Chart of the Month
Source: Thomson Reuters Datastream
There is a gaping chasm between the reported confidence of US consumers and company CEOs, which has an eerie likeness to the 2006-08 period. Maybe, since October, corporate executives have lifted their mood as global interest rates have fallen, central bank balance sheets are growing again and US-China trade tensions appear to be easing. Or maybe, CEOs are battening down the hatches and consumers will discover all too soon that their expectations will not be fulfilled.
After a long, if unimpressive, global economic recovery, a select group of nations has brought its budgets into balance but a much larger group is sinking back into deficit. Seriously underfunded spending burdens, such as pensions, healthcare and social care systems, are interacting with new forms of internet-based tax avoidance and corporate profit-shifting to create a structural bias to fiscal deficits. As the global activity cycle turns down and the clamour for fiscal activism grows louder, the gulf between the fiscally responsible and the rest threatens to become a chasm.
In the past cycle, banks’ share price in developed economies have shown strong co-movement with the country’s sovereign yield curve. As banks borrow short-term and lend long-term, a steeper yield curve should enhance banks’ profitability as the net interest margin, the difference between interest paid on liabilities and received on assets, should rise. However, we notice a puzzling relationship between the yield curve and banks’ valuation in Europe. The chart shows that between 1996 and 2009, a flatter yield curve in the Euro area was associated with higher banks’ valuation. Is a steep yield curve in the Euro area really what banks need?
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