The Fed lowers its benchmark rate to 1.5-1.75%. It says it wants to take a break. It downplayed expectations of another cut this year. The three drops this year are consistent with the September dots’ graph. Now the real rate of the fed is negative while the unemployment rate is at 3.5%. Always a very strange configuration.
We are waiting for the press conference to find out what Powell will say about the money market, which is not stabilizing. There is a real concern.
On this latter point, the message from Powell was clear. Stay away, it is not your business. It’s a bit scary, isn’t it ?
GDP growth in France was 1% in Q3 versus 1.1% in the first quarter and 1.4% in the second (annual rate). The carry over for 2019 at then end of the third quarter is 1.2%. If growth is again at 1.2% in the last quarter then GDP will have grown by 1.3% on average over the year after 1.7% last year. The chart shows a rapid rise in activity since the beginning of the recovery in 2013 with a trend at 1.45%. We also note the particular character of the year 2017 during which the expansion had an exceptional character (2.4%). Since the last quarter of 2017, the annualized average growth is only 1.25%. It is this figure that is probably closest to the capacity of the French economy.
Domestic demand is at the heart of this expansion, while foreign trade contributes negatively. A sharp rise in imports was observed while exports continue to grow. The rise in imports comes after a negative figure in Q2. There is a catch-up effect. The rise in consumption has been stable on average since the beginning of the year at around 1.2%. It was at 1.3% for Q3 to compare with 1.5% in Q1 and 0.9% in Q2. Investment rose 3.8% after 2.1% in Q1 and 5.1% in Q2. These two components are at the heart of French growth. Note the continued growth of business investment despite a mediocre international environment. This may result from the temporary improvement of margins (double CICE effect and lower expenses in 2019) and a proactive economic policy in 2020 to support domestic demand. It is most encouraging. The slowdown in housing investment is worrisome but in line with what is happening in the private real estate market. The market is less dynamic with housing starts declining.
This internal dynamic reflects the economic policy that supports domestic demand to limit risk on growth. The increase in purchasing power resulting from the various bonus and the drop in the housing tax and the increase in employment, that will be seen again in the third quarter (November 8), are as much support for this internal demand. This promotes business investment. The dynamics of the economy is not excessive. There is no strong upside on growth however the risk of rupture is limited. This is essential in a risky international context
US households remain confident about the labor market robust momentum. The “more optimistic” trend is picking up again “It’s easy to find a job” This is rather auspicious for the end of the year. The risk of fragility is less marked for the US economy
The CFNAI index (Fed Chicago) indicates in September that the Fed’s decision to ease monetary policy is not linked to a risk of recession. An index close to -0.7 generally reflects a risk of recession & intervention by the Fed. It is -0.24 in September. More details here
> The Fed’s meeting with a press conference and a press release on Wednesday. Two questions: are disagreements between FOMC members remain as high as in September ? Will the Fed cut its target rate ? The dots graph suggests a third cut this year.
> Christine Lagarde will replace Mario Draghi as president of the ECB next Friday. The balance between politics and economics will be different than in the current mandate. The main task for Christine Lagarde will be to maintain the cohesion of the ECB members at a moment where the monetary policy is already very accommodative and the impact of a change will be questioned and lower than in the past.
> On the Brexit side, a vote is expected today on the possibility of general elections on December the 12th Boris Johnson will probably not have the qualified majority for it.
The EU, in a draft, has proposed an extension of the Brexit until the end of next January.
> GDP figures will be released this week in the US and in France (30) and in the Euro Area, Italy and Spain (31). Expectations are on lower figures than in the second quarter. This would be consistent with the business surveys seen during this third quarter.
> ISM index for the manufacturing sector (November 1) will be key to anticipate the business cycle profile in the US. The index was below the 50 threshold in August and September.
> The Chinese official PMI index (31) and the Markit index for the manufacturing sector (1st )
> The Markit indices for the manufacturing sector will be released on November the 1sr except on Continental Europe.
> The US employment report next Friday. The momentum is lower than in the first part of the year even with a very low unemployment rate
> Inflation flash estimates will be released in Europe this week. (Euro Area 31). As the oil price is on average lower than in September (53.7 € in October vs 56.7€ in September ) and has to be compared with a high level in October 2018 (70.3€). The energy contribution will be strongly negative and the inflation rate will be probably below the 0.8% seen in September.
>The ECB meeting (October 24) will be the most important event of the week. During last meeting, the ECB adopted a very accommodative monetary policy stance. This led to important discussions notably on the resumption of the QE and on the forward guidance as these measures will remain until the EA inflation converges to the ECB target. Nothing new is expected?
>This meeting will be the last for Mario Draghi. He will quit the ECB at the end of this month and be replaced by Christine Lagarde. Draghi has given to the ECB the soul and the instruments that are necessary for an independent and influential central bank (more details on Draghi’s impact on the ECB in the document).
> Many corporate surveys for October will be released during the week. The French “climat des affaires” (23), the German Ifo (25), the Markit flash estimate (24) and CBR orders in the UK (21) The current mood in developed countries is pessimistic and this will not reverse rapidly. The IMF forecasts was a synthetic view of this backdrop. A Brexit deal would have had a positive impact but the Parliament has not allowed for it. BoJo has ask for a new delay until the end of next January. This increases uncertainty as we don’t know what will happen in the next three months. Do we converge to a new referendum ? Will Bojo force the Brexit before the end of next January ? Will there be general elections ? No one knows. Many would like to write the future but the recent past has shown that the foreseeable future is not predictable. There are uncertainties also coming from the discussions between China and the US. Discussions, last week was mainly on agriculture as there is a necessity for the US to reverse the trend coming from the trade war. China now buys soybean in Brazil rather than in the US. This weakens Trump future presidential campaign. The risk associated with this negotiations’ failure is a source of supplementary weakness. The uncertainty for the future is still high and is a constraint for the economic activity.
>Durable goods orders in the US for September (24). These numbers have not been strong recently and could reflect a weakness in corporate investment in coming months. > Existing homes sales in the US for September (22) This statistic is important as it reflects a kind of wealth effect. Thera are more house owners in the US than people having a large portfolio of risky assets. Movement in the real estate has therefore more impact on consumers’ behavior than the stock market can have. The existing home sales is for me the most important statistic that shows this wealth effect. Recent improvement was supportive for consumers’ expenditures.
There is a lot of talks about the German savings rate, which is supposed to have increased recently in response to the drop in interest rates, notably the ECB rates. The anxiety caused by the fall in interest rates would encourage Germans to save more to counteract this uncertain environment. It does not work. Germans do not vote against the ECB by increasing their savings as savings rates are stable.
This story about the Germans’ behavior is supposed to show the frustration of our neighbors and the inability of the ECB to manage monetary policy.Very Smart People are still alive and in action.
I have looked at the series of the household savings rate (savings on disposable income) and the global saving rate (Total income minus private consumption minus public consumption as a% of total income). These are the two relevant series for measuring the savings rate, in Germany or elsewhere.These two series, in recent years are flat like the back of the hand.
The household savings rate has fluctuated between 9% and 11.2% since the first quarter of 2009 and stands at 10.8% in the second quarter of 2019. It can even be said that since the start of the euro area, the German household savings rate is stable on these same levels.
Yet since 2009 the refi rate has declined by 250 basis points, same for the deposit facility rate. There is no impact of the ECB rate on the behavior of the savings rate.
We can also look at the overall saving rate, that of the German economy as a whole. As the households’ saving rate, this one is stable.Since 1991, it has been slightly above 25% of GDP.It is not an additional saving behavior that explains the increase in the German external balance but the decline in the investment rate (the difference between the savings rate and the investment rate is the current account balanceas a% of GDP). For the overall saving rate also, the impact of the Bundesbank rate and then the ECB rate does not seem to exist.