<link>https://www.home.saxo/en-sg/insights/content-hub/rss/christopher-dembik</link><description /><language>en-SG</language><a10:id>https://www.home.saxo/en-sg/insights/content-hub/rss/christopher-dembik</a10:id><a10:link rel="self" href="https://www.home.saxo/en-sg/insights/content-hub/rss/christopher-dembik" /><ttl>60</ttl><item><guid isPermaLink="false">{C2971020-059D-454C-8165-EF6767720355}</guid><link>https://www.home.saxo/en-sg/content/articles/macro/the-puzzle-of-the-chinese-economy-24042023</link><a10:author><a10:name>Christopher Dembik </a10:name></a10:author><category>product-macro</category><category>place-lc/cn</category><category>Recession</category><title>The puzzle of the Chinese economy<div class="article-excerpt">There is a broad consensus among economists that the reopening of the Chinese economy will be one of the main drivers of global growth in the coming quarters. That’s still uncertain. The latest Chinese data shows the economy is slowly recovering but not all the sectors at the same speed. In addition, local governments’ stimulus is most of the time behind the recovery process. Domestic consumption and imports are still underwhelmed. That’s the missing part of the Chinese recovery which is absolutely needed for growth to spread across the world.</div><div class="article-rte"><div class="rte--output"><p><span>One week ago, China posted impressive trade statistics. In March, export growth increased by 14.8 % year-over-year versus expected minus 7 %. The monthly trade surplus was a massive $88.2bn. This was the fifth highest monthly trade surplus ever recorded by the country, all the more surprising given that March surpluses are usually small due to seasonal effects. This record is even more surprising when we compare China&rsquo;s performance with that of neighboring countries. South Korean exports declined in double digits in the first quarter and it wasn&rsquo;t the only export-oriented Asian economy facing a challenging start of the year &ndash; Singapore too, for instance! Looking into detail, China&rsquo;s export growth was mostly driven by a strong demand in electric vehicles (+122 %), lithium-ion batteries (+94%) and solar batteries (+23%). Based on these data and the strong 4.5 % GDP growth in the first quarter, we could easily draw the conclusion that the Chinese economy is recovering fast, which will be beneficial for the global economy. Experience shows it takes about six to nine months for China&rsquo;s recovery to spread across the world.</span></p> <p><span><strong>That&rsquo;s not so simple, unfortunately. </strong>The surge in exports is not the consequence of a better global macroeconomic environment but rather of aggressive local government support. Since the beginning of the year, we know China is worried about weak exports. The central government has asked local governments to help businesses stabilize their exports. This is what is currently happening. The unusual March performance basically reflects subsidies and implicit transfers. In the short-term, local governments can continue supporting exporter&rsquo;s competitiveness. But they will reach their limits sooner than later as they are anyway financially squeezed. Ultimately, growth in exports needs to come from the household sector. This is currently the weakest point of the Chinese economy. Since the reopening, most analysts are expecting a surge in domestic demand this year to drive overall GDP growth in a healthy way. But so far this has been very hard to find evidence of that surge in consumption. The March inflation number (at 0.7 % year-over-year) and the low level of capacity utilization in the manufacturing sector (74.3 % in the first quarter as shown by the below chart) don&rsquo;t help. This is an issue for China, but also for the global economy. The mainstream market narrative is that the coming months may be bumpy, the United States may experience a 1990-style recession but the outlook will improve from year-end thanks to China&rsquo;s recovery. In recent days, many analysts showed trust in this narrative by pointing out the strong GDP growth performance in the first quarter. Let&rsquo;s not focus too much on the base effect related to the reopening of the economy which distorts data. They are missing a much bigger point. <strong>This is not rising GDP which drives growth across the rest of the world. Rising imports do.</strong> Unfortunately, the picture is less positive than exports with a negative print in March at minus 1.4 % year-over-year. We still expect Chinese consumption to pick up this year, therefore pushing imports upward. But it will take certainly longer and it will be probably much more complex than the market expects. This has clearly not been priced in by the market yet.&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2023/may/24_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>China</span> <span>Recession</span></div>Mon, 24 Apr 2023 12:30:00 Z2023-04-25T07:48:17Z{58649214-1951-4E90-9E3D-188B268198B9}https://www.home.saxo/en-sg/content/articles/quarterly-outlook/a-whole-new-world-of-higher-interest-rates-04042023Christopher Dembik Primary-Quarterly OutlookPrimary-Quarterly Outlook 1st rowA whole new world of higher interest rates<div class="article-excerpt">After almost a decade and a half of ignoring interest rates, the world is slowly waking up to the reality that rates once again have a firm impact on the macroeconomic situation, which can mean all sorts of challenges.</div><div class="article-rte"><div class="rte--output"><p>The recent market stress and the ongoing pressure facing smaller US banks appears eerily similar to the Savings and Loan (S&amp;L) crisis in the United States, which occurred between 1986 and 1995, and resulted in the failure of nearly a third of the 3,234 savings and loan associations. It was partly a duration crisis. Savings and loan associations were competing with government sponsored enterprises to balance 30-year fixed rate mortgages, which have no place on a balance sheet due to inherent duration mismatch with funding. This may remind us of the First Republic&nbsp;$98bn mortgage book. Back then, like today, the pace of rate hikes harmed the profitability of banks and left some, especially small ones, vulnerable to flighty deposits. The current Silicon Valley Bank&rsquo;s failure was about the bonds they hold, but the broader issue also includes rate mortgages they have in their balance sheet. All of this is repairable. </p> <p>So far, policymakers have moved quickly to get a handle on the situation. They resorted to old, efficient tricks from previous episodes of financial stress to provide liquidity to the market &ndash; meaning access to emergency lending and USD swap lines to boost dollar liquidity. The latest tool serves as a backstop for the financial sector: any big bank globally that can post good collateral at the Bank of England, the Swiss National Bank, the European Central Bank or the Bank of Japan can get dollars from its central bank (which gets dollars from the US Federal Reserve) any day of the week. This is like a global discount window for dollars aimed to avoid dollar shortage in the system. In the previous crisis, these mechanisms helped bring stability back after a while, and one can expect this to happen once again. But this liquidity backstop &ndash; which is in no way comparable to Quantitative Easing &ndash; won&rsquo;t go to the real economy. That&rsquo;s what should worry us.</p> <h4><strong>Higher risk of a US recession</strong></h4> <p>When we published our forecasts for 2023, we were not among the recession camp, as the level of credit entering the economy was not consistent with a recession. In Q4 2022, Commercial and Industrial lending &ndash; a key barometer of economic growth - was up at a stunning 11.5% year-over-year rate. In real terms, it was at 5.05%<em>&ndash; see below chart</em>. Our baseline was that the economy was heading for a period of quickly oscillating expansions/contractions, growth perhaps easing and unemployment rising but still low. Most companies were not ready to give up the employees whom they had so much difficulty hiring (thus raising the risk of job zombification). For most market participants, it was probably harder to address than the standard recession playbooks. </p> <p>But things are about to change.&nbsp;US banks short on cash have borrowed large amounts of money from the US Federal Reserve ($300bn&nbsp;in the week ending March 19, for instance). We don&rsquo;t believe a lot of those bank reserves will be lent out, unfortunately. The main macro risk from the current market stress is that banks will slow credit growth. Why does that matter? In a highly leveraged economy like ours, a constant inflow of credit is needed to generate growth. In the United States &ndash; where capital markets play a key role for credit generation &ndash; banks still represent around 40% of private credit. And for SMEs &ndash; which have a particularly large macro footprint &ndash; bank tightening is a big deal. We still think it is too early to call for a US recession &ndash; we lack macro data to back this call. But the new dynamic risks bringing an eventual recession sharply forward.</p> <h4><strong>What&rsquo;s next to pay attention to?</strong></h4> <p><span>It will take weeks or perhaps months to better assess the exact macroeconomic situation. The level of uncertainty is unusually high. In the interim, we should monitor commercial mortgage-backed securities and broader credit spreads, especially in the United States. Interbank lending conditions are certainly not of much use, at least in the short-term and after the backstops implemented. The stresses will be very hard to monitor in real time. We also guess that central bankers will keep communication channels wide open with the banking industry to make sure there is no market stress emerging. In our view, there is no material risk of rolling bank runs &ndash; this is clear. But market participants need to focus on the impact of the unfolding market stress on broad lending conditions and the deeper structural weaknesses among smaller banks, especially with respect to commercial property. This is a potential elephant in the room in the United States. Banks smaller than the top 25 largest account for a massive 67% of commercial real estate lending. According to the International Monetary Fund, there are&nbsp;$2trn of loans to the commercial real estate sector in the smaller US banks. The problem is that Covid has changed the world of work. About 50% of employees haven&rsquo;t gone back to the office full time and, as leases come up for renewal, the risk is high that many will not be renewed, thus leaving a long tail of non-performing loans on the books of the banks (especially the smaller banks).</span></p> <p><span>In Europe, there are issues too &ndash; however, less acute for now. Higher interest rates and lower affordability in the real estate sector are also destabilising the financial and macro landscape. We are beginning to see the consequences of the exit from negative rate policy, noticeably in countries where mortgage loans are fixed at variable rates (which is basically most of Europe). In Greece, foreclosure filings are on the rise (especially since the Supreme Court has allowed private investment funds established abroad to buy property and resell it &ndash; thus fueling property speculation). In Sweden, the residential property market is going through one of the worst drops globally &ndash; with 16% of home values wiped out in the past year, after higher rates fed into variable mortgages. This is not over yet. The Swedish central bank, the Riksbank, is expecting the decline to reach 20% from the peak a year ago. In the United Kingdom, mortgage approvals are sinking due to higher rates. According to the Office of National Statistics, the monthly cost of a new mortgage rose by 61% in the year to December 2022 for the average semi-detached house. This keeps increasing. It is still too early to assess the exact macro implications of all of this. It will become clear not in a matter of weeks, but over months. What is sure is that it does not bode well and that the macroeconomic outlook is getting more worrying than it was just weeks ago.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2023/april/qo2-23/01-chris.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook</a> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook 1st row</a></div>Tue, 04 Apr 2023 06:00:00 Z2023-04-04T05:34:28Z{D433B8EC-C9AF-4FD5-8EDD-6DC67627A308}https://www.home.saxo/en-sg/content/articles/macro/the-french-social-contract-is-definitely-broken-28032023Christopher Dembik product-macroplace-lc/frThe French social contract is definitely broken<div class="article-excerpt">Macron’s 2022 election was often portrayed as the establishment’s last chance to avoid voters turning away from government parties. The least we can say is that Macron has not been very successful until now. Many voters find him insufferable. His original sin is that he never acknowledged that he won the 2022 presidential election not because voters embraced his political platform but because a majority of voters was afraid to have a far-right president. One year later, it is far from certain there would be a majority of voters to prevent Le Pen from being victorious. </div><div class="article-rte"><div class="rte--output"><p><span>The social turmoil continues.&nbsp;Videos showing demonstrators chanting around a fire&nbsp;</span><span>"Louis XVI, Louis XVI, we beheaded him. Macron, Macron, we can do it again&rdquo; are spreading on social media. Strikes and violent demonstrations are becoming the new normal in Macron&rsquo;s startup nation. What triggered this social revolt? The government decided to use Article 49.3 of the Constitution &ndash; an unpopular though legal mechanism that allows a bill to be adopted without a formal vote in the National Assembly &ndash; to pass his signature pension reform. It aims to increase the retirement age from 62 to 64 to fund the redistributive pay-as-you-go system. This triggered anger among part of the population and a feeling of brutality coming from the top. The ongoing crisis goes beyond discontent against the pension reform. During last weekend, a demonstration organized by the green movement against large water reservoirs used for agricultural purposes ended up in a violent fight with law enforcement and a burnt police vehicle. France is at the edge of an unknown territory once again. The last time it has happened was before Covid, in 2018, when a new gas tax &ndash; which was finally not implemented &ndash; sparked the Yellow Vest Movement.&nbsp;</span><span>At that time, many considered it was only an anti-tax movement - as we have seen somewhere else. This was partly true. However, the Yellow Vest Movement was much more than that. It was the consequence of a growing disconnect between urban and rural areas but also between voters and elected officials. Government mistrust temporarily vanished with the Covid crisis (though the anti-vaxx movement was very vocal in France). It is now back with the pension reform. Most French don&rsquo;t want to work two more years. Who can blame them? But the current social revolt is not only about pension reform, hard working conditions and a better balance between life and work. This is not a social crisis like the one of 1995 when the center-right Jupp&eacute; government unsuccessfully tried to pass a pension reform. This sparked a three-week national strike. Now, the legitimacy of the elected officials, especially Macron, and the very principle of the representation of the people by elected officials are being questioned. This is a regime crisis which is not coming from nowhere. It certainly originates from the 2018 Yellow Vest Movement or perhaps even earlier. But it is now reaching a breaking point.</span></p> <h3 class="article-heading--3"><span><strong>The 2022 presidential election was the last chance for the establishment</strong></span></h3> <p><span >The broken social contract has been one of our long-term macro calls for years. Our chief economist, Steen Jakobsen, mentioned it back in 2014-15 the first time. This explains Trump&rsquo;s election, Brexit and Marine Le Pen&rsquo;s good chance to become one day France&rsquo;s next president. This also explains the current regime crisis in France. For years, the political elite tried to find how someone like Trump could win the U.S. presidential election. The point is that it has nothing to do with Trump but all to do with the fact that he is anti-establishment. We could say the same thing about Le Pen (though she has softened her anti-establishment tone to appear more suited for the job). What is currently happening in France is what we have feared for years. Voters (perhaps not most of them but certainly the more vocal) are turning away from the social contract &ndash; the basic political theory behind all of today&rsquo;s societies. Voters want anything but the establishment. In France, Macron&rsquo;s 2022 election was often portrayed as the establishment&rsquo;s last chance to avoid voters turning away from government parties. The least we can say is that Macron has not been very successful until now. Many voters find him insufferable. His original sin is that he never acknowledged that he won the 2022 presidential election not because voters embraced his political platform but because a majority of voters was afraid to have a far-right president. One year later, it is far from certain there would be a majority of voters to prevent Le Pen from being victorious. The pension reform is needed from an economic viewpoint but not THAT pension reform presented THIS way. This antagonizes voters, even within Macron&rsquo;s party Renaissance. Several loyal MPs confirmed being surprised by the use of Article 49.3, for instance.</span></p> <h3 class="article-heading--3"><span><strong>Le Pen 2027</strong></span></h3> <p><span>What&rsquo;s next for France? France is the perfect example of the broken social contract. There are rumors Macron could call for snap elections to get out from the current crisis. This has happened in the past. But it was not always a wise choice. In 1997, two years after the strike against the pension reform, the center-right president Chirac dissolved the National Assembly and called for new elections. With this decision, he hoped to regain political momentum. It was a failure. His party lost and he had to work with a left-wing government for five years (1997-2002). It is very unlikely that Macron will commit the same mistake. According to an IFOP poll of 25 March, the NUPES (the left-wing political alliance between the Greens, the Socialists and the far-left) and the National Rally (Le Pen&rsquo;s party) would be the main winners with 26 % of votes each. Macron&rsquo;s party would score at 22 %. This is not that bad. But it is still four points lower than at the 2022 legislative election. The other parties (such as the center right LR which has partly supported the pension reform) would score close or below to 10%. On top of the ongoing social and regime crisis, there would certainly be an institutional crisis. It is hard to know from which party the prime minister would be. The only thing that is certain is that he/she would belong to the anti-establishment. What is happening in France matters for the rest of Europe. High energy prices, widespread inflation, banking stress and so on are pushing voters in the hands of anti-establishment parties (this has already happened in Italy with the Meloni government). I would not have said that a few years ago. But it will also probably happen in France. The likelihood that Le Pen will be France's next president in 2027 is much higher than the NUPES leader M&eacute;lenchon's, in my view. He is rightly viewed as too radical by a majority of voters. His party refused to officially condemn the ongoing violent demonstrations, for instance. Le Pen could be a more suitable vote for many.&nbsp;It is no secret that she has done a fine job to convince business leaders that if she is elected there will be no economic chaos.&nbsp;</span></p> <p><span>&nbsp;</span></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>France</span></div>Tue, 28 Mar 2023 03:00:00 Z2023-03-28T04:14:13Z{9F670E51-FD2B-4DF1-8F7D-747540556D2D}https://www.home.saxo/en-sg/content/articles/macro/ecb-preview-keep-calm-and-breath-15032023Christopher Dembik product-macrocurrency-eurforex-euraudforex-eurcadforex-eurnokforex-eurplnforex-eursekforex-eurchfforex-eurjpyplace-lr/eursubject-is/pol.euforex-eurgbpforex-eurusdEuro Stoxx 50Euro BundECB Preview: Keep calm and breath<div class="article-excerpt">The European Central Bank (ECB) cannot blink at that stage. It needs to deliver a 50-basis point interest rate hike at tomorrow’s meeting. Anything else would risk turning into a communication disaster. However, the pace of monetary policy is highly uncertain in the medium-term due to growth concerns and the ongoing market turmoil.</div><div class="article-rte"><div class="rte--output"><h3><span><strong>Baseline: Expect a 50-basis point interest hike at 3 % and no real guidance on the scope of interest rate hike after that.</strong></span></h3> <p><span>We don&rsquo;t think the Silicon Valley Bank&rsquo;s failure and the current market turmoil will have a direct impact on tomorrow&rsquo;s ECB rate decision. The ECB cannot blink at that stage. It needs to deliver a 50-basis point interest hike, at 3 %, to show determination to fight high inflation. This is a matter of credibility. Inflation is more entrenched than initially anticipated.&nbsp; Yesterday, France's Consumer Price Index was revised higher for&nbsp;February, at 6.3 % year-over-year - this shows that the inflation headache is here.&nbsp;</span><span>The main drivers of inflation have changed. In 2022, energy was the main contributor to higher prices. In 2023, it will be replaced by food and profit. An internal&nbsp;ECB&nbsp;presentation, unavailable to the public, reportedly shows &ldquo;that company profit margins have been increasing rather than shrinking, as might be expected when input costs rise so sharply&rdquo;. This means that corporate profits are now driving inflation more than wages. Higher inflation for longer plays in favor of a continued hiking cycle.</span></p> <p><span>However, the uncertainty regarding the magnitude of monetary policy tightening beyond the March meeting is unusually high. This is partially explained by growth concerns. The euro area Q4 2022 GDP was revised down, from +0.11% to -0.03% QoQ, mostly due to a sharp revision of the Irish Q4 GDP (from +3.5% to only +0.3% QoQ). On top of that, credit data will likely be weak. In the coming months, expect a big battle of wills brewing between hawks and doves. Monetary policy uncertainty is also explained by financial instability risk. It is premature to know how the ongoing market turmoil will unfold. But this is getting clear that whilst hiking the ECB will need to ensure European banks continue to be well capitalized and have enough liquidity buffers. As rates have gone and continue to go up, high quality liquid assets portfolios have decreased in value. Fortunately, the ECB has the tools to intervene preemptively. The central bank can provide swap lines to banks or decide not to end up TLTROs, for instance. This should be enough to contain liquidity risk.</span></p> <p><span>The high uncertainty in monetary policy is reflected in market expectations of terminal rate. Last week, the terminal rate was hovering at 4 %. It is now down below 3.75 % for the first time since 17 February (mostly because of the ongoing market stress and the potential ripple effects on growth). In our view, the ECB will probably not provide much guidance on the scope of interest rate hike beyond the March meeting. This is the wisest thing to do. They will reaffirm that monetary policy will remain data dependent. It will evolve depending on inflation data, the range of sentiment indices (PMI), the new editions of the&nbsp;ECB&nbsp;surveys (the Corporate Telephone Survey, the Consumer Expectations Surveys, the Survey of Professional Forecasters etc.), the incoming data on credit and&nbsp;bank&nbsp;lending rates and the updated information on unemployment and wage dynamics. The evolution of market stress and financial conditions will also be at the center of interest, at least in the short-term.</span></p> <p><span ><em>Despite the market turmoil, market stress is still contained in the eurozone. The ECB systemic risk index is far from the risk area, currently at 0.24.</em></span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2023/march/ecb-systemic-risk-index.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>EUR</span> <span>EURAUD</span> <span>EURCAD</span> <span>EURNOK</span> <span>EURPLN</span> <span>EURSEK</span> <span>EURCHF</span> <span>EURJPY</span> <span>Europe</span> <span>European Union (EU)</span> <span>EURGBP</span> <span>EURUSD</span> <span>Euro Stoxx 50</span> <span>Euro Bund</span></div>Wed, 15 Mar 2023 18:00:00 Z2023-03-15T18:29:27Z{863D6557-F99C-4938-AA13-B89947504DCF}https://www.home.saxo/en-sg/content/articles/macro/the-velocity-of-money-does-not-suggest-a-us-recession-is-imminent-09032023Christopher Dembik product-macroRecessionRecession Watchcurrency-usdforex-eurusdThe velocity of money does not suggest a U.S. recession is imminent<div class="article-excerpt">We are not in the recession camp. We believe that as long as the velocity of money is rising, the likelihood of a U.S. recession is low this year. </div><div class="article-rte"><div class="rte--output"><p><span>At the end of 2022, the market consensus was expecting a recession in the United States for this year. This has not happened yet. And this is unlikely to happen, in our view. This week&rsquo;s employment data for February are likely to show the economy is still very resilient despite broad-based inflationary pressures and higher cost of capital. The consensus expects that job creations are back to normal in February around 200k after a strong jump in January at 507k. The unemployment rate is expected to marginally increase to 3.5 %. These are very good figures. One can say that the labor market is a lagging indicator of the business cycle. This is true. More fundamentally, we don&rsquo;t see how the United States could enter a recession in the short-term with the velocity of money being on the rise. The velocity of money (V) is the rate at which money is being spent in the economy. In simpler terms, this is how fast the same &ldquo;100 USD&rdquo; changes hands. V is generally a function of two things: the pace of growth in the economy and growth in the money supply. We can both use M1 and M2 for the calculation of the money supply. Think of M1 as the more focused number. It includes cash and transaction deposits whereas M2 is a larger indicator and encompasses savings and money markets among other things. Conventional economic theory usually considers that the faster the money changes hands (through the daily function of an economy), the more the economy grows. This fully makes sense. The below chart shows the evolution of V since the early 1960s in the United States. After reaching a peak in the mid-1990s at 2.2, it has decreased to an historical low of 1.1 in 2020 due to the deep and broad shock related to the pandemic. This is not surprising. What is interesting is that V is now increasing, though from a low starting level. As long as V is expanding, the probably is high the U.S. economy will grow. This can be puzzling given the cost of capital is rising and inflation is hitting purchasing power. In our view, the $5tr stimulus that was triggered to fight the economic consequences of the pandemic partially explains the rise in V. Our baseline is the U.S. economy will continue to grow this year, at a lower level than in 2022 of course. But a recession is far from certain (unless it is voluntarily engineered by the U.S. Federal Reserve to tame inflation &ndash; this is not the case so far).&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2023/march/01_cdk_23.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Recession</span> <span>Recession Watch</span> <span>USD</span> <span>EURUSD</span></div>Thu, 09 Mar 2023 08:30:00 Z2023-03-09T09:11:59Z{9BFFBA6A-78B3-4B0F-A067-A2121E5CCB86}https://www.home.saxo/en-sg/content/articles/quarterly-outlook/broken-europe-07022023Christopher Dembik Primary-Quarterly OutlookPrimary-Quarterly Outlook 1st rowBroken Europe<div class="article-excerpt">While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.</div><div class="article-rte"><div class="rte--output"><h4 class="article-heading--4">A resilient economy</h4> <p class="text--body">We were too pessimistic about the euro area. Softer energy prices, the lack of black-out (resulting both from energy supply diversification and better weather conditions) and resilient hard data (notably in Germany) are pushing forecasters to review their 2023 recession calls. The eurozone 2023 consensus GDP is up from minus 0.1 percent to 0.0 percent. This is a small but significant move and it doesn&rsquo;t appear to be the end. We still believe the consensus is too low. In mid-January, Goldman Sachs was the first international bank to completely reverse its call for the eurozone, moving its GDP growth forecast from minus 0.1 percent to 0.6 percent. We are not that bullish at Saxo but we confidently believe that the eurozone could avoid a recession this year with a GDP growth target close to 0.3 to 0.4 percent. Remember that a few months ago, approximately&nbsp;more than 90 percent of the forecasters predicted that a recession is the baseline for this year.&nbsp;</p> <p class="text--body">What has changed? The economy is actually stronger than expected. The Citi Economic Surprise Index (below chart) now stands at a one-year high. This means that economic data are better than economists&rsquo; projections. This may&nbsp;especially true for Germany. While gas consumption has collapsed by double digits, industry output has remained largely flat. Not only could this be considered as a remarkable achievement, based on the latest November data on industrial production, but it also looks like there may be no recession in the German industry in Q4.&nbsp;The first estimate of German 2022 GDP is also significantly higher than forecasted, at 1.9 percent &ndash; this represents 0.5 points above the government&rsquo;s target. Everything indicates that the economy will remain at a resilient pace in the short term, with all the nowcasting models pointing to an economic recovery this quarter. Hence, the probability of a recession is now declining quite fast. We also believe there will be no extreme macro and market events in 2023 &ndash; which could be positive from a growth perspective. If the economy performs much better, this will however give ECB policymakers more confidence in hiking rates as laid out in December by Christine Lagarde.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2023/february/qo1-2023/01-chris.png"/></div><div class="rte--output">Economic surprises are improving significantly in the euro area. The consensus, 0.0 percent GDP growth in 2023, seems slightly conservative and is bound to be revised up.</div><br/><div class="article-additional-rte"><div class="rte--output"><h4 class="article-heading--4">But risks are looming</h4> <p class="text--body">However, this does not mean that the year 2023 will not be challenging:</p> <ul> <li><strong>Credit stress is on the rise </strong>&ndash; this is the first time in a decade we start the year with European IG credit yield above the 4 percent level. Expect many companies to face difficulties getting access to new sources of funding. Many small and medium caps will probably have no other choice but to resort to ultra-dilutive financing, such as convertible bonds. Retail investors should stay away from these listed companies.</li> <li><strong>The market will need to absorb about &euro;700bn of liquidity due to the ECB quantitative tightening.</strong> This is a complicated exercise which will result in tighter financial conditions and perhaps higher volatility in equity.</li> <li><strong>The energy crisis will be back on the agenda again. </strong>This is not politically correct, but climate change has certainly helped avoid an energy crisis in Europe so far. However, when it will be time to refill depleted stockpiles in the spring, expect that prices will move up again. We are confident that the EU will be able to find energy suppliers (for instance, natural liquified gas from the United States, Australia or even Mozambique), but at a high cost. This will ultimately fuel inflation higher in the second semester, along with higher oil prices resulting from higher Chinese demand (we estimate that China&rsquo;s reopening will boost oil demand by 4m bpd around spring &ndash; this is about three times more than the growth in demand forecasted by the market).</li> </ul></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2023/february/qo1-2023/02-chris.png"/></div><div class="rte--output">Prices on the wholesale electricity market increased tenfold during the peak of the 2022 crisis in several EU countries. This was partially explained by rising gas prices due to the war in Ukraine and problems with nuclear generation in France. Now, prices are receding. But the market does not expect a return to the pre-Covid situation (where prices were below EUR60 per MWh). </div><br/><div class="article-additional-rte"><div class="rte--output"><h4 class="article-heading--4">What about the risk of a wage-price spiral? </h4> <p class="text--body">The labour market remains tight in the eurozone. The last data show that the eurozone unemployment was at 6.5 percent in November 2022 and at 6.0 percent in the European Union. Within the EU, Spain scores the highest official unemployment rate (12.4 percent) and Germany and Poland the lowest one (3.0 percent). In a working paper published in mid-January, ECB economists pointed out the risk of high wage growth in the coming quarters &ndash; way above historical patterns: &ldquo;This reflects robust labour markets that so far have not been substantially affected by the slowing of the economy, increases in national minimum wages and some catch-up between wages and high rates of inflation.&rdquo; We tend to disagree with this assessment. Wage growth is of course fuelling inflation in the CEE area, but this is clearly not the case in Western Europe. The likelihood that wages will increase significantly, thus becoming an issue in regards to the fight against inflation, is rather low in our view. Actually, in several countries, wage increases are dramatically lagging behind inflation. In Spain, the average real wage is now below what it was 15 years ago! It is hard to think there will be a wage-price spiral. However, if the ECB believes this is a material risk, they could decide to tighten too much &ndash; thus increasing credit stress.</p> <p class="text--body">Overall, we believe the consensus was and is still too pessimistic about the eurozone 2023 GDP growth. There is a high probability that a recession will be avoided. That being said, Europe is still broken. The energy crisis remains a major risk for the next winter &ndash; with the EU being still reluctant to embrace nuclear energy and being unable to move fast on the project of a reform of the electricity market. While the ECB expects wages to increase substantially, we see that workers are in fact becoming poorer in most countries. Several companies which have benefited from the abnormal negative interest rate periods will now face a moment of truth &ndash; many of them will probably go bankrupt. Politically, we are not optimistic. EU presidencies offer little ambition &ndash; Sweden, which heads the Council of EU unsurprisingly focuses on the Ukraine war while the Spanish presidency in the second half of 2023 will be dominated by elections in the country. There is not much positive to expect from politics this year.</p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook</a> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook 1st row</a></div>Tue, 07 Feb 2023 07:00:00 Z2023-09-23T14:26:25Z{F4940B0B-5737-4A68-9E64-810881CA1CA7}https://www.home.saxo/en-sg/content/articles/outrageous-predictions/french-president-macron-resigns-06122022Christopher Dembik editorial-outrageous predictionsRow 1 OP 2022French President Macron resigns <div class="article-excerpt">"In a televised address, he criticises the opposition’s standpoint of absolute blockage and announces he is retiring from politics." - Christopher Dembik.</div><div class="article-rte"><div class="rte--output"><p class="text--body">When President Emmanuel Macron won a second term in May 2022, he believed he could lead France on a royal road to carry out reforms. However, this was before the June 2022 legislative elections when his party and his allies lost their outright majority in Parliament, thus forcing Macron to make compromises. Needless to say, this is something he is not familiar with.&nbsp;&nbsp;<br /> <br /> Confronted with a strong opposition from the left-wing alliance NUPES and Marine Le Pen&rsquo;s far-right National Rally, the government has no other choice but to pass major laws and the 2023 budget by a fast-track decree&mdash;triggering the constitution's article 49.3. Nevertheless, bypassing lawmakers cannot be a way to govern in a democracy. Not in the long run, at least. Macron initially thinks about dissolving the Parliament to organise snap elections. Polls indicate this is not a solution, as it would still lead to a hung parliament. He therefore understands that he will be a lame duck for the next four years and he will not be able to pass his signature pension reform.&nbsp;&nbsp;<br /> <br /> Following the example of the founder of France&rsquo;s democratic system Charles de Gaulle in 1946 and in 1969, Macron unexpectedly decides to resign in early 2023. In a televised address, he criticises the opposition&rsquo;s standpoint of absolute blockage and announces he is retiring from politics. While France is preparing for a new presidential election, Macron decides to realise his long-time dream of establishing a start-up.&nbsp;&nbsp;<br /> <br /> Inwardly, he did not give up on the idea of returning to power. He hopes that his supporters and the silent majority will ask him to come back when France will fall into a political turmoil, as it happened for De Gaulle in 1958. Macron&rsquo;s resignation opens the door of the &Eacute;lys&eacute;e Palace to the far-right contestant Le Pen, thus causing a wave of stupefaction throughout France and beyond, and setting up the latest existential challenge to the EU project and its shaky institutional foundations.&nbsp;</p> <strong>Market impact</strong>: <em>Causes a wobble in the euro, but eventually the opposite as the sense of crisis galvanizes an broader anti-populist coalition under new leadership &ndash; French OAT sovereign bond yields converge with German Bunds.</em></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/outrageous-predictions">Outrageous Predictions</a> <span>Row 1 OP 2022</span></div>Tue, 06 Dec 2022 00:20:00 Z2022-12-06T09:49:35Z{0FCF7C05-F2E6-47AA-A9B7-7BCE5A2A63E2}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--hong-kong-air-freight-volume-23112022Christopher Dembik product-macroplace-lc/cnChart of the Week : Hong Kong Air Freight Volume<div class="article-excerpt">Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance. It is published on a weekly basis. Today, we are looking at Hong Kong air volume freight as a proxy of the whole Chinese economy. The latest data was released less than two weeks ago, on 11 November.</div><div class="article-rte"><div class="rte--output"><p><span >Click</span><span >&nbsp;to download this week's full edition of </span><a href="https://www.home.saxo/-/media/content-hub/documents/2022/november/macrochartmania_master2311.pdf?revision=73d8e466-a8d2-47cc-b985-1830de58fd69">Macro Chartmania</a>.</p> <p><span>Today&rsquo;s edition is about global air freight. We monitor air cargo growth statistics from major hubs in Asia and in Europe as they usually are sensitive to changes in the business cycle, especially in the manufacturing sector. This gives us interesting insights on the real state of the economy. On 11 November, the latest data was published for Hong Kong International Airport. This is the busiest air cargo hub in the world. Let&rsquo;s put it that way, this does not draw a positive picture of the Chinese economy. The strict zero Covid policy continues to have a negative impact. After a strong rebound in 2021, freight volumes have been in contraction since February onwards. There is no hope for improvement anytime soon. The latest print for October shows a drop of 23.8 % year-over-year. This is close to the lowest historical point ever reached in January 2009 at minus 28.9 %. This is worse than during the first global lockdown of Spring 2020 (minus 13.1 %). The 3-month moving average, which smooths out the effects of month-to-month changes, was out at minus 23,2 % year-over-year in October. This is another confirmation that the zero Covid policy is a serious drag for the Chinese economy. But we doubt the country can exit from it anytime soon (even an easing of Covid-19 control measures seems a bit far away now that new cases are surging in several major cities). If we extrapolate figures from Taiwan (which is the latest example to exit zero Covid policy), China could expect 700&nbsp;000 Chinese to die in five months. Of course, this is only a rough estimate. But it shows that exiting the zero Covid policy is not possible, for now. All of this also has global implications. While China contributed to about 30 % of global growth impulse before the pandemic (more than the combined contribution of the United States and the eurozone), it is now down at roughly 10 %. China is not anymore the global growth engine it used to be along with the United States.&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/november/23_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>China</span></div>Wed, 23 Nov 2022 17:00:00 Z2022-11-23T17:23:14Z{2A05EB68-E10F-444E-8D8F-CCCDAD171EBD}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--us--employment-cost-index-18112022Christopher Dembik product-macroRecessionmacro-employmentcurrency-usdplace-lc/usChart of the Week : U.S Employment Cost Index<div class="article-excerpt">Our ‘Macro Chartmania’ series collects Macrobond data and focuses on a single chart chosen for its relevance. This week, we focus on the U.S. Employment Cost Index. It shows that inflationary pressures are finally fading on Main Street but not good for reasons. </div><div class="article-rte"><div class="rte--output"><p>Click to download this week's full edition of&nbsp;<a href="https://www.home.saxo/-/media/content-hub/documents/2022/november/macrochartmania_master1711.pdf?revision=26715877-044a-41e1-8f2a-81e07c42ae6c">Macro Chartmania</a>. </p> <p>The market narrative machine is fascinating. In 2022, the bear market narrative was &laquo;&nbsp;inflation shock, rates shock and recession shock&nbsp;&raquo;. For 2023, the market narrative is rather bullish. Analysts expect that inflation will move lower but will remain sticky, that a mild recession will affect most of the developed economies and that central banks will hike a little further (probably until the start of the second quarter) before pausing for the rest of the year. It is certainly too early to know the steepness of the recession and whether the United States will manage to avoid it. This is an ongoing debate among economists. </p> <p>But there are early signs inflation is finally receding, at least in the United States. This is not the case in the United Kingdom where the October CPI reached 11.1% year-over-year, for instance. In the United States, higher wages reflecting Covid unbalances, worker shortage and tight labor market partially explained the increase in prices. This is now reversing. In just the last several weeks, we have seen major layoff announcements from the tech sector (Meta, Stripe, Paypal, Microsoft, Amazon etc.). But this is not just a technology story. We have seen layoffs in other sectors of the economy, from the real estate promoter Redfin and the trucking giant C.H. Robinson among many others. </p> <p>To understand why layoffs are starting now, we need to first understand the sequence of the economy. Employment is a well-known lagging indicator. In the past, it has already happened that job losses started only with a lag of several months after the economy entered into a recession (job losses started 8 months after the official start of the 1974 recession, for instance). But some sectors of the economy are more sensitive than others to higher interest rates, which can help predict whether or not we will face massive layoffs. This is the case of the housing market especially (we used to say that the housing market is the business cycle in the United States). With the cooling of the housing market which started in early 2022, the consumption of things associated with home buying are also going down - with a lag. Think home appliances, home-building tools etc. The housing slowdown is spreading into the rest of the economy. This puts pressure on big durable goods and thus on the industry that moves these goods around the world. This explains why C.H. Robinson fired 650 employees one week ago. This is only the beginning, in our view.</p> <p>Mass layoff to come means that the drop in wage increases, which has just started, will continue in the coming months. In the below chart, we have plotted the National Federation of Independent Business (NFIB) compensation plans and the Employment Cost Index. Only a net 23 % of small businesses plan to raise compensation in the next three months. This is much lower than a few months ago (when it was at a cycle peak of 32 %). Compensation practices of small businesses tend to lead to broader wage and salary growth. Therefore, we can expect that the Employment Cost Index, which has started to decelerate recently, will continue moving downwards, likely well below 4% going into 2023. This could ultimately ease inflationary pressures and open the door to a slower pace of Fed rate hikes. This echoes comments from Fed Vice Chair Lael Brainard earlier this week&nbsp;: <em>&ldquo;It will probably be appropriate soon to move to a slower pace of increases.&rdquo;</em></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/november/16_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Recession</span> <span>Employment</span> <span>USD</span> <span></span></div>Fri, 18 Nov 2022 06:30:00 Z2022-11-17T18:02:10Z{E5CB6C30-F83E-4BA6-9712-80674B01BFC2}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week-strong-us-credit-growth-25102022Christopher Dembik product-macroplace-lc/usforex-eurcadforex-eurplnforex-eurnokforex-eurchfforex-euraudforex-eursekforex-eurjpycurrency-eurplace-lr/eursubject-is/pol.euforex-eurusdforex-eurgbpChart of the Week: Strong U.S. credit growth<div class="article-excerpt">In today's edition, we focus on the pace of U.S. credit growth and whether or not it indicates an imminent risk of a U.S. recession. To put it simply, credit growth is stabilizing at a very high level which is not normally consistent with a recession. Other credit aggregates we monitor, such as the credit impulse, are oriented north too. It is currently running at 4.5 % of GDP - this is the highest level since 2011.</div><div class="article-rte"><div class="rte--output"><p><span>Click to download this week's full edition of <a href="https://www.home.saxo/-/media/content-hub/documents/2022/october/macrochartmania_2410.pdf?revision=6a6f0924-a347-4ac4-838c-d03822e5e542">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</span></p> <p><span>A majority of market participants believe a soft landing in the United States is an unlikely scenario. Based on the latest credit data, this is still possible though. In the below chart, we show the evolution of commercial and industrial loans and leases. This is an important category of assets that commercial banks report on their balance sheets. This has been published on a quarterly basis by the U.S. Federal Reserve (Fed) since 1947. The latest data for the third quarter was out a few days ago. Commercial and industrial loans and leases are still growing at a strong pace, running at 17.3 % year-over-year in Q3. The last peak was in Q2 2020 &ndash; immediately in the aftermath of the outbreak. Growth was without any historical precedent at 88.3 % year-over-year. But the circumstances were out of the ordinary. At Saxo Bank, we also measure the growth of credit using credit impulse. This is a larger aggregate which measures the flow of new credit issued by the private sector as a percentage of GDP (see the chart in today&rsquo;s Macro Chartmania). It is heading north at 4.5 % of GDP. Both indicators (commercial and industrial loans and leases and credit impulse) are used to predict a recession. When both are in a contraction, this usually ends up in a recession. As you can see, the current credit growth is not consistent with an imminent recession. We believe that the release of the first estimate of the Q3 U.S. GDP on 27 October will confirm the U.S. economy is rather resilient, despite growing concerns about inflationary pressures (the economist consensus expects GDP growth to reach 2.4 %). In our view, the resilient U.S. economic outlook (especially if we compare with the eurozone) and the continued strong inflow of credit in the economy should give the U.S. Federal Reserve enough room for maneuver to hike interest rates in November and beyond. We believe that the central bank will hike rates by 0.75-point&nbsp;next month. Fed officials could also start debating whether and how to slow the pace of increases after that, but more to take into consideration hidden financial risks (notably on the U.S. bond market) rather due to concerns about an imminent recession.&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/october/24_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span></span> <span>EURCAD</span> <span>EURPLN</span> <span>EURNOK</span> <span>EURCHF</span> <span>EURAUD</span> <span>EURSEK</span> <span>EURJPY</span> <span>EUR</span> <span>Europe</span> <span>European Union (EU)</span> <span>EURUSD</span> <span>EURGBP</span></div>Tue, 25 Oct 2022 04:30:00 Z2022-10-24T12:34:15Z{DECAD340-7AA5-4FD3-AF6A-A042E994D9F9}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--ecb-systemic-risk-index-18102022Christopher Dembik product-macroECBEuro dollar optionsubject-is/pol.euplace-lr/eurforex-eurchfforex-euraudforex-eursekforex-eurcadforex-eurplnforex-eurnokforex-eurjpyforex-eurusdcurrency-eurforex-eurgbpChart of the Week : ECB Systemic Risk Index<div class="article-excerpt">In today’s ‘Macro Chartmania’, we talk about fragmentation risk in the eurozone. We use the ECB Systemic Risk Index to track market stress. It was initially developed by Hollo, Kremer and Lo Duca in 2012, in the midst of the eurozone sovereign debt crisis. Market stress remains at an elevated level. But it is now decreasing which seems to indicate that central banks are getting control back of the bond market (where tension was the highest in recent weeks).</div><div class="article-rte"><div class="rte--output"><p>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/october/macrochartmania_1810.pdf?revision=67b439f6-9215-4b34-97b7-f8f1bd279536">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.</p> <p>The ECB Systemic Risk Index is based on fifteen financial stress measures such as exchange rates or spreads. Before Covid, we used to identify the level between 0.25 and 0.30 as the danger area for the eurozone which could force the ECB to adopt a more dovish stance or to step in in the market (verbal communication or bond purchasing). Things have changed. The indicator reached a peak at 0.50 in early October without any intervention from the central bank. The last time such a level was reached was in 2011 when investors were wondering if the eurozone would implode. This was before Draghi&rsquo;s whatever it takes. However, there is good news&nbsp;: the indicator is receding a bit. It now stands at 0.40. This is still comparatively high. But it seems to indicate that bond market dysfunction (which partially resulted from contagion from the UK bond market meltdown following the release of the costly &lsquo;mini-budget&rsquo;) is disappearing. Looking at the situation this week, it seems that central banks are back in control, for the moment. It is uncertain how long it might last. In the short-term, this means that the ECB has a large room for maneuver to increase interest rates next week. Our baseline is that the Governing Council will need to send a new hawkish message (meaning 50 basis point interest hikes) as inflation continues to increase (it is running at 10 % year-over-year in September in the eurozone) and it is still widespread (going from the manufacturing sector to the services sectors). We think the ECB can accept a higher risk of financial fragmentation in the eurozone in the short-term in order to fight inflation in the long-term, at least until the recession will be officialized, likely in the first quarter of 2023. This means that the ECB has until February 2023 to bring back real interest rates high enough for inflation to finally recede. In the world of central bankers, this is a rather short window of opportunity to act.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/october/ecb-systemic-risk-index.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>ECB</span> <span>Euro dollar option</span> <span>European Union (EU)</span> <span>Europe</span> <span>EURCHF</span> <span>EURAUD</span> <span>EURSEK</span> <span>EURCAD</span> <span>EURPLN</span> <span>EURNOK</span> <span>EURJPY</span> <span>EURUSD</span> <span>EUR</span> <span>EURGBP</span></div>Tue, 18 Oct 2022 08:00:00 Z2022-10-18T09:51:28Z{75C76575-7E86-4031-9E07-1B1BCCA7E9C8}https://www.home.saxo/en-sg/content/articles/macro/this-chart-tell-us-more-about-what-is-happening-in-financial-markets-than-any-other-11102022Christopher Dembik product-macrocurrency-usdFederal ReserveFederal ReserveRecessionThis chart tell us more about what is happening in financial markets than any other<div class="article-excerpt">There is one thing that really matters more than others, and it is global U.S. dollar liquidity. The bad news is that it is in contraction for the first time since early 2019. Usually, this is a synonym of market turmoil and higher risk aversion. We consider this is certainly one of the most important and less mentioned drivers behind the continued drop in financial markets in recent months. </div><div class="article-rte"><div class="rte--output"><p><span>This is a fact&nbsp;: we operate in a dollar-based world. Therefore, U.S. dollar liquidity serves as a key driver of the global economy and financial markets. At Saxo Bank, the evolution of U.S. dollar money supply is our favorite dollar liquidity indicator. In the below chart, we track U.S. dollar liquidity based on the evolution of the monetary aggregate M2 in the twenty-five largest economies converted into U.S. dollar and minus the evolution of M3 in the United States. This is certainly the most important chart to understand what is currently happening in financial markets. </span></p> <p><span>In the wake of the outbreak, U.S. dollar liquidity increased reflecting efforts from the U.S. Federal Reserve and other major central banks to avoid a liquidity crisis similar or worse than that of 2007-08. It was successful. Since mid-2021, U.S. dollar liquidity has slowly started to decrease. But liquidity remained abundant until very recently. The liquidity issue on the UK bond market, which triggered an emergency intervention from the Bank of England, is one example of what may happen in the coming months if liquidity, especially U.S. dollar liquidity, is scarce. The two last times financial markets went through such a contraction in liquidity, it was in 2015 (when China devalued the CNY) and in early 2019 (at that time, the focus was on the Chinese-U.S. trade war). It caused an emerging market turmoil, deteriorated financial conditions and higher U.S. dollar funding costs.&nbsp; But there is one major difference compared to 2015 and 2019, there was no inflation at that time. It is now the single one major issue for policymakers. Given inflation will remain volatile in the months to come and that it has not peaked in most countries (with the exception of the United States), central banks have no other choice but to keep normalizing monetary policy. This means that U.S. dollar liquidity will continue to fall in the short-term. It will have a net negative impact on financial markets, especially the equity segment, and the global economy (for more on our Q3 earnings expectations, see Peter Garnry&rsquo;s latest <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.home.saxo%2Fcontent%2Farticles%2Fequities%2Fq3-earnings-season-kickoff-starts-with-a-warning-from-shell-07102022&amp;data=05%7C01%7C%7C461c415c25964f6433da08daab6ec81e%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C638010789559032653%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=toqC4LgXxoVAQAIWD%2FsNnPWBlTLlG5RvODyckhEDpZY%3D&amp;reserved=0">article</a>).</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/october/usd-liquidity-indicator.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>USD</span> <span>Federal Reserve</span> <span>Federal Reserve</span> <span>Recession</span></div>Tue, 11 Oct 2022 07:00:00 Z2022-10-11T10:11:08Z{CAE5054C-BC21-4755-9A73-DB063DE11C6A}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--fx-risk-indicator-10102022Christopher Dembik product-macroMacro-FXcurrency-usdCurrencyCurrency riskChart of the Week : FX Risk Indicator<div class="article-excerpt">In today's edition, we focus on the FX space and discuss the evolution of risk perception.</div><div class="article-rte"><div class="rte--output"><p><span>Click to download this week's full edition of&nbsp;</span><a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.home.saxo%2F-%2Fmedia%2Fcontent-hub%2Fdocuments%2F2022%2Fseptember%2Fmacrochartmania_week38.pdf%3Frevision%3D35a75660-e83e-4820-8847-c53cc1758d02&amp;data=05%7C01%7C%7C518ad4fad45242cb1f6908daaab0ea56%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C638009974409298824%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=HIh36YP0i6U6aDTUAO5crUMA5lqLuFOmZJdkvgPWpKs%3D&amp;reserved=0"><strong><span></span></strong></a><a href="https://www.home.saxo/-/media/content-hub/documents/2022/october/macrochartmania_week41.pdf?revision=2499bc77-45f5-412b-85f6-68bbc6167342">Macro Chartmania</a>&nbsp;<span>composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</span></p> <p><span><strong>Saxo Bank&rsquo;s FX risk indicator</strong> is based on the evolution of Asian currencies (excluding Japanese yen) versus the US dollar. Since Q4 2021, we see a continued increase in risk aversion in the FX space. This is the first time since the first global lockdown in 2020. In our last update, our indicator is down minus 8.9 % in Q3. This is the biggest drop since Q3 2015 when China devalued the renminbi by surprise. There are several aspects behind the rise in risk aversion&nbsp;: the risk of a global recession, the European energy crisis, the consequences of the Ukraine war, &lsquo;permanent&rsquo; inflation and, first and foremost, the drop in U.S. dollar liquidity. In our view, this is one of the most important and less commented drivers. Based on our own data, global U.S. dollar liquidity is in a contraction for the first time since early 2019 (at that time the Chinese-U.S. trade war was the main disruptive factor). We expect that the coming months will remain challenging for most of the risky assets (including emerging FX currencies) as the risks mentioned below further materialize. We remain in a U.S. dollar-centered FX market, with very little alternatives.&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/october/10_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Macro FX</span> <span>USD</span> <span>Currency</span> <span>Currency risk</span></div>Mon, 10 Oct 2022 08:30:00 Z2022-10-10T11:29:19Z{647A8260-6541-4533-9ED1-F4C49D2FF5EA}https://www.home.saxo/en-sg/content/articles/quarterly-outlook/european-energy-crisis-14102022Christopher Dembik Primary-Quarterly OutlookPrimary-Quarterly Outlook 1st rowEuropean energy crisis: it will get worse before it gets better <div class="article-excerpt">History tells us that crises lead to instability or innovation. But what will be the outcome of the current European energy crisis?</div><div class="article-rte"><div class="rte--output"><p class="text--body"><span >In </span><em >America's First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837 (2013)</em><span >, Alasdair Roberts masterfully explains how the United States dealt with the consequences of the country&rsquo;s first great depression. He demonstrates how the commitment to democracy was put to test during the crisis. He also examines how European countries navigated through this troubled period of history and how the doubling of food prices combined with very high interest rates probably caused the 1848 revolutions across Europe, at a time when labour was in high supply while capital was not. &laquo; </span><em >By early 1847, prices for basic foodstuffs doubled across Europe, triggering riots and raising fears of famine. The European government [&hellip;] responded with restrictive monetary policies that induced recession at home. In 1848, Europe realized the political consequences that followed from two years of economic distress</em><span > &raquo;. History doesn't repeat itself&mdash;but it often rhymes. The current economic period echoes that of the mid-19th century, but there are two major differences: capital is abundant (although less so than two years ago) and labour is scarce (the fertility rate in Europe was above 3 in 1848 and now stands at 1.5). Should we expect similar political instability? We cannot exclude a recurrence of the 2018 Yellow Vest movement in France, in one form or another, but this is unlikely to spread across Europe. In fact, the rightward evolution of European voters is the most immediate political consequence (see Italy and Sweden&rsquo;s September election results).&nbsp;</span></p> <p class="text--body">A third difference exists in comparison to the mid-19th-century crisis: potato disease and poor cereal harvests were among the main factors behind the doubling of food prices in 1847. These were external factors that were impossible to predict and avoid. The current inflationary crisis in Europe is mostly fuelled by a failed energy policy, with a strong, decades-long dependence on Russia&rsquo;s low-cost fossil energy and an exit from nuclear energy, combined with investments channelled towards solar and wind which are unable to provide a constant supply of energy at this stage. Nevertheless, if Europe had embraced a pragmatic rather than ideological approach on energy, we would have certainly avoided record-high energy prices&mdash;for instance, France&rsquo;s one-year electricity forward increased by 1000 percent compared to the long-term average of 2010&ndash;2019.&nbsp;</p> <p class="text--body"><span >The European energy crisis is here to stay, and my colleagues and I have extensively written about it in recent months. But there are reasons for hope, as there are at least three solutions to mitigate the effect of the current crisis, with one of them able to ease the situation almost instantly:&nbsp;</span>&nbsp;</p> <p class="text--body"><strong>Energy efficiency</strong>, the blind spot of the European energy policy. While policymakers are advising to turn off the wi-fi, how much energy does an internet box actually consume per hour? 12 Wh. For a dryer we are talking about 3 kWh, which is basically 250 times more. Thus, we give the wrong impression to European citizens that we can solve the energy crisis with daily small and simple eco-gestures. As a matter of fact, we need to invest in technological innovations, especially artificial intelligence (AI), which could bring quick and concrete benefits to users and lower consumption from this winter onwards. The Barcelona metro operator for example, has installed an &lsquo;intelligent&rsquo; air conditioning system controlled by AI in its 128 stations, in stations where there are more than 1 million passengers commuting per day. The results are positively striking: energy consumption has been reduced by a stunning 25 percent on average and users' satisfaction has increased by 10 percent. A similar system can be installed almost anywhere, in office buildings, in cinemas, suburban infrastructures, etc. This will lower energy consumption significantly, not in a matter of years, but within a few weeks of the technology being deployed.&nbsp;</p> <p class="text--body"><strong>Focus on nuclear</strong>: whether we like it or not, nuclear energy is an integral part of the solution. Therefore, we should take advantage of this crisis to rethink our policy stance on nuclear power. In early September, several non-partisan organisations launched a petition to prevent Switzerland from abandoning the use of nuclear power in 2027, as scheduled. Further, only France and the United Kingdom have reported sizable nuclear capacity under construction. However, while most European countries are reluctant to move forward with nuclear power, Asia is embracing it. South Korea is reversing nuclear phaseout and China is accelerating its huge buildout in reactors. It is important to highlight that nuclear power is not without issues (see corrosion issues in France&rsquo;s nuclear reactors), but it guarantees energy independence and low energy prices in the long run. Moreover, the concept that nuclear power is unsafe is not accurate. In particular, the prevailing belief that nuclear waste is uniquely dangerous and that the industry does not know what to do with it is false. In fact, radioactivity diminishes quickly with time: about 40 years after it&rsquo;s done making power, the radioactivity of a fuel bundle falls by over 99 percent. Most of the industrial waste we manage never gets less toxic over time&mdash;not even in a million years. In addition, the industry is working on recycling processes with some success. In France, 17 percent of nuclear generation is already produced thanks to recycled materials, and this is only the beginning. Nuclear should definitely be an integral part of the energy transition if we ever want to reach a low-carbon economy.&nbsp;</p> <p><span ><strong>Building industrial infrastructures to accelerate the green transition</strong>: In recent years, Europe has invested massively into the green transition (solar, wind, biomass, etc.), but there is a missing piece. Namely, Europe's lack of industrial infrastructure and inability to control the supply chain required for this transition. Let&rsquo;s take the example of electric vehicles (EVs). On 29th June 2022, the European Union member countries agreed that new passenger cars and vans will only be sold if they don&rsquo;t emit any CO2 from 2035 onwards. In theory, this should have boosted the adoption of EVs. But who is controlling the mining and processing of critical minerals needed for EV batteries and the green transition? China. The economic power represents 50 percent of the global manufacturing capacity for wind turbines, 66 percent for solar modules and 90 percent for storage batteries. The majority of rare earth elements are mined and processed in China (59 percent and 88 percent respectively). The share is almost as important for other minerals such as lithium and cobalt &ndash; see the chart below. Diversification from China&rsquo;s supply won&rsquo;t be easy, and it won&rsquo;t happen overnight. But there are other countries that can at least partly serve as supply hubs: Chile for lithium, South Africa for platinum and Congo for cobalt. What we have done wrong until now has been to focus on the final product (EVs, for instance) without securing the supply chain. We are repeating the exact same mistake we made with Russia (for fossil energy) and China (for masks and vital drugs during the Covid pandemic).&nbsp;</span></p> <p class="text--body">The winter will be tough&mdash;there&rsquo;s no doubt about it. But a recurrence of the crisis is not inevitable in 2023. There are ways to create solid ground for the energy transition in Europe on the condition we escape ideology, and we focus on tried and tested solutions to diversify our energy mix. It&rsquo;s now up to policymakers to make the right choice.&nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/qo4-2022/cdk-01.png"/></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/qo4-2022/cdk-02.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook</a> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook 1st row</a></div>Tue, 04 Oct 2022 01:30:00 Z2022-10-04T05:33:41Z{AE4D3EB5-ED63-40ED-AB44-95F39151DA77}https://www.home.saxo/en-sg/content/articles/macro/tension-in-the-uk-and-eu-credit-markets-is-reaching-crisis-levels-28092022Christopher Dembik product-macromacro-central banksCredit spreadplace-lc/gbcurrency-gbpforex-eurgbpsubject-is/pol.euTension in the UK and EU credit markets is reaching crisis levels<div class="article-excerpt">The United Kingdom is becoming one major credit risk, not only for GBP assets but also for the rest of the world. Tension is increasing in global credit markets, especially in the Eurozone. Several indicators are not in the risk-zone, but it is time to stay careful. All our team are constantly monitoring the situation to provide you with the latest updates.</div><div class="article-rte"><div class="rte--output"><p><strong><span>What is happening ?</span></strong></p> <p><span>The IMF and several rating agencies expressed concerns about UK Prime minister Liz Truss&rsquo;s fiscal package :</span></p> <p><span>"Given elevated inflation pressures in many countries, including the UK, we do not recommend large untargeted fiscal packages at this juncture, as it is important fiscal policy does not work at cross purposes to monetary policy" - IMF</span></p> <p><span>In addition, the IMF indicated that they are "closely monitoring economic developments in Britain and [ they are ] engaged with the UK authorities". This is a very strong and unusual statement from the IMF.</span></p> <p><span>Several rating agencies have also warned that the UK&rsquo;s new fiscal policy regime is "credit negative" - Moody&rsquo;s.</span></p> <p><span>This has increased massive selling in GBP and pushed UK yield into risky territory. In the space of a few days, the UK 5-year CDS jumped to 38 basis points &ndash; this is close to the levels reached at the start of the Covid-19 outbreak <em>&ndash; see Chart 1</em>. This is a clear sign of market tension.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/28_09_2022_cdk_italy5ycds.png"/></div><div class="article-additional-rte"><div class="rte--output"><p><span>At mid-day, the Bank of England had no other choice but to step in in an effort to restore market confidence. The Bank indicated they will carry out temporary purchases of long-dated UK government bonds from today in order to "restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses". It is too early to say whether this will be successful or not.</span></p> <p><strong><span>What is the problem ?<br /> </span></strong><span >On 23 September, the UK government unveiled a new fiscal package which will increase the level of public debt and might complicate the Bank&rsquo;s task to lower inflation. This resulted in a drop of confidence in the country. This is a problem for any country facing such a situation. But this is worse for the UK. The country is more reliant than ever on inflows of foreign money to finance its excess consumption. The current account deficit was at a record high of 8.3 % of GDP in the first quarter this year. Even in the best case scenario, if it falls to 4 %, this will be complicated to finance. As foreign investors head for the exit worried about the government&rsquo;s ballooning pile of debt, there is a material risk that the UK might not be able to attract enough foreign capital to fund its debt at current levels of interest. In the worst case scenario, the UK might need to be forced to sell assets to foreigners. But we are not in this situation yet.</span></p> <p><strong><span>What are the consequences ?<br /> </span></strong><span >The UK is becoming a major credit risk not only for GBP assets but also for the rest of the world, primarily the eurozone. We see some kind of contagion effect in the eurozone credit market.</span></p> <p><span>The spread between the 10-year Italian government bond and the 10-year German government bond which serves as a benchmark is above 250 basis points again <em>&ndash; see chart 2</em>. It is now back to pre-Covid levels when ECB President Christine Lagarde put her foot in her mouth by saying that "the European Central Bank is not here to close spreads". The widening in spreads not only reflects concerns about Giorgia Meloni&rsquo;s victory in Italy but contagion from the UK credit risk too.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/28_09_2022_cdk_italygermanybondspreads.png"/></div><div class="article-additional-rte"><div class="rte--output"><p><span>We also closely monitor broader measures of financial stress, such as the ECB Systemic Risk Indicator <em>&ndash; see chart 3</em>. It is above 0.40 &ndash; which is usually considered as the risk-zone. If it continues increasing, it could reach in a matter of weeks levels of 2011 &ndash; at the peak of the European sovereign debt crisis. Here again several factors play a role (the European energy crisis, the risk of a eurozone recession etc.). But contagion from the UK is noticeable as well.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/28_09_2022_cdk_ecbsystemicrisks.png"/></div><div class="article-additional-rte"><div class="rte--output"><p><span>We are now in a situation where the markets could easily break. We cannot exclude that other central banks will step in, following the examples of the Bank of England, if financial conditions continue to deteriorate. This is the right moment to be careful if you are exposed to the market.</span></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Central Banks</span> <span>Credit spread</span> <span>United Kingdom</span> <span>GBP</span> <span>EURGBP</span> <span>European Union (EU)</span></div>Wed, 28 Sep 2022 11:40:00 Z2022-09-28T11:50:19Z{45236F15-F91D-4BE3-816D-6D8BC2CCB731}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--s-korea-trade-data-are-on-a-free-fall-26092022Christopher Dembik product-macroRecessionEuro dollar optionmacro-balance of trademacro-central banksChart of the Week : S. Korea trade data are in a free fall<div class="article-excerpt">The bullwhip crunch in global manufacturing is hurting all the world’s largest exporters. In our view, the most vulnerable countries are South Korea, Germany and the United States. But there is more: the situation could further deteriorates if the current overvalued dollar environment causes a global currency crisis. Last week’s Bank of Japan and Japan Ministry of Finance intervention in the FX market is perhaps only the beginning of more interventionism to come. </div><div class="article-rte"><div class="rte--output"><p><span >Click to download this week's full edition of&nbsp;</span><a href="https://www.home.saxo/-/media/content-hub/documents/2022/september/macrochartmania_week38.pdf?revision=35a75660-e83e-4820-8847-c53cc1758d02">MacroChartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</p> <p>South Korea&rsquo;s exports fell 8.7 % in the first twenty days of September from the same period a year earlier. This matters because South Korea is considered as a bellwether for global trade and growth by economists. The drop is partially explained by holiday effects (the Chuseok holidays from 9 to 12 September) and by slowing growth in main trading partners. Exports to Japan over the same period decreased by 8.2 % and exports to China dropped by a stunning 14 %. This is an indicator of how strong the current slowdown of the Chinese economy is &ndash; see the below chart. Exports to Vietnam are falling by 12.9 %. The South-East Asian country is a major trade partner for South Korea. Over the years, many South Korean high-tech companies have sent components to be assembled there (Samsung, for instance). This has accelerated in recent years on the back of the US-China trade war.</p> <h2 class="article-heading--2">A bullwhip crunch in global manufacturing</h2> <p>The counter-performance of South Korea trade is just one of many bad trade indicators that have been released in the recent weeks. For example : container spot rates are set for a hard landing. The bellwether Shanghai Containerized Freight Index is down 58 % since January and spot rates have fallen by around 10 % for the fourth week running. This is the most watched rate indicator on sea freight from China. This is not only caused by the effect of China&rsquo;s zero covid policy on trade. This reflects first and foremost a slowdown in global demand. The Drewry World Container Index draws a similar picture. This is a composite sea freight rate on eight major routes to/from the United States, Europe and Asia. It has been going down for the 30th week in a row. It is now standing 57 % lower than the same period last year. Global recession or no recession, it seems obvious that the bullwhip crunch in global manufacturing is going to hurt all the world&rsquo;s biggest exporters, in the same way they enjoyed a massive boom in 2020-21. During the Covid period, consumers have reacted by stocking up on essential goods, thus leading to shortages. Supply chains have had to ramp up production to cope with the unprecedented increase in demand. Now, demand is decreasing due to higher cost of living and fears of recession. The world&rsquo;s largest exporters are in a tough position. In our view, the most vulnerable countries are South Korea, Germany (where the manufacturing sector is hit by a massive 139 % year-over-year increase in the energy bill) and the United States too.</p> <h2 class="article-heading--2">The beginning of a global currency crisis ?</h2> <p>The risk of a global currency crisis is another headache for exporters. A weak currency is usually beneficial for exports. But a too weak currency often increases the cost of intermediary goods and energy for countries which are dependent on it from external supply. Last week, Japan intervened in the forex market to stem the depreciation of the Japanese yen with the blessing of the U.S. Treasury. However, this is unlikely to succeed unless there is a coordinated intervention by the United States, Europe, Japan and the United Kingdom, as we saw in the September 1985 Plaza Accord. Other countries are favoring less costly options &ndash; forex interventions are depleting foreign reserves and are rarely successful in the long run. For instance, they are providing FX hedging protection to most-exposed companies. This is the pace chosen by South Korea. On 23 September, the government decided to use the country&rsquo;s foreign exchange equalization fund to meet shipbuilding companies&rsquo; forex hedging demands for their overseas orders. As currency volatility is increasing in an overvalued dollar environment, expect more and more countries and central banks to try to rein in the depreciation of their local currency. But we doubt this will be enough to revive global manufacturing.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/25_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Recession</span> <span>Euro dollar option</span> <span>Balance of Trade</span> <span>Central Banks</span></div>Mon, 26 Sep 2022 04:00:00 Z2022-09-26T06:04:51Z{A53B1D09-5F61-4840-AEF8-E487E5375D97}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--frances-recession-is-right-around-the-corner-19092022Christopher Dembik product-macroRecessionforex-eurusdplace-lc/frChart of the Week : France’s recession is right around the corner<div class="article-excerpt">According to a Bloomberg poll released today, economists see an 80 % chance of a recession in the euro area in the next twelve months. In the same poll, more than half consider a second 75 basis-point rate hike is likely at the European Central Bank’s meeting in October. But some eurozone countries will navigate better in a recessionary environment than others. We expect France to be one of the most resilient euro area countries in 2023.</div><div class="article-rte"><div class="rte--output"><p><span><span >Click&nbsp;</span><span >to download this week's full edition of&nbsp;</span><a href="https://www.home.saxo/-/media/content-hub/documents/2022/september/macrochartmania_week38.pdf?revision=35a75660-e83e-4820-8847-c53cc1758d02">MacroChartmania</a></span><span>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</span></p> <h2 class="article-heading--2"><strong>No recession, really&nbsp;?</strong></h2> In mid-September, France's Minister of Economy, Bruno Le Maire, denied the risk of a recession in France in 2023. The French government targets a GDP growth at 2.5 % this year (prior estimate at 2.7 %). This makes sense based on the most up-to-date data. The 2023 GDP growth has been revised downward at 1 % versus prior estimate at 1.3 %. This is overly optimistic, in our view. When we look at the INSEE business climate indicator and its main components, the economic slowdown is obvious (with the exception of the construction sector) &ndash; see below chart. The slowdown will accelerate in the coming months and could cause a recession. Last week, Barclays was the first international bank to forecast a recession in 2023 for France (GDP contraction of -0.7 %). This is our baseline too (GDP forecast at -0.2 %). A few days ago, the Bank of France published its three main scenarios for the French economy next year. A recession is one of them (expected drop in GDP of -0.5 %). The forecasts for 2023 range from +1 % to -0.7 %. This shows the high level of uncertainty regarding the trajectory of the economy next year. The forecasts will likely be adjusted more often than usual in order to reflect the evolution of the energy crisis in Europe and the risk of energy rationing. <h2 class="article-heading--2"><strong>What really matters is the depth of the recession</strong></h2> In the case of France, we are optimistic. The recession is unlikely to be deep and long. The Bank of England forecasts a contraction in UK GDP of minus 2.1 % next year. There is a broad consensus that the recession will be massive in Germany due to the reliance on Russian gas and the exit from nuclear power. In its <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.bundesbank.de%2Fresource%2Fblob%2F896998%2F68b693961a4e7f5b2ef7ba2225d5788f%2FmL%2F2022-09-monatsbericht-data.pdf&amp;data=05%7C01%7C%7C20fdd64ab7704474137b08da9a52f2f1%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637991979293178148%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=oIyYwLGdoALI5vLa%2FTsOmHGSMZ3RrO7NxoQ03TPKHxg%3D&amp;reserved=0">economic bulletin of September</a>, the Bundesbank is forecasting a deep recession&nbsp;: <em>&laquo;&nbsp;Economic output is likely to decline noticeably in the fourth quarter [ following a slight contraction in Q3 </em><span><em>]. This should also be the case in the first quarter of next year&nbsp;&raquo;.</em> That won&rsquo;t happen in France. The expected drop in GDP will be lower than in most other European countries for three main reasons : <br /> <br /> 1) Generous automatic stabilizers (despite the introduction of a less generous unemployment insurance reform in 2019 which reduced insurance payouts for high earners and required people to work for longer before claiming benefits) ; <br /> <br /> 2) An healthy labor market (the rate of activity among people aged between 15 and 64 years old is at an all-time high at 73.5 % - this is the best indicator to assess the real state of the labor market); <br /> <br /> 3) With the exception of Germany, no other European government has been so spent so much to mitigate inflation and higher energy prices. The French government has done everything it can to accommodate households and companies (cap on energy prices and rent increases, higher pension, higher salary for civil servants etc.). According to our estimate, the total amount allocated to fight inflation already reaches more than &euro;60bn. This includes &euro;44bn already spent from September 2021 to August 2022 and about &euro;17-18bn for the announced extension of several measures going into 2023. This will certainly increase more in the coming months. The &laquo;&nbsp;Whatever it costs&nbsp;&raquo;, which started in 2020, is not over yet. For the sake of comparison, the stimulus plan to mitigate the economic effects of the Covid amounted to &euro;100bn. France&rsquo;s total anti-inflation will likely be close to this amount by the end of 2023, in our view. This raises questions about the level of public debt as a percentage of GDP. But this is certainly a necessary step to avoid a deep and long recession like in several of our European counterparts.&nbsp;</span></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/20_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Recession</span> <span>EURUSD</span> <span>France</span></div>Mon, 19 Sep 2022 15:00:00 Z2022-09-19T15:54:38Z{DD65407E-DE08-450C-9F01-ACCA91F25557}https://www.home.saxo/en-sg/content/articles/macro/eu-energy-crisis--tensions-are-mounting-ahead-of-key-summit-05092022Christopher Dembik product-macrocommodity-natural gascommodity-gas oilcommodity-gasolinesector-Oil and Gassector-gics-1010Recessionplace-lr/eursubject-is/pol.euEU Energy Crisis : Tensions are mounting ahead of key summit<div class="article-excerpt">Tensions are mounting in the energy front today. The European natural gas futures jumped 35 % this morning as Russia kept Nord Stream 1 link shut.</div><div class="article-rte"><div class="rte--output"><p><span>Over the weekend, several EU member countries announced measures to mitigate the impact of the crisis (&euro;65bn anti-inflation plan in Germany, &euro;23bn liquidity support to energy producers in Sweden, for instance). This is only the beginning. EU countries will have no other choice but to go big this winter to avoid a full-scale recession which could potentially cause a financial crisis.</span></p> <p><span><strong>Prices continue to jump&nbsp;</strong>: Volatility and the lack of liquidity are among the two main issues in the European energy market, at the moment. This morning, European natural gas futures surged as much as 35 % after Russia halted the Nord Stream pipeline to Europe indefinitely. This is happening ahead of a key EU emergency energy meeting scheduled for 9 September. According to the Financial Times, Russia is likely to stop supply via Nord Stream 1 as long as European sanctions remain in place. This is yet to be confirmed officially. Russia is still supplying the EU with gas via Belarus and Ukraine. But the quantities are marginal. This nightmare scenario (Russia cutting off gas) was expected. That&rsquo;s why the EU speeded up gas imports over the summer, especially importing massively liquefied natural gas from the United States. Gas storage is now at 80 %. But this is not enough. On average, gas storage was around 82 % in the EU on 31 August. We need to reach the target of 90 % to be able to provide a buffer for peak demand in winter months. In winter, electricity demand usually doubles in most countries (from 45 MWH per day to 90 MWh per day in France, for instance). We are not in a safe area yet. High prices are another issue. We are now approaching &euro;300 per MWh for natural gas in the EU for all winter. Households and industries will be crushed by these high energy prices for such a long time, unless governments decide new measures to accommodate them. This is happening, fortunately. </span></p> <p><span><strong>Go big or go away&nbsp;:</strong> Over the weekend, several EU governments have unveiled new measures to cope with the energy crisis. Energy utilities and producers are facing massive margin calls &ndash; with a few companies at risk of liquidity crisis (Germany&rsquo;s Uniper and two Vienna municipal utilities, for instance). To prevent such a scenario, the Swedish government has announced a &euro;23bn liquidity backstop for utilities. The scheme is operational from today onwards. It will stay in place as long as needed. The guarantees are designed to help companies struggling to meet the surging collateral requirements needed to trade electricity. It will bring more liquidity to the market too. Over the weekend, the Finnish government confirmed that it is planning to implement similar guarantees. It could actually be reproduced all across the EU if EU energy ministers decide so at this week&rsquo;s emergency meeting. In addition, Germany presented its third anti-inflation plan for about &euro;65bn &ndash; this is much more than the two previous plans combined. This includes several measures which could be introduced by other EU countries&nbsp;: a tax on superprofits (we expect France and the United Kingdom to follow this path soon), &euro;300 subsidy to retirees distributed at the end of this month, checks to students and a reform of the housing allowance which benefit to about 3 million people versus 700,000 as of today All the European governments have well-understood that the energy crisis could generate social tensions in the most affected countries and, potentially, trigger a financial crisis (thus, the need to provide liquidity to the energy market). </span></p> <p><span><strong>Key focal points at this week&rsquo;s EU energy meeting&nbsp;: </strong>According to Reuters, the EU energy ministers will try to find an agreement on a gas price cap and on providing companies facing high margin calls emergency liquidity support (the Swedish scheme will probably be reproduced in other countries). The ministers will also focus on reforming more deeply the European electricity market. Two main options are on the table&nbsp;: the &lsquo;Iberian exception&rsquo; and the Greek non-paper (for a more detailed analysis of the challenges of this week&rsquo;s meeting, see&nbsp;<a rel="noopener noreferrer" href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.home.saxo%2Fcontent%2Farticles%2Fmacro%2Feu-emergency-energy-meeting--a-never-ending-story-31082022&amp;data=05%7C01%7C%7C3d2a86a0afaf43166e5f08da8f4512bd%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637979824075208546%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=%2B3WYGNiHS737I6057WZFy0MRnW%2BEjFysAjRGDa9C0u0%3D&amp;reserved=0" target="_blank">EU Emergency Energy Meeting : A Never Ending Story</a>, 31 August 2022).</span></p> <p><span>My colleague Ole S. Hansen will publish a more detailed update on the EU gas and power prices. Don&rsquo;t miss it <a href="https://www.home.saxo/en-gb/insights/news-and-research/commodities">HERE</a>.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/september/05_cdk_1.png"/></div><div class="rte--output">From Steen Jakobsen's latest macro presentation</div><br/><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Natural Gas</span> <span>Gas Oil</span> <span>Gasoline</span> <span>Oil and Gas</span> <span>Energy Sector</span> <span>Recession</span> <span>Europe</span> <span>European Union (EU)</span></div>Mon, 05 Sep 2022 14:30:00 Z2022-09-05T14:01:50Z{F2CCBE36-E4EB-4993-A004-477AD94EEEBD}https://www.home.saxo/en-sg/content/articles/macro/eu-emergency-energy-meeting--a-never-ending-story-31082022Christopher Dembik product-macrosector-gics-1010place-lc/rusubject-is/pol.euplace-lc/frplace-lc/esforex-eurusdEU Emergency Energy Meeting : A Never Ending Story<div class="article-excerpt">The Czech Presidency of the Council of the European Union (EU) announced an emergency energy meeting will be held on 9 September in Brussels (Belgium). </div><div class="article-rte"><div class="rte--output"><p>Last week, France 1-year forward electricity prices crossed for the first time ever the level of &euro;1,000 per megawatt-hour (MWh). Before the crisis, anything above &euro;75-100 per MWh was considered as expensive. Three main options are on the table : targeted compensatory measures for low-income households, applying the &lsquo;Iberian exception&rsquo; to the entire EU (temporarily decoupling the price of gas from that of electricity) and reforming more fundamentally the European electricity market. There is no easy answer. Each of these options has downfalls. In our view, the energy crisis is here to stay. The world of cheap energy is over. We have entered into a brave new world of high inflation and high energy prices.</p> <p><strong>An unbearable cost :</strong> According to the calculations of the Brussels-based think-tank Bruegel, EU governments have allocated almost &euro;280bn to help companies and households to cope with higher energy bills since September 2021. In nominal terms, the largest European economies allocated the most funding (Germany &euro;66bn, Italy &euro;49bn and France &euro;44bn). In percentage of GDP (which is a better way to compare), the financial cushion deployed is the largest in Greece (3.7 %), Lithuania (3.6 %) and Italy (2.8 %). This cannot last forever. Several countries are looking to reduce financial support. They want to implement a targeted approach to mostly help low-income households. In France, the government capped energy prices in 2022 (gas prices were frozen at the levels of Autumn 2021 and electricity prices increased only by 4 % this year for households). But this is costly (around &euro;20bn &ndash; this is about half of the annual budget of the French ministry of Education). Based on current energy prices, expect the cost to be close to &euro;40bn for this year. In light of higher interest rates and risks that massive financial stimulus further fuels inflation, we believe that many European governments will follow the pace of the French&rsquo;s. They will decide to downsize the financial package aimed to cushion the energy crisis. On top of that, several EU countries are embattled with the need to bailout utilities at risk of insolvency (Germany&rsquo;s Uniper and two Vienna municipal utilities, for instance). This is only unfolding now.</p> <p><strong>Electricity market intervention is back on the agenda :</strong> Yesterday, the president of the European Commission (EC), Ursula Gertrud von der Leyen acknowledged the EU electricity market is no longer functioning. This is an understatement. There are mostly two options on the table. Both will be discussed at the upcoming emergency meeting of 9 September. The first option is to propose that the entire EU apply the<strong> &lsquo;Iberian exception&rsquo;</strong> to set electricity prices. In mid-April 2022, the EC agreed that Spain and Portugal create a temporary mechanism to decouple the price of gas from that of electricity for a period of 12 months. Concretely, the price of gas was capped to an average of &euro;50 per megawatt-hour. This resulted in electricity bills being halved for about 40 % of Spanish and Portuguese consumers with regulated rates. This could be applied at the EU scale. This is supported by Germany, Austria, Belgium, Spain and Portugal especially. However, this is far from being perfect. It led to significant leakage &ndash; basically a surge in power exports to France. In other words, a lot of the subsidy actually ends up in France. In addition, prices continue to increase at a speedy rate for 60 % of consumers. The second option is to<strong> separate the wholesale power market into two segments :</strong> a mandatory pool for low-variable cost technologies (wind, solar, nuclear, for instance) and a conventional market for fossil condensing plants. This proposal is pushed forward by Greece. This is a more fundamental reform of the EU electricity market. But there are several downsides, especially regarding how existing long-term contracts will be treated. Much more emergency meetings will be required before a coherent approach will be approved. Don&rsquo;t expect major decisions to be announced next week.</p> <p><span ><strong>The nuclear option :</strong> In our view, the European energy crisis is an opportunity to rethink policy stance on nuclear power. Last week, several non-partisan organizations launched a petition to prevent Switzerland from leaving nuclear power in 2027, as scheduled. This decision was initially taken in the aftermath of the 2011 Fukushima crisis (Japan). According to the July data from the World Nuclear Association, France and the United Kingdom are the two main European countries with the most nuclear capacity under construction. But others don&rsquo;t seem to embrace this option. In Germany, the Greens prefer to restart coal-fired power stations rather than rethinking the nuclear exit plan. This is puzzling. Nuclear power is not without issues (see corrosion issues in France nuclear reactors). But it guarantees energy independence and lower energy prices in the long-run. While Asia is embracing nuclear power (South Korea is reversing nuclear phaseout and China is accelerating its huge buildout in reactors, for instance), we fear that the EU will still be reluctant to bet on nuclear for ideological reasons. Like it or not, nuclear energy is our best option at the moment to reduce dependence on expensive fossil energy and move forward fast with the green transition.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/august/31_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><p><em>On the spot side, electricity prices continue to remain close to record high in France and Germany, respectively at 641 and 604&euro; per MWh. In contrast, they remain comparatively low in Spain and Portugal, around 200&euro; per MWh. This is roughly 10 times more than before the Covid, however.</em></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Energy Sector</span> <span>Russian Federation</span> <span>European Union (EU)</span> <span>France</span> <span>Spain</span> <span>EURUSD</span></div>Wed, 31 Aug 2022 15:30:00 Z2022-08-31T17:20:30Z{CCBF0571-61F8-4C01-A9A7-D8ACB4EEABFD}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--the-energy-crisis-is-hitting-france-29082022Christopher Dembik product-macroHot Topic Future of Energysector-gics-1010subject-is/pol.euplace-lr/eurplace-lc/frECBInflationInflationSGFocus InflationChart of the Week : The energy crisis is hitting France<div class="article-excerpt">France is well-known for his strong reliance on nuclear energy (about 69 % of electricity generation). But France’s forward energy prices are currently higher than those of any other major European economies (Germany, for instance). This is puzzling. In today’s ‘Macro Chartmania’, we explain the current state of France’s electricity crisis, why the worst is yet to come and why it may last for more than a single winter. We also discuss the monetary policy implications of elevated energy prices in France and in the rest of the eurozone, in light of European Central Bank (ECB) Board Member Isabel Schnabel’s speech at Jackson Hole last week.</div><div class="article-rte"><div class="rte--output"><p><em>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/august/macrochartmania_week35.pdf?revision=4ac51c0e-0bb2-49ca-800c-d7d4a23e77ee">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</em></p> <p>France&rsquo;s electricity prices are close to record highs. The baseload power price is above &euro;900 per MWh &ndash; see below chart. Many other European countries face similar prices (Germany, Belgium, Italy, for instance). But tensions are higher in France. The French-1 year electricity forward is at the highest level among major developed European economies. Last Friday, it jumped to a historical record of &euro;1,000 per MWh (versus &euro;900 per MWh for Germany). This represents an increase of +1000 % compared with the long-term average of 2010-2020. This is also a clear signal that traders don&rsquo;t expect prices to get back to normal anytime soon.</p> <p><span>Contrary to other European countries, France&rsquo;s energy crisis has little to do with the Ukraine war and the European sanctions against Russian gas. This is mostly due to corrosion issues in nuclear reactors (t</span>his caused the shutdown of about half of France's fifty-six nuclear reactors.<span>) and low water levels related to unusual heat during the summer (three nuclear reactors were shut down temporarily because of climate conditions this month). The country is highly dependent on nuclear energy. This represents about 69 % of electricity generation (this is a larger share than any other country). About 17 % of nuclear electricity is produced thanks to recycled materials. Summer heat will likely stop soon. But corrosion issues are partially structural and here to stay. In a statement a few months ago, the French nuclear energy regulator ASN mentioned that a restart of nuclear reactors closed due to corrosion could take up to several years. </span>The risk of electricity shortage is therefore real this winter (no matter how the weather conditions are, actually). During the summer, electricity demand is around 45 GWh. During the winter, higher consumption will push electricity demand around 80-90 GWh on average. This will put under tension all France's electricity infrastructure, thus increasing the risk of a shortage. We think that France is certainly in a worse position than Germany when it comes to energy supply (at least, in the short-term).</p> <p>So far, the French government has mitigated the energy crisis by capping electricity and gas prices for households (gas prices were frozen at Autumn 2021&rsquo;s levels and electricity price increase was capped at +4 % this year). This does not apply to corporations, however. This cannot last forever. The cap on energy prices will expire at the end of the year for gas and in February 2023 for electricity. The government is not planning to extend it further. It is too costly (about &euro;20bn so far this year on a total of &euro;44bn of various measures to support companies and households facing high inflation. This represents the total annual budget for education in France). From 2023, more targeted measures to help the low-income households to cope with higher energy prices is the most likely scenario. Will it be enough&nbsp;? This is far from certain. A repeat of the 2018 Yellow Vest Movement (meaning massive demonstrations against the cost of living) is not out of the table, in our view.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/august/29_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><h2 class="article-heading--2">Eurozone monetary policy implications</h2> <p>France is not the only European country in a very uncomfortable position, at the moment. The situation is worse than in its counterparts. But all the continent is facing the prospect of a difficult winter due to persistent high inflation. Contrary to the United States, we think the peak in eurozone inflation is ahead of us.</p> <p><span>The explosion of power prices is one of the three factors (along with a weak euro exchange rate and the easing of government measures to cap prices from 2023 onwards) which make us consider that inflation will remain elevated for a prolonged period in the eurozone. In terms of monetary policy, this means the ECB is likely to be more aggressive in the short term before potentially reviewing its policy stance if the recession materializes. The ECB Board Member Schnabel was very clear about it at last week&rsquo;s Jackson Hole Symposium. In her <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.ecb.europa.eu%2Fpress%2Fkey%2Fdate%2F2022%2Fhtml%2Fecb.sp220827~93f7d07535.en.html&amp;data=05%7C01%7C%7Cbd561ca759214c3437ae08da89a8be21%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637973655966080205%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=qDhm%2FrGz%2Bla%2FTozXRz61SCbuarYuwDWcI2LNmX%2B9ysA%3D&amp;reserved=0">speech</a>, she argued that three arguments of why central banks should act with determination : 1) inflation uncertainty (there is no way to predict accurately the evolution of energy prices in such a volatile environment, for instance) ; 2) credibility ; and 3) the cost of acting too late (in some respect, the ECB certainly waited for too long between the February policy pivot and the July interest rate hike). In the short-term, this means there will be more weight on realized&nbsp;data (especially the preliminary release on Wednesday of the August eurozone CPI expected at a new record high of 9 % year-over-year). This increases the probability of a significant move of 75 basis points at the next Governing Council of 8 September.</span></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Hot Topic Future of Energy</span> <span>Energy Sector</span> <span>European Union (EU)</span> <span>Europe</span> <span>France</span> <span>ECB</span> <span>Inflation</span> <span>InflationSG</span> <span>Focus Inflation</span></div>Mon, 29 Aug 2022 09:00:00 Z2022-08-29T11:16:27Z{6D1736C6-2AB3-4E63-BD36-FF8B893FE4E3}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--weak-germany-25082022Christopher Dembik product-macroplace-lc/deRecessionRecession WatchEuro dollar optionEuro Stoxx 50Chart of the Week : Weak Germany<div class="article-excerpt">In today’s ‘Macro Chartmania’, we give an update on the German economy. Back in 2019, we wrote that the German economy was structurally doomed to decelerate due to China’s slowdown and severe underinvestment in the ICT (Information and Communication Technology) sector. This was before the 2020 pandemic outbreak and the 2022 energy crisis. Now, there is little doubt that Germany will enter into a recession this year. It is facing a perfect storm : high inflation for a prolonged period, failure of the multi-decade model growth based on cheap Russian energy and massive imbalance in R&D investment. This is not to say that Germany will become Europe’s new sick man. The country has everything in hand to overcome these challenges. But, in the short-term, it is without doubt a tough time for Germany and thus for the rest of the eurozone. </div><div class="article-rte"><div class="rte--output"><p><span>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/august/macrochartmania_2508.pdf?revision=3e94299a-966f-40d4-8b4c-722e3decc31a">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</span></p> <p><span>The below chart partially explains why the&nbsp;German economy is not out of the woods anytime soon. So far, the country has avoided entering into a technical recession. This is explained by a rebound in external demand reflecting improved export growth to Turkey and a stabilization&nbsp;in export growth to the United Kingdom - two key trade partners. However, a recession is certainly only a matter of time. On Monday, the Bundesbank acknowledged that a recession is likely this year. The weak economic momentum in China is a source of concern. China is Germany&rsquo;s most important trading partner with an average total trade volume in recent years of around &euro;200bn. The latest data show that Germany export growth to China is close to its lowest level since the pandemic outbreak, at minus 8.3 % year-over-year in July. Based on preliminary trade data, the recent stabilization&nbsp;we can see in the below chart is likely to continue. But China&rsquo;s weak growth is not Germany&rsquo;s only problem. Inflation is here to stay. The Bundesbank forecasts it will peak around 10 % in the coming months versus 8.5 % year-over-year in July. This is likely. Contrary to the United States, the peak in eurozone inflation is ahead of us. Even if we pass the peak, inflation will remain elevated for long due to higher energy prices (lower reliance on Russian gas and oil will take years to materialize), weak euro exchange rate (a drop of the EUR/USD cross to 0.96 by year-end is highly possible) and the easing of government measures to cap prices (eurozone inflation is actually now artificially low). </span></p> <p><span>On top of that, Germany is also facing a structural challenge due to misallocation of investment. This is nothing new. But this is becoming an accurate problem nowadays as the economy is showing worrying signs of weakness. Looking at the global level, Germany is well-ranked in terms of R&amp;D investment. Here comes the issue. A big chunk of it is attributable to the struggling automotive sector. It represents more than 50 % of total R&amp;D investment over the recent years against only 6 % in the United States, for instance. The automotive sector is now in disarray. Supply chain disruptions, weaker demand and high energy bills are hurting carmakers. </span>In the latest ZEW report for August 2022, the current conditions subindex for the car industry was out at minus 44.1. This is a better reading than a few months ago. It fell at minus 61.7 in April 2022 on the back of the Ukraine war, for instance. This is still close to its lowest annual levels,&nbsp;however. The oversized share of R&amp;D investment coming from the car industry has an immediate negative impact&nbsp;: the ICT sector suffers from chronic underinvestment. This negatively impacts potential growth and leadership in key technological innovation. The pandemic outbreak and the following lockdowns showed that Germany is lagging behind in digitalization notably. Germany&rsquo;s economy is now at a crossroads. For years, policymakers avoided tackling the issue of overdependence on cheap Russian energy (which was a key factor behind German industry&rsquo;s high competitiveness) and massive imbalance in R&amp;D investment. Hopefully, the upcoming recession will help to move forward on these two issues. There is no other choice but to find new energy alternatives.&nbsp; The process has already started. This is also urgent to reduce economic dependence on the car industry and channel R&amp;D investment in other sectors. This has yet to happen. In the meantime, if Germany sinks into a recession, expect the eurozone to follow immediately after.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/august/25_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Germany</span> <span>Recession</span> <span>Recession Watch</span> <span>Euro dollar option</span> <span>Euro Stoxx 50</span></div>Thu, 25 Aug 2022 07:30:00 Z2022-08-25T10:09:59Z{5EABA433-A75C-44B3-BFD9-7C3004F2F227}https://www.home.saxo/en-sg/content/articles/macro/chart-of-week--emerging-market-britain-08082022Christopher Dembik product-macroUK-elections-Brexitforex-gbpcadforex-gbpaudforex-gbpchfforex-gbpjpycurrency-gbpforex-eurgbpforex-gbpusdRecessionChart of the Week : Emerging market Britain ?<div class="article-excerpt">In today’s ‘Macro Chartmania’, we give an update on the British economy. A few months ago, we warned the UK economy is one of the developed countries most likely to enter into a recession. There is no debate about it anymore. Last week, the Bank of England updated its macroeconomic forecasts for the years until 2025. These are frightening. The United Kingdom is projected to enter into a recession in Q4 2022. This could last five quarters and cause GDP to fall about 2.1 % - as deep as the recession of the early 1990s. But this is not the worst. Very often, the economy rebounds quite sharply after a recession. This is unlikely to happen this time. The slump will last. The BoE sees GDP still 1.75 % below today’s levels in mid-2025. </div><div class="article-rte"><div class="rte--output"><p><span><em>Click here to download this week's full edition of <a href="https://www.home.saxo/-/media/content-hub/documents/2022/july/macrochartmania_week32.pdf?revision=0fb8423c-4eb9-4310-8467-da19165c5e02">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</em></span></p> <h4 class="article-heading--4">The United Kingdom is more and more looking like an emerging market country:</h4> Political instability (the new Prime Minister will be announced on 5 September after Boris Johnson&rsquo;s resignation), trade disruptions (due to Brexit and Covid-related bottlenecks), energy crisis (the risk of a blackout this winter is real) and high inflation (the Bank of England forecasts that UK CPI will peak at 13 % in October but this is certainly a bit optimistic) are all hurting the UK economy. The only major difference&nbsp;: there is no currency crisis. The sterling pound exchange rate is rather stable. It only dropped 0.70 % against the euro and 1.50 % against the U.S. dollar over the past week. Our bet&nbsp;: after surviving Brexit uncertainty, we don&rsquo;t see what could push the sterling pound into a free fall. All the leading indicators point in the same direction&nbsp;: <br /> <br /> <h4 class="article-heading--4">The worst is yet to come for the British economy. </h4> There is a consensus among economists about that very fact. The OECD&rsquo;s leading indicator for the United Kingdom, which is supposed to anticipate reversals in the economy six to nine months in advance, fell to 98.6 in June. The annual rate was 7.3 % in June 2021 (partially reflecting the post-lockdown rebound). It now stands at minus 2.9 %. The change is impressive over a year. This is not only linked to Covid data noise. This is a clear sign that a recession is coming. In addition, new car registrations, which are often considered as a leading indicator of the overall UK economy, continue to drop. This also reflects the deep collapse in consumer confidence (see chart below). In July 2021, after the peak of the pandemic, new car registrations stood at 1,835,000. They now stand at 1,528,000, a sharp drop of 14%. This is the lowest level since the end of the 1970s. The recession will be long and deep. There won&rsquo;t be an easy escape. This is the most worrying, in our view. The Bank of England assesses the slump will last with GDP still 1.75 % below today&rsquo;s levels in mid-2025. What Brexit has not done by itself, Brexit coupled with Covid and high inflation have succeeded in doing. The UK economy is crushed.<br /> <br /> <h4 class="article-heading--4">The window for further rate hikes is closing&nbsp;: &nbsp;</h4> Last week, the Bank of England hiked interest rates by 50 basis points, from 1.25 % to 1.75 %. We think the Bank of England&rsquo;s next rate hike in September (probably of 50 basis points) could be the last. Outside of the jobs markets, there are signs that some of the key inflation drivers may be starting to ease. In addition, the prospect of a long recession (five negative quarters of GDP starting in Q4 2022 all the way through to Q4 2023) will certainly push the Bank of England into a wait-and-see position. On the topic of balance sheet reduction, we don&rsquo;t expect any changes in the medium-term. Gilt sales will begin shortly after the September meeting. They will amount to &pound;10bn per quarter the first year (this amount will be revised each year). We think the Bank of England has a rather traditional approach to deal with the current macroeconomic situation. Domestic demand must be slowed down by pushing GDP below its potential level, thus increasing unemployment and lowering inflation. A key rate of 2.25 % could already have a noticeable positive impact on the overall inflation dynamics, in our view. However, this is too early to know whether the current tightening cycle will definitely be over in September. The inflation dynamics have been a bit unpredictable in recent months. This is the least we can say.<br /> <br /> <h4 class="article-heading--4">The social contract is broken&nbsp;: </h4> Imagine the graduate entering the workforce in 2009/10, who will have been told this was a once-in-a-lifetime crash. They are now in their early 30s and having yet another once-in-a-lifetime economic crisis. They faced an economy of suppressed wages, no housing prospects, two years of socializing&nbsp;lost to lockdown, obscene energy bills and rent and now a lengthy recession. This will lead to more poverty and despair. The Bank of England is now forecasting that real household post-tax disposable income will fall by 3.7 % over this year and next. This would be easily the weakest two years on record since 1963. The lowest income is hit the hardest. The International Monetary Fund found the poorest households in the United Kingdom are amongst the hardest hit by the cost of living in Europe. They found that living costs for the poorest 20 % of households are set to rise by about twice as much as those for the wealthiest, for instance. If this situation would happen in France, there would be a street revolution. Remember the Yellow Vest Movement in 2018. But this is the United Kingdom. It will unlikely lead to any major political shift. There will be more social distress, wealth inequality and poverty all around, however. The sixth largest economy in the world will look even more like an emerging market country, unfortunately.</div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/august/08_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Brexit</span> <span>GBPCAD</span> <span>GBPAUD</span> <span>GBPCHF</span> <span>GBPJPY</span> <span>GBP</span> <span>EURGBP</span> <span>GBPUSD</span> <span>Recession</span></div>Mon, 08 Aug 2022 02:00:00 Z2022-08-08T06:35:15Z{C3E23A0A-3025-472C-938A-BAC367CC8E2A}https://www.home.saxo/en-sg/content/articles/macro/us-2q-gdp-growth-are-we-in-a-recession-28072022Christopher Dembik product-macroRecessionplace-lc/usmacro-gdpU.S. 2Q GDP growth: Are we in a recession?<div class="article-excerpt">What is a recession ? This looks like an easy question. Most investors and analysts would answer that two consecutive quarters of negative GDP growth is the common rule-of-thumb definition of a recession. This is not quite that. That’s why even if today’s U.S. 2Q GDP growth is in contraction territory (after a negative print in 1Q at minus 1.4 %), this does not necessarily mean the United States is in a technical recession.</div><div class="article-rte"><div class="rte--output">The U.S. Biden administration has prepared the ground for a negative U.S. 2Q GDP print. On 24 July, U.S. Treasury Janet Yellen confirmed GDP growth could be disappointing in 2Q. She is expected to host an (unusual) press conference later today after the GDP report. In a rather unusual move, the White House published a blog article entitled&nbsp;<em><a rel="noopener noreferrer" href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.whitehouse.gov%2Fcea%2Fwritten-materials%2F2022%2F07%2F21%2Fhow-do-economists-determine-whether-the-economy-is-in-a-recession%2F&amp;data=05%7C01%7C%7C5b73bcc9209f43a2441908da6fdd5a35%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637945293738705521%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=79RAPVJl%2B67yo%2BxEay8axovO9vaVb4xWJEux0VJetOE%3D&amp;reserved=0" target="_blank">&ldquo;How Do Economists Determine Whether the Economy Is in a Recession?</a>",</em>&nbsp; on 21 July.<br /> <br /> <h3 class="article-heading--3"></h3> <strong ></strong> <h3 class="article-heading--3">Let&rsquo;s first ask the easy question: What is a recession?</h3> <strong ><br /> </strong><span >The common rule-of-thumb definition in most countries is two consecutive quarters of negative GDP growth. In 1Q, U.S. GDP growth contracted by minus 1.4 % <em>- see Chart 1</em>. Based on the latest statistics (such as the housing market data with a drop of 30 % of new homes sales since December 2021 and 8.1 % only for the month of June), risks are tilted to the upside that growth will contract in 2Q too. This would mean that the United States is in a technical recession. However, this is not that straightforward. The official definition of a recession in the United States differs from other countries.&nbsp;</span>The National Bureau of Economic Research (NBER), an independent body founded in 1920, is the official recession scorekeeper. It defines a recession as a&nbsp;<em>&ldquo;significant decline in economic activity that is spread across the economy and that lasts more than a few months&rdquo;.</em>&nbsp;Several variables are taken into consideration, such as:&nbsp;<strong>employment (both establishment and household survey), real consumer spending, real manufacturing and trade sales, industrial production and real personal income (excluding government transfers like unemployment insurance)</strong>. Surprisingly, the NBER does not base much of its decisions on GDP. It is taken into account. But it plays a little role in assessing the reality of a recession. This is for good reasons. GDP is released only quarterly. It is subject to major revisions years after its first release. It can be skewed by a couple of sectors too. The issue of revisions is actually pertinent now. Many economists believe that U.S. 1Q GDP will be revised in positive territory ultimately (this makes sense based on gross domestic income data &ndash; which can be considered as an income-side estimate while GDP is a production-side estimate). Expect that private domestic final demand (which represents consumption + business fixed investment + residential) to be revised upward especially. This is our preferred metric at Saxo Bank since it is more correlated to future GDP growth. If this happens, the &ldquo;two negative quarters&rdquo; threshold (which matters so much for market participants) will certainly not be met.&nbsp;<br /> <br /> <strong ></strong> <h3 class="article-heading--3">Now, let&rsquo;s ask a second question: Are we in a recession?</h3> <p><strong >Short answer:</strong><span >&nbsp;probably not judging by the main indicators the NBER and economists look at.</span></p> <span >This does not mean that the United States will exit this cycle without going through a recession or a&nbsp;</span><em >recessionette</em><span >&nbsp;(term coined by the U.S. economist Diane Swonk to define a healthy contraction in GDP growth which brings down inflation). This will depend on several factors we cannot fully assess now, such as the speed of monetary policy tightening and its impact on the overall economy or the effect of the ongoing Chinese stimulus on the global economy. There is still a lot of uncertainty and lags which make it difficult to forecast the pace of the economy in the near future.<br /> <br /> </span><span >However, based on the indicators the NBER pays most attention (see the list below), we can all agree the United States is certainly not in a recession now. All of them are either still rising or have flatlined. But there is no significant decline.</span><span >&nbsp;If we look at more real-time indicators (NBER&rsquo;s indicators are mostly backward-looking), the economy still looks in a fine shape, though decelerating. The state of the labor market is not consistent with an economy in recession, especially. In June, the United States had recovered 98 % of jobs lost during the pandemic, and all private sector jobs lost at the start of the outbreak have been recovered. Unemployment has remained at its historic lows in 2022. Unemployment claims are up a bit. But this can be partially explained by seasonal noise. Job openings are slightly down. But they are still very high. There are cracks in the foundation of recovery forming, of course. No one can deny it (see our analysis about the U.S. housing market risks,&nbsp;<em><a rel="noopener noreferrer" href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.home.saxo%2Fcontent%2Farticles%2Fmacro%2Fchart-of-the-week--housing-is-the-business-cycle-23062022&amp;data=05%7C01%7C%7C5b73bcc9209f43a2441908da6fdd5a35%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637945293738705521%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=8%2F%2FepluIBbI1HARlK8dFv7Yjn1yED%2FLiQj7Ku6olTz0%3D&amp;reserved=0" target="_blank">Housing IS the business cycle</a></em>, 23 June). There is also a lot of data noise due to the pandemic effect, which makes it harder than usual to read the economy too. However, these are not the signs of a recessionary economy, in our view. Therefore, we should certainly avoid over-interpreting today&rsquo;s figures too much. They are volatile and highly subject to revision.</span></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/july/28_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Recession</span> <span></span> <span>GDP</span></div>Thu, 28 Jul 2022 05:00:00 Z2022-07-28T07:49:59Z{7F112941-CA9F-4881-98A5-D6B12B942307}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--tough-week-for-the-german-economy-26072022Christopher Dembik product-macroplace-lc/deRecessionEuro dollar optionEuronextEuropean styleEuro Stoxx 50place-lr/eursubject-is/pol.euChart of the Week : Tough week for the German economy<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the German economy which accounts roughly for 1/3 of the eurozone economy. Headwinds are increasing at a fast pace. Yesterday, the IFO business survey for this month fell sharply to 88.6 after a strong start of the year. Last week, the flash composite PMI for July dropped under the threshold of 50 for the first time since last December (indicating business activity is in contraction). Expect Q2 German GDP to contract (the first estimate is released on Friday this week). If business activity remains gloomy for the rest of the summer, the German economy is likely doomed for a technical recession this year.</div><div class="article-rte"><div class="rte--output"><p>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/july/macrochartmania_week30.pdf?revision=3a049ec1-3448-42c0-96f3-fc2a74e75878">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</p> <p><strong>Sentiment in the German economy has dropped in July&nbsp;: </strong>At the start of the year, the German economic outlook was rather positive (the IFO business climate index was at 98.8 in February, just before the start of the Ukraine war). Household balance was strong and companies were satisfied both with the current assessment and the expectations. This is not the case anymore. The macroeconomic outlook has radically changed in the space of a few months. Companies are now betting on a long economic and energy crisis. The drop in the business climate continues this month, with an index out at 88.6 from 92.2 in June. The downturn in the business climate is driven by expectations for the next six months &ndash; which decreased to 80.2 in July from 85.4 in June. This is the sharpest drop since March and the third largest drop since the pandemic started. Recent surveys have confirmed risks to growth are tilted to the upside &ndash; think the flash German PMI estimate for July which was out in contraction territory last week, for instance. The stage is set for a gloomy summer season and, perhaps, an even worse winter season if the energy crisis becomes more acute.</p> <p>We have plotted the expectations component and the current assessment together -<em>see below chart</em>. This usually gives us a signal on the future trend of the IFO business survey. We can take it as a leading indicator of the leading indicator. The current signal is quite ugly. It now stands at minus 17.4 &ndash; the lowest level on record. The previous lowest points were at minus 7.2 (Global Financial Crisis), minus 4.9 (Eurozone sovereign debt crisis) and minus 11.7 (Covid outbreak). This will translate into lower investments and hirings in the months ahead.</p> <p><strong>Downturn across key sectors&nbsp;: </strong>The business climate in manufacturing dropped to 90.2 in July from 93.5 in June. In this sector both the current assessment as well as the expectations component are in a free fall. The manufacturing is still exposed to supply shortages and dislocations in international shipping (there is little improvement, actually). Adding to that inflation across the board which is seriously harming margins. The business climate for the services fell sharply to 1.4 in July from 12.8 in June while expectations reached their lowest post-Covid level at minus 24.1. We could assume the travel industry is in a better shape (after two summers in a row of restrictions, Germans want to travel). This is not the case. The business climate has started to slowly get down. The index was out at 23.3 in June versus a post-Covid peak at 24.5 in May (there is no data for July yet). Expectations are worrying too (32.7 in June versus 50.6 in May).</p> <p><strong>Germany is on the brink of a technical recession&nbsp;:</strong> The June IFO survey adds to previous recessionary signals. Germany is facing a perfect storm (supply chain disruptions, inflation across the board which is denting consumption, energy crisis, lower global demand etc.). Next Friday, the first estimate for 2Q GDP growth will be released. Expect a contraction. If business activity remains subdued over the summer and energy crisis issues increase, the German economy will likely face a technical recession this year. The energy crisis is a much bigger issue than inflation for Germany, in our view. Last week&rsquo;s reopening of the NordStream1 pipeline has helped to fill up the country&rsquo;s gas reserves. They are now at 66%. But they are unlikely to reach the minimum threshold of 90% before the winter period. German politicians are trying to revert unwise energy policy decisions (such as the closure of nuclear power plants). But it will take time before it has a positive impact on the energy supply. We increasingly fear that the German government will need to resort to the rationing of electricity this winter. This will push industrial production in a free fall. No need to say that recession would follow up soon after.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/july/26_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Germany</span> <span>Recession</span> <span>Euro dollar option</span> <span>Euronext</span> <span>European style</span> <span>Euro Stoxx 50</span> <span>Europe</span> <span>European Union (EU)</span></div>Tue, 26 Jul 2022 06:00:00 Z2022-07-26T10:57:18Z{FF7185B7-0BDE-4F32-A2DD-32F604B2795E}https://www.home.saxo/en-sg/content/articles/macro/the-clock-is-ticking-for-italy-once-again-22072022Christopher Dembik product-macroplace-lc/itindexcfd-spmib.iEuronextEurexEuropean stylecurrency-eurforex-eurgbpsubject-is/pol.euplace-lr/eurforex-eurchfThe clock is ticking for Italy (once again)<div class="article-excerpt">Since 1945, Italy has had 69 governments - one every 1.11 year. This is a record in Europe. Tomorrow, the Italian Prime minister Mario Draghi will tell lawmakers if he will resign. That would imply snap elections within 70 days - most likely in September. However, this is far from certain. Remember it is never easy to predict the outcome of an Italian government crisis.</div><div class="article-rte"><div class="rte--output"><p><strong><span>There are at least five possible scenarios:</span></strong></p> <p><span><strong>1&deg;</strong> Draghi remains in office with the same majority. But it seems unlikely as it would imply a massive turnaround of Giuseppe Conte&rsquo;s Five-Star Movement &ndash; the largest political party within the coalition (104 deputies at the Chamber of Deputies on a total of 630 and 61 senators on a total of 315). The party triggered the current crisis by refused to support Draghi&rsquo;s government in a critical vote;</span></p> <p><span><strong>2&deg;</strong> Draghi is successful in setting up a new government with a different majority. But it is a tricky task since there is no real alternative to the Five-Star Movement;</span></p> <p><span><strong>3&deg; </strong>Draghi requests irrevocable resignations without asking Parliament vote. This is unlikely at that stage;</span></p> <p><span><strong>4&deg;</strong> Under pressure from the Italian president Sergio Mattarella and several political parties (such as Matteo Renzi&rsquo;s Italia Viva), Draghi agrees to limp on for a little while longer in order to avoid a political crisis. He heads a technocratic government until the 2023 general elections (&lsquo;caretaker&rsquo; government). This could be a consensual approach among Italy&rsquo;s political class and certainly the best scenario for the eurozone in order to avoid turmoil in the middle of the summer break;</span></p> <p><span><strong>5&deg;</strong> Draghi fails to form a new government or refuses to lead a transitional and temporary government until the next elections. The snap election takes place within 70 days (likely in September). The latest polls show the Five-Star Movement would get crushed, with less than 12 % of voters. Giorgia Meloni&rsquo;s Brothers of Italy would be the main winner. It secured just 4.8 % of the vote in the last general election in 2018 (37 deputies and 21 senators in the current assembly). It is now the country&rsquo;s most popular political party, favoured by about 22.5 % of voters. If its members stick together, Italy could be ruled by a center-right coalition led by Meloni. This would be very bad news for the eurozone at the worst time ever (lower growth ahead, fragmentation risk in financial markets, low market volumes and risk of energy crisis this winter).&nbsp;Monetary tightening is already adding a lot of pressure on the financial system: liquidity is worsening, volatility and market maker restraint and failed settlements are at a record high. Add to that the usual Italian political crisis and you get the worst cocktail ever for the summer break. Expect a faster rise in Italian yields whether this should happen. However, this does not mean the European Central Bank (ECB) would automatically intervene. There is first a problem of timing regarding some technicalities. It is likely the ECB will say something about anti-fragmentation on Thursday, but the tool is probably not ready yet. The central bank will basically kick the can to September. In addition, the ECB will probably not intervene anyhow because the spread widening results mostly from political uncertainty and not &ldquo;unwarranted&rdquo; tightening.</span></p> <p><span>In our view, snap elections are far from certain. It is never easy to predict the outcome of an Italian government crisis. We need to be humble about that. Most of the time, we get it wrong. Earlier this year, President Mattarella did not want a new term. Market analysts were expecting a new political crisis (myself included). Finally, he was persuaded to stay on after failure to find a successor. This could certainly happen the same thing this time again. Draghi could stay a bit longer to avoid chaos (scenario 4&deg;). What is certain is that Draghi&rsquo;s national unity project has collapsed, however. Political instability remains a norm in Italy. &nbsp;</span></p> <p><em>Italy-Germany government bond spread has significantly increased since the ECB&rsquo;s pivot in past February when the central bank acknowledged that inflation is not that transitory and it requires a change in policy to fight against it (tightening process). But the current spread is still much lower than at the start of the Covid outbreak. When the ECB president Christine Lagarde indicated the central bank &laquo;&nbsp;is not here to close spreads&nbsp;&raquo;, the Italy-Germany government bond spread reached 266 basis points. It is now hovering around 200 basis points. This is not in risk-zone yet. But it is approaching, for sure.&nbsp;</em></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/july/19_cdk_2.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Italy</span> <span>ITALY40.I</span> <span>Euronext</span> <span>Eurex</span> <span>European style</span> <span>EUR</span> <span>EURGBP</span> <span>European Union (EU)</span> <span>Europe</span> <span>EURCHF</span></div>Tue, 19 Jul 2022 09:30:00 Z2022-07-19T13:39:42Z{239ABEAE-3467-4C89-B496-E3C4AC5F0A5B}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week-semiconductor-supply-glut-coming-19072022Christopher Dembik product-macroRecessionNVIDIA CorporationAdvanced Micro Devicesplace-lc/krChart of the Week: Semiconductor Supply Glut Coming?<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the risk of chip glut which is slowly materializing. This is bad news for the semiconductor industry (for companies like Nvidia and Micron Technology for instance). This is good news for inflation (this should be another factor pushing inflation lower in the short term). </div><div class="article-rte"><div class="rte--output"><p><span>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/july/macrochartmania_master_week29.pdf?revision=40bf26cb-730d-4a65-808f-8deb67d5f5d0">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</span></p> <p><span>In a normal period, &ldquo;just in time&rdquo; manufacturing was the norm for most companies. They ordered chips as close to production time as possible to avoid excess. But everything changed when the outbreak started in March 2020 and supply chains increased. Hoarding became the new normal. Companies have been stockpiling chips all around the globe a bit like consumers stockpiled toilet paper in Spring 2020 as they feared shortage. This is about to change. Inflation out of control in many developed countries along with Covid restrictions in China and recession fears will dampen demand in the short and medium term. Semiconductors are basically a cyclical industry. Demand is high when GDP growth is strong, and it is low when growth slows. But the downturn might be more significant this time than in previous economic turmoil. We are unable to know how many excess chips are in warehouses around the world. However, we know inventory is at a record high. According to the latest data, South Korea&rsquo;s semiconductor inventory levels increased by 53 % year-over-year in May &ndash; see below chart. This is only the beginning. A few months ago, companies were wondering how to secure supplies. Now they wonder why they have all this inventory and what they will do with that as demand is slowing down. Expect manufacturers to decide to use up chips in warehouses instead of buying new ones and to cancel orders. This is already happening. Several companies have recently announced they will reduce supply due to lower demand (Micron Technology, Nvidia, for instance). Orders from key clients have been reduced, sometimes drastically (Apple, Advanced Micro Devices etc.). This will certainly get worse in September when a lot of companies will review their business plan and cut demand expectations and investments. This is likely to last. Going into 2023, we believe overcapacity will remain a major issue for the semiconductor industry, especially if the economic slowdown accentuates (this is our baseline, actually). &nbsp;</span></p> <p><span>Chipmakers supplying automotive, data centers, low-end smartphones, gaming and mining cryptocurrency will thrive in the coming quarters. However, there is one exception: demand for high-quality smartphone devices (typically for Apple devices) remains high. This will likely help Taiwan Semiconductor Manufacturing Co (TSMC), Apple&rsquo;s main supplier, to do better than most of its competitors. TSMC accounts for half of all global chipmaking revenue.</span></p> <p><span>The United States&rsquo; goal to boost local semiconductor manufacturing is another factor which will increase the supply glut. Democratic lawmakers and the White House are currently working on a legislation which would fund $52bn for chips production subsidies and boost U.S. scientific and technological innovation to compete with China. Hopefully, this legislation will be passed in the coming days or weeks (before many Congress members hit the campaign trail ahead of November&rsquo;s midterm elections). The impact on the industry will not be overnight. This is a long-term process, of course. But it will certainly push prices lower. </span></p> <p><span>This is a worrying moment for the semiconductor industry. In the long run, we still have a positive view on this industry. The trend of the Internet of things will drive high growth. This is basically the idea that ever more physical objects in the world will get microprocessors and sensor integration and communicate with the Internet. Typically, the 5G rollout globally will add to demand over the coming decade (see our report, <em><a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.home.saxo%2Fcontent%2Farticles%2Fequities%2Finternet-of-things-to-drive-high-growth-for-semiconductor-industry-07052021&amp;data=05%7C01%7C%7Cb8c53ac71099476ea4c808da68e01a4e%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637937608971679938%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=s00G9MS55m55bEihOkvW2UvSxIypKYz%2B9O6ZXDGPYNo%3D&amp;reserved=0">Internet of things to drive high growth for semiconductor industry</a></em>, July 2021).</span></p> <p><span>In the short-term, the U-turn in the semiconductor industry is not all negative. This is a positive signal on the inflation front. The semiconductor glut will push for further stabilization for the price of vehicles and electronics in the coming months. This is what is needed to tame inflation. Other factors are also pushing inflation down at the global level: lower commodity prices, falling freight rates, easing rents (in the United States) and rising retail inventories. All of this is the sign of a cooling global economy (but this is not necessarily the sign of an upcoming recession).</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/july/19_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Recession</span> <span>NVIDIA Corporation</span> <span>Advanced Micro Devices</span> <span>South Korea</span></div>Tue, 19 Jul 2022 08:30:00 Z2022-07-19T13:17:16Z{114DA106-F2DA-4A18-88F9-743EF9765940}https://www.home.saxo/en-sg/content/articles/quarterly-outlook/crisis-redux-for-the-eurozone-05072022Christopher Dembik Primary-Quarterly OutlookQuarterly Outlook 4th rowMacro: crisis redux for the eurozone? <div class="article-excerpt"> Every day, we get asked, about “‘Recession or no recession?’”. It is not a binary trade situation where recession is bad, and no recession is a green light for risk. </div><div class="article-rte"><div class="rte--output">Every day, we get asked, &lsquo;Recession or no recession?&rsquo; It is not a binary situation where recession is bad and no recession is a green light for risk. We are going to be in much lower growth, especially in 2023, than many had expected, whether there&rsquo;s technically a recession or not. The material growth slowdown is visible in all the recent statistics. The eurozone is certainly in a worse position than the United States or China. Eurozone policymakers, especially the dovish majority of the European Central Bank (ECB) Governing Council, took too long to acknowledge that inflation is not as transitory as earlier thought. I remember the short but instructive discussion I had with the central bank governor of a &lsquo;small&rsquo; eurozone country in October 2021. At that time, we been warning our clients for months that high inflation is here to stay. This wise governor agreed that there was growing evidence that inflation won&rsquo;t disappear, and that the central scenario of the ECB staff was too optimistic. But he belongs to a minority in the Council and had little leverage to push the rest of the Council in the right direction. Several months later, I think there is now a broad consensus that inflation will remain a headache for years to come.&nbsp;<br /> <br /> &nbsp;<br /> <h4 class="article-heading--4"> Inflation is structural&nbsp;</h4> The main issue is inflation on the supply side. This refers to inputs to production (labour, fuels, commodities like agriculture and electricity), operations and transport. Operations can be shocked and resumed quite fast. We experienced it in Europe during the pandemic. Transport can be shocked due to a strike, blockages or a lack of containers (which is a major issue nowadays) too. But this can be resolved with time. We expect the arrival of new containers from 2023 onwards will help ease transportation bottlenecks. All of these can be considered as transitory. But the supply shock affecting inputs to production is certainly much more permanent.&nbsp;&nbsp;<br /> <br /> Let&rsquo;s look at commodities. Despite all the communication around green transition, Europe is still very dependent on fossil fuels (oil, natural gas and coal). Because of the war in Ukraine, we are shocking the Russian supply of fossil fuel&mdash;the very thing we use. With demand rising and supply shocked, prices rise&mdash;this is basic economics. We would logically expect investment to jump to crush prices. But there are two issues. First, we don&rsquo;t consume crude oil but rather the refined part of it. There is an entire infrastructure built to refine Russian oil in Europe, but we cannot use it anymore. We need to replace it, but it will take years to build an entire new infrastructure. In the meantime, costs will continue to increase. Second, the European Union is imposing regulations for the green transition from fossil fuel. Europe has always acted by regulating things. But green transition regulation has diverted needed investment in fossil fuel infrastructures to renewable energy, without making sure that green energy can provide a constant supply of energy to Europeans. At the end of the day, this means higher energy costs for years to come. Inflation is structural.&nbsp;<br /> <br /> However, there is another factor which is inflationary to some extent&mdash;fiscal policy. European governments have unveiled emergency measures to address inflation&mdash;for instance, value-added tax (VAT) reduction on energy and extension of the benefit of the &lsquo;social tariff&rsquo; on electricity and natural gas for the poorest households in Belgium, and increasing the minimum wage to &euro;12 per hour from next October and an additional aid of &euro;100 for the poorest households in Germany. With the fiscal potential in Europe far greater than many other places, expect these one-shot measures to become more permanent and for other subsidies to come soon.&nbsp;</div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/june/q3-2022/chris14x.png"/></div><div class="article-additional-rte"><div class="rte--output"><h4 class="article-heading--4"> When risk becomes reality&nbsp;</h4> Economic history has taught us that the only way to lower inflation is to hike interest rates. Many other central banks have done it since the exit of the last global lockdown in spring 2021. After a long period of hesitation, the ECB is finally going with the crowd. They will hike interest rates at the July meeting by 25 basis points (a &lsquo;gradual&rsquo; tightening)&mdash;the first since 2011. It would be too easy if the ECB could normalise monetary policy by only focusing on inflation and growth. However, there is another issue to tackle that&rsquo;s as important as high inflation&mdash;financial fragmentation.&nbsp;&nbsp;<br /> <br /> Bond market volatility is picking up everywhere, mostly due to the big global inflation shock that is hitting everyone. But the deterioration is faster in the eurozone. The repricing of risk in a world without quantitative easing (QE) is painful. The ECB Systemic Risk Indicator (developed in 2012 and based on 15 financial stress measures) is back to levels not seen since the outbreak in March 2020 (see chart 1). The repricing is more painful for some countries than others. Since the end of QE, Italy&rsquo;s borrowing costs have jumped higher. The 10-year bond yield is now nearly three times as high as in early February. The spread vis-&agrave;-vis Germany has risen too and is back in risk territory (see chart 2). What is most worrying is not the level of bond yields but the process. Volatility is picking up too quickly and liquidity conditions are deteriorating fast at the same time. Basically, foreigners just want to get out of the Italian bond market (see chart 3).&nbsp;<br /> <br /> There is no doubt the ECB will announce a new tool to manage sovereign spreads soon, perhaps as early as the July meeting. We don&rsquo;t have many details at the moment. Based on Isabel Schnabel&rsquo;s recent comments, we can assume it will be some kind of Outright Monetary Transactions programme with light conditionality, for a temporary period of time and with shorter maturities than the Pandemic Emergency Purchase Programme (perhaps between two to five years). It should be enough to avoid a repeat of the 2012 crisis, but this is far from certain. The ECB cannot refrain from raising interest rates. The more they do, the more that breaks and the more they will have to buy eurozone government bonds. From an optimistic viewpoint, a eurozone crisis redux is not all negative. From 2012 onwards, the previous crisis helped to bring about crucial institutional reforms that strengthened the eurozone framework. The same could happen again in case of a new crisis. However, the eurozone bond market situation raises a serious question in the long run: Can this go on forever ? At some point, the southern eurozone countries should be able to face the markets without the ECB stretching its mandate to rescue them. Otherwise, the ECB could end up owing the entire Italian debt.&nbsp;<br /> <div>&nbsp;</div></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/june/q3-2022/chris24x.png"/></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/june/q3-2022/chris34x.png"/></div><div class="article-additional-rte"><div class="rte--output"><a class="v2-btn v2-btn-primary" href="https://www.home.saxo/en-sg/products">Explore products at Saxo</a></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook</a> <span>Quarterly Outlook 4th row</span></div>Tue, 05 Jul 2022 05:00:00 Z2023-09-23T15:10:05Z{2742E96E-AEDF-49C6-861B-94DF163B0994}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--housing-is-the-business-cycle-23062022Christopher Dembik product-macroplace-lc/ussubject-is/lifesoc.housingChart of the Week : Housing IS the business cycle<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the U.S. housing market. We believe that the housing market IS the business cycle in the United States or, at least, it plays a major role in the current cycle. Recent data confirms that housing will severely curtail in the coming months. Whether it will be a soft and a hard landing, it is still too early to say. Harder is the slowdown, higher is the probability of a recession or a recessionette this year or in 2023, of course. For the moment, a recession is not our baseline for the United States at Saxo Bank.</div><div class="article-rte"><div class="rte--output"><p>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/june/macrochartmania_master2306.pdf?revision=64140c50-b677-461c-bf57-732272c6ef69">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</p> <p>The American economist Edward E. Leamer wrote an interesting paper at the eve of the Global Financial crisis in September 2007&nbsp;: <em><a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.nber.org%2Fpapers%2Fw13428&amp;data=05%7C01%7C%7Ca67b8677506c45244a7c08da547166a7%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637915143485290889%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=0vBWmHp2FA1gUhFMx6ZpwNS0%2B9h5R4Bef5TzJYLHwkY%3D&amp;reserved=0">Housing IS the business cycle</a></em>. While we don&rsquo;t agree with all the conclusions, the main take fully makes sense. Over the past decades, the housing market has systematically played a key role in the U.S. business cycle. This is also the case in the current cycle. Economists but also investors certainly did not pay enough attention to the housing market over the last two years, especially early in the pandemic when massive stimulus had fueled demand and had increased price bubbles all across the United States (at national level, housing prices are up almost 40 % on average since the outbreak).</p> <p><strong>The housing market is now in a vulnerable position.</strong> With high inflation across the board pushing consumer confidence downward and mortgage rates surging above 6 % following the U.S. Federal Reserve&rsquo;s tightening cycle, the risks of hard landing are tilted on the upside. Over the past few weeks, several large real estate firms such as Redfin Corporation or homebuilders such as Lennar (the second largest player in the United States) have warned against the risk of slowdown. Some of them have already introduced lower prices and incentives in certain areas to sustain demand. But it is too early to know whether this will be successful. At the moment, all the data confirm a material slowdown. The market is very unbalanced. In May, existing homes sales fell 3.4 % to 5.4 million units. This is a new post-pandemic low. They are down 17 % from January. The biggest and most worrying drops are in the Midwest, the West and the South. At the same time, median prices continue to jump (+15 % at $408 000 &ndash; this is a new all-time high). Inventory is very low at only 2.6 mo. Housing permits and housing starts are down in May too. Housing starts feel 14.4 %. This marks the third monthly decline in five months. Housing permits dropped by 7 % the same month. The market is a unique situation. The last time housing affordability was so low, it was in 2007 <em>&ndash; see below chart</em>. Expect it will get worse in the short- and medium-term. The surge in mortgage rates, which is only starting, is a major constraint for new home buyers. Adding to that the &lsquo;rate lock&rsquo; at very low rates (this means the interest rate won't change between the offer and closing), expect also less housing mobility. This will have ripple effects on the whole economy, starting from the housing construction activity, with varying lags depending on backlogs. </p> <p><strong>Upcoming data from the housing market will help us assess whether there is a material risk of recession or not.</strong> The latest survey of professional forecasters shows a 20 % recession probability. When we hit these levels, the economy is usually already in recession. Economists have a poor track-record to accurately forecast recession. There are only two exceptions&nbsp;: in the early 1980s when the Fed chair Paul Volcker jacked up rates to kill inflation (but it was so obvious that even economists saw it coming) and in 1995 when it ended up in a soft landing. We are currently not forecasting an upcoming recession in the United States. The probability it happens this year or next year will highly depend on the evolution of the housing market. But there is no debate we are going to be in much lower growth, especially in 2023 than many had expected, technical R or no R. The material growth slowdown is visible across all the data.&nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/june/23_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span></span> <span>Housing</span></div>Thu, 23 Jun 2022 09:00:00 Z2022-06-23T09:15:25Z{38D6F876-4782-44C0-8A64-6FC831B0AA0A}https://www.home.saxo/en-sg/content/articles/macro/ecb--a-clear-roadmap-for-the-summer-holiday-more-uncertainty-from-september-onwards-09062022Christopher Dembik product-macroECBEuro dollar optionforex-eurcadforex-euraudcurrency-eurforex-eurjpysubject-is/pol.euforex-eursekforex-eurplnforex-eurnokforex-eurchfplace-lr/eurforex-eurgbpforex-eurusdECB : A clear roadmap for the summer holiday, more uncertainty from September onwards<div class="article-excerpt">The European Central Bank (ECB) confirmed they will hike interest rates at the July meeting by 25 basis points. This is a done-deal. Uncertainty remains regarding the scope of the hiking cycle after the summer. This will depend mostly from the evolution of the HICP and inflation expectations. The eurozone is likely to exit the era of negative rates (this was economic nonsense) by the end of Q3 this year. We think the hiking cycle could be shorter with fewer hikes than the money market expects, especially if growth continues to slowdown in the second part of the year. The risk of recession is low this year. But the eurozone is undoubtedly facing economic stagnation. </div><div class="article-rte"><div class="rte--output"><h2 class="article-heading--2"><strong><span>What was announced</span></strong></h2> <h3 class="article-heading--3"><em><span>&laquo;&nbsp;It&rsquo;s not just a step. It&rsquo;s a journey&nbsp;&raquo; - ECB President Christine Lagarde</span></em></h3> <p><span>We are a bit puzzled by today&rsquo;s ECB meeting. The ECB clearly confirmed they will hike rates by 25 basis points at the July meeting. This is the first time in memory that a G10 central bank explicitly tells us the amount they intend to hike at the next meeting. Fed President Jerome Powell hinted at a 50 basis points interest hike in June, for instance. But it was not presented as a done-deal. He kept some optionality. This is surprising the ECB decided to tie their hands, for no real gain. The ECB is more uncertain regarding the September meeting. Lagarde said they could move by 50 basis points, depending on the inflation backdrop. Beyond September, the ECB appears committed to a gradual rate path &ndash; a less hawkish outlook taking into consideration the risk of lower growth (especially if the cost of living continues to rise, thus pushing consumption down. Real incomes are expected to drop in most eurozone countries this year, according to the OECD, sometimes quite sharply, like in Greece with a drop of 7 %). We don&rsquo;t comment much on the new ECB staff forecasts. The inflation forecasts for this year are already outdated. Forecasts for 2023 and 2024 will likely be revised upward for inflation and downward for GDP growth by year-end. This is certainly the right moment to be humble and acknowledge that inflation is so sticky that we are unable to forecast it even for the next three months.</span></p> <h2 class="article-heading--2"><strong><span>What is missing</span></strong></h2> <h3 class="article-heading--3"><em><span>The ECB is here to close spreads </span></em><span>&ndash; see below chart</span></h3> <p><span>The ECB wrongly believed that by going with the safe option of a 25 basis points interest hike in July, the Italian bond market would give them a break. It hasn&rsquo;t happened that way, unfortunately. Immediately after the press conference, the core/periphery spread widened significantly. Italy&rsquo;s 10-year government yield was 23 basis points higher. The gap between the German and the Italian 10-year government bond yields widened further (220 basis points). We are back in the danger zone. But this is no time to panic yet. We are still far from levels which would trigger a market intervention. However, we believe that the ECB will have no other choice but to provide news about an anti-fragmentation facility at the July meeting. No doing so would push spreads higher at the worst time ever, when volumes are getting dangerously lower. This anti-fragmentation facility is a must-have for the ECB in order to speed up the tightening process if needed (that&rsquo;s why the idea is supported by hawks) and to avoid a repeat of the 2012 sovereign debt crisis. However, this won&rsquo;t be easy. Designing such a weapon is complex. All the pre-existing solutions (Securities Market Programme and Outright Monetary Transactions) come with major political and technical drawbacks. We think the easiest option would be to implement some kind of OMT 2.0 with soft conditionality. But further discussions are needed. This would ideally come on top of the &euro;200bn of firepower coming from bringing forward PEPP reinvestments by one year (referring to the Pandemic Emergency Purchase Programme launched at the start of the outbreak in March 2020). Though this amount is significant, this is only a first line of defense. It would do too little to avoid financial fragmentation within the eurozone if this happens. In many regards, the design and the implementation of an anti-fragmentation facility is much more important for the future of the eurozone than the short-term pace of interest rates.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/june/09_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><h2 class="article-heading--2"><span><strong>What&rsquo;s next</strong></span></h2> <h3 class="article-heading--3"><span><em>Inflation expectations will be the key driver from September onwards</em></span></h3> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><span>The first estimate of the June eurozone HICP will be on 1 July. In May, it reached a new high of 3.8 % year-over-year (with core goods at 4.2 % and services at 3.5 %). This is uncomfortably high. A new jump would increase pressure in favor of a 50 basis points move in September. </span></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><span>From September onwards, expect that market-based and survey-based inflation expectations (SPF) will be the main drivers of policy normalisation. At today&rsquo;s conference, Lagarde mentioned &laquo;&nbsp;initial signs&nbsp;&raquo; of inflation expectations getting de-anchored. This draws a lot of market expectations. But the central bank&rsquo;s hawkishness might vanish fast if GDP growth continues to slow down. The ECB will navigate in a very complicated economic environment from Q3 onwards &ndash; lower investment, gloomy consumption and inflation well-above the target for longer. Expect tough discussions between hawks and doves within the Governing council and a more uncertain pace of monetary policy normalisation.</span></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><span>Expect the eurozone to exit negative rates by the end of Q3 this year. The era of negative rates was a costly anomaly for the financial sector. This is positive news. We are getting back to normal. But we think the market is probably over-estimating the pace of monetary policy tightening in the medium-term in the eurozone. We think that lower growth could push the ECB to slow the hiking cycle sooner than expected.&nbsp;</span></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>ECB</span> <span>Euro dollar option</span> <span>EURCAD</span> <span>EURAUD</span> <span>EUR</span> <span>EURJPY</span> <span>European Union (EU)</span> <span>EURSEK</span> <span>EURPLN</span> <span>EURNOK</span> <span>EURCHF</span> <span>Europe</span> <span>EURGBP</span> <span>EURUSD</span></div>Thu, 09 Jun 2022 16:00:00 Z2022-06-09T17:42:37Z{DEE23A42-E64B-49E2-A01B-03723E8D1C73}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--an-ecb-rate-hike-is-imminent-08062022Christopher Dembik product-macroECBEuro dollar optionsubject-is/pol.euplace-lr/eurforex-eurcadforex-euraudforex-eurplnforex-eurgbpforex-eurnokforex-eursekforex-eurchfforex-eurusdforex-eurjpycurrency-eurChart of the Week : An ECB rate hike is imminent<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the upcoming European Central Bank (ECB) meeting scheduled for Thursday. All the data are collected from Macrobond and updated each week.</div><div class="article-rte"><div class="rte--output"><p>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/may/macrochartmania_master0706.pdf?revision=b8546691-87f5-4a3b-a810-bbf95af34d2b">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.</p> <p>This week&rsquo;s ECB meeting will open the door to an interest rate hike in July &ndash; the first time since 2011. Expect the ECB to announce an end to its bond buying program and that net asset purchases will be completed by the end of the month. This is a necessary step before increasing interest rates. Focus will be on the new ECB staff forecasts. There is no pleasant surprise to expect&nbsp;: a clear downward revision to GDP growth and core inflation above the target longer out are likely. However, the eurozone should avoid entering into recession this year (though a bunch of countries might already be in a technical recession, such as France). GDP forecasts will certainly be revised downward once more before the end of the year. Therefore, don&rsquo;t over-interpret the new forecasts. The ECB has a track-record of being overly optimistic about growth and its ability to deal with inflation -whether it is too low or too high. &nbsp;</p> <p>Pay more attention to Christine Lagarde&rsquo;s press conference. The eurozone CPI topped 8 % year-over-year in May &ndash; the highest on record - and the eurozone HICP, which is highly watched by the ECB, reached a new high of 3.8 % in May (with core goods at 4.2 % and services at 3.5 %). This is uncomfortably high. In these conditions, Lagarde has little choice but to deliver an hawkish message this week &ndash; meaning higher rates and a stronger euro. The next data to look at closely will be the first estimate of the June eurozone HICP on July 1. ECB hawks might be vocal in favor of a fast tightening pace afterwards. While pressure is undeniably building in favor of a 50 basis point move in July, we doubt the ECB will start its hiking cycle with such a big step. This would be very surprising and inconsistent with Lagarde&rsquo;s forward guidance (she has recently signaled the ECB&rsquo;s first moves would take place gradually). We don&rsquo;t think one data point will make such a difference that the ECB will decide to act stronger in July. A 25 basis point interest hike is a safe and reasonable option, in our view. This has already been priced in the market. This partially explains why downward pressure on the euro exchange rate has eased since mid-May. From September onwards, the ECB is likely to steadily lift the deposit rate &ndash; <em>see market forecasts below</em>. For the record, the two last times the ECB hiked interest rates in July, it was just ahead of a recession. But we think the eurozone will avoid it, at least this year. </p> <p>Discussion will be about financial fragmentation this week too. According to the Financial Times, there is a large consensus within the Governing Council to support a facility to manage sovereign spreads &ndash; some sort of OMT 2.0 with light conditionality. Italy is still the main point of worry. Foreign investors have tried to exit the Italian bond market since January (this was not the case in any other Southern European country). This will likely accelerate in the coming months, adding more pressure on Italian sovereign yields. Even the hawks are supporting the idea of a facility because they understand well this is a necessary condition if they want to hike interest rates more aggressively. This new facility would come on top of the &euro;200bn of firepower coming from bringing forward PEPP reinvestments by one year (referring to the Pandemic Emergency Purchase Programme launched at the start of the outbreak in March 2020). Though this amount is significant, this is only a first line of defense. It would do too little to avoid financial fragmentation within the eurozone if this happens. We don&rsquo;t expect the facility to be officially announced this week. The debate is only starting and some technical work needs to be done as well. An official announcement will probably be made after the summer. This will have much more implications for the eurozone than the tightening cycle. It will help create the required safety cushion the union needs to deal with this new period of economic history characterized by higher nominal rates, lower growth and high inflation for longer.&nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/june/07_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>ECB</span> <span>Euro dollar option</span> <span>European Union (EU)</span> <span>Europe</span> <span>EURCAD</span> <span>EURAUD</span> <span>EURPLN</span> <span>EURGBP</span> <span>EURNOK</span> <span>EURSEK</span> <span>EURCHF</span> <span>EURUSD</span> <span>EURJPY</span> <span>EUR</span></div>Wed, 08 Jun 2022 07:00:00 Z2022-06-08T07:40:03Z{C31CB4A0-6D06-44E1-9169-BFD8446D0F9A}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--the-supply-chain-is-a-big-mess-and-the-fed-cannot-do-anything-to-change-this-30052022Christopher Dembik product-macroplace-lc/cnmacro-balance of tradeChart of the Week : The supply chain is a big mess and the Fed cannot do anything to change this<div class="article-excerpt">In today’s ‘Macro Chartmania’, we look at the May release of the Manufacturing Business Outlook Survey for the region of Philadelphia.</div><div class="article-rte"><div class="rte--output"><p><span>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/may/macrochartmania_master3005.pdf?revision=630508d0-6dab-4638-97e1-c7c0e7e6c160">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.</span></p> <p><span>The global economy is facing at least&nbsp;<strong>four major shocks</strong>&nbsp;: 1) the Ukraine war which increases the risk of a recession in Europe this year (but we don&rsquo;t forecast the eurozone economy will enter in a recession in 2022) ; 2) tighter U.S. financial conditions that will choke off the housing market ; 3) China&rsquo;s lockdowns that will cause Q2 Chinese GDP to contract and ; 4) persistent supply chain disruptions resulting from a combination of factors (extreme weather in India/Pakistan, lack of containers, China&rsquo;s zero Covid policy which may last at least until the congress of the ruling Communist Party in the autumn, high transportation and energy costs etc.).</span></p> <p><span>For years, global growth has been a function of the inflow of liquidity and credit into the economy, mostly driven by quantitative easing and other ultra-accommodative monetary policies.&nbsp;<strong>Now, global growth is a function of the availability of real things&nbsp;</strong>such as diesel, electricity, natural gas, fertilizers, grains, copper, nickel or lithium. Basically, things that central banks cannot print. This is rather unusual. This will last.</span></p> <p><strong><span>Take container ships&nbsp;:</span></strong><span> a fifth of them are currently stuck in congested ports, partially due to China&rsquo;s lockdowns and new shipping capacity has yet to be built (source&nbsp;: <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.maritime-executive.com%2Farticle%2Fwindward-fifth-of-world-s-containerships-are-stuck-in-port-congestion&amp;data=05%7C01%7C%7C7bf6bf1425e64105bf4108da420aabb6%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637894910978543754%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=oVexGLDnRjS1YsxWIYtd1LQG1qG3%2BsQrDc4g76FThuA%3D&amp;reserved=0">The Maritime Executive</a>). Don&rsquo;t expect any long-lasting improvement in the supply chain before 2023 at best when new containers will likely arrive in the market. This will reduce congestion, hopefully. In the interim, lingering supply chain difficulties will continue to weigh on economic activity. In the below chart, we show expectations of unfilled orders by manufacturing firms from the Philadelphia region (access to the full survey&nbsp;<a rel="noopener noreferrer" href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.philadelphiafed.org%2Fsurveys-and-data%2Fregional-economic-analysis%2Fmbos-2022-05&amp;data=05%7C01%7C%7C7bf6bf1425e64105bf4108da420aabb6%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637894910978543754%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=TDPfi42qfQ8tTi2XUxJc595MHlW1Wz1nfUgYcfaaQL0%3D&amp;reserved=0" target="_blank">here</a>). In May, the index for expected unfilled orders decreased from minus 13.4 to minus 24.5. This is a record low since March 1995 (it was at minus 27.8). Firms consider that China&rsquo;s lockdowns combined with the shortage of inventories will negatively impact U.S. industrial production in the short- and medium-term. We observe similar trends in several other U.S. regional manufacturing surveys. Future unfilled orders are also in negative territory (minus 2.6) in the region of New York in May, for instance.</span></p> <p><span>Despite an easing in restrictions in Beijing since yesterday and in Shanghai from 1 June onwards, global trade congestion continues to cause backlogs and higher inflation across the board. Due to Shanghai's lockdown, up to 260,000 twenty-foot equivalent units (which is a commonly used measure of volume in units of twenty-foot long containers) could not leave the port of the city in April. This will take weeks to ship, probably between 8 to 10 weeks according to our own calculations. This will imply higher transportation costs too. Neighboring ports are also highly congested, such as the port of Ningbo-Zhoushan (busiest port in the world in terms of cargo tonnage) where a large number of containerships have been diverted away from Shanghai in recent weeks. Traffic on the Asia-Europe route is particularly slow now. The average delay of container ships doing a complete rotation reached an average of 20 days in May, compared to 17 in February according to the online liner shipping solution Alphaliner. Port delays are increasing a lot in Europe, where ships must await berthing before docking. This ultimately increases bottlenecks. Expect the situation to worsen in the very short-term as a new wave of Chinese exports looms with the reopening of the economy. This means that the bottom has certainly not been reached yet in the below survey. The index for expected unfilled orders is likely to move lower in June and in July, at least.&nbsp;<strong>We need to understand the global supply chain is a big mess and the Fed cannot do anything to change this.</strong>&nbsp;Bottlenecks are here to stay. This is certainly an over-optimistic view to believe that inflation can be put under control just by raising interest rates for several months in a row.&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/30_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>China</span> <span>Balance of Trade</span></div>Mon, 30 May 2022 09:00:00 Z2022-05-30T12:16:23Z{0BA2D4DF-550A-4BC9-B2B4-8B00B0FF2056}https://www.home.saxo/en-sg/content/articles/macro/eurozone-pmi-held-surprisingly-well-in-may-despite-higher-costs-and-supply-disruption-24052022Christopher Dembik product-macroforex-euraudcurrency-eurforex-eurcadsubject-is/pol.euplace-lr/eurforex-eurjpyforex-eurnokforex-eurusdforex-eurgbpforex-eursekforex-eurchfforex-eurplnEuropean styleEuro Stoxx 50Eurozone PMI held surprisingly well in May despite higher costs and supply disruption<div class="article-excerpt">The results of the S&P flash PMI indicators for the eurozone showed activity continued to rise in both the services and the manufacturing sectors. But there are still signs of uncertainty related to record-high inflation and supply issues impacting domestic demand in the medium term. The PMI indicators do not confirm any imminent risk of technical recession in the eurozone.</div><div class="article-rte"><div class="rte--output"><p><span>Despite a tightening in financial conditions, increased geopolitical risk due to the Ukraine war, a lower euro exchange rate which increases imported inflation and lower fiscal stimulus in most countries, the eurozone economic recovery continues this Spring but at a slower pace than in 2021 and in early 2022. Eurozone activity in the services sector slowed to a 2-month low of 56.3 versus 57.7 in April. Pent-up pandemic demand explains most of the momentum with a surge in spending on tourism and recreation, in particular. As factories were constrained by widespread supply shortages resulting from the Ukraine war and China&rsquo;s lockdowns, the manufacturing PMI decreased to a 18-month low of 54.4 versus 55.5 in April. On a positive note, the sector continued to report solid hiring. Though it may not last if inflationary pressures remain in place most of this year (at some point, factories will need to further cut costs, including labor cost). The latest PMI data are consistent with the eurozone economy growing at a solid quarterly rate of 0.6% so far in the second quarter. This is obviously disappointing (remember that many economists expected the start of a second Roaring Twenties after the Covid pandemic ended in Spring 2021). But given all the risks facing the economy, this is an overall positive and encouraging performance.</span></p> <p><span>Key details from the flash PMI report:</span></p> <ul > <li><strong><span>Price pressures remain a major issue</span></strong><span>&nbsp;with input cost and output charge inflation holding close to record highs. S&amp;P notes that <em>&ldquo;prices charged for goods and services rose at the second-highest rate yet recorded by the survey, though the rate of inflation cooled slightly compared to April following a second successive monthly easing in firms&rsquo; input cost inflation&rdquo;</em>. Inflation is still uncomfortably high and will remain elevated for a prolonged period of time. The peak in CPI has not been reached yet. Expect the European Central Bank (ECB) to increase interest rates at the July meeting of 21 July (one day after the release of the flash Q2 eurozone GDP) and to exit negative interest rates around September in a move to lower inflationary pressures. The ECB is also likely to express more concerns about FX and the euro exchange rate (in an effort to reduce imported inflation). ECB&rsquo;s Christine Lagarde indicated this morning the Governing council is <em>&ldquo;attentive to the level of the euro&rdquo;</em>. This is a way to get back control of the agenda while hawks are increasingly calling for a bold move to contain inflation too.</span></li> </ul> <ul> <li><span><strong>The Omicron variant has no direct impact on the eurozone economy anymore. </strong>This is not an issue. Most restrictions have been lifted in recent weeks. In France, mask-wearing is not mandatory in public transport since 16 May and there is no need to show a health pass to enter in restaurants or bars. Life has resumed as normal finally. This partially explains the surge in the service sector observed in several countries.</span></li> </ul> <ul> <li><span><strong>The gap between the manufacturing and the services sectors is increasing in France.</strong> Whereas the French manufacturing PMI softened to a 7-month low of 54.5, the service sector showed resilience with a flash estimate at 58.4 versus prior 58.9 in April. The manufacturing malaise mostly results from difficult access to raw material and higher prices which weigh on demand. There were mentions of clients being dissuaded from placing orders due to high inflation across the board while other customers decided to adopt a wait-and-see approach, for instance. On top of that, exports in the manufacturing sector continue to decline. This will leave marks on the economy. We see growing evidence of a two-speed economy emerging within France, as the service sector will likely push GDP growth higher in the coming months partially balancing the weakness across the manufacturing industry. We still believe France is at risk of a technical recession this year, especially after the release of the stagnant Q1 GDP and the negative contribution to activity from the final domestic demand excluding inventory (minus 0.6 point in Q1). This is one of the most important indicators to assess the real state of the French economy, in our view.</span></li> </ul> <ul> <li><span><strong>The UK PMI data signal a major economic slowdown in May</strong> as the cost of living crisis hits customer demand. The services PMI fell to a 15-month low of 51.8 versus 58.9 in April while the composite output index dropped to a 15-month low of 51.8 versus 58.2 in April. These are stunning decreases over such a short period of time. Business expectations are gloomy due to concerns about squeezed margins, weaker order books, record-inflation across the board and geopolitical uncertainty. In the services sector, expectations fell by the most since March 2020 when the pandemic first hit, for instance. The travel, leisure and events sector is the only one experiencing strong growth conditions (for obvious reasons). With inflation out of control (that was acknowledged by the Bank of England recently) and growing risk of compressed domestic demand, we think the United Kingdom is likely to go through a technical recession this year. This is our baseline.</span></li> </ul></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/24_cdk_2.png"/></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/24_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>EURAUD</span> <span>EUR</span> <span>EURCAD</span> <span>European Union (EU)</span> <span>Europe</span> <span>EURJPY</span> <span>EURNOK</span> <span>EURUSD</span> <span>EURGBP</span> <span>EURSEK</span> <span>EURCHF</span> <span>EURPLN</span> <span>European style</span> <span>Euro Stoxx 50</span></div>Tue, 24 May 2022 06:00:00 Z2022-05-24T09:19:29Z{58DA7D08-D6FB-4453-BCEE-D8522E0A83FE}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--is-a-recession-inevitable-in-the-united-kingdom-23052022Christopher Dembik product-macrocurrency-gbpforex-gbpcadforex-gbpaudforex-gbpchfforex-gbpusdforex-eurgbpforex-gbpjpyplace-lc/gbChart of the Week : Is a recession inevitable in the United Kingdom ?<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the UK economy following the release last week of worrying data about consumer confidence. All the data are collected from Macrobond and updated each week.</div><div class="article-rte"><div class="rte--output"><p>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/may/macrochartmania_master2005.pdf?revision=03fc0639-abc0-4406-a4a1-e1ab2d963b73">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.</p> <p>A global recession is not our baseline. But we acknowledge that several countries are likely to enter into technical recession this year. We are very pessimistic about the United Kingdom&rsquo;s outlook, especially. All the statistics released last week tend to indicate the economy will experience negative growth this quarter&nbsp;: the GfK consumer confidence fell below all-time low, at minus 40 in April, due to the surge in cost of living, retail sales look stagnant in the medium-term despite the short-term April rebound (+1.4 % MoM in volumes) and the April CPI jumped by two percentage points in just a month, from 7 % YoY in March to 9 % in April. Expect it to climb above 10 % in the coming months. Add to that the effect of the extra bank holiday which is likely to reduce activity this quarter. The pool of savings accumulated through the Covid crisis remains abundant. But it is mostly concentrated among higher-income households. Therefore, it is very unlikely to help much with consumption. </p> <p>All the major leading indicators of the UK economy confirms the worst is yet to come. The UK OECD leading indicator, which is designated to anticipate turning points in the economy six to nine months ahead, fell in April at 100. The year-on-year rate was at 10.4 % in April 2021&nbsp;; it now stands at minus 0.4 %. This is quite a swing over a one-year period. In addition, new car registrations, which are often viewed as a leading indicator of the wider UK economy, are in free fall driven by a massive drop in consumer confidence &ndash; see below chart. In June 2021 (post-Covid peak), new car registrations were at 1.88mn. It is now at 1.61mn &ndash; a stunning drop of 11 %. </p> <p>We think that at least two major developed economies are on the brink of a technical recession this year&nbsp;: the United Kingdom and France (which experienced stagnant growth in Q1 driven by a worrying drop in domestic demand). Australia is also a reason for worry, in our view. The Reserve Bank of Australia is tightening aggressively in a global inflation surge and business cycle that is already very long in the tooth. A policy error can easily happen, in this context. A larger number of developed economies are going through some form of stagflation (this is the case of Germany, for instance). In the United States, domestic demand remains solid (April retail sales and April industrial production figures were encouraging despite the surge in prices). A soft landing will be a complicated task for the&nbsp;U.S. Federal Reserve. But this is still possible. As a warning, we&nbsp;may adjust our forecast for global growth in the coming months if the contraction in new export orders in Germany and China (the two main global exports) last. This would give more credibility to markets&rsquo; call of global recession. This is too early to say, however.&nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/20_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>GBP</span> <span>GBPCAD</span> <span>GBPAUD</span> <span>GBPCHF</span> <span>GBPUSD</span> <span>EURGBP</span> <span>GBPJPY</span> <span>United Kingdom</span></div>Mon, 23 May 2022 05:30:00 Z2022-05-23T08:30:49Z{50C050B3-0243-4C5C-84A4-2F220E711D33}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--real-effective-exchange-rates-eur-and-usd-17052022Christopher Dembik product-macroforex-cadusdcurrency-usdforex-usdmxnforex-usdrubforex-usdnokforex-usdtryforex-usdzarforex-xauusdforex-eurusdforex-usdjpyforex-usdcadforex-usdchfforex-gbpusdforex-audusdforex-nzdusdXAGUSDXPTUSDChart of the Week : Real Effective Exchange Rates (EUR and USD)<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the Real Effective Exchange Rate (REER). All the data are collected from Macrobond and updated each week.</div><div class="article-rte"><div class="rte--output"><p>Click to download this week's full edition of <a href="https://www.home.saxo/-/media/content-hub/documents/2022/may/macrochartmania_master1605.pdf?revision=db0b0729-031c-4094-926d-63d4d8ea8643">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments.</p> <p>The below chart shows the Real Effective Exchange Rate (REER) for the euro and the U.S. dollar. This is the weighted average of a country&rsquo;s currency against a basket of other major currencies. It is used for international comparisons, especially by the International Monetary Fund and the World Bank, for instance. <strong>Currently, the U.S. dollar is 27 % too high compared to the euro, based on the REER.</strong> The last time the gap was so wide was when the outbreak started in 2020. This is only the beginning, in our view. U.S. dollar net speculative positioning continues to increase at a speedy pace. Several factors are pushing investors to look for the default safe haven&nbsp;: risk of technical recession or stagflation in several developed economies (France, Germany and the United Kingdom, for instance), skyrocketing commodity prices (especially for agricultural goods due to the Ukraine war and the drought in India), equity bear market, lockdowns in China which will push down global GDP growth this year, persistent inflationary pressures (resulting from supply chain disruptions and higher wage compensations, amongst other things) etc. From a technical point of view, the USD is likely to move upward in the short-term. We expect that risk-off waves will push the DXY index well above 105.00. The EUR/USD is likely to remain under pressure too.</p> <p><strong>How long do you think this can go on before something snaps&nbsp;?</strong> My bet&nbsp;: the European Central Bank (ECB) will have no other options but to increase interest rates at the July meeting to bring support to the EUR and close the gap with the U.S. dollar. Timing is everything&nbsp;: the July meeting will take place just one day after the release of the first estimate of the eurozone Q2 GDP. If the Governing Council decides to move forward with a rate hike, this would reduce imported inflation, in theory. The ECB is caught between a rising dollar and a weak euro. This is simply intolerable. Several governing council members, including those considered as the most pragmatic, are now leaning in favor of a rate increase and exiting negative rates by the end of the year (Banque de France&rsquo;s Villeroy de Galhau, for instance). This will certainly not solve from one day to another inflationary pressures within the eurozone (inflation is partially driven by external forces such as commodity prices). But it will at least reduce the FX-passthrough into inflation which is becoming problematic.&nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/16_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>CADUSD</span> <span>USD</span> <span>USDMXN</span> <span>Usdrub</span> <span>USDNOK</span> <span>USDTRY</span> <span>USDZAR</span> <span>XAUUSD</span> <span>EURUSD</span> <span>USDJPY</span> <span>USDCAD</span> <span>USDCHF</span> <span>GBPUSD</span> <span>AUDUSD</span> <span>NZDUSD</span> <span>XAGUSD</span> <span>XPTUSD</span></div>Tue, 17 May 2022 08:30:00 Z2022-05-17T09:47:37Z{34539603-BA52-4BBF-B54E-72F0DA2F947D}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--ecb-systemic-risk-indicator-10052022Christopher Dembik product-macroECBforex-eurcadsubject-is/pol.euforex-euraudplace-lr/eurcurrency-eurforex-eurgbpforex-eursekforex-eurplnforex-eurchfforex-eurnokforex-eurjpyforex-eurusdEuronextEuropean styleEuro dollar optionChart of the Week : ECB Systemic Risk Indicator<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the ECB Systemic Risk Indicator. All the data are collected from Macrobond and updated each week.</div><div class="article-rte"><div class="rte--output"><p>Click to download this week's full edition of <a href="https://www.home.saxo/-/media/content-hub/documents/2022/may/macrochartmania_master0905.pdf?revision=0bbac52f-cf68-467c-bfe7-4b195bd56c4c">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments: MacroChartmania_master1402.</p> <p>Risks are tilted to the upside in the eurozone&nbsp;: risk of technical recession in France, risk of stagflation in Germany, persistent supply chain disruptions (due to the zero Covid policy in China and the Ukraine war), commodity supercycle (with higher food and energy prices hitting hard the 15-20% lowest income quintile), low real effective exchange rate leading to higher imported inflation (based on our calculations the EUR is 27 % too low compared to the USD, for instance) and weak European leadership, amongst other things. The situation is unlikely to improve, in the short-term. We see higher risks of financial stress in the eurozone too. We measure the evolution of financial risk using the ECB Systemic Risk Indicator (created in 2012 by Hollo, Kremer and Lo Duca) <em>&ndash; see below chart.</em> This is based on fifteen financial stress measures (such as exchange rates and spreads etc.). It now stands at 0.26 and keeps climbing. It is still below the peaks reached in March 2020 at 0.35 (global lockdown) and in February 2022 at 0.34 (invasion of Ukraine by Russia). But we believe it is likely to reach the pain zone of 0.34-0.35 in the coming months and weeks. </p> <p>Foreign investors are getting increasingly worried about the risk of bond market fragmentation in the eurozone. Some countries are in a better position than others. Liquidity in the Italian sovereign bond market has been deteriorating sharply this year. Basically, foreigners just want to get out. This is not the same situation in Spain, for instance. The country is still getting foreign inflows. Wider spreads are putting Italy at risk. We fear the country will become Europe&rsquo;s black sheep once again &ndash; thus putting eurozone policymakers to the test. The Italian long-term bond yields are now 2 percentage points higher than for Germany (which serves as the market benchmark). It will probably get worse when the ECB ends Quantitative Easing and starts hiking interest rates, perhaps as early as at the July meeting. There will be no roaring twenties for the eurozone.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/10_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>ECB</span> <span>EURCAD</span> <span>European Union (EU)</span> <span>EURAUD</span> <span>Europe</span> <span>EUR</span> <span>EURGBP</span> <span>EURSEK</span> <span>EURPLN</span> <span>EURCHF</span> <span>EURNOK</span> <span>EURJPY</span> <span>EURUSD</span> <span>Euronext</span> <span>European style</span> <span>Euro dollar option</span></div>Tue, 10 May 2022 04:00:00 Z2022-05-10T07:14:22Z{84F479BE-E53B-4D27-AE5B-C5D5080F05C6}https://www.home.saxo/en-sg/content/articles/macro/soaring-food-prices-across-the-board-are-hitting-hard-consumption-in-developed-countries-04052022Christopher Dembik product-macrosector-Commoditycommodity-orange juicecommodity-ricecommodity-ethanolcommodity-corncommodity-soybeancommodity-sugarcommodity-coffeecommodity-cottoncommodity-heating oilSoaring food prices across the board are hitting hard consumption in developed countries<div class="article-excerpt">Soaring food prices are eating household’s purchasing power in the developed countries. The 15-20 % lowest income quintile is the most vulnerable with food prices reaching records. Even with higher wages, most households are not able to cope with this new situation and face tough trade-offs (choosing between buying pasta or meat, for instance). Expect things to get worse, in the short-term. This will likely lead to a major drop in consumption in the coming quarters. It has already started in some countries (France, for instance). This is something to monitor closely as it increases the risk of stagflation and, here and there, of recession.</div><div class="article-rte"><div class="rte--output"><p>The index of food prices published by the Food and Agriculture Organization (FAO) surged 12.6 % between February and March. It is now standing at its highest levels since 1990 (when the index was first created). The previous record was set in 2011 (at 137 versus 159 now) <em>&ndash; see the below chart.</em> Both temporary and structural factors are pushing food prices higher at the global level&nbsp;such as higher cost for labor, ocean freight rates which has been steadily rising for more than a year, higher raw material costs, poor weather conditions (heat wave in India and Pakistan at the moment, for instance), export restriction, strong demand for various foods (chicken and other meats in several developed countries) and strong demand for biofuels which has increased speculative demand by non-commercial traders, amongst many other things. </p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/may/04_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><p class="v2-p-s"><strong><em>Explanation&nbsp;:</em></strong><em> The FAO Food Price Index (FFPI) is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices weighted by the average export shares of each of the groups over 2014-2016. See this <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.fao.org%2Ffileadmin%2Ftemplates%2Fworldfood%2FReports_and_docs%2FFO-Expanded-SF.pdf&amp;data=05%7C01%7C%7C6ce7bba172df441f29bc08da2dd44ba3%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637872687214045398%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=HuaSe5mvVQxjxUekQ3YKGIRisNf%2FWTBgG2GY%2FeeIyN0%3D&amp;reserved=0">article</a> for further technical background on the construction of the index. </em></p> <p><strong >Expect things will get worse, in the short term at least.</strong><span > We already know how vulnerable emerging and developing countries are to food price fluctuations (32 countries in Africa are importing more or less 90 % of basic foods). This means higher political instability in the emerging world. But what is new is that developed countries are hit hard by soaring prices too. Several developed countries are experiencing strong wage increases since the reopening of the economy (even in the eurozone where wages are finally catching up). But this is not enough to cope with higher inflation. Our baseline is that the lowest income quintile in the developed world (around 15-20 % of households) will face a severe income squeeze in the coming months.</span></p> <p><strong>A lot of food items are price inelastic &ndash; or not responsive to price. But not all of&nbsp;them.</strong> We say that prices are inelastic when a price increase does not induce a drop in consumption (most of the time, because the items are considered as essential). According to the U.S. Department of Food, the price elasticity of U.S. household demand for bread and cereals is at 0.04 &ndash; when the reading is much below 1.0, it means that the item is not responsive to price. This makes sense. Bread and cereals are often basic items in the grocery list for the poorest households. There is no immediate substitute either. Studies show only a major increase in prices&nbsp; for basic items can lead to a drop in consumption - meaning a double-digit increase. The U.S. Department of Food takes the example of a 25 % increase in bread prices leading to a 1 % fall in consumption. However, some food items are price elastic, such as food away from home, juice, soft drinks etc. According to the U.S. Department of Food, a 10 % increase in soft drink prices should reduce consumption by 8-10 % on average. The poorest households are now facing a trade-off between eating pasta or fresh meat. This is as basic as that.&nbsp; A study from France&rsquo;s national office of statistics (INSEE) shows that when the prices of cereals and pasta increase by 1 % on average, this induces a drop of 0.23 % of the quantity of consumed meat, for instance. Basically, households give up on what is seen as the most expensive or <em>&lsquo;luxury&rsquo;</em> expenses in the grocery list.&nbsp;</p> <p><strong>Higher food prices will cause a major drop in consumption.</strong> In the current context of prolonged high inflation, the consumption of essential food items (inelastic prices) will likely remain stable in most developed countries. But the consumption will drop for other food items and unnecessary expenses (trips, electronics, hotels etc.). Several countries are already experiencing a significant decrease in consumption. In France, household consumption of goods fell 1.3 % in March 2022 in volume. The drop is mostly explained by a decline in food consumption (minus 2.5 %). Looking into details, this only concerns inelastic food demand (sweets and sugar, eggs, cheese etc.). This is cause for concern. In most developed countries, consumption is the main driver of economic growth. This increases the risk of stagflation or, in some cases, of recession (typically in the United Kingdom). Expect political turmoil as well. From where I am sitting (in Saxo&rsquo;s Paris office), I would not be surprised that France will face massive demonstrations after the summer break with people getting down in the streets to protest against high cost of living and high food prices (remember that the 2018 Yellow Vest Movement was initially caused by an increase in fuel prices). What is certain is that we will not experience another Roaring Twenties, contrary to what several colleagues believed when the developed economies reopened in Spring last year. The economic outlook is gloomier.</p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Commodity</span> <span>Orange Juice</span> <span>Rice</span> <span>Ethanol</span> <span>Corn</span> <span>Soybean</span> <span>Sugar</span> <span>Coffee</span> <span>Cotton</span> <span>Heating Oil</span></div>Wed, 04 May 2022 09:30:00 Z2022-05-04T14:04:19Z{5130AECB-DFE5-4390-8B3A-E9E21F14777C}https://www.home.saxo/en-sg/content/articles/quarterly-outlook/the-great-erosion-05042022Christopher Dembik Primary-Quarterly OutlookPrimary-Quarterly Outlook 2nd rowThe Great Erosion <div class="article-excerpt">Inflation is anything but transitory. At its March meeting, the ECB released its latest staff macroeconomic projections. All scenarios show a decrease in CPI. </div><div class="article-rte"><div class="rte--output"><p class="text--body">Inflation is anything but transitory. At its March meeting, the European Central Bank (ECB) released its latest staff macroeconomic projections. In all scenarios, the euro area Consumer Price Index (CPI) is expected to decrease close to 2 percent year on year in 2023 (see Chart 1). This is wishful thinking; it currently stands at 5.8 percent year on year (the latest figure for February). It&rsquo;s not just oil and energy prices that are rising fast anymore. Food, non-energy industrial goods and services are all accelerating at more than 2 percent; inflation is now broad-based. This is before we see the full consequences of the Ukraine war on the inflation dynamics. Our baseline is that the war will add at least one percentage point to the average euro area CPI this year. We have discovered with the conflict that Ukraine is a hub of international trade; for instance, it produces 70 percent of global neon gas exports. This purified version of gas is crucial to the semiconductor industry and we need it for many daily life products such as smartphones, medical devices and household appliances. But war is not the only issue on the table.&nbsp;</p> <h4 class="heading--4">Supply chains disruptions will last at least until 2023&nbsp;</h4> <p class="text--body">Supply chain disruptions are increasing. There was no real improvement before the war and now, things are getting worse; this is the biggest trend unfolding in front of us. On top of closed and sanctioned Russian mineral exports, several countries are limiting their exports of basic goods. On March 14, Argentina shut down its soya and soy oil exports (41 percent and 48 percent of global exports respectively) for an unlimited period. At the same time, Indonesia tightened export curbs on palm oil&mdash;the world&rsquo;s most widely used vegetable oil and used in several food products. Many countries are following the same path, including Serbia, Ukraine, Egypt, Algeria and Bulgaria. Others are still dealing with the pandemic. Shenzhen, China&rsquo;s enormous manufacturing hub and port city, went into lockdown in mid-March. Shenzhen is home to some of China&rsquo;s most prominent companies, including Tencent Holding, operator of the popular WeChat message service, and the electric car brand BYD Auto. It&rsquo;s also the fourth largest port in the world by volume with the transit of 15 percent of Chinese exports. It could take six to eight weeks to clear the backlog; a sustained improvement in international shipping is only expected in 2023 onwards when new containers will arrive in the market. Port congestion is not the only driver of inflationary pressures. In the past few months, we have mentioned several times that the European green transition is fundamentally an inflationary shock for the European households and companies (see our <a href="https://www.home.saxo/en-sg/content/articles/quarterly-outlook/the-eus-unwise-energy-policy-25012022">Q1 outlook</a>). &nbsp;Instead of the COP26 resulting in a phasing down of coal, the sad reality is that coal and gas are growing. Hopefully, the Ukraine war will lead to a rethink of the Germany and Belgium nuclear phase-out, but it will take at least 7 to 10 years before new nuclear power stations are operational. In the interim, inflation will remain a headache.&nbsp;</p> <h4 class="heading--4">History doesn't repeat itself, but it rhymes&nbsp;</h4> <p class="text--body">In our view, comparing today&rsquo;s inflation with the 1970s or the 1973 oil crisis does not make sense. There are at least two main differences: the Covid-19 policy mix in the developed world was out of all proportion to what we have known in the past, and there&rsquo;s no price-wage loop in most euro area countries. In the 1970s, wages were automatically indexed to inflation. This is not the case anymore, with a few exceptions (in Cyprus, Malta, Luxemburg and Belgium, indexation is based on core CPI). So far, wage negotiations in euro area countries have led to an average increase below inflation (less than 1 percent in Italy and between 2 and 3 percent in the Netherlands, Austria and Germany, for instance); this is not the stagflation we experienced in the 1970s. Some economists call this new period the Lowflation. We call it the Great Erosion: erosion of purchasing power, corporate margins and growth due to the explosion of supply costs at the global level. This is the fifth regime shift over the past twenty years: the Great Moderation, the housing bubble, the Secular Stagnation and the Taper Tantrum were the other four. The main question now is who will bear most of the cost. Our bet? Corporate margins. What could prevent this? Basically, we need productivity gains. Unfortunately, we don&rsquo;t see strong evidence in the data of sustained productivity gains from remote work, and whether the green transition will have a net positive or negative effect on productivity is debatable.&nbsp;</p> <h4 class="heading--4">The inflation/recession dilemma&nbsp;</h4> <p class="text--body">All the central banks are officially committed to fighting inflation&mdash;this is obvious. The hawks clearly took control of the ECB narrative at the March meeting, but some central banks are certainly more committed than others. We suspect they could take a sustained 3-4 percent annual inflation rate rather than engineering a recession to get them lower. This means they could bluff about it staying hawkish in words rather than deeds. This is certainly more the case for the US Federal Reserve than for the ECB. Don&rsquo;t forget inflation above the last 20-year average has a positive impact on the debt burden too; this is an added bonus. After the Global Financial Crisis of 2007-08, many countries tried the conventional way to reduce debt&mdash;meaning austerity and structural reform. It has failed and now it&rsquo;s time to adopt a more unconventional approach: inflation, repression and, in a few cases, default. This will have major implications in terms of investment (outweigh commodities and real estate amongst other options) but also fiscal policy with increased income redistribution for the lowest quintile of households. Not everyone is prepared for what is coming: a prolonged period of high inflation before it drops.&nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/qo2/q2-cdk-02.png"/></div><div class="article-additional-rte"><div class="rte--output"><a class="v2-btn v2-btn-primary" href="https://www.home.saxo/en-sg/products">Explore products at Saxo</a></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook</a> <a href="https://www.home.saxo/en-sg/insights/news-and-research/thought-leadership/quarterly-outlook">Quarterly Outlook 2nd row</a></div>Mon, 04 Apr 2022 23:30:00 Z2022-04-05T05:14:55Z{ADB3E133-6692-4E46-A8F6-D144FA52F993}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--us-30-year-mortgage-rate-22032022Christopher Dembik product-macroplace-lc/uscurrency-usdChart of the Week : U.S. 30-year mortgage rate<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the U.S. 30-year mortgage rate. In January 2022, it stood at 3.1%. It is now above 4%. This is only the beginning. Many U.S. households are not able to buy at the 4% rate anymore. This worsens the issue of housing affordability in the United States. </div><div class="article-rte"><div class="rte--output"><p>Access this week's full edition of&nbsp;<a href="https://www.home.saxo/-/media/content-hub/documents/2022/march/macrochartmania_master.pdf?revision=97cd3502-78d4-44ff-a61e-39de863dcfc8">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</p> <p><span><strong>Housing affordability</strong> continues to be a major challenge in the United States. Home prices keep jumping (</span><span>+15% year-over-year to $357,300 on average) while sales continue to fade and the inventory of unsold homes increases. Buyers are trapped. They face higher difficulties resulting both from sustained price increases and rising mortgage rates. Many of them who managed to get a 3% mortgage rate are no longer able to buy at the 4% rate. Exactly one year ago, the average rate on the 30-year loan was at around 3%. It now stands at 4.5%. This is the highest level since December 2018. The average rate on 15-year, fixed-rate mortgages, which is popular among those refinancing their homes, is up too. It is hovering around 3.4% instead of 3.09% one week ago. This is only the beginning. Mortgage rates are highly correlated to the Federal Reserve&rsquo;s benchmark short-term interest rate. We expect the Federal Reserve to hike the rate by 400 basis points during this cycle in order to fight inflation. This would be similar to the previous tightening cycles which took place since 1985. We could, therefore, see the 30-year mortgage rate beyond 5%. This would be the first time since 2010. Social consequences would be massive (homebuyers dropping out from the market, breach of the social contract etc.). Owning a home is now a distant dream for a growing number of Americans.&nbsp;</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/march/22_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span></span> <span>USD</span></div>Tue, 22 Mar 2022 06:30:00 Z2024-03-23T00:10:32Z{92005B37-0945-4775-9C9C-34C0251EE3BD}https://www.home.saxo/en-sg/content/articles/macro/french-election-update--a-replay-of-2017-21032022Christopher Dembik product-macroFrench Elections 2022French Election Update : A replay of 2017<div class="article-excerpt">We see a 80% chance that President Emmanuel Macron will be re-elected against far-right Marine Le Pen. Macron’s expected victory should not be considered as the triumph of reformism but instead as the symbol of a severe crisis of French democracy. This would be the fourth time in twenty years that the French use their vote to vote against someone and not for someone at the presidential election (Chirac-Le Pen 2002, Sarkozy-Hollande 2012, Macron-Le Pen 2017). Expect Macron to face a lot of opposition to his reforms in his second term. No matter how large his majority will be at the National Assembly, he will be a lame duck.</div><div class="article-rte"><div class="rte--output"><p><strong><span>The message of the polls&nbsp;:</span></strong><span> All recent polls show Macron is well ahead of the pack in the first round (~</span>30% compared with <span>~</span>26-27% a month ago). The recent increase is mostly explained by the &laquo;&nbsp;rally around the flag&nbsp;&raquo; effect due to the Ukraine war. Macron is considered as the most competent to deal with the situation by a majority of voters. The far-right candidate Marine Le Pen is still in the second position (<span>~</span>17-18%). But she is slightly lower than in the previous polls, perhaps due to her loud Putin sympathies in the past. The fight for the third position continues between the center-right <em>Les R&eacute;publicains</em> Val&eacute;rie P&eacute;cresse and the extreme-left Jean-Luc M&eacute;lenchon (who was the third man of the 2017 French presidential election). Both are at 13% in the latest OpinionWay poll released today. The former TV pundit Eric Zemmour is losing momentum. He is now ~10%. This is partially explained by his extremist positions on Islam which antagonize a majority of voters and his previous admiration for Putin&rsquo;s regime. In many respects, he appears much more radical than Le Pen on several issues, including immigration. While most voters worry about inflation and the economy, Zemmour only talks about immigration. This is a mistake. With the exception of M&eacute;lenchon, all the other left candidates are below 5%. Voters are skeptical about the exit of nuclear power &ndash; which is at the core of the Greens&rsquo; economic platform. They understand quite well it will lead to higher energy prices. A few months ago, the Greens were ~10% of voting intentions in the first round. The socialist candidate and current mayor of Paris, Anne Hidalgo, is ~1-2%. The Socialist Party has not worked seriously over the past five years to propose a credible economic platform and its candidate is considered as one of the most unfit candidates for the job, even among socialist supporters. <strong>This election will certainly mark the end of the Socialist Party in France and the continuation of the profound political reconfiguration of the Left and the Right, which has started since 2017</strong>. If the center-right P&eacute;cresse is not qualified for the second round, expect a profound crisis of the <em>Les R&eacute;publicains</em>, similar to what has happened to the Socialist Party in 2017. </p> <p><strong><span>Le Pen&rsquo;s new consensual economic program&nbsp;:</span></strong><span> Last week, Le Pen gave a four-hour long TV interview to the French TV show &lsquo;Face &agrave; Baba&rsquo; &ndash; a very popular program mostly watched by young people. She appeared better prepared, including on economic topics, more moderate and calmer than during the final debate of the 2017 presidential election when she lost the argument against Macron. She debated against several opponents and experts, including myself. Her overall performance was good and, sometimes, even impressive. Her main slogan is to &laquo;&nbsp;Give the French their money back&nbsp;&raquo;. She proposed several tax cuts&nbsp;: VAT cut from 20% to 5.5% on energy and abolition of income tax for people below 30, for instance. This is consensual and would make sense. She also proposes a national loan with a nominal 2% annual interest (known as <em>&lsquo;grand emprunt&rsquo;</em>) to invest into new technologies. This is the only economic proposal which is an economic nonsense in her platform, in our view. Why would France borrow at 2% from its citizens while it can borrow very large amounts in financial markets at very low cost, close to 0% over a ten-year period&nbsp;? This measure would be very costly for the country&rsquo;s public finances.</span></p> <p><strong><span>Macron&rsquo;s right-wing economic platform&nbsp;:</span></strong><span> Last week, Macron proposed a major reform of inheritance rights and to raise the retirement age to 65 instead of 62, if he is re-elected. This aims to attract right-wing voters. </span><span>Compared with other European countries, tax on inheritance is very high in France. This is a sensitive issue for voters. Macron wants to increase the allowance on direct line inheritance from 100,000 euros to 150,000 euros. In addition, the regime of heirs in direct line to the children of the spouses would be extended. In many other countries, inheritance tax has been abolished : in Sweden (2004), Slovakia (2004), Austria (2008) and the Czech Republic (2014). In Poland and Portugal, spouses and direct descendants (which includes both parents and children) are exempt from inheritance tax, for instance. There is still a long road ahead for France to lower taxation. We see a 80% chance that Macron will be re-elected against Le Pen. But he is seen as a <strong>&lsquo;default choice&rsquo;</strong> by a majority of voters. This means he will certainly face much more opposition to his reforms and more violent street protests than in the past. We doubt he will be able to raise the retirement age, for instance. No matter how large his majority will be at the National Assembly, he will be a <strong>lame duck</strong>. </span></p> <p><strong><span>What to watch now&nbsp;:</span></strong><span> There is no debate with all the candidates before the first round of 10 April since Macron refused to participate. We will therefore focus mostly on polls in the coming three weeks.</span></p> <div class="telerik_paste_container" > <p class="MsoNormal" ><strong><span >The message of the polls&nbsp;:</span></strong><span > All recent polls show Macron is well ahead of the pack in the first round (<span >~</span></span>30% compared with <span >~</span>26-27% a month ago). The recent increase is mostly explained by the &laquo;&nbsp;rally around the flag&nbsp;&raquo; effect due to the Ukraine war. Macron is considered as the most competent to deal with the situation by a majority of voters. The far-right candidate Marine Le Pen is still in the second position (<span >~</span>17-18%). But she is slightly lower than in the previous polls, perhaps due to her loud Putin sympathies in the past. The fight for the third position continues between the center-right <em>Les R&eacute;publicains</em> Val&eacute;rie P&eacute;cresse and the extreme-left Jean-Luc M&eacute;lenchon (who was the third man of the 2017 French presidential election). Both are at 13% in the latest OpinionWay poll released today. The former TV pundit Eric Zemmour is losing momentum. He is now ~10%. This is partially explained by his extremist positions on Islam which antagonize a majority of voters and his previous admiration for Putin&rsquo;s regime. In many respects, he appears much more radical than Le Pen on several issues, including immigration. While most voters worry about inflation and the economy, Zemmour only talks about immigration. This is a mistake. With the exception of M&eacute;lenchon, all the other left candidates are below 5%. Voters are skeptical about the exit of nuclear power &ndash; which is at the core of the Greens&rsquo; economic platform. They understand quite well it will lead to higher energy prices. A few months ago, the Greens were ~10% of voting intentions in the first round. The socialist candidate and current mayor of Paris, Anne Hidalgo, is ~1-2%. The Socialist Party has not worked seriously over the past five years to propose a credible economic platform and its candidate is considered as one of the most uncompetent candidates, even among socialist supporters. <strong>This election will certainly mark the end of the Socialist Party in France and the continuation of the profound political recomposition of the Left and the Right, which has started since 2017</strong>. If the center-right P&eacute;cresse is not qualified for the second round, expect a profound crisis of the <em>Les R&eacute;publicains</em>, similar to what has happened to the Socialist Party in 2017. </p> <p class="MsoNormal" ><strong><span >Le Pen&rsquo;s new consensual economic program&nbsp;:</span></strong><span > Last week, Le Pen gave a four-hour long TV interview to the French TV show &lsquo;Face &agrave; Baba&rsquo; &ndash; a very popular program mostly watched by young people. She appeared better prepared, including on economic topics, more moderate and calmer than during the final debate of the 2017 presidential election when she lost the argument against Macron. She debated against several opponents and experts, including myself. Her overall performance was good and, sometimes, even impressive. Her main slogan is to &laquo;&nbsp;Give the French their money back&nbsp;&raquo;. She proposed several tax cuts&nbsp;: VAT cut from 20% to 5.5% on energy and abolition of income tax for people below 30, for instance. This is consensual and would make sense. She also proposes a national loan with a nominal 2% annual interest (known as <em>&lsquo;grand emprunt&rsquo;</em>) to invest into new technologies. This is the only economic proposal which is an economic nonsense in her platform, in our view. Why would France borrow at 2% from its citizens while it can borrow very large amounts in financial markets at very low cost, close to 0% over a ten-year period&nbsp;? This measure would be very costly for the country&rsquo;s public finances.</span></p> <p class="MsoNormal" ><strong><span >Macron&rsquo;s right-wing economic platform&nbsp;:</span></strong><span > Last week, Macron proposed a major reform of inheritance rights and to raise the retirement age to 65 instead of 62, if he is re-elected. This aims to attract right-wing voters. </span><span >Compared with other European countries, tax on inheritance is very high in France. This is a sensitive issue for voters. Macron wants to increase the allowance on direct line inheritance from 100,000 euros to 150,000 euros. In addition, the regime of heirs in direct line to the children of the spouses would be extended. In many other countries, inheritance tax has been abolished : in Sweden (2004), Slovakia (2004), Austria (2008) and the Czech Republic (2014). In Poland and Portugal, spouses and direct descendants (which includes both parents and children) are exempt from inheritance tax, for instance. There is still a long road ahead for France to lower taxation. We see an 80% chance that Macron will be re-elected against Le Pen. But he is seen as a <strong>&lsquo;default choice&rsquo;</strong> by a majority of voters. This means he will certainly face much more opposition to his reforms and more violent street protests than in the past. We doubt he will be able to raise the retirement age, for instance. No matter how large his majority is at the National Assembly, he will be a <strong>lame duck</strong>. <span ></span></span></p> <p class="MsoNormal" ><strong><span >What to watch now&nbsp;:</span></strong><span > There is no debate with all the candidates before the first round of 10 April since Macron refused to participate. We will therefore focus mostly on polls in the coming three weeks.</span></p> <p class="MsoNormal"><span ></span></p> </div></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/march/21_cdk_1.jpg"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>French Elections 2022</span></div>Mon, 21 Mar 2022 11:00:00 Z2022-03-21T14:35:42Z{7457855E-14D8-4B91-8EE7-F96F8C829DD4}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--us-weekly-crude-imports-from-venezuela-08032022Christopher Dembik product-macroplace-lc/veplace-lc/uacommodity-heating oilcommodity-crude oilcommodity-gas oilsector-Oil and GasOilChart of the week : U.S. weekly crude imports from Venezuela <div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on U.S. weekly crude import from Venezuela. It has been flat since April 2019. But things might change following a meeting this weekend between U.S. officials and the Venezuelan government to talk about oil exports to replace Russia's.</div><div class="article-rte"><div class="rte--output"><p><span >Access this week's full edition of&nbsp;</span><a href="https://www.home.saxo/-/media/content-hub/documents/2022/february/macrochartmania_master0803.pdf?revision=062e5d86-4543-4aa9-8966-d036139ffcc3">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.</p> <p><span>The below chart shows the evolution of U.S. weekly crude imports from Venezuela. The country used to produce roughly 5m bbl/day and to export at least 1m bbl to the United States in better times. Exports to the United States dropped to zero on 28 April 2019 when the Trump administration banned U.S. companies from importing Venezuelan oil. Before the sanctions were introduced, exports were already in a free fall (minus 80 % from April 2018 to April 2019). The shortage of US dollars, the long-term underinvestment in oil infrastructures and reputation risk for U.S. companies doing business in Venezuela explain the drop in 2018. Without U.S. buyers, Venezuela had to turn to Asia (mostly China and India) and to Iran. The initial arrangements of the Iran-Venezuela cooperation deal entitled that Iran purchases Venezuelan oil while Venezuela buys Iran&rsquo;s petroproducts to reinvigorate its energy industries.</span></p> <p><span>In a surprising turn of events, last week, U.S. envoys went to Venezuela&rsquo;s capital, Caracas, to restore diplomatic ties and to negotiate a lift of U.S. sanctions on the condition that Venezuela does not back up Russia anymore (see the&nbsp;<a rel="noopener noreferrer" href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.wsj.com%2Farticles%2Fu-s-officials-meet-with-regime-in-venezuela-to-discuss-oil-exports-to-replace-russias-11646591752&amp;data=04%7C01%7C%7C658d8788654f4c4d19e008da0106e675%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637823426389993540%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&amp;sdata=7tatZ4itN827OuUPkHKRNLDt5Boibw6Ip%2F1jZkPlY1M%3D&amp;reserved=0" target="_blank"><span>report</span></a>&nbsp;from the Wall Street Journal). It is still early days. But there is a clear path for at least a partial lift of the U.S. sanctions, in our view. The United States is set to ban Russian oil as soon as today. The&nbsp;European Union could announce steps to reduce drastically dependence on Russian oil as early as this week, perhaps at the upcoming EU Summit in Versailles (France) scheduled for 10 and&nbsp;11 March. In these circumstances, Venezuela&rsquo;s oil could serve as a substitute (Russia&rsquo;s oil exports to the United States topped to 500.000 bbl/day). Venezuela is an obvious option for the United States for two reasons. First, it is highly more convenient to get those barrels online from Venezuela, which is closer, than from Russia. Second, Venezuela&rsquo;s super-heavy oil is a great match for light U.S. shale to balance it out. It won&rsquo;t be all easy,&nbsp;however. There are pending questions regarding the real state of Venezuela&rsquo;s oil infrastructures and its capacity to speed up production in a short period of time.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/march/08_cdk_1.jpg"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Venezuela</span> <span>Ukraine</span> <span>Heating Oil</span> <span>Crude Oil</span> <span>Gas Oil</span> <span>Oil and Gas</span> <span>Oil</span></div>Tue, 08 Mar 2022 14:00:00 Z2024-03-09T06:12:25Z{F50AE040-D0C7-404F-B46C-6BC9ABA3478A}https://www.home.saxo/en-sg/content/articles/macro/the-war-in-ukraine-is-the-fastest-growing-refugee-crisis-in-europe-since-ww2-07032022Christopher Dembik product-macroplace-lc/uaplace-lc/plThe war in Ukraine is the fastest growing refugee crisis in Europe since WW2<div class="article-excerpt">In this brief, we expose the basic facts about the Ukrainian refugee crisis. This is part of our continuing efforts to better explain key events affecting the market. It is, of course, too early to understand the exact economic and political implications of this crisis. But we can already say this is the biggest refugee crisis facing Europe since WW2, with already more than 1.5 million refugees. This is only the beginning, unfortunately.</div><div class="article-rte"><div class="rte--output"><p><strong><span>Total number of refugees from 24 Feb to 5 March&nbsp;:&nbsp;</span></strong><span>1.5 million (source&nbsp;: UNHCR). Of which, around 1 million are now in Poland. Hungary, Moldova, Slovakia, Romania received more than 400,000 between them. About 5 percent of refugees (mostly coming from the Donbass) have headed east to Russia.</span></p> <p><span></span><em >The below map is from 4 March. You can see the situation is evolving very fast on the ground. Three days ago, there were around 649,000 refugees in Poland. Now, it stands at 1 million.</em></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/march/07_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><p><strong><span class="underline; ">This is the fastest growing refugee crisis in Europe since WW2.</span></strong></p> <p><span></span><span >The UNHCR expects that the number of refugees could reach 5 to 7 million in the coming weeks.</span></p> <p><span></span><span >For the sake of comparison, there are more than 6.8 million refugees from the Syrian crisis &ndash; the world&rsquo;s largest ongoing refugee and displacement crisis &ndash; and about 6 million refugees due to the Venezuelan crisis (a large majority of Venezuelans left the country for economic reasons). This gives you an idea of the scale of what is happening in Ukraine, right now.</span></p> <p><span></span><strong ><span class="underline; ">The EU has dropped entry requirements to welcome Ukrainian refugees</span></strong><strong >.&nbsp;</strong><span >Slovakia has opened its borders to refugees without travel documents, while the Czech Republic has lifted its ban on Ukrainians crossing without COVID-19 certificates, for instance. On 3 March, the EU interior ministers gave unanimous backing to a plan to grant temporary residency to Ukrainian refugees &ndash; this is expected to come into force within days.</span></p> <p><span></span><strong ><span class="underline; ">Poland is in the front-line</span></strong><span >&nbsp;: Poland, already home to an estimated 1.5 million Ukrainians (both naturalized citizens and temporary migrant workers), has welcomed around 1 million of all new refugees.</span></p> <p><span></span><span >Several fiscal measures have been unveiled to help the refugees and Polish citizens helping them&nbsp;:</span></p> <p><span></span><span >Polish households will receive around 1200 zlotys per month (around 251 euros) if they host refugees at home. This will cost approximately 15bn zlotys a year (around 3bn euros).</span></p> <p><span>On top of that, Ukrainian refugees will have access to family benefits such as&nbsp;:</span></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><span><em>the &ldquo;500+&rdquo; child benefit programme</em> - 500 zlotys monthly payment for every child under 18 years old, regardless of family income&nbsp;; </span></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><span><em>Family Care Capital</em> &ndash; one-time payment of 12&nbsp;000 zlotys for the second and subsequent children, regardless of family income&nbsp;;</span></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><span><em>and a Good Start</em> &ndash; 300 zlotys payment for all students starting a school year, regardless of family income.</span></p> <p><strong><span class="underline; ">Political consequences</span></strong><strong><span>&nbsp;: </span></strong><span>In several countries, the refugee crisis has created a sense of national unity and put domestic political issues on the backburner. In Poland,<strong> </strong>a poll by IBRiS for the Rzeczpospolita daily released on 4 March showed that over 90% of Poles support accepting Ukrainian refugees, while 64% say they are personally willing to help them. The center-left opposition is working hand in hand with the center-right government. This is quite unusual. France is going through a rally-round-the-flag moment too. An IPSOS poll released on 5 March shows that President Emmanuel Macron, who is now an official candidate, is above 30 % for the first time. The far-right candidates Marine Le Pen and Eric Zemmour are in the second and third position, respectively. Both are lower than in the previous polls (perhaps due to their previously loud Putin sympathies). However, it is still early days. Much can happen until the first round of the presidential election on 10 April.&nbsp;</span></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Ukraine</span> <span>Poland</span></div>Mon, 07 Mar 2022 16:30:00 Z2022-03-07T19:10:06Z{5C5E2DA0-9FBA-4553-B292-3E8547815BF5}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--geopolitical-risk-index-rises-to-a-two-decade-high-03032022Christopher Dembik product-macroplace-lc/uaplace-lc/rucommodity-goldforex-xauusdChart of the Week : Geopolitical Risk Index rises to a two-decade high<div class="article-excerpt">In today's 'Macro Chartmania', we focus on the Geopolitical Risk Index (GPR) - a geopolitical risk benchmark which gets back to 1899.</div><div class="article-rte"><div class="rte--output"><p>Download this week's full edition of&nbsp;<a href="https://www.home.saxo/-/media/content-hub/documents/2022/february/macrochartmania_master0303.pdf?revision=099e6726-a410-4362-b44f-3fd0a2cba7c7">Macro Chartmania</a>&nbsp;composed of more than 100 charts to track the latest macroeconomic and market developments.</p> <p>The Geopolitical Risk Index is based on the work of D. Caldara and M. Iacoviello (&ldquo;<a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.federalreserve.gov%2Feconres%2Fifdp%2Ffiles%2Fifdp1222.pdf&amp;data=04%7C01%7C%7C9062c63e1961464805ac08d9fd332afe%7C48794f312f6d49098b2f53b64c7f3199%7C0%7C0%7C637819218877193714%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&amp;sdata=d31AjxuqxvLuSHJhMa1V4N8%2FZD63foQwMgedy0%2FpmJY%3D&amp;reserved=0">Measuring Geopolitical Risk</a>&rdquo;, working paper, Board of Governors of the Federal Reserve Board, 2017). The methodology is rather simple as it counts the occurrence of words related to geopolitical tensions in leading international newspapers. As far as I know, this is the only geopolitical risk benchmark that gives a historical perspective since it gets back to 1899.</p> <p>The GPR spikes around the two world wars, at the beginning of the Korean War (1950-53), during the Cuban Missile Crisis (1962), after 9/11 and now after the Ukraine invasion by Russia.&nbsp; It now stands at a two-decade high at 281 &ndash; close to the levels reached after 9/11 (the peak was at 303). This is the fourth highest level on record. The GPR is updated on a monthly basis. Given the evolution of the crisis in Eastern Europe, the April print is likely to keep moving higher, in our view. Contrary to the VIX, the correlation between the GRP and most financial instruments or assets (e.g. gold for instance) is poor. This is however an interesting indicator. This time, it does not only reflect the rise in geopolitical risk but also a profound paradigm shift in security policies for Europe and the rest of the world following the invasion of Ukraine. &nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/march/geopolitical-risk-index-longterm.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Ukraine</span> <span>Russian Federation</span> <span>Gold</span> <span>XAUUSD</span></div>Thu, 03 Mar 2022 15:00:00 Z2024-03-09T00:07:13Z{741993B8-E68C-45D0-B384-7563CC078F19}https://www.home.saxo/en-sg/content/articles/macro/eurozone-inflation-for-february--the-worst-is-yet-to-come-02032022Christopher Dembik product-macroInflationSGFocus InflationInflationsubject-is/pol.euplace-lr/eurEuro Stoxx 50EuronextEuro dollar optionEurozone inflation for February : The worst is yet to come<div class="article-excerpt">Inflation is still running hot in the eurozone. The headline is well-above the consensus in February, at 5.8 % year-on-year versus 5.3 % expected. The Eurostat report covers the period before the recent increase in energy prices related to the invasion of Ukraine by Russia. Therefore, inflation will likely jump more substantially in March, above 6 %. We estimate that the ongoing events in Eastern Europe will add one percentage point to inflation this year.</div><div class="article-rte"><div class="rte--output"><p><strong>Eurozone inflation is up once more&nbsp;: </strong>Eurozone consumer price index (CPI) rose 5.8 % year-on-year in February after 5.1 % in January (see Chart), markedly above the market consensus of 5.3 %. Energy prices contributed substantially &ndash; they surged 31.7 % year-on-year in February after 28.6 % in January. Expect energy prices to continue rising in the short term due to the Ukrainian conflict. Oil prices stand now well-above the $100 threshold. The recent increase in wholesale oil and gas prices will be probably largely passed on to consumers in the coming months. Energy is not the only factor pushing inflation higher. Goods inflation is now at 3 % year-on-year. It will likely remain elevated at least for the first part of this year due to supply chain disruptions hitting food commodities. As a result, core CPI jumped too, from 2.3 % year-on-year in January to 2.7 % in February. The decrease noticed in January due to the German VAT effect is completely erased. </p> <p><strong>Inflation is jumping in all eurozone countries&nbsp;:</strong> Italy was a major reason for the strong rise in the eurozone inflation. The headline rose 6.2 % year-on-year, up from 5.1 % January. The marked rise in Italian inflation is in line with the results from other eurozone countries which had already reported their EU-harmonized inflation figures&nbsp;: </p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>France to 4.1 % in February from 3.3 % in January</p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Germany to 5.5 % in February from 5.1 % in January</p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>Spain to 7.5 % in February from 6.2 % in January</p> <p><strong>ECB dilemma&nbsp;:</strong> In the short term, we believe the ECB will hold off on policy move until Ukraine clarity. Next week&rsquo;s Governing Council meeting will mostly focus on the impact of the conflict on inflation and financial stability. We estimate that the Ukraine conflict will add one percentage point to the eurozone inflation this year. The headline rate for March (first estimate released on 1 April) will be above 6 %, without any doubt. In the medium term, the combination between the green transition, the structural lack of investment in energy infrastructures and the troubled situation in Ukraine will constitute a new inflation shock that the ECB will need to address. Eurozone inflation is now uncomfortably high. This is not transitory anymore. Real income squeeze will be massive for the eurozone&nbsp;households. ECB's hawks have temporarily leaned towards the status quo because of the war. But once the geopolitical situation will be stabilized, they will certainly be very vocal in favor of a tightened monetary policy to fight inflation. Expect a heated debate within the ECB about the opportunity to raise interest rates earlier than anticipated.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/march/02_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>InflationSG</span> <span>Focus Inflation</span> <span>Inflation</span> <span>European Union (EU)</span> <span>Europe</span> <span>Euro Stoxx 50</span> <span>Euronext</span> <span>Euro dollar option</span></div>Wed, 02 Mar 2022 11:00:00 Z2022-03-02T11:54:43Z{A09D7908-0952-45F7-AF21-23D6409483DB}https://www.home.saxo/en-sg/content/articles/macro/ukraine-conflict-a-wake-up-call-for-europes-energy-security-24022022Christopher Dembik product-macroplace-lc/uaplace-lc/rucommodity-gas oilcommodity-gasolinecommodity-natural gassector-Oil and Gassubject-is/pol.euplace-lr/eurplace-lc/deUkraine conflict: Europe's energy security threatened<div class="article-excerpt">Since 2014, the European Union (EU) had plenty of time to reduce its energy dependence on the Russian Federation. Instead, gas and oil imports from Russia have increased. The Ukrainian conflict should serve as a wake-up call to the EU on the urgent need to diversify its energy sources. Fortunately, there are several solutions. </div><div class="article-rte"><div class="rte--output"><p><strong><span>The current situation&nbsp;:</span></strong><span>&nbsp;Russia currently produces 10.1m bpd of oil, of which 5m is exported globally in a crude form. The EU takes about nearly half of it. The most vulnerable EU countries are Germany (for refineries), the Netherlands and Poland. They account for 48 % of all Russian crude oil exports. Russia also represents 46.8 % of the EU&rsquo;s natural gas imports versus 32 % in 2012. The EU's higher energy dependence on Russia is partially the consequence of the&nbsp;</span><span><a rel="noopener noreferrer" href="https://www.home.saxo/content/articles/quarterly-outlook/the-eus-unwise-energy-policy-25012022" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.home.saxo/content/articles/quarterly-outlook/the-eus-unwise-energy-policy-25012022&amp;source=gmail&amp;ust=1645784590184000&amp;usg=AOvVaw0riWIFrISKlf8X32WYbNkZ" data-removefontsize="true" data-originalcomputedfontsize="16"><span>green transition</span></a>&nbsp;implemented by the EU over the past years. The EU has actively promoted intermittent renewables, which cannot provide a constant supply of energy source, while pushing for the closure of nuclear reactors (Germany and Belgium, for instance). This ultimately increased dependence on natural gas imports. <br /> <br /> Germany is the most vulnerable EU country <em>- see chart 1</em> : 55 % of gas imports come from Russia, up 15 points since 2012. It also accounts for 26.7 % of primary energy consumption. Russian gas is transported via three pipelines to Germany as a first entry point to the EU&nbsp;: Nord Stream 1, which is operational since 2012, Yamal-Europe and Brotherhood. Yesterday, German Chancellor Olaf Scholz pulled the plug on Nord Stream 2 &ndash; which should have doubled Russia&rsquo;s direct export capacity to Germany, from about 59bn cubic meters to around 100bn cubic meters. This is a very significant step and a chance for a fresh start for Germany&rsquo;s Russia policy. Political pressure (especially coming from Poland) is increasing on Germany to shut down Nord Stream 1 too. This is unlikely. The economic cost for Germany would outweigh the potential diplomatic gains.<br /> <br /> <strong data-removefontsize="true" data-originalcomputedfontsize="16" >A wake-up call for the EU&nbsp;:</strong><span >&nbsp;The EU&rsquo;s energy dependence on Russia is nothing new. The issue was raised in 2014 immediately after the annexation of Crimea by the Russian Federation. But nothing has been done by the EU and member state countries. The situation in Ukraine will serve as a wake-up call for the EU, in our view. To reduce the dependence on Russia, we can imagine four options&nbsp;:</span><br /> </span></p> <p data-removefontsize="true" data-originalcomputedfontsize="16"><span>-</span><span>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span><strong data-removefontsize="true" data-originalcomputedfontsize="16"><span>Germany and Belgium reconsider their nuclear power stance.</span></strong></p> <p data-removefontsize="true" data-originalcomputedfontsize="16"><span>-</span><span>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span><strong data-removefontsize="true" data-originalcomputedfontsize="16"><span>More efforts are made to develop shale gas production in the EU and boost renewables.&nbsp;</span></strong></p> <p data-removefontsize="true" data-originalcomputedfontsize="16"><span>-</span><span>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span><strong data-removefontsize="true" data-originalcomputedfontsize="16"><span>The EU asks the United States to export more liquified natural gas (LNG) to Europe</span></strong><span>&nbsp;&ndash; the exports are now at a record of 400m cubic meters per day. But a sustained increase would require the establishment of new LNG infrastructures for billions of dollars and take years to build.</span></p> <p data-removefontsize="true" data-originalcomputedfontsize="16"><span>-</span><span>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span><strong data-removefontsize="true" data-originalcomputedfontsize="16"><span>The EU does more to seek alternative energy sources</span></strong><span>&nbsp;from e.g. the Gulf (especially Qatar, the world&rsquo;s largest LNG producer), Azerbaijan through the Southern gas corridor (but this is not the best alternative) and Northern Africa (especially Algeria, the EU&rsquo;s third largest gas supplier). In the short term, there is nothing to expect from Norway, the EU&rsquo;s second largest gas supplier. It has already reached the upper limit of its export capacity.</span></p> <p data-removefontsize="true" data-originalcomputedfontsize="16"><strong data-removefontsize="true" data-originalcomputedfontsize="16"><span>Macro implications&nbsp;:</span></strong><span>&nbsp;The economist consensus expected that inflation will drop this year. It won&rsquo;t happen. Expect energy prices to keep increasing. This will be a major headache for central banks. Until yesterday, the majority of concern from central banks stemmed from the inflation impulse resulting from the Russo-Ukrainian crisis. There was a lack of appetite to apply brakes on tightening plans. But this was before the full-scale invasion.<br /> <br /> In the short term, several central banks could decide to postpone or scale down their tightening plans depending on the evolution on the ground. In the medium term, we believe that the war situation will mostly constitute a big inflation impulse via higher energy prices (oil will likely stay above the 100$ threshold for a while, for instance). <br /> <br /> Coupled with inflation in the services sector, supply chain disruption and wage-price spiral in several countries, this means inflation is likely to continue increasing most of this year. Germany's producer price index for January was up 25 % year-over-year. Imagine where it could go with much higher energy prices. What is coming is a massive inflation shock which will force all the central banks, even the European Central Bank, to normalize monetary policy faster and more aggressively than anticipated.<br /> <br /> <em>Chart 1: Germany's gas supply by source (Reuters)</em></span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/24_cdk_1.jpg"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Ukraine</span> <span>Russian Federation</span> <span>Gas Oil</span> <span>Gasoline</span> <span>Natural Gas</span> <span>Oil and Gas</span> <span>European Union (EU)</span> <span>Europe</span> <span>Germany</span></div>Thu, 24 Feb 2022 10:00:00 Z2024-03-02T00:09:41Z{C5F5EC6A-F0B4-4F3C-87E1-BD76102886A7}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--the-inverted-yield-curve-22022022Christopher Dembik product-macroplace-lc/usRecession Watchforex-cadusdcurrency-usdforex-usdcadforex-usdnokforex-usdtryforex-usdzarforex-eurusdforex-gbpusdforex-usdjpyforex-audusdforex-usdmxnforex-xauusdforex-nzdusdforex-usdrubforex-usdchfXAGUSDXPTUSDChart of the Week : The inverted yield curve<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the inverted yield curve. It is known as an ominous indicator of the upcoming U.S. recession. But it is sending a false signal now, in our view. </div><div class="article-rte"><div class="rte--output"><p><span>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/february/macrochartmania_master2201.pdf?revision=c6f2b88b-27d4-44d4-9c0b-610fb3f82e6b">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.</span></p> <p><span>An inverted yield curve occurs when U.S. yields on shorter-dated bonds jump above the ten-year. This is usually the signal that investors expect a deterioration in near-term economic conditions and aggressive intervention from the U.S. Federal Reserve (Fed). Therefore, they want more compensation for loaning money out two years than they do for ten years, for instance. There are at least two yield curves usually watched: the two-year/ten-year spread (the most common indicator used) and the one-year/ten-year (most often mentioned by Fed research papers). Why this matters now: short-term government bonds yields (between three months and five years) have risen more than long ones this year, thus fattening the curve. The curve is not inverted yet. But it follows a steep downward trend. The two-year/ten-years stands now at +45 basis points. It was at +89 basis points in early January. The flattening of the curve partially reflects market expectations that the Fed will hike interest rates several times in the coming months to contain inflation. This is seen by some investors as a bearish signal that the risk of recession is increasing in the U.S. too. </span></p> <p><span>The yield curve inversion has a decent track record to predict a recession. It has successfully predicted all but one of recent U.S. recessions since the 1970s (the only two exceptions are the recession of 1990 and the inversion of 2019 which did not predict anything). But this time is different. The curve is probably sending a false signal, in our view. Massive quantitative easing has depressed the term premium and the long end of the curve is heavily distorted. There are also distortions caused by a preference for safe-haven assets in the current period market by higher geopolitical risk. This preference especially causes higher demand for ten-year Treasury bonds (negative risk premium). The influence of these two factors cannot be ignored. We don&rsquo;t say that investors should dismiss signals sent by the curve. But they need to be carefully interpreted. There is nothing magical about going to zero. It might happen in the coming months or quarters, but this won&rsquo;t necessarily mean that recession is about to come. Only a big inversion of the yield curve is likely to be a troubling signal. This is not yet the case.</span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/22_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span></span> <span>Recession Watch</span> <span>CADUSD</span> <span>USD</span> <span>USDCAD</span> <span>USDNOK</span> <span>USDTRY</span> <span>USDZAR</span> <span>EURUSD</span> <span>GBPUSD</span> <span>USDJPY</span> <span>AUDUSD</span> <span>USDMXN</span> <span>XAUUSD</span> <span>NZDUSD</span> <span>Usdrub</span> <span>USDCHF</span> <span>XAGUSD</span> <span>XPTUSD</span></div>Tue, 22 Feb 2022 10:00:00 Z2024-02-24T00:02:27Z{A48CAC9D-6D2D-4D6E-9DA4-27ACECC06293}https://www.home.saxo/en-sg/content/articles/macro/german-ifo--positive-momentum-little-impact-from-the-russo-ukrainian-crisis-so-far-22022022Christopher Dembik product-macroplace-lc/deplace-lc/ruplace-lc/uacurrency-eurforex-euraudforex-eurcadforex-eurjpysubject-is/pol.euplace-lr/eurforex-eurgbpforex-eursekforex-eurchfforex-eurplnforex-eurnokGerman IFO : Positive momentum, little impact from the Russo-Ukrainian crisis so far<div class="article-excerpt">The German IFO for February continues to move upward. This confirms the momentum for the German economy is improving in Q1. The potential economic impact from the Russo-Ukrainian crisis is likely to remain limited, at least in the short term. </div><div class="article-rte"><div class="rte--output"><p><strong><span>Improving outlook:</span></strong><span> Sentiment in the German economy has improved noticeably in February. After a positive reading in January (96.0), the Ifo Business Climate Index rose to 98.9 this month <em>(see &ndash; Chart 1).</em> Companies are betting on an end to the coronavirus crisis. The uptick continues to be driven by the expectations for the next six months &ndash; which jumped to 99.2 in February from 95.8 in January. Recent surveys have confirmed the positive momentum of the German economy &ndash; think the German preliminary PMI for February for instance. The German economy is still operating below its potential. But the stage is set for an improving outlook over the course of Q1, and perhaps over Q2. Household balance are strong and companies are satisfied both with the current situation and the expectations. </span></p> <p><strong><span>Upturn across key sectors:</span></strong><span> The business climate in manufacturing rose to 23.5 in February from 20.0 in January <em>(see &ndash; Chart 2)</em>. In this sector, both the current conditions as well as the expectations component improved. However, manufacturing is still exposed to supply shortages and dislocations in international shipping, with material shortage hampering production. Business climate in construction also improved, from 8.0 to 8.3. Construction was never hit that hard by the pandemic and was operating close to capacity during most of the recent period. Finally, the business climate for both the services and trade increased too (to 13.5 in February from 7.7 in January and to 6.6 from -1.3, respectively). The strong rebound in the services sector is explained by the end of most COVID restrictions in February<em> (see- Chart 3)</em>.</span></p> <p><strong><span>Little to no impact from the Russo-Ukrainian crisis:</span></strong><span> The February poll was filed before the intensification of the Russo-Ukrainian crisis, especially before reports emerged of Russian troops rolling into eastern Ukraine. The latest events will undoubtedly increase uncertainty in the short-term. But the economic impact on Germany is likely to be limited, unless the EU commits to tough and widespread sanctions against Russia&rsquo;s energy sector, for instance. This is unlikely at that stage. Several major EU members (Austria, Italy and Germany) are favoring a targeted approach with less negative economic implications for the EU. </span></p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/22_cdk_2.png"/></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/22_cdk_3.png"/></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/22_cdk_4.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Germany</span> <span>Russian Federation</span> <span>Ukraine</span> <span>EUR</span> <span>EURAUD</span> <span>EURCAD</span> <span>EURJPY</span> <span>European Union (EU)</span> <span>Europe</span> <span>EURGBP</span> <span>EURSEK</span> <span>EURCHF</span> <span>EURPLN</span> <span>EURNOK</span></div>Tue, 22 Feb 2022 09:00:00 Z2024-02-24T00:01:44Z{1520464D-2012-42F4-997A-5378BB58C175}https://www.home.saxo/en-sg/content/articles/macro/us-ppi-for-january--pipeline-inflationary-pressures-are-still-building-15022022Christopher Dembik product-macroInflationSGFocus InflationInflationU.S. PPI for January : Pipeline inflationary pressures are still building <div class="article-excerpt">Inflation in the United States is running hot. Both the CPI and the PPI report for January are above expectations. There is no sign that inflation is slowing down or that it has approached its peak. On the contrary, it is now strong and broad-based. The U.S. Federal Reserve has certainly been too complacent regarding the inflation dynamics. Expect the central bank to act aggressively at the upcoming March FOMC meeting (consensus : 50bp interest rate hike). </div><div class="article-rte"><div class="rte--output"><p><span >&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><strong ><em>The U.S. Producer Price Index (PPI) for final demand rose by 1.0 % in January. This is a strong acceleration following an increase of 0.9 % in November and 0.4 % in December 2021. On a year-over-year basis, final demand prices jumped by 9.7 %. This is uncomfortably high.</em></strong></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><strong><em>Core PPI (excludes food, energy and trade services) for final demand rose by 0.9 % in January. This is the largest increase since January 2021 (1.0 %). On a year-over-year basis, core PPI is up by 6.9 %.</em></strong></p> <p><span>&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span><strong><em>Pipeline inflationary pressures are building. Higher commodity prices, global trade disruptions and increases in key inputs to production are pushing overall prices higher. This is the clear signal that inflation is not transitory but structural in the United States, in our view. In these circumstances, the U.S. Federal Reserve will have no other option but to respond aggressively at the next FOMC meeting in March. This implies that a 50bp interest rate hike is likely. </em></strong></p> <p>The personal consumption component of the PPI &ndash; a proxy for the Consumer Price Index (CPI) &ndash; is up by 0.7 % month-over-month after 0.5 % in December 2021. This suggests the headline CPI for February is likely to remain elevated and that inflationary pressures will not decrease. We don&rsquo;t exclude that headline CPI could reach 8 % in February or in March. <em>The release of the first estimate of the February CPI is scheduled for 10 March. </em></p> <p>Pipeline inflationary pressures are high. Inflation for processed goods rose 1.7 % MoM, inflation for services used as inputs to production moved up 0.3% MoM and inflation for unprocessed foods excluding energy was up 0.1% MoM. Inflationary pressures will remain a headache for much longer than initially expected.</p> <p>The underlying inflation trend appears to be around 8% - the three-month annualized change in core PPI jumped to 8.2 % versus prior 7.8 %. This is unprecedented in recent history.</p> <p>Inflation is broad-based&nbsp;: services +0.7 % month-over-month, goods +1,3% month-over-month, energy +2,5 % and food +1,6 %. There are strong increases in hospital outpatient care, apparel, jewelry, travel accommodation, truck transport, autos, diesel, beef/veal, dairy, jet fuel etc. U.S. Inflation is now structural. </p> <p>We see two options to fight inflation&nbsp;: tightened monetary policy (on the way) and removal of tariffs barriers, notably those implemented under the Trump administration (this is rarely mentioned). &nbsp;</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/15_cdk_1.png"/></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/15_cdk_2.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>InflationSG</span> <span>Focus Inflation</span> <span>Inflation</span></div>Tue, 15 Feb 2022 15:00:00 Z2024-02-24T12:02:21Z{1B15B7DA-133C-4F25-8E34-03F0F33024EE}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--ecb-systemic-risk-indicator-14022022Christopher Dembik product-macroplace-lr/eursubject-is/pol.euEuropean styleEuronextEuro Stoxx 50place-lc/uaplace-lc/ruChart of the Week : ECB Systemic Risk Indicator<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the ECB Systemic Risk Indicator. All the data are collected from Macrobond and updated each week.</div><div class="article-rte"><div class="rte--output"><p>Click here to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments:&nbsp;<a href="https://green.int.cmprod.saxo//-/media/content-hub/documents/2022/february/macrochartmania_master1402.pdf?revision=81247882-edcb-4c26-a3ca-87c402b78562" >MacroChartmania_master1402</a>.</p> <p>The <strong>ECB Systemic Risk Indicator</strong> was initially developed by Hollo, Kremer and Lo Duca in 2012, in the midst of the eurozone sovereign debt crisis. This indicator is based on fifteen financial stress measures (such as exchange rates, spreads etc.) and is used to track emerging market stress that could potentially impact the eurozone monetary policy. For the first time since the outbreak, it now stands at 0.15 &ndash; the highest level reached in 2018 and 2019 on the back of global trade tensions. This is still comparatively low. It skyrocketed to 0.34 in mid-March 2020 and 0.44 in 2012. But expect it to keep&nbsp;increasing in the short term both reflecting a repricing of risk in a world without QE and higher risk aversion due to the Russo-Ukrainian crisis. The repricing of risk will be more painful for some eurozone countries than for others. The Italy-Germany government bond spread is further moving upward at 167 basis points. The risk-zone is identified around 200-250 basis points by the market. Contagion to other Southern European countries is limited, for the moment. There is no eurozone fragmentation yet. As we are entering into a new monetary and economic paradigm (structurally high inflation and tightened monetary policy), investors need to get used to higher premium. <strong>We are at a crossroads.</strong> In our view, financial stress remains under control in the eurozone. This is more debatable in the United States. But if the ECB Systemic Risk Indicator gets back to the 0.20-0.25 area &ndash; which we identify as the danger area for the eurozone, this could force the ECB to adopt a more dovish stance. This could lead to a downward adjustment of ECB interest rate hike expectations too. </p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/14_cdk_1.png"/></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Europe</span> <span>European Union (EU)</span> <span>European style</span> <span>Euronext</span> <span>Euro Stoxx 50</span> <span>Ukraine</span> <span>Russian Federation</span></div>Mon, 14 Feb 2022 15:00:00 Z2024-02-24T00:01:26Z{07A0460E-72C2-4FF8-918A-06BB13083FD5}https://www.home.saxo/en-sg/content/articles/macro/us-january-inflation--a-painful-reality-check-10022022Christopher Dembik product-macroFocus InflationInflationInflationSGproduct-bondssubject-is/fin.stpbondsubject-is/fin.corpbondConvertible bondsU.S. January inflation : A painful reality check<div class="article-excerpt">U.S. January consumer price index (CPI) is higher than expected, at 7.5 % year-over-year versus expected 7.3 % and prior 7.0%. Inflation is now broad-based. This is a painful reality check for the transitory camp. Inflation is not only caused by used cars - the usual excuse of sell-side analysts. A large part of inflation is structural, in our view. It will take much more than a 50bps interest hike by the U.S. Federal Reserve (Fed) to push inflation downward. Expect the rate-hike cycle to be very aggressive in the short term. We would not want to be in Jerome Powell’s shoes now. </div><div class="article-rte"><div class="rte--output"><p><strong>Driving forces&nbsp;:</strong> On a year-over-year basis, the main factors driving inflation higher are unchanged&nbsp;: used cars (+40.5 %), gasoline (+40.0%), gas utilities (+23.9%), meat/fish/eggs&nbsp;(+12&nbsp;;2 %), new cars (+12.2 %) and electricity (+10.7 %). Excluding volatile components (such as energy), inflation remains uncomfortably high at 6 % year-over-year versus prior 5.5 %. This shows a large chunk of inflation is not transitory but structural (wage-price spiral and supply chains bottlenecks, for instance). Supply chain disruptions are likely to last longer than forecasted. The line of ships waiting to enter the Los Angeles and Long Beach port complex remains elevated. They collectively account for roughly 40 % of United States-bound import volumes. According to Sea Intelligence, the punctuality of containerships, which is an indicator to measure port congestion, stands at 12 % (against 23 % in Europe, for comparison). Bottlenecks might only ease when new containerships arrive in the market, from 2023 onwards. This means that global cost transportation will remain a headache for businesses all this year again. U.S. home prices are another concern, in our view. Shelter inflation is exploding. Homeownership is the least affordable since 2008. Based on data from the Atlanta Fed, the median American household now needs a third of its income to cover mortgage payments on median-priced homes. This might fuel social discontent and populism going into the next election.</p> <p><strong>Inflation warning for U.S. consumers&nbsp;:</strong> Persistent high inflation is erasing wage increases, especially for the lowest quintile income. This will slowdown GDP growth. There are already early signs that inflation is hitting the purchasing power and consumption. U.S. December retail sales disappointed (minus 1.9 % versus expected minus 0.1 %). The drop is partially explained by the Omicron wave but also by less buying due to high prices. The control group &ndash; which is used for GDP calculation purposes &ndash; came well below the estimate of 0.1%, at minus 3.1%. We agree one data point does not make a trend. But if January retail sales are out down again next week (release on 16 February), it will be time to start worrying about the strength of the U.S. consumer and to revise downward GDP forecasts for 2022. </p> <p><strong>What to expect&nbsp;?</strong> U.S. rate futures now see a 50 % chance of a 50 basis points interest rate hike in March, from 30 % before the CPI release. If the probability rises in the coming weeks well above 50 basis points, it will be complicated for the Fed not to deliver. Expect next week&rsquo;s release of the January producing price index (PPI) to constitute another strong incentive to act fast and strong at the March FOMC meeting. The likelihood inflationary pressures ease in the short term is low. We expect CPI to climb to 8 % in February or in March. The Fed has certainly been too complacent regarding the evolution of inflation. It cannot wait any longer to contain it. If the Fed does not meet expectations, the immediate risk is to cause a quicker tightening in financial conditions. This would be a nightmare for the Fed. The market currently forecasts that the Fed will tighten more than the Bank of England (BoE) from now to September. Until now, the BoE was considered as the most aggressive central bank from developed markets. The adjustment to a world without quantitative easing and low nominal interest rates will be painful for the U.S. bond market in the coming weeks and months. The new normal means more volatility and higher cost of financing. Not all the market participants are ready for that. </p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/10_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><p class="v2-p-s"><span ><em>We plotted on the above chart U.S. CPI, ISM manufacturing prices index and a gauge for commodity prices produced by the Hamburg Institute of International Economics. Despite the recent easing in the ISM manufacturing prices index, there are several other factors pushing inflation higher. Commodity prices are one of them. This is explained both by high demand (conjunctural) and by the lack of investment in fossil energy infrastructures before the pandemic (structural). Other factors pushing U.S. inflation above the rooftop are wage-price spiral and home prices, for instance.&nbsp;</em></span></p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <span>Focus Inflation</span> <span>Inflation</span> <span>InflationSG</span> <span>Bonds</span> <span>Government Bonds</span> <span>Corporate Bonds</span> <span>Convertible bonds</span></div>Thu, 10 Feb 2022 14:00:00 Z2024-02-17T00:07:46Z{F2729710-60CE-4047-9AC1-CAF78F4BB6BB}https://www.home.saxo/en-sg/content/articles/macro/chart-of-the-week--financial-condition-indexes-08022022Christopher Dembik product-macroproduct-equitiesWall StreetFederal ReserveFederal Reservecurrency-usdChart of the Week : Financial Condition Indexes<div class="article-excerpt">In today’s ‘Macro Chartmania’, we focus on the financial condition indexes. All the data are collected from Macrobond and updated each week. </div><div class="article-rte"><div class="rte--output"><p>Click <a href="https://www.home.saxo/-/media/content-hub/documents/2022/february/macrochartmania_master0802.pdf?revision={30FF7877-593D-439D-B25F-303108855794}">here</a>&nbsp;to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. </p> <p>With the Fed&rsquo;s new monetary stance and the recent increase in market volatility, attention has turned to financial conditions. The below charts show three common gauges of broad financial conditions in the United States&nbsp;(the National Financial Condition Index, the Kansas City Financial Stress Index and the Office of Financial Research Financial Stress Index or OFR FSI). There is little methodological difference in the construction of these three indexes. The OFR FSI is updated on a daily basis while the two others are updated on a weekly basis. We tend to closely monitor the OFR FSI because it can track almost in real time a sudden increase in financial stress with major negative implications for financial assets, typically equities. The OFR FSI is now at minus 1.79 &ndash; a negative reading means that stress levels are below average. In comparison, it climbed to 10.26 at the start of the pandemic in March 2020. This was below the historical peak of 29.32 reached in October 2008 in the aftermath of the bankruptcy of Lehman Brothers. All of these indexes show current U.S. financial conditions are comparatively accommodative. There is still enough liquidity in the market, though it is decreasing. This partially explains the recent market turmoil. We know that the U.S. Federal Reserve will watch closely for any sign of financial stress resulting from the ongoing monetary regime change. This will certainly influence the pace of monetary policy normalization more than any major statistics (such as unemployment and even inflation data). The last time the OFR FSI turned positive (meaning that stress levels are above average), the Fed had no other choice than to stop its rate-hiking cycle and ultimately reverse it. It was in December 2018. If history is any guide, expect that the Fed will likely stop its hiking cycle which is about to start from March onwards when the OFR FSI will be close or in positive territory. It could happen sooner than most expect. </p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/08_cdk_3.png"/></div><div class="article-additional-rte"><div class="rte--output"><p>This is a daily market-based snapshot of stress in global financial markets. It is constructed from 33 financial market variables, such as yield spreads, valuation measures, and interest rates. The OFR FSI is positive when stress levels are above average, and negative when stress levels are below average.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/08_cdk_1.png"/></div><div class="article-additional-rte"><div class="rte--output"><p>This is a weekly measure of risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and &ldquo;shadow&rdquo; banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.</p></div></div><div class="article-image"><img alt="" src="https://www.home.saxo/-/media/content-hub/images/2022/february/08_cdk_2.png"/></div><div class="article-additional-rte"><div class="rte--output"><p>This is a monthly measure of stress in the U.S. financial system based on 11 financial market variables. A positive value indicates that financial stress is above the long-run average, while a negative value signifies that financial stress is below the long-run average.</p></div></div><div><img style="float: left; margin-right: 12px;" src="https://www.home.saxo/-/media/content-hub/images/general/author-profile-pictures/christopher-dembik-400x400.png?mw=48" alt="Christopher Dembik " /><div>Christopher Dembik </div><div>Head of Macroeconomic Research</div><div>Saxo Bank</div></div><div ><b>Topics:</b> <a href="https://www.home.saxo/en-sg/insights/news-and-research/macro">Macro</a> <a href="https://www.home.saxo/en-sg/insights/news-and-research/equities">Equities</a> <span>Wall Street</span> <span>Federal Reserve</span> <span>Federal Reserve</span> <span>USD</span></div>Tue, 08 Feb 2022 16:00:00 Z2024-03-16T12:14:19Z