Global Daily – German sentiment drops on trade fears

by: Aline Schuiling , Bill Diviney , Tom Kinmonth

Euro macro: Germany’s ZEW drops on fears for trade war – Germany’s ZEW economic sentiment indicator dropped to 5.1 in March, down from 17.8 in February. The indicator gauges the expectations of financial analysts and economists about economic conditions during the next six months, and measures the difference between the percentages reporting “improve” and “get worse”. Therefore, a positive reading still reflects that, on balance, Germany’s economy is expected to strengthen. Sentiment was probably hit by the tariffs on imports of steel and aluminium that were imposed by the US and by fears that these would result in retaliation by other countries and a wider trade war. Indeed, Germany’s economy is largely export driven, while the country is Europe’s largest steel producer and the US its main export market. Although Europe might still be able to get exemption from the US tariffs, Germany would be one of the countries that would suffer the most if these attempts were to fail, and probably also from disruptions in global trade more generally. Nevertheless, we think the outlook for Germany’s economy remains one of robust growth, as the strength of domestic demand should cushion any potential weakening of export growth. (Aline Schuiling)

UK Macro: Inflation cools a touch, but unlikely to dissuade the BoE from hiking in May – February CPI inflation came in just shy of expectations at 2.7% yoy (consensus: 2.8%), with core CPI coming in at 2.4% yoy (consensus: 2.5%). The biggest drivers of the decline in the headline rate were food and transportation. However, we also saw a moderation in services inflation in the core measure, which had been surprisingly firm in recent months, despite still relatively subdued wage growth. Indeed, services inflation dropped to 2.4% yoy, down from 2.7% in January, and the lowest reading since December 2016.  Although a touch weaker than expected, we think the BoE will continue to feel confident hiking its policy rate by 25bp in May, given its conviction – expressed in recent hawkish commentary from MPC members –  that the tight labour market will drive a pickup in wage growth this year, which should in turn keep core inflation firm. With that said, the print will provide some relief for those fearing the BoE might be falling behind the curve, and supports our view that the BoE will tighten policy only gradually, with just two 25bp hikes projected for 2018. (Bill Diviney)

European Financials: Seeds planted for European bank consolidation – After a few years of only limited consolidation in the European banking sector, at times due to failing banks, we are now potentially seeing the first ripples towards orderly consolidation in the sector. EU banks have actually reduced their cross-border bank claims by around 25%, and cross-border loans by around 40%, since the start of the global financial crisis. Indeed, over the past few years the European banking sector has experienced low profitability, elevated costs (e.g. regulation fixed costs), dramatic technological advancement and the opportunity for strong synergies (e.g. eurozone development generating similar bank account structures). In other industries this would mean that the sector is crying out for consolidation. This has not happened so far. However, a combination of state sales, private equity and rapid technological change, against the backdrop of  improving economic conditions, should now sow the seeds for consolidation. Small and mid-sized banks which do not adapt are likely to suffer faster under an increasingly agile and rapid environment, which has finally been built by the removal of the shackles of capital increase and regulatory uncertainty. Technological innovation will only add fuel to this trend. Fortunately we have reached the point where the consolidation should occur in a more orderly fashion than previous years. (Tom Kinmonth)