William De Vijlder

Group Chief Economist BNP Paribas

Eurozone: Cooler sentiment

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équilibre

Tipping points

US long-term rates rose sharply in early October, which brings to mind the sudden rise in early February. Upside surprises in terms of wages and inflation triggered February’s upturn, while the catalyst in early October was a strong rise in non-manufacturing ISM, an indicator that is usually not monitored very closely. That this indicator should have such a big impact already shows how nervous the markets are.

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US

Understanding the market’s volatility

In Wall Street stock market fell sharply again, pursuing a bearish trend initiated several weeks earlier. For an economic understanding of these trends, it is worth comparing equity market behaviour with that of the other asset classes, an exercise that is all the more difficult given that the correlation between asset classes tends to increase as pressures rise.

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media

Don’t mention the R word

People update their expectations more quickly when media coverage of a given economic topic becomes more intense. The change in the outlook is more important than today’s cyclical environment. Monitoring media coverage of economic slowdown risk will become particularly relevant against the background of a loss of momentum in survey data.

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eurozone tagcloud2

Strengthening the eurozone: prospect of progress at last?

The German finance minister has made a plea for the creation of a pan-European unemployment fund. Being able to borrow from the fund would require having contributed in the past as well as having met certain criteria in terms of economic policy. This form of risk-sharing would soften the impact of downturns and hence would be an important contribution to strengthen the eurozone.

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Global economy

Softer growth amid increased uncertainty

Growth has eased during the course of this year with the US being the major exception largely thanks to fiscal stimulus. The ensuing cyclical desynchronization has caused a broad-based appreciation of the US dollar, in particular versus emerging currencies. In some cases (Argentina, Turkey), the depreciation has been considerable due to country-specific developments. Global growth should continue to ease further next year and lead to a certain resynchronization: the impact of the US fiscal boost will wane, Fed tightening should start to have an effect and corporate investment is expected to slow, which in turn should weigh on world trade growth. Even in the absence of additional tariff increases, fears of more tit-for-tat measures could sap business confidence.

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investor risk appetite

A sudden drop in risk appetite

The eruption of US equity market volatility, with global spillover effects, is a delayed reaction to a rather significant increase in bond yields since the second part of August. Market-implied inflation expectations didn’t move that much so the rise in long term rates reflects an increase in real yields which in turn is related to strong growth numbers. Historically the relationship between weekly changes in yields and stock market performance is weak. This implies that one should focus on drivers of investor risk appetite and in particular signs of slower growth.

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Federal Reserve

United States: Data-dependent discomfort

Recent indicators point towards ongoing strong US growth. The non-manufacturing ISM index has caused a jump in treasury yields: data-dependent forward guidance implies that investors expect the Fed will not remain passive when data are particularly strong. Growth outside the US is slowing yet higher US yields have been mimicked across the globe. The dollar has also strengthened which is unwelcome news for corporates in developing economies which carry a lot of debt in USD.

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Fed: the Phillips curve is flat

Fed chairman Jerome Powell made important comments during his press conference. Fiscal policy is on an unsustainable path and lasting widespread tariffs would be bad for the US and the world. Monetary policy remains accommodative and data-dependent. Markets liked the dovish bias in the message.

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lightning

Ten years after: The uncomfortable new normal

Ten years after the collapse of Lehman Brothers, assessing to what extent major economies have fully recovered from the ensuing global financial crisis and the Great Recession very much depends on the perspective which is chosen. A mixed picture emerges: in most countries per capita real GDP is higher than before the crisis. But public sector debt hasn’t declined and growth has been slow, despite the expansionary policy stance. Policy rates are still (very) low and central bank balance sheets are vastly bigger. Policy leeway hasn’t been restored which implies that thinking about how to address the next downturn should be high on the agenda.

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Secteur manufacturier

Global economy: Decline of manufacturing sentiment slows down

Since the end of 2017, most countries have witnessed a decline of the Markit PMI index for the manufacturing sector. The pace of decline is slowing however in the past 3 months compared to the previous 3 months. This and the still high level of the index in many countries point towards an ongoing satisfactory growth pace.

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Fed: Avoiding the risks of stargazing

In assessing its monetary policy stance, the Fed pays attention to differences between realised and target inflation, unemployment and its natural rate, the policy rate and its neutral rate. Estimates of these reference points are highly uncertain. For this reason the Fed adopts a pragmatic approach based on data-dependence and gradualism: dovishness still prevails.

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Fed building

Fed: Market considers tightening cycle is well advanced

Recent Federal Reserve research shows that the slope of the short end of the yield curve is a more reliable indicator than the commonly used difference between 10-year and 1 or 2-year US Treasury yields. In a similar vein, we can look at the difference between the forward 3-month LIBOR rate and the spot rate. This difference has increased as of late. However, the level and shape of the entire forward curve show that the market is of the view that the Fed tightening cycle is well advanced.

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Picture William De Vijlder

EcoTV Week – 07/20/2018 – The psychology of protectionism

Corporate America is increasingly confronted with the consequences of tariff increases and is concerned that more is to come. This is a reminder that protectionism influences the economy not only directly via prices or changes in supply and demand but also indirectly because of increased uncertainty.

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question mark

Emerging ambiguities

Economic prospects have become more uncertain since the beginning of the year. Will the Federal Reserve be more aggressive faced with a US economy operating at full cruising speed? Does the flattening of the yield curve foreshadow a more-severe-than-expected slowdown in 2019? What will be the consequences of higher tariffs? These ambiguities have emerged at the same time as various pressures in the emerging countries.

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blue sky

Guarded confidence

Growth assumptions for the world economy remain at a high level in 2018 underpinned by a powerful combination of job creation, rising company profits and easy access to financing. Yet sources of concern have multiplied and others have become far more intense, leading to a sentiment of increased uncertainty. This is predominantly related to politics and economic policy, which leaves room for positive surprises, but if nothing changes, it could also result in ever stronger headwinds for consumer spending, business investment and international trade

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William De Vijlder

About William De Vijlder

Group Chief Economist BNP Paribas
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