Macro Weekly
Han de Jong
Chief Economist
Group Economics
Draghi disappoints as oil falls
further while economy improves
5 December 2014
ECB President Mario Draghi disappointed market participants. This says more about how hyped up market expectations were
than about what is urgently needed. One thing is clear, the ECB will step up its actions in the new year. Two points are
important to make about this. First, it really isn't all that relevant how the ECB achieves its aim of lengthening its balance
sheet, as long as it achieves it. Second, the ECB has very little chance of raising inflation expectations in the short term. Oil
prices are currently driving inflation expectations and the ECB does not play a role in the oil market. Meanwhile, various
indicators signal that the weakness of the German economy over the summer and the autumn will prove to be temporary.
Draghi disappoints...
Inflation expectations
Ever since his speech at Jackson Hole in August, ECB
Central bankers watch inflation expectations very closely. They
President Mario Draghi has raised expectations that the ECB
like them to be 'anchored' near their target. The idea is that
would shortly and aggressively step up its actions. Indeed, the
inflation expectations affect behaviour and if inflation
ECB has been buying covered bonds and they have been
expectations fall too much and stay too low for too long, the
more aggressive than they had on previous occasions.
economy is in danger of entering sustained deflation. Inflation
Deteriorating economic conditions and uncomfortably low
expectations in the eurozone have become 'dislodged'. In the
inflation are good reasons for the ECB to try to boost the
course of 2014, the anchor has started drifting. As such, it is
economy and try to push inflation back to its target of 'below,
reasonable for the ECB to react to that. But there is a big
but close to 2%'. Participants in financial markets were,
'BUT'. Inflation expectations are driven by oil prices in the short
apparently, hoping that Draghi would announce further steps at
term, particularly when oil prices move significantly. The simple
the press conference yesterday. He did not. Instead, he
truth is that the ECB has no control over or effect on oil prices.
indicated that such action will come after the turn of the year.
Therefore, the ECB is largely impotent when it comes to
Markets were disappointed. Perhaps it was not only the timing
affecting inflation expectations in the short term. While we think
of the action that fell short of expectations, but also the
that oil prices will soon find a bottom and then bounce a little,
specifics of what Draghi said. Market participants may have
chances are relatively high that lower energy costs will push
assumed that so called 'sovereign QE' (the ECB buying
eurozone inflation down further and, possibly, into negative
government bonds) was a done deal. But Draghi did not
territory, at least for a while. This would not be the end of the
commit to that. Buying government bonds is controversial. It
world.
would be more convenient if the ECB was able to lengthen its
balance sheet without purchasing government bonds.
IEA supply vs demand oil
mln barrels/day
...but more action on the way
We think it is better to look at the broader message. And that
message is quite clear. The ECB is determined to lengthen its
94
92
balance sheet significantly. How it will achieve that is actually
90
not really that relevant and it depends on a number of issues.
88
Most important, the more banks borrow from the ECB under
86
the TLTRO facility, the less chance that the ECB will feel
obliged to buy government bonds to achieve the desired
increase in its balance sheet. We will get a clearer picture
shortly when the second tranche of the TLTRO will be
84
82
08
09
10
11
Demand
12
13
14
Supply
allocated in a few days. In addition, the ECB will first look at
other assets, such as agency debt and corporate bonds,
Source: IEA
before buying government bonds.
Macro Weekly - 5 December 2014
1
Falling oil: good or bad?
Fed’s end of year forecast. Both indicators suggest that the
Mr Draghi talked a lot about oil prices in his recent press
economy is making fast progress towards maximum
conference. The message is not entirely clear, at least, not to
employment. The labour market is now showing tighter
me. In the past, the ECB, and the Bundesbank before that,
conditions which should spur wage growth.
have always played down the relevance for monetary policy of
swings in oil prices and their impact on headline inflation. And
Germany: Business confidence in construction
it is important to determine what causes the decline in oil
prices. If lower demand for oil (resulting, for example, from a
recession) is the main driver, then slumping oil prices are a
index
60
symptom of an economic problem. The situation is different if
higher oil production is the main cause. We believe that the
50
current decline in oil prices is more caused by the supply side
of the oil market than the demand side. That is an important
reason for us to see the decline in oil prices mainly as a
40
tailwind for the global economy and for oil importers in
particular, obviously. The eurozone economy will benefit and
growth is likely to pick up in the months and quarters ahead.
The ECB is too pessimistic on growth
30
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Source: Bloomberg
The ECB has lowered its GDP growth and inflation forecasts
for 2015 and 2016. The downgrade of its growth forecast for
Germany: Business confidence in retail
2015, from 1.6% to 1.0% was particularly large. We think the
index
ECB is now far too pessimistic. It looks to us as though the
revision was largely driven by disappointing data over the
60
summer. We have argued that the weakness would be
temporary as the economy will increasingly enjoy tailwinds
from lower oil prices, lower borrowing costs, the decline in the
55
euro, less austerity and the healing of the credit channel. In
addition, we have argued that the weakness over the summer
was partly the result of an inventory correction in the industrial
50
sector globally. Such corrections are temporary by definition.
Recent data encouraging
Recent economic data is consistent with our more optimistic
view. Eurozone retail sales recovered a little in October from a
sharp drop in September. More importantly, German factory
orders were strong in October and significantly ahead of
expectations, following a couple of months of weakness. The
picture emerging from various sectoral confidence indices is
also positive. Confidence in the German retail sector and in
German construction rose significantly in November, the
second consecutive material improvement. The strengthening
45
Jan-12
in three years. Underutilisation in the labour market is
gradually diminishing. The November nonfarm payrolls report
(+321K) showed that employers ramped up hiring. The
unemployment rate was unchanged at 5.8% which is below the
Jan-13
Jul-13
Jan-14
Jul-14
Source: Bloomberg
Taking stock
Our views on these issues can be summarised in the following
bullet points:
•
The ECB will expand its balance sheet more
•
The market is obsessed with the question of whether or
aggressively in the new year
not the ECB will buy government bonds, but that is not so
of confidence is cancelling out weakness in previous months.
The US labour market report delivered its strongest job growth
Jul-12
relevant as long as the ECB lengthens its balance sheet.
•
The ECB will, if possible, avoid, but certainly delay
buying government bonds, because such purchases are
controversial. In any event, government bonds will not be
at the top of the ECB's shopping list when the 'sales' start
after Christmas.
Macro Weekly
2
•
Should the ECB fail to lengthen its balance sheet without
buying government bonds, they will not hesitate (too
long) to enter that market.
•
The ECB is worried over inflation expectations, but has
•
Eurozone headline inflation may fall into negative territory
very little influence over them in the short term.
in the months ahead. This is not the beginning of a
sustained period of painful deflation.
•
Recent data suggests that the weakness in the eurozone
seen over the summer and the autumn will be temporary
•
The slump in oil prices is largely driven by higher oil
production and is therefore a significant tailwind for the
global economy in 2015, and for the eurozone in
particular
Find out more about Group Economics at: http://insights.abnamro.nl/en/category/economy/
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Macro Weekly
3
Main economic/financial forecasts
GDP grow th (%)
2013
2014e
2015e
2016e
+3M
+12M
2015e
2016e
2.2
2.3
3.8
3.0
United States
0.23
0.24
0.8
1.4
1.4
3.1
-0.4
0.9
1.5
1.9
Eurozone
0.08
0.08
0.0
0.0
0.0
0.0
Japan
1.5
0.5
1.1
1.6
Japan
0.18
0.18
0.2
0.2
0.2
0.2
United Kingdom
1.7
3.0
2.8
2.6
United Kingdom
0.55
0.55
0.6
1.2
1.2
2.2
China
27/11/2014 04/12/2014
2016e
United States
Eurozone
3M interbank rate
27/11/2014 04/12/2014
7.7
7.5
7.0
7.0
World
Inflation (%)
3.2
2013
3.2
2014e
3.8
2015e
3.9
2016e
+3M
+12M
2015e
United States
1.5
1.7
1.6
2.2
US Treasury
2.25
2.24
2.8
3.0
3.0
3.5
Eurozone
1.3
0.5
0.9
1.5
German Bund
0.71
0.77
1.1
1.3
1.3
1.6
10Y interest rate
Japan
0.3
2.7
1.7
2.0
Euro sw ap rate
0.91
0.99
1.3
1.5
1.5
1.8
United Kingdom
2.6
1.4
1.1
1.9
Japanese gov. bonds
0.43
0.41
0.6
0.7
0.7
1.0
China
UK gilts
1.92
1.99
2.4
2.7
2.7
3.2
27/11/2014 04/12/2014
2.6
2.0
2.5
2.9
World
Key policy rate
4.0
04/12/2014
3.8
+3M
3.8
2015e
3.8
2016e
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.50
1.00
3.00
EUR/USD
1.25
1.24
1.20
1.15
1.15
1.00
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
117.7
119.8
120
125
125
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.57
1.57
1.46
1.47
1.47
1.33
Currencies
Bank of England
0.50
0.50
1.00
2.00
EUR/GBP
0.79
0.79
0.82
0.78
0.78
0.75
People's Bank of China
5.60
5.10
5.10
5.10
USD/CNY
6.14
6.15
6.20
6.25
6.17
6.25
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Day
Date
Time
Country
Monday
Monday
Monday
Monday
Monday
Monday
Monday
08/12/2014
08/12/2014
08/12/2014
08/12/2014
08/12/2014
08/12/2014
08/12/2014
00:50:00
00:50:00
06:00:00
08:00:00
09:15:00
18:30
JP
JP
JP
DE
CH
CN
US
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
09/12/2014
09/12/2014
09/12/2014
09/12/2014
09/12/2014
09/12/2014
09/12/2014
01:01:00
07:45:00
08:45:00
10:30:00
13:30:00
16:00:00
16:00:00
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
10/12/2014
10/12/2014
10/12/2014
10/12/2014
10/12/2014
10/12/2014
10/12/2014
10/12/2014
10/12/2014
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
GDP - % qoq
BOP Current account - JPY bn
Economy Watchers Survey - index
Industrial production - % mom
CPI - % yoy
Trade balance - USD bn
Fed's Lockhart speaks on Monetary Policy in Atlanta
3Q F
Oct
Nov
Oct
Nov
Nov
-0.4
963.0
44.0
1.4
0.0
45.4
-0.1
432.0
GB
CH
FR
GB
US
US
GB
BRC Retail sales - % yoy
Unemployment - %
Trade balance - EUR mln
Manufacturing production - % mom
NFIB small business optimisme - index
US Job Openings by Industry
NIESR GDP estimate - % qoq
Nov
Nov
Oct
Oct
Nov
Oct
Nov
0.0
3.2
-4715.0
0.4
96.1
4735.0
0.7
02:30:00
09:00:00
10:00:00
10:30:00
10:30:00
21:00:00
15/12/2014
15/12/2014
15/12/2014
CN
ZA
NO
GB
GB
NZ
CN
CN
CN
CPI - % yoy
CPI - % yoy
CPI - % yoy
Trade balance Non-EU - GDP mln
Trade balance - GDP mln
Policy rate - %
M2 money growth - % yoy
New yuan loans - RMB bn
Aggregate financing - RMB bn
Nov
Nov
Nov
Oct
Oct
Dec 11
Nov
Nov
Nov
1.6
5.9
2.5
-4048.0
-2838.0
3.5
12.6
548.3
662.7
11/12/2014
11/12/2014
11/12/2014
11/12/2014
11/12/2014
12/11/2014
11/12/2014
11/12/2014
11/12/2014
11/12/2014
11/12/2014
00:50:00
01:01:00
08:00:00
09:30:00
10:00:00
11:15:00
14:30:00
16:00:00
22:30:00
JP
GB
DE
CH
NO
EZ
US
US
NZ
KR
RU
Machinery orders private sector - % mom
RICS house price balance - %
CPI - % yoy
Policy rate - %
Policy rate - %
ECB TLTRO allotment (EUR bn)
Retail sales - % mom
Business inventories - % mom
PMI manufacturing - index
Policy rate - %
GDP - % yoy
Oct
Nov
Nov F
Dec 11
Dec 11
2.9
20.0
0.6
0.0
1.5
-1.4
18.0
0.6
0.0
Nov
Oct
Nov
Dec 11
3Q P
0.3
0.3
59.3
2.0
0.7
0.3
0.2
12/12/2014
12/12/2014
12/12/2014
12/12/2014
12/12/2014
12/12/2014
12/12/2014
12/12/2014
05:30:00
06:30:00
06:30:00
06:30:00
11:00:00
13:00:00
13:00:00
15:55:00
JP
CN
CN
CN
EC
IN
IN
US
Industrial production - % mom
Fixed investments - % yoy
Retail sales - % yoy
Industrial production - % yoy
Industrial production - % mom
Industrial production - % yoy
CPI - % yoy
Univ. of Michigan cons. confidence - index
Oct F
Nov
Nov
Nov
Oct
Oct
Nov
Dec P
0.2
15.9
11.5
7.7
0.6
2.5
5.5
88.8
0.1
ABN AMRO
0.5
44.5
0.3
96.2
96
1.6
-2566.7
3.5
12.5
650.0
890.0
3.5
0.0
1.5
0.3
1.9
0.7
15.8
11.6
7.5
0.1
89.2
89.5
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Macro Weekly
4