Global Daily – Doubts about the US stimulus

by: Nick Kounis , Aline Schuiling

Global Markets: Doubts build about US stimulus – Investor scepticism about President Trump’s ability to put in place a sizeable economic stimulus package built on Monday. Government bond yields declined a long with equities and the US dollar. The dollar also felt the impact of falling real yields, while the euro was boosted by hawkish commentary by the ECB’s Executive Board member Sabine Lautenschlaeger. Speculative long positions in the US dollar and short positions in US Treasuries are large, making markets particularly sensitive to shifts in how investors see the balance of risks. In Europe, government bond yield curves flattened, as bond yields were pulled down to some extent by their US counterparts. This follows the scrapping of the vote on the new healthcare bill in the House on Friday as it became clear that there was insufficient support to push it through. This increases the probability – which had already been rising before Friday’s failure – that Mr Trump’s fiscal stimulus will come later and be more modest. This reflects two factors. First, the US administration would have wanted that in terms of sequencing, the health care reform bill should pass before tax cuts. The latter process is already running late. Second, to the extent that the President is facing difficulties getting support from his own party, this could be a signal that further legislation may not be pushed through easily, despite the President and Congress having the same political colour. We are currently reviewing our assumptions about the US fiscal stimulus. Currently we have the impact coming though from the middle of the year onwards. However, given the delays, the boost from the fiscal stimulus may well not come through until next year. On the other hand, we judge that the current cyclical momentum in the US economy is stronger than incorporated in our own (as well as consensus) GDP forecasts. (Nick Kounis)

170327-Global-Daily.pdf (46 KB)

Euro Macro: Bank lending growth stabilises, country divergence remains – The ECB’s Monetary developments in the euro area showed that growth in bank lending in the eurozone stabilised in February. The monthly flow in loans (adjusted for sales and securitisation) to non-financial companies declined to EUR 3bn, down from EUR 13bn in January, while its annual growth rate declined to 2.0% from 2.3%. Meanwhile the flow in loans to households declined to EUR 12bn from EUR 19bn, while its annual growth rate edged to 2.3% from 2.2%. Changes in growth in eurozone bank lending tend to follow changes in nominal GDP growth with a delay of around 1.5 to 2 years. Therefore, we expect growth in total lending to increase in the course of this year (to around 2.5-3% by the end of the year from 2.3% now), reflecting the strengthening of GDP growth in the course of 2015. Meanwhile, the data for the individual eurozone countries continues to show divergence in bank lending growth between the periphery and core. Indeed, the annual change in total bank loans still is negative in Ireland (around -3%), Portugal (around -1.5%), Greece (-1.5%) and Spain (-1%), while it is growing robustly in Belgium (+7.5%), France (+5%), Germany (+3.5%), Finland (+3%) and Austria (+2.5%). In Italy and the Netherlands annual growth is close to zero.  (Aline Schuiling)