USA
• Inflation rising on energy base effects, as expected
In September, the U.S. consumer price index surged to 1.5 % (y/y) from 1.1 % in the previous month amid strong gains in the energy prices (2.9 %) compared to the previous month including fuel oil (2.4 % m/m) and motor fuel (5.7 % m/m). On an annual basis, energy prices were less of a drag (-2.9 % y/y) than in August (-9.1 %) on the headline CPI index. The core inflation rate fell moderately from 2.3 % to 2.2 % y/y. In the total of the year, CPI inflation is expected to average 1.2 % and it is projected to rise to 2.2 % in 2017. As a measure of underlying price pressures arising from tightening labor market conditions, labor cost (average hourly earnings) rose by 2.6 % (y/y) in September following a steady upward trend from an average of 2.3 % last year.
Eurozone
• ECB: Waiting for December
• Bank lending survey indicates mild improvements in credit supply and demand in Q3
Last week, the governing council (GC) of the European Central Bank (ECB) left the key interest rates unchanged (0,0 % main refinancing rate, -0.4 % deposit facility rate), as widely expected. The ECB continues to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of net asset purchases. The monthly asset purchases of 80 bn EUR (Quantitative Easing, QE) are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the GC sees a sustained adjustment in the path of inflation consistent with its inflation aim. The above wording was unchanged to previous introductory statements following meetings of the GC.
With respect to the economic outlook, President Draghi said that while the euro area economy continued to show resilience to the adverse effects of global economic and political uncertainty, the baseline scenario remains subject to downside risks (related mainly to the external environment).
Looking ahead, the GC noted that it remains committed to preserving the very substantial degree of monetary accommodation which is necessary to secure a sustained convergence of inflation towards its target. In December the GC’s assessment will benefit from the new staff macroeconomic projections and from the work of the committees on the options to ensure the smooth implementation of the purchase programmes until March 2017, or beyond, if necessary.
In the Q&A session, President Draghi reiterated that tapering was not discussed in the meeting. (Tapering refers to the reduction or stepwise shut down of the monthly asset purchases.) However, committees have been put in place to review the asset purchase programmes. Also based on the review, Draghi said that the December decisions will tell what the ECB is going to do in the coming months.
In March 2017, the stock of purchased asset is going to reach 1.8 trillion EUR. An abrupt end to QE in March is highly unlikely, therefore most market participants expect that the ECB will in December announce the extension of the monthly asset purchases (likely by six to nine months). It is also possible that the ECB reduces the amount of monthly asset purchases (for example by 10 or 20 bn EUR) after March 2017. It is less likely that in December a (stepwise) slow down (f. ex. by 10 bn EUR in each consecutive month) is announced. President Draghi mentioned that although inflation is likely to pick up in next months, mostly due to base effects, there are no convincing signs of an upward trend in inflation yet; strongly indicating an extension of QE beyond March of next year.
The October Bank Lending Survey (BLS) that is conducted by the ECB on a quarterly basis, reported that in Q3 loan growth in the Euro Area continued to be supported by increasing demand across all loan categories, while credit standards remained unchanged for enterprises and eased for households.
Credit standards on loans to households for house purchase eased. Credit standards on consumer credit and other lending to households also eased in Q3. For the fourth quarter of 2016, banks expect a net tightening of credit standards on loans to enterprises, while they expect a marginal net easing for housing loans and broadly unchanged credit standards for consumer credit.
Competitive pressures and lower risk perceptions continued to have an easing impact on credit standards on loans to enterprises, while banks’ cost of funds and their willingness to tolerate risk had a broadly neutral impact. For loans to households for house purchase, competitive pressures had an easing impact, as did cost of funds and balance sheet constraints and risk perceptions. The percentage share of rejected applications decreased for all loan categories.
Net demand for loans to enterprises continued to increase and banks expect it to increase further in Q4 2016. In addition, net demand for housing loans as well as net demand for consumer credit continued to increase in Q3. Demand is driven by the low general level of interest rates, for household credit also housing market prospects and consumer confidence were important.
With respect to the impact of the ECB’s expanded asset purchase programme (APP), banks have used the additional liquidity related to APP for granting loans, for refinancing purposes and to a lesser extent for purchasing assets. The net easing impact of the APP continued to be stronger for terms and conditions than for credit standards and the easing impact was greater for loans to enterprises than for loans to households. At the same time, Euro Area banks reported a negative impact from the APP on their profitability, owing to the effect on the net interest margin.
CEE
• Russia: Monthly data turning more positive
In September, monthly economic indicators improved in Russia. In particular, consumer income is recovering from protracted levels. Real wages increased by 2.8 % (y/y), while a decline by 0.7 % was expected (Bloomberg consensus forecast) and the August print was revised from -1.0 % to 2.7 %. Real wages rise as nominal wages recover and inflation keeps slowing. Real disposable income declined by 2.8 % (y/y); significantly less than in the previous month (-8.2 %). On a 12-month basis, real disposable incomes are still 5 % below the level a year ago but the trend is now improving. Accordingly, it can be expected that Russian households start adapting their consumption behavior. In annual comparison, real retail sales were 3 % below the sales in September 2015 but the trend is now improving. Between January and August, the annual decline in retail sales was between five and six percent. Car sales were still down 11 % year-over-year though they are now on an improving trajectory after a deep slump in 2015 (-35 %).
The consumers are also gain from a stable labor market. Total employment stopped falling recently, unemployment claims are declining and the unemployment rate was stable at 5.2 % in September. In Q2 2016, real GDP had declined by 0.6 % (y/y) following a drop of 1.2 % in Q1. Growth will have gradually turned positive in the second half of the year and reach around -0.5 % for the total of 2016 (after -3.7 % last year).