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    EcoWeek of 17 May 2019
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    Import tariffs have a negative impact on the targeted country. Retaliation will in turn have negative consequences for the country which started the tariff hikes. Even in the absence of retaliation, there will be negative consequences. Household spending will suffer from a loss of spending power due to an increase in inflation following higher import prices and/or a switch to domestically produced goods. For the same reason, aggregate corporate profits may suffer. Companies may also cut back their investment because of increased uncertainty. Empirical research confirms these outcomes.
    Over the past few months, the news flow for the German economy has definitely improved. Manufacturing output strengthened for the second consecutive month, although remaining well below last year’s level. Also industrial orders rose slightly, although falling short of market expectations. Even though consumer confidence slightly weakened April, it remained at a very high level.
    EcoWeek of 10 May 2019
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    In the European Union, CO2 emissions from fossil fuel combustion declined 2.5% in 2018 compared to the year before. Considering that GDP grew, this implies a reduction in carbon intensity, thereby continuing a long-term trend. The developments in individual countries  vary and quite a number of countries have seen an increase in emissions. Likewise, the differences are considerable concerning the emissions per capita depending on the level of economic development, although this is just one factor amongst many which influence the emission intensity.
    Most leading economic indicators are in line, or even above, expectations. Activity in the manufacturing sector remains subdued, the Purchasing Managers Index (PMI) reaching only 47.9 in April. This poor performance is partially offset by the resilience of the PMI Services Index which is below its long-term average but still well above the 50 threshold (52.8 in April).
    EcoWeek of 03 May 2019
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    According to Jerome Powell, the fundamentals supporting the US economy remain solid. First quarter growth has been robust but underlying concerns about the quality of growth have emerged. Growth has benefitted from a drop in imports and rising inventory levels while residential investment acted as a drag. In the coming months, imports should rebound and inventories should witness a scale back. The onus will fall on consumer spending and corporate investment to neutralise the effects of these anticipated headwinds on growth.
    According to the first INSEE’s estimate, real GDP growth remained stable at 0.3% q/q in Q1 2019. This figure is in line with our expectations but it paints a mixed picture, an even more mixed one than during the two previous quarters.

On the Same Theme

The import tariff boomerang 5/17/2019
Import tariffs have a negative impact on the targeted country. Retaliation will in turn have negative consequences for the country which started the tariff hikes. Even in the absence of retaliation, there will be negative consequences. Household spending will suffer from a loss of spending power due to an increase in inflation following higher import prices and/or a switch to domestically produced goods. For the same reason, aggregate corporate profits may suffer. Companies may also cut back their investment because of increased uncertainty. Empirical research confirms these outcomes.
United States, is the flattening yield curve a concern? 5/3/2019
In the United States, the flattening yield curve is neither accidental, nor insignificant. It anticipates an economic slowdown.
Strong growth, low inflation 4/26/2019
The first quarter turned out to be strong after all. The just released first estimate for first quarter GDP showed an annualised quarter over quarter increase of 3.2%, ahead of the consensus number of +2.3% and better than the previous quarter (+2.2%). Data released earlier this month had suggested that March looked good though not great.
Inversion, then recession? 4/19/2019
Although losing steam, the economic activity in the US is seen keeping on a rather dynamic path in 2019. The International Monetary Fund still forecasts a 2.3% increase in GDP this year, while delivering an increasingly cautious message in the meantime. The IMF recently pointed out several risk factors, including the record high corporate debt ratio, the opacity and less stringent standards on the leveraged loan market, and stretched equity market valuations. Moreover, the inversion of the yield curve is virtually complete, which in the past has always been an early-warning sign of recession.
Three different messages from Washington DC 4/12/2019
President Trump has argued that the US economy would get a boost if the Federal Reserve were to cut rates. The minutes of the FOMC show the members are confident about the growth outlook. The outlook for inflation, against a background of global uncertainties, allows them to be patient in terms of policy. The IMF in its latest Global Financial Stability Report expresses concern about how high debt levels weigh on the resilience when faced with significantly slower growth or higher borrowing costs. This implies that Fed policy will not only be confidently patient but also patiently vigilant.
United States: Non-bank finance has relatively higher exposure to poor quality auto loans 4/10/2019
At year-end 2018, auto loans outstanding peaked at US 1,274 billion in the United States. This is the third largest debt category for American households, behind mortgage loans (67%) and student loans (11%). At 9% of total loans outstanding, their weight has increased constantly since 2010. The Federal Reserve Bank of New York recently released unpublished data broken down by lending sector. In Q3 2018, non-bank finance companies originated 12% of loans outstanding, half of which were subprime loans*. These auto finance companies, which are generally highly leveraged, remain highly exposed to credit risk (only 17% of loans outstanding are securitized). It does not augur well for these finance companies that the share of auto loans with late payments of more than 90 days has increased constantly, to 4.5% at year-end 2018. * loans to borrowers with a credit rating of less than 620
Pressure on central bank liquidity is going undetected 4/9/2019
Since 20 March, American banks have been making overnight transactions with base money at higher rates than the US Federal Reserve pays on their current accounts. At a time of abundant central bank reserves (compared to pre-crisis standards), this unusual structure for money market rates comes as a surprise. This rate structure reflects the tensions on central bank liquidity over the past year, in terms of both demand (driven up by new liquidity requirements) and supply (squeezed by a more attractive repo market). Without an intensification of transactions in the interbank market, the Fed is unlikely to change its decision to continue reducing its balance sheet through the end of September. Yet there are clear signs that central bank liquidity is under pressure, although it is going undetected because it is occurring outside of the money market and thus off the monetary authorities’ radar. In the end, the Fed may have to reinject central bank money notably via Treasury repurchase agreements (repos). Reducing reverse repo operations with foreign central banks would be a faster solution that would not change the size of its balance sheet.
Does the flat US yield curve imply an imminent recession risk? 4/8/2019
Past US recessions have been preceded by an inversion of the yield curve, so now that the curve has flattened, recession fears are on the rise. However the lead time tends to be long and variable so it is better to closely monitor the one year treasury rate. A drop in this rate would be perceived as a bad sign for the growth outlook.
Discomforting dots 3/22/2019
The growth projections of the FOMC members have been revised downwards and the unemployment projection has seen an upward revision. The projections for the federal funds rate (the “dots”) have dropped 50 basis points. The Fed chairman considers the outlook to remain favourable, adding that it is a great time to be patient. Markets are less upbeat. They interpret patience as an underlying concern about downside risks and price a rate cut in the course of next year. We expect the policy rate to stay at its current level, this year and next.
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%.

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