Finally the high yield bond spread versus US treasuries is still low, which implies ongoing easy financing conditions and also reflects that investors are relaxed about the growth outlook and credit risk.
Published on April 17, 2018 in :
Fiscal and monetary policy
Turning points in the assessment of making major purchases lead those of the overall consumer confidence indicator.The difference of how top and bottom quartile income households assess their spending on major purchases is highly cyclical and its turning points lead those of consumer confidence. Based on recent observations, this suggests that the cyclical peak in consumer confidence is near.
Published on April 16, 2018 in :
Economic cycle
In most eurozone countries, durable goods consumption in relation to income is still below the previous cyclical peak
Consumer confidence tends to be higher than the previous peak. This combination suggests there is pent-up consumer demand but it could also reflect lingering households’ concerns about the lasting nature of the current robust growth.
Published on April 9, 2018 in :
Economic cycle
Eurozone business investment in relation to GDP is still below the previous cyclical peak but the difference is small, implying that the argument of pent-up demand isn’t that strong. However, the picture varies a lot depending on the country. In most countries, including the big four, the business climate is above the level registered at the end of 2007. This means that the investment/GDP ratio still has upside potential provided that confidence is translated into spending.
Published on April 4, 2018 in :
Economic cycle
The FOMC has an asymmetrical loss function: avoiding a recession is more important than avoiding the risk of overheating. With this comes the necessity of a symmetrical inflation objective: a temporary overshooting is acceptable. Given the unclear relationship between unemployment and inflation, the Fed’s tone remains cautious despite upbeat growth projections.
Published on March 26, 2018 in :
Fiscal and monetary policy
In this video, William De Vijlder comments Fed’s new economic projections since the arrival of the new president, Jerome Powell.
Published on March 23, 2018 in :
Fiscal and monetary policy
The IMF and the OECD have expressed concern about rising trade tensions. At the macro level, tariffs create a lose-lose situation but the sector impact varies a lot. Beyond the direct economic effect, the impact on inflation and financial markets should also be taken into account. The biggest concern is the headwind coming from a structural increase in uncertainty.
Published on March 19, 2018 in :
A different look
For the government to be formed after the elections, boosting potential GDP growth should be a key objective in view of its impact on public finances and the labour market.
Published on March 13, 2018 in :
Structural policy
At a given moment during the month of February, the S&P500 was down 10% from its historical high. Using the commonly used definition, this meant it was in correction territory. This was considered by some as a healthy correction whereas others argued it might very well mark the beginning of an era of structurally higher volatility. Econometric research and model-based simulations show that the economic impact of equity market corrections is rather small. The stylised facts however show the key role of the reciprocal influence between equity markets and growth expectations. In this respect, particular attention should be devoted to the evolution of the corporate bond spread.
Published on March 12, 2018 in :
Economic cycle
Mario Draghi’s insistence on the slippage of the reform effort in 2017, his strong urge to complete the Banking Union and the CMU, his concern about protectionism, etc. help explain the cautious stance of the central bank.
Published on March 12, 2018 in :
Fiscal and monetary policy
Core inflation projections by the ECB have followed a surprisingly predictable path. Starting at close to but below 2% for long horizons, they decline as the remaining horizon shortens. The big difference between the projections at long horizons and the eventual outcome implies they provide little information to the market: they simple confirm the ECB’s objective. They can also introduce a dovish policy bias.
Published on March 12, 2018 in :
Fiscal and monetary policy
The euro is undervalued versus the dollar on a purchasing power parity (PPP) basis. This raises the prospect of an appreciation of the euro. In gauging the consequences one should focus on inflation rather than on the growth impact.
Published on March 5, 2018 in :
Fiscal and monetary policy
February risks going down in history as the beginning of a new era marked by Wall Street’s correction. The central banks should be relieved by this “mission accomplished” but some discomfort is likely to be felt by the financial markets, which fear that more restrictive than expected monetary policies.
Published on March 5, 2018 in :
Economic cycle
Should we welcome the decline of the dollar or be alarmed? Eleven factors explain this slide whose spillovers depend on whether we take a short or medium-term perspective.
Published on March 1, 2018 in :
Fiscal and monetary policy
Fiscal reflation in a full employment economy makes it very likely that the US current account deficit will increase alongside the budget deficit. Despite rising bond yields, fuelled by the prospect of increasing budget deficits and monetary tightening, the dollar has weakened.
Published on February 26, 2018 in :
Fiscal and monetary policy
After the upside surprise to hourly wages earlier this month, the consumer and producer price inflation numbers have also come in higher than expected. Anticipating inflation dynamics has become very difficult, as the Phillips curve has become less apparent. This forces investors and policy makers to pay more attention to recent data than to long-term relationships.
Published on February 19, 2018 in :
Fiscal and monetary policy
During the current business cycle, rising bond yields have been accompanied by rising equity prices. From a historical perspective, the rise in equities in recent months has been abnormally strong, probably helped by the prospect of corporate tax cuts. Market developments this week show a high sensitivity to economic surprises which may end up fuelling economic uncertainty.
Published on February 12, 2018 in :
Markets and financial investments
The recently released winter forecasts of the European Commission express confidence that solid growth will continue. The expansion is broad-based and has become self-reinforcing. Labour market slack implies that growth should continue to grow well above potential but increasing shortages in specific areas are expected to eventually act as a speed limit leading to a moderation in growth.
Published on February 9, 2018 in :
Economic cycle
Historically, a rising rate environment in the US has been a matter of concern for developing economies. It seems that this time is different: despite rising US yields, emerging market currencies have strengthened. This has contributed to a weakening of the effective exchange rate of the dollar and an easing of financial conditions in the US.
Published on February 5, 2018 in :
Fiscal and monetary policy
The combination of tax cuts and a still accommodative monetary policy should be very supportive for growth in the short run, all the more so given the easing of financial conditions (rise in equity market, weakening of the dollar). The longer run perspective is more sobering: limited potential to cut policy rates and a reduction of the fiscal policy space. Addressing growth slowdowns will be more challenging than ever.
Published on February 2, 2018 in :
Fiscal and monetary policy
Eurozone growth is robust. Sentiment indicators and the drivers of final demand all point towards ongoing strength. At some point however, growth will slow down. Whether this will cause a jump in uncertainty very much will depend on the financial environment.
Published on January 29, 2018 in :
Economic cycle
