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Weekly

Mind your Back!

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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?

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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

After the ECB’s big flop, is there a life raft to cling to?

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Too little too late or simply lacking credibility, the ECB’s announcement was a flop. While for many observers, the measures were supposed to drive the euro down, give stock markets a shot in the arm (particularly banking and cyclical stocks) and increase the level of long rates by brightening the euro area outlook, by all accounts, they failed to win over the markets. The stock markets are stumbling, bank stocks sagging, bund yields have hardly budged and the euro is about where it was prior to the June 6th announcement. Of course, all is not lost but it seems that we’ll have to look elsewhere: the US, China or even Iraq, which, at the time of publication, was the most pressing concern. Everywhere markets look, the rosier scenario is simply not materializing.

Ground Zero

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Will the raft of measures announced by the ECB be enough to restore growth in the euro area? The answer will depend on the following three factors:

– The effective size of the package,

– The ability of demand for credit to be stimulated,

– The return of a more favorable international economic context, which provides an outlet for improved competitiveness that has been at the origin of deflationary risk.

The markets have been circumspect with regard to these measures because none of these factors are guaranteed to materialize at this point.

Three reasons why long-term interest rates will continue to fall

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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

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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”

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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

With Americans taking care of their health, can the Fed relax?

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In the first quarter, Americans allocated over half of the increase in consumption spending to healthcare, which represents an increase of 10% on an annualized basis compared with previous quarter. Without this acceleration, real household consumption would not have increased 3%, as published the day before yesterday, but rather a mere 1.3%; GDP would not have flat-lined but fallen 1.0%, all other variables held constant.

A detailed analysis of these numbers undoubtedly curbs the newfound optimism resulting from the announcement of a 4.6% increase in spending on services in the first quarter and the publication of an encouraging April jobs report. The Fed is not likely to be able to ignore this news.