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Weekly 31st March 2017


Highlights of the week


  • Markets: European yields down; the US dollar was stable. Credit markets stabilized; the US market and oil prices turned up.
  • Eurozone: inflation slows down sharply, bank credit holding strong.
  • US: Q4 GDP growth revised upward.



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The week at a glance

Economic indicators


Inflation slows down sharply. The Eurozone’s headline inflation index slowed down sharply in March, to +1,5% YoY (vs +1.8% forecast and +2% in February). Core inflation (ex food and energy) also decelerated to +0.7% YoY (+0.9% in February). Bank credit holding strong. In February, the volume of bank credit to nonfinancial corpora-tions was up +2% over one year; consumer credit was up +2.3%. Economic confidence is still high. The Euro-pean Commission's Economic Sentiment Index reached 107.9 in March, almost unchanged from February (108.0).

While inflation should gradually decline from its February peak (due to oil prices basis effects), the sharp drop in March was probably exaggerated statistical factors. Economic indicators were better than expected in the first quarter, which caused us to revise our growth forecast for 2017 upward (+1.5% instead of +1.3% previously). Still, even this new number seems timid now. For the time being, we are maintaining a conservative approach due to the impending French elections, but we may have to revise our projections upward again in mid-year.

United States

Q4 GDP growth revised upward. According to a third estimate, growth was +2.1% (annualised) compared to the previously-announced +1.9%. The main reasons for this revision are bigger increases in household consumption (+3.5% annualised) and inventories. Conversely, business investment and exports were adjusted downward. Consumer confidence jumps. The Conference Board's consumer confidence index was up very sharply in March to 125.6 (from 116.1 in February). This is its highest level since December 2000.

The revision of Q4 figures does not fundamentally change the outlook for the US economy: growth is effectively matching the trend, whereas growth in previous quarters had been highly volatile. This increase in consumer confidence shows that the expectations for Trump's promised measures are still very high.



Economic indicators for February strongly suggest that the economy has farther room to go, albeit a slower pace. Industrial production advanced by 2.0% in February after contracting by 0.4% in January. Recovery in output was largely expected in by the market, as export volumes, which had been released the previous week, jumped 4.6% in February. Manufacturing output is expected to dip 2.0% in March then bounce up 8.3% in April. Household expenditure rose 2.5% in real terms, following a 0.5% increase in January. Core CPI represent-ed a 0.2% increase y/y compared to 0.1% in January.

Smoothing out sporadic ups and downs in the first four months of the year, industrial production is likely to gain at a reasonable pace, reflecting the global economic recovery. However, we should be aware of a standstill in inventory adjustment, albeit a temporary one. Industrial shipments unexpectedly sank by 0.1% due primarily to stagnation in investment goods. As a consequence, inventories of final demand goods rose sharply. Inventories-to-shipment ratio of producer goods started picking up. On the employment front, the good news that unemploy-ment fell to 2.8%, the lowest since June 1994 was completely muted by a marginally looser supply and demand situation. The effective job-to-applicant ratio has stuck to 1.43 for the last three months whereas new job openings are levelling off. The inventories-to-shipment ratio of producer goods and new job openings are components of a country’s leading indicator.


China’s March official manufacturing PMI came better than expected at 51.8 (vs. consensus 51.7 and prior at 51.6), remaining in expansion territory for the eighth consecutive month, and with the highest reading since 2011.

We have been calling for manufacturing PMI to remain within expansion territory. March official manufacturing PMI remained high, where output (54.2 in March vs. 53.7 in February), new orders (53.3 in March vs. 53.0 in February), and new export orders (51.0 in March vs. 50.8 in February) continue to show improvement and strength. However, the purchasing price index declined to 59.3 in March from 64.2 in February, perhaps suggest-ing that PPI (producer price index) is going to peak soon. Longer than expected Chinese economic stabilization from 2016 to 2018 is helping shape an global upturn cycle, which clearly benefits global cyclical sectors, commod-ities and also emerging markets, in our view.       


After contracting in Q3 2016 by 1.3% yoy, GDP growth rebounded in Q4 by + 3.5% yoy, well above consensus expectations of 1.9%. Overall, in 2016, growth will have been 2.9%, so much lower than in 2015 (6.1%).

According to initial estimates, this rebound can be explained by a recovery in household consumption (+ 5.7% in Q4 versus -1.7% in Q3) and exports (2.3% vs. -9.3%) . Note that despite the sharp rise in inflation and unem-ployment, consumption was also higher than in Q2. However, we continue to forecast a slowdown in growth this year at 2.2% due to the many internal and external political uncertainties that will weigh on the recovery. 


Monetary Policy


As the markets had already priced in, Banxico raised its key rate by 25bp to 6.50%.

Despite the peso’s recent gains, there are many uncertainties, particularly with regard to prospects for US mone-tary and trade policy. As a result, Banxico’s statement suggested that the tightening cycle would continue in order to anchor medium- and long-term inflation expectations. However, we expect future rate hikes to be limited, due to relatively soft economic growth. Barring a major shock, we forecast another 25bp hike, most likely in the second half.

South Africa

The SARB kept its key rate on hold at 7%, while putting out a relatively neutral communiqué suggesting that the tightening cycle is coming to an end and raising the possibility of rate cuts in the near future if inflation expectations allow that.

Based on the latest political developments and the dismissal of the finance minister, Pravin Gordhan, who was much liked by the markets, the rand has dropped more than 8% in one week, i.e., since the start of the rumours. If the rand fails to rally, obviously, there will be pass-through effects on inflation and inflation will recede less than expected this year, which would de facto reduce the SARB’s margins for manoeuvre. Meanwhile, in addition to political issues, the stabilisation in the rand also depends on US monetary policy. Hence, if the Fed raises its rates by 50bp that will limit the SARB’s options in equal measure.


Financial markets


European yields down. Ten-year German and UK yields fell, respectively, by 6 and 7bp on the week, ending at 0.34 and 1.12%. US yields ended the week about where they started it.

European yields were driven down by both anonymous statements by an ECB member to the effect that the market overinterpreted the comments made at the 8 March Council of Governors meeting, and, to a lesser extent, the triggering of Article 50 by the UK government. We are sticking to our conviction that German yields should rise significantly in 2017.

Foreign exchange

The US dollar was stable against almost all the major currencies in the week. Remarkably, the South African rand (ZAR) lost almost 7%, driven by rising political risks in the week that culminated in President Jacob Zuma’s firing the respected finance minister Pravin Gordhan. On the positive side, the Russian ruble (RUB) appreciated by almost 2% against the dollar. Support for the currency possibly came after a survey commissioned by the Central Bank of Russia (CBR) and released on Thursday showing that inflation expectations of households are in a downward trend but are “still considerably above the inflation target” and this is “forcing the Bank of Russia to pursue a moderately tight monetary policy”. This might be interpreted as a slightly change in the CBR’s communi-cation from a dovish tone at last week monetary policy committee to a more neutral tone regarding monetary policy. The EUR/USD lost 1.1%% and returned to the 1.06 level not seen in two weeks, while the GBP/USD was relatively stable at about 1.24.

Unless we have a data upside surprise for the US, such as a pick up on inflation or much stronger than expected employment data, which would trigger a change in the Fed’s communication to a more “hawkish” tone, we believe that the dollar may not see a new cycle of rally again until we have concrete news from the fiscal stimulus. That said, some events might play against the currency in the short run such as protectionism talks that might come to headline again as soon as in April – China’s president is meeting D. Trump next week and US-Japan economic meeting is schedule for the month.


Credit markets have stabilised in a week that did not offer any major news on the macro scenario. The reaction of bond markets to the rumours about the ECB’s apparent uneasiness over the recent rise in yields supported total returns and appetite for IG bonds, as they are more sensitive than HY bonds to rate trends. The ECB’s data on its latest purchases confirmed the central bank’s commitment of broadening the universe of bonds included in its CSPP portfolio, ultimately representing a supportive indication.

After a limited correction in previous weeks, probably on some profit taking following the good performances delivered in January and February, credit markets resumed their positive trend. However, valuations clearly limit the potential for further spread tightening, especially among some high beta segments in the US and among non-financial IG debt in Europe, which, as we know, is a constant target of ECB purchases


The US market and oil prices turned up this week. After falling almost constantly since peaking on 1 March, the US markets have rallied since 28 March. The trigger was the release of the Conference Board’s consumer confidence index, which was far above the consensus (125.6 vs. 114.0), up more than 9 points vs. February and at a high since December 2000! The renewed strength in the US economy helped firm up the dollar and interest rates. Oil prices also rose this week (+4% by Brent, +6% by WTI) due to weaker-than-expected increases in crude inventories and in the run-up to a possible extension in the OPEC agreement. As of Thursday evening, Wall Street was up 1.0% since last Friday, driven by banks (+2.2%) oil shares (+2.6%). Meanwhile, defensive sectors (0%) and those exposed to interest rates, such as utilities (-1.5%), telecoms (-0.2%) and real estate (+0.2%), underperformed. European equity markets (+0.9%) tracked their US peers, with France and Germany up 1.3%, Italy up 1.2%, Switzerland and Spain up 1.0%, and the UK up 0.5%. In addition, with the receding in risk aversion, the most defensive sectors, such as real estate (-1.5%) and telecoms (-0.3%), were bid down.

The US market didn’t take long to recover from the messy attempt at reforming Obamacare. Investors focused on the current recovery and solid earnings forecasts. US equities are expensive, but the new president’s tax promis-es are likely to boost earnings and bring valuations back down to earth. In other words, Congress no longer has any margin for error in this area.



Key upcoming events

Economic indicators

United States : Unemployment rate should remain stable in March. 

Germany : Industrial production should have significantly decreased in February.







Key events



Market snapshot



Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 31st March 2017
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