Macro Weekly – Draghi successful

by: Han de Jong

  • Draghi delivers the message and pushes the euro lower
  • IFO more than reverses tow monthly declines as ECB Bank lending survey shows further relaxation of the credit channel
  • US expansion getting a stronger base from corporate investment
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ECB President Mario Draghi is not always successful in achieving what we assume he wants to achieve in terms of reactions on financial markets. His contribution to the ECB conference in Sintra, Portugal, at the end of June, unintentionally preceded an appreciation of the euro from USD1.12 to 1.20. While the euro had recently stabilised around USD1.18, telling markets that policy accommodation is going to be reduced was always implying the risk that the euro might strengthen further. e are assuming that the ECB does not want to see the euro rising any further, at least for now. So we were holding our breath on Thursday when Draghi spoke at the usual press conference following the ECB’s policy meeting.

This time, he was very successful. The direction of the actual policy decisions was well flagged to markets beforehand and they did not include huge surprises. As we had expected, the monthly purchases of bonds will be halved from January onwards to EUR 30 bn while the programme will run at least until September 2018. Rate hikes will not happen before 2019, most likely not until well into 2019. This is the sort of forward guidance that appears to be very important for the currency market. The euro lost over two cents during the next 24 hours while bond yields eased somewhat. This contributed to a strong price performance of European equities.

The ECB’s Q3 Bank Lending Survey showed a continuation of recent trends. Lending standards are being eased at a very modest pace, while banks are experiencing strengthening loan demand. This is all positive. Meanwhile, banks’ response to the ad-hoc part of the survey suggests that the need for the ECB’s asset purchase programme is decreasing. This is encouraging.

Ifo powering ahead

European risky assets were further supported by a solid reading on the Ifo-index, the authoritative gauge for German business confidence. The headline index registered a significant jump in October: up to 116.7, the highest in decades, from 115.3 in September. The jump followed two consecutive monthly declines. Both sub-series, expectations and current conditions, were up considerably in October.

I have highlighted before that the strength of the eurozone economy is the tide that is lifting all boats. This was, again, confirmed by Italian data. Growth of industrial orders in Italy accelerated from 10.1% yoy in July to 12.2% in August.

The preliminary reading on the Markit PMIs for the eurozone showed stronger confidence in manufacturing in October, but weaker confidence in the services sector. I realise it may look as though I am biased and am interpreting the data in a way that suits me, but I consider the manufacturing sector more important. While services make up a bigger part of the economy than manufacturing, the latter is more cyclical and tends to lead the rest of the economy.

US capex spending on the rise

The preliminary October Markit PMIs for the US showed increases in business confidence in manufacturing and services. The regional indices showed a decline in Richmond (12 versus 19 in September), but a rise in the Kansas Fed survey (23, up from 17).

More important in my view was the durable goods orders data for September. Total durable goods orders rose 2.2% mom after a 2.0% rise in August. This report contains several indices that provide clues into corporate investment spending. Orders for non-defence capital goods excluding aircraft rose 1.3% mom, its third consecutive 1.3% monthly gain. This pushed the yoy rate to 7.0%. The shipments of such products rose a more modest 0.7% mom, after 1.2% in August.

The US durable goods orders data, plus the various elements of several business confidence surveys, suggest that investment spending by corporates is gaining momentum and is set to register accelerating growth. That would be very supportive for the current economic upswing to extend well into 2018 and, likely, beyond.

Q3 US GDP growth amounted to 3.0% qoq annualised. Private consumption, business investment (except in structures), residential construction, foreign trade and inventories added to growth, while total government spending was a tiny drag on growth. The GDP data confirms the picture of balanced, decent growth. It is unclear if the hurricanes have had much of an impact.