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Weekly 07th April 2017


Highlights of the week


  • Markets : developed yields down; a relatively calm week on the Forex market. Equity markets at half-mast.
  • Eurozone : retail sales rise, unemployment falls.
  • US : nonfarm payrolls below forecast. Ebbing vehicle sales.
  • EMEs : economic activity indicators are up.



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The week at a glance

Other events

South Africa

On April 3rd, 2017, Standard and Poor’s downgraded South Africa’s sovereign rating by one notch to BB+ (junk status), with a negative outlook. This rating action was motivated by the fact that the recent changes in the leadership including the removal of the Minister of Finance are likely to negatively impact fiscal and growth prospects. The rating agency expects political risks to remain high this year and, consequently, potential policy shifts could harm fiscal and growth outcomes even more than previously expected. Moreover, the rise in contin-gent liabilities from state owned enterprises has also contributed to the rating downgrade.

We are not surprised by this move as we expect the executive cabinet reshuffle to undermine the government’s progress on ongoing fiscal and structural reforms. Together with lower investor confidence, this may compromise the ongoing economic and fiscal recovery and negatively impact the sovereign’s creditworthiness. We expect other rating agencies to also revise South Africa’s credit rating downwards: Moody’s already placed the sover-eign’s Baa2 rating on review for downgrade on April 3, 2017.


Economic indicators


Retail sales rise, unemployment falls. Retail sales rose +0.7% in the Eurozone in February (vs. +0.5% ex-pected and after January's gain was revised upward to +0.1% instead of the previously announced -0.1%). Over one year, the increase is 1.8%. Country by country, February's gains were 1.8% in Germany, 0.7% in France, and +0.2% in Spain. The unemployment rate was down to 9.5% in February (after 9.6% in January). It reached 3.9% in Germany, 10% in France, 11.5% in Italy, and 18% in Spain.

Economic numbers in the Eurozone remain favourable. With a 9.5% jobless rate, however, don't expect much upward pressure on wages at the scale of the entire Eurozone in the near term. In Germany, though, the situation may be different. Until now, despite a very low unemployment rate, workers’ demands have been contained by fairly weak inflation expectations and the nature of a large part of jobs (in lower-paying service sectors). However, these factors may have reached their limits.

United States

Nonfarm payrolls below forecast. The US economy generated only 98K net new jobs in March, much less than forecast (180K) and February (219K). The unemployment rate declined to 4.5% (4.7% in February) while the participation rate remained stable at 63%. Average workweek hours remained unchanged at 34.3 while average hourly earnings decelerated slightly to 2.7% YoY (vs. 2.8% in February).

Ebbing vehicle sales. Vehicle sales fell back to 16.6M in March (vs. 17.3M expected and after 17.6M in February). ISM indicators still high despite a decline in services. The ISM Manufacturing Index declined to 57.2 in March (compared with 57 expected and after 57.7 in February). Its new orders component is still very high (64.5). Meanwhile, the ISM Non-Manufacturing Index retreated to 55.2 (compared with 57 expected and after 57.6 in February).

Those figures, notably the disappointing job market numbers, are not enough to conclude that the US momentum is really weakening. Remember that in recent year there have been many disappointing monthly job market fig-ures that gave misleading signals while the general trend was good. Moreover, as the US economy is near full employment, we should expect some gradual deceleration in nonfarm payrolls. For the moment, factoring in the latest real data for consumption and production that were also below forecast and the strong impression that the President will have a hard time keeping a lot of his promises, we maintain a scenario of GDP growth at around 2% per year for 2017 (less in H1, a bit more in H2).

Emerging markets ex Asia


Economic activity indicators are up. Russian GDP came out positive in Q4 2016 at +0.3% yoy compared to -0.4% in Q3. Russian, Turkish, Brazilian, and Mexican Manufacturing PMIs for the month of March increased, while Brazil's, at 49.6, did not make it into positive territory. The same improvement was seen for Services PMIs in Brazil and Russia.

While Russian inflation fell by 0.3pp in March to 4.3% yoy, Turkish inflation was higher than expected with +1.2pp to 11.3% yoy compared to 10.7% expected by the markets.

Overall, in 2016, Russia suffered a 0.2% recession, which was less severe than in our scenario (-0.7%). We should point out that the Russian statistics institute revised its GDP data in 2016. As such, in 2015, the recession was measured at only 2.8% compared to 3.7% previously estimated. We are maintaining our scenario of a return to positive growth of +1% for Russia for 2017. We continue to predict an improvement in the economic situation in Brazil and stabilisation in Mexico. On the other hand, in Turkey, the political situation makes it hard to predict anything, at least until the results are in from the referendum on the constitution next week.


Monetary Policy


India’s central bank RBI unexpectedly hiked reverse repo rate by 25bps from 5.25% to 6%, at its April 6th meeting, but RBI remained repurchase rate on hold at 6.25%, and cash reserve ratio at 4%, both as expected.

The decision to keep the repurchase rate on hold at 6.25% was unanimous among 6 members of the Monetary Policy Committee (MPC). However, the RBI MPC narrowed the policy rate corridor from +/-50bps to +/-25bps, in order to better align the money market rates with the policy rate. RBI revised up slightly its FY18 full year CPI inflation to 4.75% from 4.5% in its February meeting, among which monsoon, rent allowances, GST and general government deficit with upside risks in RBI’s view which may put pressure on CPI outlook. We think RBI’s tenden-cy by overestimating inflation is getting weaker, i.e. its forecast is more close to what inflation is going to behave, and as a reflection its tolerance for relative higher inflation is getting better. We also think RBI is more on the easing side than the hiking side hence it would rather keep the policy rate (repo rate) on hold for longer than expected.

Czech Republic

In an extraordinary monetary policy meeting held on Thursday, the Czech National Bank (CNB) exited its commitment to the currency floor. For over three years, the CNB had used exchange rates as a monetary policy tool by setting a floor of 27 for the EUR/CZK exchange rate in November 2013.

The action was not a surprise per se. By keeping its transparency commitment, the CNB indicated during its last monetary policy committee held last week (30 March), that the exit from the FX commitment would happen any time from 1 April. It happened a few days later. As the markets expected, the EUR/CZK parity appreciated, but the movement was quite limited: it gained 1.3% to reach 26.66 during the day. That said, both our valuation models and the macro aspect suggest that a strong appreciation of the currency is very unlikely as, i) the currency is already overvalued and ii) the Czech Republic is an export-driven economy and the CNB would surely intervene in the forex market to keep the CZK from rising too much – in fact, they clearly stated they would do so. Moreover, it is very likely that any speculative capital will leave the country in the very short run.


Financial markets


Developed yields down. The US and German 10-year rates lost 7 and 9 bp for the week, to close at 2.32 and 0.23%, respectively. The drop in rates coincided with the publication of an ISM Manufacturing Index that was very good but in line with expectations, whereas survey figures had been in the habit of coming in better than expected in recent week, and with the disappointing job report.

It's notable that German yields did not react to the many dovish statements of ECB members on Thursday (Draghi, Praet), indicating there is no urgency in making any changes to forward guidance. We continue to expect German long-term rates to increase this year.

Foreign exchange

A relatively calm week on the foreign-exchange market. Few changes to note on the major currencies. The EUR/USD exchange rate closed out the week at 1.06. Note that the Czech koruna appreciated by 1.7% against the euro after the CNB's decision (see above). Let us highlight the good average performances of emerging currencies over the past three months against the developed currencies.

The current wait-and-see phase, specifically with regard to the new US administration's policies, is conducive to investment on high-interest-rate currencies such as the Brazilian real.


Central bank communication, delivered through minutes of the latest meetings or via public speeches, was front and centre on markets’ radar screens on both sides of the Atlantic. While the FOMC has started the discussion about its exit from QE, through future changes in the dimension of the Fed’s balance sheet, Draghi underlined the need to move on with the current purchase programme in the eurozone, the day after Jens Weidmann re-opened the issue of forward guidance. Both Praet and Constancio, together with Draghi sent dovish signals, also underlying the very recent decline in core inflation as a disappointing factor to be considered. The ECB’s communication helped to support European credit markets and to limit the potential impact from the (prob-ably) earlier than expected discussion about the future compression of the Fed’s balance sheet.

Q1 2017 just ended with quite positive performances recorded by European credit markets. After a slightly negative number in February, excess returns turned positive in March for EUR IG corporate bond indices (+53 b.p.),while HY added another 55 b.p. to their performance. While IG debt accumulated an excess return over bunds of about 73 b.p. for the quarter as a whole, the cumulative excess return on HY bonds reached a full 2%. These numbers represent almost one third of the overall excess return delivered by two asset classes in 2016 as a whole, respectively equal to 2.3% and 7.6%. Total returns, impacted by the trend in underlying government yields, are another story: in fact, the HY total return in Q1 2017 reached 1.6%, while IG bonds delivered a lower 0.25%. In both cases, however, performances were higher than the -1.3% total return recorded in Q1 by peripheral sovereign bonds. As in the previous quarter, political risk and higher average duration levels had a greater impact on peripheral sovereign bonds than corporate bonds. Among IG corporate sectors, furthermore, financials continue to outperform, and in particular subordinated debt, which recorded 1.7% and 2.2%, respectively on a total return and excess return basis. Positive correlation with recovering financial equity, together with still attractive spreads, are leading financial subordinated debt outperformance, which, as we have just shown, is comparable to the numbers delivered by HY debt. These two sectors (HY bonds and IG financials) are still among our preferred segments of the eurozone credit market.


Equity markets at half-mast. After a very positive first quarter for the equity markets, they are a bit more hesitant as the second quarter begins. In the first quarter, the MSCI World gained +5.4%; the emerging markets gained +7.5%; the MSCI EMU +6.8%; the S&P500 +5.5%; the FTSE100 +2.5%; and the Topix brought up the rear with only -0.4%. Since the month began, they are down by an average of -0.5%; the gap between the emerging mar-kets (+1.1%) and Japan (-2.2%) is continuing.

The markets are in standby until they know more about US tax policy, and the agenda for that will be key. The Trump administration will not hand its policy in to Congress until May, and negotiations will not get going before summer. The Fed's minutes reveal that the step of reducing its balance sheet could be taken before year's end. So the handover from monetary policy to tax policy could accelerate in the second half of the year. While the US market's valuation is very high, this transition should be watched very closely.



Key upcoming events

Economic indicators

US : CPI is expected to remain almost stable in March.

Eurozone : 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 07th April 2017
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