Written on April 20th, 2017
During the ECB’s press conference on March 9th, Mario Draghi indicated that the members of the Governing Council had briefly discussed modifying forward guidance on interest rates. Although the ECB intends to keep rates at their current levels or lower for an extended period stretching beyond the asset-purchasing programme (APP) deadline, the ECB’s slightly less accommodative tone triggered speculation over a potential rise in rates before the APP comes to a close, in December at the earliest.
However, during a speech in Frankfurt at the start of April, Mario Draghi together with ECB chief economist Peter Praet put an end to the speculation by confirming that forward guidance remained intact. Mario Draghi indicated he saw “no cause to deviate from the indications we have been consistently providing in the introductory statement to our press conferences“, which includes forward guidance. Chief economist Peter Praet stated that “If investors start perceiving that the path of the policy rate is subject to upward uncertainty […] long-term interest rates will be pushed higher and asset purchases will become less effective“.
The Eurozone economic picture remains on track, as evidenced by its latest confidence indicators. The composite PMI continued upwards in March to reach 56.4, its highest level since 2011 and an improvement on February’s figure of 56.0. Improvements were particularly noticeable in France despite the political uncertainty surrounding the outcome of country’s forthcoming presidential election (see French elections and financial markets: what would an extreme scenario look like? ).
Economic statistics were somewhat of a mixed bag. Both healthy retail and car sales indicate good first-quarter household spending figures. However, February’s industrial output (excluding construction) fell back 0.3% and January’s 0.9% rise was revised down to 0.3%. February’s step backwards can be partly explained by lower energy production due to mild weather. Manufacturing rose for the second straight month.
Inflation slowed sharply in March. Headline inflation fell from 2.0% year-on-year in February to 1.5% year-on-year in March, with underlying inflation standing at 0.9% and 0.7% respectively. The slower inflation figures are partly down to lower oil prices and possibly Easter holiday calendar effects.
March’s job report contained an assortment of data. Private sector job creations fell back sharply to 89,000 compared with 221,000 in February. Some of the fall was probably due to adverse weather during the survey period. In construction, a very weather-dependant industry, job creations fell from 59,000 to just 6,000. Weather issues may also have affected housing starts and building permits, which nonetheless remain close to business-cycle highs.
Meanwhile, figures based on household survey data saw the unemployment rate fall from 4.7% to 4.5%, in sharp contrast with the disappointing payroll-sourced job-creation figures. Annual wage growth fell back slightly from 2.8% to 2.7%. Other labour market indicators, including weekly unemployment claims, proved reassuring.
Household spending in the first quarter was poor, falling in February for the second straight month (-0.1% in volume after -0.2% previously). March’s 5.4% fall in car sales does not bode well for the month. However, the slowdown is occurring at a time when household disposable income is rising and confidence levels remain high.
In addition, ISM business confidence survey data remain healthy. The manufacturing sector index for March came out at 57.2 and the services index at 55.2. Overall, even if first-quarter growth disappoints due to weaker spending, the slowdown is unlikely to persist.
Inflation came to an abrupt halt in March. Headline inflation fell 0.3% for the month and underlying inflation fell 0.1%, the sharpest fall since 1982. The decline can be partly explained by lower communications prices. Year-on-year, headline inflation fell from 2.7% to 2.4% and core inflation, which excludes the volatile food and energy components, fell from 2.2% to 2.0%.
Against this backdrop, investors have revised their Fed rate-rise predictions for 2017 downwards, and now only expect one 25 bps rate rise, whilst the Fed is forecasting two.
Year-on-year GDP growth came out at +6.9% for the first quarter of 2017, following a +6.8% rise in the fourth quarter of 2016. The services sector slowed slightly (+7.7% versus +8.3%) whilst the secondary market accelerated (+6.4% versus +6.1%).
According to the monthly data, the faster first-quarter growth was down to both stronger domestic demand, especially investment in infrastructure and property, and foreign demand.
Thanks to reflation effects in industry, nominal growth reached 11.6% year-on-year versus 9.6% previously, its highest level since the first quarter of 2012. This first-quarter growth figure is a good starting point for the government, which has set its 2017 growth target at around 6.5%.
March’s business data indicated an improving economic picture for the end of the first quarter. Industrial output accelerated sharply (+7.6% versus +6.8% in January/February) within a context of higher profits for the sector, accelerating exports (+16.4% versus -1.3%), a jump in retail sales (+10.9% versus +9.5%) driven by higher car sales (+8.6% versus -1.0%), an acceleration in investment across all sectors (+10.9% versus +9.5%) and still-robust imports (+20.3% versus +38.1%).
Survey results also paint a healthy economic picture. March’s official manufacturing PMI index reached its highest level since 2012 at 51.8 versus 51.6 in February. Similarly, the non-manufacturing index reached its highest level since 2014 at 55.1.
The property market is proving resilient, despite measures to curb rising prices in the sector. In volume, housing starts rose 18.1% year-on-year in the first quarter and housing sales rose 16.9%.
Data from the National Bureau of Statistics of China indicated more moderate annual growth in new-house prices across 70 medium- and large-sized cities in March (+10.1% year-on-year versus +10.6%), due to a higher base effect. Monthly trends do nonetheless indicate renewed acceleration.
In light of this, several cities have announced fresh restrictions on access to ownership and the resale housing market.
The opinion expressed above is dated April 2017 and is liable to change
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.
-- PDF --