Slowdown in US factory activity; no extension to be seen for euro interest rate benchmark

Oct 2 • Morning Roll Call • 1118 Views • Comments Off on Slowdown in US factory activity; no extension to be seen for euro interest rate benchmark

On Monday we have seen a slowdown in the US factory activity after more than fourteen year high in September, with new orders growth retreating. However, as the bottleneck in supply seems to be easing, we can expect a steady route in the manufacturing expansion. In addition, data has shown yesterday that there was a slight increase in the construction spending in August, with no significant change in the view of continuous strong economic growth in the 3rd quarter.

The ISM index of national factory activity fell 1.5 points, coming to a reading of 59.8 in September, while in August we have seen a strong reading of 61.3 (highest since May 2004). Worth mentioning is that any reading above 50 still indicates growth in manufacturing that accounts for around 12% of the US economy. In addition, the ISM described the demand as robust, while the employment resource and supply chains are still facing a struggle, however with a less degree. Of course, there was a mention of the trade war, where the report stated that factories will remain concerned of the tariff related activity and the reciprocal tariffs, and their impact on the company revenue and current manufacturing locations. On this point, the analysts are warning about the possible impact that the import duties may have on the supply chains, warning that it may cause disruption, weaken business investment and cause a slowdown in the economy’s momentum.

Regarding the EU related news yesterday, according to Reuters, the European Union will not constitute an extension of the Europe interest rate benchmark, despite the warnings of a market crunch. A euro benchmark (ESTER) that is compiled by the ECB will replace the current EONIA benchmark, however ESTER (overnight rate) will not be published on daily basis until October 2019, a few months before the EONIA is about to be sparred in December 2019, since it will not comply with the EU rules coming into force the following month.
Because of the change, banks requested a delay in order to avoid a possible disorderly transition of thousands of financial contracts, however an EU legislation proposed u the European Commission would be required, where the EU rules must be approved by the parliament and the EU member states first, and this can be a lengthy process.

In addition, the banks have warned that the transition time between EONIA to ESTER will not be sufficient and that 1-2 years extension is needed. As the European Commission is not in favor for the extension to be granted, the banks may be preparing for the worst, according to global head of compliance at Credit Agricole Carlos Molinas.

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