Week End Blog – Russia, again, lower bond yields, again, and GDP growth, again

Another week dominated by geopolitical tensions. Equities are up this week, but it feels like this could become a bumpy ride. As in almost every other week this year interest rates went down. The graph below is perhaps the best reflection of recent events. Russia turns out to be pretty resourceful in finding ways to increase its influence along the Ukraine border. Aid convoys, ‘lost’ military people and now a possible third front, we have all seen it.

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After breaking the 1% threshold last week, the German 10-year bond yield pushed through and touched a low 0.867% at some point. For reference, at the start of this year the 10-year bond yield was just below 2%. On average the yield decreases with 0.13% per month. If this were to continue the yields on 10-year German government bonds will be zero in February of next year. Who needs a bazooka?

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It’s not only about geopolitical tensions. Eurozone macroeconomic data falls short of expectations in almost all cases. The correlation between negative macro surprises and the bond yield is pretty strong.

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Among the laggards was, of course, France. French business confidence showed a significant decline in August and was the latest disappointment in what is becoming a series of weak data.

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Another statistic showing sharp declines is Mr. Hollande’s approval rate. I’m no expert on this but a satisfaction rating below 20% doesn’t make it any easier to push through desired reforms. This week Hollande shuffled his cabinet and for now austerity is still on the agenda, but the clouds on the horizon are turning dark.

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Meanwhile the situation in Germany is not getting any better either. The Ifo index, a good proxy for future GDP growth, fell in again in August, and again by more than expected. Lower estimated growth rates for the German economy are openly discussed at this point.

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Time for some positive news. Please, take a look at the chart below. US Durable goods orders crushed expectations and rose more than 22%(!) in August. Yes, durable goods orders are notoriously volatile and yes everybody wanted a plane in August, but since this number is already part of Q3, we should appreciate it as it is.

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A look in the rear-view mirror also gave something to cheer about. After an already pretty impressive first estimate of second quarter GDP growth, the second estimate was lifted a little higher. The US economy now grew 4.2% on an annualized basis in Q2.

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However, interest rates went down in the US as well. Could this be because inflation is still quite some time away? A nice article was posted on Bloomberg this week citing the phenomenon of Pent-Up Wage Deflation. ‘During the recession and after, employers seeking to maintain employee morale refrained from cutting pay. That left wages higher than they normally would be after a severe downturn. As a result, employers now may not have to offer increases to attract workers as the job market improves, according to San Francisco Fed economist Mary Daly.’ This effect should wane though once the natural rate of unemployment comes near. So I looked up this graph from a while ago which shows we could be pretty close to that point. More on the Pent-Up Wage Deflation here.

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Since this wasn’t the most positive Week End Blog I conclude with a comical graph of how the stereotypes in Holland work. Learn this by heart and you will be able to make your way through the country with ease. Until next week.

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