Germany and France on a slower momentum

According to companies’ survey in Germany and in France the economic activity was marginally down in August. German’s companies were a little more pessimistic for the 6 month period to come.
Even if levels are different we perceive in the following graph that there is a kind of stability in economic activity during the last twelve months. This synchronization of the business cycle suggest that France and Germany cannot really expect a stronger growth momentum in the short run. In other words, it seems that German and French economic activity are not able to accelerate from their current level. It’s not worrisome for Germany as its unemployment rate is low but it is problematic for France as its unemployment rate is just below 10%. As there is no impulse from outside as world trade trend is flat, it means that the impulse must come from inside. The ECB has done the job so we must expect a more proactive fiscal policy in order to jump on a higher trajectory. Continue reading

Low momentum in the US

The Markit index for the manufacturing sector was marginally down in August. It was at 52.1 versus 52.9 in July. The average for the first two months of the third quarter is 52.5 versus 50.9 for the second quarter.  There is an acceleration of the manufacturing activity between the second and the third quarter. This was seen also in the manufacturing index that was published by the Federal Reserve last week.
Nevertheless this stronger pace will be transitory.
The graph below show the strong consistency between the Markit index and the manufacturing Production Index from the Federal Reserve. The lower index in August suggest that the width of the recent acceleration will be limited.
us-2016-august-markit-ipi.png
The new orders dynamics is also limited. The ratio of new orders to inventories is above  1 but is not accelerating.
us-2016-august-markit-ratio.png
In other words, there are no pressures on the economy and that’s the main reason for the Fed to maintain its current strategy.

Slow trend in the Euro Area

The Markit survey synthetic index was stable in August. It was at 52.3 as in July. The average of the first two months for the third quarter is 52.3 which is marginally above 52.2 which is the second quarter average. This level is consistent with a 0.3% (1.2% at annual rate) growth during the third quarter. There is no fracture that could come from the referendum in the United Kingdom. Brexit effects are still to come (see here and here on the first impact on investment)
Looking at the index trend we see that its level is almost stable since the beginning of 2015. This shows that the Euro Area economy is not able to go faster than the current 1.5% growth. It has no capacity to accelerate. This is not enough. Continue reading

Oil Price and Inflation – Rupture

Currently, the most important graph is the price of oil.
Last week, the oil price was above its level of August 2015. The oil price has started to fall at mid-2014. Since this moment, the oil price was always below the level it had one year before. this has changed last week. It’s the first time since 2014 that we see such a crossing.
This means that the energy contribution to the inflation rate will rapidly tend to 0 and if the price remains close to 50 the contribution will become positive. Therefore the inflation will rapidly converge to the core inflation rate. It will still be below central banks’ target (2%) but it is an important step. Continue reading

Brexit has not started yet

The referendum on Brexit was almost two months ago (June 23). We are now far from the recession that was announced in the case of a “Leave” vote. Yesterday, retail sales for July were strong (+1.4%). It is not a fracture (see this article this morning in the Guardian).

But it is too soon to rule out the possibility of a recession.
The main reason for that is that no measures have been taken to change the rules with the European Union.

Economists said that two points were important Continue reading

US, Japan UK, France – What to keep in mind on Tuesday

Five points to keep in mind

Minutes of the Federal Reserve
The good thing with the minutes of the last meeting of the Monetary Policy Committee of the Federal Reserve is that you can find what you want to find.
The main sentence to perceive this is the following “Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity. A couple of members preferred also to wait for more evidence that inflation would rise to 2 percent on a sustained basis.Some other members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.(page 12)”
The first part tells that the FOMC is cautious but the end of the sentence tells that improvement in macrodata could lead to a new strategy.
The Fed is also very attentive to the international context forcing the US central bank to remain cautious “In addition, it was noted that the dollar is a principal reserve currency and that monetary transmission in the United States occurs through funding markets that are quite globally connected.(page 3)Continue reading

A Two-Speed Euro? Not a Good Idea

In an article in the Financial Times, this morning (see here), Joseph Stiglitz suggests a two-speed euro area. There are two points in this article: One is the usual bashing of the euro as a very bad idea, the second is on the necessity of a two-speed Eurozone from the current situation. The main reason is associated with the absence of adjustments between countries that do not go at the same speed and with very different characteristics. Therefore the dynamics is far from optimal leading to a very inefficient situation according to Stiglitz.

A two-speed euro is not a good idea as I think that it would be the end of the Euro Area. Continue reading