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Weekly 03rd February 2017


Highlights of the week


  • Markets: Developed long-term yields slightly down, credit spread slightly wider. The correction of the US dollar continues. Equity markets stabilized.
  • US: January job growth beats expectations.
  • Eurozone: Inflation cycle lagging behind US cycle. New disputes over Greek aid plan.
  • Emerging markets: Chinese official manufacturing PMI slightly better, Turkish inflation slightly higher.



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The week at a glance

Other events


More disputes over the aid plan. The Eurogroup meeting on 26 January did not promise a rapid agreement for the payment of a new aid tranche to Greece. In addition, the IMF said on Friday 28 January that it considered Greek debt to be stuck on an untenable long-term trajectory, an analysis that contradicts that of the European Union. Thus, the IMF is demanding new arrangements for the debt that Greece owes the other eurozone governments, a condition of its own participation in the aid plan (the IMF's participation is demanded by Germany). However, the IMF and the European Union agree to require new austerity measures from Greece if the country does not manage to maintain a primary surplus of 3.5% of GDP, a requirement rejected by the Greek government.

Without releasing a new aid tranche, Greece will not be able to make the large repayments scheduled for this summer, and a new "Greek crisis" will loom. Most probably, an agreement will be reached after all, but the major electoral deadlines between now and then in the eurozone (Netherlands and France) are not going to facilitate discussions. However, the IMF's participation seems highly compromised.


Economic indicators


Rebound in GDP growth in Q4 in the eurozone and France. Eurozone GDP rose 0.5% in Q4 (number in line with expectations, after growth adjusted upward to +0.4% in Q3, vs +0.3% announced previously). Over 2016, growth was 1.7% (annual average number compared to 2015). France's GDP, meanwhile, rose by 0.4% in Q4 (1.1% for the year). Consumer spending was up by +0.6%, public consumption by +0.4%, non-financial business investment by 1.3%, and consumer housing investment by +0.9%. External trade made a positive contribution of 0.1pp, and inventory creation a negative contribution of -0.2pp.

The eurozone had a good year end, from a macroeconomic standpoint. As for France, the annual growth figure is disappointing (1.1%, while the government had initially said 1.5%), but the dual rebound in business investment and housing investment does send a favourable signal for 2017.

United States

January job growth beats expectations. Nonfarm payrolls increased by 227K in January (vs expected 175K and 157K in December). The unemployment rate rose slightly (4.8% after 4.7% in December), but partly due to a rise in the participation rate (62.9% after 62.7% in December). Average  workweek hours remained stable at 34.4. The U6 ‘augmented’ unemployment rate rose slightly to 9.4% (vs 9.2% in December). Average hourly earnings decelerated to 2.5% (vs 2.8% in December). Additionally, the ISM Manufacturing index increased to 56 (vs 55 expected and 54.5 in December). Its new order component rose to the very elevated level of 60.4.

The US economic cycle remains strong while the business climate has reacted positively to the Trump election. However, the rise in long term interest rates and the dollar (not to speak of uncertainties) could slightly weaken the economic momentum at the beginning of 2017.



China’s January official manufacturing PMI came slightly better than expected at 51.3  (vs. consensus 51.2 and prior at 51.4),  remaining in the expansion territory for six consecutive months.

We have been calling for continuous manufacturing PMI stabilization within expansion territory. The stabilization in January official manufacturing PMI remained at relative high level, where output (53.1 in January vs. 53.3 in December 2016), export (50.3 in January vs. 50.1 in December), and import (50.7 in January vs. 50.3 in December), indicating potential trade recovery. What is surprisingly good is the manufacturing PMI remained quite resilient before and during the Chinese New Year. We have extended our China stabilization call into end of 2017 given both bottom-up and top-down forces, and we think China stabilization is the key source of global economic stabilization in 2017.



In January, the rise in consumer prices (9.2% yoy) was higher than in December (8.5%), due in particular to higher inflation in food products and energy. Producer prices also rose more sharply: 13.7% yoy in January versus 9.9% in December.

Considering the fall in the Turkish lira, inflationary pressures are expected to persist, especially since we believe that the CBRT will continue to manage liquidity provisions rather than increasing its repo rate.


Monetary Policy


Little changes in the FOMC statement. The main changes concern the sentences with references to inflation, in which the transitory effects are not mentioned anymore. 

The rise of headline inflation and mostly of inflation expectations had been a “game changer” for the Fed, which will be able to apply its fed funds scenario far more easily in 2017/2018.


In its quarterly report, the Bank of Japan revised its GDP projections for FY2017 and FY2018 upward from its assessment in October. Recovery in industrial output on the back of firmer growth in advanced economies led the Bank to the brighter outlook. The upward revision for FY17 is no surprise, since the market consensus view has been already stronger during the last three months. In contrast, the upgrade for FY18 is greater than the consensus, reflecting the BOJ’s bullish perspective. In contrast, the BOJ surprisingly left its inflation outlook unchanged, although market participants’ median forecast has been inching up in the last quarter. The BOJ remain hawkish, boasting that the 2% inflation target will be met in late-2018. Yet the gap has narrowed between the Bank and the consensus.

On the surface, the central bank will stick to its generous stance, based on the negative interest rate and yield curve control.  Yet the part of the quarterly report describing the inflation outlook sounds a bit hawkish. First, the Bank is increasingly confident in an acceleration of inflation on the back of a commodities rally and a weaker yen. Second, the combination of tighter labour market, a recovery in production and exports, and higher capacity utilisation supports the Bank’s tenet of a shrinking output gap. 

The Bank of Japan is unlikely to alter the current monetary operation framework any time soon, since core CPI is still below zero. Yet industrial production has completely recouped the contraction from the consumption tax hike in April 2014. Stronger demand should generate inflation pressure later on.  The scope of y/y decline in December was already the smallest in 10 months. The core barometer is expected to emerge into positive territory in April at the latest as the labour-intensive service sector passes higher personnel costs onto consumers. If the economy remains resilient towards the middle of the year, the BOJ may feel it less necessity to peg the 10-year benchmark yield at zero.


The Russian Central Bank (CBR) maintained the status quo and let its key rate unchanged at 10%.

This decision is in line with expectations but the tone of the CBR’s statement is more surprising. Indeed, while at the end of January inflation was 5.1% in line with the CBR’s expectations, the statement indicates that “given internal and external developments” the CBR’s “capability to cut its key rate in the first half of 2017 has diminished”. The timing of the easing cycle of the CBR might be postponed. Nevertheless, we maintain our forecast of at least 150 bp cut this year. We believe that the statement aims at reassuring markets on the capacity of the CBR to meet its 4% target inflation in a context where the Ministry of Finance has announced that the FX purchases would begin on February the 7th. i.e the ruble could face downward pressures.


Financial markets


Developed long-term yields slightly down. The German and US 10y. yield finish the week at 0.42 and 2.43% respectively. The main event of the week on fixed-income markets is about the Eurozone sovereign spreads.  In particular, the French and the Italian 10y. spread widened significantly. The 10y. spread between France and Germany rose above 60 bps for the first time since early 2014.

The pressure on sovereign yields will remain strong until the French elections. The latest developments of the French political scene made the outcome of the election more unpredictable.

Foreign exchange

The correction of the US dollar continues, as it depreciated vs virtually all currencies at the notable exception of the GBP. More than half of the “post-election” USD bounce has been offset: it is only 2% above its pre-election levels while it has been 5% above at its peak. The USD/JPY comes back at 113 while the EUR/USD comes back at 1.08. Note the very strong performance of the Turkish lira (+4.1% vs the USD over the week), which remains the currency with the worst performance year-to-date (-5.2% vs USD).

The fading of the post-election USD bounce is linked to the loss of momentum of the US long-term yields, the 10y. being close to its early2017 levels. This being said, a repricing of a March fed funds hike would push the USD in the short-run.


Spreads were only slightly wider over the week in the eurozone, on rising volatility in risky assets and on the back of higher spreads paid vs. Bunds by most eurozone government bonds. To some extent, political risks and uncertainty counterbalanced the still positive tone of macro data. Looking ahead, as the earnings season is now getting in full swing in Europe too, it could shed more light on the improving micro trends. The end of January delivered positive performances for both European and US credit markets: the EUR HY excess return over Bunds reached 1.25% in the first month of 2017, a bit higher than the corresponding 1.14% delivered by US speculative grade bonds over US Treasuries. IG were more affected by negative effects produced by rising yields, but were nonetheless in positive territory: EUR IG delivered a 26 b.p. outperformance vs. core govies, while US IG “beat” US govies by 17 b.p.

Thus far, sentiment in credit markets remains well sustained, supported by the positive backdrop of supportive economic signals coming from advanced economies. This includes PMIs in the eurozone, which are confirming a growth trajectory, and also comparable readings for the corresponding US leading indicators, which bode well for corporate bonds. Furthermore, the Fed confirmed its gradual approach to normalising rates, which will help maintain an accommodative monetary policy stance overall among major economies. However, renewed political risk was felt in government spreads on the back of the electoral agenda, together with Brexit negotiations drawing closer and the very first decisions by new US administration. Inflation surprises are keeping upward pressure on bond yields, ultimately adding to some profit taking.


After four bearish sessions in a row – from last Thursday to Tuesday – the equity markets stabilised starting on Wednesday against a backdrop of good numbers on business (Manufacturing PMI in China and the eurozone; ISM Manufacturing Employment Index in the US). However, questions about Donald Trump's first steps have gone unanswered. The pragmatic scenario of moderate reflation that had won the market over could crumble under political slippage.

Scarcely ten days into his term, Trump has stepped up his outrageous statements. While his electoral core may have enjoyed it, a faction of the Republican establishment is starting to question things. From the viewpoint of international investors, domestic or specific issues – Obamacare, Supreme Court nominee, visa reform, wall with Mexico, sanctions against Russia – will be loudly debated but remain secondary. On the other hand, everything to do with American taxation and bilateral trade relations with China and Germany will be very closely scrutinised. The tax issue, for both revenue and expenditure, will be decisive for the equity markets (lower corporate income tax rates, greater repatriation of cash, and buyback opportunities) as well as the fixed-income and foreign-exchange markets (impact on interest rates). Likewise, punitive tariff measures against China would open a real Pandora's box. Finally, a few weeks after Obama's farewells to "his closest ally," blacklisting Germany for its trade surplus would be a true change in paradigm, with unforeseeable consequences.



Key upcoming events

Economic indicators

  • US: Michigan consumer index should be slightly lower than previous month.
  • Eurozone: German industrial production should stabilize.






Key events

  • Worth watching : the ECB and Fed’s monetary policy committee meetings.


Market snapshot



Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 03rd February 2017
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