Core Government bond rates and the EUR are contained as a result of a series of events (Brexit, Italy, slowdown of euro area GDP, lower oil prices)
Euro area growth slowed in Q3:18 (0.2% qoq or +1.7% yoy, vs 0.4% qoq on average in H1:18). The headline figure was driven by weak output data in Germany (28% of total EA GDP) and Italy (15%). Germany’s GDP contracted by -0.2% qoq (+1.2% yoy) vs +0.5% qoq on average in H1:18, reflecting idiosyncratic auto sector headwinds as the adoption of Worldwide Harmonised Light Vehicle Test (WLTP) production standards -- that apply stricter environmental rules -- led, inter alia, to a decrease in working hours, car production and car exports.
The decline in German growth and stagnant Italian output (-0.2% qoq or +1.2% yoy, vs 0.5% qoq on average in H1:18) resulted in the weakest pace of euro area growth since Q1:13. Excluding these two countries, growth appeared more resilient elsewhere (est: +0.4% qoq). The temporary nature of factors underpinning the soft outcome suggests a more favorable view for the current quarter, with consensus anticipating a rebound in euro area GDP growth to 0.4% qoq in Q4:18.
However, the underlying growth trend has likely eased compared with solid levels in 2017 and early 2018 (see graph below), while risks do not appear likely to abate soon (protectionism - trade wars, Italy, Brexit). November PMI data (due on 23/11) will provide further guidance for Q4 growth, with euro area composite PMI at a 2-year low of 53.1 in October.
The EU and the UK have finalized a Draft Withdrawal Treaty. PM May secured the backing of her cabinet, but several ministers resigned and there is increased likelihood of a vote of “no confidence”. EU leaders are scheduled to approve the agreement on November 25th, while the British parliament is likely to vote on the treaty in mid-December.
Japan’s economic growth declined in Q3:18, mainly due to a confluence of natural disasters that hit the country during this period (e.g. typhoons, earthquake) which led to disruptions in economic activity. Indeed, output contracted by 1.2% qoq (annualized), slightly worse than consensus (-1.0%), but is expected to rebound in Q4:18 (cons: 2.4%), supported by private consumption, as well as business and government spending.
Overall, soft Q3:18 growth could impact the Bank of Japan’s policy (meeting on December 19-20), which is expected to continue its QE purchases (JGBs: at an annual pace of crica ¥50tn vs a soft-target of ¥80tn, ETFs & REITs at ¥6tn) and its long-term rates targeting (to around 0% ± 20 bps).
Global equity markets slowed in the past week (MSCI ACWI: -1.2% wow | -4.8% ytd), as cyclical (US IT) and energy sectors recorded losses. US equities declined (S&P500: -1.6% wow | +2.3% ytd), while emerging markets were up by 1% wow (-15% ytd). Oil was under renewed pressure during the past week (Brent: -4% wow to $66/barrel | -1% ytd), as the market appears over-supplied and the surplus is expected to remain until H1:19, according to the IEA (see page 11 – WTI oil price graph).
The poor risk sentiment was evident in government bond yields which ended the week down (UST10Yr: -12 bps wow to 3.06%, German 10Yr Bunds: -4 bps wow to 0.37%) with corporate credit spreads widening sharply. The British pound underperformed across major currencies (-1.9% against the euro to €/0.890) due to Brexit woes (see graph page 3).