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Weekly 03rd March 2017


Highlights of the week


  • Markets : Developed rates came back up sharply; dollar recovers. Credit markets still well sustained and equity markets still performing.
  • Eurozone: Temporary oil-related effects push inflation to 2%.
  • US: Business climate indicators continues to improve.
  • Emerging Economies (EMEs): China’s February official manufacturing PMI better than expected.



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The week at a glance

Economic indicators


Temporary oil-related effects push inflation to 2%. The consumer price increase stood at 2% over one year in February (in line with expectations, after 1.8% in January). However, core inflation (ex-energy and food) remained stable at a much lower point: just 0.9%. Meanwhile, unemployment came in at 9.6% for January (unchanged from December). Country by country, the jobless rate (Eurostat standard) was 3.8% in Germany, 10% in France, 11.9% in Italy, and 18.2% in Spain. Finally, Spain's GDP growth was confirmed at +0.7% in Q4, Italy’s GDP growth at 0.2% (in line with the previous estimate).

Beginning in April, inflation will very likely recede due to oil’s base effects. Despite recent positive surprises on growth, the economic cycle in the eurozone is not yet at the stage where domestic inflationary pressures tied to wages could emerge (yet this could happen in Germany, in limited fashion). Spanish economic growth – which was very strong again in 2016 – is likely to lose steam this year, now that a large part of the catch-up effect after the violent crises in 2008-2013 has already materialized. Italy’s recovery remains very slow.


Business climate indicators continues to improve. The Manufacturing ISM Index reached 57.7 (it was expected unchanged at 56), its highest since August 2014. Its New Orders component was especially high at 65.1. The non-Manufacturing ISM index also rose to 57.6 (vs expected unchanged at 56.5).The 2d estimate of Q4 GDP confirmed quarterly growth at 1.9% (annualized). Finally, the personal consumption expenditure deflator rose 1.9% YoY in January (vs 1.6% in December). Its core component (excluding energy and food), which is the inflation index followed by the Federal Reserve, remained unchanged at 1.7% YoY.

The US economy continues to react positively to the new President’s promises, even though more time is needed before they become reality and some disappointment cannot be ruled out (see the editorial). Inflation is trending upwards, but only moderately.



A slew of economic indicators offset disappointment from the sudden fall in industrial production. Industrial production unexpectedly contracted by 0.8% m/m in January, in contrast to the market consensus of +0.4%. Moreover, manufacturers foresee a bumpy road, forecasting a 3.5% rise in February and 5.0% plunge in March. However, retail sales advanced 1.0% y/y after rising 0.7% in January. Companies increased capital spending in Q4/16 by 3.8% y/y. CPI excluding fresh foods crept up by 0.1% y/y for the first y/y increase since December 2015

The surprise weakness in industrial production appears to have to do with the Chinese Luna Year. The festive season started much earlier than last year, depressing Japanese exports to greater China to a large extent. Moreover, there could be some disturbance in seasonal adjustments, taking other buoyant indicators into account. Inventory adjustment continues and more manufacturers will be poised for a reacceleration in production. The Bank of Japan will not instantly change its policy, seeing the inflation is back to the positive territory. Nevertheless, the market could remain anxious n whether the central bank will seriously try to ease upward pressure in yield curve, particularly the longer end.


China’s February official manufacturing PMI came better than expected at 51.6  (vs. consensus 51.1 and prior at 51.3),  remaining in the expansion territory for seven consecutive months, and highest reading since 2011. China Caixin manufacturing PMI came better than expected as well at 51.7 (vs. consensus 50.7 and prior 51.0), significantly reversing market’s lower expectations.

We have been calling for continuous manufacturing PMI stabilization within expansion territory. The stabilization in February official manufacturing PMI remained at high level, where output (53.7 in February vs. 53.1 in January), new orders (53.0 in February vs. 52.8 in January), and new export orders (50.8 in February vs. 50.3 in January) continue to show improvement and strength. Longer than expected Chinese economic stabilization from 2016 to 2018, is helping shape an upturn global cycle, which clearly benefits global cyclical sectors, commodities and also emerging markets, in our view. 


Monetary Policy


The BoC kept its interest rates unchanged, as expected.  In the statement, the BoC kept the dovish tone already observed in January, as the Bank seems very cautious when talking about the recent improvement in both inflation and economic activity (i.e., “but”, “however”, and “slightly” were adverbs used extensively in the statement).

Apparently such a tone had already been priced in by the markets: the reaction of the Canadian dollar (CAD) was not impressive; the 2y yield felt slightly (3 bps) while the 10y was almost unchanged. All in all, the dovish statement summed up by trade front risks (there are no concrete news on the NAFTA negotiation) do not favor the CAD in the short term.


Financial markets


Developed rates came back up sharply. German and US 10-year yields closed out the week at 0.35% and 2.49%, respectively. Sovereign spreads were down substantially in Europe. The 10-year spread between France and Germany was narrowed to 60 bp.

After the numerous declarations of FOMC members, it appears now very likely that the Fed will hike the fed funds in March and probably two other times in 2017. We continue to think that long-term rates will rise in 2017, in the US and in Germany. In the US, the long end of the curve will continue to flatten.

Foreign exchange

The dollar recovers. The effective exchange rate followed by the Fed gained 0.6% over the week. The USD/JPY exchange rate was back near 115 and EUR/USD near 1.05. The biggest depreciations came from the Turkish lira, the Colombian peso and the Canadian dollar (-3.1%, -2.3%, and -2.2% respectively for the week against the dollar). Note that the Mexican peso appreciated strongly after the comments from Wilbur Ross, the US commerce secretary, on a possible trade deal with Mexico that would “boost” the peso according to him.

The acceleration of the fed funds tightening cycle will continue to exert some pressure on currencies of countries running high current account deficits. The EUR/USD parity can temporarily go below 1.05 but we continue to expect that the euro will finish the year higher than the current levels.


Credit markets remain well sustained by both fundamental and technical factors: a solid momentum in macro growth indicators, firming micro signals coming from the earning season and, last but not least, persisting demand for corporate bonds among risky assets, on the back of the search for yield and thanks to the ECB action. The critical question  for investors at this juncture is increasingly about how the reduction in asset purchases from April onwards will be implemented by the central bank  and to what extent this reduction will impact CSPP.

February ended this week and it proved to be another month of solid performances for European corporate bond markets, in both absolute and relative terms with respect to other fixed-income segments. Once again, beta exposure was the name of the game, as speculative grade bonds led IG bonds, as in January. In the first two months of 2017, in fact, EUR HY reached a cumulative total return of 1.7% and a corresponding 1.5% excess return vs core government bonds. High grade corporate bonds, over the same period, delivered 59 b.p. and 20 b.p. respectively in terms of absolute and excess return.

Interestingly, high quality speculative grade have beaten mid quality segments, as BB-rated debt delivered a 1.8% vs a lower 1.2% reached by B-rated debt.

Among IG bonds, BBB-rated debt was the outperformer (72 b.p.). The comparison with periphery sovereign debt sees corporates again as the winners: year to date, in fact, periphery debt lost 1.3% (-1.5% in terms of excess return over core govies). This is due to the fact that political uncertainties have impacted much more on sovereign debt tan on corporate bonds. The other side of the coin of the recent outperformance delivered by credit markets is represented by the tighter level reached by valuations and the lower potential for further outperformance in the future, as elections approach.


Equity markets continue to perform strongly. The MSCI World AC gained another 0.5% last week, spurred on by the shift in the Fed’s tone suggesting an imminent rate hike. A manufacturing ISM index above forecasts and a high in new orders also drove the trend, as did Donald Trump’s more “presidential” tone on Tuesday before Congress. After +1.3% Wednesday, Wall Street gained +0.6% for the full week (as of Thursday evening). This rally spread to Europe, driven by reassuring numbers on German inflation, PMI and others. As of Thursday evening, the MSCI Europe was thus up 1.9%, including +2.2% in Paris, which looked as if it had shrugged off the uncertainties of the presidential campaign. 

The MSCI World AC notched up its fourth consecutive week of gains, which is rare. In fact, it only happened twice in 2016 (19 February and 1 June), but in a very different context, as last year those were rallies after sharp corrections (the collapse in oil prices in early February 2016 and the pro-Brexit vote in late June). Is this latest winning streak part of a broader trend? Since Trump’s election in early November, the equity markets have turned in four consecutive months of gains, which is unprecedented over the past three years. Investors have chosen to consider the glass half-full, focusing on reflation and an upturn in earnings, while playing down so far the US market’s already excessive valuation, the coming Fed tightening, and the European election agenda.



Key upcoming events

Economic indicators

  • Eurozone: GDP is expected to stabilize in Q4. 
  • US: Trade deficit is expected to widen in January 






Key events



Market snapshot



Letter finalised at 3pm Paris time

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