Posts tagged ‘confidence’
Market chat on the subject of the eurozone has tended to be rather downbeat over the last few years. Some observers have focused on its benighted wrangling over sovereign debt; others, more recently, on the supposed millstone of deflation. And there have of course been those who have questioned the zone’s very future. Narrative gloom set in well before the double dip recession’s second leg, persisted throughout it (Q4 2011 – Q1 2013) and has continued since. Today, however, the fundamentals are refusing to play ball even more stubbornly than they usually can, when the mood takes them.
Earlier this month we saw the ECB revise its growth forecast for 2015 up from 1.0% to 1.5%. Just this week, consumer confidence in the eurozone hit its highest level since the short-lived spike up into July 2007. And the composite output indicator showed the strongest level of growth since May 2011, before the market crash and pandemonium which dominated the second half of that year.
There are three major reasons for this.
- The euro has depreciated. It has fallen by over 20% against the dollar over the last nine months (from 1.365 to 1.088) and more modestly against sterling and the yen also (-8.7% and -6.5%).
- This real world monetary easing has been matched by the ECB’s first foray into quantitative easing. Dubious though the policy’s concept and effects may be, markets have tended to approve of this.
- The eurozone collectively is the world’s largest net importer of crude oil. Though the euro has got cheaper, oil has got cheaper still: the near Brent crude future is 36% lower in euro terms today than it was nine months ago.
Against this background the strong performance of European equity markets versus their developed-world peers is understandable. (The Stoxx 50 is up by 17% so far this year as against 11% for the Nikkei, 4% for the FTSE 100 and zero for the S&P.) The question is: can it last?
Disaster notwithstanding, the answer might just be “yes”.
The benign effects of cheap oil on the US as another significant net importer are offset by fears over monetary tightening in the face of a galloping labour market. These intensified last week when the word “patient” was removed from the formal description of the Fed’s present monetary stance. The Bank of England is similarly looking to tighten policy at some point as affirmed by Governor Carney only this morning. Before the oil price collapse began to be felt in earnest there were signs of price pressure in these economies and should the collapse unwind at all into the end of this year those signals will get stronger and stronger.
The unemployment rate in the eurozone, by contrast, fell by only 0.6% over the whole of last year to end it at 11.3%. This brings with it all sorts of other problems, of course, but from an inflationary perspective it leaves a lot of slack in the labour market. It looks likely to be some considerable time before investors need to worry about monetary tightening from the ECB.
On a similar note: with oil and other commodities having fallen or – at best – stabilized in price over the last few months, there is little danger of the weak euro having an inflationary effect. At the same time, the pitch of its descent means it has been winning that notorious game of “beggar my neighbour” for its exporters on the major currency markets. (This is not such great news for some far eastern countries, including China, whose exchange rates have strengthened impressively against the euro.)
There are always risks and Europe faces its own particular demons. But the speed of the turnaround there has been impressive: it was only back in November that the EU Commission last cut its forecast for 2015 growth. Like good news, quick turnarounds might well strike readers as a most un-European phenomenon. It has been most welcome to see the Continent delivering such pleasant surprises for a change.
Markets barely had enough time to recover from Mario Draghi’s last “rock star” performance at the ECB before he shocked them with yesterday’s encore. Back in June he left his fans with the rhetorical question: “Are we finished? The answer is no.” Yesterday he proved it, lifting the lid on a plan for purchasing about €700bn worth of asset-backed securities while slicing another 10bp off policy rates. Only six of the fifty-seven economists and investment banks surveyed by Bloomberg expected the rate move, and the ABS programme, though trailed at the June ECB press conference, has also come surprisingly quickly.
Three months ago it looked as though Mr Draghi was playing to the crowd as much as anything. Two questions now emerge:
- Has anything substantial happened in Europe since June which has increased the need for emergency monetary measures?
- If not, how necessary are the ECB’s announcements as “open mouth operations”?
Look at the growth numbers reported in August and it is tempting to answer question (1) with a “yes”. Across the eurozone as a whole, GDP for Q2 was flat, down from an already-muted 0.2% rise in Q1. Stagnation in France was no surprise but it was a mild shock to see Italy back in recession. At the same time, headline inflation has continued to fall back with the annual CPI increase to August down at 0.3%. There has also been heightened concern in recent weeks over events in eastern Ukraine, with some commentators attributing weakness in European business investment to fears over escalating sanctions against Russia.
At the same time, however, it’s not that simple. The PMI composite indicator of economic output for the eurozone remains well into positive territory, despite the usual variation between countries, and the economic sentiment indicator (of consumer and business confidence) remains well off its 2012 lows – and indeed well above the levels associated with the three quarters of positive growth witnessed from Q2 2013. The ECB along with the consensus expects GDP to grow again this quarter, albeit at the accustomed muted rate. Even on the inflationary front much of the decline is down to cheaper energy prices: the “core” CPI rate for August, which as it excludes volatile items such as food and energy is supposed to be a more accurate reflection of the economy’s underlying price dynamics, actually rose for the second time since May to 0.9%. On balance, then, it does not seem reasonable to believe that there has been a material deterioration in the fundamental prospects for the eurozone over the last three months.
This does nothing to detract from the importance of question (2). At yesterday’s press conference (the full text of which can be read here), Mr Draghi had the following important, and in this blog’s view unarguable statement to make in the tangential final section of his answer to a question about fiscal policy:
[I]n many parts of the euro area, there are several reasons why growth is not coming back, but one of them is actually that there is lack of confidence. There is lack of confidence in the future, lack of confidence in the prospects, in economic prospects, of these countries.
It is an indisputable fact that much of the world’s confidence in recent years has relied for better or for worse on the perceived actions of central banks. The ECB understands this. And the reaction to this week’s news, together with one key longer-term trend, seems to indicate that they are getting the confidence-building part of their operation right.
First the reaction yesterday: Stoxx 50 up by 1.8% on the day, credit spreads tighter, euro back under 1.30 for the first time in over a year – in its biggest daily percentage fall against the dollar since the height of the debt crisis in November 2011 – and as for the bond market, well, that brings us on to the longer-term trend side of things.
Talking of the height of the debt crisis, back in November ’11 it cost the Italian government 7.9% to raise three-year money. A few months later, after the ECB announced its potential use of an emergency long-dated bond-buying programme, Italy was borrowing for ten years at 5.8%. Finally, just on Thursday last week, Italy raised ten year money at 2.4% and five year at 1.1%, record lows in both cases. And it isn’t just Italy. At the time of writing, two year bond yields are actually negative now in Germany, Denmark, Finland, Belgium, the Netherlands, France, Austria, Slovakia and (wait for it …) Ireland. It puts even the two-year Japanese government bond to shame, and makes the yield on our own 4% 2016 gilt look positively generous at 0.8%. All this is just excellent news, of course, if you’re an indebted sovereign looking to refinance your borrowing at the cheapest rates available in the world.
It doesn’t do to be complacent about Europe, or indeed the world economy in general. But it is encouraging that the ECB has been rising to the market’s demands for action in its own managed, but clearly credible way. European confidence in particular does indeed need all the help it can get. Rock star: play on …
Some time ago we looked at the rare phenomenon that is the consumer confidence indicator:
It has been observed that making decisions on the basis of economic releases is like driving your car while looking only in the rear view mirror. The “latest” data, as a rule, only tells you what happened in the past: that GDP number refers to last quarter, those unemployment figures are the fruit of hiring decisions taken possibly years ago, and even that inflation number only tells you what prices did last month.
As with any rule, however, there is an exception. Confidence surveys can give a reliable indication of future economic out-turns as they poll people about their intentions, and private consumption is invariably the largest component of economic output.
This week, consumer confidence data was published for the US, the UK and the Eurozone. In each case confidence both rose on the month and exceeded economists’ expectations.
Conference Board data for the USA rose to a six-year high. In Euroland the indicator reached its highest level since November 2007, punching above the twenty year average for the measure in the process. And in the UK, GfK data showed the mood of the British consumer improving to its strongest pitch since August 2007.
At the more granular level in Europe in particular the signs have been encouraging. We dealt recently with the risk posed to the eurozone by possible weakness in France; well, French consumer confidence data posted the strongest result this week since July 2012. In Italy too, we had the best result for this indicator since the year before that. Both of these outcomes were positive surprises for the market.
Elsewhere in the world the news is not so unequivocally positive. In Japan for instance, the sales tax goes up on Tuesday from 5% to 8% – a well-flagged move but one which has had a measurable impact on confidence and consumer behaviour. Then again, one might equally point to the positive surprise in the US, which suggests that the growth impact of the coldest winter since 2009-10 / 1911-12 (depending on the measurement period) will prove more transient than some had expected.
This week’s releases are good news. This blog highlighted going into the New Year that growth would be a crucial topic for 2014. Political risk and anxiety over the Chinese peril certainly do not help. But these confidence indicators suggest that developed-world growth, which has only just begun growing over consecutive quarters for the first time since 2010, will continue to improve from here. That would certainly help bring us closer to the end of the beginning of the protracted torture of the financial crisis .. And, of course, closer to a new set of problems in due course.
The most significant UK event this week was the release of the Bank of England’s latest Inflation Report and accompanying press conference. Mr Carney’s “forward guidance” on interest rates, introduced last year, came under particular scrutiny with unemployment now within sight of the 7% level originally identified as a precondition to tightening policy. This guidance – “open mouth operations” in City slang – has been broadened. In line with statements from the Fed, the Bank is making quite a strong effort as the recovery strengthens to contain expectations that its base rate will rise. From the introduction to the Report:
“The UK recovery has gained momentum and inflation has returned to the 2% target … employment gains have been exceptionally strong and unemployment … is likely to reach the MPC’s 7% threshold by the spring of this year. Even so, the Committee judges that there remains spare capacity, concentrated in the labour market.
Inflation is likely to remain close to the target over the forecast period. Given this … the MPC judges that there remains scope to absorb slack further before raising Bank Rate. Moreover, the continuation of significant headwinds — both at home and from abroad — mean that Bank Rate may need to remain at low levels for some time to come.”
The message is clear. On the one hand the Bank has partially unwound one of its emergency monetary measures by taking residential mortgages out of the scope of its Funding for Lending scheme. The economy has picked up. On the other hand the Bank mustn’t frighten the horses by allowing premature expectations for rate rises to dampen confidence. Tighter credit markets and a stronger pound could undo the work of an accommodative base rate whose work against a fragile background is not yet done.
At the same time the Bank must justify its stance with an eye on the outlook for inflation. This is something it has woefully misjudged in recent years. Yet the argument remains the same: with spare capacity in the labour market there is no upward pressure on wages (which the data shows has been true) and so an increase in rates to tamp down demand is unwarranted.
This blog noted a few months ago that inflation is not yet on the world’s list of concerns. Indeed, in Europe the annual rate of CPI inflation has come in below 1% consistently since September and there is now talk of deflation in the eurozone. But in the UK prices have been much more stubborn. Can we really expect them to remain around the CPI target level of 2% over the next two years as Mr Carney’s model expects – the first time this will have happened since 2005?
We ought to have some sympathy for the Bank. Some of the inflation since the Great Recession has been attributable to VAT hikes, fuel duty and other indirect taxes. The question is: have these effects – which have nothing much to do with capacity in the labour market – really gone away?
When it comes to utility bills, for example, are we sure that costs due to capital investment programmes and environmental measures can be kept away from consumers? And is the impact of flooding on the price of food destined to be entirely negligible? There is also housing to consider. House prices are rising at over 5% on the ONS measure: over three times the average rate for 2012. For most months in 2011 they fell.
Governor Carney’s message on Wednesday saw bond yields and expectations for shorter-dated interest rates increase, and the biggest one-day rise in trade weighted sterling since last April. The market’s horses are not frightened, but nor are they discounting the eventual policy impact of the UK’s recovery entirely.
As conditions improve and risks remain, central banks have a tightrope to walk between destabilising recovery and fanning inflation. We must all hope they have a very keen sense of balance.
What an interesting year it is turning out to be.
This afternoon, stronger-than-expected employment data from the US surprised markets, driving equities to new record highs and causing bonds to sell off …
… But not all bonds. Government yields in Spain, Portugal, Italy and Greece have reached new lows for the year. 10-year Italian debt looks set to spend its first week below 4% since November 2010 – and this when a new prime minister has just announced he’s sick of austerity and wants to take some tax hikes off the table.
Safe haven bonds have held their ground well, the equity rally has seen huge regional variation and gold has made up a considerable amount of the ground it lost in its massive downward splurge last month. But we have been seeing real signs of a return to confidence – in some cases, even, a return to reason – in financial markets that have been challenged by serious events and which in recent years might have been expected to have reversed as a result.
We have spoken before about a “tug of war” between the US and Europe. If the US recovery keeps its pace and we see a return to growth on the other side of the Atlantic too, then the focus of this game will change.
There has been a lot of comment about a supposed “Great Rotation” from bonds to equities this year, and use of the phrase “risk on” whenever there are signs of this. The fact is though that this rotation / risk revaluation has been highly selective. European equity has lagged, as have the major emerging markets (three of the four “BRICs” are down YTD, with the exception of India, where the Nifty 50 has sputtered all of 0.7% higher). And even with this afternoon’s moves, benchmark bond yields in the US, the UK, Germany and Japan remain lower than where they ended 2012.
A sustained return of market confidence and a continued absence of macroeconomic catastrophe should see more of a “rotation” in appetite for risk than we have had so far: not just bonds-into-equities, but “safe” equities into markets, sectors and strategies which are still feared; spread compression in credit markets that is mirrored to a greater extent by drifts downward in over-bought government bonds … There are those who regret having missed what they see as a surprising rally in risk, but in fact this has been sufficiently limited for plenty of opportunities to remain should momentum build, broadening the spectrum of risk revaluation and making price behaviour elsewhere more consistent with what we have seen on the stock exchanges of New York, London and Tokyo.
It is true that this has been a frustrating, difficult and indeed hair-raising recovery. Market confidence could still quite easily come unstuck. But it is surely an equal truism that by the time everyone has regained their confidence, lost their fear of setbacks and decided to buy, risk markets really will be overpriced.
This is likely to take some time. And in a few months, of course, it might well look with hindsight that we should have all sold in May and gone away. Otherwise there are still opportunities out there – for now.
The gold market has been interesting again recently. Following a few months’ stately decline it suddenly collapsed over the weekend, losing more than $200 per ounce in the course of two days’ trading (prices here). It has bounced a little since but remains 20% down over the past six months. Now the gradual decline could be explained by reference to dollar weakness, but the spike down suggests something else.
Reuters has some interesting comments from Singapore overnight. Asian investors are at least as hooked on gold as are some of us in the west, and generally assumed to be keener buyers at a retail level. Here’s what a gold trader had to say:
Prices have suddenly jumped but I guess it’s because gold
has broken the $1,400-level again. Technically, people are just
buying up again …
This is from the global head of commodity strategy at ANZ:
A key factor to watch will be gold (exchange-traded fund)
ETF holdings, with a stabilisation in ETF holdings and then
fresh ETF buying to restore some of the lost confidence for
longer term gold investors.
The rest of the article waxes on about declining inflationary risks in the US and putative bullion sales by European central banks. As regular readers will know, the economic arguments used to explain the price behaviour of gold have always been utterly specious. The rally has been driven by sentiment – a heady mix of panic over the world at large and greed at the prospects for the supposed opportunity presented by gold ownership in particular.
So what is interesting about the discussion and coverage now is that the focus has shifted to this way of thinking. Note that the professionals comment on technically-driven trading and investor interest. This is what is getting the attention. Wise-sounding opinions on “fiat currency”, quantitative easing and so on are being displaced by the rather less elevated analysis of the commodity market’s real drivers: supply and demand.
Gold has always been a safe haven – in a sense. (It is, after all, a costly and highly volatile one.) Should funk set in again it might well reach the $2,000 or even $10,000-an-ounce levels being predicted for it with some confidence only 18 months ago.
Meanwhile, however, it would be consistent with growing confidence for investors to lose their appetite for gold as a haven asset. Perhaps what we are seeing is a buying opportunity, as is being advocated by some. Alternatively, this could be the early popping sound of a major bubble.
What is going on in Britain?
A few weeks ago this blog noted the underperformance of the UK equity market, and drew attention to falls in consumer confidence which set the country apart from its developed world peers. Was it possible that something about the UK economy was causing us to lag the recovery in the rest of the world?
Data released yesterday offered completely contradictory answers to that question. On the one hand, the Nationwide measure of consumer confidence failed to recover and remains at levels last seen in the teeth of the recent contraction. On the other hand, the monthly CBI survey showed rising optimism and buoyant order books in the manufacturing sector, and retail sales figures got a boost last month from the weather and the royal wedding.
So which data is right? Is Britain a country that will recover along with the rest of the world, or stagnate?
There is a way of reconciling the apparent contradiction between these different pieces of information – and it’s not hopeful. In a world where economic data largely tells us what happened weeks or months ago, confidence surveys are an exception in that they afford a glimpse of what might lie ahead (“leading indicators” in the textbook jargon). So while the CBI series and the retail sales data give grounds for hope today, weak consumer sentiment suggests a more difficult tomorrow.
Of course, recoveries are patchy things. In 1984, for example, confidence and growth both took a knock on the back of the miners’ strike, but recovery from the rather severe recession of 1980-81 soon picked up speed again to become the famous late 80s boom. Consumer nervousness could always turn round and see us “recover the recovery” in a similar way.
Today, however, a major strain on confidence is the squeeze on real incomes arising from modest wage growth in the face of relatively high inflation. There is no way of telling for certain how long this squeeze may last, though it has already proved far more persistent than the pickets of a generation ago and is expected to last a while longer.
Growth forecasts for the UK have already been revised down. Absent that turnaround in confidence, there is a chance that our growth blip could become a double dip.