Global Daily – Eurozone growth not enough to get core inflation going

by: Aline Schuiling , Nick Kounis , Maritza Cabezas

Eurozone macro: GDP growth stable at modest level in Q3 – Eurozone GDP growth stabilised at 0.3% qoq in Q3. The outcome was in line with the expectations. The details have not been published yet, but we think the composition of growth was roughly in line with Q2 as well, with final domestic demand growing modestly and net exports more or less neutral to growth. On an annualized basis the current rate of growth is closely in line to trend growth (around 1-1.25%), implying that no underlying inflationary pressures are building up. Looking forward, we expect somewhat stronger growth in the final quarter of this year and the first of next year, as global trade is gaining some strength, while domestic demand will continue to grow at around the same pace as in Q3. Subsequently, we see growth slowing down again in the course of 2017, largely because private consumption, which was the main pillar for growth last year and in the first half of this year, will slow down due to a combination of a jump in energy inflation and weak wage growth. Moreover, the stronger euro effective exchange rate will weigh on net exports. Overall, we expect eurozone GDP to grow by around 1.6% this year and 1.4% in 2017. (Aline Schuiling)


Global-Daily-Insight-1-November-2016.pdf (164 KB)


ECB view: Still no sign of underlying inflation – Eurozone HICP inflation edged up to 0.5% yoy in October from 0.4% yoy in September. Meanwhile, core inflation was stable at 0.8% yoy. This means that the rise in underlying inflation that the ECB is looking for before considering tapering its asset purchases remains absent. Indeed, the rise in headline inflation reflects the waning drag from past falls in energy prices. Looking forward, we expect headline inflation to rise further as energy prices actually start to have a positive effect on CPI inflation. This should drive CPI inflation to a peak of around 1.5% around the end of Q1, before drifting down during the rest of the year. Meanwhile, we think core inflation will remain flattish in the coming months, given subdued wage growth and falling ex-energy import prices. Indeed, the drivers of core inflation point more to the downside than the upside. Given the subdued inflation outlook, we think that the ECB will expand the duration of its QE programme from March 2017 currently to September 2017 in December. The ECB will also likely announce changes to its QE programme to increase the universe of eligible assets. We think it will likely decide to start buying bonds that yield less than the deposit rate (so far restricted) as well as buying bonds below the 2y maturity. Finally, we also expect that the ECB will relax the criteria to conduct substitute purchases. (Nick Kounis)

US elections: US presidential election day: the timeline – The US presidential elections are scheduled for 8 November. How quickly will we know the outcome? Candidates need 270 seats to win. The opening time for voting varies in each state. Voting starts between 6:00 and 7:00 (ET) or 11:00 to 12:00 (GMT), polling stations start to close at 19:00 (ET) or 00:00 (GMT) and ends at midnight (ET) or 5:00 (GMT). If the earliest possible time for polls would be followed and projections are made as early as 19:30 (ET) or 00:30 GMT, we would have a good idea of whether Hillary Clinton has the support of the swing states. It will particularly interesting to know the outcome of Florida, with 29 seats and Ohio with 18 seats (at 00:30 GMT), both states remain until now largely divided. If these states show a Democratic preference, this could give Clinton the votes she needs to reach a majority. For a more detail, please see our note US Watch – US presidential election day: the timeline.(Maritza Cabezas)

Fed preview: On hold in November, but strong Q3 GDP growth supports rate hike in December – The statement following the FOMC meeting which concludes on Wednesday, will likely keep the policy rate on hold. Markets are confident that the Fed will delay the rate hike in November. The Fed funds futures, imply that there is a 17% chance of a rate hike in November and a 69% chance in December. This is in line with our view of a December rate hike. The FOMC statement should make modest revisions regarding the state of the economy. Indeed near-term risks to the economic outlook remain balanced. Previously, the statement mentioned that the Fed has decided to wait for the “time being” for further evidence of continued progress towards its objectives. We think that this phrase will be adjusted to show that the time for rate hike is drawing nearer.  Indeed, the better than expected GDP report released on Friday, suggests that the economy is on track for a rate hike.  The economic recovery has gained momentum, as a result of stronger exports (0.8ppt contribution), partly to a temporary increase in soybeans and higher inventories (0.6ppt contribution). The PCE, the preferred inflation measure of the Fed is in line with the Fed’s forecast (1.7% yoy), while the labour market remains strong.  We expect the economy to continue to grow around trend in the coming quarters, suggesting that  slow pace of rate hikes is still likely. (Maritza Cabezas)