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Weekly 17th February 2017

Highlights of the week 

  • Eurozone: Q4 economic growth revised slightly downward.
  • US: good retail sales and rising inflation.
  • Markets: developed bond yields roughly unchanged; the dollar down overall. Speculative grade bonds continue to outperform among major EUR fixed income segments; the American market is still breaking records.

The week at a glance 

Economic indicators


Q4 economic growth revised slightly downward. Eurozone GDP rose +0.4% in Q4, a bit less than initially announced (+0.5%). Country by country, the increase was +0.4% in Germany and France, +0.2% in Italy, and +0.7% in Spain. The downward revision was due to a sharp decline in industrial output in December (-1.6% compared to November, for the eurozone as a whole). Over the 4 quarters of 2017, Eurozone GDP rose 1.7%.

This slightly reduced number does not fundamentally change the scenario of an improving European economy – which has been confirmed by the first indicators on 2017. The European Commission has just raised its growth forecast for this year from 1.5% to 1.6%; meanwhile, we are raising our own forecast from 1.3% to 1.5%.

United states

Good retail sales and rising inflation. In January, retail sales rose +0.4% (vs. +0.1% expected and after December's gain was revised upward to +1% instead of the previously announced +0.6%. Control-group retail sales (close to the balance of personal consumption used to calculate GDP) also rose by +0.4% in January. Inflation hit 2.5% over one year in January, after 2.1% in December. Core inflation (ex-energy and food) stood at 2.3% after 2.2% in January.

US economic indicators remain strong. We think that the decisions the new administration will make (starting with tax cuts) will prolong the US growth cycle, even though Trump has done little in his first month in office to ease uncertainties over what measures will actually be taken or how they will be funded.


The economy grew annualised 1.0% in the final quarter of last year, for the fourth consecutive quarter of q/q expansion.  As a consequence, Japan has expanded at above potential for the last five years, except for 2014 when the consumption tax hike dampened economic activities.  Domestic demand led growth in the first half of 2016 and net exports assumed the role of mainstay in the latter half.   Looking into details, the contribution of consumer expenditure to Q4 growth was virtually zero, while capital spending lift GDP by 0.6 percentage point.  The decrease in inventories depressed GDP by 0.5 p.p. The contribution of external demand was 1.0 p.p., in which vigorous exports boosted growth by 1.9 p.p., while imports muted it by 1.0 p.p.

We have witnessed a virtue cycle, in which recovery in exports successfully reduces unsold goods, after which producers beef up operations and, finally, a brighter outlook leads to capital investment.  The economy will continue to demonstrate annualised growth of approximately 1.0% throughout 2017 as such favourable feedback loop works. As for consumer spending, however, risk is inching up and that sharp rise in consumer prices could undermine households, since spring wage negotiations will be tough.  Despite substantial recovery in corporate earnings, companies remain extremely cautious in raising base payment, reflecting fears of protectionist trade policies and an unexpected surge in the yen. 


China’s January Total Social Financing surprised big to the upside again. China’s January money data came in much better than expected. M2 came in line at  11.3% (vs. consensus and prior at 11.3%) bottoming out from July 2016, where total social financing came in much stronger than expected at CNY 3740bn (vs. consensus CNY3trn and prior CNY1626bn), and new yuan loans came slightly weaker than expected at CNY 2030bn (vs. consensus CNY2440bn, and prior CNY1040bn). January 2016 CPI yoy came slightly stronger than expected at 2.5% (vs. consensus 2.4% and  prior 2.1%), and PPI surprised to the upside significantly again (which is very positive) at +6.9% (vs. consensus 6.5% and prior 5.5%).

Among the January price and money data, there are several highlights: 1. What is strongly significant continues to be upside surprises coming from PPI number, extending its positive growth for a fifth consecutive month, and this is the highest reading since September 2011. This is the third time after 5 years that PPI is higher than CPI ever since November 2016. The surge in PPI was broad based and especially coming from mining and raw materials' sectors with 31% (vs. 21.1%yoy in December 2016) and 12.9% (vs. 9.8% yoy growth in December). Overall we expect PPI inflation will stay positive throughout 2017, and CPI inflation will be modest.  2. Within the new yuan loan breakdown, rebound in long term corporate loans is the biggest contributor. This validates further our thinking that private capex expansion is indeed happening with longer term potential of improvement. We continue to believe the Chinese economic stabilization is sustainable at least until end of 2017 and likely into 2018 as well.          


India’s January wholesale prices yoy (WPI), was higher than expected at 5.2% (vs. consensus 4.34%, and prior 3.39%). India’s January CPI yoy came around in-line at 3.2% (vs. consensus at 3.24%, and prior 3.41%), which is all time low.

The weakness in CPI is driven by lower than expected food prices where food inflation within CPI is at 0.5%yoy in January (vs. 1.4%yoy in December). We continue to hold our view that RBI’s inflation outlook has been lagging in a way inflation was behaving much weaker than RBI expected, and hence we believe RBI has to remain accommodative longer than market expected, and ease bigger than market expected, given the chaos from demonetization.


Financial markets


Developed bond yields roughly unchanged. US and German 10-year yields closed out the week at 2.41% and 0.30%, respectively. Sovereign spreads finished the week at the levels of last week. The 10-year spread between France and Germany closed out the week at 73 bp, close to the high points of recent years. 

French bonds will stay under pressure until the French elections, since the spread with Germany is directly linked to trends in poll numbers. We expect that German rates will rise again in 2017, with an increase in market inflation expectations and the idea that the ECB must adjust its message. 

Foreign exchange

The dollar down overall. Currencies that appreciated most over the week were the South African rand (+2.2%), the Israeli Shekel (+1.3%), and Turkish Lira (+1.2%). Scandinavian currencies continued to appreciate against the euro. The EUR/USD exchange rate closed out the week at 1.07. 

The EUR/USD exchange rate has suffered slightly in recent weeks due to the political risk of the many elections on the calendar in 2017. In the longer term, the euro has a certain potential to appreciate against the dollar.


Speculative grade bonds continue to outperform among major EUR fixed income segments. The tightening mode was confirmed also in the last week, as spreads were back close to end-of-January lows or hit new lows.  At this writing, EUR HY non-financial spreads are currently trading at 337 b.p., i.e. year-to-date lows, having tightened by 33 b.p. since the start of January. IG non-financials have been more stable so far, as spreads are currently not so far from year starting levels. Over the last few weeks, financials have been impacted more by peripheral government bonds’ underperformance, triggered by rising political concerns. However, risk premiums are also currently lower year-to-date in these segments.

Technicals remain “beta friendly” and a look at spread compression between HY and IG shows that speculative grade is not yet at stretched levels, either in terms of spread differential or spread ratio relative to IG bonds. Furthermore, IG bonds feel the negative effect from rising yields more than HY, both in terms of direct impact and indirect effect from absolute return investors’ repositioning on other fixed income segments. The hunt for yield and the lack of alternatives in the 1-5 yr segment is still the main driver behind this strong start of the year for speculative grade bonds: furthermore, they also look less impacted by political uncertainty than some of the available alternatives (namely periphery bonds).


The American market is still breaking records. The other equity markets were also up, buoyed by favourable earnings reports for the fourth quarter of 2016. 72% of US companies have now published, as well as 95% of Japanese and 50% of European companies. Earnings were up 5% for the period in the United States, 11% in the eurozone, and 13% in Japan.

Oil prices have bottomed out in January 2016. In February, equities followed. That was one year ago. Long-term rates had to ride out Brexit, but ultimately turned upward as well. The oil countershock is providing the supporting arguments for shoring up the markets. In fact, it is bringing about the nominal recovery of the economy, which is beginning to result in a profit recovery. While electoral deadlines in Europe are raising doubts in the short term, that could be taken as opportunities to buy. On the other hand, the US market is very pricey, and the closer we get to the end of the year, the greater the risk becomes of an abrupt correction by the global equity markets.


Key upcoming events

Economic indicators


Eurozone: Manufacturing PMI should decrease slightly. US: Michigan consumer sentiment should be stable







Key events




Market snapshot





Letter finalised at 3pm Paris time

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ITHURBIDE Philippe , Global Head of Research
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Weekly 17th February 2017
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