Israel Ceasefire in Gaza fairly predictable, the assault has gone on for a sufficiently long time to serve most political objectives of the warring parties. As such it is a sustainable halt to hostilities, repeating the cycle we’ve seen numerous times in the past. There are two fights going on here, on is technological and the other political. Israel have struck Hamas very harshly, depleting its stockpiles and damaging its infrastructure. It has also demonstrated its technological capabilities to defend Israel from rocket attacks (for the most part) — Hamas were not able to overwhelm Iron Dome despite their best efforts.
The ECB’s fingerprints remain all over the Eurozone money supply and credit numbers, with M3 hitting 11% yoy in November, the strongest reading we’ve seen thus far. This continues to be propelled by M1 which is up 14.2% yoy, overnight deposits up €1.053trn year-to-date. We’ve also hit something of a milestone with overall M3 now back at pre-GFC/EZ debt crisis trend levels.
The monetary mutualisation of Eurozone debt (or its sovereign risk) through the ECB is becoming more likely. The fiscal monetisation of debt through the issue of Coronabonds is becoming less likely. Monetisation is feasible. The arithmetic works. If you add up all projected fiscal deficits in the Eurozone for this year, the total comes to almost exactly the fire power the ECB has approved.
In recent years equity markets have been driven more by central bank largesse than by corporate profit performance. With bond yields close to record lows — in both real and nominal terms — investors have charged into higher-yielding risk assets with gusto. Still it behoves us to keep an eye on the underlying earnings picture.
Does populism pose a risk to markets in 2019? Yes! but not from the expected quarter. 2019 brought a surprise on the European front. The support for traditional parties has been plummeting for a long time. We call this the European souffle where support for the centre ground continues to cave over time. Populist parties gained 20% or more of the vote in many national elections this year, thought there were signs of their vote stabilising in the most recent polls.
We have no strategic positions on Italy. But we went there to check on our prejudices and met with a wide range of wise people. This confirmed that we should not short Italian sovereign debt right now - or anything else in Italy.
Eurozone saw a renewed uptick in money supply growth in August, but it was driven by a further increase in M1 rather than broader money. Credit growth seems to be on a firmer footing, with strength being driven by France and Germany while in Italy and Spain we’re still seeing deleveraging, notably on the corporate side. And deposits still growing faster, suggesting some caution. Quite positive from the ECB’s perspective, particularly with the latest easing package yet to factor.
Money supply continues to tick up again, but overall there is not much to suggest we’re in any marked re-acceleration phase, which is equally evident in the persistently weak money multipliers. Credit data surprised on the downside thanks to some moderation in consumer demand for money. Non-financial side looks stronger.
April turned out to be another poor month for German industry with the decline in overall industrial production fairly modest compared to the drop on the manufacturing side, where output dropped 2.5% on the month leaving output down 3.4% y/y.
Eurozone putting together some better credit figures in April (once adjusting for sales and securitisations) amid strong growth in non-financial corporate borrowing in Germany and consistently strong credit demand (at both a corporate and consumer level) in France. This growth has more than offset ongoing weakness in Italy, where NFC lending continues to contract rapidly.
Eurozone April inflation matched the increase the market was expecting, notably core which now stands at its highest level in 43 months. But this really flatters the overall picture given the increase in package holiday prices (notably in Germany) which lifted the recreation component of core this month, alongside an overall uptick in corresponding services.
Money supply growth has picked up again but it’s being driven by a rise in M1, specifically overnight money. Velocity continues to fall. Credit growth meanwhile remains in the doldrums.
Unsurprising to see overall loan demand and supply conditions little changed with weaker corporate demand offset by stronger demand on the consumer side. While banks expect corporate loan demand to pick up in the second quarter looking at underlying economic conditions this seems quite optimistic,
Eurozone February money supply & credit chart pack.
Eurozone January money supply & credit chart pack