Global Economic & Markets Factbook, June 2016: Key Takeaways
US real GDP decelerated to 0.8% q-o-q saar in Q1:16, albeit growth is expected to pick up to c. 2%-2.5% q-o-q saar in Q2, as consumption has rebounded and the housing sector remains strong. Job creation slowed sharply in May, with nonfarm payrolls (NFPs) increasing by 38k, the smallest gain since September 2010. Thus, the Fed, which remained on hold in June, will err on the side of caution with οne or at best two rate increases in 2016 unless GDP resumes its upward trend towards 2%, NFPs revert to gains of 100k and inflation moves higher.
Euro area real GDP accelerated to 2.2% qoq saar in Q1:16 from 1.7% in Q4:15. In Q2, growth will continue to be supported by personal spending, private investment and fiscal spending. The ECB, assuming Brexit is avoided, will maintain a "wait-and-see" stance, as the balance of risks to growth has improved. Despite the resilience of the domestic sector, protracted political uncertainty, could disrupt the fragile euro area recovery.
UK real GDP was 1.4% qoq saar in Q1:16, down from 2.4% in Q4:15. In Q2, GDP growth is expected to decelerate towards 1%, as investment plans are deferred due to policy uncertainty stemming from the upcoming EU membership referendum (June 23). The Bank of England, if the UK votes to remain in the EU, is likely to remain on hold during the course of 2016, seeking evidence that growth is picking up and uncertainty is fading. If the UK votes to exit the EU, the Bank of England will cut rates, reactivate QE purchases and provide cheap funding to the banking sector, despite a likely surge in inflation amid a weaker GBP.
In Japan, real GDP growth in Q1:16 surprised on the upside, increasing by 1.9% qoq saar, following a contraction of -1.8% in Q4:15. The pick-up appears difficult to sustain in the current quarter. Investment will remain sluggish amid declining profitability, sentiment and weak prospects for external demand. The Bank of Japan remained on hold in June, albeit further easing is expected in H2:2016 (likely at the July 29 meeting), in view of the fact that there is still a long way to go in reaching the inflation target (2%).
The Chinese economy remains on the path of a gradual transition towards a more sustainable, albeit lower, pace of growth. Consensus expects real GDP growth to decelerate to 6.6% yoy in Q2:16 and to 6.5% yoy in 2016, the low end of the Government's target (6.5% - 7.0%). Risks of a "hard-landing" remain, in view of surging corporate and quasi-Government debt. Indeed, the expansionary monetary stance since Q3:15 has fueled a further build-up in debt. The Chinese private sector debt-to-GDP ratio is estimated at 210% in Q4:15, having almost doubled since 2008.
US Equities continued to overperform their peers in Q2 (+70bps vs the MSCI DM), while Japanese equities (-3.5%) underperformed, with the significant appreciation of the Yen worsening the sentiment for corporates' profitability. The delay in the consumption tax increase by the Japanese Government did little to support risk appetite. European equities have demonstrated high volatility intra-quarter mainly due to elevated political uncertainty (Eurostoxx: -1.3%, FTSE100:+0.8%, so far, in Q2).
Government bond yields have declined further in Q2 due to a dovish turn by the Fed, increasing Government bond purchases by the ECB, and more recently due to heightened uncertainty regarding the UK referendum. Bunds and JGBs carry negative yields up to the 10Yr and 15Yr tenors, respectively. Credit indices (IG and HY) have tightened on both sides of the Atlantic, following: i) the ECB's decision to incorporate IG corporate bonds in its Asset Purchase Program; and ii) higher oil prices, albeit the rally has abated somewhat lately.
Euro area and Japan also saw their currencies appreciate versus the USD in Q2, by + 1.2% to USD1.12/€ and +7% to ¥105/USD, respectively, due to better growth prospects (euro area) and central bank inaction (BoJ).