In the eurozone, current public debt ratios are much higher than before the Great Recession. A proper assessment of the risk that this entails should also take into account other changes in the economic environment, and in particular, the decline in long-term sovereign rates.
This trend has accentuated recently, with long term interest rates in several eurozone countries dropping below zero. But the decline has been at work for a long time and has already produced major effects. On the chart, each point represents a member state. The x axis shows the country’s debt ratio and the y axis the interest charge paid each year on its public debt. The rotation of the regression line between 2007 and 2019 shows that although these countries generally have much heavier debt ratios than in 2007, they pay much smaller interest charges than in the past. Considering that interest rates are expected to stay low for a long time and given that maneuvering room for monetary policy is close to exhausted, some countries might turn towards fiscal policies to support activity. The ECB has already made a plea in that sense, at least for those countries with fiscal space.
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EUR/USD is trading below 1.10, consolidating the gains a series of disappointing US figures. US Non-Farm Payrolls carry lower expectations than usual, while wages are set to remain high.
GBP/USD is trading around 1.2350, steadying amid media reports that the EU has given UK PM Johnson until October 11 to improve his Brexit proposal which is supported at home. US Non-Farm Payrolls are eyed.
A late recovery in the US equity markets helped bounce off lows on Thursday. Fed rate cut expectations kept the USD bulls on the defensive and capped gains. All eyes remain glued to Friday’s release of the closely watched US NFP report.
Fears are growing that American hiring is slowing down – that has already hurt the dollar – but can EUR/USD rise? September’s Non-Farm Payrolls report is eyed with fear and may trigger more volatility than normal – breaking the trend of relatively muted reactions.
Gold edged higher through the early European session on Friday, albeit remained well below the overnight swing high to over one-week tops. All eyes remain glued to Friday’s important release of the NFP report.
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