While a couple of participants preferred a 50bps cut there were also several participants who favoured ‘maintaining the same rate’. Thus, the minutes offered little for the doves and continued to frustrate and drive Trump to twitter again overnight as he continues to see a Fed falling short of his suggested of 100bps of cuts over a ‘fairly short period of time… with perhaps some quantitative easing as well’.
As the dust settles after the rout in Argentina debt markets it appears some of the largest Emerging Market funds took the brunt of the collapse with returns dropping up to 3.5% on the day. This leaves many with a less than 1% return for the year to date. The question now; are they a buy at this juncture, we think not. The outlook for a US recession is increasing in probability and if that is an occurrence over the coming twelve to eighteen months the last place we think you want to be is in lower-rated assets as the spread widening that may occur could be punishing, hence our stance in longer maturity higher-rated assets.
Yesterday was all about economic data as US CPI came in a little higher than expectations and the German ZEW index came in at disastrous levels.
On the US CPI both overall and ex-food and energy indices came in up 0.3% with firmness broad-based although there is thought to be some impact from the tariffs in the data. The headline rate moved up from 1.6% to 1.8% YoY and the core rate up to 2.2% from 2.1%. Energy prices were strong as gasoline jumped by 2.5% but there was also surprising strength in used car pricing, apparel and medical care. We continue to monitor the data as our long-duration positioning is reliant on a relatively low inflationary outlook.
So to the German ZEW report…..Ouch. The current situation index came in at -13.5 from the -6.3 expected, bad enough but the expectations index which was expected at a lowly -28 came in at -44.1 from the prior months reading of -24.5. Now call us old fashioned if you want, but does Germany really need a hard Brexit, on top of the very obvious weakness in the manufacturing sector, we think not. Could be Boris’s timing is spot on.
Germany’s problem is that it produces very little energy. It imports 92% of its gas needs and a massive 98% of its oil needs. As such, Germany needs to step up efforts to secure a reliable supply of gas. With Germany weaning itself off of nuclear and coal power generation, natural gas must take up the slack, especially for its manufacturing sector.
Europe’s reliance on Russian gas is a good illustration of the important trading relationship between Russia and Europe. Gazprom estimate they supplied up to 34.7% of the gas consumed in Europe in 2017; Germany is the largest individual market. This it implies Europe’s approach to sanctions is necessarily different to the US. Although it is a different industry, last week the US eased the recent sanctions on Rusal, given the knock-on effects on European businesses, by extending the deadline to October for compliance. US Treasury Secretary Steven Mnuchin commented: ‘Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider RUSALs petition.’
Not that the German economy has fared poorly in the past four months, but the political stalemate that has endured over that period is finally moving forward - with Chancellor Angela Merkel’s conservatives (CDU/CSU) yesterday agreeing terms for a renewed ‘grand coalition’ with Martin Schulz and the SPD. But many on both sides still oppose the pairing which in some ways seems about as unmelodious as the UK’s Clegg-Cameron-Coalition of yesteryear. So in the typical drawn-out fashion a final vote on the deal, by half a million registered SPD members, is still required and expected by the 4th of March.
UK’s Industrial Production for November 2017 came in this morning as forecasted at 0.4% mom: the 8th consecutive rise. Last time this happened was over 23 years ago in May 1994. Moreover, because of revisions to prior months’ data the yoy Industrial Production growth read 2.5%, beating forecasts of 1.8%. And although we are a nation built more upon the service industry, such an improvement should at least help the 2017 GDP figure reach its 1.5% target, which was notoriously revised downwards over the course of last year, as stalled Brexit negotiations took their toll.
Today France celebrates la fête nationale (or Bastille Day) and Emmanuel Macron is hosting Donald Trump at the celebration: Perhaps in another demonstration of his intent to make a mark in international affairs as well as domestic policy. Once the festivities end the focus will no doubt return to Macron’s domestic agenda and how much of his policy rhetoric he is able to execute.
Markets are relatively quiet in anticipation of the main event of the next 24 hours – tomorrow’s Governing Council Meeting of the ECB in Frankfurt (or perhaps for some it is the new iPhone release and Apple keynote presentation later today). However, happenings on the other side of Germany are worth watching too, namely the state legislature win of the anti-establishment Alternative for Germany Party (AfD) in Mecklenburg, home state of ‘Mutti’ Merkel, pushing her Christian Democrat Party (CDU) down to third place. This could turn out to be a significant antecedent to a further rise in the populist anti-immigration AfD Party and even lead to a swing in federal elections in 2017. Current opinion polls put the AfD in the mid-teens which if held or increased would give them enough seats in parliament to encumber the usual grand coalition between the CDU and the Social Democrats (SPD). An even a small interloper in the Bundestag could obstruct political decision making at the heart and industrial engine of the Eurozone, just at a time when reforms and decisiveness may be needed across Germany and the Eurozone.
The IMF’s 19 July economic update contained yet another downward revision to their global growth estimates: now running at 3.1 percent for 2016 and 3.4 percent for 2017. The report noted “The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.” The growth forecasts for the UK saw a modest downgrade to 1.7 percent in 2016 but the 2017 estimate was slashed by 0.9 percent to 1.3 percent.