Mario Draghi still gloomyGathering for its monthly policy meeting, the Governing Council of the European Central Bank (ECB) remained somewhat gloomy about the outlook for economic growth and inflation. However, the financial markets largely ignored this pessimism.
On Friday morning, a barrel of North Sea Brent oil was USD 50.14, up ten cents from the closing price on Thursday.
Ben Steinebach Head of Investment Strategy
ECB President Mario Draghi was naturally pleased with the eurozone’s relatively strong Q1 economic growth this year (0.6% relative to Q4 of 2015). However, he immediately tempered his satisfaction by adding that this growth was presumably not entirely representative, owing to circumstances (such as this year’s early Easter), and that Q2 would probably be marked by a slower growth rate. Despite this warning, the ECB’s officials have adjusted this year’s projected growth rate from 1.4% to 1.6%. However, based on the projections for 2017 and 2018 – 1.7% for both years – very little improvement is expected. The ECB is even less optimistic about the projected inflation.
With oil prices on the up, this year’s inflation is projected to be marginally higher than was expected three months ago (0.2% instead of 0.1%). For 2017 (1.3%) and even 2018 (1.6%), however, inflation will still fall significantly short of the ECB’s 2% target. The estimates for the underlying inflation (i.e. adjusted for higher oil prices) for this year and the next two years have in fact been lowered by 0.1 percentage points relative to the estimates from March (down to 1.0%, 1.2% and 1.5%). This hints at ongoing concerns at the ECB about the deflationary forces in Europe’s economy. Nevertheless, the ECB refrained from taking action last week to counter this development, and for an obvious reason: despite having been announced in March, some of the ECB’s programmes have yet to kick off. The scope of the bond-buying programme will be expanded to include corporate bonds, but not until 8 June, and the liquidity injections into the banking sector are also scheduled to commence in June. The ECB will wish to review these programmes first, yet considering the pessimism surrounding the outlook we very much expect further measures to be announced in September.
Oil prices steady despite OPEC summit failure
On Friday morning, a barrel of North Sea Brent oil was USD 50.14, up ten cents from the closing price on Thursday. Seemingly, then, last Thursday’s failed OPEC summit in Vienna has barely impacted oil prices, if at all. Iran rejected a Saudi proposal to support a new (and lower) ceiling on oil output. Apparently the declining supply in the United States had as much impact (in an upward direction) on prices. The macroeconomic indicators published last week showed a mixed pattern. In the United States, household consumption in April rose more strongly than in March, and in fact outperformed the projections. House prices in that month did the same. However, consumer confidence was down slightly in May, though still acceptable. The final data about May’s sentiment among purchasing managers differed somewhat between countries. On the whole the figures reported for the services sector were slightly more positive than for industry, although here too some data were measured above 50 (which represents neither improvement nor decline). France was an exception, with an industry index falling short of 49, which might be due to the strikes and social problems. Europe’s Economic Sentiment Indicator (which combines consumer and business confidence) rose for the second consecutive month in May, following the downward trend earlier this year when the financial markets were unsettled.
Stock markets undecided
Last week saw little in the way corporate news, and as already noted the macroeconomic reports showed a mixed pattern. As a result the global stock markets lacked direction and their movements were confined to a relatively narrow bandwidth. In the United States, most of the leading stock indexes managed to improve, with small and medium-sized enterprises outperforming the major listed companies. The Russell 2000 (small caps) gained 1.75% last week, against 0.8% for the S&P 500 (the five hundred largest companies). Most European indexes recorded slight losses, ranging from -0.3% for Belgium’s index to -2.3% for Italy’s. The Dutch market featured prominently in business reports last week. Ahold was one of the last companies to publish its Q1 earnings. Its revenue was up by 4.3% relative to a year before, reaching EUR 11.8 billion, owing largely to strong supermarket sales in the Netherlands and the United States. Bol.com’s online sales also contributed a significant percentage. Profit was up by more than 13% to EUR 241 million. Earlier in the week Belgian postal company Bpost’s attempt to take over PostNL had fallen through. The Belgian company had offered EUR 5.10 per share, putting PostNL at a value of EUR 2.25 billion. PostNL turned the offer down, reportedly having been expecting EUR 6.00 per share. Wolters Kluwer is spending EUR 250 million to buy French software company Enablon, in a push to reinforce its portfolio of legal software. Like Europe’s other stock markets, the AEX lost ground, closing at 0.74% lower on Thursday than on the Friday before. By Friday morning the index had recovered somewhat, fluctuating marginally above 450 points in anticipation of the US jobs reports that were scheduled to be released in the afternoon.
Little direction expected from this week’s news
The earnings season is practically over; I have only identified one company – Porsche – that is scheduled to announce its earnings this week. It will also be a slow week for macroeconomic news. Most of the interesting reports in the earlier part of the week are expected to come from Germany, where new data will be published about industrial orders and industrial output in April. The statistical offices of the United Kingdom and Italy will also announce their industrial output for the same month. The European Union and Japan will present their second estimates for Q1 economic growth, while the United States is set to publish reports on labour productivity and labour costs per unit of product for the same quarter. Lastly, final figures on inflation in May are expected from Germany, the Netherlands and China.
By the time you read the present issue of Investment News, we will undoubtedly already know the number of new jobs created in the US in May, as well as the latest unemployment figures there. Our prediction is 170,000 new jobs added, and 5% of the working population.