U.S.: Strong labour market pushes Fed towards December
The October jobs report was very strong, with +271,000 jobs created, far more than expectations of +180,000 to +190,000 and substantially more than in August and September even though both of those months were revised upwards. In addition, unemployment edged down -0.1pps to 5%, and the broader gauge of under-employment, the U-6, fell -0.2pps to 9.8%, below 10% for the first time since May 2008. Perhaps most importantly, however, hourly wages jumped a full +9 cents and by +2.5% y/y, the fastest since July 2009. The Fed has been waiting for positive data on wage inflation before moving on interest rates and, combined with recent speeches from Fed Chair Yellen and others, the first rate hike now seems more likely in December rather than 2016. Meanwhile, the latest ISM non-manufacturing index also came in quite strong, gaining +2.2 to 59.1, markedly in expansionary territory. Of the ten components, nine are above 50, eight improved and new orders gained +5.3 to a very strong 62.0. The trade deficit also showed strength in September, falling –USD7.2bn, with exports up +1.6% while imports fell -1.8%.
Romania: No end to political uncertainty
Last week, Prime Minister Victor Ponta resigned after a fatal accident in a Bucharest nightclub triggered large-scale anti-government protests. Over the past year, Ponta had already been under pressure to resign over multiple corruption and fraud allegations but had managed to stay in office in spite of many protests and party defections. This week President Iohannis appointed Dacian Ciolos, an independent technocrat, as new prime minister. Ciolos has served as a former agriculture minister of Romania and, more recently, as the agriculture commissioner on the European Commission. He has 10 days to name a cabinet and draft a legislative programme that will be put for a vote of confidence in parliament. If he gets it, he is likely to govern until the next general election in December 2016; otherwise early elections may be called. Against the backdrop of further increased political and policymaking uncertainty the Central Bank decided last week to retain its key policy interest rate at 1.75%, despite ongoing deflation (-1.6% y/y in October). Euler Hermes expects this rate to be maintained until mid-2016.
China: Another month, another mixed performance
In October, exports in nominal USD terms were down -6.9% y/y (after -3.7%) and fixed asset investment (+10.2% y/y YTD, after +10.3%) and industrial production (+5.6% y/y, +5.7%) decelerated slightly. Retail sales remained resilient, with growth increasing moderately, to +11.0% y/y (from +10.9%). Going forward, business surveys show signs of stabilisation. The Markit Caixin China General Services PMI improved to 52.0 in October (from 50.5) with an increase in new business and employment components. Meanwhile, deflationary pressures persist, with consumer price growth decelerating in October (+1.3% y/y after +1.6%) and producer prices declining for the 44th consecutive month (-5.9% y/y, unchanged on September). Credit conditions remain fragile despite several cuts in interest rates. After a rebound in September (RMB1,050bn), new yuan loans decreased to RMB513bn. Further monetary easing is therefore likely, with at least a 25bps cut in both the policy rate and the reserve requirement ratio, which we expect will result in growth of +6.8% in 2015 and +6.5% in 2016.
Greece: Still some obstacles
The ECB Asset Quality Review and stress tests of four banks (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) revealed a total EUR14.4bn capital shortfall under the adverse scenario and EUR4.4bn in the baseline scenario. The recapitalisation process has to be concluded before the end of the year. The latest Eurogroup meeting revealed that several milestones of the adjustment programme are still not implemented (dealing with NPLs, mortgage debts and household insolvency law) and gave Greece until 16 November to tackle such measures in order to allow disbursement of the EUR2bn aid tranche and the EUR10bn in bank recapitalisation. The banks continue to register low levels of deposits (EUR130bn in September, -25% since December 2014) and remain dependent on the ECB Emergency Liquidity Assistance facility (EUR86bn). The Troika review started on Wednesday and is expected to take 2-3 weeks. If positive, it will allow some debt relief and could restore a measure of confidence. This, together with bank recapitalisation, could allow a (partial) lifting of capital controls early next year.