eco TV Week


United States: Expanding US federal debt will require raising more foreign capital   12/2/2022

For the past 10 years the attractiveness of US Treasuries for foreign investors has been in decline. In the light of official projections that the US federal debt will almost double over the next ten years, strengthening their appetite appears paramount.

Can Germany escape the recession?   11/25/2022
Since the beginning of 2022, German growth has never ceased to surprise by its resistance, driven by the end of post-Covid catch-up effects. However, the deterioration of the economic situation is now such that all the engines of growth are weakening and fading one by one. In terms of consumption, investment and foreign trade, all followed a downward trend in the fourth quarter. It therefore seems unlikely that German GDP will continue to grow in the last three months of the year. Despite this, the recession that awaits Germany in 2023 is expected to be moderate and time-limited due to massive public support.

Gone with the wind: the erosion of real household wealth   11/18/2022
Household wealth -the difference between assets (property, financial) and financial liabilities- matters because in the longer run, it should allow to finance expenditures post retirement. During the pandemic, we have seen in the euro area a big jump in the savings rate as well as an above-trend increase in property prices whereas financial assets suffered from negative valuation effects. The European Commission estimates that, on balance, between the onset of the pandemic and the end of 2021, households accumulated around EUR 2.7 trillion of new wealth in excess of the normal trend. This was considered as a factor of resilience for household spending. Households could save less than normal in case of a weaker economic environment because they had saved more than normal during the pandemic. However, according to the European Commission, by mid-2022 elevated inflation had already eroded the real value of additional wealth by almost 50%, implying a much thinner cushion to absorb shocks.

Spain: national recovery plan, contrasted progresses   11/10/2022
With nearly EUR 19 bn released between the start of 2022 and mid-September, a third more than during the same period in 2021, the Spanish National Recovery and Resilience plan is gaining traction. However, some obstacles to its implementation on the ground remain.

France: Inflation spike? Not yet   11/3/2022
Inflation has accelerated markedly during 2022. After a limited disinflation during the summer, driven by lower gasoline prices, the inflation rate has reached a new peak in October. Core inflation is accelerating, and expected food and energy price increases are suggesting even higher inflation during Q12023, before a gradual disinflation. In parallel, as wage growth should accelerate moderately, household purchasing power should exhibit a modest increase in 2023.

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On the Same Theme

The sobering record of real GDP forecasts during recessions 11/27/2022
Economic forecasting in the run-up to and during recessions is particularly challenging. An analysis of the Federal Reserve of Philadelphia’s survey of professional forecasters shows that, since 1968, forecast errors during recessions are significantly higher than during non-recession periods. Moreover, forecast errors during recessions are predominantly positive, so forecasts tend to be too optimistic, even if they concern the next quarter. At the current juncture, there is broad consensus, if not unanimity, that downside risks to growth dominate due to the multiple headwinds and uncertainties. The historical forecast record is another reason to be mindful of these risks.   
The end of wage bargaining power? 11/22/2022
Inflation seems to have peaked in June in the United States. The continuation of the momentum and the pace of disinflation will depend to some extent on easing of the tightness in the labour market, which continues to support wages. In October, the slight increase in the unemployment rate and the slowdown in  nonfarm payrolls gains could well indicate the beginning of such easing. What about wage dynamics? According to the Atlanta Federal Reserve’s Wage Growth Tracker, the first signs of a slowdown are emerging.  This indicator measures, on a three-month rolling average, the median percent change in the hourly wage of individuals observed 12 months apart. According to this indicator a slowdown in wage growth seems to be emerging, although this is still to be confirmed. After peaking in July and August (6.7%), wage growth stood at 6.4% in October (compared to 6.3% in September). In addition to pointing to a possible wages’ deceleration, this indicator provides another interesting information on the difference in wage dynamics depending on whether individuals are employed (job stayers) or have changed jobs (job switchers). After a strong increase, the slowdown in the salaries of job switchers seems to be well under way (7.6% in October, down continuously since its high of 8.5% in July). On the other hand, wage growth for job stayers recovered slightly in October (5.4%), interrupting a slowdown which began in June (6.1%). If this trend of a slowdown in wage growth is confirmed, which is likely, employees may be less inclined to change jobs for salary reasons, which could reduce the tightness in the labour market.
Disinflation has started 11/13/2022
The US consumer price data for October have reinforced the view that disinflation -the narrowing of the gap between observed inflation and the central bank’s inflation target- has started. That conclusion seems clear as far as headline inflation is concerned -it has peaked in June- but we need confirmation that the decline in core inflation from the September peak is not a one-off. Core goods inflation has been moving down but core services inflation  remains stubbornly high on the back of transportation services and shelter. What matters now for the economy and financial markets is the speed of disinflation because this will influence Fed policy, the level of the terminal rate and how long the federal funds rate will stay there. All this influences the perceived downside risks to growth. 
Federal Reserve: how much is enough? 11/6/2022
At which level will the Federal Reserve stop hiking the federal funds rate? The question is hugely important for activity and demand in the US economy as well as for financial markets. During his recent press conference, Fed Chair Jerome Powell remained vague about the reaction function of the FOMC but he did mention that they would be looking at real interest rates. This raises the question which inflation measure to use to move from nominal to real rates. A possible solution is to use the term structure of inflation expectations that is calculated by the Federal Reserve Bank of Cleveland. Despite its significant recent increase, the real one-year Treasury yield is still below that reached during previous tightening cycles, with the exception of 2018. Against the background of elevated inflation, it is clear the tightening cycle is not about to end.  
Employment shows resilience  11/6/2022
According to the preliminary estimate by the Bureau of Economic Analysis (BEA), annualised quarterly growth in US GDP rebounded sharply in Q3 to 2.6%, following two quarters of negative growth (respectively -1.6% in Q1 and -0.6% in Q2). The upturn in growth was driven mainly by the significant contribution from foreign trade (2.8 percentage points), which was based on the very strong increase in exports of goods and services (+14.4%), while imports fell sharply (-6.9%). Consumer spending (contribution of one percentage point) is holding up quite well given the extent of the inflationary shock. On the other hand, residential fixed investment continued to fall (for the sixth consecutive quarter) and the downward trend was accentuated (negative contribution of -1.4 percentage points). 
Foreign investors in US Treasuries: official and private sectors now neck and neck 10/18/2022
Liquidity in the US Treasuries market has deteriorated significantly since the start of the year. Against the backdrop of monetary tightening and fears of recession, the strengthening of the dollar and the high volatility in yields are discouraging investors, whether US or foreign, while the Fed has started to reduce its portfolio. Given the size of the debt to be financed (23,000 billion US dollars of marketable debt at the end of June 2022), the prudential constraints limiting the intermediation capacities of primary dealers are an aggravating factor. For many years now the attractiveness of US Treasuries for foreign investors has been in decline. The weighting of their holdings in marketable US federal debt stood at 32% at the end of June 2022 compared with 57% at the end of 2008. This decline is exclusively due to official investors: with a view to diversifying their foreign exchange reserves (or even supporting their currencies), central banks and foreign governments have to some extent turned away from Treasuries, and more generally from the dollar. Therefore, while the official sector was the US Treasury’s primary foreign counterparty at the end of 2008 (74%), in June 2022 it held only 53% of the federal debt held abroad. In terms of the total stock of Treasuries, the respective numbers were 42% and 17%. Reflecting the growing role of private investors (such as insurance companies, pension funds and hedge funds), the overall exposure of foreign investors to the American economy (in the form of securities, loans and deposits) has gradually shifted to riskier assets (at the end of June 2022 it consisted of 36% of equities and fund shares compared to 15% at the end of 2008). This growing role could lead to greater interest rate volatility as private investors generally have a shorter investment horizon than official investors.
Resisting without convincing 10/2/2022
Persistent inflation and the rapid and sustained rises in interest rates are hitting the US economy hard. However, business climate surveys are recovering, albeit modestly, and consumer confidence has improved for the second consecutive month. Business climate indices rebounded in September, although without moving back into growth territory. The composite PMI recovered significantly (+4.7 points compared to August) to stand at 49.3, mainly driven by the strong growth in the services sector PMI (+5.5 points, to 49.2) and, to a lesser extent, by a slight improvement in the manufacturing PMI (+0.2 points, to 51.8).
Close to inflation peak? 9/29/2022
Following a second contraction in its GDP in Q2, the outlook for the US economy is at least uncertain. Inflationary pressures are showing signs of easing, but the pace of disinflation could be longer than expected. While consumer confidence recently paused its downward trend and in fact recovered slightly in August, business surveys show a sharp decline in sentiment, particularly in the manufacturing sector. The Federal Reserve has continued the rapid rise in its fed funds rates, which are now at restrictive levels.
Vacancies, job turnover and disinflation 9/25/2022
The tight US labour market plays a crucial role in the effort of the central bank of bringing inflation back to target. Slower growth in labour income should lead to slower demand growth, whereas smaller wage increases will ease pressure on corporate profit margins and reduce the need for companies to charge higher prices. The labour market is characterized by a dynamic interaction between job openings, unfilled vacancies, voluntary departures (quits) and layoffs. In the US, unfilled vacancies and the quits rate have started to decline and one should expect that this dynamic will gather pace, causing a slowdown in wage growth. The question remains to what extent this will bring down inflation, which is why the Federal Reserve’s policy is completely data-dependent.
Is the Inflation Reduction Act living up to its name?  9/5/2022
The US labour market continues to perform well. The unemployment rate stood at 3.7% in August, up slightly from 3.5% in the previous month. Total nonfarm payroll employment growth is slowing down but remains significant (+315k m/m), particularly in professional and business services, health care, and retail trade. The labour market’s resilience to the slowdown in growth is an important element in mitigating the impact of the rising cost-of-living.

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