The ECB says it needs time to beef up its anti-deflation measures. Let’s not kid ourselves, the bank is in no hurry. There seems to be but one justification for its move to space out its meetings from every four to every six weeks and the innovation that consists of publishing its minutes: deflate ballooning expectations of future intervention.
This, in reality, was the only take-away from the ECB’s monthly monetary policy meeting held this week. In other words, there is no revolution under the European skies: the pace of change is still in slow motion and lacking in ambition.
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Mind your Back!
France is stumbling, Germany weakening, the U.S. wobbling, Brazil is down a match point and J. Bullard has promised us rate hikes by March… the summer is going to be a real barn burner! Will M&A activity be robust enough to continue to fuel investor confidence?
It’s looking like things are getting tight, considering recent economic developments and central banks’ bungled messages. Let’s take a closer look at the most disruptive factors from the week.
– Euro area: if Germany is a locomotive, is France the caboose?
– U.S. growth will not exceed 1.5% this year
– It’s match point in Brazil
– Beware of the impatience of certain central bankers
Cultural Revolution afoot at the IMF?
Made at the same time as the downwards revision of its U.S. growth forecast for 2014, the IMF’s recommendation that U.S. authorities increase the minimum wage flew well under the market’s radar but is, by all measures, very intriguing. It is hardly standard operating procedure for the New York-based organization to suggest that a wage increase be used to increase the economic outlook of a country.
Seven years after the start of the economic crisis, does this recommendation point to an acknowledgment that ongoing policies have failed and need to be replaced? Seemingly, this is the message that is being sent, judging by the positions taken and papers published in recent months. The IMF’s recommendation would then worth more attention than it has been given up until now
Fed calm things down
No stress: that’s how the message sent by the Fed after its FOMC meeting on June 18th can be summed up. Through a statement, it left its message from April pretty much unchanged, thus leaving no room for excessive reactions in either direction. Janet Yellen excelled at this balancing game even as the environment had grown increasingly tense in the few days before the meeting.
By calming things down, Janet Yellen has snuffed out the risk of runaway anticipations and opened the door to a correction on the two-year, whose levels had become dangerously tight in the last two weeks.
The Fed’s consistent message is a stabilizing factor amid growing geo-political tension and, consequently, stress on the price of oil.
On balance, today’s communication strengthened our expectations, validating our scenario that the probability of an interest rate hike in the foreseeable future is low. Growing concerns over the possibility of a sustained gap in long-term interest rates between the US and the euro area should ease, which also reduces the likelihood of the dollar strengthening much versus the euro.
Geo-political and oil risk notwithstanding, the overall picture is mostly favorable for equities on both sides of the Atlantic but could also prove promising for gold, given the risks associated with future developments in the situation in Iraq
Who still doesn’t have a pair of “Birkies”? Or how Made in Germany sheds stereotypes
Retailing, leather goods, shoes…German brands are flourishing in unexpected places. Birkenstocks sandals, which seem headed to becoming the must-have item for the summer of 2014, are the latest trend in a broader movement towards reshaping “Made in Germany”.
Increasingly present on European shelves, everyday consumer products with relatively low added have gained in popularity and are a far cry from the heavy industrial goods, manufacturing equipment and upscale household appliances that have forged Germany’s industrial fabric. This is particularly interesting given markets’ recent infatuation with exotic emerging countries.
Three reasons why long-term interest rates will continue to fall
The downwards movement of government bond yields has picked up in recent weeks revealing investors’ growing indecision, whereas the consensus had promised them just the opposite. We see several reasons for the drop in long rates which, in our opinion, is not a temporary phenomenon and could, in fact, continue:
– The market is right not to buy the Fed’s outlook
– The ECB is beginning a long process of unconventional monetary policy, which, given the growth slowdown, should benefit bond markets more than equities.
– Global disinflation is gaining ground
France: survey results are converging… for the worst
Distortions from the end of the year between PMI polls, foreshadowing recession, and INSEE data, mostly reassuring, have evened out. Good news for starters, as PMIs made up for their lag, the present convergence has become worrying: all surveys, across the board, paint a decidedly ugly picture.And for two reasons:
1) the return of consumer concerns,
2) the lack of an export recovery.
The whole picture is cause for concern. After zero growth in the first quarter, the downturn of the most recent indicators accentuates the risk of a fresh – and sustained – fall in economic activity. The more-or-less consensus forecast of 1 % French growth on average is now very “passé”. In fact, French growth will struggle to do better than 0.5% this year! This is very bad news, for France and the rest of the euro area.
“Our currency, your problem”
Things are a little clearer since Mario Draghi’s press conference: the ECB considers the euro’s strength a deflationary risk factor. It is likely to move as a result, albeit in a measured manner starting in June then increasingly so thereafter if necessary, which will probably be the case. Against a backdrop where most other central banks are implementing monetary policies aiming to depreciate their currencies, the hesitancy of the ECB was no longer tenable. So that was a bit of good news but let’s not get ahead of ourselves: by taking such action Mr. Draghi is trying to give the other central banks a taste of their own medicine, making life hard on the Fed, BoJ and BoC, and not the other way around