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Weekly 23th June 2017


Highlights of the week

  • Markets: short-term rates continued to rise in Germany; the US dollar gained against almost all currencies, especially against oil-related ones. The oil price moved back into the radar screens of corporate bond markets; equity markets are still calm.
  • Eurozone: The business climate has worsened, but it is still at a very positive level.
  • US: The index of leading economic indicators is still faring well.



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The week at a glance

Economic indicators


The business climate has worsened, but it is still at a very positive level. Q1 growth in France was revised upward. The Flash estimate of the Eurozone PMI Composite is 55.7 for June (vs. 56.6 forecast and 56.8 in May). Activity accelerated in industry but slowed in services. PMI Composites also retreated in Germany and France. French Q1 GDP growth was revised upward. Based on a new estimate, French GDP rose by 0.5% in Q1 vs. +0.4% previously reported. Household consumption did not budge, and the main contribution was from inventory build-up, but business investment also fared well.

After the very good surprises of recent months, a pause for breath in certain indicators was to be expected. Based on the latest figures, we have raised our growth forecast for the Eurozone from 1.6% to 1.8% for 2017, and from 1.5% to 1.6% for 2018.

United States

The index of leading economic indicators is still faring well. The Conference Board index of leading indicators rose by 0.3% in May after gaining 0.2% in April. Existing home sales surprised on the upside in May at 5.62m (vs. 5.55m forecast and vs. 5.57m in April).

Many US figures came in below forecast in the first half, but not so much as to cast doubt on the recovery. An improvement is likely in the coming months.


Solid improvement in all supply-side indicators, and a moderate increase in some demand-side indicators in May. Industrial production and manufacturing recorded growth rates of, respectively, 5.6% (versus 2.3% in April) and 5.7% (versus 0.7% in April) YoY. The demand side surprised to a lesser extent. Indeed, real wages expanded by 3.7% YoY in May. Retail sales increased slowly at 0.7% YoY.

It seems that industrial production is being boosted by stronger global trade growth. The economy is also undeniably gaining from lower inflation and a more accommodative monetary policy. However, volatility in oil prices that leads to a decline in the ruble, which is supportive for exports and could weigh on the rhythm and magnitude of the easing cycle as well as on the public finances.


Strong GPD growth in Q1 2017 boosted by private consumption. Real GDP growth was reported at 2.8% YoY and 0.67% QoQ during Q1 2017. The main factor supporting growth was private consumption (+3.1% YoY). Net exports did not contribute to growth as sequential import growth was higher than export growth. Investment did not contribute either, as it recorded no growth in Q1 2017, thus slowing down by 1.1% YoY from Q4 2016.

This GDP figure is high. However, growth should now stabilize, and we expect a shift in the engines of growth going forward. The contribution from private consumption should decelerate, while net exports and manufacturing should further contribute to growth. On the other hand, investment spending outlook appears bleak.

South Africa

Headline inflation was reported at 5.4% YoY in May (versus 5.3% in April) in line with the consensus. Core inflation stabilized at 4.8% yoy.

The decline of inflation paused in May after four consecutive months decrease. As South Africa has just entered into a recession, it should help core inflation to decrease. However, if the recent fall of oil prices continues and the political crisis poses question on the independence of the central bank, the rand could depreciate further and push inflation to the upside. Inflation is currently in the SARB’s 3-6% target range but, regarding the upward risks, it could stay on hold at the next meeting.


Financial markets

Fixed -income

Short-term yields continued to rise in Germany. The two-year yield continued the upward move that had begun after the latest Council of Governors meeting, on 8 June, hitting -0.62%, a high since November 2016. Tenyear German and US yields ended the week almost unchanged, at 0.26 and 2.16%. In Europe, sovereign spreads narrowed further.

Long-term bond yields have probably bottomed out, with excessive pessimism on US economic outlook and on the Fed Funds tightening plan but also because it inflation expectations are unlikely to recede any further. The latest political developments in Italy reassured the markets. Early elections now look less likely, and officials of the Five-Star movement now speak of a euro referendum as a mere “negotiating tool” and have reaffirmed their commitment to Europe. 

Foreign exchange

The US dollar gained against almost all currencies, especially against oil-related ones. The remarkable decrease in oil prices in the week (see above) penalized oil-driven currencies, specifically the Russian ruble (-3.2%) and the Colombian peso (-1.2%), the worst-performing currencies. We also note that increased geopolitical tensions between the US and Russia might also have weighed on the poor performance of the Russian ruble. The euro was relatively stable, at 1.12, and the yen weakened by 0.3% to 111.2.

Doubts about the rebalancing of the oil market may keep weighting on oil- related currencies for some time. Such a situation favors the USD, which has recently gained support from a more-hawkish-than-expected Fed and as economic surprise indices are extremely negative currently in the US.


After falling below USD 45/bbl, the oil price moved back into the radar screens of corporate bond markets. US HY bonds were the most heavily impacted by falling energy prices, with the speculative grade energy sector’s spread widening by about 50 b.p. in the first days of the week. As a consequence, US HY tended to underperform EUR HY, with the latter keeping their supportive bias of the previous weeks. In equities, the relative underperfor-mance of the sector appeared to be much larger than in credit markets.

Apart from the limited, negative impact of lower commodity prices, credit markets continue to be sustained by a positive tone, especially in the Eurozone. Supportive macro data together with accommodative ECB policy and lower political risk, following the second round of French parliamentary elections, bode well for credit markets. The further fall in periphery sovereign spreads, on the back of lower political risk and better macro data, supported the recovery of periphery IG corporate bonds. Spreads paid by peripheral financials vs core financials compressed on average by almost 10 b.p. in June, within a spread tightening trend. At the same time, among non-financials, peripherals led the recent trend with spreads back below levels paid by non-periphery issuers. In a nutshell, technical and fundamentals are still driving valuations tighter.


Equity markets are still calm. Yet another week with little movement. Most regions posted moderate gains, led by Japan. Further weakness in oil prices was a drag only on the sectors and countries concerned.

The equity investment case is still intact: US yields range between 2% and 3%, and earnings will remain on an undemanding basis of comparison until the third quarter. That said, while low yields are boosting US tech stocks, this is not the case for European equities, at least in theory, as they are weighted much more in financials. The simultaneous outperformance of these two components therefore has its limits. Although inflation expectations are currently headed down, a rebound in long bond yields (after a surprising negative first quarter in the US) would probably catch wrong-footed anyone who began to following the trend in US tech stocks now. In contrast, it would boost European stocks, which is one pillar of our investments this year.


Key upcoming events

Economic indicators


Japan: Industrial production is expected to decrease in May.

Germany: Retails sales should increase in May.

2017.06.23--weekly-economics ind






Key events



Market snapshot

2017.06.23--weekly-market snapshot

Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 23th June 2017
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