Macro Weekly – A lot of distraction

by: Han de Jong

  • Politics, trouble in the banking sector and many central bankers speeching are attracting lots of attention
  • Meanwhile, eurozone inflation rises, German business confidence jumps and US data suggest a modest cyclical improvement
  • Japanese GDP data: all wrong?
Macro-Weekly-30-Sep-2016.pdf (128 KB)

It is just a few weeks until the US elections. The first televised debate between the two main candidates was seen to be won by Hillary Clinton. But given the large number of undecided voters, the lack of general popularity of either candidate and the experience with the Brexit vote in the UK, it is wise to be cautious on calling the outcome. I get many questions about future US trade policy. Both candidates are vocal in their support for protectionist measures. This is worrying in my view as the worst that could happen to the global economy is a reversal of trade integration. The question is if a new president will follow policies consistent with the election rhetoric.

I would assume that Donald Trump means what he says on international trade and that he will follow a protectionist agenda. As far as Hillary Clinton is concerned, I think she is a free trader at heart and only talks a protectionist line as that is what voters want to hear. As a result, I would not expect her to follow a protectionist agenda if elected president.

Another worrying view Donald Trump holds is that the Fed is politicised. It is not only Trump himself, but also others in his camp who have come out to claim that the Fed is essentially a supporter of the Democrats and that their policies have been all wrong and at the expense of the common citizen. This raises the risk to Fed independence should Trump become president, not something financial markets should like.


A lot of attention has also been focussed on the woes of Deutsche Bank. This is not the place to comment on the specifics of Deutsche’s prospects. Suffice it to say that the German lender is a systemically important financial institution. It is several times larger than Lehman Brothers was before it got in trouble. Should the problems at the bank become too big for management to handle, one has to be aware that a new regulatory regime exists aimed at protecting tax payers. This new framework is untested under such conditions. And it remains to be seen to what extent they contribute to financial stability or actually lead to instability. At this stage, however, any talk of that is premature.

Central bankers

Central bankers were out in full force in recent days to share their opinions. ECB boss Mario Draghi met with German MPs defending the ECB’s actions and the MPs criticising the bank. Presumably, neither side was particularly convinced by the other.

Fed chair Janet Yellen testified before Congress. This also got some politics thrown in as Yellen was questioned about donations Fed governor Lael Brainard has made to the Clinton campaign. While this is not illegal, it was argued that it shows a political bias in the Fed.

Other than that Yellen did her best to come across as balanced. From what she said and what other Fed speakers have said in recent days, I conclude that the Fed is likely to raise rates in December, bar an adverse turn in economic data.

Recent US data has been reasonably good. Regional measures of business confidence have become a little more consistent, showing an improvement. The latest set of durable goods orders show that business investment is likely to pick up somewhat. Non-defence capital goods orders (ex air) have risen in three consecutive months to August, after five months of weakness.

Ifo surprise

The authoritative Ifo index of German business confidence surprised positively, showing a large jump in September. The rise in optimism was broad based. Perhaps the most remarkable and encouraging was the strong improvement in the ‘expectations series’ in the manufacturing sector. It has not registered such a large monthly rise since the initial phase of the recovery after the financial crisis in 2008. It is not so easy to determine what is going on here. Some comments suggest that it is due to abating fears about Brexit, but I find it hard to believe that can be the whole story. If the strengthening of optimism is sustained in the months ahead, I would assume it is simply the result of an improving global industrial cycle. As I have argued before, some Asian data is consistent with this view. The most recent indictor to support this view is Taiwanese industrial production. In line with the country’s export orders, production rose strongly in August.


As far as Brexit fears are concerned, UK data released recently confirms abating fears. Both consumer confidence and the Lloyds business barometer improved convincingly in September. Long-term worries about Brexit consequences may be more difficult to shake off than the short term ones. Key players in the debate still appear not in agreement how the Brexit should take place with some prominent politicians arguing for a ‘hard Brexit’. It will be some time before we get clarity on these issues.

Eurozone inflation up

Headline inflation in the eurozone edge up from 0.2% yoy in August to 0.4% in September. This will be welcomed by the ECB. The rise was expected as the drop of oil prices over a year ago is dropping out of the year-on-year comparisons. Headline inflation should pick up further in the months to come. More important, core inflation was unchanged at 0.8% yoy, a sign that underlying inflation pressures remain extremely subdued.

Japan data all wrong?

A Cabinet Office study group was set up in Japan to assess the accuracy of GDP data. There had been some inexplicable inconsistencies between the GDP data and other indicators in recent year. A Bank of Japan report suggests that GDP growth in 2014 has actually been around 2.4%, much higher than the 0.9% contraction the official numbers are saying. As GDP data is an important guide for economic policy this Bank of Japan finding is highly disturbing. Nobody expects the data to be completely correct, but a gap of over 3% is much bigger than the margin of error and leads to completely wrong conclusions. If these problems apply to Japanese data, one wonders to what extent they apply to other countries as well. My guess is: not so much. I have two considerations. First, there would not appear to be major inconsistencies between GDP data and other economic data in most countries. And, second, the problems are reportedly caused by the surveys on which the data is based and the ageing of the population. But in terms of age profile, Japan is well ahead of other countries.