EcoWeek of 13 September 2019
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    Market expectations were elevated but the Governing Council did not disappoint. The comprehensive nature of the package, with the introduction of state-dependent forward guidance, take away the need to envisage additional measures in the foreseeable future. ECB watching has been narrowed to monitoring the gap between inflation and the ECB target. Given certain negative side effects of the current monetary mix, which are acknowledged by the Governing Council, fiscal policy, where leeway is available, is now requested to step up to the plate, so as to foster growth and speed up convergence of inflation to target. The policy baton has been passed.
    Business cycle indicators mostly disappointed during the summer months and ended up below the already subdued expectations. In July, both industrial production and orders fell sharply. This could be partly attributed to the early start of the summer holidays. In that case, an opposite effect can be expected in August. More worrying was the more-than-expected decline of the IFO climate index in August, as business conditions in trade and services fell sharply. It is a sign that the deterioration of the business climate is not anymore confined to only manufacturing, something which has been emphasized by the Bundesbank. But this was contradicted in early September by the PMI composite. The indicator was actually stronger than expected, as services growth remained solid.
    EcoWeek of 06 September 2019
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    Business surveys in the US paint a diverging picture: manufacturing is worsening significantly but services have picked up nicely. Taking a broader perspective, evidence is building of a slowing economy. Less dynamic growth can be observed in engines of growth of the world economy: China and India, although reasons differ. In Europe, Germany is probably already in a technical recession whereas France is resilient. Central banks are back in easing mode but the effectiveness will be hampered by elevated uncertainty, despite the announcement of a new round of trade negotiations between the US and China.
    The latest economic indicators still send a mixed signal. The months pass but nothing seems to change. While GDP growth is declining (+0.2% q/q in Q2 2019 after +0.4% in Q1), activity in manufacturing remains subdued and the Purchasing Managers Index (PMI) of this sector is well below its long-term average. Conversely, the services sector resists and the PMI is globally in line with expectations. In this environment, headline inflation remains pretty far from the 2% target, and surprised to the downside. The core component of the CPI keeps oscillating around only 1% (+0.9% in July).
    EcoWeek of 30 August 2019
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    Asset prices can play a useful role when assessing the economic outlook. The big drop in treasury yields during August has raised concern although a nowcast points to satisfactory third quarter growth in the US. This would mean that increased uncertainty about the trade dispute has caused a flight to safe havens and a decline in long term interest rates. Swings in the communication about the trade dispute cause swings in investor uncertainty and hence in risk premiums. This reduces the signal quality of asset prices, which may end up weighing on the real economy.
    Our pulse indicators continue to send a positive signal: stability of the INSEE business and consumer confidence surveys in August, even a slight improvement in the composite PMI; a more important than expected fall in Q2 unemployment rate (-0.2 points, at 8.5%); a small but solid rebound in July consumer spending on goods (+0.4% m/m); a slight upward revision of the second estimate of Q2 GDP growth (+0.1 point, at 0.3% q/q), thus running at the same rate as in Q1.

On the Same Theme

Slowing growth 7/26/2019
According to the recently released Beige Book of the Federal Reserve, the United States should continue to see modest growth. Most indicators are above their long-term average, the manufacturing ISM and industrial production being exceptions.
The US expansion: after the record, what’s next? 7/11/2019
In the US, current expansion has entered its 121th month, beating the previous record, which was set in the 90s when Bill Clinton was president. Beyond their length, there are other similarities between the two expansions.
Monetary policy at a turning point 7/10/2019
Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
US: much reason to celebrate? 7/5/2019
This week saw two reasons to celebrate in the US. First, it’s 4th of July week and, second, we have started the 121th month of economic expansion, the longest in US history.
Primary dealers absorb nearly 40% of the Fed’s net sales of Treasuries 7/3/2019
Since October 2017, the Federal Reserve (Fed) has no longer been rolling over all of the debt maturing in its securities portfolio. In other words, it is proceeding with net asset sales (tapering). By 26 June, its holdings of US Treasuries had declined by USD 355 billion while Agency debt securities and Agency mortgage backed securities were down by USD 249 billion. The shrinking of the Fed’s balance sheet has had a notable impact on money market rates due to the pressure it is placing on central bank liquidity. Pressures have picked up since last fall, when declining yields reduced investors’ appetite for Treasuries. As a result, there has been a big increase in the net position of primary dealers in Treasuries: inventory increased by USD 140 billion between October 2018 and June 2019. To finance these “net purchases”, primary dealers have increased their borrowing on the repo market, placing upward pressure on repo rates. *Primary dealers act as a market maker for government securities, participating in auctions, placing securities and ensuring liquidity in the secondary market for T-bills.    
Soft landings are difficult, even more so today 6/21/2019
The Fed has turned the corner and is now looking towards moving into easing mode.
A mixed landscape 6/7/2019
In the United States, the tide hasn’t turned yet for consumers: on the positive side, our barometer points to low unemployment, strong consumer confidence and dynamic household revenues and spending. Inflation is also mild, which boosts purchasing power. Even so, the horizon is not all rosy. Positioned in the forefront of the economic cycle, industrial leaders report a decline in output, which was one of the barometer’s weakest scores in April, and their expectations did not pick up in May.
About the decline in US long-term rates 6/5/2019
Interest rates on US federal government debt have declined significantly in recent months. With the yield on 10-year Treasuries at 2.1%, the Federal government’s cost of borrowing has fallen to the lowest level since September 2017. President Donald Trump is bound to be pleased. The supremacy of the dollar offers him the privilege of being able to widen the deficit almost endlessly, at a time when the appetite for US Treasuries seems to be inexhaustible. Yet the stronger demand for Treasuries is also a warning signal: it indicates that investors are seeking safe havens as they form more cautious expectations. In the United States, the decline in yields is also a faithful indicator of a deterioration in the business climate.
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.
Strong growth but questions about quality 5/3/2019
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.

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