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Weekly 13rd July 2017


Highlights of the week

  • Markets: the German 10-year rate surpassed 0.60%; the euro continues to rise against the dollar;  Cash credit indices proved resilient to the sharp rise in yields in Germany, reassurance from the Fed.
  • US: the job market and business climate are still faring well.



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The week at a glance

Economic indicators


An increase in industrial output. Euro zone industrial production rose by 1.3% in May (vs. +1.1% forecast and after a 0.3% increase in April). It rose by 1.4% in Germany, 1.9% in France, 0.7% in Italy and 1.6% in Spain.


Figures are still solid in the euro zone. Economic growth may have been even stronger in Q2 than in Q1 (+0.6%).

United States

The job market and business climate are still faring well. The number of job openings was 5.67m in May, which is still very high, albeit lower than in April (5.96m). The NFIB index of small business confidence continued to slip, falling to 103.6 in June from 104.5 in May after its early-year peaks but is still far higher than it was prior to Trump’s election.


The US expansion cycle continues. It has been surprisingly long (eight years) and surprisingly slow, yet it is showing no true signs of running out of steam.


Monetary Policy


United States

The Bank of Canada (BoC) has raised its key interest rate by 25 bp to 0.75%. The BoC's key rate had been kept at 0.50% since the summer of 2015 as the central bank adopted a cautious approach following the sharp drop in oil prices beginning in mid-2014. The BoC believes that the current weakness in underlying inflation will prove temporary and that the recent excellent growth figures will soon enable the closure of the output gap.


Members of the committee dealing with monetary policy had begun sending more aggressive signals in recent months, and the markets gradually priced in an interest rate hike. With oil prices low, the BoC will be unable to undertake a rapid tightening cycle. Furthermore, Canada's effective exchange rate has risen 5% since mid-May, which will push down inflation.


Financial markets

Fixed -income

The German 10-year rate surpassed 0.60% for the first time since 2015, ending the week at 0.59%. The US 10-year rate ended the week at 2.33%. Inflation breakevens in Europe recovered from their end-June low points and returned to their mid-May levels. Sovereign spreads in Europe narrowed slightly on long maturities after the widening triggered by Mario Draghi’s speech on 27 June.


As we detailed in last week’s editorial, the rise in German long rates may continue for a while longer yet. However, this trend could be curbed by the ECB if it believes that rates are rising too far too fast. This is not the case at the moment. Benoit Coeuré explained on 5 July that “he didn’t think that this type of market reaction was particularly significant when looking at the bigger picture, especially with the economic forces at work.”

Foreign exchange

The euro continues to rise against the dollar, with the spread narrowing between US and German rates. The EUR/USD exchange rate is now close to 1.15, which is its highest level since early 2015.



The euro is expected to continue to strengthen over the coming quarters. The main reason why the euro depreci-ated in 2014/2015 and has remained low subsequently is the huge portfolio investment outflows caused by rates that are too low (or even negative) in the eurozone. The recalibration of the ECB's policy is likely to reverse this trend, with flows becoming positive again. This and the very high current account surplus (nearly €400 bn) is expected to contribute to the euro's appreciation. As a reminder, in 2014, the Fed's tapering coincided with a sharp appreciation of the US dollar.


Cash credit indices proved resilient to the sharp rise in yields in Germany. Credit indices performed in the euro and dollar markets.


The environment remains buoyant for credit in the eurozone: (1) The fundamentals of eurozone companies re-main robust. Issuers are benefiting from a better economic environment which resulted in a significant improve-ment in the growth of revenues and profits in Q1. In addition, the contained growth of debt, despite very attractive financing conditions, contributed to the reduction/ stabilisation of European issuers' debt leverage. (2) Technical factors are positive thanks to the CSPP, the ECB's corporate debt purchase programme. (3) However, valuations are stretched: the potential for spread tightening is limited. Lastly, we favour carry strategies in this market (BB, BBB, subordinated financial debt). 


Reassurance from the Fed: Janet Yellen’s remarks during her Congressional hearing clearly reassured the equity markets. After missing a step early in the week, the markets rallied in unison, with the exception of Japan, driven by the Fed chairman’s cautious tone (see above). In the US, the Dow Jones rose by 0.6% to a new high. The NASDAQ, which is more sensitive to interest rates, turned in even stronger gains (+1.1%). European markets, which are more volatile than the US market, amplified the rally with average gains of +1.5%. Emerging markets (+2.2%) were the main beneficiaries of the Fed’s conciliatory tone. Japan, on the other hand, gave up 0.5% on Wednesday, hit by the strengthening in the yen.


Lacking any new developments in earnings, the equity markets have focused over the past few weeks on everything having to do with inflation (wages, oil, etc.) and interest rates, with the latter decisive in equity market valuations. The paradox, however, is that the equity markets welcomed both higher bond yields (a sign that reflation is well-anchored) and the accommodating messages of central bankers indicating that the tightening would still be moderate… Will this win-win spiral ever end? Some say the markets are ripe for a correction this autumn. The key is what will be the trigger (China, US fiscal reform…) - as earnings are expected to be good and central banks predictable - unless an accumulation of details...  


Key upcoming events

Economic indicators

  • China : Retail sales is expected to drop in June
  • UK: CPI should be remained stable in june



Key events



Market snapshot


Letter finalised at 3pm Paris time

ITHURBIDE Philippe , Global Head of Research
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Weekly 13rd July 2017
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