There is a link between yesterday’s article and this as I note a side-effect of the US Dollar Index pushing above 101 overnight. In fact it has made 101.25 the highest since 2003. This means that the morning espresso of European Central Bank President Mario Draghi will taste even better as he watches the Euro dip below 1.06 versus the US Dollar. He may even take the time to note that the Euro has fallen against the UK Pound £ which has regained 1.17 today. Only the Japanese Yen may interrupt his bonhomie and that is because it has fallen even faster. Of course there is still a fair bit of ground to be lost for the Euro to get back to where it was earlier in 2016 but Mario will be pleased to see it heading in what he considers to be the right direction. He will love this from @RANsquawk which even manages a reminder of his alma mater.
EUR/USD has seen the longest losing streak since its inception having fallen 4.93% and Goldman Sachs expects parity by the end of 2017.
This morning’s release will also give Mario something to smile about.
The current account of the euro area recorded a surplus of €25.3 billion in September 2016 . This reflected surpluses for goods (€30.3 billion), services (€4.8 billion) and primary income (€4.2 billion), which were partly offset by a deficit for secondary income (€14.0 billion).
A dip but the monthly numbers are erratic and the annual figures are very strong.
The 12-month cumulated current account for the period ending in September 2016 recorded a surplus of €337.5 billion (3.2% of euro area GDP), compared with one of €322.5 billion (3.1% of euro area GDP) for the 12 months to September 2015.
He enjoys recounting stories about the basic underlying strength of the Euro area economy although of course he will move swiftly on before people point out that with a falling currency and current account surplus he is exporting deflation to others.
Here the going gets tougher as Mario has pointed out in a speech in Frankfurt this morning.
Since the onset of the global financial crisis, 2016 has been the first full year where GDP in the euro area has been above its pre-crisis level. It has taken around 7.5 years to get there.
There is also something revealing in the language used here.
The economy is now recovering at a moderate, but steady, pace.
If we move to the Eurostat release we see the problem here.
Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) and by 0.4% in the EU28 during the third quarter of 2016, compared with the previous quarter
Firstly the Euro was supposed to be a triumph but yet again it has underperformed the other nations in the European Union. Then we get the “moderate” bit as it has gone 0.3% twice now but you might question the “steady” if you note it went 0.5%, 0.5% before that. With negative interest-rates and 80 billion a month of QE surely we should be seeing an acceleration not a slowing? But as ever reality is not a friend here as I note this description of the slowing.
allowing the recovery to gather steam,
There is a genuine success in the first part of the quote before as we also get an interesting way of analysing the drop in this quarters economic growth for Germany to 0.2%.
And the recovery has become more broad-based, with less difference in economic performance across countries.
Also progress in boosting inflation is as slow as a Geoffrey Boycott innings.
Euro area annual inflation was 0.5% in October 2016, up from 0.4% in September…….. A year earlier the rate was 0.0%
Care is needed here as whilst it is official policy to boost inflation I think it is a bad idea. But returning to the official line this is happening more slowly than expected and hoped. Also whilst I am no great fan of core inflation measures the ECB will have spotted this. From @fwred.
Short-term dynamics in ECB’s ‘super core’ inflation measure look worrying, down to 0.85% (3rd lowest print ever).
Wages growth seems to be underperforming as well.
There are all sorts of problems here but then apparently not.
The first development that gives us comfort is the improving solvency of the banking sector……. Common Equity Tier 1 ratios in the euro area have improved substantially, rising from less than 7% for significant banking groups in 2008 to more than 14% today.
Or maybe there are.
may also have created some uncertainties, for instance over steady state capital levels, which are reflected in bank share prices.
Of course there are dangers in viewing things too much via bank share prices especially in the case of Monte Paschi which bounces around like the penny (Euro cent) stock it now is. But of course there is food for thought in the world’s oldest bank being a penny stock especially after so many bailouts. The outlook for profits is “challenging”.
Even though the euro area banking system is today more resilient, its profitability remains a challenge – one that is weighing on bank share prices and raising the cost banks face when raising equity.
We are getting something of a swerve here as we were previously told that negative interest-rates would be no big deal for bank profitability.
If we move to the lending figures then I will be watching the next set closely because whilst we have seen some growth that looked like it was fading in the last series as we wait to see if it was an aberration or a new phase.
In spite of the fact that the ECB has continued with its 80 billion Euros a month of bond purchases a month, bond prices have fallen recently and yields risen. For example Italy finds itself with a yield of 2.12% on its ten-year bond and Germany 0.3% after a period where it was patd to borrow even at that maturity. There are still quite a few negative bond yields at the shorter maturities but there have been shifts away from this. Perhaps the most exposed is Portugal with its 3.82% ten-year yield and sizeable national debt. As an aside some seem to be more equal than others and France in particular in the bond buying. As even in the Euro area we see that we are promised rules but get something rather different.
But as I have written before this gives the ECB an opportunity to act again.
So even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support.
We arrive at a type of groundhog day as I note that this time last year we were discussing monetary tightening in the US and a Euro area easing. Of course the US Federal Reserve has spent all of 2016 promising this and not delivering and the ECB move will be more minor but nonetheless there are similar themes at play to last year. Rather than a “taper” I expect the ECB to extend its QE for another 6 months and for its committees to find more bonds it can buy. Of course it is really only can kicking and at well over a trillion Euros an expensive can at that but that is central banking these days.
Meanwhile if this from Reuters is any guide Mario may be able to stop worrying about further Chinese devaluations.
Chinese policymakers have been unfazed by the yuan’s recent slide, but are ready to slow its descent for fear of fanning capital flight if the currency falls too quickly through the psychologically important 7-per-dollar level, policy advisers said…..The yuan fell on Friday to an eight-year low of 6.8950 per dollar, extending a sharp decline in the past week and taking its fall so far this year to 5.8 percent. If maintained, it would mark the yuan’s biggest annual decline since the landmark revaluation in 2005.
Maybe they feel that is enough for now…..