Trans-Atlantic Market Relationships
Comments To
Global Interdependence Center GIC Abroad - Paris Investment Seminar J. Paul Horne Independent Market Economist
Paris – 8 Dec. 2006
1
U.S. – Europe Correlations • • • • • • •
$ and € financial markets convergent GDP growth trends – to converge ? Productivity trend: US ▼ Euro ▲ Inflation or ... disinflation ? Interest rates – convergence ahead FX – symptom of basic disequilibria Equities in ’07: post-2002/3 bull tired 2
Equity market trends – 1994 - 2006 US lost lead
Post-2000 lows Think Tokyo dull ?
• Source: ECB Nov. Mthly. Bull. – mthly.3Avgs.
Equity markets since 2002/3 lows Tokyo top gainer since 2003
•
Source: MSCI, Bloomberg, Horne Economics – thru 2dec06 4
Intl. P/Es & volatility – 1988-2006 Convergence startling !
• Source: BIS Annual Report, Jun06 5
Equity & debt home bias (%)
Decline = int’l. diversification.
• Source: ECB November Monthly Bulletin.
6
GDP growth rates since 1999 US potential GDP: 3%
EU Potential GDP: 2%+
• Source: ECB Nov. Monthly Bulletin – % a.r., 7 qrtly.
Euro-U.S. Corporate Profits Growth Trends
Long trend attracts capital to US; financing C/A; boosting our debt.
Source: ECB Monthly Bulletin, Sep06. 12 & 60-mo. forecasts Euro STOXX8& SPX.
OECD: synchronization in Sep06
US declined since Sep.
• Source: OECD, Composite Leading Indicators, Nov06 9
Productivity growth trends since 1992 235
170
2005 avg.
141
130
1992 = 100
195
176
150
157 1992 1992-2005 avg
110
90
70
50 UK
Germany
France
US
Sweden
• Sources: ECB, Eurostat, BLS – 2dec06. 10
CPI trends 1999 - 2006
€ = 1.8% Nov06
• Source: ECB Nov. Mthly. Bull. - % a.r., 11 mthly.
Households net lending – 1997 - 2004 EU, JP, CH finance US over-spending
• Source: ECB Nov. Mthly. Bull. - % of12GDP.
ECB – Fed monetary policy 1999 - 2006 ECB to hike 25-50 bps
Fed succeeded. Next move down.
•
Source: ECB November Monthly Bulletin. Official rate changes. 13
3-mo. Money market rates – 1994 -2006
Convergence will increase
• Source: ECB Nov. Mthly. Bull. – a.r., mthly. 14
10-yr. Govt. bond yields – 1994 - 2006
In parallel how long ?
• Source: ECB Nov. Mthly. Bull. – Mthly.15 Avgs.
Key FX rates – before $ plunge $1.333:€1 on 3dec06 $ lo: $1.365 on 30dec04
$ hi: $0.823
• Source: ECB Nov. Monthly Bulletin – 1Q99 16 = 100.
December 2005 Forecasts ... • “... I serve up the following forecasts for 2006: $1.35 per euro and U.S. ten-year T-yields up to 5%, both by end-2006; stagnation of the U.S. housing market slows GDP growth to 2.5% by 4Q06; the S&P 500 drops 10 % in the year; oil and gold remain around today’s prices; and Europe’s economy sticks at 2.0%. U.S. Midterm elections will cost the administration seats but, unfortunately, not control of House and Senate.” • Source: J.P. Horne Yearend letter, Dec. 2005 17
Conclusions - 2007 Forecasts • • • • • • •
US – Euro GDP growth to converge ▼ Inflation may slow ▼ = disinflation $ and € bond yields in parallel ▼ Euro equities to outperform – then ▼ Fed and ECB rates will converge - ▼ $ ▼ to $1.40/3 : € by Jun07; then ▲ Beware of financial black holes .... 18