Euro area business and consumer confidence indicators rose to multi-year highs in November
The minutes of the November 1st Fed meeting support expectations for a rate hike on December 13, by 25 bps to 1.50%, with markets assigning a 92% probability.
The minutes were more cautious regarding inflation returning to 2% yoy in the medium term (core PCE: +1.3% yoy in September), with several members expressing concerns due to downside risks to long-term inflation expectations. As a result, market expectations for the federal funds rate in the medium term decreased slightly and remain 75 bps below the projections of the FOMC meeting participants at end-2019.
The euro area recovery remains solid, with the composite PMI increasing sharply by 1.5 pts, to a 6½-year high of 57.5 in November, suggesting a further pick-up in activity. Economic confidence appears unaffected by the recent political developments in Germany. In the event, note that, on Friday, the Socialist SPD agreed to enter coalition talks.
In the UK, the pace of fiscal consolidation will ease slightly in response to weaker-than-previously-expected growth, according to the Budget Statement, with net tax reductions and a reduced pace of spending cuts amounting to £16.2 bn (0.8% of GDP) up to fiscal year 2020/21. Half of these measures will apply to fiscal year 2019/20 (0.4% of GDP). The fiscal loosening is not significant, thus UK Government bond yields remained broadly unchanged wow (10Yr: -4 bps to 1.25%).
Global equities rose in the past week (MSCI World: +1.3% wow) to record highs, supported by strong economic data and corporate earnings momentum. At the same time, oil prices rose by 1.9% to $63.5/brl, due to renewed optimism that the OPEC-led production cut deal (valid up to March 2018) will be extended at the November 30th meeting.
Euro area Banks (+0.8% wow) have lagged the headline index (Eurostoxx) since early October (-3.7% vs -0.3%), when the ECB launched a public consultation (scheduled to run until December 8th) on a draft addendum to its non-performing exposures (NPE) guidance, aimed at fostering more timely provisioning and write-off practices for new NPEs (i.e. those classified as such from January 2018).
Moreover, by the end of Q1:18, the ECB’s Banking Supervision will present its considerations for further policies to address the existing stock of NPEs (€830 bn as of Q2:17 or 7.6% of euro area GDP). Recall that the aforementioned stock is disproportionately allocated in Italy (27% of total euro area NPEs / Bank equity prices: -3.5% since early October) and Greece (13.5% of total euro area NPEs / Bank equity prices: -12.6% since early October).
Chinese equities underperformed during the past week (-0.4% | -3% on Thursday | +24% ytd), as profit taking was spurred by: a) concerns that financial conditions may tighten amid a rise in bond yields (10Yr: +35 bps since end-September to 3.97%); and b) the authorities’ efforts to stem excessive leverage.
The slightly dovish tilt by the Fed regarding medium-term inflation prospects led the USD lower during the past week (-1.2% against the euro to $1.193). The euro (2-month high) found further support from strong PMIs and signs of declining political uncertainty in Germany.