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EcoWeek

    EcoWeek of 26 February 2021
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    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.
    In February, the economic climate has slightly deteriorated compared to the previous month. Our proprietary business climate indicator for Germany - the unweighted sum of the Pulse’s components - deteriorated slightly, to - 0.35 in February compared with -0.1 in the previous month. Since April 2020, the climate indicator has been in negative territory...
    As shown in our barometer, manufacturing activity has continued to strengthen at the beginning of the year. The manufacturing PMI index reached 55.1 in January, the best reading since March 2018. Italian industry is probably benefiting from activity in the US, which is stronger than in Europe...
    The latest Google Mobility Report published on 23 February paints an encouraging picture of store footfall and visits to recreational facilities around the world, especially in Europe...
    EcoWeek of 19 February 2021
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    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. Finally, should senior policy makers merely talk about the possibility of debt cancellation, this could also entail a cost: financial markets could consider that the unthinkable is gradually becoming less unthinkable.
    A robust and lasting normalisation of the economic situation will depend on gaining full control over the Covid-19 pandemic and on the renewed confidence of economic agents. Yet the Eurozone economy is struggling to recover in the midst of persistent lockdown measures and health restrictions. After a robust economic rebound in late spring 2020, the recovery phase has virtually levelled off thereafter.
    Retail and leisure traffic flows are increasing in some countries and declining in others according to the Google Mobility Report released on 14 February.
    EcoWeek of 12 February 2021
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    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.
    Even as the Covid-19 pandemic spreads to more victims than ever in the United States, there have never been such high hopes for a recovery. With the number of deaths averaging nearly 3000 a day since January 15 – 50% more than during the April 2020 peak – the health situation remains persistently bad. Yet vaccination campaigns are also accelerating...
    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 rollout of the vaccination process is vital for the economies to go back to normal again. According to the latest figures available on Oxford University’s Our World in Data website, 152 million doses of Covid-19 vaccines were administered in 73 countries, adding 72 million doses and 9 countries up to 10 February...

On the Same Theme

Rising bond yields, a concern for equity investors? 2/26/2021
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.
Light at the end of the tunnel 2/12/2021
Even as the Covid-19 pandemic spreads to more victims than ever in the United States, there have never been such high hopes for a recovery. With the number of deaths averaging nearly 3000 a day since January 15 – 50% more than during the April 2020 peak – the health situation remains persistently bad. Yet vaccination campaigns are also accelerating...
US banks: plans for share buybacks before the downsizing of balance sheets 2/3/2021
Since March 2020, exceptional measures to bolster liquidity have resulted in a significant expansion of banks’ balance sheets. Fearing that leverage requirements could hamper the transmission of monetary policy and affect banks’ abilities to lend to the economy, the authorities have temporarily relaxed such requirements in the US (until 31 March) and in the eurozone (until 27 June). In the US, although the temporary exclusion of reserves and Treasuries from leverage exposure (the denominator of the Basel ratio) is automatic for large bank holding companies, it is optional for their depository institution subsidiaries. The latter can only make use of the exclusion if they submit their dividend payment plans (including intra-group dividends) for supervisory approval. Although their balance sheets carry the bulk of the reserves of consolidated groups, as well as a substantial share of Treasuries, a large majority of subsidiaries did not take up this option last year. Earnings for the year and the ban on parent companies buying back shares have contributed to strengthening capital (Tier 1 capital, the numerator of the ratio), with the result that leverage ratios have deteriorated only slightly. However, the Fed has now lifted the ban on share buybacks, for the first quarter of 2021 at least. Reserves and thus, other things being equal, banks’ balance sheets could significantly increase again this year (with the Fed continuing to purchase securities at the rate of USD 120 bn per month and the Treasury’s plans to reduce its holdings with the Fed by USD  800 bn). The ambitious capital distribution plans announced in recent days (share repurchases and dividend payments) could therefore require measures to slim down balance sheets in order to preserve leverage ratios and at the same time the scores for the systemic importance of certain groups.
Call options as lottery tickets: does it matter? 1/29/2021
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. 
The (un)surprising weakening of the dollar and what could change it 1/22/2021
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.  
Harsh times 1/15/2021
The health and economic situations in the USA will get worse before they get better. Winter conditions and travel over the festive period have produced a resurgence of Covid-19, whose rate of transmission is breaking all records: 225,000 new cases per day on 13 January (7-day average) or 68 cases per 100,000 people, a contamination rate twice that in the European Union (EU)...  
Change of scenery 12/17/2020
The 46th president of the United States, Joe Biden, will face a difficult mandate. At the time of his inauguration on 20 January 2021, he will inherit a sluggish economy, as the Covid-19 pandemic continued to worsen with a human toll of tragic proportions. Looking beyond the health crisis, the new Democratic administration will have to act on political and social stages that have never seemed so antagonistic at the dawn of a new decade. With his reputation as a man of dialogue, Joe Biden will need all of his long political experience and skills in the art of compromise to try to heal America’s divisions.
The US stock market and the labour market: worlds apart? 12/11/2020
In the US, the behaviour of the equity market versus the level of employment is very different in the current recession compared to previous recessions. The recession this year stands out because of its sudden, enormous job losses, which were quickly followed by a significant albeit very incomplete recovery. The equity market, after a huge drop, has rebounded swiftly and made new highs although earnings –on a 12 month moving average basis- still have to rebound. For 2021, more than anything, earnings growth matters.
Are the GSEs ready to exit FHFA conservatorship? 12/8/2020
The US mortgage market – the epicentre of the 2007-2008 financial crisis – has yet to be reformed. Nearly half of the USD 10,000 billion in housing loans are guaranteed by the Federal government via two private agencies (GSE), Fannie Mae and Freddie Mac, which were placed under FHFA conservatorship after they were bailed out in 2008. In recent weeks, there have been growing rumours that the FHFA is seeking to hasten the end of its conservatorship of the two agencies. Accelerating this process risks restricting household access to mortgage loans by prematurely ending the GSE Patch. Nonetheless, the colossal amount of capital that would be needed to carry out their exit from conservatorship, as well as uncertainty over the terms for maintaining the government guarantee, are likely to delay this process.
Bad signs 11/27/2020
Even if a vaccine is made available soon, it will take months for the USA and the rest of the world to recover from the traumas of the Covid-19 pandemic. Although the US economy is amongst those to have seen the best recoveries so far – notwithstanding comparison with China – it still bears many scars, some of which are clearly visible in our barometer...

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