1. society
2. work
3. unemployment

Economic Research
Week in Focus
.
17 October 2014
Price slide: ECB to rush to the rescue
Recession worries have caused equity markets to plummet in recent days. But not even we,
though being pessimistic about the cycle, expect a recession. In the medium term, the equity
markets should pick up again, especially since it is now far more likely that the ECB will start
buying up government bonds on a grand scale before the end of this year. The period of
asset price inflation, fanned in this instance by the ECB, is not yet over.
Page 2
DAX has been plummeting at times
DAX index, end-day data
10100
9900
9700
9500
9300
9100
8900
8700
8500
Jan-14
Feb-14 Mrz-14
Apr-14
Mai-14
Jun-14
Jul-14
Aug-14
Sep-14
Okt-14
Source: Bloomberg, Commerzbank Research
Stress test: No quick fix for credit and economic growth
In contrast to ECB President Draghi, we do not expect the results of the bank stress tests –
which will be published on 26 October – to lead to a pick up in credit growth or economic
activity. According to our empirical analysis, the sluggishness in lending is not primarily
attributable to a lack of supply, but rather to weak credit demand. The stress tests will not
change this picture in the near-term.
Page 3
Product Idea: Lock-in Floater in US$. The markets increasingly believe that the Fed will
raise rates later than previously thought. This product is designed for investors who, like us,
believe the market to be wrong.
Page 6
Outlook for the week of 20 October to 24 October 2014
Economic data: There is a good chance in our view that purchasing managers’ indices for
manufacturing in the euro zone and Germany stabilised in October, partly thanks to the
weaker euro.
Page 8
Bond market: In the week ahead, 10y Bund yields could fall even further as investors
realise the rising risks of our €QE base case materializing already this year.
Page 12
FX market: Weak US inflation figures could support market concerns about the timing of
Fed rate hikes whilst the EUR should come under growing pressure on QE speculation.
Page 13
Equity market: The Q3 reporting season seems set to disappoint investors.
Page 14
Chief economist
Dr Jörg Krämer
+49 69 136 23650
[email protected]
Editor
Peter Dixon
+44 20 7475 4806
[email protected]
Commodity market: With OPEC holding still, oil continues its price slide, and new multiyear lows could be reached again next week. The recent recovery on the gold market is
prone to a correction.
Page 15
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Price slide: ECB to rush to the rescue
Dr Jörg Krämer
Tel. +49 69 136 23650
The equity markets are starting to price in a recession. But not even we, though being
pessimists about the cycle, expect a recession. The buoyant US economy and the fact
that the euro zone debt bubble already burst in 2008 suggest that a recession is unlikely.
In the medium term, the equity markets should pick up again, especially since it is now
far more likely that the ECB will not wait until the start of next year to act, but will start
buying up government bonds on a grand scale before the end of this year.
Equity markets now factoring in a recession, …
The DAX has fallen almost 12% since mid-September. The PER established on the basis of
corporate earnings expected over the next 12 months is now just under 11, i.e. below the longterm average. Investors are starting to price in falling earnings and thus a recession – but how
likely is the latter?
… but even we don't expect one
The emerging markets pose the greatest threat, as we wrote here a week ago. A major concern
as far as we are concerned is falling real-estate prices in China, and our 2015 growth forecast
for the country, at 6.5%, is much lower than the figure envisaged by most economists. Yet we do
not expect a recession in the western world, for the following reasons:
•
USA: Following the first quarter slump caused by the weather, the economy has made a
good recovery. On the strength of the monthly data published so far, a third-quarter result of
a good 3% or so seems likely. Yesterday's dip on in the New York Fed's indicator of
sentiment was just a one-off.
•
Eurozone: Our 2015 growth forecast for the region, 0.8%, has long been considerably lower
than the consensus figure of 1.2%, but we would not go so far as to predict a recession. The
big bubble in the eurozone peripheral countries did after all burst back in 2008, triggering
severe recessions there. Spain, Portugal and Ireland are still recovering from the slump.
There have of course been excesses in France and Italy too (overly high debt levels in the
private sector, above-average growth in unit labour costs), but they have been on nothing
like the scale seen a few years ago in Spain, Portgugal or Ireland.
Moreover, we might still see QE this year …
All in all, we feel that the market has been too pessimistic over the past few days. The DAX will
no doubt remain volatile over the coming days and weeks, but in the medium term prices should
rally once more. This is also suggested by the ECB's policy: We were one of the first banks to
predict at the end of August that the ECB would buy government bond on a generous scale,
envisaging this happening at the start of next year rather than this year. Meanwhile, though, it
has become far more likely that the bank will act before the end of this year:
•
Concerns about the economy that have triggered the drop in equity prices make it ever
more likely that the ECB will have to lower its optimistic growth forecast for 2015 of 1.6%.
This fact plays into the hands of those on the ECB Council in favour of relaxing the reins, as
does our expectation the end of the bank stress test will not in fact sound the all-clear for
weak lending (see page 3).
•
Long-term inflation expectations have dropped sharply. The figure envisaged in five years'
time for the following five years (obtained from inflation swaps) has fallen and now stands at
only 1.76%. After deduction of the risk premium, which the ECB estimates at ¼ to ½ of a
percentage point, it becomes clear that long-term inflation expectations are now below
1.5%. We do not see any serious problem here, but ECB President Draghi made it clear at
the early September press conference that the ECB will act if inflation expectations continue
to fall.
… which should stabilise the markets
Bund yields have probably not reached their lowest point yet, given that ECB government bond
purchases are on the cards. This makes equities with high dividend yields attractive, and the
main reason for our expecting the equity markets to settle down again gradually and then start to
rise once more. The asset price inflation promkpted by the ECB is not yet over.
2
research.commerzbank.com
17 October 2014
Dr Christoph Balz
Tel. +49 69 136 24889
Dr Michael Schubert
Tel. +49 69 136 23700
AQR and stress test:
No quick fix for credit and economic growth
On 26 October, the ECB will release the results of the bank stress test. According to our
empirical analysis, it is unlikely even thereafter that credit will pick up quickly – as ECB
President Draghi expects – and give the economy a lift. This is because the sluggishness
in lending is not primarily attributable to a lack of supply, i.e. balance sheet problems at
banks, but to weak credit demand. And this will barely change near-term, partly because
debt levels in the private sector are already high in many euro countries. For this reason
the stress test will be no quick fix for credit and for economic growth. This should be
another reason why the ECB will conduct broad-based purchases of government bonds
next year.
Supply problems are not as severe as often thought…
In a speech a few days ago, ECB President Draghi expressed the conviction that credit would
pick up noticeably from the start of 2015. After all, he said, the banks’ balance sheet adjustment
was reaching its conclusion (see box on page 4), and this removed an important obstacle to
lending and thus eventually to economic growth.
There is no doubt that dynamic lending is impossible without sound bank balance sheets. The
adjustment that is about to be concluded is therefore an important step. But for this factor alone
to give lending a notable lift, the decline in credit seen in recent years would have to be primarily
attributable to supply problems.
In fact, there seem to be supply problems in several countries: We have shown that the high
lending rates in Spain are mainly owed to the high default risks there. 1 And in Italy, a monthly
survey conducted by the Italian statistical office Istat indicated that recently borrowing terms for
businesses have deteriorated markedly again. But in the euro area as a whole, these problems
should not be so severe, because conditions are much better in other countries. For example,
borrowing terms for businesses in Germany have been very good for some time according to the
ifo credit hurdle.
Our credit model underpins this assessment for the whole euro area. The model estimates the
year-on-year growth rate of loans to the private sector on the basis of the investment ratio (gross
fixed capital formation in percent of GDP) and the year-on-year growth rate of GDP, i.e.
practically credit demand. Credit growth recently barely differed from the estimated value
(chart 1), whereas at the start of the decade, for example, it had fallen well short of the estimate
CHART 1: Euro area – only slightly better credit growth
CHART 2: Euro area – supply factors work with a delay
Loans to private sector, year-on-year; model value, based on
investment ratio and year-on-year GDP (from Q3/2014:
Commerzbank forecast); estimation error
Model estimation error and credit standards for lending to euro area
businesses according to Bank Lending Survey, six quarters
2
previously, diffusion index
12
3
10
2
8
1
6
0
4
-1
2
-2
0
-3
-2
-4
-4
2005
2007
model error
2009
2011
loan growth
Source: ECB, Commerzbank Research
2013
2015
model estimate
-5
2005
-25
-5
15
35
55
2007
2009
model error (lhs)
2011
2013
2015
credit standards (inverted, rhs)
Source: ECB, Commerzbank Research
1
“Euro periphery: credit risks preventing lower interest rates”, Economic Insight of 28 October 2013.
Difference between the sum of responses under “tightened considerably” and “tightened somewhat” and
the sum of responses under “eased somewhat” and “eased considerably” (in percent of responses), with the
calculation weighting large changes with 1 and small changes with 0.5.
2
17 October 2014
research.commerzbank.com
3
due to supply restrictions in the aftermath of the Lehman failure. Our credit model thus shows
that credit volumes in the euro area are currently mainly declining due to weak demand rather
than supply problems.
… and easing works only with a delay
This picture should become more firmly established in the coming quarters. On one hand, the
conclusion of the bank stress test reduces the supply restrictions, which are not dominant
anyway. On the other, banks have eased their credit standards progressively in recent quarters.
The latter will only influence developments in credit by and by. The deviations of our model’s
estimates from actual developments in credit can be fairly well explained with the development
of the banks’ credit standards 3 (chart 2, p. 2). But note that it takes around six quarters for the
effect of changes in supply conditions to fully unfold, which seems partially attributable to the fact
that we analyse the year-on-year growth rate of private sector credit. This implies two things:
•
Since credit standards have been eased progressively in recent quarters and this affects
credit growth with a delay, credit growth in 2015 will likely turn out up to ½ percentage point
higher than should be expected on the basis of developments in demand alone (chart 2: the
model error in 2015 probably has a positive sign).
•
We certainly expect that credit standards will be eased even further in the coming quarters,
though not abruptly. But even if this did occur, the delayed influence of supply conditions on
credit growth suggests that this effect would only become visible in credit in 2016 rather
than 2015.
Weak economy constrains credit, not vice versa
A quick and strong uplift for credit and thus for economic activity is therefore unlikely from this
side. Since supply problems are of rather minor importance in the euro area as a whole, lending
should instead be influenced by the demand for credit and thus eventually by economic activity.
And the latter should remain very modest for some time yet owing to various factors:
•
Private sector debt levels have surged rapidly in recent years, and not only in the periphery
but also in many core countries of the euro area. Moreover, we also saw exaggerations in
the property market there, and the competitiveness of these countries has deteriorated. The
correction of these undesirable developments of the past decade will constrain economic
growth for some time to come.
•
In addition, structural factors acting as a brake on growth, such as the inflexible labour
markets in several euro countries, have been in place for a long while.
•
Near-term, the nearly flat growth in demand from emerging markets should also work to
further constrain economic growth in the euro area.
In light of all this, we expect credit in the euro area to remain stagnant next year in the best case.
Our model even forecasts a continued decline (chart 1, page 2), which could be prevented,
however, by the moderate improvement in supply conditions.
Weak credit growth makes QE in 2015 more likely
The quick fix for credit which ECB President Draghi hopes to see in early 2015 should therefore
fail to occur, and as a result the sign of hope for economic growth which the ECB anticipates
from this side is unlikely to materialise. This development is another reason for us to expect that
in the first half of 2015 a majority on the ECB Council will vote for broad-based government bond
purchases.
3
Chart 2 shows the credit standards for lending to businesses in the euro area. The credit standards for
mortgage lending to private households run parallel, i.e. their information content is similar from the empirical
perspective.
4
research.commerzbank.com
17 October 2014
Box: How do the asset quality review and the stress test work?
Background: In November, the ECB will assume supervision responsibilities for the most
important banks in the euro area (first of the three pillars of the banking union). To assess the
health of these institutions beforehand, the central bank examined their assets for risks as at 31
December 2013 (asset quality review, AQR). As part of the AQR regulatory and accounting rules
were initially standardised to allow a cross-bank comparison. In a second step selected balance
sheet items, such as non-performing loans, were examined for incorrect valuations. It was
analysed whether the valuation of the assets and the collateral is adequate and whether the
corresponding provisions are appropriate.
On this harmonised basis the EBA (European Banking Authority) conducted stress tests for 123
banks from 22 EU countries. The aim of this analysis was to ascertain whether the banks are
robust, i.e. whether they have sufficient capital in different scenarios.
Scenarios: The EBA has looked at two scenarios for the years 2014 until 2016. In the baseline
scenario the economy in the euro area will grow by 1.2%/1.8%/1.7% in these three years, which
seems too optimistic from today’s perspective. For this year and next we forecast growth rates of
less than 1%, given the structural problems in major countries such as Italy and France and in
light of the after-effects of earlier exaggerations on the property market and with regard to private
sector debt.
In the adverse scenario a sharp rise in long-dated yields, above all in the US, triggers a general
asset revaluation, which adversely affects the emerging markets in particular. In the euro area,
the sovereign debt crisis flares up once more, and yield premiums of peripheral bonds versus
Bunds rise again. Long-dated government bonds from Italy and Spain trade at a yield of 5.9%
and 5.7%, respectively. Against this backdrop the economy in the euro area contracts in 2014
and 2015 by 0.7% and 1.4%, respectively, and remains stagnant in 2016. This would mean a
bigger minus than in 2012/2013 and thus a very deep recession, though the plunge would be
much less severe than in 2009. When after the Lehman failure the stability of the global financial
system was called into question, the euro area economy contracted by 4.5%.
Schedule: ECB and EBA will announce the results of the AQR and the stress test on Sunday,
26 October at 12:00 noon (Frankfurt time). The banks will be informed three days earlier so that
they can analyse their figures and prepare statements for the public.
Consequences: If EBA/ECB detect a capital shortfall for a bank, the institution has to provide
the regulators with a plan for how to remedy this shortfall two weeks after the release. The
measures (e.g. a capital increase) will have to be carried out within either six or nine months,
depending on whether this shortfall already arose in the baseline scenario /AQR or only became
apparent in the adverse scenario.
Likely outcome: Our bank analysts have estimated in a model to what extent the individual
banks are affected by the various risk factors. The simplified approach used for this purpose
surely cannot reflect the complexity of the AQR and the stress test and take account of the
discretionary powers of the ECB and the EBA. Subject to this caveat, they found that most of the
banks that are likely to fail the test have already raised new capital. 4 For this reason broadbased uncertainty in the financial markets is unlikely, especially since the focus tends to be on
concerns about the global economy at the moment.
4
17 October 2014
See “EU banks – Who’s afraid of the stress test? These banks should be!”, 23 September 2014.
research.commerzbank.com
5
Product idea: Lock-in Floater in US$
Markus Koch
+49 69 136 87685
The uncertainty about the timing of Fed rate hikes next year is reviving once again. As a
result, long-term Eurodollar futures recover at a faster pace than the short end (flatter
Libor curve). Markets thus expect Fed policymakers to maintain ultra-easy conditions for
longer. However, given strong labour markets we challenge current policy expectations
and recommend investing in a leveraged Lock-in Floater in US$ with a 5y term. The
structure will lock-in a 3.5% p.a. coupon, if the reference index (US$ 3M Libor)
accumulates a target coupon of 3.5%. If the Fed/ECB policy decoupling proves
sustainable, the structure holds out potential currency gains.
Despite the US labour market well on track for 2015 target levels, the Eurodollar future strip has
resumed curve flattening trends. While inflation pressures are still of no concern in the US, Fed
funds may stay low through 2015 given the current weakening of the USD and risks of growth
slowing down abroad (Fed’s Fischer). The Fed’s judgments (dots) and our own analysis suggest
otherwise. Indices for job vacancies, for instance, which have risen to a 13-year high likewise
challenge the view that the labour market is still substantially underutilised. All considered we
firmly believe policymakers cannot afford not raising rates for the next two years as
unemployment is returning to its natural level. Long story short, we look for US$ 3-month Libor
rates to rise at a substantially faster pace than implied by the strip.
Investors who share our view on US$ 3-month Libor rates are advised investing in a Lock-in
Floater with a 5y term and denominated in US$. The note’s coupons are calculated from the
US$ 3M Libor rate (references index) leveraged by 125%. Based on the current fixing (see box),
this results in an initial coupon of currently c. 29bp in the first quarter. The structure features a
lock-in element. If the cumulated sum of all coupons paid reaches at least 3.5% (target), a fixed
coupon of 3.5% p.a. will be paid until maturity.
Based on the current forward strip, for instance, the reference index accumulates the target sum
by spring 2016 after which the fixed coupon will be automatically locked-in. Yet given our
expectation of the US Fed to swiftly unwind its ultra-easy monetary policy, the index would
ultimately rise at a faster pace compared with forwards. This in turn implies the structure to
accumulate the targeted coupon sum (3.5%) already by autumn 2015. The performance of the
structure will thus depend on the pace which the index rises. Intriguingly even in the worst case
(unchanged reference index) the coupon lock-in – although materialising in 3 years’ time – would
generate an average coupon close to current 5y swap levels.
Finally given the note’s denomination in US dollar, a likely long-term weakening of the euro
versus the US dollar could generate currency-driven gains and vice versa. In the latter case, the
pick-ups incurred may still (more than) offset currency-driven losses.
Lock-in Floater in US$ with a 5y term
Issuer
Type:
Maturity:
Currency
Minimum lot
Reference index (RI):
Coupon:
Fixing:
Payment:
Basis:
6
A- (average)
Private Placement
5 years
US Dollar (US$)
€ 1m equivalent
US$ 3-month Libor
125% of reference index until the cumulated sum of coupons totals
3.5%. A coupon of 3.5% p.a. fixed is locked-in, once the coupon
condition has been met.
Quarterly, in advance
Quarterly, in arrears
Quarterly/30/360
research.commerzbank.com
17 October 2014
Major publications from 10 – 16 October 2014
EM Briefing: Singapore – MAS maintains appreciation bias on wage
fears
Singapore’s economy grew 2.4% y/y in Q3, unchanged from Q2. This is in line with full year
growth likely to come in around a modest 3%. Unlike previous cycles, the domestic sector or
services remain the key growth driver as opposed to exports due to the sluggish global rebound.
For USD-SGD, we maintain an upside bias to 1.30 by year-end on the firmer USD tone. more
EM Briefing: Malaysia – Budget 2015 sticks to curtailment plus
development theme
Prime Minister Najib Razak unveiled a cautious budget last Friday that adhered to the theme of
fiscal consolidation. At the same time, there were offsetting measures to shore up growth. The
government projects a robust 5.5-6% growth this year and 5-6% for 2015. If the current market
volatility continues, BNM may stay on hold in November but remain cognizant of the inflationary
risks. more
FX Hotspot: The Currency War comes to Europe
The recent outturn of CPI data in the euro zone and other regional European economies
combined with declining business sentiment means that central banks in the region will
increasingly have a bias towards maintaining weak currencies. Given that the USD is trading
more robustly this means that the so called ‘Currency War’ is now more of a European rather
than a USD centric phenomenon. more
FX Hotspot: The market is losing courage
By no means did the market ever really believe the FOMC projections as regards the
normalisation of interest rates. For some time now market expectations regarding the US key
rate have been below the median of FOMC members’ expectations. But in the meantime the
discrepancy has reached absurd levels, as the gap is constantly widening. The market is now
only expecting one single, solitary rate step next year. more
FX Hotspot: Like a stone
The euro zone 5Y×5Y inflation expectations – the ECB’s preferred measure for long term
inflation expectations – are dropping like a stone (see chart 1). Yesterday they eased below the
1.8% mark for the first time. This increases the likelihood that the ECB will feel obliged to
weaken the euro rapidly and significantly. more
Commodity Spotlight Agriculturals: Further build-up in stocks –
prices at rock-bottom
At the latest since the last old-crop contracts expired, markets have only been seeing the
comfortable supply situation in 2014/15 for grains, oilseeds and cotton. This is pushing prices
lower and lower. That said, the fact that prices have now hit multi-year lows will not be without
effect on supply and demand. At least in the case of corn, where prices performed very badly,
production is likely to be cut back in 2015 in favour of soybeans. Besides corn, wheat prices
should also profit from this, while soybean prices should struggle to recover. more
17 October 2014
research.commerzbank.com
7
Preview – The week of 20 to 24 October 2014
Time
Region Indicator
Period
Forecast
Survey
Last
Monday, 20 October 2014
No relevant data is due for release.
Tuesday, 21 October 2014
•
3:00
CHN
Industrial production
Sep
yoy
7.4
7.5
6.9
15:00
USA
GDP
Existing home sales
Q3
Sep
yoy
SAAR, mn
7.2
5.16
7.2
5.09
7.5
5.05
Sep
Sep
mom, sa
mom, sa
%
0.0
0.1
1.00
0.0
0.2
–
-0.2
0.0
1.00
Oct
Oct
Oct
Oct
sa
sa
sa
sa
95.0
48.5
48.0
50.0
–
–
–
49.8
96.0
48.8
48.4
49.9
55.0
50.3
55.1
50.1
55.7
50.3
Wednesday, 22 October 2014
13:30
USA
CAD
CPI
CPI excl. food and energy
BoC interest rate decision
Thursday, 23 October 2014
7:45
8:00
FRA
•
8:30
GER
Business climate (Insee)
PMI, manufacturing
PMI, services
PMI, manufacturing
•
9:00
EUR
PMI, services
PMI, manufacturing
Oct
Oct
sa
sa
9:30
PMI, services
Norgesbank interest rate decision
Retail sales
Oct
NOR
GBR
sa
%
mom, sa
yoy
k, sb
sa
52.0
1.50
0.1
3.1
280
-12.0
52.0
–
-0.2
2.8
–
–
52.4
1.50
0.2
4.5
264
-11.4
sa
qoq
yoy
sa
SAAR, k
8.0
0.7
3.0
-8.0
450
8.1
0.7
3.0
–
473
8.3
0.9
3.2
-7.2
504
13:30 USA
Initial claims
15:00 EUR
Consumer confidence
EUR: EU leader summit in Brussels (23/24 October)
Sep
18 Oct
Oct
Friday, 24 October 2014
7:00
9:30
GER
GBR
GfK Consumer confidence
GDP
Nov
Q3
14:00
15:00
BEL
USA
Business confidence
New home sales
Oct
Oct
Source: Bloomberg. Commerzbank Economic Research; *Time BST (subtract 5 hours for EDST. add 1 hour for CEST). # = Possible release; mom/qoq/yoy: change
to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; • = data of highest importance for markets.
8
research.commerzbank.com
17 October 2014
Economic data preview:
Dr Ralph Solveen
Tel. +49 69 136 22322
Euro area: First small signals of hope from the PMIs?
There is a good chance in our view that purchasing managers’ indices for manufacturing
in the euro zone and Germany have stabilised in October, as the weaker euro should
gradually be having a positive impact. In China, economic growth is set to have weakened
to 7.2% in the third quarter, though industrial production should have expanded at a
slightly stronger rate again in September compared to August.
In the past few weeks, the bad news dominated for the euro zone and the Germany economy
especially. Next week, there is at least some hope of a positive signal again, with much to
suggest that the purchasing managers’ indices for manufacturing (PMI) have stabilised after
falling sharply for some months.
We have often said in the past that our Early Bird has a certain lead over the Ifo business
climate. The same holds for the PMI (chart 3). At the previous two lower turning points (January
2009 and July 2012), the Early Bird’s lead was seven and eleven months respectively. This time,
the Early Bird hit a low in January of this year and has been rising since amid the weaker euro.
Consequently, we are now in a period in which the improved cyclical environment shown by our
indicator should gradually have a positive impact for businesses.
In addition, we have a statistical effect. Many responses in the PMI survey appear to depend on
whether production, orders etc. of the surveyed companies increased or decreased compared to
the same month of the previous year. Businesses presumably look at the figures of the previous
month as more recent figures are not available. Therefore, their responses this time were
probably mainly based on the September figures, where the year-on-year comparison was
presumably much better again compared to the August figures as September 2014 had one
more working day than September 2013 (which was not the case in August) and production in
September was much less affected than August by the summer holidays falling comparatively
late.
These two factors combined have prompted us to anticipate a practically stable purchasing
managers’ index in our forecast both for Germany (forecast: 50.0 after 49.9; consensus: 49.8)
and the euro zone (forecast: unchanged 50.3; consensus: 50.1).
China: Slower growth in Q3
GDP for Q3 is due on Tuesday and we forecast growth of 7.2% year-on-year, in line with
consensus (7.2%) and down from 7.5% in Q2. Our forecast is consistent with quarter-on-quarter
growth (non-annualised) of 1.7%. We expect industrial production for September, also due on
Tuesday, to rebound to 7.4% (consensus: 7.5%), following the slump to 6.9% the prior month
(chart 4). Our forecasts are consistent with 2014 GDP growth of 7.3%.
CHART 3: Germany – PMI about to stabilise?
CHART 4: China – weak August just a slip?
Early Bird; Purchasing managers’ index for manufacturing (PMI)
Industrial production, year-on-year change in %
1.0
0.5
65
15
60
14
55
13
50
0.0
-0.5
-1.0
2008
2012
Source: Bloomberg, Commerzbank Research
17 October 2014
2013
2014
PMI (rhs)
11
45
10
40
9
35
8
30
2009 2010 2011
Early Bird (lhs)
12
7
6
2011
2012
2013
2014
Source: Global Insight, Commerzbank Research
research.commerzbank.com
9
Central Bank Watch (1)
Fed
Hefty turmoil on the global financial markets and some
worse-than-expected US data have shifted market
expectations of a first rate hike to the fourth quarter of 2015.
That said, members of the Federal Open Market Committee
appear to be quite unimpressed by the latest developments.
According to media reports, Janet Yellen was confident in a
closed event at the weekend that the US economy would
continue to post stable growth. John Wiliams, president of
the San Francisco Fed, tried to dispel concerns that global
economic weakness would stop the Fed from normalising
monetary policy. This would only be a possibility for him if the
inflation rate did not rise above 1.5% and there was no
evidence of an upward trend in wages. This would then be a
sign that the outlook had changed markedly. Under such
circumstances, he would even be prepared to consider
renewed bond buying. However, Williams and presumably
most of his colleagues still see the economy on track.
Consequently, the latest turmoil has probably not changed
the outlook for monetary policy so far.
Bernd Weidensteiner
+49 69 136 24527
CHART 5: Expected interest rate for 3-month funds (USD)
2,0
1,5
1,0
0,5
0,0
current Dez 14
Futures
16.10.14
Mrz 15
Jun 15
09.10.14
Sep 15
Dez 15
Commerzbank
TABLE 1: Consensus forecasts Fed funds rate
Q4 14
Q2 15
Q4 15
Consensus
0.25
0.25
1.00
High
0.25
1.00
2.00
Low
0.25
0.25
0.25
Commerzbank
0.25
0.50
1.50
Source: Bloomberg, Commerzbank Research
ECB
In recent days, statements of ECB Council members by and
large confirmed that the central bank is ready to do more
(including QE), but that at the same time at least some
Council members are critical regarding QE. Most importantly,
ECB president Draghi said that the ECB “is ready to actually
do everything that falls within its mandate”. He saw no major
risks of a bubble in euro zone government bond markets,
suggesting he does not expect instability to impede possible
sovereign bond purchases by the ECB.
ECB’s Coeure emphasised that “we are moving now to a new
stage where we want to significantly increase the size of the
balance sheet of the ECB, starting with ABS and coveredbonds purchases.
ECB’s Weidmann argued that government bond purchases
ECB would not have much of an effect on the economy, as
yields are already near record lows. ECB’s Knot said that the
ECB had “more or less” reached its limit on ways to support
the economy. Similarly, ECB’s Nowotny argued that “in the
situation now, I think that these [EU] investment programs
make much more sense to discuss than to discuss QE
perspectives.” Nowotny and Hansson urged patience to let
ECB stimulus measures already announced work their way
through the economy.
Dr Michael Schubert
+49 69 136 23700
10
CHART 6: Expected interest rate for 3-month funds (EUR)
1,0
0,8
0,6
0,4
0,2
0,0
current Dez 14
Futures
16.10.14
Mrz 15
Jun 15
09.10.14
Sep 15
Dez 15
Commerzbank
TABLE 2: Consensus forecasts ECB minimum bid rate
Q4 14
Q2 15
Q4 15
Consensus
0.05
0.05
0.05
High
0.05
0.05
0.05
Low
0.05
0.05
0.05
Commerzbank
0.05
0.05
0.05
Source: Bloomberg, Commerzbank Research
research.commerzbank.com
17 October 2014
Central Bank Watch (2)
BoE
As market turmoil once again rears its head and international
headwinds mount, the prospect of a UK rate increase
continues to recede into the future. As global conditions
become more volatile, market pricing of a UK rate hike has
changed such that the probability of a 25 bps rate hike in Q2
2015 is now seen as little more than a 50-50 shot. However,
in a speech earlier this week MPC member Weale gave no
indication that next week’s MPC minutes will indicate a
change in his view that rates should rise. He argued that the
recent decline in unemployment points to a declining margin
of spare labour market capacity “that ought to lead to an
increase in inflationary pressure over the two to three year
horizon which concerns the [MPC].” But whilst many
indicators suggest that the labour market is back at its preLehman state, the proportion of those working part-time who
would rather work full-time is only slightly down from the highs
of 2012 and way above any level since the data were first
recorded in the early-1990s. In our view this is an indication
that there is more capacity than the headline unemployment
rate implies and supports our view that we cannot simply rely
on the headline rate as a pointer to future inflation.
Peter Dixon
+44 20 7475 4806
CHART 7: Expected interest rate for 3-month funds (GBP)
2,0
1,5
1,0
0,5
0,0
current
Dez 14
Mrz 15
Jun 15
Sep 15
Dez 15
Futures
16.10.14
09.10.14
Commerzbank
Norges Bank (Norway)
Norges Bank has kept the key interest rate at 1.5% since
March 2012 and the signals from the September meeting
suggest it will leave it there for longer; it withdrew its previous
suggestion of an interest rate cut in the coming months. At
the same time, it has deferred prospective first interest rate
hikes from the end of 2015 to the beginning of 2016. This is
because Norway's economy faces substantial change with
the expected sharp fall of investment in the oil sector, which
will probably also apply the brakes on other sectors.
The likelihood of a further interest rate cut has actually
increased recently as the oil price had fallen sharply and the
inflation rate was below Norges Bank's expectations.
Furthermore, the growth outlook for Norway's key buying
countries has clouded further and the ECB is signalling its
readiness for broad-based sovereign bond buying. However,
the hurdle for a rate cut in Norway is high, not least because
of the high level of private debt. Moreover, the government is
planning an expansionary budget with tax cuts and high
expenditure on infrastructure to support growth. Additional
impetus should come from further NOK depreciation. We
therefore expect an unchanged key interest rate next week.
A new outlook on interest rates is not due until December.
CHART 8: Expected interest rate for 3-month funds (NOK)
3,0
2,5
2,0
1,5
1,0
current
Dez 14
Mrz 15
Futures
16.10.14
Jun 15
Sep 15
Dez 15
Commerzbank
Elisabeth Andreae
+49 69 136 24052
17 October 2014
research.commerzbank.com
11
Bond market preview:
Michael Leister
Tel. +49 69 136 21264
Bund markets already pricing our €QE base case
History is in the making on euro area bond markets as 10y Bund yields have fallen to new
all-time lows. Plummeting inflation expectations have again been the key driver, with
developments in the US and UK suggesting that disinflation concerns are increasingly
turning into a global phenomenon. Peripheral bond markets have sold-off aggressively
though with patterns reminiscent of the debt crises. We expect these dynamics to continue
near term. 10y Bund yields could fall even further as investors realise the rising risks of our
€QE base case materializing already this year.
TABLE 3: Weekly outlook for yields and curves
Bunds
US Treasuries
Yields (10 years)
Moderately lower
Moderately lower
Curve (2 - 10 years)
Moderately flatter
Moderately flatter
Source: Commerzbank Research
Outlook for the Bund
future,
18 – 24 October
Economy
→
Inflation
↑
Monetary policy
→
Trend
↑
Supply
→
Risk aversion
↑
The Bund rally has accelerated this week with 10y Bund yields printing new all-time lows at c.
0.7%. Furthermore, German sovereign bonds with maturities up to January 2019 are trading with
a negative yield (see chart 9).
Plummeting inflation expectations have once again been the key driver of this rally. The 5y5y
forward inflation swap has deteriorated further, while the real yield of German inflation-linked
bonds has even increased despite the record lows in nominal yields. In the US and the UK
market-based inflation expectations have also fallen sharply, suggesting that disinflation is
increasingly morphing into a global phenomenon for investors following the series of
disappointing inflation data across the globe.
The last two trading sessions have added another dimension to the Bund rally though.
Peripheral bonds have weakened aggressively, with the patterns on peripheral bond and equity
markets reminiscent of the debt crises. Italian spreads vs German Bunds for example have risen
to the highest level in eight months (see chart 10). Greece has been under pressure in particular
following the ongoing political headlines and the yield on the 10y GGB has risen more than
230bp this week.
We expect these developments to continue next week. The positive data releases in the euro
area and stress test results will likely be insufficient to materially turn around the current crisis
sentiment, particularly as thin liquidity conditions and the spike in volatility push investors to the
sideline. We therefore reiterate our cautious stance on peripheral markets. In addition, inflation
markets look set to remain under pressure and a verbal intervention from ECB president Draghi
seems required to stabilise these. Taken together, we therefore still expect new lows in 10y
Bund yields to materialise. With a moderate correction likely in the wings after the stress test
results are out, we recommend adding to duration given rising risks of our €QE base case
possibly materialising already this year.
CHART 9: Bund yields reach new all-time lows across the
CHART 10: Peripheral bonds under heavy pressure
10y BTP-Bund-spread, in bp
curve, again…
Yields of German sovereign bonds, in %
1.8
230
1.6
1.4
210
1.2
190
1.0
0.8
170
0.6
0.4
150
0.2
0.0
130
Jan-14
-0.2
0y
5y
10y
15y
20y
Source: Bloomberg, Commerzbank Research
12
25y
30y
Mar-14
May-14
Jul-14
Sep-14
35y
Source: Bloomberg, Commerzbank Research
research.commerzbank.com
17 October 2014
FX market preview:
Thu Lan Nguyen
Tel. +49 69 136 82878
Concerns about global growth are weighing on the USD
Concerns about slowing global growth are weighing on the USD because the market is
increasingly calling into question whether the Federal Reserve will soon start to
normalise its monetary policy. Weak inflation figures could support this trend near-term.
Meanwhile, the EUR should come under growing pressure on QE speculation.
TABLE 4: Expected weekly trading range
Spanne
Tendenz
Spanne
Tendenz
EUR-USD
1.2550-1.2950
Ô
EUR-GBP
0.7850-0.8075
Î
EUR-JPY
133.50-138.00
Î
GBP-USD
1.5850-1.6300
Ô
USD-JPY
104.50-108.00
Ò
EUR-CHF
1.2000-1.2120
Î
Source: Commerzbank Research
What was still interpreted as a mild consolidation at the start of the month has now developed
into perceptible USD weakness. EUR-USD rose from just over 1.25 to 1.28, and the AUD, the
NZD and even the JPY temporarily gained ground versus the USD. The main reason for this
reversal is the fear of considerably weaker global growth, which from the perspective of many
investors could combine with a strong dollar to constrain also the US economy. Since US data
releases (retail sales and Empire State Index) have recently fallen short of market expectations,
the market is increasingly calling into question whether the Fed will really normalise its monetary
policy next year. Expectations for the US key rate, which were very modest anyway, have
continued falling and thereby also contribute to the USD weakness (see chart 11).
But this suggests that the market is overly pessimistic for the US economy and therefore
underestimates the extent to which the Fed will raise interest rates next year. For this reason we
regard the current USD weakness as a correction rather than a trend change. However, we think
a string of good US data will be required to convince the market of this view. In the coming week
the USD could even continue suffering if inflation data disappoint once more.
Likewise, there is deep concern about the economy in the euro zone. The virtual collapse of
long-term inflation expectations is particularly dramatic (chart 12). Should the purchasing
managers’ indices for the euro area turn out disappointing, speculation about a broad-based
bond purchase programme of the ECB will likely mount and weaken the EUR. This could at least
cushion an increase in EUR-USD in the coming week.
CHART 11: Market doubts Fed rate hike in 2015
CHART 12: Inflation expectations have plummeted
Fed funds rate: Fed expectations as points and curves of market
expectations from Fed funds futures (end-September, two days ago
and yesterday); percent
5Yx5Y inflation expectations based on inflation swaps, euro area CPI
(ex tobacco)
2.4%
2.00
1.75
2.3%
1.50
Outlier
2.75-3%
1.25
2.2%
1.00
2.1%
0.75
2.0%
0.50
1.9%
0.25
0.00
Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
9/30/2014
Source: Bloomberg, FOMC
17 October 2014
10/14/2014
10/16/2014
1.8%
1.7%
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Source: Commerzbank Research
research.commerzbank.com
13
Equities market preview:
Markus Wallner
Tel. +49 69 136 21747
Q3 reporting season will not support the market
Negatively impacted by weak economic figures, the DAX has fallen further and is now
fluctuating at around 8,500 points. Nor can virtually any support be expected from the
current Q3 reporting season. Most of the results published so far have also been
disappointing. Although the downward movement in share prices has to some extent
normalised the high valuations of many German companies, when selecting stocks
investors should continue to pay attention to relatively low price/book value ratios
compared to the long-term average and to a stronger earnings trend than the market
overall.
TABLE 5: DAX remains weak
Gewinne 2014e
Performance (%) seit
Indexpunkte
Index
30.09
30.06
31.12
aktuell
DAX 30
8,572
-9.5
-12.8
-10.3
707.8
MDAX
14,754
-7.8
-12.3
-11.0
934.3
Euro Stoxx 50
2,893
-10.3
-10.4
-7.0
222.5
S&P 500
1,862
-5.6
-5.0
0.8
117.1
Wachstum (%)
31.12
KGV 2014e
aktuell
31.12
aktuell
31.12
731.1
1.8
11.6
12.1
13.1
994.2
27.4
41.6
15.8
16.7
242.3
4.9
12.1
13.0
12.8
119.3
7.9
9.9
15.9
15.5
Source: Commerzbank Corporates & Markets, I/B/E/S
The Q3 reporting season which is now under way is likely to provide virtually no support for the
German equity market. One indication of this is the weakness of key indicators. The Ifo business
expectations has thus fallen steadily in the third quarter and is now below 100. The purchasing
managers' index for German industry is also clearly pointing downwards. It is hardly surprising
therefore that the first company results published for the third quarter and business outlooks
have been mainly negative so far, exerting pressure on the prices of the respective stocks. The
recently much weaker euro will also have had very little impact on the third-quarter results. For
the average EUR/USD exchange rate in the third quarter of 2014 was roughly in line with that of
the third quarter of 2013. The annual average so far for 2014 is even higher than in 2013
(chart 13). Many German companies have also hedged against an appreciation of the euro and
are not therefore playing any role either in the currency's devaluation.
The intermittently fairly high valuations of many German stocks have normalised again slightly
as a result of the recent price declines. Nevertheless, when selecting stocks, investors should
continue to pay attention to low price/book value ratios compared to the long-term average. The
stock selected should also demonstrate stronger earnings momentum than the market as a
whole. Examples of this would be Fresenius Medical Care or MTU Aero Engines.
CHART 13: Euro devaluation plays virtually no role in Q3 reporting season
Annual average of EUR/USD exchange rate, January to mid-October 2014
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
2000
2001 2002 2003
2004 2005
2006 2007 2008
2009 2010
2011 2012 2013
2014
Source: Datastream, Commerzbank Research
14
research.commerzbank.com
17 October 2014
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
Price rally on the gold market is on shaky ground
With OPEC holding still, oil continues its price slide, and new multi-year lows could be
reached again next week. In contrast, sentiment in the base metal markets is unlikely to
plummet when producers and consumers meet to exchange views in London during the
LME week. Whilst the Chinese economy expanded more slowly in Q3, China’s industrial
production in September presumably increased more strongly than in August. The recent
recovery on the gold market is prone to a correction because it was primarily owed to
falling equity prices and a weaker dollar.
TABLE 6: Tendencies in important commodities
Per cent change
16 Oct.
1 week
1 month
Tendency Commodity specific events
1 year short-term
Brent (USD a barrel)
83.1
-7.8
-16.1
-25.1
Þ
Copper (USD a ton)
6550
-2.3
-5.9
-9.8
Ö
Gold (USD a troy ounce)
1243
1.5
0.6
-3.1
Ö
Source: Bloomberg, Commerzbank Research
There is no end to the price slide on the oil market: Brent oil cheapened this week by another
USD 7 and is trading at nearly USD 83 per barrel, the lowest level since late 2010. Not only the
more sceptical demand outlook of the International Energy Agency has put downside pressure
on the price. A particularly price-depressing factor is OPEC’s behaviour: Its members are
signalling no willingness whatsoever to lower their output so as to reduce the current excess
supply on the market. There is speculation on the market that the swing producer Saudi Arabia
accepts lower prices in an attempt to squeeze alternative providers out of the market. At this
point only few producers seem to have reached the “pain threshold”. As long as OPEC holds
still, the oil price should therefore continue falling. Especially speculative investors are
apparently trying to test new lows. Their net long positions in Brent presumably fell last week to
the lowest level since the inception of the data series in early 2011 (chart 14).
The gold price, in contrast, has recovered noticeably from this year’s low printed in early
October. The price fall in equity markets seems to make gold as a safe haven more attractive
again. And the weaker US dollar also helped in the last few days. But we are sceptical that a
turnaround to the upside has thus been achieved. It is to be assumed that it was above all the
fickle speculative investors who added to their net long positions (chart 15), which in early
October barely exceeded the record low from last December. Physical demand, in contrast, still
remains weak. The holdings of gold ETFs continued falling in the first weeks of October. And the
recent recovery in Indian demand threatens to be a (seasonal) flash in the pan because the
higher trade deficit will probably dissuade the government from relaxing its restrictions on gold
imports.
CHART 14: Scepticism abounds on the oil market…
CHART 15: …and on the gold market
Speculative net long positions in thousands of contracts
Oil price: Price per barrel of Brent in USD
Speculative net long positions in thousands of contracts
Gold price: Price per troy ounce in USD
Source: ICE, Bloomberg, Commerzbank Research
Source: CFTC, Bloomberg, Commerzbank Research
17 October 2014
research.commerzbank.com
15
Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)
Inflation rate (%)
2013
2014
2015
2013
2014
2.2
2.2
2.9
1.5
1.7
1.8
2.0
2.3
2.5
0.9
2.1
2.0
Japan
1.5
1.0
1.3
0.4
2.8
1.5
Euro area
-0.4
0.7
0.8
1.4
0.6
1.0
- Germany
0.1
1.3
1.3
1.5
1.1
2.1
- France
0.4
0.3
0.5
0.9
0.6
0.7
- Italy
-1.7
-0.2
0.3
1.2
0.4
0.6
USA
Canada
2015
- Spain
-1.2
1.4
2.3
1.4
0.0
0.5
- Portugal
-1.4
1.0
1.5
0.3
-0.2
0.8
- Ireland
0.2
5.2
3.1
0.5
0.6
1.4
- Greece
-4.2
1.0
2.0
-0.9
-1.3
0.5
United Kingdom
1.7
3.0
2.6
2.6
1.6
1.9
Switzerland
2.0
1.7
1.8
-0.2
0.0
0.5
China
7.7
7.3
6.5
2.6
2.3
2.5
India
4.7
5.8
6.2
6.3
6.5
6.2
Brazil
2.5
0.3
0.9
6.2
6.3
6.5
Russia
1.3
0.3
0.9
6.8
7.3
6.5
World
2.9
3.1
3.4
• The ultra-expansionary policy of the Fed
is boosting the US economy. At the
same time, fiscal policy is at least no
longer a headwind. We therefore expect
US growth to markedly accelerate.
• Growth in China decelerates further, also
due to decreasing house prices.
• The recovery in the euro zone will only
continue at a slow pace. GDP growth will
remain lower than that of the USA.
• EMU has survived the sovereign debt
crisis, but is gradually evolving into an
“Italian-style monetary union”.
• Despite its current weakness, the
German economy looks set to continue
outperforming the rest of the euro area –
partly because ECB target rates are
much too low for Germany.
• High unemployment in most countries is
keeping inflation low for the time being.
In the long term, however, inflation is
likely to rise, as central banks have given
up some of their independence.
TABLE 8: Interest rates (end-of-quarter)
16.10.2014
Q4 14
Q1 15
Q2 15
Q3 15
Q4 15
Federal funds rate
0.25
0.25
0.25
0.50
1.00
1.50
3-months Libor
0.23
0.25
0.30
0.80
1.35
1.90
2 years*
0.33
0.70
0.90
1.20
1.60
2.00
5 years*
1.33
2.10
2.40
2.70
2.95
3.20
10 years*
2.10
2.70
2.90
3.10
3.30
3.50
Spread 10-2 years
177
200
200
190
170
150
Swap-Spread 10 years
17
10
10
10
15
15
USA
Euro area
Minimum bid rate
0.05
0.05
0.05
0.05
0.05
0.05
3-months Euribor
0.08
0.05
0.05
0.05
0.05
0.05
2 years*
-0.06
-0.10
-0.10
-0.10
-0.05
0.00
5 years*
0.14
0.25
0.20
0.25
0.35
0.40
10 years*
0.79
1.10
0.80
1.00
1.20
1.35
Spread 10-2 years
85
120
90
110
125
135
Swap-Spread 10 years
27
15
25
30
35
35
United Kingdom
Bank Rate
0.50
0.50
0.75
0.75
1.00
1.25
3-months Libor
0.56
0.80
0.90
1.05
1.25
1.40
2 years*
0.63
1.00
1.25
1.30
1.35
1.55
10 years*
2.05
2.60
2.85
3.05
3.20
3.35
• The Fed is set to gradually reduce its
QE3 programme and end it in October
2014. Interest rate hikes are on the cards
from 2015Q2, due to a continuously
decreasing US unemployment rate and
gradually rising inflation.
• Due to the deteriorating growth outlook
and increasing downside risks for
inflation we expect the ECB to announce
QE within the next 12 months.
• 10y Bund yields are likely to stabilise
around 1% later this year when the Fed
communication changes but mark new
record lows when the ECB announces
QE in 2015. Thereafter, yields should
rise gradually. The structurally low
interest rate environment remains intact.
• The focus on the Fed’s lift-off will put
upward pressure on US$ rates. A return
to 3% for 10y USTs is only on the cards
for 2015, though. The curve is in for a
textbook-style flattening via the short-end
in the coming quarters.
• Risk premiums of peripheral government
bonds are set to decline further.
TABLE 9: Exchange rates (end-of-quarter)
16.10.2014
Q4 14
Q1 15
Q2 15
Q3 15
Q4 15
EUR/USD
1.27
1.25
1.22
1.19
1.17
1.15
USD/JPY
106
110
113
116
118
120
EUR/CHF
1.21
1.21
1.21
1.21
1.21
1.21
EUR/GBP
0.80
0.77
0.76
0.75
0.74
0.73
EUR/SEK
9.17
9.10
9.00
8.95
8.90
8.90
EUR/NOK
8.43
8.05
7.80
7.70
7.70
7.65
EUR/PLN
4.24
4.15
4.10
4.08
4.06
4.05
EUR/HUF
308
312
310
309
308
306
EUR/CZK
28.00
27.50
27.30
27.00
27.00
26.90
AUD/USD
0.87
0.87
0.85
0.83
0.81
0.80
NZD/USD
0.79
0.77
0.75
0.73
0.71
0.70
USD/CAD
USD/CNY
1.13
1.13
1.15
1.16
1.17
1.18
6.12
6.10
6.05
6.00
5.95
5.95
• USD should further profit from the
expectations of Fed interest rate
normalization. Current USD rates have
not priced in the speed of rate hikes that
we expect.
• The high yielding G10 currencies should
particularly suffer from US rate hikes.
• EUR will remain under pressure due to
increasing likelihood of an ECB QE
program. ECB wants a weaker EUR and
is active in achieving this goal.
• CEE currencies are generally benefiting
from the dovish ECB backdrop, meaning
central banks have room to cut rates
further. HUF, PLN and RON should trade
range-bound, while EUR/CZK will float
above the 27.0 floor set by the CNB.
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs
16
research.commerzbank.com
17 October 2014
Research contacts (E-Mail: [email protected])
Chief Economist
Dr Jörg Krämer
+49 69 136 23650
Economic Research
Interest Rate & Credit Research FX Strategy
Dr Jörg Krämer (Head)
+49 69 136 23650
Christoph Rieger (Head)
+49 69 136 87664
Ulrich Leuchtmann (Head)
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