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US inflation going nowhere 3/15/2019
The current US expansion started in the summer of 2009 but inflation remains, depending on the definition, close to or below the Federal Reserve’s target of 2%.
US mortgage market reform: Huge need for private capital 2/27/2019
On 1 February, Senate Banking Commission Chairman Mike Crapo outlined his proposal for reforming the US mortgage market. The proposal starts from the widely held position that although public guarantees are essential in ensuring a liquid and stable mortgage market, the Federal government should not be the sole party exposed to payment default risk. The Ginnie Mae securitisation model of multiple originators and multiple issuers* would be widely replicated, but only the private sector would participate in credit enhancement. Ginnie Mae would provide its guarantee (the government guarantee) to securitisations backed by loans covered by approved private guarantors. Credit risk transfer programmes would be reinforced for “non-extreme” credit risk. To limit taxpayer exposure to credit risk, a mortgage insurance fund would be created and paid into by the guarantors. Although the subject was not mentioned, the volume of private capital necessary to implement this reform would be huge, especially if it is necessary to recapitalise the current guarantors Fannie Mae and Freddie Mac (which would be “reprivatized”) by absorbing the cumulative losses and dividend payments, which exceeded core capital. * See Choulet C., The Fate of Fannie Mae and Freddie Mac is not yet sealed, BNP Paribas, Conjoncture, March 2018
Smooth landing 2/22/2019
In the United States, positive cyclical surprises have become rare: employment figures and the ISM purchasing managers’ index were the only statistics that surpassed expectations in January. Yet these are solid indicators. Moreover, although industrial output and retail sales were disappointing, they were probably caused by poor weather conditions (extreme cold wave) or temporary factors (government shutdown). For the moment, the US economy still seems to be poised for a smooth landing.
US-China trade negotiations: good news at last? 2/15/2019
There is hope that the trade negotiations between the US and China can be concluded successfully in the near term, thereby eliminating a major source of uncertainty for the world economy. It remains to be seen whether a deal would cause trade diversion to the detriment of other countries
Fed turning a corner, but into which direction? 2/1/2019
Although US growth remains strong, global headwinds, softer survey data and tighter financial conditions have put the FOMC in risk management mode. Policy remains data dependent, but a patient stance will be adopted before deciding on the next move in monetary policy. Inflation, which remains well under control, facilitates this wait-and-see attitude. Markets are now pricing in a policy easing in the course of 2020. More than anything else, this shows to which extent uncertainty has taken its toll on confidence.
United States: Soaring deficits (continued*) 1/30/2019
Geared towards the wealthiest households, President Trump’s tax cuts have not exactly matched the America First agenda. A famous foreign car brand, which can be identified by the small statue on the front hood, has just announced record high US sales for the year 2018. And it is not the only winner. By fuelling demand at a time when the economy was already operating at its potential, American policy resulted in a widespread increase in imports and a huge trade deficit. It is now at a record high at almost USD 900 billion. Higher trade barriers did not really help, as the deficit widened primarily with China. *Read also Chart of the Week published on 10 October 2018
Landing 1/24/2019
The assumption that the US economy is heading for a landing is gaining ground, not just because of the shutdown. The disruption created by the trade war with China, the appreciation of risk on bond and equity markets, the peaking of the energy sector and the deterioration of real estate indices all suggest less buoyant growth. This view is shared by the US Federal Reserve, which has adopted a more cautious tone and suspended the increase in policy rates pending future macroeconomic data.
United States: Reallocation of cash induced by money market fund reforms 1/16/2019
In 2014, the Securities and Exchange Commission (SEC) adopted reforms to limit the scope of US constant net asset value money market funds. Money market funds that until then were invested in private debt (prime funds) had to abandon this model while funds that were invested in public debt (government funds) retained the ability to provide a guarantee to investors that they would recover all of their original investment*. Starting in October 2015, the reforms have led to a massive reallocation of cash from prime funds to government funds. Foreign banks, traditional borrowers of prime funds, were deprived access to US dollars while the US Treasury and federal agencies attracted fund inflows. Part of these fund inflows has been lent to US banks. Overall, over the past three years, liquidity allotted directly or indirectly by money market funds to US banks increased by USD 155 bn, while funds allotted to foreign banks fell by USD 115 bn. *See Choulet C., US money market funds and US dollar funding, BNP Paribas, EcoFlash, 16 July 2018
The Powell put 1/11/2019
Fed chairman Powell has recently emphasized that the FOMC will be patient given the muted inflation reading and that it is ready to shift the policy stance swiftly if required. He also considers that financial markets are pricing in downside risks well ahead of the data. This means that they are too pessimistic on growth. Professional forecasters' estimates of the probability of entering into recession in the coming quarters do not display the typical pre-recession dynamics either.
Monitoring US recession risk 1/8/2019
Market behaviour and comments from company executives point towards increasing concern about the risks of a recession in the US. Based on the historical experience, the pace of monthly job creations is a key indicator to assess this risk.

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