3 to 9 December: It’s the economy, stupid!

Sovereign yields sank to alarmingly low levels on both sides of the Atlantic by the end of the week. In addition, the US Treasury curve produced a very unusual shape during the week, i.e. the 5-year yield slipped below 2-year tenor, while the 10-year remains above both – although barely. The question arises: why are yields so depressed, especially when the Fed has been tightening and the ECB is laying the groundwork to start tightening? To answer this question, we quote Bill Clinton’s famous Presidential campaign slogan ‘It’s the economy, stupid!’ from 1992, as it remains valid today. It is, indeed, the current state of the economy and its outlook for growth that weighs on sentiment in financial markets. In the Eurozone, market participants may believe that the European Central Bank’s claim to exit from its ultra-loose monetary policy stance is just not credible, due to the meagre economic growth and the absence of domestic price pressures. Meanwhile, US markets may be distressed by trade war-related concerns that could hurt the profitability of US corporates. Therefore, there is a key difference between what causes European and US markets to stir: the Euro Area continues to face inherent structural deficiencies that are not being addressed due to seemingly irresolvable internal political tensions, while sentiment in the US is curbed by fears induced by trade tensions. This leads us to conclude that divergence in terms of monetary policies, economic and market performances between the Euro Area and the US may continue next year – especially if volatility brought about by trade wars dissipate.

During the week ahead, the US is going to release CPI inflation and retail sales figures from November and the Markit manufacturing PMI number for December. Although the releases will not influence short-term interest rate expectations, since the Fed’s – expected – rate hike in December is a done deal, all three indicators should give guidance to financial markets on where the Fed funds rate could peak next year. The Eurozone will also release CPI inflation and PMIs next week, but most importantly, the European Central Bank will deliver the last monetary policy decision this year, including the announcement of the asset purchase programme’s termination at the very end of December.

Within the EM universe, various Asian countries are going to reveal a set of relevant macroeconomic indicators, such as CPI inflation in India, money supply, retail sales and industrial production in China, while the Philippine central bank decides on the policy rate. Latin American markets will focus on high-frequency macroeconomic data in Mexico, Colombia and Brazil (e.g. industrial production, retail sales, etc.). In addition, the Peruvian central bank announces its decision on the policy rate. Meanwhile, within the African space, Q3 GDP data will be published by Morocco, Kenya and Nigeria.

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