US Macro: Trade policy yet to impact the numbers, but anecdotal concerns are increasing – The ISM manufacturing PMI unexpectedly rose in June to 60.2, a four-month high, from 58.7 in May. We had expected a moderation – perhaps driven by new orders or export orders – given the uncertainty surrounding trade policy. However, although there was much qualitative concern expressed by survey respondents, there was no hard evidence in the numbers of any slowdown, or even a hint of a slowdown; the new orders index was broadly stable at 63.5 (May: 63.7), while new export orders increased marginally to 56.3 (May: 55.6). While the ISM and other PMIs suggest remarkable resilience in the US economy in the face of trade policy uncertainty, the degree of qualitative concern expressed does nonetheless pose the risk that decisions to delay investments shows through in slower new orders growth in the coming months. For instance, one respondent called the tariff threat a ‘drag on growth for investments’, while another said that they would shift production for the Chinese market to a Canadian plant to avoid tariffs. One respondent furthermore pointed to manpower resources being spent on tariff contingency planning that would otherwise be “used for more productive projects.” As such, while things look fine for the time being, the longer tensions continue to escalate, the higher the risk that trade policy starts to materially dampen the growth outlook. (Bill Diviney)
Euro Rates: Finally more details on the ‘new EONIA’ benchmark methodology – Last week, we reported that an ECB working group had started their first public consultation phase for their proposals of an EONIA alternative. One of the three likely candidates for the new euro risk-free rate is the Euro Short-Term Rate (ESTER), which we think is the most likely EONIA replacement. More details have been published by the ECB on its calculation methodology and we will discuss some key points below – for more details see here.
ESTER is a rate which reflects the wholesale euro unsecured overnight borrowing costs of euro area banks. It is calculated using overnight unsecured fixed rate deposit transactions over EUR 1mn. Furthermore, ESTER is calculated daily as a volume-weighted trimmed mean by ordering the transactions from the lowest to highest rate; aggregating the transactions at each rate level; removing the top and bottom 25% based on volume, and calculating the mean of the remaining 50% of the rates. It is based on eligible data from the unsecured market segment of the MMSR.
Interestingly, some contingency measures will also be taken into account, as a fully transactions based benchmark is vulnerable to adverse market circumstances, given that the availability of transaction data could become scarce and volatile. A short-term contingency procedure will be triggered when the number of reporting banks is less than 20, or when five or more banks account for >75% of total transaction volumes. In short, when one of these contingency criteria are met, then ESTER will be calculated using the usual calculation methodology as explained above, in combination with the rate from the previous TARGET2 business day. Should this occur on a day when the ECB policy rate is changed, the ESTER calculation would naturally be corrected to account for this. (Fouad Mehadi)