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Weekly 10th March 2017


Highlights of the week


  • Markets : developed yields clearly up over the week; the dollar kept its recovery path. The reaction of major European credit markets to the ECB meeting was overall positive; equity markets stalled.
  • Eurozone: GDP growth confirmed at +0.4% in Q4 2016.
  • US: another strong job report.



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The week at a glance

Other events


Home stretch before the elections. On 15 March, the Netherlands are going to open the series of major political events scheduled for 2017 (the next of which should be triggering the Brexit process by late March, the French electoral cycle between April and June, and German elections in September). Like many neighbouring countries, the Netherlands have had rising eurosceptic sentiment for a few years, driven primarily by the PVV party and recently encouraged by the Brexit victory and that of Donald Trump. However, the latest polls have been a bit less pro-PVV than those at the start of the year. Rather than the 30 seats (sometimes more) that were projected for it in January (in a 150-member assembly), the most recent figures give it only about 25 or less, which could put it only in second place. In any case, the party is not likely to become part of the government, which will probably be formed by a coalition dominated by the traditional parties (the Netherlands are used to this type of coalition, even though they may have to unify more parties than usual this time).

The elections in the Netherlands are much less worrying to investors than those that will soon be held in France. In fact, in a proportional electoral system, the PVV cannot win a majority (even unifying its forces with those of other eurosceptic parties), and no big traditional political party seems to be ready to form a coalition with it. Moreover, no referendum on the country's membership in the eurozone and the EU can be organised without Parliament's approval. However, if the PVV gets a better score than predicated by the latest polls, the worries over France could intensify (many observers would see such an outcome as a new confirmation of the polls' tendency to underestimate the protest vote).


Economic indicators


GDP growth confirmed at +0.4% in Q4 2016. GDP grew 1.7% over the four quarters of 2016. Q4 growth was driven mostly by domestic demand: +0.4% for consumer and government spending, and +0.6% for investment. Changes in inventory also made a positive contribution of 0.1pp. On the other hand, the contribution from foreign trade was negative (-0.1pp), due to a rise in imports (+2%) greater than that in exports (+1.5%).

The health of domestic demand confirms the European cycle's solid momentum. The indicators for the start of 2017 even show an acceleration. The risks, for the recovery to continue, are mainly political and/or external.

United States

Another strong job report. The US economy generated 235K new jobs in February (vs 190K expected and after 238K in January). The unemployment rate declined to 4,7% (after 4.8% in January), the “augmented” U6 unemployment rate dropped to 9.2% (after 9.4%) and the participation rate rose slightly to 63% (vs 62.9%). Average hourly earnings accelerated to 2.8% YoY (after 2.5%) while average workweek hours remained stable at 34.4.

The robust job market recovery gives no signal of losing steam. The acceleration in job earnings, even unspectacular, clears the way for the Fed to increase rates at the next FOMC.



China’s Producer Price Index (PPI) momentum extended strongly into February. In terms of price data, February 2017 PPI surprised on the upside significantly again (which is very positive) at +7.8% (vs. consensus 7.7% and prior 6.9%), and CPI yoy came much weaker than expected (better) at 0.8% (vs. consensus 1.7% and prior 2.5%).  China’s February FX reserves came in better than expected at US$3005.1bn (vs. consensus US$2969.0bn and prior US$2998.2bn), with a surprising increase of US$6.9bn (vs. a depletion of US$12.3bn in January), and moved back above the US$3trillioin threshold.  In terms of trade data, China’s February export growth yoy in CNY terms came in worse than expected at 4.2% (vs. consensus 14.6% and prior 15.9%), with import yoy growth in CNY terms surprising on the upside  with 44.7% (vs. consensus 23.1% and prior 25.2%). In terms of money data, M2 came in slightly weaker at  11.1% (vs. consensus 11.4% and prior at 11.3%), total social financing came in weaker than expected at CNY 1450bn (vs. consensus CNY1150bn and prior CNY3737.7bn), and new yuan loans came in stronger than expected at CNY 1170bn (vs. consensus CNY950bn, and prior CNY2030bn).

Among the February price, FX reserve, trade and money data, there are several highlights: 1. The much stronger PPI brings China’s real interest rate even more negative to -3.5%, which is hugely positive for corporate earnings. The widening difference between CPI and PPI to as high as 7% now has also amazingly put corporates in a sweet spot. 2. The increase in FX reserves is due to asset price inflation, but moving back to US$3trillion is still positive, even though the long term trend is clearly that FX reserves have to come down much further. 3. Imports remained strong in February 2017 in iron ore at 13% yoy growth (vs. 12% in January), coal imports at 31% yoy growth (vs. 64% in January), and steel products at 17% yoy growth (vs. 17% in January). The global commodity rally in 2016, 2017 and likely beyond are being driven by real and fundamental demand from China, domestic over-capacity reduction in China, and a worsening environment in China. 4. The slowdown in money supply in February is normal, given that huge liquidity had already been injected in January. The increase in medium- and long-term lending to corporates is very positive, indicating further capex expansion can be expected. 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 Reserve Bank of Australia (RBA) left its target rate unchanged at 1.5%, as expected. That said, it is important to highlight the positive tone in the statement for the economic outlook. The Board observed for example that i) exports have risen strongly; ii) most measures of business and consumer confidence are at, or above, average and that iii) improvement in the global economy has contributed to higher commodity prices which are providing a “significant” boost to the national income.

We believe the central bank is comfortable with the current monetary policy stance and has completely taken further monetary policy easing off the table. That said, it is difficult to foresee an increase in interest rates any time soon as: i) the Australian economy is continuing its transition following the end of mining investment boom; and ii) labor market conditions continue to be mixed, with considerable variation in employment across the country and employment growth concentrated in part-time jobs. However, solid commodity prices could keep helping the adjustment process of domestic economy. The AUD/USD appreciated slightly after the decision, and short and long yields did not move significantly.


Financial markets


Developed yields clearly up over the week. The German and US 10y. have risen by respectively 9 and 10 bps over the week, at 0.44 and 2.58%. The 2y. US yield hit its highest level since the end of 2008. In Europe, sovereign spreads widened slightly. The 10y spread between France and Germany is now at 63.7 bps.

The fact that a March fed funds hike appears more likely and the less dovish tone from the ECB (see front page) pushed up long-term yields. In Europe, the gradual exit from ultra-loose monetary policy will steepen the short-end of the German yield curve.

Foreign exchange

The dollar kept its recovery path and gained against almost all the major currencies over the week. The effective rate followed by the Fed gained 0.3% and now accumulates 2.8% of gains since the US elections. Commodity currencies were among the worst performers and especial highlight go to the Norwegian krone, the New Zealand dollar and the Brazilian Real which lost 1.7, 1.5 and 1.3%, respectively. Note that i) the release of a surge in the US oil inventories in the week might have weighted  to the poor performance of oil related currencies and that ii) the strong contraction of the Brazilian GDP in 2016 might have played an extra downside pressure to the USD/BRL. The euro appreciated 0.3% and stood at 1.06 after the ECB’s MPC when Mario Draghi expressed optimism about the economic outlook (see Editorial) and the USD/JPY finished the week at 115.

Stronger than expected employment data in the US (see above) and  monetary policy divergence gave support to the USD in the week: while recent Fed members speeches signals that a fed funds hike next week is “likely appropriate”, the ECB kept its cautions tone to the Eurozone despite observed some improvement in the outlook for GDP and inflation. This is also the case  among  central banks of other advanced economies, such as the RBA (Australia) and the RBNZ (New Zealand). Such conditions might continue giving support for the dollar in the middle run, but going back to highs observed in January are less likely without surprising positive news about the fiscal policy program.


The reaction of major European credit markets to the ECB meeting was overall positive, though not remarkable in terms of spread tightening: the ECB sounded more constructive on the economic picture and therefore less dovish than in past months, but at the same time it did not give any signs of moving out the current monetary stimulus in 2017. In a nutshell – an environment that looks favourable to risky assets like corporate bonds, as monetary stimulus is here to stay together with an improved growth momentum. The confirmation of the decision to reduce the volume of monthly purchases from EUR 80bn to EUR 60bn starting next month was overall credit-neutral: even in case of a proportional reduction applied to corporate bond purchases (let’s say from current EUR 8bn path to EUR 6bn), the ECB would keep quite a supportive demand effect on credit markets in 2017.

Our reading of the ECB meeting outcome is that, among credit sectors, it looks more supportive to financials. Firstly, in fact, a less dovish perspective on the back of improved big picture points to a further steepening of the yield curve, ultimately supporting banks’ business models. Secondly, financials and especially subordinated debt generally look less tight than non-financials’ debt on a relative value basis and therefore more resilient to the negative rate effect from eventual rising yields. 


Equity markets stalled. After four consecutive weeks of gains – something that happened only twice last year – equity markets at last paused for breath this week, with MSCI World AC down 0.3% (as of Thursday evening), driven down by the US (-0.8%). In contrast, the euro zone (+0.7%) and Japan (+1.2% on Friday evening) held up relatively well, while emerging markets consolidated (-0.4% in local currency).

The equity markets’ break this week should be kept in perspective. Whereas the Fed is likely to raise its rates next Wednesday, the market stall is technical, above all, with the US having just posted its sixth consecutive week of gains – which happened only twice over the past forty months. Against this backdrop, it is hardly surprising that the markets took some profits, but that doesn’t mean they have moved to a more cautious footing. Historically, when there’s a string of good economic news and the Fed raises its interest rates, equities do not necessary consolidate. Quite the contrary, when the ISM moves above 56, the markets generally gain almost 10% in the coming six months.



Key upcoming events

Economic indicators

  • Eurozone: Industrial Production should rise again in January.
  • US: Core CPI should decelerate in February.






Key events



Market snapshot



Letter finalised at 3pm Paris time

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