apr Mar Apr 1Q P May 6
52.3 53.7 53.5 58.9 -0.2 188.7 -2.2 1.5
53.7 53.5 58.7 -0.3 199.3 -1.8 1.5
Thursday Thursday Thursday Thursday Thursday Thursday Thursday
07/05/2015 07/05/2015 07/05/2015 07/05/2015 07/05/2015 07/05/2015 07/05/2015
08:00:00 09:00:00 09:30:00 10:00:00 13:00:00 14:30:00 21:00:00
DE CH NL NO CZ US US
Manufacturing orders - % mom Foreign currency reserves - CHF bn CPI - % yoy Policy rate - % Repo rate - % Initial jobless claims - thousands Fed Reserve consumer credit - USD bn
Mar Apr Apr May 7 May 7 May 2 Mar
-0.9 522.40 0.4 1.25 0.1 262 15.5
1.3 526.33
Friday Friday Friday Friday Friday Friday Friday
08/05/2015 08/05/2015 08/05/2015 08/05/2015 08/05/2015 08/05/2015 08/05/2015
08:00:00 10:30:00 14:30:00 14:30:00 14:30:00
DE GB US US US CN CN
Industrial production - % mom Trade balance - GDP mln Change in employment private employment - thousands Change in employment total - thousands Unemployment - % Exports Imports
Mar Mar Apr Apr Apr Apr Apr
0.2 -2859 129 126 5.5 -15.0 -12.7
0.3 -2300 223 225.5 5.4 2.9 -9.8
ABN AMRO
-0.5
1.5 2.0 0.4
1.13 0.1
0.1
15.7 0.5 223 225 5.4
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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