Global Daily – Eurozone still set for strong Q3

by: Aline Schuiling , Kim Liu , Georgette Boele , Nick Kounis

Euro Macro: Sluggish industrial production during summer months  –  Industrial production in the eurozone was weaker than expected in July. It grew by merely 0.1% mom, following a 0.6% mom contraction in June. That said, production data tend to be volatile during the summer due to holiday planning. If we look at the 3month-over-3month growth rate, production was up by 1.4% in July, implying it still grew robustly moving into Q3. Moreover, surveys relating to the level of orders and inventories in the eurozone’s industrial sector in July and August showed that the ratio of orders to inventories rose to its highest level since the start of 2011. This makes us confident in our view that the weakness in production in June and July is temporary and will be followed by a rebound in the next few months. On top of that, data for retail sales and car registrations that have been published so far for June-July suggest that private consumption continued to grow robustly in Q3. All in all, we still expect GDP growth to be a little higher in Q3 (0.7% qoq) than in Q2 (0.6%). (Aline Schuiling)

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Global Markets: Implication for scenario change for Rates and FX – Following the changes in our base scenario for the ECB and the Fed yesterday (see note here), we followed up today with more detailed notes on the implications for Rates and FX markets. Given our expectations of a more prolonged unwind of the ECB’s QE programme and delayed Fed hike we have revised our 10y Bund and Treasury yield forecasts lower, so we now expect a more modest rise. We still expect euro bond curves to steepen (especially in 2s10s and 5s30s) and ASW to tighten, albeit more modestly than before. Eurozone country spreads are set to widen, most notably Italian spreads. For more, please see here (for professional clients, see disclaimers in the document). Meanwhile, we argue that euro strength is not over yet and explain why we expect EUR/USD to rise to 1.30. In particular, the Fed’s exit experience tells us that euro upside is here to stay. See note here for more. Finally, we expect sterling to outperform versus the dollar and to be resilient versus the euro. We expect the following currencies to perform against the dollar: Canadian dollar, Australian dollar, New Zealand dollar, Swedish krona and Norwegian krone. We see upside for the euro versus the Swiss franc, Japanese yen and Canadian dollar but weakness versus Australian dollar, New Zealand dollar, Swedish krona and Norwegian krone. For more explanation, see our note here. (Kim Liu, Georgette Boele and Nick Kounis)