Citibank 1/6: EU-US divergence - mind the gap(s)!
Citi analysts - #Europe is still struggling to recover from the Covid-19 pandemic, while the US is continuing to recover. Euro area real GDP has contracted by 0.7% QQ (-4.9% YY) in 4Q-20.
Citi analysts - #Europe is still struggling to recover from the Covid-19 pandemic, while the US is continuing to recover. Euro area real GDP has contracted by 0.7% QQ (-4.9% YY) in 4Q-20.
Citibank 2/6: Over the same period, US GDP has risen by 1.1% QQ (-2.4% YY). Citi analysts focus on 6 of the more salient aspects of the transatlantic divergence between the euro area & US & conclude the gap is unlikely to narrow any time soon & could even widen in the short-term.
Citibank 3/6: Transatlantic divergence - where are the gaps? – (1) Business Cycle — Euro area weakness is unlikely to end soon, with a challenging 2Q, perhaps extending into 3Q with narrowing only expected 12 months out; (2) Vaccinations — Europe lags US by 2 months.
Citibank 4/6: Optimistic (pessimistic) scenario suggest narrowing (widening) to 1.5 (2.5) months; (3) GDP trend — return to pre-crisis trend is more complicated for euro zone. Underperformance could become entrenched and output gap much larger; (4) Widening fiscal gap —
Citibank 5/6: from twice as large in 2020, US stimulus could be more than 3 times bigger than euro area in 2021; (5) US reflation vs #euroarea ‘low-flation’ — less scope to rebound in euro area due to smaller pent-up demand & Covid-driven distortions, no housing component in CPI,
Citibank 6/6: larger labor market slack and more subdued inflation expectations. Bottom Line - On ECB and Fed’s imputed short-end rate paths, investors are more optimistic about higher US yields, while uncertainty still reigns about possible next ECB steps.
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