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MARKET ECONOMICS | GLOBAL WEEKLY
Macro Matters
Issue 104, 16 October 2014
Page
THE BIG PICTURE
Market fluctuations have reached fever pitch in recent days, largely due to the suspicion that the global economy is losing
steam at a time when some central banks are twitching to start raising rates. The eurozone is at the epicentre of it all.
2-3
THEMES OF THE WEEK
ECB asset purchases: A stitch in time …
The ECB is aiming to steer its balance sheet back toward 2012 levels. We think purchases under its announced assetbuying programmes will leave it short of this goal.
4-5
France: Zeroing in on inflation
French inflation fell to a five-year low in September. However, unlike 2009, when the decline was driven by oil prices, this
bout of low inflation is broad based.
6-7
Italian 2015 budget: Playing to the home crowd
Italy’s draft budget for 2015 includes a number of growth-boosting measures, in part financed by spending cuts. It raises
the budget-deficit target to 2.9% of GDP from 2.2%. The European Commission will probably reject it.
8-9
US: Dollar signs
The effects of the stronger USD on US growth and inflation may not, in themselves, be enough to stay the Fed’s hand
from tightening in the middle of next year, but weaker foreign demand and higher risk premia add to the case for a delay.
10-11
Japan: Fate of the VAT hike may rest with Q3 GDP
Growth of 2% q/q or so in Q3 2014 is unlikely to be hailed as a triumph in Japan’s political circles. We expect the government
to stick to its plan to raise the country’s VAT rate once again in October 2015, but weak Q3 growth could allow a delay.
12-13
China: Deflation nation
China is sliding into deflation. Manufacturing prices have been falling for 33 months in y/y terms, matching their record
losing streak of the Asian crisis. Surveys signal no respite.
14-15
Latam: Who’s afraid of the big, bad Fed?
Despite the market’s gyrations, we still expect the Fed to hike rates slowly from June 2015. Historically, though, Fed
tightening has not been kind to Latam. Our strategists have come up with trade ideas to capitalise on our macro views.
16-17
DATES AND DATA
One-week calendar
18-20
Economic forecasts
32
Contacts
34
Key data preview
21-28
Recently published research
33
Disclaimer
35
Central bank watch
29-31
www.GlobalMarkets.bnpparibas.com
Please refer to important information at the end of the report.
Big picture
Markets in panic mode
Market fluctuations have reached fever pitch over the past few days, with the continued decline
in equity markets accompanied by new cyclical lows in bond yields and, more recently, a sharp
widening of eurozone bond spreads. One of the culprits behind these moves has probably been
the suspicion that the global economy was losing momentum at a time when some central
banks were twitching to start normalising interest rates. The epicenter of the move has been the
eurozone, due to the heightened vulnerability of the economy to possible external shocks and
its perceived limited scope for policy reaction. The bloc is facing a whole raft of problems.
Eurozone suffering from a
lack of growth …
The first issue is the eurozone’s lack of growth. Expectations of a gradual economic recovery in
H2 have been dashed by falls in the leading indicators and, more recently, the hard data
(industrial production fell 1.8% m/m in August). We are maintaining our forecast of 0.1% q/q
growth in Q3, but see an increasing risk of Q4 growth coming in well below our forecast of
0.2%. The drag from the EU-Russian rift is part of the story, as is, we believe, the economic
slowdown underway in China. The extent of the impact on euro-area growth prospects is telling
in terms of how vulnerable the economy is to external shocks. With trend growth very low,
uncertainty burgeoning and deleveraging still in train in many economies, an external shock is
likely to have severe and enduring effects on growth.
… limited fiscal room for
manoeuvre …
A second, aggravating factor is that the eurozone’s fiscal room for maneuver is very limited,
thanks to its high level of public debt (and the budgetary rules of the EU’s fiscal compact). EU
Commission President Jean-Claude Juncker’s plan to boost infrastructure spending at the EU
level has merit. However, it is not yet clear how such a plan would be financed. Moreover, even
if implemented, it would take time to have a meaningful impact on the economy. At the national
level, attempts by France and, most recently, Italy to shy away from fiscal consolidation have
met with criticism from Brussels. The draft budgets of both countries risk being rejected by the
European Commission, potentially triggering a damaging political spat.
... and low inflation
Third, at 0.3% y/y in September, euro-area inflation is simply too low. What’s more, the
prospects of a rebound thanks to energy-related base effects in Q4 have now evaporated with
the sharp decline in oil prices. We have cut our inflation forecast for Q4 to 0.3% y/y from 0.5%
and now expect inflation to average 0.6% next year, down from 0.9% previously. The risk of a
negative inflation print over the next six months or so is non-negligible, in our view.
ECB’s credibiity is being
questioned
Fourth, markets appear to have growing doubts on the willingness and/or ability of the ECB to
respond effectively to the shock that has hit the economy. The maths suggests that the ECB’s
plan to steer its balance sheet back towards 2012 levels by buying asset-backed securities
(ABS) and covered bonds is ambitious, while influential members of the Governing Council
continue to oppose more radical action, such as government bond purchases.
It is in this context that the 5y5y inflation swap rate, which is closely monitored by the ECB as a
measure of inflation expectations, has fallen to lows around 1.7%. The market looks to be
testing the ECB’s resolution to defend price stability. The reaction of ECB speakers out on the
circuit so far has been pretty muted, probably fuelling speculation that the more conservative
members of the ECB board have the upper hand at the moment.
Higher spreads are a
reason for concern
It is, therefore, very significant, in our view, that eurozone bond spreads, which had remained
remarkably stable in view of the market jitters so far, have recently widened and not only in the
eurozone periphery. Unlike the decline in oil prices, which boosts consumer purchasing power,
and the depreciation of the currency, which boosts corporate competiveness, higher spreads
are not a self-correcting mechanism. They lead to a tightening of monetary conditions with a
detrimental impact on confidence and, ultimately, growth in what risks becoming vicious circle.
Our Financial and Monetary Conditions Index (FMCI) suggests monetary conditions have
tightened again of late after easing due to EUR depreciation over the previous six months.
So, what happens next? A speedy catalyst for change in current market sentiment would be a
shift in rhetoric from the ECB. We think it highly likely that the ECB will change its tune – and
potentially very soon.
Luigi Speranza
Macro Matters
16 October 2014
2
www.GlobalMarkets.bnpparibas.com
ECB needs to change its
Our view has been that a significant ‘shock’ would probably be required to push the ECB into a
rhetoric, possibly very soon broad-based asset purchase programme that includes sovereign bonds, given how contentious
such a step would be. We noted that such a shock could take various forms: the economy going
back into recession, persistently lower-than-expected inflation, an abrupt fall in inflation
expectations and/or an unwelcome tightening of financial and monetary conditions, either via
the exchange rate or a rise in risk premia, including sovereign debt markets.
Not just one, but all of these are now materialising and it is difficult to see how the ECB can
avoid a broader programme of quantitative easing (QE) under such circumstances. The longer
the current turmoil persists, the more likely we are to get a “we’ll do whatever it takes”-type
comment from ECB chief Mario Draghi at, if not before, the next policy meeting on 6 November.
The clock is ticking and the potential costs associated with delaying are on the rise. Because of
the continued turmoil, therefore, the least we would expect from November’s meeting is a signal
that the ECB is getting closer to launching a long-overdue, full-blown QE programme.
US Fed is leaving all of its
options open
In the US, it is more difficult to fully reconcile the rally in government bonds and the decline in
stock prices with the economy’s performance. Retail sales have certainly disappointed, but
other indicators (including the Fed’s Beige Book, initial claims and industrial production) have
fared better and continue to point to reasonably strong growth. The recent decline in oil prices
will translate into sizeable gains in purchasing power and, hence, consumption. Still, comments,
such as those from St. Louis Fed President James Bullard (that the “Fed could continue with
QE beyond October” and that if the economy remained strong, the Fed “could end QE in
December”) suggests concern among policymakers is mounting as to the possible damage that
could be caused by a negative wealth effect and lower external growth. The central bank is
likely to leave all of its options open and reiterate its mantra that policy is data dependent.
In Asia, lower oil prices
are creating policy space
In Asia, the decline in oil prices is transforming the region’s inflation outlook, increasing the
scope for most regional central banks to ease policy. The Bank of Korea this week trimmed
rates for a second time in three months (by 25bp), as widely expected, pushing its key policy
rate back to its financial crisis-low. With sluggish global growth outside the US increasing the
risk that economic growth will remain tepid and the disinflationary impact of tumbling oil prices
set to push well-below-target inflation even lower, the door remains ajar for more easing.
Indian rates have also fallen but, while CPI data this week showed headline inflation dropping to
a record low of 6.5% in the index’s three-year history, challenging base effects and substantial
shortfalls in crop production due to insufficient monsoon rains are expected to see food inflation
pick up again. Still, high inflation expectations will continue to fend off core disinflation. The RBI
has little scope to cut policy rates anytime soon if it wants to hit its 6% target by early 2016.
China’s deflationary
pressures are intensifying
Inflation data also confirm intensifying deflationary pressure in China. PPI deflation worsened in
September, with the y/y rate negative for the 33rd consecutive month. Perhaps of greater
concern is CPI inflation’s downward surprise for a second straight month. Already at a 56-month
low of 1.6% y/y, inflation could dip into negative territory if oil and house price falls gather pace.
The imbalance between housing supply and demand, combined with the latest foreign-reserves
data, showing a record pace of hot-money outflows (even when valuation effects are taken into
account), suggests house price falls will likely deepen. Greater deflationary pressure plus
tumbling industrial growth mean China will continue to struggle to generate the double-digit
nominal growth needed for debt sustainability. The Q3 national accounts data, due for release
next week, should show official real growth slowing to just 7.1% y/y (from 7.5% in Q2) and the
economy’s broadest measure of costs and prices – the GDP deflator – flirting with deflation.
Brazilian inflation to see
little relief from falling oil
In Latam, the sharp decline in oil prices is set to be detrimental to oil-exporter economies, such
as Venezuela, Mexico and Colombia. This is likely to show up in a deterioration of Colombia’s
current-account deficit (of 1.2pp to 5% of GDP, based on current oil prices, by our estimates),
while the impact on Mexico’s current account is likely to be more muted. Lower oil prices will
bring little inflationary relief to Brazil, however. The impact of the decline in oil prices is being
offset in part by the accompanying foreign-exchange depreciation. What’s more, for countries
like Brazil, the real inflation challenge is domestic, not external. A domestic supply-demand
mismatch has already pushed inflation well above the official target, despite the repression of
regulated prices to contain headline inflation.
Luigi Speranza
Macro Matters
16 October 2014
3
www.GlobalMarkets.bnpparibas.com
ECB asset purchases: A stitch in time …

The ECB is aiming to steer its balance sheet back toward 2012 levels. We think purchases
under its announced asset-buying programmes will leave it short of this goal.

At present, EUR 300bn of ABS is held as collateral for ECB operations. Since the financial
crisis, most ABS have been retained rather than sold and, thereby, used as collateral.

Weak market dynamics raise doubts about whether the ECB can promote a significant
increase in ABS issuance. Large covered bond purchases also look problematic.

The timing is far too slow. TLTRO and asset purchases will not begin to expand the balance
sheet until 2015. With falling oil prices, the deflationary threat is immediate.

Doing too little now raises the chances of having to do more later.
Balance-sheet expansion
of EUR 1trn
In June, the ECB announced a package of measures to boost the eurozone economy and its
flagging inflation rate, including targeted long-term refinancing operations (TLTROs) and two
asset purchase programmes. At its 2 October press conference, the ECB provided more details
on the purchase programmes, but the announcement was disappointingly light on detail. No
quantitative target was set for either of the programmes and ECB President Mario Draghi
refused to be drawn on whether his stated desire to expand the ECB balance sheet back to
2012 levels meant a January 2012-like balance sheet of EUR 2.7trn or a July 2012-like balance
sheet of EUR 3.1trn. Still, Mr Draghi cited EUR 1trn as the amount of assets that could be
purchased. The shrinkage of the ECB balance sheet since its 2012 peak is of this magnitude.
Purchased ABS to be
similar to ABS collateral
There are certain features of the asset-backed securities (ABS) market that will act to limit the
size of the purchase programme in that market. According to the Association for Financial
Markets in Europe (AFME) securitisation report for Q2 2014, there are roughly EUR 1trn of
European ABS, but less than EUR 900bn are from eurozone countries. In terms of credit
quality, Mr Draghi cited the fact that the ECB had been accepting ABS as collateral in its
liquidity operations for 10 years and that the ABS purchased would be of similar credit quality to
those pledged as collateral, with concessions for Greece and Cyprus as long as they remained
in a bailout programme.
Only EUR 400bn of ABS to
qualify for purchases
ECB data show that there is currently EUR 300bn pledged in eurosystem operations out of
EUR 680bn in eligible assets (Chart 1). This leaves EUR 380bn as the pool of available assets,
broadly in line with the EUR 400bn estimated by ECB Vice President Vitor Constancio in a
speech on 6 October. Mr Constancio’s slightly higher number may take into account ineligible
Greek and Cypriot ABS.
Actual purchases likely to
be much lower
The ECB reckons that the stock of appropriate covered bonds should make up the EUR 600bn
shortfall in assets suitable for purchase. Of course, just because there is a stock of EUR 1tn that
looks suitable to purchase does not mean that the ECB will able to purchase it all. Purchases
could fall well short of the theoretical maximum. If the ECB were to purchase EUR 400bn of
ABS, it would be holding a very large share of existing issuance, either in outright terms or
Chart 1: ABS eligible and used for ECB operations
Chart 2: Assets held as collateral by the ECB
1200
EUR bn
1000
ABS Eligible
Non‐Marketable
23%
800
600
Other Marketable Assets
6%
ABS Used
400
200
0
Jan 12
Jan 13
Regional Government Securities
5%
Uncovered Bank Bonds
11%
Covered Bank Bonds
18%
Corporate Bonds
5%
Jan 14
Source: Macrobond Financial, ECB, BNP Paribas
Source: Macrobond Financial, ECB, BNP Paribas
Colin Bermingham
Macro Matters
Asset‐Backed Securities
15%
Central Government Securities
17%
16 October 2014
4
www.GlobalMarkets.bnpparibas.com
through collateral. This means it would need to bid up the price significantly in order to secure
its target ownership level, increasing the amount of credit risk transferred to the ECB balance
sheet. Our view is that the ECB will generally only purchase 15-25% of the outstanding assets,
putting an upper limit of EUR 100bn on ABS purchases.
Most recent ABS created
just as collateral
One ECB strategy is to try to encourage further issuance of ABS. If it could boost the size of the
market, then it could also boost the size of its purchase programme. Attempting to revive the
European ABS market could prove difficult, however. Chart 3 shows how European ABS
issuance has been placed (sold) or retained since 2006. After the market collapsed in 2008,
most of the issuance was retained on the balance sheet of the issuer. Strong issuance in 2008
and 2009, despite the market collapse, is down to the fact that ABS originators could use their
issued securities as collateral in ECB operations. Thus, banks that needed liquidity, but could
not use individual loans (or anything else) as collateral, could package the loans and use this as
collateral (in a process known as ‘originate-to-repo’).
True market depth is much
shallower
The lower portion of each bar in Chart 3 shows the amount of ABS sold, so is probably a better
measure of the true strength/demand of the ABS market than the amount issued. Amounts sold
remain paltry, at less than EUR 100mn a year since 2008, underlining that liquidity in the market
remains moribund. The ECB can encourage the markets and hope that regulators sign off on
lower capital charges for ABS, which are acting as a deterrent to buyers. Still, the numbers
show the ECB has a tough task on its hands.
ECB faces a significant
shortfall of bonds to buy
Ultimately, purchases under these two programmes are likely to fall well short of EUR 1trn. ABS
will probably be in the region of EUR 100bn over the next two years. Purchases of covered
bonds are likely to be little more than EUR 100bn over the same period, we estimate. The 70%
purchase limit on new issuance prevents the ECB from buying private placement directly from
banks and from paying off-market prices in the primary market. What’s more, the market is also
shrinking; with gross issuance falling – partly because banks shifted funding from covered
bonds to LTROs – it is becoming difficult to purchase large tranches in the secondary market. In
short, the ECB could struggle to buy more than EUR 200bn in an asset pool of EUR 1trn.
Of course, the ECB could make up the shortfall in its balance-sheet expansion through the
TLTRO programme, but the initial take-up has been disappointing. It may be that the banks are
waiting for the results of the ECB’s comprehensive assessment and asset quality review before
increasing their TLTRO funding. More likely, though, the banks have little appetite to lend in the
real economy and the deterioration in the growth outlook will only prolong this behaviour.
While the purchase of covered bonds should start this month, the timetable for the ECB to begin
ABS purchases is vague (sometime in Q4) and the next round of TLTRO funding takes place in
December. In the case of the TLTRO, the funding given out by year end is unlikely to match
expiring LTRO funds, meaning no net expansion of the ECB’s balance sheet under this
programme until 2015. Thus, the process of balance-sheet expansion is going to be very slow,
but the threat of deflation is immediate, particularly amid falling oil prices. The ECB’s drip-feed
of policy initiatives lacks the ‘big-bang’ impact of QE in other countries and has been
unsuccessful in halting the slide in inflation expectations. The longer the ECB takes to expand
its balance sheet, the greater the odds that it will have to do more to have the desired effect.
Too little, too late?
Chart 3: Placed versus retained issuance
900
800
Placed
Eur bn
Chart 4: 5y5y forward inflation expectations at a new low
Retained
700
600
500
400
300
200
100
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
YTD
Source: AFME securitisation data snapshot Q2 2014, BNP Paribas
Source: Macrobond Financial, BNP Paribas
Colin Bermingham
Macro Matters
16 October 2014
5
www.GlobalMarkets.bnpparibas.com
France: Zeroing in on inflation

French inflation fell to a five-year low in September. However, unlike 2009, when the decline
was driven by oil prices, this bout of low inflation is broad based.

Core inflation is low, despite tax increases earlier this year. Underlying inflation, which
excludes volatile items and taxes, has fallen to an unprecedented 0%.

The low level of French economic activity has pushed down prices. However, France should
be able to avoid deflation, primarily thanks to the stickiness of wages.
French inflation falls to a
five-year low in September
French September inflation fell 0.1pp to 0.3% y/y on a CPI basis and 0.4% y/y on a HICP basis.
In both cases, this was the lowest level since October 2009. However, the structure of inflation
is very different today to what it was five years ago (Chart 1). For most of 2009, energy prices
were down more than 10% y/y, after jumping in 2008. Last month, energy prices declined, too,
but by a more moderate 2.5% y/y. Conversely, food prices (driven by fresh food prices, which
rebounded 4.9% m/m in September, but declined 2.1% y/y) made less of a negative contribution
to inflation, falling just 0.6% y/y. The combined negative effect of food and energy actually
declined slightly, from 0.4pp to 0.3pp. Though the Brent crude oil price is currently heading
south, we believe the negative role of food and energy will continue to fade.
Core inflation is the culprit
It is core inflation that lies behind the decline in headline inflation. Manufactured goods prices
suffered a slight distortion in July and August due to the early start of seasonal sales, similar to
that seen in January and February. They are now back in line with trend, down 0.7% y/y
(Chart 1). The euro’s recent decline has not yet had a visible impact on imported goods. The
inflation rate on services prices has also fallen to 1.5% y/y, its lowest level this year (ie, since
the value-added tax (VAT) rate was increased on 1 January 2014).
Excluding taxes, inflation
actually declined to zero
Looking at the domestic measure of underlying inflation, which excludes volatile items (such as
energy and fresh food), but also taxes, September inflation fell to 0.04%, the lowest level ever
recorded for this measure, which goes back to 1991, and probably the lowest level for more
than 50 years, would comparable data be available. The contribution of taxes remains
important, though hard to measure. Taxes on tobacco still account for 0.07pp of the domestic
headline rate, though that is about half their contribution in the first half of 2014.
Producer and retailer
pricing power is weak
The gap between the core HICP and French underlying inflation rates gives us a fair idea of the
impact of the VAT increase. Compared with the inflation rates just before the January tax hike,
we can see that a large part of the gap, about 60%, of the VAT hike was absorbed by producers
and retailers, which cut ex-tax prices rather than pass on the rise to customers. Clearly, the tax
absorption rate was more significant for goods and services taxed at the standard rate, which
rose modestly, from 19.6% to 20%, rather than for services taxed at the intermediate rate
(mainly home repairs and restaurants) which jumped from 7% to 10% (Chart 2).
Chart 1: French CPI inflation, main items (% y/y)
Chart 2: Impact of the intermediate VAT rate hike
Source: Macrobond, INSEE, BNP Paribas
Source: Macrobond, INSEE, BNP Paribas; blue = home repairs; green = cafes
and restaurants; *VAT hike applies to both items
Dominique Barbet
Macro Matters
16 October 2014
6
www.GlobalMarkets.bnpparibas.com
Weak activity weighing on
consumer prices
Such behaviour is a response to low final demand and only serves to underline concerns about
the risk of recession and deflation down the road. Moreover, a key reason the corporate sector
has been able to cut (or not raise) ex-tax prices is the tax credit for competitiveness and
employment (TCCE). This credit has been used to cut prices rather than bolster profitability or
finance investment. Producers and retailers are most concerned about maintaining turnover
(please see France: 2015 budget preview of 22 September 2014). The TCCE has not been
enough to buoy revenue, however. Over the past four quarters, France’s corporate gross
operating surplus has fallen to 34.2% of GDP, its lowest level since 1986. With a further credit
to come next year, on top of the so-called ‘responsibility pact’, prices may continue to fall.
Low inflation should help
bolster consumption
The solution may lie in the problem, however, as the low level of inflation should bolster
households’ purchasing power. Some of these gains have been absorbed by a rise in direct
taxation in a vain attempt to reduce the budget deficit. The rest went into savings in the first half
of the year, which saw the household savings ratio at 15.9%, up 1.0pp from H2 2013. With
inflation continuing to decline and a portion of the rise in direct taxation due to be repealed,
some of the purchasing power gains could filter through to consumption in the coming quarters.
French inflation aligning
with the eurozone average
France’s HICP inflation rate fell to 0.36% in September, converging on the eurozone inflation rate
of 0.31%. This was not expected just a few months ago due to France’s higher tax rates. France’s
core HICP inflation rate (0.9% in September), which is more sensitive to the VAT hike, is also
converging on that of eurozone (0.8%), but remains higher for the time being (Chart 3).
Other measures of French inflation are also weak. The September median inflation rate eased
to 0.89%, 1.4 standard deviations below its 15-year average. Despite tax hikes, at 0.61% in
September, the trimmed mean was also close to its historical low of 0.57% in January 1999
(Chart 4). What’s more, the share of items for which prices have been on the decline has been
close to 30% for the past five months. Though not a record, this is quite high, especially as most
items were subject to the rise in VAT.
The risk of French
deflation is remote
Although French inflation excluding taxes is at zero, we do not believe France is at risk of
deflation. First up, there are a few more tax hikes scheduled for next year, mainly in relation to
energy, which should continue to make a positive contribution to the headline rate, although the
2015 budget is not yet finalised. The decline in food prices is unlikely to persist at its current
pace. EUR depreciation will have a greater effect on imported prices in the near future, as the
pass-through to prices is always quicker than the effect on volumes.
Labour costs will rise, but
inflation will remain low
Most importantly, however, French nominal wages are less flexible than in most other eurozone
countries, both to the upside and the downside (please see French wages: The cause and
effect of rigidity of 4 February 2014 for more). The average monthly wage was up 1.4% y/y in
Q2 2014, at least a 20-year low and even lower than during the period of wage restraint that
accompanied the decline in French working hours (from 1999 to 2001). For legal reasons,
nominal wage cuts remain the exception rather than the rule. With productivity gains limited by
the slow pace of growth, therefore, French unit labour costs will continue to rise, preventing
France from seeing full-blown deflation.
Chart 3: HICP inflation: France vs the eurozone (% y/y)
Chart 4: Indicators of the risk of French deflation
3.0
‐
Trimmed mean (% y/y)
5
2.5
10
2.0
15
20
1.5
25
1.0
30
35
0.5
Share of items in deflation
(RHS, inverted scale, %)
40
0.0
45
99
Source: Macrobond, Eurostat, BNP Paribas
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: INSEE, BNP Paribas
Dominique Barbet
Macro Matters
00
16 October 2014
7
www.GlobalMarkets.bnpparibas.com
Italian 2015 budget: Playing to the home crowd

Italy’s draft budget for 2015 includes a number of growth-boosting measures, in part
financed by spending cuts. It raises the budget-deficit target to 2.9% of GDP from 2.2%.

If passed by parliament and implemented effectively, the measures should boost GDP next
year. The European Commission will probably reject the plans as they stand, however.

Prime Minister Matteo Renzi’s reform zeal is boosting his approval ratings, however, and a
bill going through parliament to facilitate labour-market reform is a major step forward.

Italy’s growth outlook remains grim, though. We expect GDP to contract again in Q3 and
the risks have increased of another decline in Q4.
This article was originally published as an eponymous desknote on 16 October 2014.
Italy abandons austerity
for growth-boosting plans
Draft budget: A change of gear
The draft Italian budget for 2015, approved by the cabinet late last night, is a significant break
from the past. The bill foresees a number of growth-boosting measures worth EUR 36bn (or
2.3% of GDP), including tax cuts aimed at cutting labour costs for companies. This is to be
financed in part through spending cuts (EUR 15bn) and other measures (EUR 10bn) in the
context of a comprehensive spending review. As a result, Italy’s budget-deficit target for 2015
will rise to 2.9% of GDP from 2.2% previously.
In our forecasts, we had already taken into account some relaxation of Italy’s budgetary
consolidation efforts and pencilled in a deficit of 2.6% of GDP for 2015. The draft budget not
only goes beyond our already generous figure, but aims to strike a more growth-friendly balance
between revenue and spending. As suggested by the poor response of the economy to the tax
cuts implemented last May, some caution is warranted here: against a backdrop of great
uncertainty, the multiplier associated with tax cuts may be lower than normal. Still, if passed by
parliament and implemented effectively, the budget has the potential to boost GDP growth
somewhat next year compared with our current forecast of 0.3%.
European Commission
likely to reject the draft
Opposition in Brussels
The budget will raise more than one eyebrow in Brussels, however, for at least three reasons.
First, it envisages a limited improvement in the structural budget balance, contrary to EU rules
requiring an improvement of half a percentage point per year. Second, Italy’s already lofty public
debt-to-GDP ratio is likely to keep rising as a result of the higher deficit. Third, the plan is
subject to significant implementation risk.
The tax cuts will be implemented immediately, while the impact and effectiveness of the
spending cuts are more uncertain. The European Commission is therefore likely to argue that in
the absence of additional spending cuts, the 3% budget-deficit limit is at risk. The risk is
therefore high that the Commission will reject Italy’s draft 2015 budget – its prerogative under
the rules of the European fiscal compact.
Italy also planning reforms
to kick-start growth
Progress on the reform agenda
The budget is part of a more comprehensive strategy, which includes structural reform, to kickstart the Italian economy. Prime minister, Matteo Renzi, recently upped his reform efforts and is
currently pushing a proposal through parliament to increase the flexibility of Italy’s labour
market. The bill, approved by the senate last week, tasks the government with legislating on the
issue within set limits (an ‘enabling’ law). The bill now has to be approved by the lower house
and this will probably happen by year end. From then, the government will have six months to
introduce detailed legislation.
One of the goals of the bill, dubbed the Jobs Act, is to overcome the dualism of Italy’s labour
market by reducing the difference between temporary and permanent contracts. Among other
initiatives, the government intends to modify article 18 of the country’s labour law, which
governs unfair dismissal, with a view to relaxing the rules on terminating employment contracts.
Luigi Speranza
Macro Matters
16 October 2014
8
www.GlobalMarkets.bnpparibas.com
Latest reforms not
uncontroversial at home
This is a particularly controversial issue and the premier is up against plenty of opposition from
within the rank and file of his own party, not to mention the country’s labour unions. In this
context, last week’s passage of the bill by the senate has to be viewed as a major victory for Mr
Renzi, enhancing the credibility of his reform agenda.
That said, this is only the first step on a long legislative road. What’s more, the bill does not
tackle other crucial issues, such as the wage-bargaining process, which is still too centralised
and rigid, especially when viewed against progress made in other countries, such as Spain.
Italian voters seem to be
embracing Renzi’s zeal
Mr Renzi reaps his reward in higher approval ratings
One thing in Mr Renzi’s favour here is the positive response of voters to recent developments.
After losing ground in the opinion polls earlier in the year, when the government appeared to run
out of reform steam, the popularity of the prime minister and his government is again in the
ascendant, according to the latest polls. Significantly, most of the gains are at the expense of
the centre-right, while the ratings of the anti-austerity Five Star have remained broadly stable,
around 20%. We view this as a sign that Mr Renzi’s reform enthusiasm is paying off.
There are a lot of hurdles
to overcome, however
Still, Italy’s political climate remains highly uncertain. Former premier Silvio Berlusconi, down
but not out, still has a de facto veto on the institutional reforms on which current Prime Minister
Renzi has staked much of his credibility. The passage of the reform, therefore, is potentially
subject to the strategic whims of the media magnate. Opposition to structural reform from within
Mr Renzi’s own party is also rife. His opponents are a minority in the party, but have a not
insignificant number of seats in both houses of parliament. Any split in the party would,
therefore, potentially put the government’s parliamentary majority at risk. And it is also worth
remembering that Five Star leader Beppe Grillo’s populist stance – including recent calls for a
referendum on remaining in the euro, though that has failed to gather significant momentum –
remains pretty appealing for a significant portion of the population.
Mr Renzi to stay in power
until at least mid-2015
Against this fragmented backdrop, the lack of a concrete alternative to the current government
appears to remain one of the key reasons for its survival, underlining its vulnerability. Still, we
think the most likely scenario is that Matteo Renzi will remain in power, at least until mid-2015,
when there is likely to be a presidential election, giving him sufficient time to pass a number of
key reforms, including the Jobs Act.
Growth could throw a
large spanner in the works
Lack of growth is the key risk
The weakest link in all of this is Italy’s growth outlook. Expectations of an economic recovery in
the second part of 2014 have once again been dashed. As noted, the tax cuts implemented in
May had a smaller-than-expected impact on consumption due to a lack of consumer confidence
and the need to replenish savings depleted during the crisis to smooth consumption.
Credit constraints and slower export growth (due to the EU-Russian sanctions and the
economic slowdown in Italy’s main trading partners in the rest of the eurozone, such as
Germany) is likely to stall the improvement underway in investment. We, therefore, expect
Italian GDP to continue to fall in Q3 (-0.1% q/q). And the risks of another fall in Q4 (our current
forecast is for a flat reading) have increased.
We still think the economy
will pick up next year
As some of the headwinds currently facing the economy are likely to abate in 2015, we continue
to believe the Italian economy will recover gradually next year, possibly with some help from the
measures included in today’s draft budget. However, the budget notwithstanding, the risks to
our forecasts remain skewed to the downside.
With Italian inflation already in negative territory (-0.1% y/y in September), the risk of a
prolonged period of very low, or even negative, nominal growth is high. This will have a
detrimental impact on Italy’s deficit and debt dynamics. Moreover, it could eventually erode Mr
Renzi’s popularity, with potentially significant implications for both confidence and reform.
Luigi Speranza
Macro Matters
16 October 2014
9
www.GlobalMarkets.bnpparibas.com
US: Dollar signs

The USD’s strength has been more marked against the EUR and JPY than against the
effective exchange-rate basket.

A stronger USD will impact growth and inflation only slightly. The appreciation we have seen
to date might knock 0.1-0.2% off growth in the first year and a bit less off inflation.

This, by itself, may not be enough to stay the Fed’s hand from tightening in the middle of
next year, but weaker foreign demand and higher risk premia add to the case for a delay.

The Fed has plenty of time before the middle of next year to make a data-based analysis.

Lower inflation, especially in light of recent oil price weakness, means the Fed would have
more room for manoeuvre when it comes to a delay if doubts about growth rise.
The dollar is strong across
the board
The dollar is strong across the board, especially against the JPY and EUR. Since mid-March, it
has appreciated 3.7% against the JPY and 8.2% against the EUR. So, what does this general
appreciation mean for US growth, inflation and the Fed?
Broad dollar index is not
high on an historical basis
Table 1 shows the key destinations of US goods exports and Table 2 shows where US imports
come from. In calculating an effective exchange-rate index, note also has to be taken of
competition in third markets (between US and European plane manufacturers, for example).
The Fed publishes a few different measures of the effective exchange rate of the US dollar. One
covers just the currencies of advanced economies, but as a result of the increased importance
of emerging markets to world trade, we prefer the broader index that covers 26 currencies.
Chart 1 shows how the broad and narrow exchange-rate indices have evolved in recent years.
The first point to make is that the moves in the USD recently have been mild and that its
effective index is not high on an historical basis. The recent appreciation has been more marked
against high-income countries than against the broad basket.
The impact on the US
economy looks to be small
What is the impact of appreciation on US exports, imports, GDP and inflation? Table 3 shows
estimates from simulations run by the OECD for a 10% uniform one-step appreciation of the
USD against its trade-weighted index. Given that the broad index for the dollar has risen by only
about 3% since mid-March, the year 1 impact on growth of what has been experienced so far
would be 0.1-0.2%, with a similar effect in year 2 (note that the table shows the effect on the
level of GDP). The impact on inflation would be about 0.1% in the first year and less in year 2.
Currency moves affect the
US less than others
The figures for other currencies (for example, the euro) tend to be bigger (a 10% euro
appreciation knocks 0.7% off GDP in the first year and pushes inflation up 0.7% in the second,
according to the OECD). So, why is the effect on the US so lean?
 US trade as a share of GDP is low (exports only account for around 14% of GDP).
Table 1: Key destinations for US exports, 2013 (USD bn)
Canada
Mexico
China
UK
Japan
Germany
Brazil
South Korea
France
India
Saudi Arabia
Italy
Total (USD bn)
% of total exports
% of GDP
366.3
256.6
160.6
108.7
112.8
75.3
70.7
64.4
51.6
35.7
28.0
26.2
16.1
11.3
7.0
4.8
4.9
3.3
3.1
2.8
2.3
1.6
1.2
1.2
2.2
1.5
1.0
0.6
0.7
0.4
0.4
0.4
0.3
0.2
0.2
0.2
Table 2: Key places of origin of US imports, 2013 (USD bn)
China
Canada
Mexico
Japan
Germany
UK
South Korea
France
India
Italy
Saudi Arabia
Brazil
Source: US Census Bureau, BNP Paribas
% of total imports
% of GDP
455.9
368.8
304.5
171.3
148.2
101.6
73.7
61.8
61.1
49.9
53.3
34.6
16.5
13.4
11.0
6.2
5.4
3.7
2.7
2.2
2.2
1.8
1.9
1.3
2.7
2.2
1.8
1.0
0.9
0.6
0.4
0.4
0.4
0.3
0.3
0.2
Source: US Census Bureau, BNP Paribas
Paul Mortimer-Lee
Macro Matters
Total (USD bn)
16 October 2014
10
www.GlobalMarkets.bnpparibas.com
 Many prices are set in USD, leading to a weak price effect, so the pass-through of depreciation
to import prices in slower and less full in the US than in many other countries.
FX pass-through has
waned in recent years
Thus, the appreciation of the dollar so far will have some effect on the US economy through
both growth and inflation. In almost all countries, there is substantial evidence that exchangerate pass-through (ERPT) has declined in recent years, with a number of hypotheses being
advanced to explain it:
 Monetary policy over the last quarter of a century has aimed at lower and more stable inflation.
Expectations have become more solidly anchored. There is greater central-bank credibility.
 When long-term expectations are solidly anchored, nominal shocks have a limited effect. They
become shocks to relative prices (eg, traded goods vs non-traded) rather than shocks to the
price level or inflation as a whole.
 Lower inflation has reduced the frequency of price changes (prices are ‘stickier’).
 In advanced economies, imports from emerging markets are no longer primarily commodities.
There is a much bigger share of manufactured goods and these can be ‘priced to market’ far
more, leading to a smaller pass-through.
 Greater competition in international markets may have lessened the second-round effects of
higher import prices on wages.
 Cross-border supply chains may incorporate output from more countries than in the past,
lowering the pass-though.
At face value, the Fed
should delay tightening …
Will the Fed allow the recent appreciation to affect its judgement of when and how much to raise
rates? The effects of the recent appreciation of the USD exchange rate are small. However, if
we examine OECD simulations of the effects of interest rates on the economy, they are even
more muted, especially on inflation. The OECD’s simulations suggest that a 100bp hike in
interest rates would have almost no effect on inflation in year 1, a 0.1% effect in year 2 and
0.3% in year 3. If we were to take such results at face value, they would say “delay tightening”.
… but there’s more to the
story than just the USD
Is this likely to happen? The Fed has fallen out of love with zero rates and appears to want to
tighten. But if the exchange rate continues to appreciate quickly, especially if foreign demand
and inflation fall and risk premia rise, it will have to seriously consider delaying. The moves in
the dollar so far are more likely to affect the speed of tightening than the start date, however, in
our opinion, though if US growth were to begin to falter or the labour market to weaken, then a
stronger exchange rate could tip the balance.
Domestic considerations
matter more to the Fed
In short, then, USD strength is one factor to be weighed in the balance, but domestic
considerations, particularly in relation to the labour market, matter more.
Chart 1: Fed nominal trade-weighted exchange index
Table 3: Impact on the US of a 10% rise in the USD
%
GDP (level)
Inflation
Year 1
Year 2
Year 3
-0.5
-0.3
-1.0
-0.4
-1.1
-0.9
Source: OECD
Source: Reuters Ecowin Pro, Federal Reserve
Paul Mortimer-Lee
Macro Matters
16 October 2014
11
www.GlobalMarkets.bnpparibas.com
Japan: Fate of the VAT hike may rest with Q3 GDP

Based on the data to date, we estimate Japanese real GDP to have rebounded by ‘only’ 2%
q/q or so (saar) in Q3. In political circles, this is unlikely to be hailed as a triumph.

Our view remains that Prime Minister Shinzo Abe is likely to stick to his plans to increase the
VAT rate again in October 2015, as the political cost of backtracking would be sizeable.

That said, we cannot rule out the possibility that the premier will opt to postpone the tax hike,
citing lacklustre Q3 2014 GDP growth and uncertainty about global economic prospects.
Japan’s government will decide in early December whether a second increase in the country’s
value-added tax (VAT) rate is feasible next year, after it has seen the Q3 2014 GDP data.
Naturally, other criteria will also come into play, but the market seems fixated on the GDP data
(first estimate mid-November), as weakness in the Q3 numbers will inevitably lead to louder
calls from within the ruling coalition for a deferral of the October 2015 tax increase. Based on
the data to date, we see Japanese Q3 real GDP growth at about 2% q/q annualised (up from a
7.1% contraction in Q2). There is considerable margin for error here, as virtually no data have
been published for September as yet. But, at this point, we think it unlikely that the Q3 GDP
report will be strong enough to provide the government with an unambiguous signal either way.
We estimate GDP to have
rebounded by ‘only’ 2%
A weak rebound in
consumer spending
Many forecasters were initially expecting real GDP growth of about 4% in Q3 on an annualised
basis on the grounds that consumer spending was likely to rebound solidly from the steep 5.1%
q/q decline recorded in Q2. Yet, the indicators that the cabinet office has created from various
monthly consumption-related metrics show average consumption no more than 0.5% above Q2
levels in July and August. The September figure should be stronger, as the unseasonably cool
summer weather proved a drag on consumer spending. Still, the overall indications are that
consumer spending in Q3 will only be about 1% higher than in Q2. We have consistently taken
a cautious view on to how quickly consumer spending would recover after the first consumption
tax hike in April, but the figures to date have been even weaker than we expected.
Insipid spending reflects
lower real income levels
Some attribute the weakness in consumption to the lingering repercussions of front-loaded
spending prior to the last VAT hike, but we regard the fall in real household income as the
fundamental factor. The increase in the VAT rate, itself, of course, is one factor that has brought
down real income, but households’ real purchasing power had actually started to trend lower
before that due to the impact of yen devaluation, which had translated into higher goods prices.
Indeed, if we ignore the significant pulling-forward effect on demand for consumer durables, this
factor has been causing consumer spending to soften since H2 2013.
Yet, business investment
is still trending higher
That said, on a sequential basis, worker compensation is likely to have grown in Q3, even in
real terms, thanks in part to an increase in summer bonuses. Business investment also looks to
have grown, by slightly more than 1% q/q. Due to the impact of one-off factors, business
investment has fluctuated considerably over the past two quarters, surging 7.8% q/q in Q1 and
Chart 1: Japanese private consumption, integrated
estimates (sa)
Chart 2: Contracted amount of public works
(JPY trn, three-month average, annualised, sa)
116
18
114
17
112
16
110
15
108
14
106
13
104
102
12
100
11
98
08
09
10
11
12
13
10
14
Source: Cabinet office, BNP Paribas
05
06
07
08
09
10
11
12
13
14
Source: EJCS, BNP Paribas
Ryutaro Kono / Hiroshi Shiraishi
Macro Matters
04
16 October 2014
12
www.GlobalMarkets.bnpparibas.com
falling 5.1% q/q in Q2. But with the index of aggregate capital goods supply 1.6% higher than
Q2 levels on average in July-August and the production plan survey pointing to an increase in
capital goods output in September, there appears to have been a mild uptrend in capex in Q3.
Public-works spending
likely to resume expansion
We also expect the impact of the FY2014 supplementary budget to show up as an increase in
public investment of about 5% q/q. Expansionary fiscal policy continues to support the
construction sector, although it is highly questionable whether public-works projects are being
implemented as fast as the GDP statistics indicate, given the bottlenecks in the construction
sector due to the shortage of construction workers.
Exports still in the
doldrums
On the external front, exports have remained weak and probably fell by around 1% q/q in Q3.
This is largely down to a decline in services exports, though goods exports barely grew either.
Supply-side factors are exerting a major influence here, with companies continuing to gradually
close low-margin domestic production facilities and shift more production offshore. Indeed,
although the US economy is recovering solidly, Japanese exports to the US continue to put in a
relatively weak performance. One of the major reasons for this is Japanese automakers’
decision to shift production to Mexico and elsewhere, the effect of which has been to break the
link between increasing sales in the US market and export growth out of Japan.
Inventory build-up not a
serious issue
Meanwhile, we expect inventories to have detracted 0.3pp from GDP growth in Q3, having
boosted it by hefty 1.5pp in Q2. Inventories of finished goods continued to increase until August,
but then started to slow. In addition, relatively solid auto sales data for September suggest that
there was some inventory correction in this sector, where the build-up of unsold stock was most
acute. The latest BoJ Tankan survey also indicated that most firms are not too worried about
current inventory levels, suggesting that a further significant increase in unwanted inventories
did not occur in the quarter.
Additional monetary
easing is unlikely
Thus, while the Q3 GDP report is likely to show that the Japanese economy is proving slow to
recover due to the sluggishness of consumer spending, it is unlikely to point to a sustained
downturn either. With the sequential increases in worker compensation and moderate growth in
business investment, policymakers should be able to assert that the mechanisms of economic
recovery remain in place.
The BoJ has been maintaining an optimistic view of Japan’s economic prospects on the basis
that there is still a positive cyclical link between income and expenditure. Economic growth to
date has been falling short of the bank’s projection. Nevertheless, the labour market has
continued to tighten and the yen is weakening again. For this reason, further monetary easing
seems unlikely, at least in the near term, as long as there is no sudden, sharp deterioration in
external conditions.
Second VAT hike a close
call, but likely to go ahead
In the political arena, a rebound of about 2% in annualised Q3 GDP after a plunge of 7.1% in
Q2 is unlikely to be hailed as an economic triumph. As the political cost of back-peddling on a
tax increase that has already been signed into law would be quite significant, we continue to
believe that Prime Minister Shinzo Abe will stick to the current plan to raise the VAT rate in
October 2015 (though we expect him to push for other fiscal stimulus at the same time).
Even if the financial markets took the move calmly, any decision to defer the VAT hike would
make things more difficult for the cabinet when the Diet is back in regular session in January
2015. The government would need to pass new legislation for the deferral and this could delay
the debate on the FY2015 budget and other legislation central to Prime Minister Abe’s main
policy goals, such as the right to collective self-defence.
That said, Mr Abe hopes to remain in power until 2018 and probably views the VAT hike as a
significant risk to his political longevity. Opting for another rise in the VAT rate at a time when
household frustration at rising prices is mounting is, without doubt, a huge political gamble. At
the end of the day, therefore, it will be a political judgement. We cannot, therefore, rule out the
possibility that Mr Abe could opt to defer the second VAT hike, citing a lacklustre Q3 2014 GDP
figure and uncertainty about global economic prospects.
Ryutaro Kono / Hiroshi Shiraishi
Macro Matters
16 October 2014
13
www.GlobalMarkets.bnpparibas.com
China: Deflation nation

China is sliding into deflation. Manufacturing prices have been falling for 33 months in y/y
terms, matching their record losing streak of the Asian crisis. Surveys signal no respite.

Even more worrying is that property prices are falling at a 10%-plus annualised clip. The
yawning imbalance between supply and demand suggests price falls are likely to accelerate.

The economy’s broadest measure of costs and prices, the GDP deflator, is also flirting with
deflation. The imminent Q3 national accounts data should show further weakness.

CPI inflation is now falling fast. Already at a 56-month low of 1.6% y/y, it could easily fall
below 1% by mid-2015. CPI deflation is possible if oil and house price falls accelerate.
Capex-centric growth fuels
deflationary pressure
China’s deflationary chickens continue to come home to roost. The biggest investment bubble in
1
history, financed by one of the biggest credit bubbles in history is producing serial overcapacity
across swathes of the economy, especially basic industries and real estate. The logic of China’s
wildly unbalanced growth is steadily intensifying deflationary pressure, a fading ability to
generate cashflow and a slow, grinding march towards unsustainable debt dynamics. With
system-wide leverage already well over 2x the size of the economy and the average interest
rate paid by corporates around 7%, nominal GDP growth needs to run well in double-digit
territory for debt to be sustainable. Q3 GDP data could show nominal growth slowing to 6-7%
with the deflator close to zero or even negative in y/y terms (China: Stumbling & mumbling).
Industrial deflation
engrained and intensifying
These pressures are, of course, not new and China’s state-controlled financial system ensures
that its capacity to sustain the Ponzi finance dynamics that artificially elongate the credit cycle
remains considerable. The asset-management companies (AMCs), aka China’s ‘bad banks’,
have increasingly emerged as credit-risk absorbers and liquidity providers of last resort. Clear
evidence of growing deflationary pressure on an economy-wide basis, however, is accruing as
growth fades and the diminishing return from stimulus worsens. Producer prices have been
falling for over two years, but deflationary pressures at the factory gate are once again
intensifying. The output price balance of the HSBC/Markit PMI manufacturing survey, which
correlates closely with PPI innovations, signalled industrial deflation was once again intensifying
in September. The official data confirmed this, with the PPI sliding by a worse-than-expected
1.8% y/y, extending its run of negative y/y prints to 33 months, already matching the prior
‘record’ of monthly declines set during the Asian crisis.
Property prices now also
falling at a record rate
Developments in the housing market are even more disturbing, with over-supply already
producing house-price declines at an annualised pace of 10-12% (Chart 2). As noted, house
prices are now falling both at a record pace and in a record number of cities. Given the scale of
the required likely flow adjustment (real-estate capex probably needs to fall by at least 3% of
GDP) and the likely required stock adjustment (‘shadow inventory’ of 40% of GDP), deflation in
the housing market looks virtually certain to intensify near term (China: The real (estate) deal).
Chart 1: China’s factory-gate deflation
Chart 2: China’s house price deflation
Source: Reuters Ecowin Pro, BNP Paribas
1
Source: Reuters Ecowin Pro, BNP Paribas
The IMF’s recent Article IV noted that it could only find four credit booms on a similar scale to China’s in the last 50 years.
Richard Iley
Macro Matters
16 October 2014
14
www.GlobalMarkets.bnpparibas.com
Authorities trying to fight
housing-market deflation
Because of its centrality to the economy (real-estate capex has directly accounted for 23% of all
nominal GDP growth over the past three years), the authorities are increasingly alarmed and
attempting to combat deflation in the property market by easing restrictions on property
purchases in the hope of unleashing any pent-up demand. This is unlikely to work. First, the
fundamental mismatch between supply and demand is so egregious that further substantial
deflation is virtually guaranteed. Second, deflation is becoming ever more engrained and is
likely to be adaptively feeding into expectations. Why buy today when prices will be cheaper
tomorrow? Lastly, the amount of ‘pent-up’ demand may be less than assumed. A survey
2
conducted by Southwestern University, as reported by the Peterson Institute , says that
Chinese urban household ownership is already at a sky-high 87% and that first-time buyers
account for less than one-fifth of housing demand, despite restrictions on second and third
home purchases. All told, further deep and rapid house price inflation looks baked in.
CPI inflation now also
subsiding quickly
Deflationary pressures are also beginning to eat into the CPI, which is to a degree insulated by
the still relatively healthy services sector. CPI inflation drooped to a 56-month low of 1.6% y/y in
September, less than half the authorities’ official target of 3.5%. In line with global food
developments (in CNY terms), CPI food inflation (33% of the total) continued to ease, sliding to
2.3% y/y. Outside food, there was strong disinflation in residence prices (15% of the basket)
and transportation costs (c.8.5% of the index). The official, ex-food and energy ‘core’ inflation
rate slowed to a 20-month low of 1.5%. Three-month annualised growth is a still slower 1.3%.
Econometric work helps
quantify CPI deflation risk
In order to gauge the CPI deflation risk more formally, we use a relatively parsimonious, but
powerful, inflation equation (Table 1). With six variables, we can explain more than 90% of the
variation in CPI inflation since 2000. All variables are significant and the equation’s ‘errors’ pass
most standard diagnostic tests. The output gap of the economy’s industrial sector does
considerable work in the equation, helping explain why CPI inflation slipped as industrial growth
slowed abruptly in Q3. Inflation expectations, proxied by one-quarter-ahead actual inflation, are
also a key driver and provide a degree of stability in inflation outcomes. The other key variables
are global food prices in CNY terms (a 10% move reduces CPI inflation by 0.3pp), house prices
(a 10% move causes a 0.7pp swing in CPI inflation), oil prices in CNY terms (a 10% shift gives
a 0.1pp change in CPI inflation) and the wedge between M2 and M1 money supply, which
proxies the relativity of financial conditions (a 10% move sparks an 0.8pp swing in CPI inflation).
CPI inflation could tumble
as low as ½% by mid-2015
if authorities don’t react
The equation suggests that the risk to CPI inflation is already significant. Even on relatively
conservative assumptions (industrial output gap stays the same, oil flat at USD 90/bbl, CNY
rises by 5% to the end of 2015, global food prices are flat at September’s level, as is the M2/M1
gap, house prices fall 10% by end-2015 and inflation expectations are fixed at 2%), CPI inflation
is seemingly on course to fall as low as ½% y/y (Chart 3). The results underscore that the
authorities’ policy dilemma continues to intensify and show the urgency of reinvigorating
industrial production growth and credit growth and attempting to put a floor under skidding
house prices. While the increasing drive to lower domestic rates (and banks’ cost of funding) will
remain the first of defence, another engineered CNY depreciation looks inevitable.
Table 1: Chinese CPI equation
Chart 3: What gives?
9
D e p e n d e n t Va ria b le : C P I (% y/y)
S a m p le : 2 0 0 0 Q 1 2 0 1 4 Q 2
Va ria b le
O u tp u t g a p (-3 )
B re n t o il (-1 )
G lo b a l fo o d (-1 )
M2 /M1 g a p
H o u s e p ric e in fla tio n
C P I (1 )
C o e ffic ie n t
0 .3 1
0 .0 1
0 .0 3
0 .0 8
0 .0 7
0 .7 1
Ad ju s te d R -s q u a re d
D u rb in -W a ts o n s ta t
0 .9 3
1 .7 8
Sim ulations
7
t-s ta t
4 .4 3
2 .2 3
3 .9 4
4 .6 7
2 .4 4
1 3 .8 8
6
5
4
3
2
1
0
-1
-2
* A ll va ria b le s (e xc e p t t h e o u t p u t g a p & M 2 M 1 g a p ) a re in % y/ y t e rm s
O u t p u t g a p , in % d e via t io n f ro m H P t re n d , is b a s e d o n I P
M 2 M 1 g a p is y/ y g ro wt h d if f e re n t ia l b e t we e n M 2 & M 1
-3
-4
Source: BNP Paribas
CPI(1)
00
01
02
O G (-3)
03
04
O IL(-1)
05
06
FO O D(-1)
07
08
09
M 2M 1G AP
10
11
12
HP
13
M odel
14
15
Source: BNP Paribas
2
http://blogs.piie.com/china/?p=4085
Richard Iley
Macro Matters
CPI, % y/y
8
16 October 2014
15
www.GlobalMarkets.bnpparibas.com
This section is classified as non-objective research
Latam: Who’s afraid of the big, bad Fed?
Despite the market’s gyrations this week, we continue to expect the Fed to hike rates slowly
from June 2015. Historically, Fed tightening has not been kind to Latam.
In Brazil, a rise in Fed rates will conspire with high domestic inflation to force the BCB to
increase interest rates. Mexico, however, is likely to sit and wait.
Our strategists have estimated how much Latam yield curves are likely to rise with Fed
tightening and have suggested trade ideas for capitalising on our macroeconomic views.
The trade recommendations included this note were written by Gabriel Gersztein and were
previously published on 24 June 2014, 15 August 2014 and 1 October 2014.
Be careful what you wish
for, as the Fed now knows
The US Fed is facing a problem it has wanted to face, but sooner than it would like and for
reasons it doesn’t much care for: the economy is approaching full employment. This means
rates cannot stay at zero for much longer. The Fed reckons that in the long run, unemployment
should stabilise in the range of 5.2-5.5%. The jobless rate has fallen by 1.3pp over the past year
and is now at 5.9%, so we will be in the Fed’s range by spring.
US near full employment
far sooner than expected
This has occurred sooner than the Fed had predicted, much sooner, and at a much lower level
of output than it had hoped (which is why it had expected to face this problem later). In step with
its downward revisions to the unemployment rate have come successive downward revisions to
its growth forecasts. Lower-than-expected unemployment, despite weaker-than-expected
growth, has come about for two reasons. First, productivity growth has been slow, perhaps
because of a lack of investment and because a lot of the new jobs have been low paid (and low
productivity). Second, the participation rate has fallen much more than the Fed expected, which
it now acknowledges has a very large structural component.
The Fed now faces a
dilemma
The net result is that the Fed is nearing the level of unemployment at which inflation should start to
rise, the non-accelerating inflation rate of unemployment (the NAIRU). As noted, it reckons this to
be 5.2-5.5%. The OECD says it is 6.1% and the Congressional Budget Office (CBO) puts it at
5.5%. The Fed faces a dilemma. If it wants to raise rates in a slow and steady fashion (to avoid a
sharp market correction), it needs to raise rates before inflation starts to pick up, or it may see
inflation rise more than expected and be backed into a corner and have to hike too fast, risking a
financial and economic convulsion. If it goes too soon, however, and the US economy crash lands
on take-off, the US may become Japan. On the whole, a bit more inflation is easier to deal with
than Japanisation, so the Fed will err on the side of going too late rather than too early.
We expect the Fed to hike
from June 2015, but slowly
As things stand, despite the market’s fluctuations this week, it looks like the Fed will hike in
June 2015, which is not too early if it wants to adhere to its excessively low inflation target of
2%, as it will be at the bottom end of its (excessively low?) estimated range for the NAIRU. It will
go slowly, as it is unsure how much the economy will respond to higher rates; the ‘taper
tantrum’ of last year sounded a cautionary note. The slowing of fiscal tightening means the US
economy can accelerate in growth terms despite monetary tightening, as long as the tightening
Chart 2: Mexico dynamic response to UST 10y yield
10y yield theoretical path if UST10y yield
goes up 50bps by the end of the year
46
50
40
Theoreticsal Impact (bps) on MX
10Y yield from UST 10y yield
Theoreticsal Impact (bps) on BR
10Y yield from UST 10y yield
Chart 1: Brazil dynamic response to UST 10y yield
35
30
20
10
0
UST goes up in a steady, behaved state
If a shock of 50bps take place in 1st week
-10
T-2
1
4
7
10
13
40
39
30
31
20
10
0
UST goes up in a steady, behaved state
If a shock of 50bps take place in 1st week
-10
T-2
Number of w eeks until the end of the year 2014
1
4
7
10
13
Number of w eeks until the end of the year 2014
Source: Bloomberg LLP; BNP Paribas
Source: Bloomberg LLP; BNP Paribas
Paul Mortimer-Lee, Marcelo Carvalho, Nader Nazmi, Gabriel Gerzstein
Macro Matters
10y yield theoretical path if UST10y yield
goes up 50bps at the end of the year
50
17 October 2014
16
www.GlobalMarkets.bnpparibas.com
This section is classified as non-objective research
is slow and fairly predictable. We expect 2.8% US growth next year, up from 2.1% in 2014.
Rate hikes are like roaches:
there’s never just one
The last Fed hike was in 2006. A lot of market participants have never seen a rate-hiking cycle.
Rate hikes are like cockroaches – there’s never just one. This can have a big effect on global
risk appetite, with knock-on effects on emerging markets, in general, and Latam, in particular.
Latam knows all too well
that Fed tightening hurts
Indeed, history shows that Fed tightening has not been kind to Latam. In Brazil, Fed tightening
is only likely to amplify domestic developments, forcing the BCB to hike interest rates. As we
forecast, Brazil’s inflation has proved far worse than many expected. Worryingly, regulated
domestic prices (fuel, energy, bus fares) have been kept artificially low. Next year, the inevitable
price adjustment will boost inflation. To contain inflationary pressures and repair its credibility,
the central bank will have to start raising interest rates again. Against this backdrop, Fed
tightening can only strengthen the case for the BCB to resume raising rates. Our aboveconsensus call sees Brazil’s policy rate rising to 13% next year, up 200bp from the current 11%.
Brazil will have to raise
rates, but Mexico will wait
In Mexico, in contrast, we think Banxico will sit and wait. By mid-2015, inflation will be on a clear
downtrend. We see CPI inflation falling from 4.1% at end 2014 to 3.4% y/y by June thanks to (1)
base effects that will kick in in January due to taxes that came into effect this year and (2) a new
government pricing scheme that will fix gasoline inflation at 3.0% y/y, down from double-digit
rates in 2014. The economy will also still have slack capacity. Banxico, therefore, will only react
to Fed rate hikes if they lead to disorderly adjustments in the local markets. Due to Mexico’s
strong fundamentals, we attach a low probability of no more than 10% to such an event.
Mexico will only raise
rates slightly in late 2015
Evidence of a growing link
between US-Latam rates
The direction and speed of
the UST correction matter
There are also increasing
links at the front end
We think Banxico will remain on the sidelines in the immediate aftermath of the Fed’s first rate
hike in June. The steeper local yield curve that is likely to be sparked by the Fed’s tightening will
have little impact on activity because domestic credit to the private sector only accounts for
30.6% of GDP. Because of the inflation-output trade-off and USDMXN at an estimated 12.90 or
so in H1 2015, Banxico will stay put. We see it removing a bit of its abundant monetary stimulus
in Q3 2015, as the output gap gradually moves to zero and the Fed continues to hike. We
expect Banxico to raise the policy rate in Q3 2015 in two 25bp increments. Notwithstanding
these hikes, Mexico’s monetary and financial conditions will remain expansionary into 2016.
From a market perspective, rising US interest rates have historically boosted both the short end
and the long end of Latam’s yield curves. Our Latam strategists ran a bivariate value-at-risk
(VAR) model to get the impulse-response function to simulate hypothetical moves in US yields
and quantify the responses for Brazil and Mexico. In all cases, we found strong statistical
evidence of a growing link between US and Latam rates (Charts 1 and 2).
It is not only the magnitude of the correction in the 10y UST yield that matters, but also its path
and its speed. If 10y UST yields rise by a gradual 50bp, the impact on both Brazil and Mexico’s
10y rates is lower than if the adjustment is sudden. The model also shows considerable inertia
in the responses: in both cases, and even after a theoretical stabilisation, local rates continue to
inch upwards. The effect lingers for almost nine months in Brazil and six months in Mexico and
our results suggest the theoretical long-term impact (permanent shock scenario) would be 1.4
times bigger in Brazil than in Mexico.
We looked also at the front end of the local yield curves. Once again, we found strong statistical
evidence of an increasing link between the front end of the US and Latam curves. We simulated
a scenario under which the Federal Reserve hikes rates by 100bp over a period of four months
(25bp a month), using the very short end of the US curve as an explanatory variable. There is
also significant inertia in the responses. In both cases, the impact is 40-50bp for the 2y tenor
and the bulk of the effect lingers for almost six months in both Brazil and Mexico.
We also found statistical evidence that a rise in the 10y UST yield is absorbed and amplified
away in both cases. Yet, the Brazil and Mexico’s sensitivity and responses varied. A shock from
the UST 10y yield could have different implications for each country, depending on the speed
and direction of the correction.
Target Latam spreads over
UST in the medium term
Based on our forecast for the 10y UST yield of 2.9% at year end, we should expect both the
long and short ends of the Brazilian and Mexican interest-rate curves to rise. As nominal rates
will be increasingly affected, our strategists have recommended targeting the spread over UST
in any medium-term strategy. Please see Mexico: TIIE 2s5s flattening out, Mexican Rates:
Where you goin’, güey? See also Brazil DI strategy: Receive the belly of the 17/18/21 fly.
Paul Mortimer-Lee, Marcelo Carvalho, Nader Nazmi, Gabriel Gerzstein
Macro Matters
17 October 2014
17
www.GlobalMarkets.bnpparibas.com
Economic calendar: 17 – 24 October
HIGH-INCOME ECONOMIES
GMT
Local
Fri 17/10
Spain
Norway
Eurozone
Previous
EU, Asian leaders meet in Italy
Moody's ratings review
Moody's ratings review
ECB’s Coeuré speaks in Riga, Latvia
ECB Vice-President Constâncio speaks in Frankfurt
ECB's Nowotny speaks in Vienna
ECB's Weidmann speaks in Riga, Latvia
CPI (nsa) m/m: Sep
0.0%
CPI y/y: Sep
2.1%
CPI index: Sep
125.7
BoC core CPI m/m: Sep
0.5%
BoC core CPI y/y: Sep
2.1%
Housing starts: Sep
956k
Fed Chair Yellen speaks at Boston Fed conference on inequality
Michigan sentiment (prel): Oct
84.6
Forecast
Consensus
06:45
07:45
08:00
09:00
12:30
12:30
12:30
12:30
12:30
12:30
12:30
13:55
09:45
09:45
10:00
12:00
08:30
08:30
08:30
08:30
08:30
08:30
08:30
09:55
12:30
08:30
08:00
10:00
07:30
09:30
Tue 21/10
14:00
10:00
US
Existing home sales: Sep
5.05mn
5.10mn
5.09mn
Wed 22/10
23:50
(21/10)
00:30
08:30
12:30
12:30
12:30
12:30
12:30
14:00
14:00
08:50
Japan
Trade balance (nsa): Sep
JPY -949.7bn
JPY-836.4bn
JPY-773.0bn
11:30
09:30
08:30
08:30
08:30
08:30
08:30
10:00
10:00
Australia
UK
US
0.5%
0.6%
-
-0.2%
1.7%
237.852
0.0%
1.7%
1.00%
0.1%
1.7%
238.120
0.2%
1.8%
1.00%
0.0%
1.6%
0.2%
1.8%
1.00%
06:45
07:00
08:00
08:00
08:00
14:00
08:00
08:30
08:30
12:30
13:45
08:45
09:00
10:00
10:00
10:00
16:00
10:00
09:30
09:30
08:30
09:45
France
Spain
Eurozone
96
24.5%
50.3
52.4
52.0
-11.4
96
24.3%
50.1
52.2
51.8
-12.5
50.0
52.0
-12.0
0.2%
4.5%
264k
57.5
0.4%
3.7%
285k
57.0
57.5
06:00
08:00
8.3
8.0
8.1
102.0
99.0
-
Sat 18/10
Mon 20/10
Thu 23/10
Canada
US
Eurozone
US
0.1%
2.0%
0.2%
2.1%
1008k
84.0
84.0
ECB's Visco speaks in Bologna, Italy
Boston Fed's Rosengren speaks at Boston Fed conference on inequality
ECB's Coeuré speaks at OMFIF policy group roundtable in London
Current account (sa): Aug
EUR 18.7bn
EUR 19.0bn
Germany
Bundesbank monthly report
Netherlands Consumer confidence: Oct
-7
-7
Eurozone
Fri 24/10
Canada
Norway
UK
US
Germany
Italy
10:00
12:00
CPI q/q: Q3
BoE MPC minutes
CPI m/m: Sep
CPI y/y: Sep
CPI (nsa): Sep
Core CPI m/m: Sep
Core CPI y/y: Sep
BoC monetary policy announcement
BoC monetary policy report
Industry survey: Oct
Unemployment rate q/q: Q3
PMI manufacturing (flash): Oct
PMI services (flash): Oct
PMI composite (flash): Oct
Consumer sentiment: Oct
Norges Bank rate announcement
Retail sales ex fuel m/m: Sep
Retail sales ex fuel y/y: Sep
Initial claims
Markit US PMI (prel): Oct
Moody’s ratings review
GfK consumer confidence: Nov
Fitch ratings review
ISAE consumer confidence: Oct
Market Economics
Macro Matters
0.1%
2.1%
125.8
0.2%
2.1%
1000k
-
16 October 2014
18
www.GlobalMarkets.bnpparibas.com
Economic calendar: 17 – 24 October (cont)
HIGH-INCOME ECONOMIES
GMT
Fri 24/10
(cont)
08:20
08:30
08:30
13:00
14:00
Local
10:20
09:30
09:30
15:00
10:00
Previous
Spain
Eurozone
UK
Belgium
US
Fitch ratings review
ECB's Praet speaks in Milan, Italy
GDP (prel) q/q: Q3
GDP (prel) y/y: Q3
Business confidence: Oct
New home sales: Sep
Sat 25/10
Eurozone
ECB's Visco speaks in Philadelphia, PA
Sun 26/10
Eurozone
Clocks go back one hour
Eurozone
EU leaders hold summit in Brussels
During
week
23-24/10
0.9%
3.2%
-7.2
504k
Forecast
0.7%
3.0%
-7.0
460k
Consensus
0.7%
3.0%
473k
Release dates and forecasts as of close of business prior to the date of publication; see Daily Macro Monitor for any revisions
Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies
ASIA
GMT
Local
Fri 17/10
00:30
09:00
08:30
17:00
Singapore
Malaysia
Tue 21/10
02:00
02:00
02:00
02:00
10:00
10:00
10:00
10:00
China
01:45
08:00
08:00
08:00
09:45
16:00
16:00
16:00
Philippines
23:00
23:00
(23/10)
08:00
S. Korea
05:00
13:00
05:00
13:00
Thu 23/10
Fri 24/10
During
24-27/10
Previous
Holiday
China
Taiwan
08:00
Vietnam
Singapore
NODX y/y: Sep
CPI y/y: Sep
Consensus
6.5%
2.6%
2.9%
2.6%
16.5%
11.9%
6.9%
7.5%
16.4%
11.6%
8.0%
7.1%
16.3%
11.7%
7.5%
7.2%
50.2
1.4%
7.0%
50.4
-0.8%
8.6%
-
GDP (prel) q/q: Q3
0.5%
0.7%
-
GDP (prel) y/y: Q3
3.5%
3.3%
3.3%
CPI y/y: Oct
CPI y/y: Sep
3.6%
0.9%
4.2%
3.2%
0.8%
2.0%
-
USD 1.2bn
USD 1.7bn
-
Urban FAI (ytd) y/y: Sep
Retail sales y/y: Sep
Industrial production y/y: Sep
GDP y/y: Q3
India, Malaysia, Singapore
HSBC PMI manufacturing (flash): Oct
Industrial production m/m: Sep
Industrial production y/y: Sep
BSP rate announcement
Industrial production y/y: Sep
Thailand
Forecast
6.0%
3.3%
Trade balance: Sep
Week
Release dates and forecasts as of close of business prior to the date of publication
Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies
For our four-week calendar, please click here
Market Economics
Macro Matters
16 October 2014
19
www.GlobalMarkets.bnpparibas.com
Economic calendar: 17 – 24 October (cont)
CEEMEA
GMT
Local
Fri 17/10
Previous
Russia
Czech Rep.
Wed 22/10
Thu 23/10
Real wages y/y: Sep
Retail sales y/y: Sep
Unemployment rate: Sep
Moody’s ratings review
Industrial production y/y: Sep
PPI y/y: Sep
12:00
12:00
14:00
14:00
08:00
08:00
12:00
12:00
10:00 South Africa CPI m/m: Sep
10:00
CPI y/y: Sep
14:00
Medium-term budget policy statement
14:00
Main budget deficit (% GDP): 2014/15
08:00
08:00
11:00
11:00
11:00
11:00
10:00
10:00
14:00
14:00
14:00
14:00
Poland
Poland
Turkey
Russia
Fri 24/10
Retail sales y/y: Sep
Unemployment rate: Sep
CBRT one-week repo rate
CBRT overnight borrowing rate
CBRT o/n lending rate to primary dealers
CBRT overnight lending rate
Forecast
Consensus
1.4%
1.4%
4.8%
1.2%
1.7%
5.0%
1.2%
1.5%
5.0%
-1.9%
-1.5%
4.0%
-1.7%
2.7%
-1.5%
0.4%
6.4%
0.2%
6.1%
-
-4.7%
-5.0%
-
1.7%
11.7%
8.25%
7.50%
10.75%
11.25%
3.9%
11.7%
8.25%
7.50%
10.75%
11.25%
2.4%
11.6%
-
S&P ratings review
Release dates and forecasts as of close of business prior to the date of publication; (p) = preliminary; (r) = revised
Source: BNP Paribas, national statistics, ratings agencies, central banks, Bloomberg, Reuters
LATIN AMERICA
GMT
Local
Mon 20/10
21:00
16:00
Colombia
Previous
Tue 21/10
12:00
12:00
09:00
09:00
Brazil
Wed 22/10
13:00
19:00
08:00
16:00
Mexico
Argentina
Retail sales y/y: Aug
Trade balance: Sep
Thu 23/10
12:00
19:00
19:00
09:00
16:00
16:00
Brazil
Argentina
Unemployment rate: Sep
Economic activity index m/m: Aug
Economic activity index y/y: Aug
Fri 24/10
13:00
13:30
13:30
08:00
10:30
10:30
Mexico
Brazil
Trade balance: Aug
IBGE inflation IPCA-15 m/m: Oct
IBGE inflation IPCA-15 y/y: Oct
Economic activity IGAE y/y: Aug
Current account balance: Sep
FDI: Sep
Forecast
Consensus
USD -779.40
-
-
0.39%
6.62%
0.51%
6.65%
-
2.0%
USD 0.9bn
4.4%
-
-
5.0%
0.1%
0.0%
5.0%
-
-
2.5%
USD -5.5bn
USD 6.8bn
2.6%
USD -6.8bn
USD 3.5bn
2.0%
-
Release dates and forecasts as of close of business prior to the date of publication: See Daily Latam Spotlight for any revision
Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies
For our four-week calendar, please click here
Market Economics
Macro Matters
16 October 2014
20
www.GlobalMarkets.bnpparibas.com
Key data preview: Europe
Eurozone: ‘Flash’ composite PMI (October)
BNP Paribas forecast: Down again
59
0.6
GDP % q/q
0.4
baseline +/‐0.5*RMSE
Composite PMI (RHS)
56
0.2
53
0.0
50
‐0.2
47
‐0.4
44
‐0.6
Mar‐12
41
Sep‐12
Mar‐13
Sep‐13
Mar‐14
Sep‐14
Mar‐15
Sep‐15
Index
Composite PMI
Manufacturing PMI
Services PMI
Oct (f)
51.8
50.1
Sep
52.0
50.3
Aug
52.5
50.7
Jul
53.8
51.8
52.2
52.4
53.1
54.2
RELEASE DATE: Thursday 23 October
 The eurozone ‘flash’ composite PMI is likely to continue its downward
trend in October. We expect it to decline to 51.8 from 52 in September.
 The services PMI is likely to slip lower as weak manufacturing spills
over to the domestic economy.
 This will reinforce concern that eurozone growth may dip. However,
sentiment and growth are not perfectly correlated. PMI levels around
51.5 on a four-quarter average would still be in line with some growth.
Source: Reuters EcoWin Pro, Markit
UK: Retail sales (September)
BNP Paribas forecast: Continued recovery
%
Sales excluding fuel (m/m)
Sales excluding fuel (y/y)
Sep (f)
0.4
3.7
Aug
Jul
Jun
0.2
4.5
0.4
3.4
-0.1
3.7
RELEASE DATE: Thursday 23 October
 UK retail sales growth went through a soft patch in the middle of the
year following some exceptional strength in late 2013 and early 2014.
However, it has recovered through Q3 thanks to a strong labour market
and falling inflation, which is helping real incomes.
 In line with a solid labour market, consumer confidence remains high
and consistent with robust retail spending growth. One possible
headwind is the softening of the housing market, but overall, we expect
the recovery from earlier soft readings to continue.
Source: Macrobond, ONS
UK: GDP (Q3 2014)
BNP Paribas forecast: Solid growth
%
GDP growth (q/q)
GDP growth (y/y)
Q3 (f)
0.7
3.0
Q2
Q1
Q4
0.9
3.2
0.7
2.9
0.6
2.7
RELEASE DATE: Friday 24 October
 Monthly data on services, industrial and construction output suggest
that the UK economy expanded by 0.7% q/q in Q3. While this is a touch
slower than in Q2, growth will still be comfortably above trend.
 Industrial production growth has been soft over the quarter.
Construction output fell sharply in August, but given the strength of
confidence in the sector, it is likely to have rebounded in September.
The service sector is expected to have grown at a similar pace to that
seen in H1 2014.
Source: Macrobond, ONS
Market Economics
Macro Matters
16 October 2014
21
www.GlobalMarkets.bnpparibas.com
Key data preview: North America
US: Housing starts (September)
BNP Paribas forecast: Modest pick-up
000s, saar
Sep (f)
Aug
Jul
Jun
1,000
956
1,117
909
Housing starts
RELEASE DATE: Friday 17 October
 We expect housing starts to have picked up in September, to a solid
1.0 million units saar, after August’s large drop.
 In July, building permits increased to over 1.0 million units and
remained high in August. As such, we are expecting this to support the
expected strength in starts in September.
 Residential construction hours worked showed a slight pick-up in
September, also supporting our forecast for an improvement in starts.
Source: Census Bureau, Reuters EcoWin Pro, BNP Paribas
Canada: CPI (September)
6
% y/y
5
BNP Paribas forecast: Modest increase
% m/m
Headline
4
2
1
0
BoC core
-2
Jan 00 Jan 02
BoC target bands
Jan 04
Jan 06
Jan 08
Jan 10
Aug
Jul
Jun
0.1
0.2
0.0
0.5
-0.2
-0.1
0.1
-0.1
RELEASE DATE: Friday 17 October
 Unadjusted prices are expected to have ticked up 0.1% m/m in
September, while seasonally-adjusted inflation likely increased 0.2%.
 Gasoline prices were down 0.8% in the month, but core prices are
expected to have largely offset this impact with a relatively firm print.
 Both the headline and core annual inflation rates likely held firm at
2.1% y/y.
3
-1
Sep (f)
Headline CPI
Bank of Canada core
Nominal wages
Jan 12
Jan 14
Source: Statistics Canada, Bank of Canada, Reuters EcoWin Pro, BNP Paribas
US: U of Mich. consumer sentiment (October, prelim.)
150
Real PCE (% 3m/3m saar, RHS)
130
Conference Board consumer
confidence (index)
BNP Paribas forecast: Still elevated
10
8
110
6
90
4
70
2
50
0
-2
30
10
-10
Jan 00
University of Michigan
consumer sentiment (index)
Jan 02
Jan 04
Jan 06
-4
Jan 08
Jan 10
Jan 12
Jan 14
-6
Michigan sentiment
Oct (p)
H2 Sep
Sep (p)
Sep
84.0
84.6
84.6
84.6
RELEASE DATE: Friday 17 October
 Due to recent mixed data signals, we expect the University of Michigan
index to have pulled-back to 84.0 in the first half of October, from 84.6 in
H2 September.
 Equities started the month on a soft note and earnings reports were
subdued; while employment data were strong and gasoline prices
continue to fall.
 The retracing in the weekly Bloomberg Consumer Comfort Index is
consistent with our view for confidence to moderate in October.
Source: University of Michigan, Bloomberg, Reuters EcoWin Pro, BNP Paribas
US: Existing and new home sales (September)
1000
BNP Paribas forecast: Steady and retracing
Thousands of homes, SAAR
Existing home sales (mn, saar)
New home sales (000s, saar)
900
800
700
600
New single-family home sales
500
400
300
200
07
08
09
10
11
12
13
Sep(f)
Aug
Jul
Jun
5.10
460
5.05
504
5.14
427
5.03
419
RELEASE DATE: Tuesday 21 & Friday 24 October
 Existing home sales are projected to have increased modestly in
September, to 5.10 million units (saar), just above their three-month
average trend. Contract signings, which typically lag resales by one-totwo months, declined in August, but had strengthened in July.
 Following August’s 18% m/m surge, new home sales likely retreated
considerably in September, in line with the recent weakness in mortgage
applications.
14
Source: Census Bureau, Haver Analytics, BNP Paribas
Market Economics
Macro Matters
16 October 2014
22
www.GlobalMarkets.bnpparibas.com
Key data preview: North America (cont)
US: Consumer price index (September)
BNP Paribas forecast: Core rebound
Sep (f)
Aug
238.120
0.12
237.852
-0.20
Core CPI (% m/m, sa)
%
NSA CPI Index
CPI (% m/m, sa)
0.3
12 month average
gain (% m/m)
0.2
Sep
forecast
0.18
0.1
0.0
Dec 11
Jun 12
Dec 12
Jun 13
Dec 13
Jun 14
Jul
Jun
238.250
0.09
238.343
0.26
CPI (% y/y, nsa)
1.7
1.7
2.0
2.1
Core (% m/m, sa)
0.18
0.01
0.10
0.13
Core (% y/y, nsa)
1.8
1.7
1.9
1.9
RELEASE DATE: Wednesday 22 October
 We project that headline consumer prices increased modestly in
September, reflecting a rebound in core prices following August’s slump
and a small gain in food prices.
 A modest 1.1% m/m drop in seasonally-adjusted gasoline prices is
projected to partially offset increases in non-energy prices.
Source: BLS, Haver Analytics, BNP Paribas.
Market Economics
Macro Matters
16 October 2014
23
www.GlobalMarkets.bnpparibas.com
Key data preview: Asia
Malaysia: CPI inflation (September)
30
BNP Paribas forecast: Base effects drop out
70
% 3 M /3 M s a a r
65
20
60
10
M a la y s ia P P I
0
55
50
M a la y s ia C P I
45
-1 0
-3 0
40
C h in a P M I O u tp u t P ric e s ,
3 m m a (R H S )
-2 0
35
06
07
08
09
10
11
12
13
30
14
% y/y
CPI inflation
Sep (f)
2.6
Aug
3.3
Jul
3.2
Jun
3.3
RELEASE DATE: Friday 17 October
 September CPI inflation should have eased markedly to 2.6% y/y from
3.3% y/y in August. We see core inflation being unchanged at 2.8% y/y.
 With the base effects of September 2013’s fuel price hike dropping out
of the equation, inflation should better reflect underlying inflationary
pressures, at least until further fuel-subsidy rationalisation occurs.
 Food prices should have remained stable at 3.3% y/y, while gains in
transport prices should have fallen below 1% y/y from 5.5% in August.
 The sharp drop in inflation should ease any lingering pressure on the
BNM to tighten policy, allowing it to keep rates unchanged.
Source: CEIC, BNP Paribas
China: FAI and non-property FAI (September)
BNP Paribas forecast: No bottom yet
% y/y
Fixed-asset investment
(YTD %)
60
Infrastructure
40
FAI
growth
Property
30
20
10
0
-10
05
06
07
08
09
10
11
Aug
16.5
Jul
17.0
Jun
17.3
RELEASE DATE: Tuesday 21 October
 Property has been the major culprit behind China’s investment
slowdown so far this year. Most local administrations relaxed homepurchase restrictions in August, but it seems that reinvigorating impact
on sales was fairly muted.
 Infrastructure growth softened in July and August, undermined,
perhaps, by tight credit conditions and more constraints on localgovernment borrowing.
 Manufacturing investment growth may have slowed further, too, due
to intensive PPI deflation and deteriorating profitability.
50
Manufacturing
Sep (f)
16.4
12
13
14
Source: NBS
China: Nominal and real retail sales (September)
24
BNP Paribas forecast: More softness
% y/y
Retail sales growth
(YTD %)
22
Nominal retail sales
20
18
16
14
12
10
Real retail sales
8
6
4
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Sep (f)
Aug
Jul
Jun
11.6
11.9
12.2
12.4
RELEASE DATE: Tuesday 21 October
 Nominal retail sales growth is a function of two factors: the real growth
rate and inflation.
 We expect China’s real growth rate to have held steady in September,
thanks to robust household income growth and a resilient job market.
 Meanwhile, retail price inflation is likely to have softened, as CPI
inflation dipped to a 56-month low of 1.6% y/y.
 Sales of home goods, such as furniture and appliances, were probably
subdued, owning to the slump in property sales.
Source: NBS
China: PMI and industrial production (September)
CFLP PMI (%, leading 2m, LHS)
60
BNP Paribas forecast: A small rebound
24
HSBC PMI (%, leading 2m, LHS)
20
55
16
50
12
45
IP growth (% y/y, RHS)
40
35
Apr-05
8
4
Jun-06
Aug-07
Oct-08
Dec-09
Mar-11
May-12
Jul-13
Sep-14
% y/y
Industrial production
Sep (f)
Aug
Jul
Jun
8.0
6.9
9.0
9.2
RELEASE DATE: Tuesday 21 October
 China’s CFLP PMI remained flat at 51.1 in September, with output
jumping to 53.6 from 53.2.
 The HSBC PMI staged a small rebound to 50.5 from 50.2, indicating
that underlying momentum has improved.
 Moreover, base effects for September will be slightly better more
favourable than in August, as industrial production growth moderated to
10.2% in September 2013 from 10.4% in August.
0
Source: NBS
Market Economics
Macro Matters
16 October 2014
24
www.GlobalMarkets.bnpparibas.com
Key data preview: Asia (cont)
China: GDP growth (Q3)
BNP Paribas forecast: Weaker again
% y/y
13
GDP growth
12
GDP growth (% y/y)
11
10
GDP growth (% q/q SAAR)
9
8
7
2Q14
3Q14E
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
1Q10
5
2Q10
6
Q3 (f)
7.1
Q2
Q1
Q4
7.5
7.4
7.7
RELEASE DATE: Tuesday 21 October
 Given the poor activity growth data for July and August, especially for
industrial production, GDP growth should have weakened again in Q3.
 On a y/y basis, we estimate GDP growth to have declined to 7.1% y/y
from 7.5% y/y in Q2.
 On a seasonally adjusted q/q basis, GDP growth probably softened to
1.7% from 2% in Q2.
 The sluggish growth is likely to prompt the authorities to keep
monetary policy conditions loose and embark on more mini-stimulus in
order to achieve their GDP growth target of “close to 7.5%” GDP growth.
Source: NBS
Japan: Trade balance (September)
BNP Paribas forecast: Trade gap to shrink
JPY bn
Trade balance (nsa)
Trade balance (sa)
(sa, JPY billion )
1500
1000
0
-500
-1000
-1500
05
06
07
08
09
10
11
12
13
Aug
-949.7
-924.2
Jul
Jun
-962.1
-1021.8
-828.5
-1069.5.
RELEASE DATE: Wednesday 22 October
 We expect the deficits in both Japan’s seasonally adjusted trade
account and unadjusted (original series) account to have shrunk in
September from August.
 On a seasonally adjusted basis, nominal exports appear to have
expanded and outpaced the gains expected in nominal imports.
 Real exports are also likely to have increased for the first time in two
months. However, the tone of real exports remains muted, owing to
Japan’s reduced productive capacity.
500
-2000
Sep (f)
-836.4
-793.4
14
Source: MoF, BNP Paribas
South Korea: GDP (preliminary, Q3)
BNP Paribas forecast: Downside risk
%
GDP growth (q/q)
GDP growth (y/y)
Q3 (f)
0.7
3.3
Q2
Q1
Q4
0.5
3.3
0.9
4.0
0.9
3.6
RELEASE DATE: Friday 24 October
 Q2 GDP growth was held back by a decline in consumer sentiment and
household consumption (-0.2% q/q), attributed in part to the sinking of the
Sewol in April. More recently, consumer sentiment has recovered
somewhat and department-store sales have been robust. Export growth
was steady through Q3.
 On balance, we see sequential growth picking up in Q3, though still
subdued business confidence suggests the risks are skewed to the
downside.
Source: Reuters EcoWin Pro, BNP Paribas
Singapore: CPI inflation (September)
12
BNP Paribas forecast: Core holding up
% y/y
CPI inflation
% 3m th avg/3m th avg sa an nualised
10
8
CPI
6
4
2
C o re C P I
0
-2
-4
-6
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Sep (f)
Aug
Jul
Jun
0.8
0.9
1.2
1.8
RELEASE DATE: Friday 24 October
 Singaporean CPI inflation is likely to have eased to 0.8% y/y in September
from 0.9% y/y in August.
 Despite continuing sequential gains in the price of certificates of
entitlement (COE), downward pressure on global oil prices should push
transport prices further into negative territory on a y/y basis. Meanwhile,
the pass-through from a slight weakening of the SGD should keep food
price gains stable at 2.9% y/y.
 The Monetary Authority of Singapore’s preferred measure of core
inflation, with excludes accommodation and private road transport, should
be 2.0% y/y, unchanged from August.
Source: CEIC, BNP Paribas
Market Economics
Macro Matters
16 October 2014
25
www.GlobalMarkets.bnpparibas.com
Key data preview: Asia (cont)
Singapore: Industrial production (September)
4
BNP Paribas forecast: Digging deeper
60
S ta n d a rd d e via tio n fro m m e a n
IP e x-b io m e d ,
3
40
2
20
1
0
0
-1
-2 0
-2
-4
-4 0
H S B C C h in a P M I,
la g g e d 3 m o n th s
-3
05
06
07
08
09
10
11
12
13
14
-6 0
% y/y
Industrial production
Sep (f)
Aug
Jul
Jun
2.0
4.2
3.0
0.8
RELEASE DATE: Friday 24 October
 Singaporean industrial production is likely to have grown 2.0% y/y in
September, slower than the 4.2% y/y rise seen in August.
 Although PMI data indicate that recent sequential gains in electronics
output may have continued, base effects are likely to have been more
challenging in September. As a result, electronics output is likely to have
softened to around 2.5% y/y.
 A further sequential pullback in pharmaceuticals seems likely given the
cluster’s repeated ebb and flow. However favourable base effects make
a double-digit headline gain likely, lending significant support to the
headline. Still, such a superficial lift is likely to be laid bare by industrial
production ex-biomed slipping back into negative territory.
Source: CEIC, BNP Paribas
Market Economics
Macro Matters
16 October 2014
26
www.GlobalMarkets.bnpparibas.com
Key data preview: CEEMEA
Poland: Industrial production (September)
BNP Paribas forecast: Stronger
% y/y
Industrial production
Sep (f)
4.0
Aug
Jul
Jun
-1.9
2.4
1.8
RELEASE DATE: Friday 17 October
 We expect Polish industrial production to have risen 4% y/y in
September after an almost 2% contraction in August. The rebound will
have stemmed chiefly from a working-days effect and a resumption of
production in the automotive sector, which saw a marked 30% y/y slump
in output in August, due to the impact of the summer holiday break.
 Although, the impact of the bilateral EU-Russian sanctions will weigh
on the Polish economic outlook in the months ahead, the leading
indicators suggest that the country’s industrial output dynamics should
remain pretty decent over the coming months.
Source: GUS, Reuters EcoWin Pro
Poland: Retail sales (September)
BNP Paribas forecast: Stronger
% y/y
Retail sales
Sep (f)
Aug
Jul
Jun
3.9
1.7
2.1
1.2
RELEASE DATE: Friday 17 October
 We expect Polish nominal retail sales to have risen 3.9% y/y in
September, up from August’s 1.7% y/y.
 The robust situation on the labour market, coupled with a lack of price
pressures, should bolster household disposable income over the coming
months. After a short-lived correction, consumer confidence is now
heading north again.
 Against this backdrop, we expect private consumption to remain the
key driver of Polish economic growth over the coming months.
Source: GUS, Reuters EcoWin Pro
South Africa: CPI inflation (September)
9
Headline CPI (% y/y)
BNP Paribas forecast: Lower
% y/y
Consumer price inflation
Core CPI
8
Aug
Jul
Jun
6.4
6.3
6.6
RELEASE DATE: Wednesday 22 October
 We expect South African headline consumer price inflation to
moderate to 6.1% y/y in September from 6.4% in August on the back of
softer y/y growth in fuel and food prices.
 On the month, the CPI is likely to have ticked up 0.2%, thanks to a rise
in quarterly surveyed prices of owner-equivalent rent and domestic
worker wages.
 We expect September core inflation to have climbed to 5.9% y/y.
7
6
5
4
3
2
Sep (f)
6.1
2009
2010
2011
2012
2013
2014
Source: Stats SA, BNP Paribas Cadiz
South Africa: Main budget deficit (2014/15)
BNP Paribas forecast: Slower consolidation
% of GDP
Main budget deficit
-3.0
-3.5
2013/14*
-4.7
2014/15*
2015/16*
2016/17*
-5.0
-4.5
-3.7
RELEASE DATE: Wednesday 22 October
 South Africa’s starkly weaker economic environment than that
estimated by the government in February is likely to prompt the National
Treasury to slow its budget deficit-consolidation profile, boosting the
estimated gap by 0.3-0.4pp a year over the course of the medium-term
expenditure framework.
-4.0
-4.5
-5.0
-5.5
Main Budget bal (% GDP) - Feb 2014
BNP Cadiz estimated main budget balance (% GDP)
2013/14
2014/15
2015/16
2016/17
Source: Stats SA, BNP Paribas Cadiz
Market Economics
CEEMEAnomics
16 October 2014
27
www.GlobalMarkets.bnpparibas.com
Key data preview: Latam
Mexico: Retail sales (August)
BNP Paribas forecast: Rising
Consumer
confidence
20%
8%
10%
4%
0%
0%
-10%
-20%
-30%
Jan-07
-4%
Retail sales
(rhs)
Jul-08
Jan-10
Jul-11
Jan-13
-8%
Jul-14
% y/y
Retail sales
Aug (f)
Jul
Jun
May
4.4
2.0
1.1
1.6
RELEASE DATE: Wednesday 22 October
 We expect retail sales growth to have accelerated to 4.4% y/y in
August, from.2.0% in July.
 Sales at Antad affiliates and WalMex rose at a robust pace during the
month. Strong sales in the auto sector likely provided additional support.
 August’s retail sales buoyancy will likely be short-lived, as preliminary
September data point to a sharp slowdown. Consumer confidence is
recovering, but from a low base; while consumer credit growth has been
subdued.
Source: Inegi and BNP Paribas
Mexico: Global economic indicator (August)
3mma q/q sa
(%)
2
1
110
105
0
-1
Level
-2
100
95
-3
-4
BNP Paribas forecast: Recovering
115
3
Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun
09
09
10
10
11
11
12
12
13
13
14
90
% y/y
IGAE
Aug (f)
Jul
Jun
May
2.6
2.5
2.7
1.7
RELEASE DATE: Friday 24 October
 We forecast a 2.6% y/y rise in August’s GDP proxy (IGAE), broadly in
line with IGAE’s June and July growth rates.
 Industrial production increased only 1.4% y/y in the month, keeping the
growth of the secondary sector in check. We have pencilled in growth of
3.1% y/y in the services sector, up from 2.5% in July.
 If our IGAE August growth projection is correct, real GDP growth’s
3mma would have accelerated to 2.6% y/y, its fastest pace since
January 2013.
Source: INEGI, BNP Paribas
Market Economics
Macro Matters
16 October 2014
28
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Central bank watch
EUROPE
Interest rate
Current
rate
(%)
Date
of last
change
Next change
in coming
six months
0.05
-10bp
(4/9/14)
No change
The communication at the 4 September press conference was definitive that the
ECB’s policy rates have now reached the lower bound. The ECB’s balance sheet
will, therefore, be the focus of additional policy easing.
0.5
-50bp
(5/3/09)
+25bp
(5/2/15)
The economy is growing well and the labour market is tightening. However, wage
growth is lagging and this means the BoE will wait until Q1 2015 to deliver its first
rate hike. We see rates rising by 25bp per quarter in 2015.
0.25
-50bp
(3/7/14)
No change
The Riksbank has increased its focus on deflationary risks, cutting rates by
50bp in July. With the lower bound now reached, policy looks to be on hold.
1.50
-25bp
(14/3/12)
No change
The Norwegian economy is fairly anaemic, but with inflation not far from target,
Norges Bank is constrained. We do not expect a change in policy until 2015.
0-0.25
-50bp
(3/8/11)
No change
The SNB maintains a minimum exchange rate of 1.20 to the euro. We do not
expect a shift in the policy stance, but the economy is at risk of entering a
protracted period of deflation.
Comments
EUROZONE
Refinancing rate
UK
Bank rate
SWEDEN
Repo rate
NORWAY
Sight deposit rate
SWITZERLAND
3m LIBOR target
range
NORTH AMERICA
Current
rate (%)
Date of
last
change
Next change
in coming
six months
Fed funds rate
0-0.25
-75bp
(16/12/08)
No change
Discount rate
0.75
+25bp
(18/2/10)
No change
Interest rate
Comments
US
We expect the FOMC to taper the last USD 15bn of its QE purchases at its
October meeting. With slightly higher inflation and better growth, the Fed funds
target range is likely to increase to 0.25-0.50% in Q2 2015, with help from the
IOER and reverse repo rates. We expect the Fed to begin a controlled reduction
of its balance sheet in early 2016.
CANADA
+25bp
(8/9/10)
+25bp
(8/9/10)
No change
Current
rate
(%)
Date
of last
change
Next change
in coming
six months
0-0.10
-10bp
(5/10/10)
No change
0.30
-20bp
(19/12/08)
No change
2.50
-25bp
(6/8/13)
No change
Overnight rate
1.00
Bank rate
1.25
No change
Underlying inflation is stubbornly low as the Canadian economy remains well
below potential, with a sizable output gap. We believe inflation will pick up as
growth improves, albeit slowly, and do not expect a rate hike until Q1 2016.
ASIA
Interest rate
Comments
JAPAN
Call rate
Basic loan rate
Inflation is likely to ease in H2 2014 as the impact of past yen depreciation
fades. However, with the slack in the economy having largely disappeared, any
additional easing is unlikely. We expect the BoJ to relax its stance on the
timing of achieving 2% inflation and to prolong its current policy into 2015.
AUSTRALIA
Cash rate
Low inflation and a strong AUD led the RBA to cut the cash rate to a record
low in August. With policy guidance dialled back to neutral, our base case now
assumes a long period of stable policy rates.
Market Economics
Macro Matters
16 October 2014
29
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Central bank watch (cont)
ASIA (cont)
Interest rate
Current
rate
(%)
Date
of last
change
Next change
in coming
six months
Comments
3.00
-25bp
(5/7/12)
No change
The PBoC has defied expectations of a general cut in the RRR or the benchmark
interest rate. It has chosen instead to undertake targeted RRR cuts and selective
re-lending programmes to channel credit to preferred policy areas. We continue
to expect more selective monetary easing.
0.50
-100bp
(17/12/08)
No change
The HKMA base rate moves in step with the US Fed funds rate given the
currency board. We do not expect the Fed to raise rates for the next couple of
years, implying no change in Hong Kong rates.
8.00
+25bp
(28/1/14)
No change
CPI’s faster-than-expected falls of late have knocked out the latent risk of any
further tightening by RBI this year. However, elevated inflation expectations
and the extremely insufficient monsoon rains to date leave inflation risks still
skewed to the upside. There is no scope for any policy easing by the RBI.
7.50
+25bp
(12/11/13)
No change
With improved monetary policy discipline, narrowing external deficits, a natural
downturn in the domestic credit cycle and a benign outlook for inflation, we
have withdrawn the 50bp of hikes previously pencilled into our forecasts and
now expect BI to remain on hold for the remainder of 2014.
3.25
+25bp
(10/7/14)
No change
Although weak underlying price momentum and an impending slowdown in GDP
growth would normally suggest a bias to cut interest rates, financial stability
concerns now drive policy. Early indications of a slowdown in household
borrowing should give BNM scope to leave rates unchanged for some time.
4.00
+25bp
(11/9/14)
(Q1 2015)
–
(13/4/12)
No change
MAS maintained its SGD NEER policy settings at its April 2014 meeting. A
tight labour market has ensured underlying inflationary pressures persist. This,
plus above-trend growth, suggests the MAS will retain a tightening policy bias.
2.25
-25bp
(14/8/14)
No change
The BoK succumbed to political pressure in August, cutting the policy rate for
the first time in 15 months, by 25bp. However, with more pertinent forward
indicators suggesting that aggregate growth is set to pick up in the coming
quarters, we now expect rates to remain on hold for some time.
1.875
+12.5bp
(30/6/11)
No change
The upswing in US domestic demand bodes well for Taiwan’s GDP growth
outlook. Inflation remains low, however, giving the CBC scope to leave rates
on hold for the foreseeable future.
2.00
-25bp
(12/3/14)
No change
Greater certainty about the fiscal outlook following May’s military coup has
improved consumer and business sentiment and markedly reduced the need for
further monetary easing. Conversely, though, core inflation is rising. Thailand’s
negative output gap should keep it within target, limiting the need for tightening.
CHINA
1y bank deposit rate
HONG KONG
HKMA base rate
INDIA
Repo rate
INDONESIA
1m BI rate
MALAYSIA
Overnight policy
rate
PHILIPPINES
Overnight borrowing
rate
+25bp
With M3 money supply and credit growth momentum on the rebound, a
further 25bp hike in the SDA rate, taking it to 2.75%, appears imminent. The
BSP may, however, delay further hikes in the OBR until Q1 2015, as an
expected decline in headline CPI should help contain inflation expectations.
SINGAPORE
SOUTH KOREA
Seven-day repo
rate
TAIWAN
Discount rate on 10day loans
THAILAND
One-day repo rate
CENTRAL AND EASTERN EUROPE, MIDDLE EAST
Interest rate
Current
rate
(%)
Date
of last
change
Next change
in coming
six months
Comments
0.05
-20bp
(1/11/12)
No change
The CNB’s current policy is to intervene in the FX market, targeting EURCZK
at 27.0 until inflation rises to the 2% target. This will fend off deflationary risk,
but may hurt domestic demand, delaying a broader-based economic recovery.
CZECH REPUBLIC
Repo rate
Market Economics
Macro Matters
16 October 2014
30
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Central bank watch (cont)
CENTRAL AND EASTERN EUROPE, MIDDLE EAST (cont)
Interest rate
Current
rate
(%)
Date
of last
change
Next change
in coming
six months
Comments
2.10
-20bp
(22/7/14)
No change
The NBH cut rates by 20bp in July, by more than expected, and announced the
end of its monetary easing cycle. Barring any surprises on the growth or inflation
fronts, we expect interest rates to remain unchanged for several months.
2.00
-50bp
(8/10/14)
8.00
+50bp
(25/7/14)
(31/10/14)
5.75
+25bp
(17/7/14)
+25bp
(20/11/14)
8.25%
-50bp
(17/07/14)
-
-75bp
(27/08/14)
-75bp
(27/08/14)
-
HUNGARY
Base rate
POLAND
Repo rate
As we expected, the NBP cut rates by 50bp in October. With a lack of inflationary
pressure and slowing economic growth, we see a further 50bp in rate cuts by the
end of Q1 2015, with the next move likely to be a 25bp reduction in November.
-25bp
(5/11/14)
RUSSIA
Repo rate
Stubbornly high inflation and the EU-Russian sanctions are lifting Russia’s
risk premium and hurting the RUB, increasing the odds of more monetary
tightening. Against this backdrop, we expect a 50bp rate hike to be delivered
before the end of the year, most probably at the October meeting.
+50bp
SOUTH AFRICA
Repo rate
We expect the SARB to deliver one more 25bp rate hike in November this year
as it seeks to stay ahead of the curve and keep inflation expectations anchored,
while remaining sensitive to the weaker economic environment.
TURKEY
One-week repo rate
Overnight lending
rate to PDs
Overnight lending
rate to non-PDs
10.75%
11.25%
Because of the continued depreciation pressure on the TRY, the CBRT has
started to utilise the interest-rate corridor. By squeezing TRY liquidity, the
CBRT has been forcing primary dealers to tap the overnight borrowing facility
at 10.75% and the rest of the market to borrow at 11.25%.
-
LATIN AMERICA
Interest rate
Current
rate
(%)
Date
of last
change
Next change
in coming
six months
Comments
11.00
+25bp
(2/4/14)
+50bp
(22/1/15)
The BCB paused its tightening cycle in May, leaving the Selic rate at 11%. The
central bank won’t be able to keep rates on hold for long, though. High inflation
will force it to resume raising rates later, probably in Q1 next year.
3.25
-25bp
(11/9/14)
-25bp
(16/10/14)
The Chilean central bank is likely to deliver a final 25bp rate cut in October.
After that, it will likely remain on hold to assess how the stimulus is helping
Chile’s weak economy. We forecast a flat policy rate of 3% through end 2015.
4.50
+25bp
(29/8/14)
No change
BanRep ended its rate normalisation process with a 25bp hike in August, we
believe. We think the board will stay on hold from here, as the policy rate has
probably reached its neutral level.
3.00
-50bp
(6/6/14)
No change
Banxico’s recent communications, including the quarterly inflation report, have
underscored its neutral policy stance. With growth set to rebound and inflation
stuck above target, we expect Banxico to remain on hold until Q3 2015.
3.50
-25bp
(11/9/14)
No change
The bank has used its two Q3 windows of opportunity to bring the real policy
rate closer to zero without compromising its inflation target. We think the bank
is done cutting and that the next rate move will be a hike next year.
BRAZIL
Selic overnight rate
CHILE
Overnight rate
COLOMBIA
Overnight rate
MEXICO
Overnight rate
PERU
Overnight rate
Source: BNP Paribas, BNP Paribas Cadiz, TEB, national central banks
Market Economics
Macro Matters
16 October 2014
31
www.GlobalMarkets.bnpparibas.com
Economic forecasts (GDP and CPI)
Table 2: CPI forecasts (% y/y) (1)
Table 1: GDP forecasts (% y/y)
2012
World
(2)
Advanced
(2)
Emerging & developing
G7
(2)
Asia ex Japan
(2)
CEE and Russia
Latam
(2)
(2)
(2)
2013
2014
(1)
2015
(1)
2016
(1)
2012
(3)
3.2
3.1
3.1
3.3
3.7
World
1.3
1.4
1.7
2.0
2.0
Advanced
5.2
4.8
4.4
4.5
5.3
Emerging & developing
1.5
1.5
1.7
2.0
1.9
G7
6.1
6.1
6.0
5.9
5.8
Asia ex Japan
2.4
2.0
0.9
0.2
2.5
CEE and Russia(3)
2.9
2.5
1.2
2.0
3.2
Latam
(3)
(3)
(3)
(3)
(3)
2013
2014
(2)
2015
(2)
2016
(1)
3.6
3.3
3.5
3.6
3.7
1.9
1.4
1.5
1.6
1.9
5.2
5.2
5.4
5.7
5.5
1.9
1.3
1.7
1.6
2.0
3.6
3.4
2.9
3.1
3.1
5.2
5.0
6.1
6.2
5.0
6.2
7.4
10.8
11.6
11.5
2.3
2.2
2.2
2.8
2.4
US
2.1
1.5
1.8
1.7
2.0
-0.6
-0.4
0.7
0.9
1.5
Eurozone
2.5
1.4
0.5
1.0
1.1
Japan
1.5
1.5
0.8
0.5
0.4
Japan
0.0
0.4
2.8
2.0
3.3
China
7.7
7.7
7.3
6.8
6.5
China
2.6
2.6
2.2
2.4
2.9
US
Eurozone
Eurozone countries
Eurozone Countries
Germany
0.6
0.2
1.4
1.4
1.8
Germany
2.1
1.6
0.9
1.3
1.4
France
0.4
0.4
0.3
0.7
1.3
France
2.2
1.0
0.7
1.0
1.1
Italy
-2.4
-1.8
-0.3
0.3
0.8
Italy
3.3
1.3
0.2
0.5
0.7
Spain
-1.6
-1.2
1.2
1.6
1.5
Spain
2.4
1.5
-0.2
0.2
0.7
Netherlands
-1.6
-0.7
0.5
0.9
1.4
Netherlands
2.8
2.6
0.4
1.4
1.6
Belgium
-0.1
0.2
0.9
0.9
1.5
Belgium
2.6
1.2
0.7
1.1
1.4
0.7
0.4
1.1
1.2
1.8
Austria
2.6
2.1
1.8
1.7
1.9
Austria
Portugal
-3.3
-1.4
0.9
1.3
1.4
Portugal
2.8
0.4
-0.1
0.8
1.2
Finland
-1.5
-1.2
-0.1
0.7
1.3
Finland
3.2
2.2
1.1
1.2
1.5
Ireland
-0.3
0.2
4.9
3.5
3.3
Ireland
1.9
0.5
0.5
1.3
1.5
Greece
-7.0
-3.9
0.4
2.1
2.9
Greece
1.0
-0.8
-0.9
0.3
0.8
Other Europe
Other Europe
UK
0.3
1.7
3.0
2.8
2.1
UK
2.8
2.6
1.6
1.9
2.3
Sweden
Norway
0.0
2.8
1.5
0.7
2.4
1.8
3.0
2.3
2.8
2.1
Sweden
Norway
0.9
0.7
0.0
2.1
0.0
2.1
0.9
2.5
1.9
2.7
Switzerland
1.0
1.9
1.1
1.4
1.7
Switzerland
-0.7
-0.2
0.1
0.5
0.3
CEEMEA
CEEMEA
Russia
3.5
1.3
-0.6
-2.5
1.5
Russia
5.1
6.8
7.6
7.1
4.7
Ukraine
0.3
0.0
-9.5
-4.5
1.0
Ukraine
0.6
-0.3
11.2
17.0
12.3
Poland
2.0
1.6
2.9
2.5
3.1
Poland
3.7
0.9
0.2
1.3
2.1
Hungary
-1.7
1.1
3.2
1.6
2.1
Hungary
5.7
1.7
0.2
2.6
3.4
Czech Republic
-0.9
-0.9
2.5
2.2
2.7
Czech Republic
3.3
1.4
0.5
2.1
2.1
Romania
0.6
3.3
1.7
2.2
3.0
Romania
3.3
4.0
1.3
2.5
2.7
Turkey
2.1
2.5
4.1
1.9
3.5
1.5
3.0
2.6
3.7
3.2
Turkey
South Africa
8.9
5.7
7.5
5.8
8.9
6.2
7.3
5.7
7.0
5.5
Saudi Arabia
5.8
4.0
4.4
4.3
4.0
South Africa
2.9
3.5
2.8
2.9
3.4
4.7
5.2
3.9
4.3
3.3
Saudi Arabia
United Arab Emirates
0.7
1.1
2.0
2.8
3.1
Qatar
6.1
6.5
6.1
6.9
7.4
United Arab Emirates
Qatar
1.9
3.1
3.4
4.4
4.3
Australia
1.8
2.4
2.8
2.3
2.4
India
7.5
6.3
4.8
5.3
4.3
South Korea
2.2
1.3
1.6
1.9
1.6
Asia Pacific
Asia Pacific
Australia
3.6
2.3
3.1
2.7
3.1
India
4.8
4.7
5.2
5.9
6.5
South Korea
2.3
3.0
3.5
3.3
3.0
Indonesia
6.3
5.8
5.2
5.0
5.5
Taiwan
1.5
2.1
3.6
3.6
3.3
Thailand
6.5
2.9
2.5
5.0
4.5
Malaysia
5.6
4.7
5.5
4.5
5.0
Hong Kong
1.5
2.9
1.8
1.7
1.7
Singapore
3.5
4.1
4.0
5.0
4.0
Philippines
6.6
7.2
6.5
5.5
6.0
Vietnam
5.0
5.4
6.0
6.0
6.5
Canada
1.7
2.0
2.2
2.4
2.3
Brazil
1.0
2.5
0.0
1.0
2.5
Americas
4.0
6.4
6.0
5.5
5.0
Taiwan
1.9
0.8
1.4
1.4
1.1
Thailand
3.0
2.2
2.2
2.0
2.0
Malaysia
1.7
2.1
3.2
3.5
2.5
Hong Kong
4.0
4.3
4.0
3.0
2.3
Singapore
4.6
2.3
1.5
2.5
2.5
Philippines
3.1
3.0
4.3
4.2
3.5
Vietnam
9.1
6.6
5.0
7.0
7.0
Canada
1.5
0.9
2.0
2.0
2.2
Brazil
5.4
6.2
6.3
6.7
6.7
Mexico
4.1
3.8
4.0
3.3
3.5
Colombia
3.2
2.0
2.9
3.3
3.3
Chile
3.0
2.1
4.2
3.6
3.0
10.0
10.6
25.0
26.0
30.0
3.7
2.8
3.2
2.8
2.9
63.0
(Venezuela
)
,
, ( ) 21.1 , ( ) 40.6
based on weights calculated using PPP valuation of GDP in IMF WEO
October 2013
Source: BNP Paribas, central banks, national statistics
75.0
65.0
Americas
Mexico
4.0
1.1
2.9
4.2
4.3
Colombia
4.0
4.7
4.9
4.3
4.5
Chile
5.6
4.1
2.0
3.5
4.5
Argentina
1.9
3.0
-1.5
-1.0
2.0
Peru
6.0
5.6
4.1
5.4
5.7
Venezuela
5.5
1.3
-2.5
-3.0
0.5
Argentina
Peru
(1) Forecast, (2) BNPP estimates based on weights calculated using
PPP valuation of GDP in IMF WEO October 2013
Source: BNP Paribas, central banks, national statistics
Market Economics
Macro Matters
Indonesia
16 October 2014
32
www.GlobalMarkets.bnpparibas.com
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Market coverage
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North America
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