1. Euro Area Money Supply – Good and Getting Better
Last week, the October Euro area broad money M3 flow increased by €51bn to €78bn, up sharply versus September when it rose by €7bn to €27bn. Annual M3 growth was +5.3% in October, up +0.4% from September’s number. Why is this important? Because there is a strong correlation between economic growth and money supply, as evidenced in the graph below which shows the relationship between M1 and GDP. This signal for strengthening economic growth was also reinforced at Pioneer Investment’s recent Macro Advisory Forum, where we believe the process of transforming a cyclical European recovery into a structural one is taking place, helped by strong cyclical headwinds created by the extremely accommodative ECB policy. The Euro area Composite Purchasing Managers Index release for October backed up this view, rising from 54.0 to 54.4, with both the Services and Manufacturing PMI’s increasing during the month. All in all, a good week for the Euro area economy, and one that will please the ECB ahead of their much-anticipated meeting this week.
A View from the European Equities Desk
Earnings in Europe experienced a wobble in Q3, as global growth concerns and falling commodity prices saw earnings growth slow after more positive trends over the previous quarters. In fact, the earnings season was the worst in 4 years. These developments are likely to result in aggregate earnings of the market ending close to zero in 2015, disappointing investors again.
This article was written by Craig Anzlovar, Vice President, Fixed Income Client Portfolio Manager.
Capital markets shrugged off the tragic events in Paris and ended firmer week over week (w/w). Equity markets were higher with the S&P 500 Index returning 1.73%. The Paris CAC 40 Index was also higher at 1.05%. Markets were focused on the Federal Reserve’s (Fed) October meeting minutes on Wednesday. According to the minutes, the central bank believes “it may well be appropriate” to raise rates in December. Also, it was largely agreed that the pace of increases would be gradual. The Fed Funds Futures market is pricing in a 68% chance of a December rate hike. That figure is up from 66% last week and well above the 25% low reached in October. The U.S. Treasury curve bull flattened* during the week with the 5-, 10- and 30-year yields down 5 basis points (bps), 8 bps and 10 bps, respectively. The prospect of Fed tightening supported the U.S. dollar (USD) with the Bloomberg Dollar Spot Index up 0.55% for the week. The Index is up 9.25% year to date.
1.ECB – Preparing the Ground
In July 2012, with the Euro sovereign debt crisis at its peak, ECB President Mario Draghi promised to do “whatever it takes” to ensure the continued survival of the Euro. It had an immediate effect, especially when Mr Draghi was questioned as to the actions the ECB could take, and he replied, “believe me, it will be enough”. There were shades of that speech last week as Mr Draghi spoke in Frankfurt and emphasised the Central Bank’s commitment to do “what we must to raise inflation as quickly as possible” towards the ECB’s target of close to, but below 2%. This call to action was backed up by other sources as well. The minutes of the ECB’s October meeting made it clear that the Governing Council was dissatisfied about how monetary policy had so far not been able to push inflation higher, and noted that the “degree of monetary policy accommodation would need to be re-examined in December”. In addition, the ECB’s Chief Economist Peter Praet expressed concerns on “the risks of inflation expectations becoming disanchored and on ECB credibility” as the return of inflation towards the 2% target remains uncertain even in 2017. At this stage, a cut of 10bps in the ECB’s depo rate and a monthly increase of €10bn in asset purchases are probably priced into markets. It remains to be seen if the ECB surprise the markets and acts more aggressively.
The prospect for a December Federal Reserve (Fed) rate hike continues to reverberate through financial markets. During the last week, the Fed’s rate hike bugle call was joined by the uber doves on the board, Fed Governors Rosengren and Evans. Both Governors made more hawkish-than-expected comments, including that the December meeting was a “live” one. In the last two weeks, the U.S. dollar (USD) and fixed income markets essentially priced in a December rate hike, while commodity prices and equity prices did not. But that changed last week. As a result, the market probability for a December rate hike has increased from 56% last week to 66% as of November 12 (see chart).