Macro Weekly – What a relief!

by: Han de Jong

  • Dutch voters do not choose for populism
  • Fed raises rates, but Yellen sounds less hawkish than markets feared
  • Confidence data consolidating at high levels, and harder data better too
Macro-Weekly-17-March-2017.pdf (180 KB)

It would be wrong to claim that populism has been defeated in the Dutch general elections. But the rising tide of populism has certainly at least been slowed. Dutch voters clearly do not want a populist government; in that sense, populism has been defeated in the Netherlands. I think the election result is not only a vote against a populist government; the likely coalition partners are, on average, pro-Europe,
pro-sustainability and pro a market economy.

The right wing liberal party (VVD), the Christian Democrats (CDA) and the left-leaning liberals (D66) look certain to be the core of the coalition. But they will need a fourth partner, which is either going to be the Greens (GroenLinks) or a left-leaning Christian party (Christen Unie). The combination with the Greens is the preferred option in my view as the Greens were the biggest winner in the elections and they have more parliamentary seats than the Christen Unie. The combination with the Christen Unie has only a marginal parliamentary majority. In terms of ideology, however, a coalition with the Greens is probably more difficult to negotiate. We will have to wait and see.

A relief

This result was a big relief to market participants who feared that an anti-EU party would get to power in one of the founding fathers of the EU and one of its most loyal members. All eyes now move to the elections in France. Opinion polls suggest that Marine Le Pen and Emmanuel Macron will reach the second round of the presidential elections and that Macron will win with some ease. Some people argue that opinion polls got it very wrong last year regarding the Brexit referendum and the US elections and that we should therefore be sceptical of these polls. This is incorrect in my view. Opinion polls showed that the Brexit referendum was close and that it could have gone either way. And in the case of the US elections, Hillary Clinton did get some 3 million votes more than the current President. The opinion polls got the result of the Italian constitutional referendum spot on. In the case of the second round of the French presidential elections, the lead of Macron over Len Pen in the polls is considerably larger than the margin of error. As things stand therefore, Le Pen doesn’t have a hope. But this can change, obviously.

Watch out for Beppe

Perhaps more threatening to the EU is the rise of the 5 Star Movement in Italy. Elections must be held by February next year at the latest. A government led by Beppe Grillo may try to take Italy out of the euro and perhaps even the EU.

Another relief

The US Federal Reserve raised interest rates at their March FOMC meeting. Fed officials had successfully convinced market participant this was likely to happen in the weeks before the meeting. As the move was thus widely expected, the decision was not an unpleasant surprise. What was more important was the tone of voice of chair Yellen at the press conference and the guidance provided in the statement and the dot plot. It came as a relief to market participants that the Fed is sticking to the projection of three rate hikes this year (so two more after the March hike) this year. Yellen sounded distinctly comfortable with the inflation outlook. This is certainly in line with my view. Markets had feared a more hawkish tone and were thus relieved.

Recent US inflation numbers confirm our view (or are at least not inconsistent with that view). Headline CPI rose 0.1% mom in February. The year-on-year increase accelerated to 2.7%, from 2.5. But core inflation eased from 2.3% yoy in January to 2.2%, certainly not a sign of materially rising inflationary pressures. Measures of inflation expectations have stabilised recently and in some cases appear to moving down a little. This is in line with oil prices. So the link between inflation expectations and oil prices seems to hold still. I am counting on modestly higher inflation, but nothing more.

Are confidence indicators stabilising at high levels?

Recent months have seen a remarkable strengthening of confidence indicators across many countries. Many have reached multi-year highs, some even multi-decade highs. The US Philly Fed index reached a level in February not seen in over 40 years. It fell back somewhat in March, but is still at a very high level, suggesting that the February reading was not a flash in the pan. This is also true for other indicators such as the Empire State index as well as SME business confidence (NFIB) and home builders’ confidence (NAHB) in the US.

The eurozone saw the publication of the ZEW index, measuring confidence among analists and economists. The index rose in March.

Harder data still not that convincing, though US manufacturing turning up

Hard data has been lagging confidence indicators. GDP growth in the US and in Europe has been reasonably firm in the last two years, but not overly strong and the industrial sector has been soft. If the confidence indices are to be believed, this should change before too long. Indeed, US manufacturing data is starting to follow the trend of confidence indicators. Output grew 0.5% mom in February and 1.2% yoy. It is clear that momentum has strengthened significantly in recent times. During the last six months, output growth was some 3.5% annualised and during the last three months annualised production growth was around 5%. Growth rates during these shorter periods may clearly be affected by incidental factors such as the weather. However, it is clear that momentum is strengthening.

Eurozone industrial production was strong month-on-month in January, but that was after a weak December. The yoy rate fell but the trend remains up, though the volatility of the series is high.

Harder data has been very convincing in Asia where trade growth is accelerating sharply. I think this is an indication of what is happening in the world economy. There are probably several important factors driving the gain in momentum, but few are as important as the improvement of some economic indicators in China. It seems to me that the policymakers have provided stimulus that is now being felt. Investment in construction is strengthening and this leads to stronger overall industrial production as well. Subsequently, Chinese import growth is accelerating. The graph shows how fast eurozone exports to China are growing and how much that growth is accelerating. Exports to China are about 7% of total eurozone exports, so it makes a big difference whether these exports are growing at a rate of 10% or contracting, as they were in the not too distant past.