China – The mortgaged future of the world’s biggest economy and the authoritarian temptation

During the five years of President Xi Jinping’s first term, Chinese economic growth was 7.1% p.a. on average, the lowest of the last 25 years, but the strongest of all emerging markets and even stronger when compared with developed countries. After climbing to first place in the global ranking in 2013, the Chinese economy has only widened the gap with the United States. Its GDP in purchasing power parity terms was 20% greater than that of the US in 2016. China has no lack of first-place distinctions. With more than 18% of the world’s GDP and a population of 1.4 billion, the highest in the world, China has taken first place in many areas as its economy has grown. And it is probably not ready to stop, even if its growth is showing structural decline.

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What if it’s not all about the Phillips curve?

Low inflation is focusing the minds of central banks, whose models are being challenged by an apparent anomaly, i.e. the lack of cyclical inflation. Since the reaction function of monetary policy is mainly based on the use of productive resources – first and foremost labour resources – it is understandable that the Philips curve’s current failure to work is highly troublesome. The Phillips curve has rarely exercised the minds of economists as much as it is doing today. A different approach – not looking at the supposedly known labour reserves represented by the unemployment rate, but on labour-market dynamics – could suggest a response to the current anomaly. If this approach is correct, there would be little reason to expect faster wage growth in the near future, at least – and surprisingly – in the economies furthest along the cycle, particularly the USA and UK. Lire la suite…

The Fed’s favored indicator, the US jobless rate, has fallen to 4.2%. But that’s not the whole story

Determining which way the US job market’s cursor is pointing after publication of the September report is no mean feat. Initially, the financial markets shrugged off the bad news of 30,000 job losses and focused on the good unemployment and wage figures. But uncertainty gradually came to the fore. This is because no indicator projected so much impact of September’s severe weather on US employment and by extension on US economic activity, until this report was published. In this context, and even though the members of the Fed are eager to increase the Fed funds rate, it is not clear that they will be able to cast aside the bad news of contracting salaried employment. Rather, they might have to wait for the next employment report, to be published on November 3, to obtain a clearer picture. Were they to take the initiative now, as their behavior in the last few days would indicate, the markets would be making a risky bet.

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Trump trade II – Still waiting for the big event

The US administration’s new tax reform plans were enough to prompt renewed hopes among investors for an ideal scenario: a combination of tax cuts – so positive for the US economy that they could allow the Fed to bring interest rates back to normal without damaging the equities market – and a dollar rally that would distribute part of the USA’s excess growth to the rest of the world. However, this scenario, which had already been widely priced in by the markets immediately after Donald Trump election, has little chance of happening, for both political and economic reasons.

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Long-yield conundrum – really?

The US central bank has confirmed that it will start to reduce its balance sheet from next month. Although some have gone so far as to call this a historic shift, it hardly seems to have affected the markets. Neither have projections from Fed members suggesting a further hike in the Fed funds rate by the end of 2017, which the market ended up ruling out during the summer. The market reaction has been minimal: 2-year yields have risen barely 3 basis points, and 10- and 30-year yields are up less than 5 basis points.

This ongoing inertia in bond yields is frustrating, particularly because it suggests that the markets have no faith in the Fed’s ability to do what it says. With economic data increasingly encouraging, how can we explain this paradox and what can we deduce from it for the next few months?

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Consumers on the sidelines of the recovery, but for how long?

With the upturn in business confidence, industrial investment and global trade, the international situation has felt like a new dawn in the last few months, prompting many economists to upgrade their forecasts, particularly for the eurozone. However, the one thing missing from this picture is good news from consumers who, with some rare exceptions, have been missing in action recently. Is this a temporary phenomenon or will it continue? The answer to this question will be the key factor determining the European scenario in 2018. Lire la suite…

Investment still, but still only investment

Our activity indicator fell back to 0.1 in August after jumping to 0.5 in July. Foreign trade figures deteriorated across the board and business climate indicators stopped improving, although there was a slight improvement in consumer spending in the USA and Japan and investment numbers remained very strong.

Our regional inflation indicators lost a little ground, except in the eurozone, where the indicator rose sharply.

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The argument that a weak dollar explains the outperformance of emerging markets is, well, weak

Since the beginning of the year, the MSCI Emerging Markets has advanced by 25%, and is now flirting with its August 2014 level. This follows two disastrous years during which the index lost up to 30% of its value. Even though it has been amplified by the weak dollar, this performance illustrates how emerging markets have come alive again over the past three months. In local currency, Brazil and Turkey, the most dynamic of them, have risen by 7-12%, while the vast majority of the others—Colombia, China, South Africa, Mexico, Saudi Arabia and Russia—have seen 4-8% rises. In other words, emerging markets have been more or less spared the upheavals affecting the developed world since the middle of the summer. This outperformance is often attributed to the beneficial effects of the decline in the dollar, but the real causes seem more complex. Let’s take a look.

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