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Euro area wage growth suggests the Phillips curve is not dead

Wage growth is an important input in the ECB’s reaction function, and so far it has failed to respond to the narrowing of the output gap. It could be the normal behaviour of a lagging indicator, especially as labour market slack is likely to be larger than what the drop in headline unemployment would suggest. […]

US core CPI inflation stable at 1.7% in August

CPI inflation was 0.4% m-o-m, boosted by gasoline prices, pushing the y-o-y print to a still-tepid 1.9%. Core CPI inflation was up 0.25% m-o-m; the y-o-y reading was stable at 1.7%. While improving from recent lows, there is no sign of a ‘regime shift’ in US inflation, despite the tight labour market. Globalisation and technology […]

Hopes of US fiscal easing are evaporating

Chaotic developments in the White House and ongoing gridlock in Congress have significantly reduced our expectations that the Trump Administration will bring a major fiscal boost to the US economy, particularly in 2018. In other words, we no longer expect a growth- and sentiment-boosting fiscal reform, nor a large-scale infrastructure spending plan. This is the […]

ECB, a forced taper

With the economic recovery in the euro area looking increasingly robust and broadbased, the ECB appears set to embark on a policy normalisation path, gradually phasing out of negative interest rate policy (NIRP) and quantitative easing. The ECB’s new narrative implies that the era of crisis-fighting unconventional monetary measures is over, as deflation risks have […]

Soft household formation to curb US housing

The recently released Census Bureau’s Annual Social and Economic Supplement (ASEC) brought sobering news for the US housing market: new household formation slowed significantly, to 405,000 in 2016, the lowest level since 2009 (+357,000), compared with 1,232,000 in 2015. In other terms, the number of households grew only 0.3% last year, compared with +1.0% in […]

House View, September 2017

Asset allocation There are two ways to hedge geopolitical risk: buying gold or buying protection for portfolios. We prefer the latter, to take advantage of current low volatility and because gold’s gains so far this year reflect the depreciation of the dollar. We remain constructive on DM equities, particularly the euro area and Japan. We […]

ECB hints at October decision on QE

The ECB left its assessment and communication broadly unchanged at its meeting on 7 September. Draghi confirmed that “the bulk of the decisions” on QE extension should be made at the 26 October meeting. The statement mentioned recent currency volatility as “a source of uncertainty” to be monitored in the future, and the staff projections […]

Internet disruption is affecting the laws of economics

The US economy is challenging ‘textbook’ macroeconomics. The labour market is tight, but wage growth is paltry. Growth is chugging along steadily and the output gap (the difference between actual GDP and its theoretical trajectory at full potential) is gradually closing, but inflation remains muted. Clues as to why things are not panning out the […]

The SNB still in wait-and-see mode

The SNB’s 14 September meeting could be one of the most interesting in a while, as it comes just after a period when the Swiss franc has witnessed significant depreciation, mainly against the euro. The key focus of the SNB’s September 14 meeting will be its assessment of exchange rate moves. We do not expect […]

Long-term US dollar cycle has probably peaked

The US dollar index has declined significantly this year, challenging our constructive view on the US dollar. Disappointment regarding potential US tax reform, the decline in US inflation, the significant overvaluation of the greenback and strong economic recovery in the rest of the world all help explain a large part of the US dollar’s decline. […]

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