Euro macro: Decline in PMI despite strong manufacturing sector – The eurozone composite PMI for October came in weaker than expected. The index declined to 55.9, down from 56.7 in September. The composite PMI is made up of two components; the manufacturing PMI and the services PMI. The details of the report show that the weakness was concentrated in the services sector, with the services PMI falling from 55.8 to 54.9. Still, the new business component of the services PMI stabilised and the decline in the total index was completely due to a drop in the business expectations component. Therefore, the drop in the services PMI seems to have resulted mainly from a decline in sentiment rather than a decline in the hard activity indicators. Meanwhile, the manufacturing PMI continued to rise. It increased to 58.6, up from 58.1 in September. The forward looking parts of the manufacturing survey, such as the new export orders component and the ratio between total orders and inventories all moved higher. All in all, we think the decline in the PMI does not signal a significant deterioration in economic activity in the eurozone and we continue to expect that the eurozone economy will grow at a rate well above the trend rate in the coming quarters. (Aline Schuiling)171024-Global-Daily-1.pdf (43 KB)
Fixed Income: No tapering of covered bonds – The ECB is likely to announce an extension of its asset purchases at a slower pace this Thursday (see here). However, we think that the reduction of the monthly amount of asset purchases will be focussed on purchases of government bonds and agency debt. Indeed, the CBPP3’s share in the total asset purchases has already declined significantly, limiting the room to reduce covered bond purchases much further. Besides, net purchases seem on a steady path since beginning of last year. In any case, reinvestments will keep the Eurosystem a dominant player in the covered bond market for the time being, as it currently owns some 42% of all CBPP3 eligible euro benchmark covered bonds. According to our estimates, the central bank will need to reinvest EUR 27bn in 2018, EUR 29bn in 2019, and EUR 33bn in 2020. Therefore, CBPP3 will remain a key factor dominating the covered bond market, limiting room for any significant spread widening. Please read the full report here (for professional investors only) (Joost Beaumont).