This article will be periodically updated - CH


Europe's major economies are slowing down.

In Germany the economy is loosing steam and this is apparent in Q1 numbers. Indicators are showing that - according to data and reporting from Focus Economics, key G7 indicators are pointing to a slowdown.

France: Preliminary measurements point to a slowdown in private consumption and a deceleration in investing but their outlook remains stable. A roster of events support this outlook including low unemployment, a strong euro and fiscal monetary conditions. Meanwhile in the real sector, business sentiment dropped (INSEE Index).

Over the weekend Italy president said no to appointing a Euro-skeptic FinMin. I reckoned this a positive, but the narrative has shifted..."this emboldens the two populist parties" to perhaps form a new populist front before the next elections.

While Italy remains in certain shambles and the political system upside down, a subsequent government has been formed but there is no true relief. Economic data is showing slow numbers from the first quarter and the risk of another political disaster still looms over Italy. In essence the political situation is completely unsettled

While Italy remains without a new government, it would be foolish to believe that a country where anti-system parties won 55% of the popular vote will continue to behave as if nothing had happened. But political upheavals sometime provide a unique opportunity for addressing seemingly intractable problems. - JEAN PISANI-FERRY

On one end, Spain is inching to normalcy, or what can be called normalcy. The minority government finally seems to have enough votes to see a bill through...that was last week. Spain is now back in decent. Mounting fears about political instability in Italy and Spain sent tremors through the eurozone’s two largest peripheral debt markets on Friday with investors dumping the sovereign bonds of both countries and sending European bank shares sharply lower. FT Link 

June 6th: IHS Market: Eurozone’s outlook has darkened dramatically. Italy’s turbulent political environment took its toll on businesses last month, as worries over the underlying trend in activity growth bubbled up despite a pick-up in growth in the country’s services sector that bucked a slowdown in Germany and France. The purchasing managers’ index of activity in Italy’s services sector picked up to 53.1 in May, from 52.6 in April. That compared to a fall from 57.4 to 54.3 in France and from 53 to 52.1 in Germany — a 20-month low.

June 4th: (FT) "The best argument for Italy to remain in the euro is to hope that the eurozone will eventually be reformed. If we know for certain that is not going to happen, the argument shifts."

June 1: Prime Minister Mariano Rajoy of Spain lost a no-confidence vote over a corruption scandal, turning up the political uncertainty in Southern Europe. He will be replaced by Pedro Sanchez.

May 30, 2018: From FocusEconomics: Outlook stable. The Eurozone economy lost steam in the first quarter of 2018, starting the year off on a subdued note following a stellar 2017. Growth slid to the lowest rate since Q3 2016, likely weighed down by a strong euro and weaker sentiment as well as several one-off factors such as the early timing of Easter. Available data for the second quarter suggests that growth remained at a slower cruising speed: Economic sentiment rested at March’s six-month low in April, and the composite PMI fell to an 18-month low in May. In the political arena, recent developments have also not been so sunny. In Italy, anti-establishment parties, the League and the Five Star Movement, abandoned plans to form a government on 27 May, after the Italian president blocked the nomination of a Eurosceptic finance minister, increasing the chance of early elections. Political uncertainty has also risen rapidly in Spain, and the government will reportedly face a no confidence vote in the coming days on the heels of a large corruption scandal.  FocusEconomics panelists held their view of the Eurozone economy unchanged this month and see GDP growing 2.3% in 2018. A solid labor market and robust investment should support healthy, albeit slower, growth this year. Political risks, however, continue to cloud the economy’s outlook, while slowing exports will take some wind out of the recovery. In 2019, the economy is seen expanding 1.9%. Harmonized inflation eased from 1.3% in March to 1.2% in April. Despite an ultra-accommodative stance by the ECB, price pressures remain soft and well below the Bank’s target of close to 2.0%. Our panel sees inflation averaging 1.5% in 2018, unchanged from last month’s forecast, and 1.6% in 2019. At its latest monetary policy meeting on 26 April, the ECB left its ultraaccommodative stance unchanged in the face of subdued price pressures, holding the refinancing rate at 0.00%. The next meeting is set for 14 June. All of the analysts surveyed by FocusEconomics expect the ECB to keep the refinancing rate unchanged this year amid low inflation. The Consensus Forecast is that the rate will end 2018 at 0.00% and 2019 at 0.30%. The euro lost ground against the U.S. dollar in May, falling to the lowest values seen so far in 2018. On 25 May, the euro bought 1.17 USD, a weakening of 4.3% from the same day last month. Downbeat economic data, political uncertainty and rising interest rates in the U.S. have all weighed on the euro’s value. Our panel sees the currency ending 2018 at 1.24 USD per EUR and 2019 at 1.28 USD per EUR.

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The info below is really helpful if you think about assets and pricing (which is something I think about a lot). Bitcoin inevitably could be graded based on transaction history. As soon as the US Fed adapts a "Fedcoin" system and we have the main sovereign coin with pure bitcoin coins, this could be worthwhile. The closer to the mining operation - or limited transaction history - would result in a coin that trades at a premium, assuming there was a system. After-all a clean BTC could mean it was never tainted, it was never a vehicle for black market payments. Grade A level to Grade D, or what have you. From this I see sorts of additions to the system, perhaps coupon redemption and distressed debt administration. - CH

From Davis Polk: A possible future for bitcoin is one in which the old banknote lists return in 21st-century form—bitcoin from a particular address would be graded based on its transaction history and relative distance from flagged transactions or blacklisted addresses. For example, as generally described by JP Koning, Grade A bitcoin would be “fresh” bitcoin, purchased directly from a miner and would trade at a premium. Grade D bitcoin, meanwhile, may have passed through a blacklisted address and trade at a significant discount. In between are bitcoin that are not closely associated with a blacklisted address or that have been “cleaned” by passing through a bitcoin mixing service that makes tracing more difficult. Such grading schemes could easily become enormously complex given that bitcoin easily moves across borders, and various jurisdictions could have overlapping or inconsistent blacklists, tort laws, AML/KYC requirements, and laws particular to digital assets. This type of regime could lead to a market where any large bitcoin transaction would require a bespoke appraisal. Further, because bitcoin do not go out of circulation, bitcoin will “age,” becoming less valuable over time as each transaction makes it more likely that it will pass through a tainted address. All told, fungibility issues could easily become a substantial limiting factor on bitcoin’s usefulness as a currency.

Thank you:

 Davis Polk + Matt Levine @ Bloomberg

From Focus Economics:

Comprehensive GDP data revealed that the recovery lost steam in the fourth quarter of last year, with growth weighed on by inventories as well as slowing fixed investment. Recent indicators, however, suggest that activity likely bounced back in the first quarter of 2018 and that overall the recovery remains on track if lackluster. Consumer confidence improved in Q1 and the unemployment rate inched down in February, boding well for household spending in the quarter. Positive signs emerged from the external sector as well with exports growth hitting a 10-month high in January and the Ural oil price jumping in March, which should support export revenues. On the political front, as widely expected, President Vladimir Putin won the 18 March election, securing over 75% of the votes. More recently, on 6 April, the United States unveiled new sanctions against several high-profile Russian businessmen and their affiliated companies. The measures freeze their U.S. assets and ban Americans from conducting business with them. The sanctions caused turmoil in Russian financial markets, with the main stock index diving and the ruble depreciating over 4.0% on 9 April.

Rising oil prices, a healthy labor market and improved consumer confidence should cause growth to gather steam this year. However, limited oil output and structural rigidities will hamper activity, while the impact of the fresh sanctions is still uncertain. Focus Economics Consensus Forecast panelists see GDP expanding 1.8% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen stable at 1.8%.

source: tradingeconomics.com 

The consumer confidence indicator published by the Federal Statistics Service (Rosstat) improved in Q1 2018, rising to the highest reading since Q3 2014. The consumer confidence indicator rose from Q4 2017’s minus 11 points to minus 8 points. Despite the rise, the index remains firmly entrenched below the 0-threshold, which indicates that pessimists outnumber optimists. According to the survey, the improvement was broad-based across the components of the index. Households were more optimistic about the future economic situation in Russia and assessed the current situation less negatively than in the previous quarter. In addition, households’ assessments of their current and future personal financial situation improved in Q1. FocusEconomics Consensus Forecast panelists expect private consumption to expand 3.3% in 2018, which is up 0.3 percentage points from last month’s projection. For 2019, panelists expect private consumption to increase 2.6%

MONEY
Central Bank cuts key interest rate to 7.25% in March At its 23 March meeting, the Board of Directors of the Central Bank of the Russian Federation (CBR) decided to cut the key interest rate by 25 basis points to 7.25%, a move widely expected by market analysts. The decision followed a same-sized cut in February and marks the lowest policy rate since April 2014. Low inflationary pressures have given the Bank space to pursue an easing cycle as it aims to transition to neutral monetary policy. In its accompanying statement, the CBR commented that inflationary expectations are continuing to fall, and that price pressures remain low; they are, however, low partly due to a favorable base effect. The Bank expects inflation to return to its target of 4.0% in the second half of 2018 as this base effect from high food prices last year fades. Notably, it made no changes to its growth projections for the Russian economy this month despite higher oil prices, citing ongoing structural issues and lower sensitivity to oil price fluctuations as the reasons for the unchanged prospects. Looking forward, the Bank signaled that more cuts are in the pipeline, as it stated that it plans to complete the transition to neutral monetary policy by the end of the year. A key interest rate of between 6–7% is considered as roughly neutral. The Bank, however, highlighted one new upside risk to its inflation outlook: A tight labor market could put upward pressure on prices through higher wages. The next monetary policy meeting is scheduled for 27 April 2018. FocusEconomics panelists see the key interest rate ending 2018 at 6.56%. In 2019, panelists see the Central Bank lowering the monetary policy rate further, with a Consensus Forecast of 6.15%. 

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Data from: Focus Economics, Zermatt Research, Rosstat, Trading Economics 

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A string of weaker economic data suggests that the Eurozone economy decelerated at the start of 2018, following a robust spell of growth last year. While GDP data for the first quarter is still outstanding, monthly indicators have been soft, with economic sentiment falling throughout the quarter, and industrial production dropping in January and February. That said, the tailwinds of last year’s solid growth remain largely in place, and the slowdown is likely to be moderate thanks to a tightening labor market and ultra-accommodative monetary policy. FocusEconomics analysts expect GDP to have expanded a seasonally-adjusted 0.5% over the previous quarter in Q1, down from Q4’s 0.7% expansion. Preliminary GDP data released by national statistical institutes revealed that growth waned in Austria, Belgium and France. In France, a weak performance by the external sector and a sharp slowdown in corporate investment dented momentum in the quarter. While subdued domestic activity likely sparked the slowdown in Belgium, the details behind the release are still outstanding. Although Austria’s economy decelerated somewhat, growth was still strong by historical standards, bolstered by both domestic demand and the external sector. Meanwhile, Spain expanded at a solid rate, clocking a third consecutive quarter of steady growth. First-quarter GDP data for the remaining economies is still outstanding. The political landscape in the common currency bloc remains uncertain and convoluted, casting a shadow on its future. Italy is in a state of political deadlock after the March election yielded a fragmented congress, and it remains to be seen when or if a government will be formed. Moreover, it seems unlikely that a new government will have the political willpower or ability to push tough economic reforms, which could limit the economy to growing at a subdued rate. In Slovenia, early elections were called for 3 June on 14 April, following Prime Minister Miro Cerar’s resignation. Early polls place the center-left List of Marjan Sarec (LMS) in the lead; this is the first time LMS is running in a national vote. However, uncertainty is high, and the race is close, making it difficult to call. Meanwhile, Greece presented its post-bailout vision to Eurozone members on 27 April as it enters the final stretch of its third bailout program. The program is set to expire in August, and the country is eager to acquire debt relief and take control over its economic policy; Regional outlook moderates

3 May 2018 however, there are fears among Euro officials that Greece could backslide on reforms or fiscal consolidation once the bailout ends. Negotiations over an exit package are expected to continue in the coming weeks.

The Eurozone economy appears to have hit a speed bump in the first quarter, with monthly indicators pointing to a deceleration in activity after a robust spell of growth in 2017. Industrial production plummeted in February, and economic sentiment dropped in March. In addition, the composite PMI fell to an over one-year low in March and hovered there in April, suggesting that the soft patch may have leaked over into Q2. On the political front, wrangling over the 2021–2027 EU budget is set to begin, and the European Commission will present its draft proposal on 2 May. The budget will likely contain some cuts to spending programs and larger national contributions, in part due to the UK’s exit from the bloc, which is set for March 2019. Soft incoming data led FocusEconomics panelists to downgrade their view of the Eurozone economy this month, following six consecutive upgrades. Growth is seen remaining healthy in 2018, supported by an improving labor market, accommodative monetary policy and firm investment. That said, an uncertain political scene and global trade tensions could dent confidence, while exports are expected to lose steam due to a strong euro. The panel now sees the Eurozone economy growing 2.3% this year, down 0.1 percentage points from last month’s forecast. In 2019, GDP is forecast to grow 2.0%. Harmonized inflation rose to 1.3% in March (February: 1.1%). Inflation has failed to pick up substantially despite an ultra-accommodative stance by the ECB. On 26 April, the Bank made no changes to its monetary policy. Our panel sees inflation averaging 1.5% in 2018 and 1.6% in 2019.

From Focus Economics