On Monday, the Eurogroup agreed on the payout of the remaining EUR2.8bn of the second tranche under the three-year financial aid program. EUR1.1bn will be disbursed immediately for debt servicing needs while the remaining EUR1.7bn will be disbursed as soon as net arrears from September will be cleared by the Greek government. The Eurogroup has acknowledged the Greek government’s compliance with the 15 policy “milestones” (including energy sector liberalization, pension reform and setting up of a privatization agency) although last month only two reforms were found to be completed. The Eurogroup’s decision gives short-term relief as tough negotiations might take place with the IMF regarding its participation in the bailout. The Fund intends to decide by the end of the year on this, depending on potential debt relief measures for Greece by the Europeans on which the IMF insists. However, no discussions on this topic were held at this Eurogroup meeting. The second review of the European institutions is expected to start in mid-October. Euler Hermes expects full-year GDP to decline by -0.2% in 2016 before returning to growth of +2% in 2017.
U.S.: Modest job creation, Fed on track for December hike
156,000 jobs were created in September, slightly less than expectations, while the unemployment rate rose +0.1pps to 5.0%. Manufacturing lost 12,000 jobs, the second consecutive decline, otherwise gains were widespread across most industries. The labor force increased by 444,000, inching the participa-tion rate up +0.1pps to 62.9%. Wages rose +0.2% m/m to +2.6% y/y, a figure which has been between +2.3% and +2.7% over the past year, indicating little wage pressure. The ISM non-manufacturing index was strong in September, gaining +5.7 points to 57.1, well into expansionary territory. New orders gained +8.6 points to a strong 60.0, while export orders rose a huge +10 points to 56.5. Nine of the ten components rose and all ten are now above 50. Euler Hermes believes the recent data makes a Fed rate hike in December quite likely. Financial markets are also pricing in a 70% chance of a move. The increase is unlikely to have a significant effect on the real economy since it is only a 25bps move off of still historically low rates, and U.S. financial markets have almost certainly priced in the move.
Brazil: Time for fiscal orthodoxy
Brazil's lower house of Congress approved on 10 October a measure to limit public spending in real terms, with an upper bound fixed to the previous year’s inflation rate. It will be effective for the next decade. The new President, Michel Temer, secured his largest victory to date with 366 votes in favor and 111 against the measure. Although Temer’s approval rating was just below 20% in May right after the impeachment of Dilma Roussef, his predecessor, it seems that meanwhile he has gathered the conditions to set Brazil on the path of reforms. The public spending cap is the cornerstone of Temer’s new administration to tackle Brazil’s structural issues. With an overall budget deficit larger than -10% of GDP and economic activity still contracting by -3.2% y/y in Q2 2016, the new legislation was the first to be approved in a set of measures that intends to gain back investors’ confidence through fiscal discipline. Since President Temer took office in May, the BRL gained +23% against the USD while stock markets skyrocketed. The IMF also welcomed the new fiscal orthodoxy path.
Germany: Rebound of economic activity in August
Industrial activity indicators surged in August, more than correcting July's weakness which was linked to the earlier average timing of school holidays and plant shutdowns this summer. Industrial production surged by +2.5% m/m and +8.1% y/y in August, after decreasing by -1.5% m/m and -7.7% y/y in July. Likewise, turnover in manufacturing rose by +4.1% m/m and +8.8% y/y in August, following declines of -1.5% m/m and -9.3% y/y in July. Moreover, new orders in manufacturing increased by +1% m/m and +7.7% y/y in August, up from +0.3% m/m and -6.3% y/y in July, indicating a good performance during the remainder of the year. This outlook is supported by the final Manufacturing PMI for September which rebounded to 54.3 (from 53.6 in August) close to June’s 28-month high of 54.5. Key drivers of the stronger PMI were accelerations in the forward-looking new orders and export orders components. Exports surged already by +5.4% m/m and +9.8% y/y in August, after dropping by -2.6% m/m and -10% y/y in July. Euler Hermes expects GDP growth of +1.8% in 2016 and +1.7% in 2017.