Doubling Down on ‘Twin’ Sustainability-Linked Government Bonds

Economic

Summary:

Restructuring KPI-linked bonds could be major catalyst to grow market.

One of the biggest obstacles to the growth and wider adoption of sustainability-linked bonds by sovereigns is the difficulty in assessing the true value of these products. This is because the coupons of SLBs are tied to issuers meeting specific targets on their sustainable transition plans.

However, structuring these bonds as ‘twin SLBs’ to assess the probability of issuers meeting their targets could be the solution. This involves issuing an SLB alongside a conventional bond with the same size, coupon and maturity. One would have a coupon with a step-up/step-down feature tied to key performance indicators while one would just have a standard fixed-rate coupon.

The idea is that this structure would enable the market to assess how likely an issuer is to meet its KPIs. For example, if the KPI-linked bond trades at a similar price to the conventional twin, it would suggest a high probability of the issuer meeting its targets due to a low expectation of receiving a coupon step-up. Conversely, if the SLB trades at a higher price than the conventional twin, this would imply that there is a high chance of the issuer not meeting its targets. In other words, there is more demand in the bond as investors are expecting to receive a coupon step-up.

‘It’s useful for investors,’ said Ulf Erlandsson, founder and chief executive of the Anthropocene Fixed Income Institute and one of the leading voices on the SLB market. ‘If you’re a big pension fund or asset owner with 20% to 30% of your capital tied to high-grade government bonds, you’ll be able to measure how your portfolio is aligning with net-zero climate targets.’

‘It’s also attractive to issuers themselves as they will get data on how credible their transition plans are and, if a government changes their policy, the market will respond by repricing the bonds,’ added Erlandsson.

The twin bond structure is not new. Erlandsson wrote a paper about the concept in 2020, a few months before Germany began using this approach to issue its green bonds. The experiment has since proven to successfully demonstrate the so-called ‘greenium’. In 2022, Denmark followed the twin green bond approach but, beyond these two sovereigns, the structure has not taken off. Critics point to the fact that if an investor has an option between two identical bonds with the same credit and duration risk, there is no financial incentive to buy the green-labelled security if it is more expensive.

However, in the case of twin SLBs, there is a financial incentive to buy the KPI-linked bond even if it is more expensive than the conventional twin – particularly if there is a high probability of the issuer not meeting its targets as this would result in a coupon step-up. Moreover, the greenium that comes with the issuance of twin green bonds is based more on speculation on where a green bond should trade relative to a conventional bond. But with twin SLBs, investors are basing their assessment on data and the credibility of transition plans. It is much more robust.

By implementing this structure for SLBs, issuers would also be drawing in not just green and sustainable investors, but pretty much any investor that wants to seek a financial reward. With more investors, this will encourage more issuers to sell SLBs and from there grow the market exponentially. Moving to a market-based approach for assessing the probability of issuers meeting their targets for SLBs seems like a natural progression for this product.

While only Chile and Uruguay have issued SLBs from the public sector market, more sovereigns are actively looking at this product including those from Europe, Africa and Latin America. ‘In many ways, the sovereign, supranational and agency segment could be a more natural home for SLB issuance compared to corporates,’ said Erlandsson. ‘Robust SLBs require standardised and sophisticated datasets, and such datasets are generally produced by sovereigns and public sector borrowers already.’

Source: Burhan Khadbai

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JPMorgan

Economic

One client had attended a financial seminar in which the speaker had argued that, with the baby boom generation dying off after 2030, the economy was headed for collapse. Consequently, the speaker told the crowd, they should sell their businesses and other assets and buy gold. Other clients had asked the financial advisor whether the rising federal debt must inevitably destroy both the U.S. economy and the dollar’s position as the world’s reserve currency.

Over the years, I have been asked many times by financial advisors about these and other apocalyptic scenarios. To be clear, these questions do not spring from the genuine concerns of financial advisors or even the diligent research of their clients. Rather they arise because investors are on the receiving end of messages from prophets of doom, delivered on line, via radio shows or in person. These soothsayers make a living from hoarsely barking out assertions of disaster, without any proof or even any academically sound investigation. The “tell”, of course, comes in the pitch at the end. Because of the imminent disaster, you should sell all your assets and buy gold, or bitcoin, or canned goods and ammunition….and luckily they just happen to have gold and bitcoin and a moderate supply of canned goods and ammunition in their shed out back.

Demographics and Growth

That being said, the first and best defense against such charlatans is a basic understanding of the issues at hand.

First, demographics do not doom the United States to recession.

The U.S. working age population is growing relatively slowly. The Bureau of Labor Statistics estimates that the U.S. population aged 18 to 64 grew by less than 0.1% over the past year. In addition, long-term Census projections, released last November, projected annual growth in 18 to 64 year olds of 0.1% for the rest of this decade and 0.2% for the next decade.

However, it should be noted that these forecasts assume annual net immigration of less than 900,000 between now and 2040. This is likely an underestimate based on recent migration trends and, while we clearly need comprehensive immigration reform, it should be recognized that over 70% of net immigrants are aged 18 to 64, and thus in their prime working years compared to less than 60% of the existing population.

It should also be noted that the labor force participation rate for the population aged 18 to 64 has actually been rising in recent years and hit a 15-year high in April.

Consequently, in contrast to nations like Germany, Japan and Italy, the supply of workers to the U.S. economy should continue to grow in the years ahead. In addition, the U.S. workforce continues to become more productive. While real GDP per worker increased by only 1.3% per year in the first two decades of this century it has risen at an annual pace of 1.7% since then, despite the disruption from the pandemic. With abundant investment in AI and robotic technologies, productivity growth could well accelerate from this pace in the years ahead.

In our consumer-driven economy, an economy producing more jobs, more income and more output should also continue to generate the demand for that output, allowing the economy to grow at close to a 2% pace, interrupted only intermittently by occasional recessions.

In short, while the baby boom generation will sadly fade in economic significance, there is no reason to believe that this will spell doom for the U.S. economy.

Sizing up the Debt Threat

A second strand to the narrative of economic disaster concerns the federal debt.

Last fiscal year, which ended on September 30th, 2023, the federal government ran a deficit of almost $1.7 trillion or 6.3% of GDP with federal debt in the hands of the public rising to $26.3 trillion or 97.5% of GDP. In their June forecasts, the Congressional Budget Office projected deficits of over $2 trillion per year for most of the next decade, with the debt rising to 122.4% of GDP by 2034. Moreover, these forecasts assume that the 2017 tax cuts that were set to expire in 2025 actually do so. If they were, instead, fully extended then, again using CBO numbers, the debt-to-GDP ratio would rise to 133.4% by 2034. Even this excludes the cost of further promises currently being made on the campaign trail, including eliminating taxes on social security and tips, further reductions in the corporate tax rate, and subsidies for first-time homebuyers.

It is very reasonable to worry that our democracy has degenerated to such an extent that we will to elect politicians who propose tax cuts or spending increases without any mention of how to fund them and who entirely ignore a long-term need to move the federal finances back to balance.

However, this does not mean we are on the edge of a fiscal catastrophe.

First, political promises, over and above the extension of the 2017 tax cuts, should be taken with a grain of salt. The current election campaign is very close, suggesting that whichever party wins the presidency may not also have control of both houses of Congress. Even a narrow sweep scenario would not necessarily mean significant fiscal stimulus, since Senate moderates in both parties have a history of obstructing their own president’s proposals.

Second, the world still has a huge appetite for U.S. Treasuries. In calendar 2023, in order to finance the deficit, offset quantitative tightening by the Federal Reserve and rebuild cash balances, the U.S. Treasury Department borrowed almost $2.6 trillion from global capital markets and the 10-year Treasury yield ended the year at 3.88% - exactly the same rate as at the start of the year. In the first 8 months of 2024, Treasury has raised a further $2.1 trillion and the 10-year yield stands at just 3.91%. This suggests that the world can absorb enormous Treasury issuance without a crisis.

Third, a critical factor in any fiscal crisis isn’t the debt itself – it is the interest payments on the debt. Provided inflation is low, long-term interest rates should also continue to be low, allowing the government to finance its debt cheaply. Since peaking in 9.1% year-over-year in June 2022, the U.S. CPI inflation rate has fallen to 2.9% in July of this year and is on track to drop below 2.0% early next year. The reality is that, despite the bout of inflation caused by the pandemic, the policy response and the Ukraine war, long-term forces such as diminished union power, greater inequality and increased use of information technology tend to depress U.S. inflation. And if inflation and interest rates remain low, the federal government can likely continue to run massive deficits in the years ahead without precipitating a crisis.

The Role of the Dollar

And then there is the issue of the dollar.

The U.S. dollar continues to play a preeminent role as the currency of global trade, an asset on the balance sheet of the world’s central banks and the alternative currency of choice in countries around the world where governments allow their domestic currency to be ravaged by inflation.

The dollar’s role has significant advantages for the United States. It has funneled global savings into U.S. capital markets, boosting asset prices and allowing the federal government to finance its debt more cheaply. It has allowed the Federal Reserve on many occasions to coordinate a global response to regional financial crises.

However, it has also had its downside. Partly because of its preeminent position in world financial markets, the U.S. dollar has traded at too high a level from an economic perspective for many years. In raw numbers, this can be seen in a trade deficit that will likely top $800 billion this year. In the real world, decades of a too-high dollar have decimated American manufacturing, contributing to economic decline in many communities across the nation.

With inflation retreating, a steady decline in the dollar to more appropriate levels would likely be a good thing. However, despite efforts by some nations to undermine it, the dollar is likely to retain its role in the global economy. The reason is simple – there is no better alternative.

The euro is probably the most respectable long-term challenger to the dollar. However, Europe has its own problems of slow growth and federal cohesion. Moreover, the European economy would also likely be hurt by any appreciation in the euro from its greater use as a global currency.

In short, despite occasional alarming headlines, there is no evidence that the dollar is about to plunge or lose its role in the global economy.

Apocalyptic Assets

Finally, while reasonable analysis can address many of these apocalyptic scenarios, should investors consider buying gold or cryptocurrencies anyway?

These two assets should probably be considered separately.

Gold does have some positive characteristics. It has been a form of money for millennia, it is used as an asset by central banks, it has some industrial uses and does, of course, make beautiful jewelry. In addition, short of nuclear fusion, it is in genuinely limited supply.

However, this limited supply ultimately means that it cannot be used as a modern currency. In a global economy with positive real economic growth, a gold-standard economy would be doomed to a either perpetual mild deflation or require some artificial mechanism to increase the velocity of transactions at a steady pace. Moreover, while gold has been seen as a hedge against inflation in the past, this has not worked out recently. Since January 1991, the correlation between gold and inflation has barely been positive and over the past decade it has actually been negative.

The price of gold has risen by over 20% so far this year. However, it is fundamentally a speculative asset, and, as such, should only merit a very small allocation, if any, in a diversified portfolio.

That being said, the fundamentals of gold positively glisten relative to cryptocurrencies. Cryptocurrencies have gained new interest this year as the industry has invested heavily in advertising and political contributions. However, it needs to be emphasized that an “asset” such as bitcoin can never really be used as a currency since the primary requirement of a currency is stability and that those buying and holding bitcoin are only doing so on the conviction that it will go up. Needless to say, bitcoin is not used as a reserve asset of global central banks, has no assets or taxing authority backing it and is not used in any extensive way in transactions. Nor is it really in limited supply. While the algorithms upon which bitcoin is based allow for a maximum of 21 million coins, there is absolutely nothing to stop an enterprising young crypto enthusiast from setting up “mitcoin”, “zitcoin” (or my personal favorite “davecoin”).

This is not a place to review the shortcomings of cryptocurrencies. For any financial mania to succeed you don’t need to fool all of the people all of the time – you only need to fool some of the people some of the time. You can even make a profit if, according to the greater fool theory of finance, you can find some greater fool to take it off your hands at a higher price.

However, for serious long-term investors, there is really no reason to dabble in speculation or the hunt for greater fools. The reality is that, while the U.S. economy faces plenty of risks, the noisiest alarm bells are mostly false alarms. As we enter the fall of 2024, global financial markets still offer plenty of opportunity to those willing to invest in a diversified way with one eye on valuations and the other on their own return goals and risk tolerance.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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ING

Economic

Decline expected in 2024

We expect a decrease in EU construction volumes this year (-1.5%). This is a down on our previous forecast (-0.5%), mainly because of revised Eurostat data. The European data office recently upgraded the 2023 EU Construction figure from 0.1% to 1.4%. Growth has therefore lasted longer than we expected, and as a result, the decline started later, leading to a larger-than-expected contraction in 2024.

However, the optimistic signs – noted in our previous forecast – are becoming more visible. House prices are increasing further in many countries and the issuance of building permits has risen. In addition, at the beginning of the construction value chain, it looks like the producers of building materials (eg. concrete, cement and bricks) have passed the lowest point of production volumes.

Construction volume decreasing but building material production is starting to recover

EU construction sector volume (Index January 2020=100, SA, latest data point June 2024)

Source: Eurostat, ING Research

Due to long lead times, new residential and non-residential building volumes will still decline in 2024 with home buyers and firms continuing to avoid investing in new premises. However, for the renovation subsector (including sustainability works) we foresee structural growth in demand. We also expect that investments in infrastructure will continue to grow. The main drivers for this growth will come from the EU Recovery funds, investment in digital infrastructure, waterworks, extensions of the power grid and the energy transition.

Growth returns in 2025

For 2025, we expect the above-mentioned growth trends in the renovation and infrastructure sector to continue. We also expect the new building sector to slowly improve due to the recovering housing market and the increasing amount of building permits for new homes. The result will be that growth will return to the construction sector in 2025.

Housing prices take a positive turn

In many EU countries, house prices have started to increase again, after a period of decline. Structural housing tightness, especially in cities, is supporting demand. Increasing wages and (marginally) declining mortgage interest rates make it possible for house buyers to borrow more, thus driving up house prices.

For instance, in Poland, prices of existing homes went up by more than 4% in the first quarter of the year. During the same period, house prices in Spain and the Netherlands increased by 2%. Yet, in Germany, where the economic situation is more sluggish, house prices declined (by -1.1%).

Prices of newly-built houses follow general trend in house prices

House price development Q1 2024 - Q1 2015

Source: Eurostat, ING Research

Development of prices Higher prices of existing houses are good for new residential building volumes, although this will take some time to materialise. Sales prices of new houses are closely related to prices of existing houses as they are often substitutes for consumers who are in the market for a new home. Therefore, price developments of the two can’t and won’t diverge too much in the medium and long run. So, when house prices of existing houses increase again, this also gives the opportunity for project developers to increase the sales price of newly built houses. This is also what we see happening. In addition, building material costs have almost stabilised in the last year, which makes it easier for developers to make projects profitable again. Therefore, more housing projects can be carried out.

Prices of new houses are increasing in most EU countries. Poland and Spain have witnessed the highest price increases in newly built homes during the past quarters. In France and Germany, house prices of new builds (and existing houses) are still declining. The Netherlands also experienced a modest decline in newly built house prices in the first quarter. As Dutch house prices have increased to high levels before and Dutch house prices of existing houses are on the rise again, we see this as a one-off movement.

Price developments of new houses

Prices of new houses, Quarterly index, 2015=100

Source: Eurostat, ING Research

Issuance of building permits on the rise again

Now that demand for new-build houses is increasing, it is supply that will become the main limiting factor in many countries due to shortages of building land, financial issues, complex project development and/or legal delays. Yet, after two years of decline, the issuance of EU building permits has been rising since the third quarter of 2023 and increased by 6.6% in the final quarter of last year and by 1.5% in the first quarter of 2024. High recovery rates of issued building permits are mainly being seen in Spain, Poland and the Netherlands.

The data doesn’t show any real improvements yet in France and Germany. French and German project developers and building companies are still reluctant to commit to new projects as the housing market in these countries is still sluggish compared to other EU countries. However, housing shortages in these countries will also ensure sufficient demand in the residential sector in the long run.

Permit issuance for non-residential buildings starts to dropThe issuance of permits for non-residential buildings has shown only a marginal decline in the last two years. However, the slowdown of economic growth, higher interest rates and geopolitical and economic uncertainty have made companies hesitant to invest in new premises.

In addition, during the Covid-19 crisis, there was an enormous rise in e-commerce which increased the demand for new logistics centres. Now, that this surge is over, the demand for new storage facilities is declining to more structural levels.

Nevertheless, other subsectors in the non-residential sector have partially counterbalanced the decline. Public spending on buildings for education and health has stabilised aggregate demand in the non-residential sector. As the European economy is slowly recuperating and interest rates have decreased a bit, we expect that the outlook for the non-residential sector will also improve slightly. However, it always takes time before these growth rates become visible in building volumes. We therefore expect that the non-residential sector will start to grow in 2025 after some decline this year.

The issuance of residential building permits is rising again

New buildings permits* in the EU (index 2018 Q1 = 100, SA)

*non-residential buildings measured in m2, excluding offices

Source: Eurostat, ING Research

High number of developments in Poland and Ireland

Poland has added the highest percentage of new residences to its housing stock in the period 2021-23. Polish housing stock has increased by almost 1.5% annually. Ireland and Austria also showed high yearly growth rates of new houses during this period. These relatively high rates make it possible to better deal with the scarcity of houses, as a high rate of new supply can lower shortages.

At the other end of the range, we find Italy and Spain. In these countries, the rate of new house growth is low (about 0.3% yearly). This could be due to many issues such as long permit procedures or financial shortcomings. Nevertheless, it keeps the local housing markets in Spain and Italy tight.

Fastest growth of housing stock in Poland

Average yearly new house rate (2021-23)*

*as average yearly new housing completions as a % of total housing stock

Source: Euroconstruct, ING Research

Choppy periods for renovation and maintenance

From a historical perspective, demand for renovation and maintenance has been remarkably volatile in recent times. During the first Covid-19 lockdown, people were reluctant to have handymen in their homes. This gradually changed and demand for improvement grew rapidly in 2021 as many people suddenly required a “home office” since remote work became the norm. In addition, consumers had spare money to invest in their homes as they couldn’t spend their savings on holidays.

In 2022, skyrocketing energy prices decreased consumers’ purchasing power. This resulted in a downturn in the number of people who wanted to refurbish their homes. In contrast, the demand for energy-efficient investments (eg. solar panels, insulation and heat pumps) temporarily grew as the payback period for these refurbishments dropped enormously.

Stable growth will return in the renovation sector

All in all, despite the temporary circumstances caused by the Covid-19 pandemic and the energy crisis, the trajectory for residential energy efficiency and sustainability upgrades remains promising. Looking ahead, we expect gradual growth in the renovation market due to sustained government regulations and the structural impact of higher energy prices. Therefore, demand for residential energy efficiency upgrades is likely to return to its upward trend. Consumers also indicate in surveys that they expect to improve their house in the coming months. And after the volatile Covid and energy crisis period, this indicator is slowly moving back to its structural upward trend.

Demand for home improvements has been volatile

Balance of EU consumers that expect to improve their home over the next 12 months

Source: Eurostat, ING Research

Number of EU contractor bankruptcies back to average

The number of insolvencies among EU contractors has steadily increased and has reached pre-Covid levels. The number of bankruptcies was surprisingly low during the Covid-19 period due to the massive intervention of governments to compensate for the effects of the loss of activity. Furthermore, the construction sector was modestly affected by the pandemic in comparison to other sectors, like hospitality and aviation.

Two countries stand out. In Poland, bankruptcy levels remain low due to relatively favourable market conditions. In Spain, insolvencies of building companies increased during the Covid crisis and this trend has persevered. That’s probably because the contraction of construction volumes in Spain was relatively high during the pandemic and the fiscal measures in Spain were limited compared to other hard-hit countries. In addition, in September 2022, a new Spanish law on insolvency was finally passed, which gives creditors more power. Restructuring processes that previously got stuck in court can therefore be handled faster and this could have resulted in more bankruptcies.

Since the third quarter of 2023, the level of bankruptcies in the EU construction sector has remained stable. We expect that the number of EU building companies that have to close their doors will more or less stabilise at this level during the remainder of 2024 and 2025. Price increases in building materials have mostly stopped and, as mentioned, demand will slowly pick up in the coming quarters.

Number of bankruptcies back to normal level

Number of bankruptcies construction companies in EU (index 2021=100)

Source: Eurostat, ING Research

EU country construction developments at a glance

Germany: decline continues in 2024In the second quarter of 2024, German construction volumes decreased by 2.6%. Although the first quarter showed some growth, this comes after three consecutive years of decline between 2021 and 2023. For 2024, we anticipate a further downturn in the EU’s largest construction market.

In August, German contractors were the most pessimistic among major EU countries. The continued drop in building permits for new residential projects in the first quarter of 2024 highlights ongoing difficulties. However, the civil engineering sector in Germany offers some relief. The country’s infrastructure is in poor condition, and investments in roads and digital infrastructure are driving some growth in this subsector.

France: marginal decline in 2024Overall, we expect that French construction output will decrease by -1.0% in 2024. French contractor sentiment was pessimistic in 2023 and hasn’t recuperated. In August, the French construction confidence index (EC survey) was still negative. In addition, 24% of French contractors are generally unsatisfied with their order books. The issuance of building permits for new houses is also decreasing. House prices are still declining which makes new developments more difficult. Labour shortages are less of an issue and yet 30% of French builders complain about it.

EU Construction Forecast

Volume output construction sector, % YoY

*Estimates and Forecasts

Source: Eurostat & ING Research

Netherlands: Recovery of housing market but lower production volumes in 2024We expect that Dutch construction output will shrink by around 3% in 2024, mainly due to a sharp decline in the first quarter. New construction production in 2024 will still be affected by the previous fall in permitting and declining new home sales in 2023. In 2025, there will be a recovery for the Dutch construction industry, mainly due to the upswing in newly built production of homes. At the beginning of the construction value chain, clear signs of recovery are visible. The turnover of project developers is increasing and the number of building permits issued increased in the first months of 2024. In addition, sales of newly built homes are on the rise due to the improving housing market.

Spain: High growth in the construction sectorThe Spanish construction sector grew by a very strong 4.5% in 2023 and during the first half of 2024 more or less stabilised. Nevertheless, Spanish building firms have had a difficult period. The production level shrank by almost 25% between 2019 and 2022. Yet, the development of residential and non-residential permits continued to grow in the first quarter of the year after a strong increase in 2023. The EU's recovery fund investments in the Spanish construction sector are positive as well. Therefore, we expect further growth in the Spanish construction sector in 2024 and 2025 but at a slower pace compared to 2023.

Strong development differences among countries

Volume construction sector (Index 2016=100)

Source: Eurostat & ING Research (Turkey value added data)

Poland: decline in 2024 but better outlook for 2025The Polish construction sector grew by 5.3% last year. The higher volumes were mainly driven by the infrastructure sector (+12.4%). Yet, the first half year of 2024 was less promising, Polish construction output fell by -9.8 in the first quarter and -0.9% in the second quarter, both compared to the previous quarter. Many infrastructure projects under the previous EU financial perspective have ended and the startup of new EU-financed projects will take some time. That said, building permits for residential buildings are on the rise again. House prices are still increasing which makes new developments more affordable for developers. However, this also means that people can't afford to own a house anymore. A large rebound in Polish construction as a whole is not likely to occur until 2025. Nevertheless, in residential construction, it could be as early as the second half of 2024.

Turkey: growth after a long period of declineThe Turkish construction sector grew in 2023 for the first time in five years. Production volumes increased by 7.8%. The first quarter of 2024 was also strong with growth of 3.7%. Yet, in August, the Turkish construction confidence indicator (EC survey) was still negative and builders were still not satisfied with their order books. In addition, many Turkish contractors complain about low demand and the issuance of building permits has increased a bit but follows a bumpy road. It could be that the permit data is understated. Usually, most permits are issued by municipalities. Yet, due to special circumstances after last year's earthquake, other institutions are now also granting permits which are not included in the statistics (yet). All in all, we expect the Turkish construction sector to grow further this year and next but less exuberantly than in 2023.

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The Conference Board

Economic

The gradual swing in developed market (DM) monetary policy continued in August.Last month, the Bank of England, Sweden’s Riksbank, and New Zealand’s RBNZ made three more interest rate cuts, bringing the total number of cuts by the major 12 DM central banks The Conference Board follows regularly to nine.

50% of DM central banks are now in a rate-cutting cycle. The Bank of England and New Zealand’s RBNZ increases the ranks of rate cutters to six. Meanwhile, Sweden’s Riksbank became the third repeat rate cutter, further evidence that we are moving into an environment of repeated and prolonged rate cuts. Lower financing costs and less restrictive financial conditions should contribute to improved developed world growth prospects in 2025.

The Conference Board developed market monetary policy rate average still has not progressed much. The (GDP-weighted) DM central bank policy rate average declined two basis points following the Bank of England’s and the Riksbank’s interest rate cuts last month. At 4.11% at the end of August, the DM average is still not showing a noticeable downward momentum. Meanwhile, with data available through the end of July, the GDP-weighted DM inflation average remains in a moderate downward trend.

Three more rate cuts in August support the ‘Shifting Monetary Policy Winds’ narrative

The Bank of Englandcut policy rates by 25 basis points to 5.00% during their August 1st The decision was close, with five of the nine Monetary Policy Committee (MPC) members voting for a rate cut; the other four preferred to leave rates unchanged. UK inflation has slowed to the bank's 2% target. Yet, the gap between deflationary annual goods inflation (-1.4% during June) and still elevated services inflation (+5.7%) remains wide, and the bank expects headline inflation to pick up again over the remainder of the year. Despite that, the policy statement highlighted the MPC’s view that “it is now appropriate to reduce slightly the degree of policy restrictiveness.”

The Reserve Bank of Australia (RBA) left policy rates unchanged at 4.35% and remained in the camp of central banks that have not cut rates yet. At 0.9%, Australian real policy rates remain below the 1.4% GDP-weighted DM average, indicating that monetary policy is not as restrictive as that in most of its peers. The policy statement showed the bank still very much concerned about inflation, calling it “above target and [..] proving persistent.”

The Reserve Bank of New Zealand(RBNZ) cut policy rates by 25 basis points to 5.25%. It was the bank’s first rate cut, leaving the Federal Reserve with the highest policy rates among the major DM central banks. New Zealand’s inflation rate fell to 3.3% in Q2, but it is still the second-highest rate among the 12 major DM economies. Since the RBNZ is operating with a +/- 1% band around its 2% inflation target, the bank can say that “inflation is [close to] returning to within the Monetary Policy Committee’s 1 to 3 percent target band”. New Zealand’s real policy rates at 1.9% are still relatively high, suggesting there is room for further rate cuts, but the bank is likely to proceed slowly and cautiously.

Sweden’s Riksbank cut policy rates by 25 basis points to 3.50% at their August meeting. It was the bank’s second interest rate cut since starting the rate-cutting cycle in May. Swedish real policy rates at 1.8% remain relatively high, partly because Sweden’s inflation rate has fallen to 1.7%. That suggests ample room for the Riksbank to cut rates further in the coming months, which the bank’s policy statement acknowledged by stating that “if the inflation outlook remains the same, the policy rate can be cut two or three more times this year.”

Norway’s Norgesbank left policy rates unchanged at 4.50%. Norwegian real interest rates at 1.7% remain well above the 0% - 1% neutral range, suggesting the bank has room to cut rates once conditions are deemed right. However, Norgesbank’s policy statement maintained a more cautious tone. It acknowledged that inflation has improved, but labor markets remain tight, and “the rapid rise in business costs will likely slow further disinflation.”

The Bank of Korea (BOK) left policy rates unchanged at 3.50%. Real policy rates at 1% suggest the bank is not far from neutral and, therefore, not in a rush to ease. The policy statement pointed to concerns about government measures that could stimulate the local housing market as one reason to stay on hold.

The pace of interest rate cuts should start to gather even more pace in September

September will be an extremely busy month for central bank watchers. The highlight is the FOMC meeting (Sep 19), where the Fed is widely expected to join the group of rate cutters. U.S. real policy rates are still well over 2% (2nd highest among the key DM central banks), indicating monetary policy conditions remain very restrictive. Plus, Chair Powell strongly hinted at a rate cut in his speech at the Fed’s annual Jackson Hole symposium in August, where he said: “the time has come for policy to adjust.”

Also on the calendar in September are the ECB (Sep 12) and Bank of England (Sep 19). Both banks have already started to cut rates – the ECB in June and the Bank of England in August. UK real policy rates at 2.8% are the highest among the 12 DM central banks, suggesting ample room to adjust the degree of policy restrictiveness. The ECB is facing a weak growth backdrop and a fiscal policy that is becoming more restrictive due to the reinstatement of EU deficit rules.

Meanwhile, the Bank of Japan (Sep 20) is still considering further rate increases as long as inflation remains above its 2% target. However, the sharp yen appreciation since the bank’s last meeting and concerns about the rapid unwinding of carry trades may prompt the bank to pause this month. In July, the BOJ also announced a slowdown in asset purchases that is expected to shrink the balance sheet by 7% - 8% by March 2026. So far, there is not much evidence of QT in Japan with the balance sheet reaching a new high at the end of August.

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Samantha Luan

Commodity

The complex and evolving trade relationship between the United States and the European Union is at a pivotal moment, reflecting broader global shifts and geopolitical uncertainties. As two of the world’s largest economies, the U.S. and the EU have long maintained deep economic ties, characterized by significant trade in goods and services, as well as robust foreign direct investment. However, recent years have seen these dynamics challenged by global events such as the Covid-19 pandemic, Russia’s full-scale invasion of Ukraine and the rising influence of China.

The U.S. and Europe have long enjoyed strong economic ties through international trade, although in recent years the balance of trade has been tilted in Europe’s favor: In 2022, the U.S. imported goods and services worth $723 billion from the European Union. In return, the U.S. exported goods and services worth $592 billion to the EU, resulting in a U.S. trade deficit with the EU of about $131 billion. Total U.S. trade with Europe in goods and services was 73.4 percent larger than total U.S. trade with China. Nevertheless, the U.S. trade deficit with China was almost three times as large as the U.S. trade deficit with Europe.

That could change if former President Donald Trump gains reelection this November. His protectionist trade policies, which remain a key aspect of his campaign, will likely focus primarily on China, as was the case in his first term in office between 2017 and 2021. However, there is also a considerable degree of uncertainty around the question of what Mr. Trump’s reelection would imply for the U.S.-EU trade relationship. Over recent decades, no other two major regions in the world have shown stronger ties in terms of trade flows than the U.S. and the EU, but will this relationship endure?

President Trump has openly pondered the idea of introducing a 10 percent tariff on all imports from anywhere in the world – including the EU. Such a universal tariff would be of particular significance for Europe as the most important trading partner of the U.S. Although it is often argued that Mr. Trump advocates tariffs not for their own sake but merely as a threat to impel others to reduce trade barriers, this might just be wishful thinking from those who understand and appreciate the benefits of the international division of labor.

Trade in goods

In 2020, China temporarily became, for the second time after 2010 and 2011, Europe’s largest trading partner when it comes specifically to goods, or tangible items that can be used, stored or consumed. When services are included – where the receiver does not obtain anything tangible through the transaction – the U.S. remained Europe’s biggest trading partner. If the U.S. imposes more restrictions, the trade relationship between Europe and China might be reinforced, continuing a trend observed over the past decades, during which total European trade in goods with China grew from less than 1 percent of gross domestic product (GDP) in 1999 to more than 5 percent in 2022.

European trade in goods with the U.S. initially declined between 1999 until the financial crisis hit in 2007. Since then, there has been a trend reversal: The EU-U.S. trade in goods as a total share of the EU’s GDP has been on the same trajectory as the EU-China trade in goods.

Europe has a sustained and increasing trade surplus with the U.S. when it comes to goods: While imports from the U.S. in 2023 were at about the same level as in 2000, exports as a share of GDP increased by more than 21 percent over the same period. In contrast, with China there is a sustained and increasing trade deficit. Both imports and exports have increased by a factor of more than five, and the deficit has grown from 0.3 percent of GDP in 1999 to 1.7 percent of GDP in 2023.

Trade in services

Trade in services remains dominated by the U.S. The U.S. holds a persistent and increasing trade surplus both with the EU and China. In absolute terms the trade in services is much stronger between the U.S. and the EU than between the U.S. and China, but the fall in service trade after 2019 is much stronger for the EU. In fact, in 2023 U.S.-EU trade in services as a percentage of U.S. GDP had not even returned to its level of 1999 – far less its pre-pandemic level.

It is precisely in services trade where we can observe, from the end of the first Trump administration to the end of the Biden administration, a decoupling between Europe and the U.S. relative to U.S. GDP. Given that the tie between Europe and the U.S. is also built on services, this development points to a tension in the U.S.-EU relationship with deeper causes than the prospect of Mr. Trump returning to the Oval Office. However, the tension might be exaggerated in the data presented here: In absolute terms, both imports and exports of services between the U.S. and the EU have come closer to pre-pandemic levels. It is only relative to U.S. GDP that a notable difference remains.

Foreign direct investment

The third main indicator of international trade and economic relationships is foreign direct investment (FDI). Slightly more than a quarter of the EU’s FDI outside the bloc is held in the U.S. This share, after some ups and downs, has increased only mildly over the past decade, by about 9 percent. EU foreign direct investment in China accounts for a much smaller share in overall EU external FDI, but has seen a sustained increase since 2017, rising by more than 26 percent in only five years.

There are nuances, however. When Hong Kong as a special economic zone is included, we observe a significant hike before the outbreak of the Covid-19 pandemic that subsequently vanishes. And while the overall trend remains positive, it is possible that the latest data for 2023 will show a trend reversal as a consequence of Western reactions to Russia’s full-scale war on Ukraine, and China’s friendly relationship to Russia.

Source: GIS

Risk Warnings and Disclaimers

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ING

Economic

25bp or 50bp debate remains unresolved

The jobs report provides a real mix of numbers that does little to resolve the debate over whether the Fed will cut rates by 25bp or 50bp on 18 September. We have a 50bp in our forecast, but it is a low conviction call made on the basis that inflation fears have receded and the Fed will want to get ahead of labour market weakness, which we think will become increasingly apparent in the months ahead.

US non-farm payrolls change including provisional downward revision line (000s)

US Payrolls Fails to Resolve the 25 or 50bp Rate Cut Call_1

Payrolls continue to soften, but remain positive

In terms of the August numbers, headline non-farm payrolls rose 142k versus the 165k consensus, so a slight downside miss, but there were 86k of downward revisions to the past two months. We are seeing consistent downward revisions to the data now, and that doesn’t even include the provisional benchmark revisions released a few weeks back that showed the BLS overestimated payrolls growth by an average of 78k per month in the 12 months to March 2024. For example, June was initially reported at 206k, to be revised to 179k last month, and now is just 118k, while July was revised down to 89k to 114k.

Given that, can we really trust today’s number? Do we need to knock 78k off the headline figure to take account of the error in the BLS model? - that would give payrolls growth of just 64k.

The unemployment rate has dipped back to 4.2%

On the positive side, we see that the unemployment rate has dipped back to 4.2% after rising from 4.1 to 4.3% last month. Yet the underemployment rate rose to 7.8% from 7.9% so there are a growing number of people that are working part-time, but want to work full time. In this regard, the details show manufacturing looking very weak (-24k). Retail and temporary jobs have fallen for three straight months, and IT jobs have fallen or been flat for five months.

The strength continues to be government (+24k), leisure & hospitality (+46k) and private education and healthcare services (+47k). These are sectors that are typically lowered paid, less secure and more part-time. As such, I would argue that the details are weaker than suggested by the headline; the typical sectors I would associate with a strong, vibrant economy are not performing (business services, manufacturing, transport and logistics, tech, etc).

Are we losing the "good jobs"?

Moreover, the chart below does not look good. Full-time versus part-time employment is showing a big divergence, which tallies with the idea that the US is adding largely lower-paid, part-time jobs and is losing full-time, well-paid jobs, primarily through attrition - not replacing retiring or quitting workers. Every recession starts this way, unfortunately. The easiest way to cut costs is not to replace workers, but if everyone is doing that, then the economy slows, and companies start making actual cuts down the line.

Full time versus part time employment YoY%

US Payrolls Fails to Resolve the 25 or 50bp Rate Cut Call_2

With job weakness set to intensify we still hold onto a 50bp cut view

In terms of the Fed decision, today’s readings on balance suggest a 25bp cut looks marginally more likely than 50bp (50bp is our forecast), meaning there's no real urgency to go hard early. Still, the jobs market is always the last thing to turn in a cycle, and it is already clearly cooling. Given Fed Chair Powell’s warning that “we don’t seek or welcome further cooling in labor market conditions” there is a strong argument for getting out ahead of potential weakness and opting for 50bp.

He will certainly propose it but is likely to get some pushback from some regional presidents. I strongly suspect this won't be a unanimous decision – something we haven’t seen for a long time. The next stop is CPI, which, of course, could completely blow this out of the water should we get an upside surprise of 0.3%MoM on core inflation… the job of an economist is never dull.

Source: ING

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Cohen

Contrary to wider belief, an analyst argues Ether has a slim chance of hitting new all-time highs by the end of 2024, as it has struggled to build a strong narrative and keep up with the appeal of tech stocks.

However, several traders are adamant a price spike is just around the corner.

“Right now, Ethereum is struggling with a lack of a strong narrative to drive its price, especially compared to other assets,” crypto derivatives platform Derive founder and former Wall Street trader Nick Forster told Cointelegraph.

Spot Ether ETFs returns not as lucrative for Wall Street

The launch of spot Ether (ETH) exchange-traded funds (ETF) on July 23 may have drawn more “Wall Street attention” to the asset, but its also put Ether in direct competition with more lucrative technology stocks that are “delivering better revenue and multiples,” Forster explained.

Since Jan. 1, the underlying asset Ethereum is up 0.98%, currently trading at $2,376, according to CoinMarketCap data. Meanwhile several leading tech stocks have seen far greater returns over the same period.

Ethereum printed a price of $2,282 on Jan. 1. Source: CoinMarketCap

Nvidia (NVDA) is up 122.57% trading at $107.21 and Meta Platforms (META) is up 49.26% trading at $516.86, according to Google Finance data.

He believes that “it's possible, but not highly likely” that Ether will break its current all-time high of $4,878 by the end of 2024.

“Options markets give it around a 10 percent chance,” he explained, noting that three major events “need to align” for it to happen.

These include Donald Trump winning the United States presidential election in November, the Federal Reserve making “aggressive rate cuts” to boost liquidity, and a “broader increase’ in global financial liquidity.

However, crypto trader Zen believes that a rate cut alone might not be enough. If it falls short of market expectations, it could lead to a bearish reaction.

“Be careful here. Feds cutting rates by 50 is a new rumor. Market is adjusting prices for that scenario. So 25 bps rate cut can become bearish news,” Zen wrote in a Sept. 4 X post.

US election may be a significant event for Ethereum

However, Forster claimed that the election alone could be the “most significant event” in Ethereum’s history, even more so than the approval of the ETF.

“There’s an extra bump of volatility implied around the election, with a potential 10-15% move on that day,” he added.

Forster pointed out that traders are expecting “more significant price swings” than what the asset has been printing in the near term.

“Generally, Ethereum has seen daily moves of around 2.5-3 percent, but the market is now pricing in daily moves closer to 3.5%,” he explained.

Meanwhile, pseudonymous crypto trader Titan of Crypto opined in an Sept. 5 X post that “an upward move seems just around the corner.”

They explained that when the Relative Strength Index (RSI) — measures the speed and change of price movements to identify overbought or oversold conditions — is “in or near oversold territory” on the three day chart, Ether “sees either a rally or a short-term pump.”

Fellow trader Yoddha added they are confident that Ether is “getting ready for five figures” despite the ongoing consolidation.

Source: COINTELEGRAPH

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Doubling Down on ‘Twin’ Sustainability-Linked Government Bonds

Source: Burhan Khadbai

Demographics, Debt, the Dollar and Apocalyptic Assets

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Eu Construction Outlook: Strong Decline This Year But Signs Of Recovery In 2025

Decline expected in 2024

Construction volume decreasing but building material production is starting to recover

Source: Eurostat, ING Research

Growth returns in 2025

Housing prices take a positive turn

Prices of newly-built houses follow general trend in house prices

Source: Eurostat, ING Research

Price developments of new houses

Source: Eurostat, ING Research

Issuance of building permits on the rise again

The issuance of residential building permits is rising again

*non-residential buildings measured in m2, excluding offices

Source: Eurostat, ING Research

High number of developments in Poland and Ireland

Fastest growth of housing stock in Poland

*as average yearly new housing completions as a % of total housing stock

Source: Euroconstruct, ING Research

Choppy periods for renovation and maintenance

Stable growth will return in the renovation sector

Demand for home improvements has been volatile

Source: Eurostat, ING Research

Number of EU contractor bankruptcies back to average

Number of bankruptcies back to normal level

Source: Eurostat, ING Research

EU country construction developments at a glance

EU Construction Forecast

*Estimates and Forecasts

Source: Eurostat & ING Research

Strong development differences among countries

Source: Eurostat & ING Research (Turkey value added data)

Developed Market Central Bank Watch - September 2024

The future of U.S.-Europe trade

Trade in goods

Trade in services

Foreign direct investment

Source: GIS

US Payrolls Fails to Resolve the 25 or 50bp Rate Cut Call

25bp or 50bp debate remains unresolved

US non-farm payrolls change including provisional downward revision line (000s)

Payrolls continue to soften, but remain positive

The unemployment rate has dipped back to 4.2%

Are we losing the "good jobs"?

Full time versus part time employment YoY%

With job weakness set to intensify we still hold onto a 50bp cut view

Source: ING

Ether All-time High In 2024 'possible, But Not Highly Likely'

Spot Ether ETFs returns not as lucrative for Wall Street

Ethereum printed a price of $2,282 on Jan. 1. Source: CoinMarketCap

US election may be a significant event for Ethereum

Source: COINTELEGRAPH

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