Euro area growth remains solid
The IMF maintained its 2017 overall global growth forecast at 3.5% yoy (2018: 3.6%), although it contained changes for the key regions. US GDP was revised down (by -0.2 pps in 2017 to 2.1% and -0.4 pps in 2018 to 2.1%) due to expectations for a less expansionary fiscal policy.
The UK growth forecast was also revised (down by -0.3 pps to 1.7% for 2017, and unchanged for 2018 at 1.5%) following weak activity data in Q1:2017. Euro area growth forecasts were raised (+0.2 pps to 1.9% for 2017, +0.1 pp to 1.7% for 2018) on the back of improved H1:17 momentum.
Euro area GDP appears robust, despite entering Q3 on a slightly weaker footing according to PMIs (down by 0.5 pts to 55.8 in July). The softer outcome was driven by manufacturing, which was likely hurt by the stronger euro. Notwithstanding the lower level, the composite PMI is consistent with 2.4% qoq annualized rate GDP growth in Q3:17, after a solid 2.8% in Q2:17 (actual for Q1:17: 2.3%).
At its meeting of 20th July, the ECB maintained its policy stance, i.e., i) its key policy rate at 0.00%, ii) asset purchase programme (€60bn/month at least until December 2017), and iii) forward guidance.
Mr Draghi confirmed that the Governing Council was unanimous regarding the sequencing of monetary policy changes going forward (including the issue of the need for QE purchases after December 2017). Such discussions are expected to take place in the autumn, when more data become available (growth, inflation).
Mr Draghi did not appear particularly concerned about the recent appreciation of the euro (+2.5% against the USD between June 23 and July 14), which continued to strengthen over the week (+1.7% to $/1.166, the highest level since January 2015).
Global equity markets were broadly flat on a weekly basis (MSCI World: +0.5% in $ terms, +11.9% YtD), with euro area equities declining by 2% (+7% YtD) and the German DAX index underperforming (-3.1% wow, +6.6% YtD), reflecting concerns for exporters (77% of total revenue of DAX listed firms), on the back of a rising EUR. Investor attention will shift to the July 26 FOMC meeting, when the Fed is expected to keep its policy stance unchanged (interest rates, pace of balance sheet normalization).
With the ECB not adjusting its forward guidance, periphery bond spreads over the German 10-year Bund yield declined by 10-15 bps for Spain (94 bps), Italy (157 bps) and Portugal (240 bps), more than offsetting the drop in Bund yields (-9 bps wow to 0.51%).
The IMF approved in principle a precautionary Stand-By Arrangement (SBA) of c. €1.6bn for Greece. The SBA will become effective once the IMF receives credible assurances from Greece’s European partners regarding the implementation of measures that lead to debt sustainability.
Moreover, S&P confirmed the Government debt rating at B- (Moody’s: Caa2, Fitch: CCC), revising the outlook to "positive" (from "stable") on the back of improved debt prospects. Greek assets were broadly flat over the week, with Banks down slightly, by 0.4% (+35% YtD) and the 10-year GGB yield spread little changed at 476 bps (-214 bps YtD). Note that on Tuesday, the Greek Government tapped bond markets for the first time in 3 years, issuing a five year bond maturing in 2022.