Chart of the Month
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?
Central banks have voted for a manufacturing recovery but will one appear? Taking into account the net monetary policy actions that cover 39 of the largest countries, a revival is imminent, but this ignores the impact of escalating trade tensions and random events such as the disabling of Saudi oil installations. Helpfully, China’s Caixin PMI has lifted from 48.3 in January to 51.4 in October but, unhelpfully, Germany’s PMI continues to slide (41.7 in October as compared to 49.7 in January). Central banks were powerless to arrest the 2008-09 activity slump and post-crisis recoveries have been muted, especially when QE is also taken into account.
The US president has unleashed successive waves of chaotic dislocation to global goods supply chains, prompting rapid adjustments to inventory levels. While the annual growth pace of final demand, illustrated here by retail sales values, is rarely punctuated by steep declines, industrial production values have larger and more frequent episodes of correction. The weakness of industrial production reflects the urgent desire to reduce goods inventory. It is not a reliable indicator of the course of the overall US economy.
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