Eurozone growth is robust Sentiment indicators and the drivers of final demand all point towards ongoing strength At some point however, growth will slow down Whether this will cause a jump in uncertainty very much will depend on the financial environment On several occasions, IMF managing director Christine Lagarde has stated that it s time to fix the roof when the sun is shining. Judging by the updated growth forecasts released earlier this week, the sun will keep on shining. The IMF expects.% growth in the eurozone this year and.% next (we forecast.% and 1.8%). Apart from doing roof repair, prolonged good economic weather should also be used to reflect on what will happen when seasonal change brings cooler temperatures. Theoretically, slower growth increases economic uncertainty: households and companies wonder how the slowdown could impact their income, asset values and earnings expectations. Resilience will depend on the job one is doing or the business you re in. A common way to visualise uncertainty consists of calculating the dispersion of daily returns of the components of a stock market index. When the economic outlook worsens, the share price of companies will react in different ways depending on the resilience of earnings. Using this approach, the chart shows the return dispersion of the Eurostoxx 5 constituents as a proxy for eurozone uncertainty. Comparing its evolution with the Markit manufacturing PMI, a measure for the eurozone business cycle, shows that the relationship is not stable: cyclical slowdowns sometimes see an increase in uncertainty but not always. There must be other factors at play. An obvious place to look is the interest rate environment considering that share prices depend EUROZONE: UNCERTAINTY AND THE BUSINESS CYCLE PMI Manufacturing Eurostoxx 5 volatility 1y yield spreads (lhs) Euro high yield & German 55 3. 5.5 5. 1.5 1. 35.5 3. 1 3 5 7 9 11 13 15 17 Eurostoxx 5 volatility = -day moving average of the cross-sectional standard deviation of daily returns of the index constituents Sources : Thomson Reuters, Markit, FRED, BNP Paribas on the earnings outlook, the level of the risk free rate and the required risk premium. To that end the high yield bond spread versus Bunds has been added to the chart. It is a measure of financial frictions and investor risk appetite or aversion. There is a very high correlation between the equity return dispersion and the high yield bond spread. This doesn t come as a surprise: more often than not, news which is bad for the shareholder will tend to be bad for the corporate bond holder as well. From a macroeconomic perspective this result implies that economic slowdowns do not necessarily cause a big increase in uncertainty: fluid financing conditions or the appearance of financial frictions will make a big difference. When the sun is shining we should build a dashboard to track the change of seasons. Financial data have as much a role to play as traditional activty and sentiment indicators. 5. 3.5 5 15 1 5 Markets Overview Pulse & Calendar Economic scenario
Ecoweek 18- // January 18 economic-research.bnpparibas.com The essentials Week 19-1 18 > 5-1-18 CAC 5 57 } 5 81 -.8 % S&P 5 81 } 839 +1. % Volatility (VIX) 11.3 } 11. +.3 pb Euribor 3M (%) -.33 } -.33 +.1 bp Libor $ 3M (%) 1.7 } 1.75 +.8 bp OAT 1y (%).7 }.77 +5. bp Bund 1y (%).5 }.55 +.8 bp US Tr. 1y (%). }.3-1.5 bp Euro vs dollar 1. } 1.5 +.3 % Gold (ounce, $) 1 333 } 1 359 +1.9 % Oil (Brent, $) 8. } 7.8 +3. % Money & Bond Markets Interest Rates ECB.. at 1/1. at 1/1 Eonia -.3 -.35 at 1/1 -.37 at /1 Euribor 3M -.33 -.33 at 5/1 -.33 at 1/1 Euribor 1M -.19 -.19 at 1/1 -.19 at /1 $ FED 1.5 1.5 at 1/1 1.5 at 1/1 Libor 3M 1.75 1.75 at /1 1.9 at 1/1 Libor 1M.3.3 at /1.11 at 1/1 BoE.5.5 at 1/1.5 at 1/1 Libor 3M.53.53 at /1.5 at /1 Libor 1M.79.79 at /1.7 at 3/1 Commodities Exchange Rates 1 y bond yield, OAT vs Bund Euro-dollar CAC 1. 1..8... highest' 18 lowest' 18 Yield (%) Spot price in dollars lowest' 18 18( ) Oil, Brent 7.8. at /1 +.% Gold (ounce) 1 359 1 33 at 1/1 +.% Metals, LMEX 3 35 3 3 at 9/1-3.5% Copper (ton) 7 11 883 at 3/1-5.% CRB Foods 339 33 at 1/1-3.% w heat (ton) 1 155 at 1/1 -.% Corn (ton) 131 1 at 8/1-1.% Variations 1 = 18 USD 1.5 1.5 at 5/1 1.19 at 9/1 +.1% GBP.87.89 at /1.87 at /1-1.5% CHF 1.1 1.18 at 15/1 1.1 at 5/1 -.% JPY 135.9 13.9 at 5/1 133. at 1/1 +.5% AUD 1.5 1.5 at 5/1 1.53 at 9/1 +.% CNY 7.9 7.9 at 5/1 7.78 at 8/1 +1.3% BRL 3.93 3.98 at 1/1 3.87 at 8/1-1.% RUB 9.73 9.73 at 5/1 8. at 9/1 +.9% INR 79.5 79.5 at 5/1 75.9 at 8/1 +3.7% Variations.77.55. 1 17 18 Bunds OAT Equity indices 1. 1.17 1.1 1.7 highest' 18 lowest' 18 AVG 5-7y.9.5 at 18/1.3 at 1/1 Bund y -. -.59 at 11/1 -. at 1/1 Bund 1y.55.55 at 5/1. at 1/1 OAT 1y.77.77 at 5/1.5 at 8/1 Corp. BBB 1. 1. at 1/1 1.17 at 8/1 $ Treas. y.8.8 at 5/1 1.89 at 1/1 Treas. 1y.3. at /1.1 at 1/1 Corp. BBB 3.9 3.7 at /1 3.59 at 1/1 Treas. y.58.59 at /1. at 1/1 Treas. 1y 1.5 1.5 at 5/1 1.3 at 1/1 1.5 1 1 17 18 1 17 18 5 5 81 5 5 5 8 1. 3 8 1 17 18 1 17 18 1y bond yield & spreads.% Greece 38 pb 1.9% Italy 13 pb 1.9% Portugal 113 pb 1.1% Spain 8 pb.77% France pb.75% Belgium 19 pb.75% Ireland 19 pb.7% Austria 18 pb.73% Finland 18 pb.% Netherland 11 pb.55% Germany Oil (Brent, $) Gold (Ounce, $) CRB Foods 7 71 1 38 1 359 1 3 37 1 3 5 38 1 8 8 3 1 35 1 3 3 1 1 1 1 33 3 1 8 38 highest' 18 lowest' 18 Index highest' 18 lowest' 18 18 18( ) CAC 5 81 5 5 at /1 5 89 at /1 +3.% +3.% S&P5 839 839 at 5/1 7 at 1/1 +.% +.% DAX 13 98 13 5 at 3/1 1 871 at /1 +.9% +.9% Nikkei 3 9 1 at 3/1 75 at 1/1 +.% +3.5% China* 99 1 at /1 88 at 1/1 +11.9% +7.5% India* 38 1 at 3/1 at 1/1 +.1% +.3% Brazil* 38 38 at 5/1 3 at 1/1 +9.9% +11.5% Russia* 91 91 at 5/1 at 1/1 +11.% +9.9% Variations 3 1 17 18 * MSCI index 339
Ecoweek 18- // January 18 economic-research.bnpparibas.com 3 Eurozone: credit pulse Bank loans, expanding continuously since 15, have experienced a gradual stabilization in their growth rate, which slightly reduces their impulse. However, cross-country dispersion of NFC loan developments has declined overall in the eurozone. Conditions, which are already very supportive, still benefited from the unconventional monetary policy measures and further improved in the early winter. 8 % ** Credit impulse* - - - -8 Households NFC -1 Private sector Real GDP, %, y/y -1-1 5 7 8 9 1 11 1 13 1 15 1 17 18 Real GDP Growth vs Bank Lending 1 Annual growth rates**, % 1 Households NFC 1 Private sector Real GDP, %, y/y 1 8 - - - 5 7 8 9 1 11 1 13 1 15 1 17 18 8 - Net change ECB Bank Lending Survey, Expected (firms) Credit standards to firms Credit demand of firms Real GDP, %, y/y [RHS] - - 5 7 8 9 1 11 1 13 1 15 1 17 18 *Credit impulse is measured as the annual change of the annual growth rate of MFI loans ** Adjusted for securitizations Source: ECB, ECB BLS, BNP Paribas calculations - - 5 5 Net change ECB Bank Lending Survey, Expected ( households) -5 Consumer credit demand Consumer credit standards- Housing credit demand -5 Housing credit standards - Rea lgdp, %, y/y [RHS] -75-5 7 8 9 1 11 1 13 1 15 1 17 18 Indicators preview A very heavy schedule next week with, in the US, the FOMC meeting, the ISM and the labour market report. Several important releases in the eurozone: GDP for the th quarter of 17, European Commission economic sentiment, Markit PMI. Date Country/Region Event Period Survy Prior 1/9/18 United States Personal Income Dec.3%.3% 1/9/18 United States Personal Spending Dec.%.% 1/3/18 France GDP QoQ Q.5%.% 1/3/18 Eurozone Economic Confidence Jan 11. 11. 1/3/18 Eurozone GDP SA QoQ Q.%.% 1/3/18 Germany CPI EU Harmonized MoM Jan -.7%.8% 1/3/18 United States Conf. Board Consumer Confidence Jan 13. 1.1 1/31/18 United Kingdom GfK Consumer Confidence Jan -13-13 1/31/18 France CPI EU Harmonized MoM Jan -.5%.% 1/31/18 Eurozone Unemployment Rate Dec 8.7% 8.7% 1/31/18 United States FOMC Rate Decision (Upper Bound) 1/31/18 1.5% 1.5% /1/18 Eurozone Markit Eurozone Manufacturing PMI Jan 59. 59. /1/18 United States ISM Manufacturing Jan 59. 59.7 //18 United States Change in Nonfarm Payrolls Jan 183 18 //18 United States University of Michigan Sentiment Jan 95. 9. Sources: Bloomberg, BNP Paribas
Ecoweek 18- // January 18 economic-research.bnpparibas.com UNITED STATES GDP growth is accelerating along with the recovery in the emerging countries and reinforcing world trade. However the fiscal outlook remains uncertain. A fiscal stimulus still is possible, but it would not be implemented very rapidly. Potential effects are thus uncertain. The labour market is as buoyant as ever. Still, the support to households disposable income is not as strong as it looks as wage inflation remains limited. With inflation relatively muted at this stage of the cycle, the Fed is in no rush to increase rates. We forecast the Fed Funds target rates to come at 1.75% in Q1 18 and at.% by mid-18. CHINA Economic growth has started to moderate during the fall and this trend should continue in the coming quarters. Despite the slowdown, the central bank will have to continue to act to encourage the deleveraging of financial institutions and corporates and reduce financial instability risks. The authorities should maintain an expansionist fiscal policy in the short term. The tightening of domestic credit conditions, restructuring measures in the industry and the correction in the property market will weigh on economic activity. Meanwhile, exports and private consumption should be supporting factors. EUROZONE The recovery is getting stronger and broader: the dispersion of economic performances among member states is receding. Despite the cyclical recovery, core inflation still shows no sign of a convincing upward trend. For the recovery to enter its inflationary phase the economy has to improve further, until the point at which wages will tend to increase. The level of slack remains uncertain though. Broader measures of labor underutilization reach 18%, double the level of the current unemployment rate. The ECB is expected to remain cautious. FRANCE A clear growth acceleration is underway. Higher rates of growth should resume. Households consumption is supported by the jobs recovery but restrained by the upturn in inflation. Investment and exports dynamics are favourable. Risks lie slightly on the upside. We expect the output gap to slowly narrow and the unemployment rate to progressively decline, containing the rise in inflation. Fiscal policy should continue to combine growth supportive measures and consolidation ones. The fiscal deficit should not be a lot more reduced but it should remain below the 3% threshold. SUMMARY GDP Growth % 17 e 18 e 19 e 17 e 18 e 19 e Advanced.. 1.7 1.7. 1.7 United-States.3.9 1.9.1.3. Japan 1.8 1.5..5 1..8 United-Kingdom 1.5 1. 1.8.7.8. Euro Area.. 1.8 1.5 1.7 1. Germany..8.1 1.7 1.7 1.8 France 1.9. 1. 1. 1.7 1.7 Italy 1. 1.5 1.1 1. 1. 1.5 Spain 3.1...1 1.8 1. Netherlands 3..3 1.7 1. 1.7 1.8 Emerging.5.8.9 China.9..5 1..3.5 India. 7.5 7.8 3... Brazil 1. 3..5 3.5 3.5 3.9 Russia 1.7 1. 1.5 3.7.. Source : BNP Paribas Group Economic Research (e: Estimates & forecasts,) INTEREST RATES & FX RATES Inflation Interest rates, % 18 ####### ####### End of period Q1e Qe Q3e Qe 18e 19e US Fed Funds 1.75..5.5.5.5 Libor 3m $ 1.55 1.7 1.8 1.85 1.85 1.75 T-Notes 1y..75.75 3. 3..9 Ezone ECB Refi......5 Euribor 3m -.3 -.3 -.3 -.3 -.3.1 Bund 1y.5.75 1.1 1.5 1.5 1.8 OAT 1y.95 1. 1.3 1.7 1.7. UK Base rate.5.5.5.75.75 1.5 Gilts 1y 1.5 1.55 1.9.3.3.3 Japan BoJ Rate -.1 -.1 -.1 -.1 -.1 -.1 JGB 1y.8.8.8.8.8. Exchange Rates 18 End of period Q1e Qe Q3e Qe 18e 19e USD EUR / USD 1.7 1.3 1. 1.8 1.8 1.3 USD / JPY 1 18 1 17 17 13 GBP / USD 1. 1.37 1. 1.5 1.5 1.8 USD / CHF.9.9.9.9.9.9 EUR EUR / GBP.91.9.89.88.88.88 EUR / CHF 1.17 1.18 1.19 1. 1. 1.5 EUR / JPY 135 133 13 137 137 13 Source : GlobalMarkets (e: Estimates & forecasts)
BNP Paribas (15). All rights reserved. Prepared by Economic Research BNP PARIBAS Registered Office: 1 boulevard des Italiens 759 PARIS Tel: +33 () 1..98.1.3 Internet : www.group.bnpparibas.com Publisher: Jean Lemierre. Editor: William De Vijlder