As Fed Chairman, Jerome Powell, said a few weeks ago, “the main takeaway is that the economy is doing very well. Most people who want to find jobs are finding them”. For his part, ECB Chairman, Mario Draghi, explained that “underlying economic fundamentals remain solid”. According to our own econometric analyses, growth will remain well above potential this year (2.8% in the US and 2.3% in the EMU), before slowing to level out in 2019 (2.0% and 1.7% respectively) and probably going below potential later.
Investors are looking forward to the moment when they can again overweight the European banking sector in order to benefit from a catching-up effect. This is understandable because, over the past 10 years, listed banks’ shares have consistently underperformed. In fact, they have never fully recovered from the subprime and the European debt crises. 2018 does not escape this sluggishness as the sector is once again having the worst performing year to date, recording a sharp drop of 16%, against a market that is globally on the edge.
The momentum of China’s economic activity is still on our radar. Domestic demand, which Beijing wants to strengthen to rebalance its growth model, recorded a decline last month. Industrial production has slowed, and retail sales are down sharply, against a background of tighter credit conditions. Add to this the threat of a trade war with Uncle Sam and it’s easy to understand why the People’s Bank of China (PBoC) prefers to remain cautious by not tightening its monetary policy. The interest rate for the one-year Medium-term Lending Facility (MLF) was 3.30%, unchanged from April.
Recent economic publications confirm the slowdown we were expecting in the Euro Area. The economic surprise index,
which can be read as a summary of all these publications, hit a low point in May (see chart 2). Since then, it has tried to rebound but remains in negative territory. However, this deceleration does not mean that a recession is approaching. It must be read as a normalisation of growth. The upward trend is not broken. After a (too) dynamic acceleration of 2.5% per year, the activity will now progress in a sustainable manner, in line with its potential growth of 1.5%.
In the Mexican presidential elections, it was the most likely scenario that materialised. The big poll favourite, former Mexico City mayor, Andrés Manuel Lopez Obrador “AMLO”, obtained between 53% and 53.8% of the votes according to official estimates. He promised profound changes, without dictatorship. He also said he wanted a friendly and
cooperative relationship with the United States.
The risk of trade war escalated last week. The European Union has decided to impose additional taxes on dozens of American imported products, such as jeans, bourbon and motorcycles. The European Union thus echoes other countries concerned by US tariffs, like China, Mexico or Canada, which have already implemented retaliatory measures against Washington. 2
US President Donald Trump, who does not intend to stop there, has threatened to impose a 20% tax on European cars imported into the United States.
As we approach mid-year, the performance of financial markets is instructive (see chart 2). Equities are globally rising, benefiting from earnings growth, despite high valuation ratios. On the other hand, although the MSCI World has spent most of the last six months in the green area, the evolution of geographical indices is very disparate. The American S&P 500 recorded an excellent performance, at +4.9% in total return, even though the dollar appreciated by 3.0% over the period. Its Euro Area counterpart, the EuroStoxx, collected 3.0%, while the British FTSE gained barely 1.5%, the Japanese Nikkei was steady and the Swiss SMI fell by 4.8%.
Since September 2014, the European Central Bank (ECB) has purchased more than 2,400 billion euros of bonds to support growth and inflation. It continues to do so, at a rate of EUR 30 billion per month, and will continue at least until next September. However, ECB governors are deliberating this. The institution’s chief economist, Peter Praet, felt that inflation in the Euro Area was rising sufficiently to consider, as early as this week at the meeting on June14, the end of its vast debt buyback programme, known as Quantitative Easing (QE).
After rejecting Giuseppe Conte’s first proposal for a government, Italian President Sergio Mattarella finally accepted his second proposal. This 53-year-old jurist, a novice in politics, will apply the anti-austerity and security program of the two victorious parties ̶ Lega and the Five Star Movement ̶ of the last legislative elections.
Once again, private sector growth in the Euro Area slowed significantly and even more than expected in May. The composite Purchasing Managers Index (PMI), considered a reliable growth barometer, fell to 54.1, from 55.1 in April and from 58.8 in January. The consensus among economists was that the indicator would remain stable after its recent sharp fall. Growth slowed in the bloc’s two largest economies, Germany and France.