Based in Paris, BNP Paribas' Economic Research Department is composed of economists and statisticians:
« The Economic Research department’s mission is to cater to the economic research needs of the clients, business lines and functions of BNP Paribas. Our team of economists and statisticians covers a large number of advanced, developing and emerging countries, the real economy, financial markets and banking. As we foster the sharing of our research output with anyone who is interested in the economic situation or who needs insight into specific economic issues, this website presents our analysis, videos and podcasts. »
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One of the lasting consequences of the Covid-19 pandemic will be the way we work with more time spent on working from home compared to the pre-pandemic situation. Clearly, the possibility to do so depends to a large extent on the industry, the nature of the job but also the country. These developments would have profound implications on where people decide to live, the role of cities, the need for office space, the use of means of transport, the needs in terms of IT infrastructure (high-speed internet), etc. A priori, one would expect a positive impact on productivity, in particular due to increased worker satisfaction and efficiency. Based on recent surveys, that is also what companies seem to expect
Limiting global warming will require huge investments, which will partly have to come from the public sector. This could lead to a crowding-out effect. Higher public borrowing requirements could push up interest rates and weigh on private investments. In the near-term such a risk seems remote. On the contrary, there could be a crowding-in effect with a reduction in climate-related risk and positive second-round effects from green public investments stimulating private investments. To reduce the risk that financial markets would exclusively focus on the impact on public indebtedness, governments should communicate clearly on the nature of their investments, insisting that they should have a return which is a multiple of the borrowing cost.
The Covid-19 pandemic is having a profound impact on household expenditures. The volume has dropped and its composition has changed significantly. As restrictions are gradually lifted, services such as recreation, food services and accommodation, which have seen a big reduction in demand due to the restrictive measures, could thrive, to the detriment – at least relatively speaking – of spending on goods. For the strength of the early phases of the recovery, pent-up demand is an important factor. It plays a smaller role in the services sector, which could mean that countries with a larger services sector not only have suffered more from restrictive measures but could also face a bigger challenge during the recovery.
Most of our uncertainty indicators continue to decline on the back of vaccination campaigns that pick up speed and better economic data, although in several countries the number of new infections is again rising strongly. Starting top left and moving clockwise, the number of references in the media to uncertainty, after declining very strongly in recent months, has now more or less stabilized.
Central banks have become increasingly aware of the impact of climate change on price and financial stability. Moreover, by accepting collateral or via asset purchases, central banks are taking explicitly climate risks on their balance sheets. At the European Central Bank, climate change has become integral part of the monetary strategy review launched in 2020. A major question is whether climate objectives should be pursued in the conduct of monetary policy. The fear is that it could be seen as “mission creep”. At a minimum, one would expect the ECB to ask for more disclosure concerning climate-related factors for assets held on its balance sheet. But the question to what extent market neutrality should be abandoned in favour of greener objectives is still open
In many countries the number of new Covid-19 cases has begun rising again, forcing governments to maintain or tighten health restrictions. This is the case for the Eurozone, among others, where a true rebound in growth and demand has been postponed yet again. The timing of the recovery will depend essentially on the effectiveness of restrictive measures and the acceleration of vaccination campaigns, but also on spillovers effects with some of its trading partners whose economies are picking up more rapidly. The United States is one such country thanks to its successful vaccination campaign and the enormous recovery plan that has just been launched. America’s influence is not limited to providing greater opportunities for European exporters
Since the Great Recession, the monetary base in several advanced economies has seen a considerable increase, driven by the creation of bank reserves at the central bank. Yet, contrary to what had been observed in previous decades, this has not been followed by a significant pick-up of inflation. Following the global financial crisis, the demand of the banking system for central bank reserves increased a lot. This was a reflection of the dire state of the economy and money markets as well as tighter liquidity requirements. Subsequently, quantitative easing caused an increase in reserves on the initiative of the central bank
In recent months, purchasing managers in the euro area and the US have reported a significant increase in input prices as well as longer delivery lags. They reflect the next stage of the disruptive impact of the pandemic with supply struggling to meet the pick-up in demand. According to an Atlanta Fed survey, firms experiencing the most intense disruption tend to be those with the highest expectation of future inflation. It remains to be seen whether this will convince them to raise prices. The Federal Reserve is relaxed about this but, nevertheless, there will be lot of nail-biting in the second half of the year as US inflation data are released in an economy that should be able to close its output gap quickly.
The significant increase in US Treasury yields in recent months has not yet led to a widening of the spread between US Treasuries and the global emerging bond market index. This index covers USD-denominated traded bonds & loans issued by sovereign and quasi-sovereign borrowers in a large number of developing economies, whereby a distinction is made between investment grade (IG) and the lower quality speculative grade (SG) issuers. The absence of spillovers coming from the United States is a relief. Admittedly, emerging market yields have moved higher, in line with US yields, but they have been spared from a spread widening, which would have made financing conditions even more onerous. Things have been different in the past
The new economic projections of the FOMC members reflect a big but temporary boost to growth from the fiscal stimulus and the normalisation of economic activity as the adult population is vaccinated. They expect a limited, temporary increase of inflation. Four participants now expect that the circumstances would warrant an increase in the federal funds rate next year. Seven expect this to be the case in 2023. Fed chairman Powell was quick to point out that the projections are not a committee forecast and that the data do not justify a change in policy. This message clearly anchors short-term interest rates, whereas longer-term bond yields fluctuate on the waves of ease or unease about where the federal funds rate could be several years into the future.
Based on an overview of the functions of a currency, cryptocurrencies should be considered as an investment instrument, rather than as an alternative to fiat money. Since the start of 2020, correlations between bitcoin and copper, equities and, in particular, breakeven inflation have increased. Probably, investors turn to bitcoin when inflation expectations are on the rise. Swings in investor sentiment also play a role. The extent of the change in the bitcoin price suggests that speculative waves are at work, driven by momentum buying and extrapolative expectations of price appreciation
The downward trend of our uncertainty indicators continues. This is related to the improvement of the sanitary situation in several countries, the vaccination campaigns and the anticipation of a major fiscal stimulus package in the US...
The financial cycle, as captured by bond and equity market developments is very much globally synchronised, but, at present, there is a business cycle desynchronization between the US and the euro area. Rising euro area government bond yields, on the back of higher US yields, cannot be considered as a sign of economic strength. Quite to the contrary, they come at a bad moment. One would expect, at a minimum, a very strong statement from the ECB’s Governing Council on 11 March on its decisiveness to act should yields continue to rise. Markets would of course prefer immediate action. After all, the tool –the PEPP- is available so one might as well step up its use.
In the manufacturing sector, at the world level, the PMI recorded an improvement in February after having eased the month before. It is now at the highest level of the period under review. This also applies to the eurozone, where the index saw a big jump in February. The improvement in the French index was even more impressive, although its level is still below that of the eurozone...
Until recently, the rise in long-term interest rates did not stop the equity market from moving higher, but events this week suggest investors are becoming increasingly concerned. The possible impact of higher bond yields on share prices, depends on what causes the increase: faster growth, a decline in uncertainty, rising inflation expectations.The last factor is the trickiest one because it may cause a profound reassessment of the outlook for monetary policy. Over the past two decades, the relationship between rising rates and the equity market has not been statistically significant. Gradualism in monetary policy has played a role. Recent statements by Jerome Powell show he is very much aware of the importance of avoiding to create surprises.
Recently, several calls have been made for the ECB to cancel part of its government debt holdings. Such an operation would violate the EU Treaty. On economic grounds, it is unnecessary, given that the interest paid on the debt to the ECB flows back to governments in the form of dividends. It would actually entail a cost: higher inflation expectations and/or a higher inflation risk premium would cause an increase in bond yields. The extreme nature of the measure could also undermine confidence. In reality, the very low levels of interest rates imply that governments have a lot of time to bring their finances in better shape
The dire state of the labour market requires a major support effort for the economy. This view is shared by Fed Chairman Jerome Powell and Treasury Secretary Yellen. The massive fiscal stimulus plan prepared by the Biden administration has received criticism from prominent economists. They argue that the plan is too big and could trigger a sizeable increase in inflation. In deciding on the size of the fiscal plan, risk management considerations play an important role. Doing not enough is clearly the greater risk. However, doing a lot will eventually force the Federal Reserve to demonstrate its independence by not shying away from raising rates despite the impact on government finances.
The World composite purchasing managers’ index has been in a narrow range since August last year. At 52.3, it is still comfortably above the 50 mark, although it has been trending down since the peak of 53.3 reached in October. However, the dynamics at the country level are very heterogeneous...
The preliminary estimation for euro area inflation surprised to the upside, with annual core inflation reaching 1.4% in January. Monthly inflation was negative however, at -0.5%. Due to the Covid-19 pandemic, inflation data have become very noisy and hence more difficult to interpret. Survey data show rising input prices and lengthening of delivery times, which could exert some upward pressure on inflation. These factors should dissipate during the course of the year. Given the economic slack, any lasting pick-up in inflation should be a very gradual process.
Academic research shows that certain investors look at single stock call options as lottery tickets. They are aware they can lose money but nurture the hope of very big gains. To some extent, the share price behaviour in recent days of certain US small cap stocks illustrates this thinking. The combination of herd-type momentum buying and a short squeeze has caused huge share price swings. Should this become a recurrent phenomenon, it might reduce the informational efficiency of equity prices, increase the required equity risk premium and influence the cost of capital of companies.
In recent months, the dollar has weakened versus the euro although the real bond yield differential between US Treasuries and Bunds has increased. Amongst the factors that may explain this development, Federal Reserve policy is particularly important through its impact on capital outflows from the US and currency hedging behaviour of eurozone investors.The biggest risk for a change in direction of the dollar would be a repetition of the ‘taper tantrum’ of 2013 with the Federal Reserve starting to point towards a possible beginning of the normalisation of its policy. However, such a change in guidance is not to be expected anytime soon.
Yields on US Treasuries and German Bunds tend to be highly correlated but since the end of August, Bund yields have been essentially stable whereas treasury yields have increased.This spread widening is explained by a rising real rate differential, to a large degree due to a decline in German real yields. This could reflect a more gloomy view of bond investors about the growth outlook in Germany and, by extension, the Eurozone. Another, more likely, interpretation is that the real rate risk premium has declined in Germany due to the asset purchases of the ECB. In such case, investors will become increasingly nervous about the prospect that in a post-pandemic world the ECB will eventually have to stop the net purchases under its PEPP.
The latest readings of our indicators show a decline of uncertainty. Starting top left and moving clockwise, the decline of the media coverage based indicator continues but momentum is slowing and the level remains high. This is unsurprising given the newsflow on new infections. Uncertainty based on company surveys has recently declined somewhat in Germany but, again, the level remains very high. The same applies to the US with respect to sales revenue growth expectations...
It is quite likely that, going forward, fighting recessions will be the remit of governments with central banks facilitating this task by creating cheap financing conditions. As a consequence, public indebtedness may very well remain high.One should wonder whether this could end up having negative consequences. A possible transmission channel is the pricing of government debt via a sovereign risk premium. Another factor can also play a role. Since 2015, when German bond yields increased, the rise in Italian yields has been even bigger -so the spread widens- whereas French yields has increased in line with German yields
In order to get a feel about how the Covid-19 pandemic has influenced activity in 2020, it is sufficient to look at one single chart, the composite PMI. Data plunged globally in March and troughed at very low levels in April. The third quarter saw strong activity with readings above the crucial 50 level in most countries. Under the influence of a new wave of infections, sentiment dropped again in the eurozone in November. In the US on the other hand, the index remained well above 50...