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Daily Agenda: Yuan Shows Signs of Stabilizing
China sends message to G20; Trump paints image of decline in Cleveland; DOJ moves to block health insurance mergers.
In an address before world policymakers gathered for this weekends G20 meeting in Beijing, Chinese Premier Li Keqiang sent a stark message about his nations role in the global economy. While many G20 leaders discussed the need for international coordination, Li explicitly warned that China cannot shoulder the burden of global growth alone and urged other nations to pursue proactive economic policies. Li noted that significant yuan devaluation would not be a tool deployed by China as it grapples with sluggish global demand. After six consecutive weeks of declines, the onshore yuan finished the week higher against the dollar after two increases in daily fixing levels by Chinas central bank, the Peoples Bank of China. The rebound came after a period of increased capital outflows, according to Goldman Sachs analysts. The firm estimated that nearly $50 billion left the mainland in June, roughly double the level in May.
Trump argues only he can save America. In a speech that painted a dark vision of a U.S. facing economic catastrophe and vulnerability to terorist attack, Republican candidate Donald Trump argued that only he is uniquely equipped to lead the nation out of the crisis. Addressing the GOP convention on the final evening, Trump assailed the record and character of presumptive Democratic nominee Hillary Clinton, casting blame on the former Secretary of State for a wide range of national security threats.
DOJ moves to block insurance megamergers. On Thursday, the Department of Justice filed lawsuits in federal court to block the mergers of Anthem and Cigna Corp. as well as Aetna and Humana. The suits allege that the mergers would hurt consumers by reducing competition among providers. Initial responses by the companies named in the suit indicate that they intend to contest the litigation.
GE beats earnings estimates. Second- quarter financial results released by General Electric exceeded consensus analysts estimates with earnings of $0.51 per share versus an average Wall Street forecast of $0.46. The financial results included proceeds of the sale of the conglomerates appliance division, which was completed last month. A 31 percent year-over-year increase in revenues from the power-generation division also contributed to the strong performance.
European PMI signals growth. Preliminary Markit purchasing manager index levels for the Eurozone indicated growth continued within the European Union despite concerns over the Brexit vote in the United Kingdom. While activity cooled for the month, according to the measure, both headline manufacturing and services indices for the common currency zone, at 51.9 and 52.7 respectively, remained positive. Secretly, Markits headline readings for both manufacturing and services for the U.K. contracted for the month.
Portfolio Perspective: ECB Hints at Further Easing in September
As widely expected, the European Central Bank left its policy rates and its asset-purchase program unchanged at Thursdays Governing Council meeting.
Euro area growth is seen as having moderated during the second quarter and, in line with our expectations, the recovery is seen as proceeding at a moderate pace. Although financial markets weathered the spike in uncertainty that was spared by the U.K. Brexit referendum with encouraging resilience, the ECB deems the risks to the growth outlook as tilted to the downside, citing besides Brexit-related spillovers geopolitical uncertainties, subdued growth prospects in the emerging markets, insufficient structural reforms and the need for further balance-sheet adjustments.
Euro area inflation remains subdued, as headline inflation edged up to 0.1 percent year-over year, in June. While inflation is seen rising during the latter part of the year, base effects from energy prices are seen as the main driver of these increases, rather than underlying demand strength. Against this background, we expect headline inflation rates to eventually close the gap with core inflation rates and both likely to come in around 1 percent year-over-year by year end, only half of the ECBs de facto 2 percent target.
The ECB confirmed the need to preserve an appropriate degree of monetary accommodation in order to secure a return of inflation rates towards levels that are below, but close to, 2 percent without undue delay. Just as the IMF has revised down its growth forecasts for Europe in the aftermath of the Brexit referendum, the ECB is likely to revise down its growth forecasts in September; it currently projects a further acceleration growth to 1.7 percent in 2017. On the heels of such a revision, it is quite likely that it will also revise down moderately its inflation forecasts for 2017 and 2018, currently at 1.3 percent and 1.6 percent.
A downward revision to the ECBs inflation forecasts would likely open the door to further policy easing in September. We expect a six to 12-month extension of the asset-purchase program that is currently scheduled to end in March 2017, with the monthly speed of the purchases likely to remain unchanged at 80 billion euros. The parameters governing these purchases, however, would likely be eased to ensure that there are sufficient securities available for the ECB to execute its commitments. In particular, the ECB may consider extending its purchases to include bank bonds.
Jürgen Odenius is head of Macroeconomic Research for Prudential Fixed Income in Newark.