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Weekly 21st April 2017


Highlights of the week


  • United States: Increase in industrial production, mixed figures for the real estate sector.
  • Eurozone: Confidence indicators are still improving.
  • China: China's Q1 2017 GDP surprised to the upside, at 6.9% yoy.
  • Markets: German interest rates rose slightly while French spreads fell somewhat before the first round of the French presidential election. The pound sterling up sharply after the announcement of early elections in the United Kingdom. Credit investors still focused on the upcoming French elections and macro data. Uncertain equity markets.



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The week at a glance

Economic indicators


Confidence indicators continue to improve. The April Flash PMI Composite for the euro zone rose to 56.7 (vs. 56.3 forecast and vs. 56.4 in March). The improvement came in both services and manufacturing. The French PMI Composite rose, while the German one decline slightly. Meanwhile, the euro zone consumer confidence index (at -3.6) is at a 10-year high.

Confidence indicators, which had already surprised on the upside in Q1, got Q2 off to a flying start. Our forecasts (GDP up 1.3% in 2017 and up 1.5% in 2018) are now too low. Thus far we had maintained a cautious stance due to political risk but will soon raise these forecasts if there is no great election surprise in France.

United States

Increase in industrial production, mixed figures for the real estate sector. Industrial production rose by +0.5% in March (in keeping with expectations, after a +0.1% increase in February). Capacity utilisation rose to 76.1% (versus 75.9% in February). As for the real estate market, the NAHB index (real estate developer confi-dence) fell to 68 (versus expectations of 70), after reaching 71 in March. New housing starts fell to 1,215 million in March (versus 1,303 million in February) while construction permits rose to 1,260 million (versus 1,216 million in February).

These figures do not significantly change our impression of a cycle of US economic growth that is expected to continue despite its usual quarterly volatility (GDP growth was probably weak in Q1) and Donald Trump’s likely inability to fulfil most of his promises (at least not anytime soon).



China's 1Q2017 GDP surprised on the upside. China's 1Q2017 GDP came at 6.9% yoy (vs. consensus and prior at 6.8%). China's March real economic activity also came in better than expected. China March retail sales’ yoy growth surprised on the upside big at 10.9% (vs. consensus 9.7% and prior 10.9%); China March industrial production yoy growth came in much stronger than expected at 7.6% (vs. consensus 6.3% and prior 6.0%); and China's March Fixed asset investment (FAI) YTD yoy growth was also much better than expected, at 9.2% (vs. consensus 8.8% and prior 8.9%).

Within March real economic activity data, there are several highlights: 1. Cement production turned positive, at +0.3% yoy (vs. 0.4% yoy in January to February), which reflects demand pickup; 2. Coal production turned posi-tive as well, at to +1.9% yoy (vs. -1.7% yoy in January to February), indicating relative strong demand on the ground; 3. Power generation came in strongly as well, at +7.2% yoy (vs. +6.3% yoy in January to February); 4. And more importantly property FAI came in much better than expected in March at 9.4% YTD yoy (vs. +8.9% YTD yoy in January to February); property new starts also picked up to 13.1% YTD yoy (vs. 10.4% YTD yoy in January to February); 5. Highway FAI continued to be strong at +27.5% YTD yoy (vs. +21.6% YTD yoy in January to February). We believe 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.


Financial markets


German interest rates rose slightly while French spreads fell somewhat before the first round of the French presidential election. As such, 10-year German yields ended the week at 0.24% and interest rate spreads between France and Germany were at 69 bp. It should be noted that France issued €2 billion in 5-year bonds on Thursday, and demand was in keeping with previous issues. At the end of the week, 10-year UK yields were slightly up after the announcement of early elections in the United Kingdom on 8 June. In the United States, the 10-year inflation breakeven continued to drift downward to 1.87%.

We continue to believe that German yields will be higher by the end of the year, above forwards. US interest rates will probably be at the lower end of the range. However, for the time being there are very few factors that would promote a rapid increase, as the United States Secretary of the Treasury has declared that rapid tax reform is not realistic.

Foreign exchange

The pound sterling was up sharply after the announcement of early elections in the United Kingdom (see editorial). As such, the GBP/USD exchange rate rose by 2.1% to 1.28 over the week. The pound’s effective exchange rate returned to its highest levels post-Brexit. As a group, European currencies were up against the dollar. Meanwhile, the Canadian dollar and Mexican peso depreciated significantly against the US dollar over the week.

If at least one pro-Europe candidate makes the second round of the French presidential election, that should push the euro up. We continue to believe that at the end of year the euro will be stronger than it is now.


Investors continued to focus on the upcoming French elections and macro data: to some extent uncer-tainties dragged down issuance volumes, which recently dropped from the level maintained in March and in previous months. However, despite global geopolitical tensions and European political risk, credit markets proved quite stable. In particular, European spreads were quite resilient to the recent jump in equity implied volatil-ity, which is usually a driver of credit risk premium. The rise of equity implied volatility and the recovery in both US Treasury bonds and German bunds are consistent with macro-hedging strategies being put to work in times of uncertainty: at the same time, the big picture remains credit friendly on both sides of the Atlantic. US HY bonds also tended to stabilise, after the weaker tone of the previous week, which was very much in line with US equity performance. In the eurozone, numbers related to the CSPP released by the ECB were credit friendly: the level of purchases remained strong in the second week of April and for the moment does not seem to be materially affect-ed by the step down in overall QE monthly purchased volumes.

Following one of the strongest weeks in terms of CSPP volumes (EUR 2.4bn), the ECB purchased another EUR 1.7bn in corporate bonds in the second week of April. Furthermore, in the first and second weeks of April, the ECB added six and 11 new bonds to its corporate portfolio, respectively. Following the announced reduction of overall QE monthly volumes from EUR 80bn to EUR 60bn, the ECB’s future attitude towards the purchase of corporate bonds has certainly been one of the key questions in credit investors’ minds over recent weeks and months. Despite being the very first figures released, they seem to downplay the belief that corporate bonds could be “treated” as all the other asset classes included in the QE in terms of tapered purchases. It is probably too early to derive that the ECB will continue to buy an average EUR 8bn per month of corporate bonds, but these first two weeks of April certainly seem to be encouraging in this respect.


Uncertain equity markets: Over the last week, there has been a modest decline in emerging and eurozone markets, both markets that have led the pack in terms of returns this year (+7% and +5%). The US market re-mained almost unchanged with year-to-date performance of +4.4%. The Japanese market, which has lagged recently (-3% since 31 December 2016) regained some spark. Finally, the UK market posted a slightly greater drop, as Theresa May took market by surprise by calling an election on 8 June. It has now fallen below where it was at the start of the year (-1%).

The downshift in equity markets just before the French election is no surprise. We have also witnessed a decline in bets made in the hopes of US tax reform, for which negotiations will take longer than expected. However, aside from this lull, and assuming the French elections turn out well, market trends should resume their trajectory.


Key upcoming events

Economic indicators

US: Q1 2017 GDP growth is expected to be lower than Q4 2016.

Eurozone: Inflation should increase in April.

2017-04-21-weekly-economic indicators




2017.04.27 - auctions


Key events

2017-04-21-weekly-key events


Market snapshot



2017.04.21-weekly marketsnapshot

Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 21st April 2017
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