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Weekly 10th February 2017


Highlights of the week


  • Markets : US 10 year rate almost unchanged over the week. Dollar appreciation, slight widening in credit spreads and slight recovery in equity markets.
  • United States : Jobless claims at historical low point.
  • Eurozone : Decrease in industrial output in December.
  • Emerging markets : Decrease in headline inflation in Russia and Brazil. In China, upside surprise in January trade figures but weaker than expected FX reserves.



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Economic indicators



In December, compared to November, industrial output was down by -3.0% in Germany (vs. +0.3% ex-pected), -0.9% in France (vs. -0.7% expected) and -0.5% in Spain (vs. +0.2% expected). It increased by 1.4% in Italy (vs. -0.1% expected). On Tuesday, we will know the figure for the Eurozone as a whole. In addition, the PMI for retail sales, while still in expansion territory, stood at 50.1 for the month of January, slightly below the previous month (50.4), very close to the threshold of 50.

While industrial output rose faster than anticipated in November, December's numbers show a correction at the end of the year. In 2017, the growth recovery should continue at a more moderate pace, under the aegis of tem-porary supports that are drying up (falling oil prices and delayed effects of the euro's erosion since 2014) and substantial political uncertainty.

United States

There were 234,000 initial jobless claims for the week ending 4 February (in seasonally-adjusted data). This is the lowest number recorded since November 1973.

Along with strong job creations in January, these numbers are adding to the perception of the US labour market as being close to full employment. They are moving in the direction of growth in wages – still moderate for now – and gradual reflation in the United States. This corroborates the scenario of the fed funds hikes for 2017-2018.

Russia / Brazil


In Russia, headline inflation released at +5.0% yoy in January down from +5.4% yoy in December. The de-crease in inflation was broad-based with all categories of goods registering a price slowdown. In Brazil, headline inflation sharply decreased in January (5,35% yoy from 6,29% in December) and stands now below the new upper-limit of the inflation target band (6%).

These figures are supporting our call for further substantial rate cuts in both countries by the end of 2017: -150 bp for Russia and around -200 bp for Brazil. Following the last communique of the CBR, we expect that the next cut might be delayed to Q2-2017 in Russia while we think that the BCB could cut the Selic by 75 bp in the next meeting which be held the 22nd of February.


China’s January trade figures continued to show strong momentum, as we expected. China’s January yoy export growth in CNY terms came in much better than expected, at 25.2% (vs. consensus 15.2% and prior 10.8%), while yoy import growth in CNY terms surprised on the upside, as well, with 15.9% (vs. consensus 5.2% and prior 0.6%). China’s January FX reserves came in slightly weaker than expected, at US$2998.2bn (vs. consensus US$3003.5bn and prior US$3010.5bn), with a depletion of US$12.3bn and a first-time dip below the US$3trn threshold.

Among the January trade and FX reserve data, there are several highlights: 1. Imports remained strong in Janu-ary 2017 in iron ore at 12% yoy growth (vs. -8% in December), coal imports at 64% yoy growth (vs. 52% in December), steel products at 17% yoy growth (vs. 1% in December), and crude oil at 28% yoy growth (vs. 10% in December). The global commodity rally in both 2016 and 2017 has been driven by the real and fundamental demand from China and the cutbacks of domestic over-capacity. The US$12.3bn FX reserve depletion in January 2017 is much smaller in December (US$41.1bn) and in January 2016 (US$99.5bn), indicating clear stabilizing signs in FX reserve depletion in China, given tighter capital control measures. Breaking through the US$3trn threshold is not something the markets should worry about at all. As we have pointed out since last February, even if the FX reserve level fell to US$ 1.8 trillion, it would still be fine. We continue to believe the Chinese economic stabilization is sustainable at least until end of 2017.


Financial markets



Ten-year US yields ended the week at 2.4%, almost unchanged from one week earlier. Euro yields fell slightly. Caution is still the watchword, given the prevailing political risk. The 10-year spread between France and Germany has moved above 70bp. The Italian spread is still about 190bp.

Bond investors have curbed their enthusiasm in recent weeks on the scenario of faster-than-expected growth and higher inflation. The latest jobs reports shows that wage increases are levelling off. Pressure on sovereign spreads will remain heavy in the euro zone until the French elections. The release of Marine Le Pen’s programme did nothing to reassure foreign investors. Among other things, the president of the National Front party is proposing to hold a referendum on whether France should stay in the European Union.

Foreign exchange

The dollar appreciated against most major currencies, ending three consecutive weeks of correction. The USD effective exchange rate is now ‘only’ 2.5% above its early-November level, vs. 5% in the beginning of the year. The few exceptions were generated by specific idiosyncratic factors, with the best performances from: (i) the Indian rupee (INR), which gained more than 0.6% against the dollar as the Reserve Bank of India (RBI) surprised markets with a decision to keep interest rates on hold at 6.25% while the consensus expected an interest rate cut of 25 bps and the RBI also changed its tone from accommodative to neutral; and ii) the Indonesia rupiah (IDR), which appreciated by 0.23% against the USD as Moody's rating changed the country's outlook from ‘stable’ to ‘positive’. This increases the country’s odds of getting an investment grade rating in the coming months if S&P also revise up the outlook for country. The EUR/USD was back to 1.06 and the yen to 114.

Support for the dollar during the week came from rising political risks in Europe (increasing talks about a Frexit), as well as signals from the Fed and the ECB confirming the divergent monetary policy path in both regions. Specifically, in a speech last Monday the ECB’s governor Mario Draghi emphasized that “monetary policy measures (in EU) are still needed” while the Philadelphia Fed president Patrick Harker said he could support raising interest rates in the US as soon as in March. Other factors such as fiscal stimulus and recent talks about the “border adjustment tax” in the US are also positive for the dollar and it might stay at its highs for some time to come.


Spreads widened very slightly on the credit markets. Performance is still positive on the year to date in terms of credit index spreads (US IG: -2bp; US HY: -34bp; Euro IG: -2bp and Euro HY: -25bp). This is remarkable, given how busy euro and dollar primary markets have been during this period of time.

We have downgraded the dollar market from positive to neutral vs. the euro market. The US credit markets cheered the oil price rally and, more recently, Donald Trump’s election. The gap between the two markets has narrowed considerably in recent months.
On the euro market, we are overweighting the short and mid sections of the curve, as: (1) We expect long bond yields to move up (with the Bund at 0.7% by yearend 2017); and (2) BTP yields vs. corporate bond yields are highly attractive on the long section of the curve.
Within the dollar market, we are overweighting the long section of the curve, as: (1) We expect no major rise in long US bond yields, with the Fed having reiterated that it will take a gradual approach to normalising rates; and (2) Long-dated bonds offer an attractive additional spread.


Equity markets recovered slightly. Last week the MSCI World AC index gained 0.7% after losing 0.3% the previous week. Geographically, this rally was especially pronounced in Japan (+2.0%) and China (+3.4%). The UK and the US also moved ahead, respectively, by 1.2% and +0.5%. The euro zone was on a more wait-and-see footing, at +0.1%.

This week, investors homed in on Q4 corporate releases. Earnings season is well under way in the US and Ja-pan, with, respectively, 56% and 62% of companies having reported, but less so in Europe, with 27% (17% in the euro zone) reporting. With this caveat in mind, reporting season has been rather satisfactory, with 75% positive surprises on earnings in the US (S&P 500), 70% in Japan (Topix) and 52% in Europe (Stoxx 600). Q4 EPS growth, strictly speaking, averaged +6.6% in the US, +7.3% in Europe, and as much as +14.0% in the euro zone, and +15.0% in Japan. While earnings growth in the euro zone is a good sign, investors have been held back by political uncertainty. Hence, despite these solid results, the euro zone and France and Italy in particular have underperformed the MSCI World, respectively, by -1.7%, -2.5% and -5.6%% on the year to date.



Key upcoming events

Economic indicators

  • US : Headline inflation is expected to increase. 
  • Eurozone: GDP growth is expected to stabilize in Q4.






Key events



Market snapshot



Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 10th February 2017
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