UNIQA Capital Markets Weekly

USA:

• Household consumption remains main engine of growth after a moderate Q2 GDP upward revision
• Personal consumption expenditure inflation was slightly up in August
• September employment report will be out on Friday

The third estimate of US Q2 GDP revised growth up to 1.4 % (q/q, sa, annualized rate), from the 2nd estimate of 1.1 %. Private consumption growth was 4.3 % (2nd estimate: 4.4 %) and it remained the main engine of growth in the United States. The declines in gross fixed investment were mostly revised upwardly, including structures (-2.1 %) and equipment investment (-2.9 %). Residential investment was unchanged at -7.7 %. Export growth (1.8 %) outpaced imports (0.2 %).
The personal consumption expenditure (PCE) inflation rate (the Fed’s preferred measure of consumer price inflation) rose from 0.8 % (y/y) to 1.0 % in August (Bloomberg consensus expectation: 0.9 %). The core PCE inflation increased from 1.6 % (y/y) to 1.7 %.
On Friday, the September employment report will be one of the top releases of the week. Non-farm payroll job growth had slightly disappointed in August (151.000 new jobs) and it is expected to have risen in September (Bloomberg consensus: 170.000). Monthly job growth averaged 230.000 since June. Both the rising inflation trajectory as well as the solid labor market development (the U.S. central bank’s ‘dual mandate’) did not convince the Fed to raise the federal funds rate in September and the last, ambiguous statement of the federal open market committee (see UCM Weekly as of 26th September 2016) made it even more difficult to anticipate what eventually would have to happen to trigger a further rate hike.

EUROZONE:

• Encouraging business sentiment in September
• Credit growth keeps slowly recovering
• Inflation rise is only transitory and ECB likely to fail inflation target for a prolonged period

The German ifo-business climate indicator surprised on the upside last week by increasing from 106.2 to 109.5. Both the current assessment (from 112.8 to 114.7) as well as the future expectations survey (from 100.1 to 104.5) rose significantly. The rebound in business sentiment reversed a decline since June. In addition, the outcomes were in line with the release of the economic sentiment indicators from the European Commission (EC) last week. The German EC survey inched higher (from 105.5 to 107.1) as well as results for other Eurozone countries (including France, Italy, Spain and Austria) and the index for the total of the Euro Area (from 103.5 to 104.9). This contradicts the modest decline in the Eurozone composite purchase manager index (PMI) in September, although the PMIs kept indicating a moderate expansion in economic activities (see UNIQA Capital Markets Weekly as of 26th September 2016). The bottom line is that Eurozone soft data indicators were encouraging in September. Nevertheless, a cyclical slowdown in H2 is apparent compared to economic growth in the first half of the year. Quarterly Eurozone GDP growth is expected to realize around 0.2-0.3 % in Q3 and Q4.

Meanwhile, data from the Euro Area banking sector was positive as recent upward trends in private credit continued in August.

Credit to non-financial corporates increased by 1.2 % (y/y) maintaining the growth rate of the previous three months. Total bank credit to corporates had contracted for 3 ½ years before returning to expansion by the end of the last year. Credit to the household sector has been expanding at a fast rate since last year. Annual consumer loan growth was 3.4 % in August and mortgage loans rose by 2.3 % year-over-year.
As expected, Euro Area inflation inched higher in September on base effects from last year’s energy price declines. The flash estimate for the harmonized consumer price (HICP) index was 0.4 % (y/y) following an inflation rate of 0.2 % in the previous month. An inflation tracker based on historical average monthly consumer price changes suggests that the inflation rate is going to rise to around 1.0 % (y/y) until December (due to base effects resulting from the decline in the HICP index by end of last year).

What does the rise in inflation imply for the European Central Bank?

Annual average inflation will be 0.2 % in the total of 2016 and thereby exactly equaling the projection of the European Central Bank (ECB) and the median of Bloomberg consensus analyst’s forecasts. Inflation is expected to remain subdued and below the ECBs inflation target (2 %) for a prolonged period of time. The ECB’s staff forecasts inflation of 1.2 % in 2017 and 1.6 % in 2018 implying that the monthly inflation rate would not return to the central bank’s target rate before the second half of 2018. The core inflation rate (excluding energy and food price components) remained low in September realizing at 0.8 % (y/y), while a rise to 0.9 % was broadly expected (Bloomberg consensus) and points to a prolonged, subdued projected consumer price path. This projection is further supported by several inflation expectations indicators including financial market expectations (5 year inflation forward swaps) and the ECB survey of professional forecaster’s (SPF) long-term inflation forecast.

Given that inflation is expected to remain significantly below the central bank’s inflation target for the next two years, it is likely that the ECB is going to extend its asset purchase programmes (‘QE’) beyond March 2017 and to maintain expansionary monetary policy for a long period of time.