Friday March 3, 2017 March 3, 2017 Euro-Area, U.K. Composite, Services PMIs; Italian GDP By Geoff King and Colin Simpson What to Watch: The final reading for the euro-area's February is at 9 a.m., with PMI no change expected in the previous prints for both the (55.6) or or services composite (56) releases. The U.K. composite and services PMIs for February are at 9:30 a.m., with the median estimate from a Bloomberg survey of economists predicting services to fall to 54.1 from 54. 5 in January, while the composite should climb to 55.6 from 55.5. Italy's second estimate for fourth quarter is at 9 a.m. and includes the expenditure GDP breakdown after the first estimate showed 0.2 percent quarterly growth. Economics: German January and Turkey February are at 7 a.m. retail sales CPI Czech fourth quarter is at 8 a.m. In the U.S., the final Markit services and GDP composite s are at 2:45 p.m. PMI Fedspeak: U.S. Federal Reserve Chair speaks at an Executives’ Club Janet Yellen of Chicago event at 6 p.m. Chicago Fed President and Richmond Fed Charles Evans President speak on a panel at the University of Chicago Booth School of Jeffrey Lacker Business’s annual Monetary Policy Forum. Fed vice-chair Stanley Fischer is giving the Dallas Fed President will moderate the panel. keynote speech, while Robert Kaplan Panel begins at 3:15 p.m., keynote speech at 5 p.m. Government: Counting of votes in the election starts Northern Ireland Assembly this morning, with the first results expected around lunchtime. Ministers in London are poised to reimpose direct rule if the two largest parties cannot agree to govern together. (All times local for London.) Guy Verhofstadt @GuyVerhofstadt The European Parliament will prioritise deal on UK citizens in EU & EU citizens in UK. People mustn't be bargaining chips.#RightToStay Details Quote of The Day "The Netherlands now has the chance, on March 15, to stop the that keep dominoes falling in the U.K. and in the U.S., and that might fall in Germany, France and Italy. We will stop this new trend." — Dutch Prime Minister Mark Rutte in an interview on BNR Nieuwsradio. Commentary in This Issue It’s , not Greece or Italy France, that’s most likely to bring down the single currency: Jamie (pictured) Murray , David Powell and Maxime Sbaihi. The February acceleration in euro- area is largely explained by inflation price movements that have little to do with the state of the economy: David Powell. The Czech National Bank is ready for the market to turn “quite ” turbulent after it removes its Swiss-style regime limiting currency appreciation, a decision that now appears most likely around mid-2017, Governor Jiri Rusnok said yesterday. Tweet of the Day Euro Future Norway's Overvalued Krone Seen Higher on Rate Advantage The Norwegian krone is among the most overvalued currencies against the euro, but that isn’t stopping analysts from predicting a second year of gains. The krone is trading almost 30 percent above its fair value against the common currency, an OECD measure based on purchasing power parity shows, making it the most expensive after the Swiss franc among Group-of-10 peers. Still, analysts say the krone may rise gradually as oil prices climb and fears of stoking a housing bubble prevent Norway’s central bank from easing further, maintaining the currency’s yield advantage. The median forecast in a Bloomberg survey is for it to strengthen to 8.74 versus the euro by year-end, from 8.88 currently and 9.09 as of Dec. 31. That implies a 4 percent advance in 2017, after last year’s 5.7 percent appreciation. Full story on the web. — Love Liman
Transcript
Friday
March 3, 2017
March 3, 2017
Euro-Area, U.K. Composite, Services PMIs; Italian GDPBy Geoff King and Colin Simpson
What to Watch: The final reading for the euro-area's February is at 9 a.m., with PMIno change expected in the previous prints for both the (55.6) or or services composite(56) releases. The U.K. composite and services PMIs for February are at 9:30 a.m., with the median estimate from a Bloomberg survey of economists predicting services to fall to 54.1 from 54. 5 in January, while the composite should climb to 55.6 from 55.5. Italy's second estimate for fourth quarter is at 9 a.m. and includes the expenditure GDPbreakdown after the first estimate showed 0.2 percent quarterly growth.
Economics: German January and Turkey February are at 7 a.m. retail sales CPI Czech fourth quarter is at 8 a.m. In the U.S., the final Markit services and GDPcomposite s are at 2:45 p.m.PMI
Fedspeak: U.S. Federal Reserve Chair speaks at an Executives’ Club Janet Yellenof Chicago event at 6 p.m. Chicago Fed President and Richmond Fed Charles Evans President speak on a panel at the University of Chicago Booth School of Jeffrey LackerBusiness’s annual Monetary Policy Forum. Fed vice-chair Stanley Fischer is giving the
Dallas Fed President will moderate the panel. keynote speech, while Robert Kaplan Panel begins at 3:15 p.m., keynote speech at 5 p.m.
Government: Counting of votes in the election starts Northern Ireland Assembly this morning, with the first results expected around lunchtime. Ministers in London are poised to reimpose direct rule if the two largest parties cannot agree to govern together.
(All times local for London.)
Guy Verhofstadt@GuyVerhofstadt
The European Parliament will prioritise deal on UK citizens in EU & EU citizens in UK. People mustn't be bargaining chips.#RightToStayDetails
Quote of The Day
"The Netherlands now has the chance, on March 15, to stop the that keep dominoesfalling in the U.K. and in theU.S., and that might fall in Germany, France and Italy. We will stop this new trend."
— Dutch Prime Minister Mark Rutte in an
interview on BNR Nieuwsradio.
Commentary in This Issue
It’s , not Greece or ItalyFrance, that’s most likely to bring down the single currency: Jamie
(pictured)Murray , David Powell and Maxime Sbaihi.
The February acceleration in euro-area is largely explained by inflationprice movements that have little to do with the state of the economy: David Powell.
The Czech National Bank is ready for the market to turn “quite ” turbulentafter it removes its Swiss-style regime limiting currency appreciation, a decision that now appears most likely around mid-2017, Governor Jiri Rusnok said yesterday.
Tweet of the Day
Euro Future
Norway's Overvalued Krone Seen Higher on Rate Advantage
The Norwegian krone is among the most overvalued currencies against the euro, but that isn’t stopping analysts from predicting a second year of gains. The krone is trading almost 30 percent above its fair value against the common currency, an OECD measure based on purchasing power parity shows, making it the most expensive after the Swiss franc among Group-of-10 peers. Still, analysts say the krone may rise gradually as oil prices climb and fears of stoking a housing bubble prevent Norway’s central bank from easing further, maintaining the currency’s yield advantage. The median forecast in a Bloomberg survey is for it to strengthen to 8.74 versus the euro by year-end, from 8.88 currently and 9.09 as of Dec. 31. That implies a 4 percent advance in 2017, after last year’s 5.7 percent appreciation. Full story on the web.
Italy, Not France, Is Biggest Threat to EuroBy Jamie Murray, David Powell and Maxime Sbaihi, Bloomberg Intelligence economistsAn extremist wins the French Presidency and brings down the single currency — that’s the risk everyone is talking about. Yet there are good reasons to think that won’t happen, even if Marine Le Penwins. Look beyond the French election and past this summer’s habitual Greek financing debacle, and the big medium-term risk is Italy. Here, discontent with the euro mixes dangerously with fiscal risk — a shock to the economy could see the euro buried in Rome.
Le Pen wants France to leave the European Union and to dismantle the euro area. So, what are her chances of success? Slim. She is not the bookmakers’ favorite. Most people in France want to remain a part of the EU and membership of the euro is popular. After the French election, Greece will appear more brightly on investors’ radars.
Once again, the country has to make a debt repayment in the summer and it will probably need help to cover the cost. A crowded election calendar elsewhere in Europe adds a layer of complication, but Bloomberg Intelligence Economics expects Greece to get the money it needs, probably at the last minute.
Italy also has political problems and they could be serious. The fallout from a referendum on constitutional change last year brought down former Prime Minister
and means snap elections Matteo Renzi are possible this year.
The anti-establishment party, Five Star Movement, is seeking a referendum on whether to leave the euro and more Italians view the single currency as a bad thing for the country than a good thing. Should a vote to leave be recorded, lawmakers would have to defy the will of the people to keep Italy in the euro.
The euro is unpopular in Italy for a good reason. Membership of the currency area has created imbalances, stymied productivity growth and impeded Italy’s economic recovery. BI Economics has estimated underlying productivity
growth in Italy from 1985, and the results
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show that gains slowed after the inception of the single currency in 1999.
The post-crisis years have seen only modest improvement and BI Economics
expects this productivity growth to remain sluggish. The financial industry is unable to distribute capital effectively, reform has stalled and the process of making Italy more competitive relative to its peers is proving very slow without a floating exchange rate. Since productivity gains are the only sustainable source of real income growth, this bleak outlook means Italians are likely to see little
improvement in living standards. Demographics will also create a
headwind to economic expansion in years to come as the population of working age
shrinks. If productivity growth remains weak, the volume of output in the Italian
economy could start to contract within thenext decade.
Taken together with Italy’s debt burden, this dire growth outlook means the risk of a sovereign debt crisis is significant. Italy
would have been forced out of the euro several years ago if the European
had not taken extraordinaryCentral Bank measures to cut borrowing costs. The
IMF expects the size of Italy’s debt pile to shrink relative to GDP over the next five
years. But that depends on an optimistic
improvement in the country’s fiscal position and on borrowing costs
remaining exceptionally low. Tax receipts will grow as people return
to work, but BI Economics expects further fiscal consolidation to be met with resistance, following years of austerity. And a slight increase in the average rate of interest paid on government debt looks likely, as monetary policy gradual returns to normality in the euro area. That makes for a slower descent of the debt-to-GDP ratio over the next five years than the IMF projects. But things get worse in the five years beyond the IMF’s forecast horizon.
Demographic headwinds and rising long-term interest rates mean debt may flat-line at an elevated level compared with GDP, before creeping upward in the mid-2020s. And all this assumes the country expands continuously over the next decade with no cyclical downturn.
Only time will tell whether Italy can grow its way out of trouble, implement austerity successfully or cope with a rise in borrowing costs. The point is that it wouldn’t take much for one of Europe’s biggest economies, where the euro is already unpopular, to be tipped into crisis. It’s Italy, not Greece or France, that’s most likely to bring down the single currency.
Muted Inflation Vindicates ECB's QE ExtensionBy David Powell,Bloomberg Intelligence economistThe acceleration in euro-area inflation in February is largely explained by price movements that have little to do with the state of the economy. Measures of underlying inflation remain muted. The
should feel European Central Bankvindicated in its latest decision to extend asset purchases through the end of the year in light of the inflation data. The calls from hawks to adopt a less dovish stance are likely to fall on deaf ears for the time being and at next week’s meeting of the Governing Council.
Euro-area HICP inflation accelerated to 2 percent year over year in February from 1.8 percent in December, as forecast by consensus. The largest contribution — 0.14 percentage points — came from food, alcohol and tobacco. Movements in that category of prices often have little to do with the underlying state of the economy — they can be influenced by external factors such as commodity prices and exchange rates. The next largest contribution — 0.11 percentage points — came from energy prices. They also have little to do with underlying inflation. Services added 0.06 percentage point and non-energy industry goods subtracted 0.08 percentage point.
The country breakdown reveals that the acceleration in the euro-area figure was driven by Germany and Italy. France and Spain had little bearing on it. However, given that the acceleration was largely driven by categories that have little to do with underlying inflation, the country breakdown isn’t of huge importance. Changes in those prices can vary from one country to another as a result of different national rates of taxation and hedging practices.
The ECB will probably be most focused
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on the acceleration of services inflation, which provides the best read on domestically-generated price increases in the CPI report. It ticked up to 1.3 percent year over year in February from 1.2 percent in January. However, the rise seems like little more than the normal volatility of the time series from month to
month. It was at that level as recently as December and remains in the range that has bound it for the last three years. The bigger picture for the core figure is largely the same — it was unchanged in the most recent report from the previous month at 0.9 percent but it remains range bound.
ECB Policy
Food, Alcohol and Tobacco Prices Drive Inflation Higher
Two Percent Inflation Not Enough for Draghi to Shift PolicyBy Carolynn LookMario Draghi is looking for a sign — any sign — that 2 percent inflation will be here to stay.
The president European Central Bankhas tried to silence a debate about accelerating inflation by pointing to weakness in underlying price pressures, arguing that unprecedented stimulus is still warranted. While his argument may hold even after a hefty upgrade of projections due next week, at some point his critics will probably demand a strategy.
Chances are that even by the end of the year, core inflation won’t significantly exceed 1 percent as wage growth remains muted, held back by economic slack and unemployment well above 10 percent in some parts of the region. But given operational challenges of quantitative easing, which faces an increasing shortage of eligible assets, Draghi might be willing to accept even small improvements as evidence that price stability is close to sustainable.
“If they start to see core inflation go up, they could just say ‘it’s going in the right direction, that’s enough for us’,” said
, head of macro research at Nick Kounis NV in Amsterdam. “I ABN Amro Bank
think we are starting to get toward the point but it will probably take quite some months.”
The ECB officially uses headline inflation as its prime gauge for setting policy. That rate is now seemingly in line with their goal — reading 2 percent in February — prompting calls to end a 2.28 trillion-euro ($2.4 trillion) quantitative-easing program and start raising interest rates.
With much of the increase attributable to energy, policy makers have turned their focus to a measure that strips out volatile components. Core inflation is at a far lower 0.9 percent and the gap with the headline rate is the widest since 2012. That undermines any arguments
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that price gains are about to spin out of control — particularly if you follow the ECB’s logic that underlying price pressures are an indicator of where inflation will eventually settle.
However, in practice, core inflation has undershot the ECB’s target for the majority of the euro area’s 18-year history, averaging just 1.4 percent. Thatmeans the central bank may choose to focus more on the direction the rate is heading than the actual figure.
“Core inflation will remain on a moderate recovery trend through the forecast horizon,” said , Fabio FoisEuropean economist at Plc in BarclaysMilan. “Labor-market slack in the euro-area economy remains substantial and this is likely to dampen wages for a few more quarters.”
Updated projections due next week will reveal whether the 19-nation euro zone is getting closer to Draghi’s goal: Medium-term inflation of just below 2 percent across the entire region that’ll prove to be durable and self-sustained.
Even a big upgrade — as flagged by
Governing Council member Jenswon’t extort an immediate Weidmann —
reaction.With anti-euro sentiment strong ahead
of a series of national elections, the U.K. preparing its divorce from the European Union and a protectionist U.S. administration, the ECB locked in its plans for 2017 stimulus late last year.
Economists predict policy makers will stick to their commitment, even as government bonds are getting scarce in some countries and support for ever-more purchases is wavering.
The debate about the proper scale of monetary support, though, has only just begun and is set to intensify as the economy improves.
“An accommodative monetary policy certainly continues to be appropriate,” Weidmann said this week in Ljubljana, Slovenia. “Opinions differ over the right degree of monetary accommodation and the point in time at which the price outlook will have firmed enough to justify a change in communication and ultimately in the monetary policy stance.”
Spanish GDP
Price Pressures Ex-Energy Haven't Picked Up For Some Time
Consumers Unlikely to Sustain Dizzy Growth RatesBy David Powell,Bloomberg Intelligence economistThe final reading of Spanish GDP for the fourth quarter confirmed the earlier figure and revealed that the recovery continues to be driven by household consumption. Looking ahead, surveys suggest the pace of expansion is at least likely to remain steady, but BI Economics looks for some moderation with most of the economy’s healing already achieved.
The final reading was confirmed at 0.7 percent quarter over quarter, unchanged from the rate of the prior period and in line with expectations. The breakdown revealed the expansion was driven by household consumption — that category of expenditure contributed 0.4 percentagepoint to the headline figure. Fixed investment, inventories and net exports were each responsible for 0.1 percentagepoint. The contribution from government spending was close to nothing.
The drivers of the expansion were similar to the recent past. The economy grew by 0.8 percent quarter over quarter on average in 2016. Household consumption was responsible for half of that mean figure. Net exports contributed 0.2 percentage point and fixed investment 0.1 percentage point. Government spending and inventories contributed nothing.
Surveys are providing mixed signals on the expansion of the economy at the start of the first quarter. The Spanish composite PMI reading for January was 54.7, which is close to the average for October to December of 55 and suggests the pace of the expansion was close to steady. The average of the European
’s Economic SentimentCommission Indicator for January and February stands
at 108.1, somewhat higher than the average for the fourth quarter of 107.2.
That points to a potential for a smallacceleration. Having said that, the link
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between the surveys and GDP data isn’t perfect and BI Economics still expects
some moderation in the speed of growth.With most of the spare capacity created
by the euro crisis having already been absorbed, BI Economics looks for the
pace of expansion to slow steadilythroughout the course of this year. GDP
growth is forecast to slow to 0.6 percent quarter over quarter in the first quarter
and then decelerate by 0.1 percentage point each period. That should cause the output gap to narrow from 2.5 percent of potential GDP at the end of 2016 to 0.9 percent of potential GDP at the end of this year.
09:00 Euro Area Markit Eurozone Services PMI 55.6 55.6
09:00 Euro Area Markit Eurozone Composite PMI 56 56
09:00 Italy GDP WDA QoQ 0.20% 0.20%
09:00 Italy GDP WDA YoY 1.10% 1.10%
09:30 U.K. Markit/CIPS UK Services PMI 54.1 54.5
09:30 U.K. Markit/CIPS UK Composite PMI 55.6 55.5
09:30 U.K. Official Reserves Changes — $810m
10:00 Euro Area Retail Sales MoM 0.30% -0.30%
10:00 Euro Area Retail Sales YoY 1.50% 1.10%
11:00 Ireland Retail Sales Volume MoM — -0.70%
14:45 U.S. Markit US Services PMI 54 53.9Source: Bloomberg. Survey figures updated at 5:45 a.m. London time.
Click on the to see the range of forecasts on the Bloomberg terminal.highlighted releases
The Apprentice: The "Great Enrichment" that Europe experienced after the Industrial Revolution remains a central in economic history, with questionthe exact causes still very much in doubt.
, from the David de la Croix Universite , and Catholique de Louvain
's Northwestern University Matthias and , argue that the Doepke Joel Mokyr
role of apprenticeships was crucial to the rise of Europe.
AI Warning: Should economists be more concerned about artificial intelligence and to transforming threatsentire industries and sectors? According to the 's Bank of England Mauricio
and there may be Armellini Tim Pikeprofound implications for labor markets, to the point economists should seriously consider that millions of people may be at risk of unemployment.
European Opportunity: With no fewer than three scheduled to take electionsplace in the next few months, few would disagree that Europe is headed into a period of uncertainty. , David Hussey
's head of Manulife Asset ManagementEurope, Australasia and Far East equities believes uncertainty could also be a source of opportunity, especially for investors who are willing to do their homework, engage in old fashioned number crunching and pay attention to one metric in particular: cash flow.
