Macro Weekly – Is Europe stagnating?

by: Nick Kounis , Roy Teo

Macro Weekly - 18 August 2014 - Is Europe stagnating.pdf ()
  • Big Picture: The eurozone economy ground to a halt in the second quarter. The report has once again shun a critical spotlight on Europe’s economic performance. We think that the sluggish Q2 number likely overstates the weakness of the economy. In addition, fundamentals point to resumption of growth in the second half, despite risks related to the Ukraine crisis. Still, the eurozone’s recovery remains disappointing, and policymakers should do more to strengthen economic growth.
  • Rates: German government bond yields hit yet another record low following the eurozone GDP numbers. The weak eurozone GDP data triggered a further pricing in of QE by the ECB, while there was a further downward adjustment of inflation expectations. As long as survey evidence holds up in August, we think that the central bank will refrain from QE in the next few months, as it still has to roll out the TLTROs. ABS purchases look more likely than large-scale QE.
  • FX: A slew of weak economic data across the globe has renewed market expectations that monetary policies will remain accommodative for a while longer. This was the main driver for currency markets last week as geopolitical concerns stabilised. Emerging market currencies mostly recovered as investor sentiment improved. Speeches from US Federal Reserve Chair Yellen, European Central Bank President Draghi and Reserve Bank of Australia Governor Stevens this week are likely drivers for currency markets.