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Our Economic Presidential Election Model shows Democrats earning 50.5% of the two-party votes in the upcoming presidential elections.
Solid growth in real disposable, modest inflation and a low unemployment rate are the main factors giving the slight economic edge to Mrs. Clinton.
Monthly economic data suggest that growth may be gaining some momentum. Exports in US$ terms maintained their recent upward trajectory in June while household spending indicators picked up. With regard to the second half of 2016, although prospects for exports are clouded by heightened global uncertainty, we believe that domestic growth will be supported by healthy private consumption and higher infrastructure spending.
Having implemented 100bp of easing in H1, Bank Indonesia’s policy stance during H2 will be influenced by how markets respond ahead of the next US interest rate hike, which we expect in September. Meanwhile, the latest data do not warrant any immediate action from the central bank. As such, unless there is evidence that the domestic economic recovery is suddenly losing momentum, we do not expect the central bank to unleash further easing in the next couple of months.
Although the Eurozone PMIs weakened slightly in July, the fall was much smaller than anticipated by most in the wake of the Brexit vote. Accordingly, we maintain our view that, after a sluggish Q2, growth in the Eurozone should remain fairly solid in the second half of the year.
The manufacturing PMI fell sharply in July but activity in the services sector showed remarkable strength and remained broadly unchanged over the previous month. Once again, the Germany’s service index very strong, reaching the highest level in over two years, as the European locomotive shrugged off Brexit woes. Growth in France, on the other hand, remains weaker, although the composite PMI climbed to 50 points.
Though the headline PMI readings both dropped sharply in July, the survey makes clear that the magnitude of the slowdown is closer to that seen in the Eurozone crisis of 2011 than the Global Financial Crisis of 2008.
The detail of the survey confirms the importance of exchange rates moves, with more promising signs for exporters but higher import costs causing problems.
Existing homes sales rose 1.1% in June, helped by an increase in first-time homebuyers. Low-mortgage rates and income growth should support sales going forward, but tight inventories and rising home prices will temper the pace.
As anticipated, the ECB’s Governing Council decided at its July interest rate meeting not to provide new policy support measures. But on balance, President Draghi struck a less dovish tone than expected by declining to provide any hints that a September policy stimulus would be forthcoming.
We remain comfortable with our out-of-consensus call that the ECB will end its asset purchase programme in March 2017. Further action may be more likely to come via other measures such as more direct support of the lending channel.
The "one size fits all" discussion regarding a single monetary policy for the Eurozone is an old and familiar one. In this Briefing, we take a look at the exchange rate part of this debate. Predictably, we find that a single exchange rate is not an optimal solution for economies with huge divergences in their external positions and different levels of productivity and inflation.
To do so, we look at the concept of an equilibrium exchange rate, a rate consistent with both internal and external balance. Using our Global Economic Model (GEM) we calculate what a "fair value" for a euro in different countries would be. By using Germany and Spain as examples, this exercise illustrates how core and peripheral economies in the Eurozone require different very exchange rates.
Our GEM shows that an equilibrium euro exchange rate for Germany would be close to $1.40, whereas for Spain it would be around $1.00. These results show in a clear and intuitive manner how economies with different productivity and price levels and with huge disparities in their foreign asset positions require very different exchange rates in order to achieve equilibrium.
Germany's trade balance has seen a massive increase since the introduction of the euro. While the country's extreme competitiveness plays a big role, a relatively weak currency compared to what a "German euro" would be has also been a key factor. Conversely, Spain has been forced to operate with a currency often too strong, leading to a deterioration of its external balances during most its euro membership.
But there is a silver lining to this. By removing the exchange rate as an easily available policy tool to increase competitiveness through devaluations, peripheral economies are being forced to implement structural reforms to raise relative productivity and remain competitive. While a slow and often painful process, the results have started to become apparent in Spain in recent years.
Broad money growth in the ex-China ex-Japan Asia-Pacific (APAC) region continues to slow. Latest data show the 12-month rate already at a 13-year low and the 3-month annualised numbers imply further weakness.
Moreover, the trend for weaker broad money growth is widespread, with only the Philippines posting an acceleration in 2016 relative to 2015. It is also true for real broad money growth.
The monetary data imply weaker activity in H2 2016 and into 2017. This goes against our baseline forecast, which is for economic growth to accelerate slightly in most countries in the region.
Should the monetary indications nevertheless be right, or if either of our China downturn scenarios come to pass, there is scope for easing monetary policy. Policy interest rates are relatively high by current global standards, meaning there is still space for conventional measures (i.e. interest rate cuts). Meanwhile, with the exception of Japan, none of the countries in the region have yet tried unconventional measures.
On a technical point, we have expanded our APAC broad money measure to include also India and the larger advanced economies in the region (Korea, Australia, Hong Kong, Taiwan and Singapore).
In a move that surprised the markets but was in line with our forecast, Bank Indonesia left the benchmark policy rate unchanged at 6.5% following the July policy meeting.
Nonetheless, given the headwinds to growth, there is still the possibility of future easing. However, Bank Indonesia’s policy stance will largely be influenced by how markets respond ahead of the next US interest rate hike, which we have pencilled in for September.
Both the Eurozone consumer confidence published yesterday and the French business indicators released this morning point to a muted confidence shock from Brexit. This is in line with our view of a small effect of Brexit on the Eurozone. But we have to wait until tomorrow morning, when the flash PMIs will be published, to have a more comprehensive assessment of the momentum in the Eurozone economy.
Meanwhile, it looks like the Italian government wants to accelerate the rescue of Monte Paschi di Siena (MPS) before the EBA stress test publication on the 29 of July. The plan envisages a public intervention, and some bail-in, if MPS fails to recapitalize itself in the markets.
The noticeable depreciation of the CNY in recent months has left markets unmoved, in large part because net financial outflows have receded. Meanwhile, the weakening has removed the overvaluation that had developed in 2015. Looking ahead, we expect some modest further weakening – but not much – before gradual trend appreciation resumes.
A 0.9% monthly fall in retail sales volumes in June will no doubt get Brexit-fears a tizzy.But given the strength of volumes in the preceding two months, a decline was unsurprising. Indeed, Q2 saw sales volumes rise at the fastest pace since the end of 2014.
Meanwhile, there was a rare piece of good news on the public finances front. A jump in income tax receipts contributed to monthly public sector borrowing falling by more than expected. But with the economy likely to see a marked slowdown, deficit reduction ambitions will now have to take a back seat.
The sharp decline in Venezuela's oil production in May could be a permanent shift. We estimate it will trim an additional 0.9 percentage points from GDP growth this year as well as cutting the country's dwindling FX reserves by an additional 12% (US$1.5bn).
Yet, we maintain our view that PDVSA will pay bondholders in full this year before seeking a friendly debt restructuring ahead of its 2017 maturities.
A precautionary fiscal loosening among the advanced economies has much to recommend it and is becoming increasingly likely. Even before the UK Brexit vote world growth was sluggish, and while global markets have regained their post-Brexit losses downside risks to world growth remain significant. The stimulus should focus on government investment, which has been neglected over recent years. Sharp falls in bond yields over recent weeks make a government investment programme unprecedentedly cheap.
We forecast world growth at a sluggish 2.3% this year, with a strong risk of growth sliding below 2%. A key weakness of the global recovery has been low investment, with declining government investment a major factor in this – G7 government investment fell 10% in real terms from 2009-15.
With interest rates close to the zero bound (and negative in real terms), it is likely that a government investment boost would be especially effective in boosting economic growth, with a lack of ‘crowding out effects’.
Simulations using the Oxford Global Economic Model suggest a 1% of GDP rise in government investment over two years could raise the level of GDP in individual G7 countries by 0.6-1.4% by 2017, with even larger increases if all G7 countries did this at once.
Our modelling also suggests a fiscal boost of this sort could substantially pay for itself by generating extra GDP growth and tax revenue. Loosening fiscal policy also makes sense given that, on current policies, fiscal policy across the G20 will actually turn restrictive next year.
National data published this morning support the view that Brexit has not triggered panic amongst Eurozone households. While we expect the flash EC consumer sentiment index published later today to have fallen, a steep plunge in confidence seems unlikely.
The three months to May saw the LFS unemployment rate drop below 5% for the first time since September 2005. And the single month measure suggests that further declines are in prospect.
Of course, the possibility of a Brexit-inspired slowdown may quickly change this picture. But reassuringly, the latest Bank of England’s Agents’survey found that a majority of firms did not expect a near-term impact on hiring plans.
The deterioration in external conditions has taken a toll on the economies of the Commonwealth of Independent States (CIS). Lower oil prices, reduced remittances from Russia and significantly weaker currencies have dampened the near-term outlook. Further east, the slowing Chinese economy is posing a significant challenge, but the nature of its slowdown offers the region important trade and investment opportunities.
The adjustment of CIS economies to less favourable external conditions has not been pain-free, and we expect the region to remain in recession this year. Oil exporters' high dependence on energy revenues has led in sharp currency depreciation and rising inflation. Meanwhile for oil importers, the loss of remittances has more than offset the positive impact of lower oil prices.
But the region also has to contend with China's slowing economy. Strong trade and financial linkages mean the slowdown in China is significantly dampening regional trade, through reduced demand for both commodities and manufactured exports.
But this need not all be negative for the CIS. First, given the extent of real currency depreciation, especially against the CNY, these economies will benefit from large competitiveness gains, boosting their potential to increase exports to China.
Second, the nature of China's slowdown matters. The rebalancing of the Chinese economy away from investment and towards consumption and services augurs well for CIS and other countries' manufacturing exports, particularly at the low-skilled level.
Finally, many countries in the region are well placed to benefit from the funding being allocated to China's new Silk Road policies. Chinese investment and loans will have a positive impact by improving regional infrastructure and economic diversification.
Housing starts and permits increase in June. The June data are consistent with softer momentum in residential investment in Q2 GDP.
Inflation is forecast to come in well below the RBA’s 2-3% inflation target band in Q2 marking nearly two years of sub-target inflation. Real activity is firm, but the RBA has signalled that the inflation outlook is its main concern –hence we look for the RBA to cut the policy rate by 25bp to 1.5% in August. Low interest rates and solid employment growth are supporting domestic demand while exports will benefit from a competitive currency. However, weak business investment, especially in the mining sector, is offsetting these positives. We see GDP growth of 2.9% this year and 2.7% in 2017.
The quarterly ECB bank lending survey revealed a further net easing of credit conditions for both corporate and mortgage lending. At the same time, a tightening of credit conditions in Germany (the largest economy and the most exposed to external demand) and a falling contribution from fixed investment for new loan demand suggest that the recovery is still fragile and sensitive to uncertain global demand.
In a second major reading since Brexit vote, the German investor sentiment indicator plunged 26 points to its lowest level since late 2012. A fall of this magnitude (also coming in the wake of weaker Sentix index), points to the composite PMI falling to around 51. This would be consistent with a slightly more pronounced post Brexit slowdown than we have currently envisaged.
Usually the market consensus provides a good benchmark for the economy’s prospects, but at the current time it looks seriously flawed, particularly for 2016. Several ‘consensus’ estimates include pre-referendum forecasts, while others appear not to have factored in the very strong data already published for Q2.
As a result, we think there is plenty of scope for upside surprises as the data emerges over the next six months even if, as expected, Brexit causes momentum to ebb away.
Inflation nudged up in June on the back of higher petrol prices and a reversal of May’s unusual weakness in air fares.
The sharp depreciation of sterling since the EU referendum means that inflation is likely to accelerate through the remainder of the year, breaching the 2% target in early-2017. However, with core pressures remaining very muted, this should limit the extent to which inflation accelerates.
The failed coup d’état attempt over the weekend did not generate market panic, but we think it reinforces the perilous trajectory the country and the economy are on.
The main changes to the forecast this month relate to monetary policy and the exchange rate. We now believe that the BCB will refrain from cutting interest rates this year as inflation expectations are not yet firmly under control. That said, we forecast an aggressive loosening of monetary policy next year, with the Selic rate expected to end 2017 at 10%, down from 14.25% currently. Meanwhile, the real is now forecast to trade between 3.30 and 3.65 per US$ this year, which should also help to tame inflationary pressures. We think the implications for aggregate demand will be negligible and have therefore maintained our GDP growth forecasts unchanged at -3.4% for 2016 and +0.1% for 2017.
The US economy continues to be supported by strong domestic fundamentals and momentum appears firm as we enter the back half of 2016. In line with our top 2016 calls, domestic tailwinds continue to dominate international headwinds and rising election uncertainty.
Consumer spending maintains a firm pace supported by solid employment growth and steadfast confidence. While a maturing labor market will mean lower monthly payrolls, wage growth will pick up the income growth baton.
Weakness in construction activity could be troublesome for the housing recovery, while signs of excessive leverage in the commercial real estate sector have authorities worried.
Weak business investment, restrained by a strong dollar, sluggish global growth, depressed oil & gas activity, tightening credit conditions, low profits, high inventories and rising elections uncertainty, remains the main anvil to stronger GDP growth.
Slower exports also represent a major headwind as Europe, Mexico and more broadly emerging markets have yet to show signs of a persistent growth acceleration.
While financial conditions are tighter than they were in 2014, lower long-term yields are generally supportive of activity.
While the odds of a recession have risen, they remain relatively low around 20%. That being said, we monitor recession sign-posts and highlight long-term challenges for the US economy.
With markets pricing-in an extremely slow tightening cycle, the Fed will need careful communication ahead of its future interest rate hikes to avoid tighter financial conditions. Overall, we see the Fed embracing a growth-supportive stance.
Higher oil prices are likely to weigh on India’s trade deficit, albeit only modestly as recovering exports and muted trends in other key imports, such as gold, limit the likelihood of a marked deterioration in the trade gap. Nevertheless, adverse external developments could shift the balance of risks.
With little major Eurozone economic news, the focus in Europe is still on the aftermath of the weekend’s events in Turkey. Following the failed military coup, President’s Erdogan’s authoritarian stance seems unlikely to soften and the EU-Turkey deal looks shakier than ever.
June's trade data confirms that net exports are likely to have made a positive contribution to Q2 GDP y/y growth. However, while we think the impulse from oil exports is likely to continue for a number of months, the outlook for NODX is less certain. In particular, external demand remains sluggish and the boost from the pharmaceutical sector is likely to prove temporary.
Gain in June industrial production driven by automotive and utility output. Despite an average decline in industrial production in Q2, the Fed is still on track to raise rates in September.
Retail sales up 0.6% in June, solid end to the quarter. Consumer spending looks well supported by income growth and should continue to support GDP growth going forward.
June CPI up 0.2%. Year-on-year CPI was up 1.0%, remaining below the Fed's 2% target but much improved from year ago readings. Core CPI was up 0.2% for a year-on-year increase of 2.3%. We expect inflation to remain firm around current levels which should enable the Fed to raise rates in September, if other data line up with the FOMC's expectations.
We continue to forecast the S&P index to move sideways this year. This implies a modest decline in the second half of the year. Beyond the increased uncertainty related to Brexit, the main trigger could arise from the Fed hiking rate in September, whereas the market is currently pricing in no rate increase up to June 2017. Such a market surprise has the potential to strengthen the US dollar, hurting profit margins further and therefore S&P earnings. This could be all the more problematic as we expect Q2 earnings to contract for a fourth consecutive quarter. Overall, risks to US equities remain significantly skewed to the downside. US shares are overvalued, which prevents any substantial increase in US equity exposure by long-term investors, especially local ones.
We expect the Eurostoxx to post a very modest decline this year (at best a flat performance) amid the increased political and policy uncertainty triggered by the Brexit. We have slightly revised down our equity forecast to account for the poor earnings growth so far this year (and for our lower GDP estimates: -0.1pp in 2016 and -0.2pp in 2017). Meanwhile, we don’t expect the ECB to ease its monetary stance further this year, capping thereby any rebound in PE, which should then move sideways until the end of the year. Overall, we forecast a mild recovery in Eurozone equities in the second half of this year. They remain attractive for long-term foreign investors.
The Topix index is set to post negative returns in 2016 (around -6% year on year). We have revised down our earnings estimate for FY 2016 to reflect the negative impact of a stronger than expected yen in Q2 and our revised down GDP forecast for 2016 (-0.1ppt) and 2017 (-0.2ppt). We think that the boost to valuations from further monetary (extra ¥20tn) and fiscal (¥10tn) easing expected this year may only partially offset these negatives. That said, our yearly Topix forecast performance implies quite a rebound from current levels. Japanese stocks remain undervalued both in absolute and relative terms, but the sluggish macroeconomic background may cloud equity performance in the medium-term. We continue to recommend a slightly underweight position on Japanese shares.
We are now broadly neutral on EM equities (FX hedged). We continue to recommend increasing exposure but being highly selective. Favour countries likely to benefit from the rebound in commodity prices, whose currencies are set to depreciate and whose equities are strongly undervalued (such as Russia and Saudi Arabia). These are value plays for long-term volatility-tolerant investors. Meanwhile, avoid countries facing strong macro headwinds, rising financial vulnerabilities due excess corporate leverage and political and policy uncertainties. We would thus avoid Turkey and China this year.
The Alberta wildfires will trigger a GDP contraction in Q2 after a strong start to the year. But reconstruction and oil production coming back online means growth will rebound in the second half. More generally, GDP growth will be supported by consumer spending, rising non-energy exports, the impending fiscal stimulus and a diminishing drag from energy sector investment. We forecast GDP growth of 1.3% in 2016, down from 1.4% last month, amid signs of softer domestic momentum. We expect the Bank of Canada to be on hold until the second half of 2017.
In line with our forecast, the central bank (BCCh) kept interest rates unchanged at 3.5% after its July meeting.Weak activity, a stronger currency and well-anchored inflation expectations have prompted us to revise our forecast for monetary policy; we now expect the BCCh to keep rates at 3.5% through 2017 instead of one 25bps hike.
Annual Eurozone CPI inflation was confirmed to have increased to +0.1% in June, the highest outturn since January. We continue to see inflation gradually increasing and to reach 1% by the end of the year. Moreover, monthly trade data for May suggest that net exports will not be a key source of growth for the Eurozone in Q2.
The Italian baking system remains in the headlines. We believe that PM Renzi will reach a compromise and use the stress-test results at the end of the month to trigger a public capital support of some of the most-distressed banks.
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The British public's vote to leave the EU will have wide-scale implications for businesses across the industrial spectrum.
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