On Monday, I record a podcast in French (here) on macroeconomic news of the previous week and on macroeconomic news expected for the week to come.
The translation in English of the podcast can be found below
What can we learn this week?
Companies’ surveys have shown, on average, a lower momentum in November.
In the United States, the PMI/Markit survey still shows a robust growth profile but with a weaker trend than during last spring.
This can also be read in production indices. The manufacturing production index published by the Fed was in October growing at the moderate pace. On a 3 month change basis, it was up by 2% compared to +7.2 % last June (annual rate).
As the inflation rate for October was stable for the third month in a row at 1.7%, there are no immediate incentives for the Fed to change its mind on monetary policy. No pressures for a rapid hike in its interest rates.
We had quite the same situation in the United Kingdom. The inflation rate was marginally up at 1.3% versus 1.2% in October but the core inflation rate was at the same level than in September (1.5%). Following Mark Carney, the monetary policy change expected at the end of 2015 is reinforced by the data.
In the Euro Area, the PMI/Markit index for the whole economy dropped, in November, below the 50 threshold (49.8 vs 50.4 in October). It’s the first time since July 2013. The manufacturing sector was expanding at a slower pace but the service sector was contracting (below 50) for the first time since August 2013.
Growth forecast for the 4th quarter cannot be strong
In Germany, the PMI/Markit index for the whole economy was a bit lower, in November, but was still above the 50 threshold (50.5 vs 51.6 in October). At 50, the manufacturing index showed stability of the activity.
In France, the PMI/Markit index for the whole economy was still downward trending in November (47.7 vs 48.2 in October). The manufacturing index was down (47.6 vs 48.5 in October) and the service sector index dropped to 47.75 vs 48.1 in October. The 4th quarter GDP growth is at risk
In China, the economic activity measured by the PMI/Markit/HSBC survey for the manufacturing sector was stable at 50 in November (vs 50.4 in October).
The Central Bank of China has decided, after these figures and October’s figures on industrial production and investment, to reduce its interest rates. The one year deposit rate was down 25bp at 2.75% and the one year lending rate was down 40bp at 6.4%.
But as the production price index is down by -2.2%, the real interest rate for indebted companies is close to 8%. It’s higher than real GDP growth meaning that the monetary policy stance is still restrictive. The Central Bank of China will have to reduce its interest rates again if its target is to reduce constraints on indebted companies.
On Central banks side, Mario Draghi, twice this week, said that there were still risks of deflation and that long-term inflation expectations could drift further downward. If decisions already taken by the ECB are not sufficient to create the required liquidity shock then the ECB could have a QE on other assets. It could be corporate bonds but this is not a good idea as there is not enough paper on the market. So the only asset that could be purchased on a large-scale is sovereign debt. If the second TLTRO is not a success on December the 11th then we have to expect an announcement at the first ECB meeting on January the 22nd.
In the United States, the Federal Reserve does not know exactly what to think. OK the US economy is following a robust trend but the global economy is still weak and adjustments on the labor market are not over. At the same time, the Fed has a communication problem with the “considerable time”. How to remove this sentence from the press release without changing immediately expectations on an interest rate hike? That’s the current questions. The low inflation rate this fall allows the US central bank to act later.
This week, three points have to be mentioned
- The IFO survey in Germany (Monday) and the Business Climate Index in France (Tuesday) in order to have a clearer view on the current business cycle after the PMI drop and the improvement of the ZEW survey in November
- On Friday, Eurostat will publish the flash estimate for the November inflation rate of the Euro Area (it was 0.4% in October). It will also release the unemployment rate for October
- Capital goods orders which are a part of the durable goods orders (Wednesday) in the US: Good proxy for corporate investment
We will also be attentive to the OPEC meeting, the 27th, the Juncker plan on investment, details on German GDP for the third quarter, the second estimate of the US GDP for the 3rd quarter (Tuesday) and of the UK GDP (Wednesday)
Have a great week