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Weekly 12th May 2017


Highlights of the week


  •  Markets: long-term yields without any real direction; the euro has depreciated. The euro and dollar credit markets performed well; the equity markets were rather calm
  • United States: labour market in very good shape with job openings increasing to 5.74m in March.
  • Eurozone: rise of European Commission’s growth forecast for 2017 to 1.7%; fall in projected inflation; increase of Germany’s GDP by 0.6% in Q1 2017.
  • Emerging markets: China’s PPI remained strong in April; inflation in Brazil fell below target to 4.08% in April.



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The week at a glance


Economic indicators


The European Commission raised its growth forecast slightly for 2017. It moved from 1.6% to 1.7%. The forecast for 2018 is unchanged at 1.8%. Projected inflation is down a little (from 1.7% to 1.6% for 2017, and from 1.4% to 1.3% for 2018). Germany’s GDP increases by +0.6% in Q1 (from +0.4% in Q4 2016). Detailed components are not yet available but the official press release says investment was strong, household consumption slightly on the rise and exports rose more than imports.

The economic situation continues to improve. Growth is getting more balance with more contribution from investment. We recently increase our growth forecast, although we remain a bit more prudent than the European Commission (our figures are now 1.6% for 2017, 1.5% for 2018).

United States

Slightly disappointing retail sales. April retail sales rose only +0.4% (vs. 0.6% expected and after an upwardly revised March rise of +0.1%). “Control group” retail sales (similar to household consumption as measured in GDP) rose only +0.2%. Small decline in inflation. April CPI vas 2.2% YoY (vs. 2.3% forecast and after 2.4% in March). Core inflation also declined to 1.9% (it was expected unchanged at 2%. Strong labour market. The number of job openings increased to 5.74m in March (from 5.68m in February). The NFIB small business confidence index fell slightly, but stayed high at 104.5 (vs. 104.7 in March).

The relatively weak retail sales do not change our view that the US recovery will continue, with some improvement probable later in Q2. The strong labour market remains the main supportive factor of this recovery. Relatively weak inflation means that the Fed continues to have room to increase policy rates only very gradually.


Wage data continue to betray investors. Total monthly earnings unexpectedly dropped by 0.4% y/y in March, contracting for the first time in 10 months. Accordingly, real earnings plunged by 0.8% y/y, the biggest fall since June 2015.

The negative surprise partially reflects the situation in March last year, when cash earnings soared 1.5% y/y. More importantly, though, an anaemic rise in basic monthly wages of some 0.2% y/y is vulnerable to a decline in overtime compensation and smaller bonus payments. Companies remain reluctant to raise fixed costs before witnessing a clear omen for higher productivity and profitability.

Somehow the reading appears contradictory to the fact that the unemployment rate has fallen to 2.8%, unseen for 23 years. The BOJ Tankan survey reveals that a vast range of companies claim there is a labour shortage. The surge in the jobs-to-applicant ratio, which soared to 1.45, the highest since 1990, demonstrates serious difficulties in recruiting. On the employment front, payrolls are constantly rising at 2.5% y/y. However, new employees are essentially the young, whose monthly pay cheques are relatively low. Companies simultaneously restrain the wages and salaries of employees aged 40 and over in order to flatten the “seniority wage curve”, that has been outweighing productivity growth. Aggregate wages will not show a substantial increase without broad and comprehensive efforts to boost labour productivity.


China’s Producer Price Index (PPI) momentum remained strong in April. In terms of price data, April 2017 PPI came in slightly weaker than expected at +6.4% (vs. consensus 6.7% and previously 7.6%), and CPI yoy came in slightly stronger than expected at 1.2% (vs. consensus 1.1% and previously 0.9%). In terms of trade data, China’s April export growth yoy in CNY terms was slightly worse than expected at 14.3% (vs. consensus 16.8% and previously 22.3%), while import yoy growth in CNY terms came in slightly weaker as well at 18.6% (vs. consensus 29.3% and previously 26.3%).

Within the April price and trade data, there are several highlights: 1. PPI remained strong in April, but it still made real interest rates at -2.1% very positive for corporate earnings; 2. Imports were still relatively strong in April 2017, with coal imports at 32% yoy growth (vs. 12% in March), and crude oil at 6% yoy growth (vs. 19% in March). We think the correction in PPI and commodity prices is temporary due to the slight excess inventory near term and destocking has to happen. However, it would not last long, and most likely take place before the end of the second quarter. We continue to believe China stabilisation will be sustainable through to end-2018, and Chinese economic stability is the biggest contributor to global economic stability and recovery.


Inflation drops from 4.57% yoy in March to 4.08% in April i.e below the BCB target set at 4.5%. Inflation of regulated prices fell substantially to 4.24% in April, against 5.59% in March. On the other hand, market prices fell less: 4.03% against 4.25% in March. Underlying inflation contributed to this movement from 5.62% in March to 5.2% in April.

Inflation has fallen below the target and without any external shock will continue to decrease. The current economic environment – well-anchored inflation expectations, quite stable Real, very weak labor market and low/slow recovery - is favorable to a further rate cut at the 31st May BCB meeting. However, due to the recent volatility in  Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 3 oil prices, the BCB could be cautious and not deliver more than in April i.e a decrease of 100 bp.



Financial markets


Long-term yields without any real direction. US and German 10-year yields ended the week almost where they began the week, at 2.35% and 0.41% respectively. After the significant tightening of the last two weeks, euro sovereign spreads very marginally widened.

In the absence of fiscal stimulus measures in the United States, with central banks in no hurry to withdraw accommodative monetary measures and with the subsiding of base effects on inflation, there is no immediate catalyst prompting long yields to rise again. That said, we believe European long yields will rise again significantly in the second half of the year.

Foreign exchange

The euro has depreciated after its strong outperformance in recent weeks. The EUR/USD exchange rate ended the week at 1.09 (-0.8%). Note the substantial underperformance of the Swiss franc, with the EUR/CHF exchange rate close to 1.10. Emerging currencies continued to outperform on average the developed currencies. It is also worth highlighting the remarkable stability of the USD/RMB exchange rate.

The euro is taking a break in its appreciation movement. Confirmation by ECB Board members of a gradual withdrawal from accommodative monetary measures should enable the euro to continue to appreciate.


The euro and dollar credit markets performed well this week. The euro primary market saw renewed activity after several weeks of relative calm due to the French presidential elections and the earnings season.

Eurozone: The removal of political uncertainty had a very positive influence on the markets. The Euro IG index spread tightened by almost 20bp, to 105bp, i.e. still 15bp higher than the low reached at the beginning of 2015. Credit should continue to perform well even though spread tightening potential is now more limited. However, questions generated by continued QE and the political risk in Italy could lead to volatility in the credit markets in H2. We believe these risks remain contained: (1) our scenario includes the continuation of QE in 2018 and (2) the Five Star Movement currently attracts only a third of the votes. On the euro market, we favour issuers offering yield.


The equity markets were rather calm after the French elections, the outcome of which had been expected. In addition, corporate earnings publications continued their positive drive. 81% of companies have published in the United States, 71% in Europe, and 41% in Japan. Earnings have risen by +14% in the US, 5% better than expected. In Europe they have climbed +24%, 11% better than expected. They have also risen in Japan, by +25%.

Though legislative elections in France still await, the electoral issue is now a domestic factor for France and no longer carries a systemic risk for the eurozone. As expected, the removal of this risk has been a catalyst for the eurozone markets in recent weeks. We think they still have potential, in relative terms. After profiting from the political risk premium, there is, in fact, a relative risk premium to be recovered; European equities are much less expensive than their American counterparts. This seems feasible as long as profit momentum stays strong.


Key upcoming events

Economic indicators

US: Industrial production should have stabilized in April.

Eurozone: Inflation should have increased in April.

2017.05.12 - weekly economics indicators




2017.05.12- weekly - auctions


Key events

2017.05.12 - weekly - key events


Market snapshot

2017.05.12 - weekly market snapshot

Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 12th May 2017
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