Will they rise or won’t they? There is no end to the uncertainty on the future direction of long-term interest rates. Impatience is growing as well, with, however, this paradox: the fear of being surprised by a precipitous drop in prices on the bond markets (i.e. rocketing long rates) contrasts with the long-held desire to see long rates increase, which would be a clear signal that economic conditions have improved. For nearly one year (since the start of the « taper caper »), the US market has been on edge. Now, the Bank of Japan has said it is concerned that Japanese bond markets are not taking the country’s new inflation context into account, worried about the effects should inflation finally wake up. These kinds of comments are surprising to say the least….
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Weekly
The last straw for the French economy
Either eight or nine countries in the euro area are probably in the grips of deflation. In response to the situation, the direction of economic policy will play a decisive role. It’s a foregone conclusion that the ECB will not take measures in the near term that will be aggressive enough to stem the onslaught of this plague. It will be up to fiscal and tax policies to take on this responsibility. By complying with the European Commission’s constraints, France risks plunging its economy into a deflationary abyss and with it, undoubtedly, all of the euro area.
Chinese slowdown: time to face the fatcs
Excuses for China’s poor external trade figures in March were in no short supply. Exports were down sharply for the second straight month, falling 6.6% compared with March 2013. February’s 18% cliff dive was chalked up to distortions from the timing of the New Year holiday; similarly, March data was said to be the result of abnormally strong results the year before. For the 11% slide in imports, falling commodity prices are to be blamed. So there is no need to worry, China is going through a rough patch but government stimulus is already righting the ship…
Central bank’s fight against underemployment
Janet Yellen’s insistence on the enduringly-soft job market in the US during her speech this week in Chicago and Mario Draghi’s unusual insistence on the risks associated with allowing high unemployment to remain at a high rate over a sustained period in the euro area were striking for reasons others than the quick succession of the two statements. What’s to be made of the messages?
Wind of change in Germany, and for Weidmann too…
While encouraging euro area PMIs in March convinced a number of observers that the ECB had made the right decision (i.e. perpetuate the status quo), the statement from the President of the Bundesbank has lent credence to our scenario of additional stimulus…if not immediately, at least in the not-too-distant future. Such a possibility sends a couple of messages: 1- The euro area is far from being in the clear, 2- German growth is losing steam, 3- The ECB will do more but only because the prospect of the euro area are in fact frail.
The appreciating euro or the competitive deflation trap
You heard it here first: the euro would not drop versus the dollar and could even increase. And here we are. During trading yesterday, the euro flirted with USD 1.40, its highest level since October 2011 after gaining in excess of 7% since the start of the year. This is a worrying development, which could erase nearly all of the support that improving global conditions have provided to exports.
Two reasons explain why our forecasts, unlike the market consensus, never strayed from the EUR 1.40/euro exchange rate in the past two years:
• the first is rooted in our skepticism with regard to 1) the consensus that the US economy is presumably in good health and 2) anticipations that the Fed would normalize its monetary policy in response to the expected improvement.
• the second is grounded in the side effects of the competitive deflation policies carried out by the EMU countries. The shrinking inflation gap between the euro area and the rest of the world, resulting from these policies, protects the currency’s purchasing power. Consequently, these policies offer de facto support to the euro, particularly versus the greenback whose value is automatically diluted by the massive scale of pump priming in recent years.
Therefore, it is hardly surprising that the recent disappointments on American growth have pushed the euro higher, especially since the ECB dashed all hopes of additional monetary easing last week.