Eurozone: Further and better quality monetary easing
The ECB has reinforced its monetary policy. As expected, it cut its key interest rates: -5bps to 0% for the refi rate and -10bps to -0.4% for the deposit rate and it expanded its quantitative easing (QE) programme to EUR80bn each month from EUR60bn. Positive news came from the change in the type of assets purchased to investment-grade, non-financial corporation bonds, while expanding the limit of sovereign bond purchases (to 50% per issuer from 33%). Buying corporate debt will ease financing costs for corporates and improve their profitability. In addition, the ECB decided to launch another series of four-year, targeted and longer-term refinancing operations (TLTRO II) starting in June, with the last operation set to mature in 2021. This should offer attractive financing conditions for banks (today at 0%) and, in turn, further ease private sector financing conditions as banks will have access to even cheaper liquidity if they increase their loan portfolio. ECB President Mario Draghi said that measures on interest rates would progressively give way to non-conventional measures, said to be more efficient. We believe the ECB will act again at the end of 2016 to support inflation recovery. The ECB expects inflation at +0.1% in 2016, +1.3% in 2017 and +1.6% in 2018.
U.S.: Strong job growth, but the Fed to stay on hold
The economy gained a strong +242,000 jobs in February and the previous two months were revised up +30,000. However, hourly wages declined -0.1% m/m, only the second fall in over three years, sending the y/y rate to +2.2% from +2.6% just two months ago. We see virtually no likelihood of a Fed hike next week and perhaps two, at the most, in 2016. The ISM non-manufacturing index in February slipped to 53.4 (53.5 in January) but still signals expansion. The details are positive as eight of ten components are above 50, with new orders a strong 55.5 despite slipping -1pts, and export orders rebounded to 53.5 from 45.5. Core factory orders increased +3.4% m/m but are still down -3.2% y/y. The trade deficit deteriorated more than expected in January, to -USD45.7bn from -USD44.7bn, as exports, negatively affected by the stronger USD, fell -2.1% m/m and imports slowed -1.3% on weak demand. The Fed’s Beige Book of anecdotal evidence paints a mixed picture as consumption increased overall but several Fed districts reported a downturn. Productivity in Q4 2015 fell -2.2% q/q annualised.
Italy: Not bad, but still weak
A breakdown of Q4 2015 GDP data gives a more positive picture than the superficially meagre overall growth of +0.1% q/q suggests. Excluding stocks, GDP increased by +0.5% q/q, mainly resulting from consumer spending growing slightly (+0.3% q/q), higher public spending (+0.6% q/q) and an acceleration in investment (+0.8% q/q). The rebound in exports by +1.3% q/q, although somewhat offset by more dynamic import growth of +1% q/q, also contributed to overall growth. GDP in full-year 2015 increased at a relatively slow pace (+0.6%), with exports the main contributor (+1.2pps). Indeed, exports grew at the highest pace since 2011 (+4.1%), reflecting the positive impact of a weaker EUR. Consumption picked up by +0.9% in 2015, helped by lower oil prices. Meanwhile, the increase in demand and improving financing conditions are likely to continue to support investment, which increased by +0.6% in 2015 after seven consecutive years of contraction. These positive indicators suggest a moderate acceleration in 2016 and we forecast GDP growth of +1.1%.
Egypt: Sphinx-like riddles
Business challenges are compounded by global headwinds, including weak oil prices that reduce earning capacity from the Suez Canal and Sumed pipeline and a weak recovery in Europe that slows inward investment and tourism flows. Policy responses have caused further uncertainties at the corporate level. Monetary policy will remain restrictive, given the CBE’s mandate to guard against inflationary pressures (double digit growth) and the EGP will be gradually weakened. Of particular current concern are recent restrictions on access to foreign exchange. These regulations require careful interpretation because of exemptions and exclusions but they include an increase in the required monthly foreign currency deposits at the CBE for some importing companies. This week, the CBE issued further changes aimed at easing restrictions on foreign exchange for companies that import “basic commodities”. The regulatory confusion increases payment delays (non-payment risks are also higher) and complicates commercial transactions.