Global daily insight 19 october 2016

Daily Insight

Group Economics Macro & Financial Markets Research

19 October 2016

Risks to euro bank lending Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Euro Macro: Bank lending conditions deteriorating - The ECB’s Bank Lending Survey painted a less positive picture of bank lending conditions and the economy in Q3. Credit conditions for companies were stable in Q3, interrupting a run of nine consecutive quarters of easing. Furthermore, banks expect to tighten lending standards for companies in Q4.

Credit standards continue to ease for households, for both mortgages and consumer credit.

Meanwhile, loan demand is rising but looks to be doing so at a slower pace for most loan categories. The survey suggests the eurozone economy has lost some momentum, while stress in the banking sector may now be impacting credit conditions for companies. In the special questions, banks reported that both QE and negative interest rates were having a positive impact on credit conditions and loan volumes, despite having an adverse impact on bank profits. It seems the message is that unconventional policies are proving to be good for the economy but bad for the banking sector up until now. Still the ECB is aware that further rate reductions could tip the balance, risking that banks tightening conditions because of the profit squeeze. In that case, the impact on the economy could also turn negative. So we do not think these results open the door for another rate cut, though we continue to expect an extension of QE. (Nick Kounis) Euro Credit: Banque de France makes a mistake and buys a bond that isn't eligible The Banque de France bought a bond last week that wasn't eligible for the corporate sector purchase programme (CSPP). The bond was issued by the French chemicals company Arkema and matures in October 2017. The bond wasn't eligible for the programme because of an easily-overlooked technical detail. Next to the CSPP criteria, in order for a corporate bond to be eligible, it also needs to comply with the criteria of the ECB collateral framework.

This framework consists of hundreds of pages with guidelines, amendments and references to other guidelines. In one of the annexes of the guidelines, there is a requirement with regards to the custody structure of the bonds. The bonds should be issued with a New Global Note structure. As we already wrote in a note, about EUR 100bn of seemingly 'eligible' bonds, become ineligible due to this hidden criterion ( Euro Corporate Watch – Why EUR 100bn “eligible bonds”are not eligible – for professional clients, please see disclaimers in the document). The Banque de France was subsequently forced to sell the Arkema bond and buy another bond of the same issuer instead to make up for the mistake. It will most probably be the only bond in the Asset Purchase Programme that will ever be sold. (HyungJa de Zeeuw) UK Macro: Inflation accelerates on sterling slump – UK inflation accelerated to 1% yoy in September, from 0.6% in August. Half of the acceleration came from a slowing drag from energy inflation, probably reflecting less impact on the series from past oil price falls and sterling weakness. The other half came from an acceleration of core inflation (ex-food and energy) to a two-year high. The rise in core inflation was completely related to the category that is most sensitive to rising import prices due to the slump in sterling. In particular, industrial goods ex-energy accelerated sharply, more than accounting for the rise in the core. Indeed, services inflation, which tends to be domestically generated, actually slowed in September. Our sense is that the BoE will look through an inflation spike generated by a fall

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Daily Insight - Risks to euro bank lending - 19 October 2016

in sterling, as long as it does not feed through into wider price pressures. Therefore the BoE is likely to keep the policy rate on hold in the coming months. Is the rise in UK inflation a pre-curser for a rise in inflation globally? Yes and no. An easing of the drag in energy prices will likely see headline inflation rising globally in the coming months. However, core inflation in most economies will likely remain subdued. The rise in the UK is related to sterling weakness (so that is a moderate disinflationary force for its trading partners). More importantly, global spare capacity should keep a lid on price pressures. (Nick Kounis) US Macro: Subdued core inflation – Core CPI inflation remained contained in September.

It was up by 0.1% mom (consensus: 0.2%), which brought the annual rate down to 2.2% from 2.3% the previous month. The modest core inflation print came despite another strong reading for housing (+0.4%), which has a heavy weight in the CPI (42.51%), meaning that cyclical inflationary pressures are relatively weak. Indeed, core inflation ex-shelter declined by 0.1% last month, and is trending at just 1.3% on an annual basis. Although overall core CPI inflation is above the Fed’s 2% target, that is not the measure targeted by the central bank. The core PCE deflator was running at 1.7% in August. One of the reasons for the difference is the lower weight of shelter in the PCE measure. Meanwhile, headline CPI inflation rose at the fastest pace in 5 months in September, but that was driven by energy.

The subdued trends in core inflation outside of housing reflects moderate demand and wage growth. Looking forward, we think inflationary pressure from the labour market is unlikely to rise strongly. The unemployment rate has been steady, at either 4.9% or 5%, for the last year. Although job growth has remained robust, labour supply has kept up with it. Overall, we think the subdued trend in core inflation will allow the Fed to take its time in raising interest rates. We expect one step in December followed by two moves in 2017. (Nick Kounis)

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Daily Insight - Risks to euro bank lending - 19 October 2016