Week End Blog – Euro Style QE

You can think whatever you want, but you have to admit that ECB president Maria Draghi is pretty successful. Even without having spent any QE money (the kick off is set at March 09) Draghi managed to talk down the euro in his policy press conference last Thursday. The euro is at the lowest level since 2003.

In addition, European bond yields and spreads also reached new lows. Yields on Italian, Spanish and even Portuguese bonds are now comfortable below those in the US. The Draghi Style QE is very effective so far.

And so the mother of all bond bubbles continues. For example, you would have made a 113% return if you bought a basket of Portuguese bonds at the start of 2012. Yes, 113%!

It looks like Draghi’s reach even goes beyond bond and currency markets. Eurozone retail sales rose 3.7% in January.  The fastest since 2005, but also faster than retail sales growth in the United States. That doesn’t happen too often.

The retail sales numbers were the latest strong data coming from the Eurozone. It has been more than three years since macro data was so much better than in the U.S. The surprise index is also a very powerful tool to explain the recent outperformance of European stock markets.

The strong macro data in recent weeks has resulted in an upward adjustment of GDP growth expectations this year and next. Europe may be struggling, but it’s still very much alive.

The reason for the strong divergence in the European and U.S. surprise indices also has to do with the U.S. The ISM index is back to a level last seen in January 2014. That said, at 52.9, the index still points at healthy GDP growth going forward.

Besides, the American job market shows no signs of slowing whatsoever. The number of jobs added again beat estimates as the unemployment rate fell to a low of 5.5%. Wages were slightly below expectations and grew 2.0% for the year.

A first rate hike by the Fed in the second or third quarter is now very likely. Also because inflation expectations are recovering. Hence, where rates are hitting new lows almost everyday in Europe, US bond yields are at their highs of this year.

In China the new GDP growth target for the economy was released at the opening of the National People’s Congress. 7.0% is now the new magic number. The statement contained some other interesting numbers like the goal to create 10 million new jobs. Anyway, China faces the formidable task to transform itself to a consumer-led economy.

Before the start of the new National People’s Congress, China lowered interest rates for a second time. Officially, this reflects not a change to monetary policy since low inflation levels pushed up real rates, but still. Focus on the Chinese renminbi is also increasing as every other country in the world seems to have joined the currency war.

That China finds itself on a rocky road proves the chart below. China’s speculative housing market is under severe pressure. An insightful chart by Reuters reveals that Chinese house prices are actually falling at a faster pace than house prices did in the US in the years leading up to the Great Recession.

Thank you for reading the Week End Blog. Enjoy your weekend. Monday the ECB will be in the markets together with you 😉

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