Monday, June 1Hamish Risk | May 31, 2015
Much of the end-of-week, and looking-ahead-to-this week, analysis has focussed on Friday’s US downward revisions to Q1 GDP -which came in better than expected – and the overall mixed data picture that is making the timing of rates hikes still difficult to call. Obviously, Friday’s non-farm payrolls is big focus for analysts too, where a strong report is essential if thoughts of a Q3 Fed ‘lift-off’ are to stay alive. As for coverage on the Eurozone, a lot of the research we’re reading is starting to now focus on how long it might take – and what the indicators will be – for when the ECB decides that QE has achieved its goals, after recent data suggests confidence and credit growth is growing nicely. It may still be early days of course, but there appears to be some rigorous research already under way, as we highlight one such example in today’s briefing. Some analysts expect ECB president Mario Draghi will most likely claim credit for all this when he meets the press in a few days’ time following the ECB’s upcoming policy meeting. Finally, China continues to garner lots of attention, which we highlighted a few times last week. There are some very good arguments being made on both sides of the coin as to the sustainability of the recent rally, and last week’s rout.
US rates Wells Fargo
1. Why the US yield curve should flattenIn recent weeks the steepening of the US yield curve has raised questions about the future path of interest rates. In their Interest Rate Weekly, Wells Fargo, argue that the shape of the curve isn’t all about when the Fed begins raising rates, other factors are also playing an important role too. Furthermore, the steepness of the curve is now likely to turn much flatter in the summer months, as the market moves closer to the first Fed hikes. The most interesting point about this view is that there are two distinct drivers for the short-end and for the long-ends of the curve, and only one of those is the Fed, and that the short-end. Capital flows hold the key for the long-end.
European growth Credit Suisse
2. Europe’s recovery: net-migration and womenAs the European economic recovery gains steam, the closing of the output gap is likely to come into greater focus in assessing monetary policy responses, writes Credit Suisse. And while it may take some time to close, given the economy has started to grow from a very low base, it’s important to get a handle on the assumptions on which potential output is based, and whether they are currently too cautious, or overly optimistic, in order to assess future monetary policy responses. Credit Suisse’s economics team is thus putting together a series of publications in which they attempt to establish if the euro area’s meagre potential output, estimated around 1% by consensus, is warranted. In this piece, the second of the series, they focus on the euro area’s potential supply of labour. This research provides some very useful insight into the drivers of labor supply in the Euro area – a region hampered by its aging demographics – such as net-migration and pension reforms and incentives that could promote female labour force participation. Further articles will look at capital stock and total factor productivity.
Emerging markets Deutsche Bank
3. EM stuck in limboEM economies are failing to gain traction in a context of subdued global growth and uncertainty around Fed rate hikes, writes Deutsche Bank. They think the key downside risks being driven by a China slowdown, a stronger dollar and rising rates, or cheap oil pressuring producers. Deutsche’s EM research team have produced a very useful info graphic on page 21 of the report that looks at how this theme will play out in the key EM markets, with worst impacted Turkey, and with the bright spot being India.
4. Is Turkey entering an inflexion point?With the Turkish elections on Sunday, we thought it was worth flagging up this interesting piece of research from UBS that asks whether the election will mark an inflection point in Turkish politics. The piece outlines 3 key election result scenarios, that revolve around whether HDP, the Kurdish Party, is able to cross the 10% hurdle to qualify for parliament, and how that impacts the make up of the make of the parliament and the ability of the incumbent party, AKP, to push for constitutional change. The political risks are just one of the risks facing the Turkish economy, and UBS touches on these and key priorities for structural reforms. Finally, UBS presents how various scenarios are likely to play out across all asset classes.
5. Time for NOK to buck the rising USD trendThe Norwegian Krone has certainly been one of the major casualties of the USD strength in recent times, losing 6% against the dollar since mid-May. FX strategists at Unicredit now say that its time for the Krone to appreciate, and in this research note, they outline some sound reasons for this, regardless of USD strength. This trade isn’t just because of the recovery in oil prices either, interest rate differentials have a part to play as well, and Unicredit provide some valuable context on their historical connect to NOK.