Lower inflation, higher growth and a bunch of caveats
The market was expecting a shift from the ECB but it was much more subtle than hoped.
Here’s a recap on the GDP and HICP numbers:
2017 +1.9% vs +1.8% prior
2018 +1.8% vs +1.7% prior
2019 +1.7% vs +1.6% prior
The prior forecasts were made in March
2017 1.5% vs +1.7% prior
2018 1.3% vs +1.6% prior
2019 1.6% vs 1.7% prior
Draghi tried to brush aside those forecasts by emphasizing that the tail risks had dissipated and that the ECB was more confident in the inflation that’s forecast.
To some extent the market bought his thinking and that helped the euro from the session low of 1.1195 up to 1.1220.
The takeaway is that it will be a very slow process to a hawkish stance. With inflation at 1.6% in 2019, there’s no impetus to hike at all. In addition, Draghi touched on the changes in the world that are keeping wages low. Things like globalization, automation, de-unionization and changes in regulation that are keeping wages down throughout the developed world.
At the same time, I don’t think the euro trade is a trade on rate differentials. It’s about value. The euro is depressed and eurozone assets are depressed.
Finally, we saw yet-another dip on the back of the press conference and yet again there were aggressive buyers. I’m convinced that everyone is trying to get long euros on a dip and they’re hitting increasingly shallow dips because the big retracement to 1.10 isn’t coming.
As part of its periodic Global Economic Outlook, SocGen traditionally includes a discussion of what it views are the biggest “black swans” both to the upside and the downside, and the latest just released edition titled “On a Plateau”, which took a rather grim outlook to the world economy predicting that a US recession will likely hit in the not too distant future while “China, South Korea, Australia, US, Germany, UK and Japan are in the more mature phase of the cycle”, and that current global growth is “essentially as good as it gets”…
With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.
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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…
… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.
Marine Le Pen has repeatedly underscored her desire to mend fences with Russia so that Europe has a peaceful future ahead. She lashed out at the Western sanctions against Russia as “stupid” and recognizes Crimea as part of the Russian Federation.
She believes that France should maintain equally good relations with both the US and Russia, that it has no reasons for waging a cold war with Moscow and needs closer diplomatic, trade and strategic relations with Russia, which she calls “a great country.”
Emmanuel Macron also wants to rebuild relations with Russia and engage into intense and frank dialogue, even though Paris’ vision does not totally correspond with that of Moscow.
Unions and alliances
France’s possible exit from the European Union was the centerpiece of Le Pen’s agenda ahead of the first round vote in April. She has since softened her anti-EU rhetoric a bit and now says she wants to supplant the EU with a “European alliance of free and sovereign states.”
Marine Le Pen said her first order of business on setting foot in the Elysee Palace will be to propose negotiations to radically overhaul what she described as “a totalitarian union,” and announce referendums on EU membership and on withdrawing from the European Union.
The euro climbed to its strongest level against the dollar since mid-February as the markets reassessed the odds of a December rate rise by the European Central Bank.
A day after mildly hawkish comments from European Central Bank president Mario Draghi helped send the single currency higher, the euro tacked on another 0.9 per cent to hit a three week high of $1.0673 following a report that the ECB had discussed whether rates could rise before it ends its bond buying programme.
However, two people familiar with the discussions denied there had been any meaningful debate over the issue. One person said some members are keen for the council to consider raising the deposit rate, now at minus 0.4 per cent, before it ends its quantitative easing programme.
The ECB plans to keep on buying bonds until the end of this year, and is considered likely to extend the programme into 2018 — though at a slower pace than the current level of €60bn a month.
Against the pound, the euro was up 1 per cent at €1.1393 – a level last seen in mid-January. The currency also firmed more than 1 per cent against the Japanese yen at 122.83.
A Korean special prosecutor indicted Samsung chief Jay Y. Lee on bribery charges.
Korean press is reporting that China has told its travel agents to halt sales of holiday packages to South Korea.
Bulgaria’s interim government said it may apply to join the eurozone within a month.
South Africa’s main labor union Cosatu accepted a government-proposed minimum wage.
New Commerce Secretary Ross appears to be taking a less confrontational stance with regards to Nafta.
Press reports suggest Mexico may request a swap line from the Fed.
Peru’s central bank cut reserve requirements again.
In the EM equity space as measured by MSCI, Turkey (+1.5%), Czech Republic (+1.4%), and Mexico (+1.2%) have outperformed this week, while Colombia (-3.4%), Brazil (-2.1%), and UAE (-2.1%) have underperformed. To put this in better context, MSCI EM fell -1.4% this week while MSCI DM rose 0.3%.
In the EM local currency bond space, India (10-year yield -11 bp), Poland (-9 bp), and Indonesia (-3 bp) have outperformed this week, while Turkey (10-year yield +44 bp), Colombia (+18 bp), and Malaysia (+14 bp) have underperformed. To put this in better context, the 10-year UST yield rose 18bp to 2.50%.
In the EM FX space, MXN (+1.6% vs. USD), PLN (+0.4% vs. EUR), and ARS (+0.2% vs. USD) have outperformed this week, while COP (-3.1% vs. USD), TRY (-3.0% vs. USD), and KRW (-2.2% vs. USD) have underperformed.
A Korean special prosecutor indicted Samsung chief Jay Y. Lee on bribery charges. He is accused of exchanging bribes for government favors, which were uncovered during the investigation of President Park. Lee allegedly directed tens of millions of dollars to a confidante of President Park in return for government support of a 2015 merger that benefited his interests. These developments could fundamentally change the role of the chaebol in the Korean economy.
Korean press is reporting that China has told its travel agents to halt sales of holiday packages to South Korea. If confirmed, the move would likely be in retaliation for Korea agreeing to deploy a US missile defense system. Spokesman for China’s Foreign Ministry said he wasn’t aware of any such measures while an official at the Korea Tourism Organization (KTO) said China has issued the ban. KTO estimates that nearly half of the foreign visitors to Korea last year were from China.
In the shadow of Donald Trump’s spree of controversial actions, the European commission has quietly launched the next offensive in the war on cash. These unelected bureaucrats have boldly asserted their intention to crack down on paper transactions across the E.U. and solidify a trend that has been gaining momentum for years.
The financial uncertainty amplified by Brexit has incentivized governments throughout Europe to seize further control over their banking systems. France and Spain have already criminalized cash transactions above a certain limit, but now the commission has unilaterally established new regulations that will affect the entire union. The fear of physical money flowing out of the trade bloc has manifested a draconian response from the State.
The European Action Plan doesn’t mention a specific dollar amount for restrictions, but as expected, their reasoning for the move is to thwart money laundering and the financing of terrorism. Border checks between countries have already been bolstered to help implement these new standards on hard assets. Although these end goals are plausible, there are other clear motivations for governments to target paper money that aren’t as noble.