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23 October 2014
Economics Research
The UniCredit
Weekly Focus
Economics, FI/FX & Commodities Research
Credit Research
Equity Research
Cross Asset Research
“
The end of QE in the US
No. 125
23 October 2014
”
– Focus: Despite the recent market volatility, we expect the Fed to complete the asset purchase program as planned at
its FOMC meeting next week. The Fed has largely met the main goals of its various purchase programs. The gradual
reduction of the asset purchases over the past few months showed that financial markets will manage without the
monthly liquidity injections. While the short-term benefits of this are undeniable, there are concerns about the potential
long-term costs of the Fed’s asset purchases. In addition to valid concerns about financial instability and moral hazard,
the Fed’s ballooned balance sheet makes it harder for the Fed to eventually raise its target rate. However, using a
combination of interest on excess reserves (main instrument), overnight reverse repos and a Term Deposit Facility, the
Fed should theoretically be in a position to raise rates – as soon as doing so becomes appropriate.
– Preview: Besides ending QE3 at its meeting next week, our baseline remains that the FOMC’s statement will not
reiterate the “considerable time” guidance. Instead, the Fed will most likely add language that highlights the
ependency of future policy decisions on economic and inflation developments. Regarding the eurozone, inflation
data for October will be released next Friday, and we expect headline inflation to increase slightly.
– Review: Eurostat released the first estimate of European national accounts based on the ESA 2010 methodology,
accompanied by the incorporation of statistical improvements. With the revisions to quarterly growth rates broadly
offsetting each other, the impact on real GDP was only minor. The flash estimate for the eurozone’s October PMIs
surprised on the upside, showing signs of stabilization in economic activity. In the UK, the BoE published the
minutes from its MPC’s October meeting revealing that the vote was again 7-2 in favor of keeping the Bank Rate
unchanged. Although the tone of the minutes was dovish, we continue to expect the first 25bp hike in February 2015.
Editor: Dr. Martina von Terzi, Economist (UniCredit Bank)
23 October 2014
Economics & FI/FX Research
Weekly Focus
There is life after QE
■
At next week’s meeting, on October 29, the Federal Reserve will end its current asset purchase
program (QE3). Over the past six years, the Fed has increased the size of its balance
sheet by around USD 3.5 trillion.
■
In our view, the Fed has largely met the main goals of its various purchase programs. In
particular, QE1 has considerably helped to ease broader financial conditions. More specifically,
the asset purchases have lowered 10Y Treasury yields by around 100bp.
■
Thanks to the gradual reduction of the asset purchases over the past several months, we
already got a sense of how well financial markets will fare without the monthly liquidity
injections. The answer is: not too bad. 10Y Treasury yields are currently 100bp lower than
they were six years ago, and broader financial conditions have remained very accommodative.
Moreover, history has shown that as long as interest rates go up for the right reason
(a stronger economy), stock markets should also be able to weather the increases.
■
While the short-term benefits are undeniable, there are concerns about potential long-term
costs of the Fed asset purchases. In addition to valid concerns about financial instability
and moral hazard, the ballooned balance sheet makes it harder for the Fed to eventually
raise its target rate. However, using a combination of interest on excess reserve (main
instrument), overnight reverse repos and a Term Deposit Facility, the Fed should theoretically
be in a position to raise rates – once that is appropriate.
A monetary policy experiment enters its next phase
At next week’s meeting, the Federal Reserve will formally announce the end of its long-term
asset purchase program. That completes a six-year long monetary policy experiment through
which the Fed tried to stimulate the economy and stabilize financial markets at a time when
the traditional policy instrument (the federal funds target rate) had hit its lower bound. In this
note, we will have a look back and ahead. How successful was quantitative easing (“QE”) and
how well will financial markets and the economy do without it?
The Fed’s policy reaction to halt the panic in financial markets did not begin with quantitative
easing. In addition to cuts in the target rate (from September 2007 to December 2008), the
Fed initiated several short-term liquidity programs to support, e.g., the commercial paper market,
which had tumbled throughout September and October 2008. Eventually, the first round of
quantitative easing (QE1) was announced on 25 November 2008. Overall, the Fed bought
long-term assets for no less than USD 1.725 trillion between late 2008 and mid-2010 (see
table 1). Most of the purchases were mortgage-backed securities or direct obligations of Fannie
Mae and Freddie Mac, while only USD 300bn involved Treasuries. QE2, from late 2010 to
mid-2011, on the other hand, focused solely on Treasuries. QE3, the last round, began in
September 2012. Initially, the Fed bought USD 40bn in mortgage-backed securities per
month. At that time, it continued to swap short-term into long-term Treasuries (“Operation
Twist”). As no short-term Treasuries were left to swap, the Fed began to buy longer-term
Treasuries outright, at a pace of USD 45bn a month. The total purchase amount was therefore
USD 85bn per month, until the tapering began in December 2013.
UniCredit Research
page 2
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
TABLE 1: THE FEDERAL RESERVE’S CRISIS RESPONSE
What?
When?
Cuts in the fed funds target rate
September 2007 – December 2008
How much?
From 5.25% to 0.25%
Short-term liquidity programs
August 2008 – February 2010
Up to USD 1.5 trillion
QE1
December 2008 – August 2010
USD 1.725 trillion (total)
USD 175bn (agency debt)
USD 1.25 trillion (MBS)
USD 300bn (Treasuries)
QE2
November 2010 – June 2011
USD 600bn (all Treasuries)
QE3
September 2012 – now
USD 40bn per month (MBS)
January 2013 – now
USD 45bn per month (Treasuries)
Since December 2013: reduction in
monthly purchase pace (“tapering”)
Source: Federal Reserve, UniCredit Research
Combined, these policy measures have left a significant mark on the Fed’s balance sheet.
The value of long-term securities held outright has surged since late 2008 from USD 500bn to
about USD 4 trillion (see chart 1). The total size of the balance sheet, which includes all of the
Fed’s assets, is currently no less than USD 4.5 trillion (see chart 2).
THE FEDERAL RESERVE’S UNCONVENTIONAL POLICY: IT ALL STARTED WITH SHORT-TERM LIQUIDITY PROGRAMS
Chart 1: Securities held outright by the Fed, in USD trillion
Chart 2: Federal Reserve assets, in USD trillion
4.5
4.5
QE1
4.0
QE2
QE3
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
All assets
Securities held outright
Other assets
4.0
short-term
liquidity
programs
0.0
Jan-07
Jan-14
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Federal Reserve, UniCredit Research
How successful was quantitative easing?
The stated goal of the Fed’s long-term open market operations (the quantitative easing programs)
was to put downward pressure on longer-term interest rates and thus support economic activity
1
and job creation by making financial conditions more accommodative.
Let’s begin with more accommodative financial conditions, a goal that was implied in the
above statement: To gauge the development, we use the Chicago Fed’s National Financial
Conditions Index (NFCI). The NFCI is a weighted average of 105 measures of financial activity.
Positive values of the index indicate financial conditions that are tighter than on average,
2
while negative values indicate conditions that are looser than on average.
1
2
See: Credit and Liquidity Programs and the Balance Sheet: Open market operations; www.federalreserve.gov.
More information can be found here: http://www.chicagofed.org/webpages/publications/nfci/.
UniCredit Research
page 3
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Chart 3 reveals that financial conditions tightened throughout 2007 and early 2008, before
jumping to a 25-year high after the bankruptcy of Lehman Brothers. But with the announcement
of QE1 (and other targeted short-term liquidity measures), in November, the picture began to
change. By mid-2010, when QE1 ended, the NFCI had moved back into negative territory,
indicating looser than average conditions. The first goal, easier financial market conditions,
was thus achieved!
Long-term interest rates are also lower than they were on the day of the QE1 announcement.
Even if we leave out the most recent rally, which saw yields temporarily plunging below 2%,
one can safely say that 10Y Treasury yields are some 75bp to 100bp lower than they were in
late November (3¼%). Interestingly – and counterintuitively – yields tended to rise when actual
purchases began during QE1 and QE2, and fell again thereafter. The latest sharp yield
increase occurred in May 2013, when former Chairman Bernanke first laid out the prospect for
a reduction of the purchases (“taper tantrum”). To be sure, yields over the past six years have
been impacted by several factors. So it is very difficult and notoriously uncertain to isolate the
impact of the QE programs. But according to economic studies, which tried to do this, all three
3
QE programs have lowered 10Y yields on the order of 100bp. In other words, it is more likely
than not that the goal of lower interest rates was achieved as well.
With the benefit of hindsight, one might certainly conclude that the first purchase program
(QE1) would have been enough to achieve all the targeted goals – with less than half of the
balance sheet expansion. The benefits of the subsequent programs, QE2, Operation Twist,
and QE3, on the other hand, are less obvious. We think the Fed initiated them mostly as
pre-emptive measures to insure against potential downside risk. As these downside risks –
thankfully – never materialized, it is hard to appreciate the role of the latest asset purchase
programs. To be honest, we have been somewhat skeptical about the benefits of QE2 and
QE3, but from a risk-management perspective, the Fed might have been right to provide additional
stimulus at that time.
GAUGING THE IMPACT OF QUANTITATIVE EASING ON FINANCIAL MARKETS
Chart 3: Financial Conditions Index
3.5
QE1
3.0
Chart 4: 10Y Treasury yield, %
QE2
5.5
QE3
2.5
QE2
QE3
4.5
2.0
4.0
1.5
3.5
1.0
3.0
0.5
2.5
0.0
2.0
-0.5
-1.0
QE1
5.0
1.5
25 Nov 2008
QE1 announcement
-1.5
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
25 Nov 2008
QE1 announcement
1.0
Jan-07
Jan-14
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Bloomberg, UniCredit Research
3
See e.g. J. Stein (2012), Evaluating Large-Scale Asset Purchases, remarks at the Brookings Institution, Washington D.C., 11 October 2012
UniCredit Research
page 4
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Life after QE: Financial markets will be fine
As the Federal Reserve has already significantly lowered its monthly bond purchases (to USD 15bn
from USD 85bn), we got a sense of how well financial markets will fare without the monthly
liquidity injections. The answer is: not too bad. 10Y Treasury yields have not shown any signs
of upward pressure – to say the least. This is in line with the prevailing view within the Fed
that it is not the monthly purchases (flow) but the sum of the purchases assets (stock) that
4
determines the yield effect. In other words: As long as the Fed does not start to sell the assets
that it accumulated over the past five years – which is not planned for the foreseeable future
(more below) – most of the yield impact is here to stay. To be sure, the yield effect fades as
the amount of Treasuries in the market increases, because that way the share of Treasuries
held by the Fed (as % of total supply) will shrink even as the absolute amount on the balance
sheet remains the same.
Stock markets should also remain resilient after the Fed has completed its asset purchases.
In fact, there is no conclusive empirical evidence that QE has pushed prices higher at all.
McKinsey has suggested that there may have “simply been a recovery following a large overcorrection in equity prices. […] Additionally, corporate profits have rebounded and cash levels
5
are high.” Along this line of argumentation, QE would have played a role in restoring confidence
(see above: improving financial conditions), which had allowed the rally to start. But the liquidity
increase itself would have been secondary. Chart 5, which compares the S&P 500 and the
federal funds target rate over the past 25 years, tells a similar story. Contrary to often-heard
concerns that higher rates will inevitably end the stock market rally, the S&P 500 actually
peaked only around the time that the Fed began to cut (!) its target rate – not when it began to
hike. A similar observation can be made for long-term interest rates. Between 1988 and 2011,
10Y Treasury yields and the S&P 500 have exhibited a very close positive correlation. This
observation can, in our view, be explained by the fact that both series (stocks and short-/longterm interest rates) are driven by the same underlying factor, the economy. As long as the
economy prospers, the Fed is in a position to raise rates, while at the same time stocks go up.
Once the business cycle has turned, the Fed begins to cut rates, while stocks sell off. In other
words, as long as interest rates, both on the short and the long end, go up for the right reason,
read: a better economy, stock markets should also be able to weather the increases. And
those who think that liquidity plays a more important role may take some comfort from the fact
that other central banks will fill the gap and continue to expand their balance sheets. These
are, in particular, the Bank of Japan and soon again the ECB (see chart 6).
MONETARY POLICY NORMALIZATION IN THE US DOES NOT (NECESSARILY) MEAN THE END OF THE STOCK MARKET RALLY
Chart 5: Fed funds target rate (%) and the stock market
10.0
Fed funds target rate
9.0
S&P500 (RS)
Chart 6: Central bank balance sheets, indexed: Sep-08=100
2250
500
2050
450
8.0
1850
7.0
1650
6.0
1450
350
5.0
1250
300
4.0
1050
3.0
850
2.0
650
1.0
450
150
0.0
Jan-88
250
100
Sep-08
Jan-93
Jan-98
Jan-03
Jan-08
Jan-13
Federal Reserve
BOE
BOJ
ECB
400
250
200
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Source: Bloomberg, UniCredit Research
4
See: D’Amico, S. and T. King (2013), Flow and Stock Effects of Large-Scale Treasury Purchases: Evidence on the Importance of Local Supply,
Journal of Financial Economics, 108(2), pp.425-48.
5
See: McKinsey Global Institute (2013), QE and ultra-low interest rates: Distributional effects and risks, MGI discussion paper, November.
UniCredit Research
page 5
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Will the long run costs come to haunt us?
While the short-term benefits of QE are undeniable, many observers have been worrying
about the long-term costs of the programs. One of the most prominent and most vocal critics
of the too accommodative monetary policy stance in the US has been Rajan (2005), the former
6
IMF chief economist and now Governor of the Bank of India. He was particularly concerned
about the effect of low interest rates on incentives (“search for yield”) and on financial stability
in general. In such an environment, greater supervisory vigilance is warranted. Along the
same line, former Fed Chairman Bernanke acknowledged that risks to financial stability are a
7
potential cost of QE. He, too, emphasized the need for expanded monitoring of the system.
William White, the former Chairman of the BIS Monetary and Economic Department was even
clearer: ”… easy monetary policies threaten the health of financial institutions and functioning
of financial markets, which are increasingly intertwined. […] In effect, easy monetary policies
8
can lead to moral hazard on a grand scale.” His concerns have received some backing over
the past week, when a few Fed officials were raising the specter of extending the current purchase
program or even talked about another round (QE4) after just a few days of market turbulence.
This would even top the “Greenspan put”, and signals just how quick policy makers are when
it comes to providing additional monetary policy stimulus in times of crises and even at times
of increased uncertainty. And while the oversight of financial markets has certainly been tightened
over the past few years, the litmus test will be whether these tighter rules will still be in place
when the memory of the Great Recession has faded.
Another potential cost of the aggressive monetary policy action is “that ultra easy monetary
policy will be wrongly judged as being sufficient” (White 2012) to achieve a more sustainable
medium-term growth outlook. Instead of buying time to do the right things (e.g. structural reforms),
the time would instead have been wasted. It is hard to brush aside these concerns in the US.
It appears as if the very preemptive Fed has taken all the pressure off the fiscal side to agree
on structural reforms that would have enhanced medium-term growth prospects. The only
agreements reached between Republicans and Democrats over the past few years occurred
to avoid any bigger damage. Fiscal cliff, debt ceiling and the government shutdown are the
main events to be cited in that context.
Worries about inflation, on the other hand, are overblown in our view. If anything, there remain
concerns about global disinflation or even deflation. And if inflation rates were indeed to pick
up more rapidly in the future, it would be easy for the Fed (and any other central bank) to nip it
in the bud by dramatically raising rates. That brings us to the last potential costs of the quantitative
easing programs: complicating the Fed’s future conduct of monetary policy. More precisely, the
ballooned balance sheet makes it more complicated for the Fed to lift the overnight interest rate.
Policy normalization with a large balance sheet
Traditionally, the Fed has steered the federal funds rate through the control of excess
reserves in the market. If the effective interest rate was too high, the Fed added reserves (the
increased supply lowered the price), and vice versa. Currently, however, the Fed is sitting on
a whopping USD 2½ trillion in excess reserves. This huge supply in funds will prevent any rise
in the overnight rate. Accordingly, the Fed has already come up with a different approach.
6
Rajan R.G (2005), Has Financial Development Made the World Riskier?, Presentation at the Jackson Hole Symposium, sponsored by the Federal Reserve Bank
of Kansas City, Jackson Hole, Wyoming, August.
7
Bernanke, B. (2012), Monetary Policy since the Onset of the Crisis, Presentation at the Jackson Hole Symposium, sponsored by the Federal Reserve Bank of
Kansas City, Jackson Hole, Wyoming, August.
8
White, W. (2012, Ultra Easy Monetary Policy and the Law of Unintended Consequences, Federal Reserve Bank of Dallas, Working Paper No 126, August.
UniCredit Research
page 6
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23 October 2014
Economics & FI/FX Research
Weekly Focus
The recently released “Policy Normalization Principles and Plans” explains how the approach works:
During normalization, the Federal Reserve intends to move the federal funds rate into
the target range set by the FOMC primarily by adjusting the interest rate it pays on
excess reserve balances.
The idea is that the interest paid on excess reserves (IOER) will put a floor under the overnight
rate, as no market participant should be willing to lend money at a lower rate than the one he
gets risk-free at the Fed. In addition to the primary tool (IOER), the Fed will use overnight reverse
repo agreements and a Term Deposit Facility, which helps to drain at least some reserves.
With this framework, the Fed should be in a position to raise rates – once appropriate – despite
the ballooned balance sheet.
With regard to the future development of the balance sheet itself, the Fed currently “does not
anticipate selling agency mortgage-backed securities as part of the normalization process.”
Instead, it intends to reduce its securities holdings “in a gradual and predictable manner primarily
by ceasing to reinvest repayments of principal on securities held.” More precisely, “the Committee
expects to cease or commence phasing out reinvestments after it begins increasing the target
range for the federal funds rate; the timing will depend on how economic and financial conditions
and the economic outlook evolve.” We think that this stage will be reached in late 2015, about
three to six months after the Fed began to raise its target rate.
As a result of this gradual normalization process, Chair Yellen said in mid-September, that “it
could take until the end of the decade” for the Fed’s balance sheet to get back to levels consistent
with normal monetary policy. This refers to the size as well as the composition of the balance
sheet (no more mortgage-backed securities, only Treasuries). Her timeline is in line with the
9
estimate provided earlier by several Fed researchers. According to Carpenter et al (2013),
e.g., the Fed’s balance won’t return to normal until sometime between mid-2019 and mid-2021
(chart 7 depicts the average duration of assets on the Fed’s balance sheet).
IT WILL TAKE YEARS FOR THE FED’S BALANCE SHEET TO NORMALIZE
Chart 7: Average duration of the Fed’s securities holdings, in years
9
8
6.0
7
5.0
6
current expansion (in October)
5
4.0
4
3.0
3
2.0
2
Mar 1991
Jun 1938
Feb 1961
Nov 1982
Jun 2009
Mar 1975
Nov 2001
Oct 1949
Mar 1933
Jun 1861
Oct 1945
Dec 1914
Nov 1970
May 1954
Aug 1904
Mar 1879
Dec 1870
Jul 1924
Apr 1888
Dec 1854
Jul 1921
Apr 1958
Jun 1897
Nov 1927
Dec 1858
May 1885
Jan-13
Jun 1908
Jan-12
Dec 1900
Jan-11
May 1891
Jan-10
Jul 1980
0
Jun 1894
1
1.0
0.0
Jan-09
last three expansions
10
Jan 1912
7.0
11
Treasuries
Mortgage-backed securities
Agency debt
Dec 1867
8.0
Mar 1919
9.0
Chart 8: Average duration of business cycle expansions, in years
Source: New York Fed, NBER, UniCredit Research
9
Carpenter, S., J. Ihrig, E. Klee, D. Quinn and A. Boote (2013), The Federal Reserve’s Balance Sheet and Earnings: A Primer and Projections, FEDS Working
Paper #2013-01.
UniCredit Research
page 7
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23 October 2014
Economics & FI/FX Research
Weekly Focus
If the Fed were to succeed in shrinking the balance sheet back to normal without causing major
hick-ups in financial markets and/or on the inflation side, this would provide a significant confidence
boost in the ability of central banks to use and control these (so far) unconventional tools.
We are confident that at least from a theoretical standpoint, central banks on both sides of the
Atlantic are well equipped to succeed. And quantitative easing will most likely remain in the
Fed’s normal toolbox, to be pulled out in times of (extreme) crisis situations.
One factor, however, that could derail this process is another economic downturn, which
would presumably end the policy normalization. In that context, one must not forget that the
current recovery in the US is already more than five years old, and by 2020 it would be eleven
years old. That, in turn, would be the longest recovery on record, beating the 10-year long
upswing between 1991 and 2001 by another year. Our view is that the output gap will be
closed during the course of 2015 and that the recovery “only” has another two to three years
to go, before another downturn will most likely prompt renewed monetary policy easing. But
the fact that business cycles have become longer and longer in recent decades (see chart 8)
at least suggests that such an extended recovery remains within the realms of possibility.
Dr. Harm Bandholz, CFA
(UniCredit Bank New York)
+1 212 672-5957
[email protected]
UniCredit Research
page 8
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23 October 2014
Economics & FI/FX Research
Weekly Focus
The Week Ahead
After the end of QE: Fed to leave all options open
Next Wednesday, the Federal Reserve will end its seventh regular FOMC meeting of the
year. Despite the recent market volatility, we expect that the asset purchase program will
be completed as planned. In addition, our baseline remains that the statement will not
reiterate the “considerable time” guidance. Instead, the Fed will most likely add some
language that highlights the dependency of future policy decisions on economic and
inflation developments.
QE3 will end
At next week's FOMC meeting, the Fed will formally announce the end of its latest assetpurchase program (QE3). Yes, there has been an isolated call by St. Louis Fed President
Bullard to consider delaying the end of QE3. His main concern was lower inflation expectations.
Obviously, the pace of the decline in inflation expectations has been whopping. But the level
remains healthy, with the Fed’s own 5Y breakeven rate still being at 2.20% (see left chart
below). Moreover, one simply cannot deny the important role of the more than 20% drop in oil
prices since late June. And while financial markets these days seem to view lower energy
prices unequivocally as something negative, this drop will in fact act like a positive supply
shock to most countries. Only one day after Mr. Bullard’s comments, the usually very dovish
President of the Boston Fed Eric Rosengren, stated that it is "too soon to make an adjustment
on QE plans". In other words, Bullard's proposal is not going to gain any traction, and the Fed
will end QE as planned. In our focus piece, we take a closer look at the "Life after QE".
“Considerable time” will
most likely be dropped
Our impression is that financial markets are not hoping for any changes in the QE timeline either.
Instead, investors will focus on possible changes in the wording of the FOMC statement. Most
importantly will be whether the Fed reiterates the "considerable time" language or not. We have
been arguing that this upcoming meeting is the natural candidate for the Fed to alter this guidance.
This is simply because the whole sentence ("...it likely will be appropriate to maintain the current
target range for the federal funds rate for a considerable time after the asset purchase program
ends") directly refers to the end of QE – and as QE ends, the sentence will need to be reworded
anyway. Despite the recent spike in market volatility, it is still our baseline expectation that the
"considerable time" language will be dropped. But it would be foolish not to acknowledge that
the developments during the past week have increased the chances that this crucial passage
will remain in the statement for now.
Emphasizing data dependency `
Instead of reiterating the "considerable time" passage, we expect the Fed to add some
language that emphasizes the data dependency of the future policy path. In particular, we
think that the statement might include a reference to inflation and inflation expectations, in
particular, and their relevance for upcoming policy decisions. While that is de facto stating the
obvious, it marks the final step in the Fed's switch from forward guidance to the traditional,
data dependent policy path. Adding some cautious language on inflation should appease the
doves and help to avoid too heavy market moves in reaction to the anticipated language
change.
Eurozone: inflation is set to slightly increase in October
Next Friday, eurozone inflation data will be released for October. Headline inflation for September
came in at 0.3% yoy, with the core rate at 0.8% yoy (revised slightly up from the flash estimate).
We confirm our view that headline inflation has troughed. The recent steep drop in oil prices
makes the upward trend in inflation in the next few months slower than previously expected.
In the eurozone, our preliminary estimate for October is now 0.4% yoy, and the year-end level is
0.5% yoy. This assumes a recovery in the Brent price towards USD 90p/b and a weaker EURUSD. However, even if both Brent prices and the EUR-USD were to trade at current levels
through year-end, eurozone inflation in December is unlikely to settle below the September level.
UniCredit Research
page 9
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23 October 2014
Economics & FI/FX Research
Weekly Focus
BREAKEVEN INFLATION EXPECTATIONS (%)
EUROZONE: INFLATION SET TO INCREASE SLIGHTLY
4.00
5.0
3.50
% yoy
4.0
3.00
3.0
2.50
2.00
2.0
1.50
1.0
1.00
0.0
0.50
0.00
Jan-07
5Y forward
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
10Y
Headline
Core (ex energy & food)
-1.0
Jan-07
Jan-14
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Federal Reserve, Eurostat, Bloomberg, UniCredit Research
Other Major Events & Data Releases
EUROZONE
Credit growth is likely to improve further
18
12
16
12
6
8
6
2
2
0
0
-2
-8
Aug-04
-2
Loans to NFCs, % yoy - LS
Loans to households, % yoy - RS
Aug-06
Aug-08
Aug-10
Aug-12
Sept
UniCredit Consensus
2.2
Last
2.0
■
M3 annual growth improved for the fourth consecutive
month in August, rising from 1.8% to 2.0%, with the positive monthly flow slightly above EUR 40bn.
■
We expect a further increase in September (to 2.2%),
mainly due to a positive base effect in this month.
■
Lending to the private sector will continue to improve at a
gradual pace, mostly due to a further easing in the pace of
contraction of corporate lending (at -2.2% yoy in August).
4
4
-6
M3 (% yoy)
8
10
-4
Mon, 27 October, 10:00 CET
10
14
-4
Aug-14
Source: ECB, UniCredit Research
Germany
IFO INDEX TO DECLINE FURTHER
125
120
Mon, 27 Oct, 10:00 CET
115
Ifo business climate
110
105
90
85
80
Business climate
Current situation
Business expectations
75
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
UniCredit Research
page 10
103.7
Last
104.7
■
We expect another significant decline in overall business
sentiment.
■
This would be the sixth consecutive monthly decline.
■
The deterioration should again be driven both by the business
expectations and the current situation component.
100
95
UniCredit Consensus
Oct
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
RECORD-LOW UNEMPLOYMENT RATE
13
Thu, 30 Oct, 9:55 CET
12
11
10
9
UniCredit Consensus
Last
Unemployment, mom
Oct
flat
+12,000
Unemployment rate, %
Oct
6.7
6.7
■
Unemployment will remain at a record-low of 6.7%.
■
While the number of jobseekers has been rising, additional
employment has been created (more than 30,000 per
month on average recently).
■
Hiring plans of companies signal a further rise in employment
in the next few months.
8
7
6
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
SLIGHT UPTICK IN YEARLY INFLATION RATE LIKELY
4.0
Thu, 30 Oct, 14:00 CET
3.5
3.0
2.5
2.0
0.5
Last
Oct
-0.1
Flat
Inflation rate (% yoy)
Oct
0.9
0.8
■
We expect the yearly inflation rate to rise slightly to 0.9%,
dampened by declining energy prices.
■
Inflation should have hit its trough and increase moderately in
coming months.
1.5
1.0
UniCredit Consensus
Inflation rate (% mom)
0.0
-0.5
-1.0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Feri, UniCredit Research
Switzerland
KOF to increase slightly towards its LT average
130
Thu, 30 October, 9:00 CET
120
KOF
LT average
UniCredit Consensus
Oct
99.5
Last
99.1
110
100
90
80
70
60
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
■
The KOF Economic Barometer is expected to increase
slightly to 99.5 in October after it decreased last month.
■
The Swiss leading indicator approaches its long-term
average, signaling that perspectives for the Swiss economy
remain relatively stable in the near future.
Source: Bloomberg, UniCredit Research
UniCredit Research
page 11
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
USA
Solid 3Q14 GDP growth – with upside risks
6.0
% qoq
4.0
Thu, 30 October, 13:30 CET
% yoy
GDP annualized (% qoq)
2.0
0.0
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
I/15
2.9
Last
4.6
■
The risks to our forecast are tilted to the upside, as, e.g.,
shown by the 3% estimate of the Atlanta Fed’s GDP tracker.
-6.0
forecast
2.8
The US economy probably expanded an annualized 2.8%
in 3Q14, driven by consumer spending and business fixed
investment. Net exports were a drag. Manufacturing hours
rose a more modest 0.2%, calling into question the
message from record-high business surveys.
-4.0
-10.0
UniCredit Consensus
■
-2.0
-8.0
3Q
Source: Bloomberg, UniCredit Research
Dr. Martina von Terzi, Economist (UniCredit Bank)
Dr. Harm Bandholz, CFA, Chief US Economist (UniCredit Bank New York)
Dr. Andreas Rees, Chief German Economist (UniCredit Bank)
Marco Valli, Chief Eurozone Economist (UniCredit Bank Milan)
Dr. Loredana Federico, Economist (UniCredit Bank Milan)
Edoardo Campanella, Economist (UniCredit Bank Milan)
UniCredit Research
page 12
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
The Week in Retrospect
Eurozone: adopted the ESA 2010 methodology
On Friday, 17 October, Eurostat released the first estimate of European annual and quarterly
national accounts based on the ESA 2010 methodology. For most countries, the implementation
of ESA 2010 is accompanied by the incorporation of statistical improvements, whose effect
comes on top of that of the new methodological framework.
One of the main effects of the changes (ESA 2010 plus statistical improvements) is a level
shift in GDP, which implies a higher level of nominal GDP for virtually all eurozone countries
and, therefore, lower public debt-to-GDP ratios. Despite R&D expenditure now recorded as
investment and several other methodological improvements, real GDP tends to be little affected
by the changes, with the revisions to quarterly growth rates broadly offsetting each other (see
chart below). In comparison with Germany and France, Italy displays the largest average size
of the revisions. Revisions to real GDP in the eurozone as well as in its three largest countries
remain generally limited also during the credit and sovereign debt crises. The new (quarterly)
GDP series does not affect the growth-tracking properties of the Composite PMI and the EuroCOIN
indicator. Both remain very good predictors for eurozone GDP growth.
Apart from implementing ESA 2010, many member states used this opportunity to carry out
additional statistical improvements, for example updates of data sources. In addition, as part
of the process of methodological harmonization across the EU, many member states have
improved the way they account for certain illegal activities in GDP. This adaptation of the system
of accounts is not only European, but worldwide. Europe's ESA 2010 is the counterpart of the
2008 SNA, adopted by the United Nations Statistical Commission, which has already been
implemented in the US, Australia and Canada, among others.
EUROZONE REAL GDP: NO MAJOR DIFFERENCES BETWEEN ESA 95 AND ESA 2010
2
6
1
4
0
2
-1
0
qoq ESA 95 - LS
-2
yoy ESA 95 - RS
-3
-4
-2
qoq ESA 2010 - LS
-4
yoy ESA 2010 - RS
1Q05
3Q06
1Q08
3Q09
1Q11
3Q12
1Q14
-6
Source: Eurostat, Bloomberg, UniCredit Research
UniCredit Research
page 13
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Eurozone: PMI surprised on the upside
The flash estimate for the eurozone October PMIs surprised on the upside, showing signs of
stabilization in economic activity. The Composite PMI slightly improved to 52.2 from 52.0. At
face value, this week’s data are consistent with 0.2%-0.3% qoq GDP expansion for 4Q14,
even slightly outperforming our 0.1% qoq forecast.
The manufacturing PMI was up to 50.7 from 50.3. Consistent with a slight acceleration in industrial
production, the output index increased to 51.9. New orders were stable, whereas the new
orders/stocks ratio marginally declined. The output price index was up to 49.8 from 48.9, signaling
some improvement in pricing power. On the hiring side, the employment index rose to 50.6.
The services PMI was stable at 52.4. Looking at the breakdown of the indicator, we observe a
deterioration in all its subcomponents, with the exception of the input prices index. Falling
output prices index signaled that services firms’ pricing power remains weak.
At a country level, Germany reported a remarkable increase in the manufacturing index to
51.8 from 49.9 and a decline in the services counterpart to 54.8 from 55.7. Overall, the Composite
PMI rose to 54.3 from 54.1. In contrast, France experienced a decline in the Composite PMI,
which eased to 48.0 from 48.4. Both the manufacturing PMI (slowing to 47.3) and the services
index (slight decline to 48.1) had a negative impact.
Overall, the October PMIs are definitely encouraging and suggest that fears of a renewed
recession are most likely exaggerated. Given the strong headwinds facing the eurozone recovery –
especially the impact of geopolitical tensions on sentiment and trade, and ongoing sluggishness
of global trade – today's resilience can be regarded as a positive surprise. In our view, two
factors are starting to support economic activity in the eurozone. The first one is the currency
depreciation that began in May.
According to our estimates, an initial growth impact may materialize already in the final
months of this year, although most of the benefit will probably occur in 1H15. In addition, falling oil prices contribute to curb energy costs for companies in the face of a depreciating euro.
We expect this price dynamic to be especially supportive in the coming months.
Thanks to these better-than-expected preliminary PMI readings, we believe that the ECB will
continue with its wait-and-see mode to assess the impact on the real economy of its recent
measures, without taking further action at the next meeting of the Governing Council on
6 November.
MPC minutes: the great divide
The minutes of the MPC’s meeting held on 7 and 8 October 2014 were published on
Wednesday. They revealed, as broadly expected, that the vote was again 7-2 in favor of
keeping the Bank Rate unchanged at 0.5%, with Ian McCafferty and Martin Weale continuing
to vote for a 25bp hike. The tone of the minutes was dovish, with the fall in inflation and a
weaker global outlook bolstering the view of most members to stay on hold. Nevertheless, we
continue to expect the first 25bp hike in February of next year. Below are the highlights from
the minutes:
■
UniCredit Research
For most members, there was again “insufficient evidence of prospective inflationary pressure
to justify an immediate increase in Bank Rate”. Their list of reasons was boosted by the recent
fall in inflation to 1.2% and pessimism about the global economic outlook. Notably, these
members argued against claims that the MPC should look through the weakness in inflation
because it is partly due to lower import prices whose effect will eventually disappear. They
said, “CPI inflation had fallen relative to an already weak outlook” and that, “There remained
few signs of inflationary pressure in the UK economy, even after looking through the effects
of a stronger exchange rate”.
page 14
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Again they pointed to weak pay growth, but this month additionally noted the slight fall in
inflation expectations and signs that the pace at which slack was being absorbed was
“beginning to ease”. They again pointed to the weaker global outlook, particularly in the euro
area, saying “Further downside news in the euro area had increased the risks to the durability
of the UK expansion in the medium term".
■
Two members, Ian McCafferty and Martin Weale, continued to vote for a 25bp hike. They
said the fall in inflation was partly due to lower import prices and the Committee should look
through this just as they did when import prices were pushing inflation above target in
2008. They said the downside news in the euro area has so far not been transmitted to the
UK by financial contagion unlike in 2011. Meanwhile, the unemployment rate had fallen
sharply and even if the pace of decline started to ease it should still hit its medium-term
equilibrium rate by the middle of next year. They said that wage surveys suggest wage
growth “might pick up quite sharply”. And, given the lags in the monetary policy transmission
and the exceptionally low starting point of Bank Rate, an early rise would facilitate the desire
of the MPC for any subsequent rises in Bank Rate to be “gradual”.
The rest of the text was also dovish, based on increased pessimism about the global economic
outlook partly due to geopolitical concerns but also weakness in the euro area. Although
economic activity had continued to grow at a pace “slightly above its long-term average”,
there are signs of a “slight loss in momentum from a number of indicators”, including the
housing market and business surveys – particularly in the traded goods sector due to external
headwinds and sterling’s appreciation. The minutes said the fall in inflation to 1.2% yoy in
September was 0.5pp below what the MPC expected as recently as its August Inflation Report,
and they said this is consistent with weak wage growth, a fall in unit labor costs and the fall in
import prices. Strikingly, despite the sharp fall in unemployment, they said BoE staff estimate
that, although the output gap has continued to fall, it was “slightly larger in the second half of
the year than had been previously expected.”
Despite the dovish tone of the minutes, we continue to expect the first 25bp rate hike in
February 2015, around six months earlier than the market expects. The view of most members
suggests that there is a near zero probability of a rate hike before that. In the past month or
so, we have seen a de-emphasizing of slack in the economy – which has eroded quickly –
and instead a greater focus on more direct measures of price and cost pressures – which
have weakened. Some will say this is convenient. But we expect lagging wage growth to pick
up significantly at the turn of the year when the traditional pay period starts. Then it will be
harder to find a reason to delay the rate hike further.
Dr. Martina von Terzi, Economist (UniCredit Bank)
Marco Valli, Chief Eurozone Economist, (UniCredit Bank Milan)
Edoardo Campanella, Economist (UniCredit Bank Milan)
Daniel Vernazza, Ph.D., Economist (UniCredit Bank London)
UniCredit Research
page 15
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Major Data Releases & Economic Events To Look At Next Week
Date
24 Oct-01 Nov 2014
Time Country Indicator/Event
(ECB)
Fri, 24 Oct
Mon, 27 Oct
Tue, 28 Oct
Wed, 29 Oct
Thu, 30 Oct
RU
S&P Scheduled to Review Russia's Sovereign Credit Rating
SP
Spain Sovereign Debt Rating Published by Fitch
IT
Italy Sovereign Debt Rating Published by Fitch
LX
Luxembourg Sovereign Debt Rating May Be Published by Moody's
GE
Germany Sovereign Debt Rating May Be Published by Moody's
AS
Austria Sovereign Debt Rating May Be Published by Moody's
8:00
GE
GfK Consumer Confidence
10:20
EC
ECB's Praet Speaks in Milan
UniCredit
estimates
Consensus
(Bloomberg)
Previous
8
8.3
Nov
10:30
UK
Britain Publishes its First Estimate for 3rd Quarter GDP
10:30
UK
Real GDP (% qoq)
Q3
0.7
0.7
0.9
12:00
IT
Consumer Confidence (ISTAT, index)
Oct
101.9
101
102
16:00
US
New Home Sales (thousands)
Sep
10:00
GE
Ifo Business Climate (index)
Oct
103.7
10:00
EMU
M3 Money Supply (% yoy)
Sep
2.2
15:00
US
Pending Home Sales (% mom)
Sep
10:00
IT
Business Confidence (ISTAT, index)
Oct
95.1
13:30
US
Durable Goods Orders (% mom)
Sep
0.5
470
504
104.7
2
1
-1.04
0.3
-18.4
95.1
14:00
HU
Base Rate Announcement (%)
Sep
14:00
US
S&P/Case-Shiller Home Price Index (% yoy)
Aug
5.5
15:00
US
Conference Board Consumer Confidence
Oct
87.5
0:50
JP
Industrial Production (% yoy)
Sep
10:30
UK
Mortgage Approvals (thousands)
Sep
61.0
19:00
US
FOMC Rate Decision
19:00
US
Federal Funds Target Rate (%)
Oct
0.25
9:00
SZ
KOF Leading Indicator
Oct
99.5
99.1
9:55
GE
Unemployment Rate (%)
Oct
6.7
6.7
9:55
GE
Unemployment Change (thousands, sa)
Oct
flat
11:00
EMU
European Commission Economic Sentiment (index)
Oct
13:30
US
Real GDP (% qoq annualized)
Q3
14:00
GE
Harmonized CPI (% yoy)
Oct
14:00
GE
Consumer Price Index, CPI (national, % yoy)
Oct
JP
Bank of Japan Monetary Policy Statement
Fri, 31 Oct
Sat, 01 Nov
Period
NE
Netherlands Sovereign Debt Rating May Be Published by Moody's
0:30
JP
Consumer Price Index, CPI (% yoy)
Sep
1:05
UK
Consumer Confidence (GFK, index)
Oct
8:45
FR
Household Consumption (% mom)
Sep
2.1
2.1
5.7
6.75
87
86
-1.1
-3.3
64.2
0.25
0.25
12
99.9
2.8
2.9
4.6
0.8
0.9
0.8
3.2
-2
3.3
-1
0.7
9:00
SZ
Swiss National Bank Releases 3Q 2014 Currency Allocation
11:00
IT
Consumer Price Index, CPI (% yoy)
Oct
0.1
-0.2
11:00
EMU
Consumer Price Index, CPI (% yoy, flash estimate)
Oct
0.4
0.3
11:00
EMU
Core CPI (% yoy)
Oct
0.8
11:00
EMU
Unemployment Rate (%)
Sep
11.5
12:00
IT
Producer price index, PPI (% yoy)
Sep
13:30
US
PCE Core Inflation (% mom)
Sep
13:30
US
Personal Expenditures (% mom)
13:30
US
Personal Income (% mom)
13:30
US
Employment Cost Index (% qoq)
Q3
14:45
US
Chicago Purchasing Managers Index
Oct
14:55
US
University of Michigan Consumer Confidence
17:00
IT
Istat Releases Updated Economic Forecasts
2:00
CH
PMI Manufacturing
-2
0.1
0.1
Sep
0.1
0.5
Sep
0.3
0.3
Nov
0.5
86.5
Oct
0.5
0.7
61
60.5
86.2
86.4
51.1
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted
UniCredit Research
page 16
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
UniCredit Economic Forecasts
2013
Industrialized countries
US
Euro area
Germany
France
Italy
Spain
Austria
UK
Switzerland
Japan
Developing countries
Central & Eastern Europe
Russia
Poland
Czech Republic
Hungary
Turkey
Emerging Asia
China
Real GDP (%, yoy)
2014
2015
Consumer Prices (%, yoy)
2013
2014
2015
Budget Balance (% of GDP)
2013
2014
2015
2.2
-0.4
0.2
0.4
-1.9
-1.2
0.2
1.7
1.9
1.5
2.1
0.8
1.5
0.4
-0.2
1.2
0.6
3.0
1.5
1.0
2.7
1.2
1.6
0.8
0.7
1.6
1.6
2.3
1.6
1.5
1.5
1.4
1.5
0.9
1.2
1.5
2.0
2.6
-0.2
0.4
1.8
0.5
1.0
0.6
0.3
0.0
1.7
1.6
0.1
2.8
2.2
1.0
1.6
0.8
0.8
0.6
1.9
2.0
0.2
1.8
-7.3
-3.0
0.2
-4.2
-2.8
-6.7
-1.5
-5.9
0.0
-9.3
-6.4
-2.8
0.0
-4.4
-3.0
-5.6
-2.8
-5.0
-0.1
-8.0
-5.6
-2.6
0.3
-4.3
-3.0
-4.5
-1.5
-4.0
-0.2
-6.7
1.3
1.7
-0.7
0.0
4.0
-0.4
3.0
2.4
0.0
2.9
-0.1
3.2
2.4
0.0
2.0
6.8
0.9
1.4
0.0
7.5
7.4
0.1
0.4
0.0
9.0
6.3
0.9
1.6
0.0
6.5
-0.5
-4.3
-1.3
0.0
-1.5
0.5
5.6
-1.7
0.0
-2.7
-0.7
-3.0
-2.5
0.0
-3.3
7.7
7.1
6.9
2.6
2.3
2.9
-2.1
-2.1
-2.0
Real GDP (% qoq, sa)
US (annualized)
Euro area
Germany
France
Italy
Spain
Austria
UK
Switzerland
Japan
Russia
Poland (% yoy)
Czech Republic
Hungary
Turkey
China (%, yoy)
4Q13
3.5
0.3
0.4
0.2
-0.1
0.2
0.4
0.6
0.5
0.0
0.4
2.7
1.1
0.5
0.9
7.7
1Q14
-2.1
0.2
0.7
0.0
0.0
0.4
0.1
0.7
0.4
1.5
0.1
3.4
0.6
1.1
1.8
7.4
2Q14
4.6
0.0
-0.2
0.0
-0.2
0.6
0.2
0.9
0.2
-1.7
0.2
3.3
0.3
0.8
-0.5
7.5
3Q14
2.8
0.3
0.4
0.2
0.1
0.5
0.3
0.6
0.1
0.6
0.0
2.7
0.4
0.4
0.2
7.1
4Q14
2.8
0.1
0.1
0.1
0.0
0.3
0.2
0.6
0.2
0.5
-0.7
2.6
0.4
0.4
0.4
6.9
1Q15
2.5
0.3
0.4
0.2
0.2
0.3
0.4
0.5
0.4
0.5
-0.5
2.6
0.7
0.5
0.6
7.0
2Q15
2.5
0.4
0.6
0.3
0.2
0.4
0.5
0.6
0.6
0.4
-0.2
3.2
0.7
0.5
0.6
6.9
3Q15
2.5
0.4
0.7
0.3
0.3
0.5
0.6
0.5
0.8
0.6
0.0
3.2
0.8
0.6
0.6
6.8
4Q15
2.5
0.5
0.7
0.4
0.4
0.6
0.6
0.5
0.6
-0.8
0.6
3.6
0.7
0.7
0.7
6.8
Consumer Prices (% yoy)
US
Core rate (ex food & energy)
Euro area
Core rate (ex food & energy)
Germany
France
Italy
Spain
Austria
UK
Switzerland
Japan
Russia
Poland
Czech Republic
Hungary
Turkey
China
4Q13
1.2
1.7
0.8
0.8
1.3
0.6
0.7
0.2
1.6
2.1
0.0
1.4
6.4
0.7
1.1
0.7
7.5
2.9
1Q14
1.4
1.6
0.7
0.8
1.2
0.7
0.5
0.0
1.6
1.7
0.0
1.5
6.4
0.6
0.2
0.0
8.0
2.3
2Q14
2.1
1.9
0.6
0.8
1.1
0.6
0.4
0.2
1.8
1.7
0.1
3.6
7.6
0.3
0.2
-0.3
9.4
2.2
3Q14
1.8
1.8
0.3
0.8
0.8
0.4
-0.1
-0.4
1.7
1.4
0.0
3.4
7.7
-0.3
0.6
0.0
9.2
2.0
4Q14
2.0
1.9
0.5
0.9
1.0
0.5
0.2
0.0
1.6
1.4
0.2
3.1
7.9
-0.3
0.8
0.6
9.3
2.9
1Q15
2.2
2.2
0.7
1.1
1.3
0.5
0.2
0.1
1.8
1.5
0.3
3.0
7.7
0.0
1.1
1.6
7.4
3.0
2Q15
2.0
2.1
0.9
1.0
1.4
0.8
0.6
0.5
1.7
1.7
0.1
1.3
6.5
0.7
1.6
2.2
6.5
2.9
3Q15
2.3
2.4
1.0
1.1
1.7
1.0
1.1
0.7
2.0
1.8
0.3
1.2
6.0
1.4
1.8
2.3
5.6
2.8
4Q15
2.5
2.5
1.2
1.2
1.9
1.1
1.2
0.9
2.1
2.0
0.2
2.5
5.4
1.5
1.9
2.9
6.7
2.9
Source: UniCredit Research
UniCredit Research
page 17
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
UniCredit FI/FX & Commodity Forecasts
INTEREST RATE & YIELD FORECAST (%)
2014/15
Euro area
Refi Rate
3M Euribor
10Y Bunds
current
end-4Q
UniCredit
Forward*
end-1Q
UniCredit
Forward*
end-2Q
UniCredit
Forward*
end-3Q
UniCredit
Forward*
0.05
0.09
0.89
0.05
0.05
1.10
0.05
0.10
0.92
0.05
0.05
1.30
0.05
0.10
0.97
0.05
0.05
1.50
0.05
0.10
1.01
0.05
0.05
1.75
0.05
0.11
1.06
US
Fed Funds Target Rate
3M USD Libor
10Y Treasuries
0.25
0.23
2.25
0.25
0.35
2.70
0.25
0.24
2.30
0.25
0.40
3.10
0.25
0.28
2.38
0.50
0.75
3.30
0.40
0.40
2.45
0.75
1.00
3.60
0.70
0.54
2.52
UK
Repo Rate
10Y Gilts
0.50
2.21
0.75
2.75
0.50
2.29
1.00
3.20
0.70
2.36
1.25
3.50
0.90
2.42
1.50
3.75
1.15
2.49
Switzerland
3M CHF Libor Target Rate
10Y Swissies
0.00
0.46
0.00
0.70
0.00
0.47
0.00
0.90
0.00
0.49
0.00
1.15
0.00
0.52
0.00
1.40
0.00
0.54
Russia
Reference Rate
3M Money Market Rate
8.00
8.08
8.00
9.30
8.30
8.00
9.30
8.20
7.75
9.00
8.00
7.50
8.75
7.65
Poland
Reference Rate
3M Money Market Rate
2.00
1.89
2.00
2.20
1.95
2.00
2.22
1.85
2.00
2.24
1.90
2.00
2.28
1.95
Czech Republic
Reference Rate
3M Money Market Rate
0.05
0.04
0.05
0.35
0.05
0.05
0.35
0.05
0.05
0.35
0.05
0.05
0.35
0.05
Hungary
Reference Rate
3M Money Market Rate
2.10
2.10
2.10
2.15
2.85
2.10
2.22
2.85
2.10
2.32
2.85
2.10
2.40
3.00
Turkey
Reference Rate
3M Money Market Rate
8.25
10.35
7.50
8.20
8.10
7.50
8.08
7.95
7.50
8.18
8.25
7.50
8.20
8.35
EXCHANGE RATE FORECASTS
2014/15
EUR-USD
EUR-GBP
EUR-CHF
EUR-JPY
EUR-RUB
EUR-PLN
EUR-CZK
EUR-HUF
EUR-TRY
USD-JPY
USD-CHF
GBP-USD
current
1.27
0.79
1.21
136
52.70
4.23
27.66
307
2.83
108
0.95
1.60
end-4Q
UniCredit
Forward
1.22
1.27
0.74
0.80
1.22
1.21
137
136
51.06
47.84
4.12
4.20
27.70
27.65
308
311
3.00
3.01
112
101
1.00
0.89
1.65
1.70
end-1Q
UniCredit
Forward
1.26
1.27
0.75
0.80
1.23
1.21
141
136
52.17
48.74
4.10
4.22
27.60
27.62
315
312
3.07
3.06
112
101
0.98
0.89
1.68
1.70
end-2Q
UniCredit
Forward
1.30
1.27
0.77
0.81
1.24
1.21
147
136
52.95
49.65
4.15
4.24
27.60
27.60
310
313
3.15
3.12
113
101
0.95
0.89
1.69
1.69
end-3Q
UniCredit
Forward
1.32
1.27
0.78
0.81
1.26
1.21
152
136
53.66
50.58
4.13
4.26
27.60
27.58
315
314
3.23
3.18
115
101
0.95
0.89
1.70
1.69
end-4Q
UniCredit
Forward
1225
1240
95
85
end-1Q
UniCredit
Forward
1250
1246
95
86
end-2Q
UniCredit
Forward
1250
1246
100
87
end-3Q
UniCredit
Forward
1275
1247
100
88
COMMODITY PRICE FORECASTS
2014/15
Gold (USD/ tr oz)
Oil Price (Brent, USD/b)
current
1235
85
*Bloomberg Consensus for central bank rates
UniCredit Research
Source: UniCredit Research
page 18
See last pages for disclaimer.
23 October 2014
Economics & FI/FX Research
Weekly Focus
Disclaimer
Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the right
to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice.
This analysis is for information purposes only and (i) does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any
financial, money market or investment instrument or any security, (ii) is neither intended as such an offer for sale or subscription of or solicitation of an offer to buy or subscribe
for any financial, money market or investment instrument or any security nor (iii) as an advertisement thereof. The investment possibilities discussed in this report may not be
suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. The investments discussed
may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Furthermore, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment instrument or security under discussion are not explained in their entirety.
This information is given without any warranty on an "as is" basis and should not be regarded as a substitute for obtaining individual advice. Investors must make their own determination of the appropriateness of an investment in any instruments referred to herein based on the merits and risks involved, their own investment strategy and their legal,
fiscal and financial position. As this document does not qualify as an investment recommendation or as a direct investment recommendation, neither this document nor any part
of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Investors are urged to contact their
bank's investment advisor for individual explanations and advice.
Neither UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank Pekao, UniCredit Russia, UniCredit
Slovakia, UniCredit Tiriac nor any of their respective directors, officers or employees nor any other person accepts any liability whatsoever (in negligence or otherwise) for any
loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith.
This analysis is being distributed by electronic and ordinary mail to professional investors, who are expected to make their own investment decisions without undue reliance on
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UniCredit Group. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
b) UniCredit Bank AG London Branch (UniCredit Bank London), Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom.
Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany and subject to limited regulation by the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom and Prudential Regulation Authority 20 Moorgate, London, EC2R 6DA, United Kingdom. Further details regarding our regulatory status are available on request.
c) UniCredit Bank AG Milan Branch (UniCredit Bank Milan), Piazza Gae Aulenti, 4 - Torre C, 20154 Milan, Italy, duly authorized by the Bank of Italy to provide investment services.
Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
d) UniCredit Bulbank, Sveta Nedelya Sq. 7, BG-1000 Sofia, Bulgaria
Regulatory authority: Financial Supervision Commission (FSC), 33 Shar Planina str.,1303 Sofia, Bulgaria
e) Zagrebačka banka d.d., Trg bana Jelačića 10, HR-10000 Zagreb, Croatia
Regulatory authority: Croatian Agency for Supervision of Financial Services, Miramarska 24B, 10000 Zagreb, Croatia
f) UniCredit Bank Czech Republic (UniCredit Bank Czechia), Na Príkope 858/20, CZ-11121 Prague, Czech Republic
Regulatory authority: CNB Czech National Bank, Na Příkopě 28, 115 03 Praha 1, Czech Republic
g) Bank Pekao, ul. Grzybowska 53/57, PL-00-950 Warsaw, Poland
Regulatory authority: Polish Financial Supervision Authority, Plac Powstańców Warszawy 1, 00-950 Warsaw, Poland
h) ZAO UniCredit Bank Russia (UniCredit Russia), Prechistenskaya emb. 9, RF-19034 Moscow, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
i) UniCredit Bank Slovakia a.s. (UniCredit Slovakia), Šancova 1/A, SK-813 33 Bratislava, Slovakia
Regulatory authority: National Bank of Slovakia, Imricha Karvaša 1, 813 25 Bratislava, Slovakia
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Regulatory authority: National Bank of Romania, 25 Lipscani Street, RO-030031, 3rd District, Bucharest, Romania
k) UniCredit Bank AG Hong Kong Branch (UniCredit Bank Hong Kong), 25/F Man Yee Building, 68 Des Voeux Road Central, Hong Kong.
Regulatory authority: Hong Kong Monetary Authority, 55th Floor, Two International Financial Centre, 8 Finance Street, Central, Hong Kong
l) UniCredit Bank AG Singapore Branch (UniCredit Bank Singapore), Prudential Tower, 30 Cecil Street, #25-01, Singapore 049712
Regulatory authority: Monetary Authority of Singapore, 10 Shenton Way MAS Building, Singapore 079117
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Regulatory authority: Financial Services Agency, The Japanese Government, 3-2-1 Kasumigaseki Chiyoda-ku Tokyo, 100-8967 Japan, The Central Common Government Offices No. 7.
POTENTIAL CONFLICTS OF INTEREST
UniCredit Bank AG acts as a Specialist or Primary Dealer in government bonds issued by the Italian, Portuguese and Greek Treasury. Main tasks of the Specialist are to participate with continuity and efficiency to the governments' securities auctions, to contribute to the efficiency of the secondary market through market making activity and quoting
requirements and to contribute to the management of public debt and to the debt issuance policy choices, also through advisory and research activities.
ANALYST DECLARATION
The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.
ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST
To prevent or remedy conflicts of interest, UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank
Pekao, UniCredit Russia, UniCredit Slovakia, and UniCredit Tiriac have established the organizational arrangements required from a legal and supervisory aspect, adherence to
which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese
Walls”) designed to restrict the flow of information between one area/department of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bulbank, Zagrebačka
banka, UniCredit Bank Czechia, Bank Pekao, UniCredit Russia, UniCredit Slovakia, UniCredit Tiriac, and another. In particular, Investment Banking units, including corporate finance,
capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. In the case of equities execution by UniCredit Bank AG Milan Branch, other than as a matter of client facilitation or delta hedging of OTC and listed derivative
positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and
managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other
than the sale of securities to clients.
ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED
Notice to Australian investors
This publication is intended for wholesale clients in Australia subject to the following:
UniCredit Bank AG and its branches do not hold an Australian Financial Services licence but are exempt from the requirement to hold an Australian financial services licence in respect
of the financial services UniCredit Bank AG and its branches provide to wholesale clients. UniCredit Bank AG and its branches are regulated by BaFin under German laws, which differ
from Australian laws. This document is only for distribution to wholesale clients as defined in Section 761G of the Corporations Act. UniCredit Bank AG and its branches are not Authorised Deposit Taking Institutions under the Banking Act 1959 and are not authorised to conduct a banking business in Australia.
UniCredit Research
page 19
23 October 2014
Economics & FI/FX Research
Weekly Focus
Notice to Austrian investors
This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in
whole or part, for any purpose.
Notice to Czech investors
This report is intended for clients of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia, Bank Pekao,
UniCredit Russia, UniCredit Slovakia, UniCredit Tiriac in the Czech Republic and may not be used or relied upon by any other person for any purpose.
Notice to Hong Kong investors
The information in this publication is intended for recipient(s) who is/are Professional Investor as defined in Section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571). The information in this publication is based on carefully selected sources believed to be reliable, however we do not make any representation as to the accuracy or completeness of the information. Any opinions herein reflect our judgement at the date hereof and are subject to change without notice. Any investments presented in this
publication may be unsuitable for the investor depending on his or her specific investment objectives and financial position. Any reports provided herein are provided for general
information purposes only and cannot substitute the obtaining of independent financial advice. Private investors should obtain the advice of their banker/broker about any investments concerned prior to making them. Nothing in this publication is intended to create contractual obligations.
Notice to Italian investors
This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on October 29, 2007.
In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website www.research.unicredit.eu.
Notice to Japanese investors
This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
Notice to Polish investors
This document is intended solely for professional clients as defined in Art. 3 39b of the Trading in Financial Instruments Act of 29 July 2005.The publisher and distributor of the
recommendation certifies that it has acted with due care and diligence in preparing the recommendation, however, assumes no liability for its completeness and accuracy.
Notice to Russian investors
As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation "On the Securities
Market" dated 22 April 1996, as amended (the "Law"), and are not being offered, sold, delivered or advertised in the Russian Federation. This analysis is intended for qualified
investors, as defined by the Law, and shall not be distributed or disseminated to a general public and to any person, who is not a qualified investor.
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The information in this publication is intended solely for Institutional and Accredited investors only, as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (“SFA”) and is not intended to be made available to the retail public. We have taken reasonable steps to select information based on sources believed to be reliable. However we do not make any representation as to its accuracy or completeness. This publication is distributed for information only and is not a prospectus as defined in the SFA. It is
not and should not be construed as an offer to sell or a solicitation of an offer to buy any security or investment product. It is also not and should not be construed as providing
advice regarding any security, investment or product. Any opinions herein reflect our judgement at the date hereof and are subject to change without notice. Such opinions do not
take into consideration the investment objectives, financial situation, risk appetite of any other characteristics and particular needs of an investor. You should consult your advisers concerning any potential transactions and consider carefully whether the security, investment or product is suitable for you before making any investment decision. Any
reports provided herein are provided for general information purposes only. Any information regarding past performances of the investment may not be indicative of future performances and cannot substitute the obtaining of independent financial advice.
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Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in
accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the
clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit
your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences
that meet your expectations.
Notice to UK investors
This communication is directed only at clients of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czechia,
Bank Pekao, UniCredit Russia, UniCredit Slovakia, or UniCredit Tiriac who (i) have professional experience in matters relating to investments or (ii) are persons falling within
Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion)
Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted
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be engaged in only with relevant persons.
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This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this
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Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UniCredit Capital Markets.
The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S.
reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and
reporting standards as U.S. issuers.
The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose.
Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as
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in securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to
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The information in this publication is based on carefully selected sources believed to be reliable, but UniCredit Capital Markets does not make any representation with respect to
its completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive
such information, and are subject to change without notice.
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future performance, and no representation or warranty, express or implied, is provided in relation to future performance.
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cautionary statement
This document may not be distributed in Canada.
EFI e 4
UniCredit Research
page 20
23 October 2014
Economics & FI/FX Research
Weekly Focus
UniCredit Research*
Michael Baptista
Global Head of CIB Research
+44 207 826-1328
[email protected]
Dr. Ingo Heimig
Head of Research Operations
+49 89 378-13952
[email protected]
Economics & FI/FX Research
Erik F. Nielsen, Global Chief Economist
+44 207 826 1765
[email protected]
Economics & Commodity Research
EEMEA Economics & FI/FX Strategy
Global FI Strategy
European Economics
Artem Arkhipov, Head, Macroeconomic Analysis
and Research, Russia
+7 495 258-7258
[email protected]
Michael Rottmann, Head, FI Strategy
+49 89 378-15121
[email protected]
Marco Valli, Chief Eurozone Economist
+39 02 8862-0537
[email protected]
Dr. Andreas Rees, Chief German Economist
+49 69 2717-2074
[email protected]
Stefan Bruckbauer, Chief Austrian Economist
+43 50505-41951
[email protected]
Tullia Bucco, Economist
+39 02 8862-0532
[email protected]
Edoardo Campanella, Economist
+39 02 8862-0522
[email protected]
Chiara Corsa, Economist
+39 02 8862-0533
[email protected]
Dr. Loredana Federico, Economist
+39 02 8862-0534
[email protected]
Chiara Silvestre, Economist
[email protected]
Daniel Vernazza, Ph.D., Economist
+44 207 826-7805
[email protected]
Dr. Martina von Terzi, Economist
+49 89 378-13013
[email protected]
US Economics
Dr. Harm Bandholz, CFA, Chief US Economist
+1 212 672-5957
[email protected]
Commodity Research
Jochen Hitzfeld, Economist
+49 89 378-18709
[email protected]
Anca Maria Aron, Economist, Romania
+40 21 200-1377
[email protected]
Anna Bogdyukevich, CFA, Russia
+7 495 258-7258 ext. 11-7562
[email protected]
Dan Bucşa, Economist
+44 207 826-7954
[email protected]
Hrvoje Dolenec, Chief Economist, Croatia
+385 1 6006 678
[email protected]
Ľubomír Koršňák, Chief Economist, Slovakia
+421 2 4950 2427
[email protected]
Catalina Molnar, Chief Economist, Romania
+40 21 200-1376
[email protected]
Marcin Mrowiec, Chief Economist, Poland
+48 22 524-5914
[email protected]
Carlos Ortiz, Economist, EEMEA
+44 207 826-1228
[email protected]
Mihai Patrulescu, Senior Economist, Romania
+40 21 200-1378
[email protected]
Kristofor Pavlov, Chief Economist, Bulgaria
+359 2 9269-390
[email protected]
Dr. Luca Cazzulani, Deputy Head, FI Strategy
+39 02 8862-0640
[email protected]
Chiara Cremonesi, FI Strategy
+44 207 826-1771
[email protected]
Elia Lattuga, FI Strategy
+39 02 8862-0538
[email protected]
Kornelius Purps, FI Strategy
+49 89 378-12753
[email protected]
Herbert Stocker, Technical Analysis
+49 89 378-14305
[email protected]
Global FX Strategy
Dr. Vasileios Gkionakis, Global Head, FX Strategy
+44 207 826-7951
[email protected]
Kathrin Goretzki, FX Strategy
+44 207 826-6076
[email protected]
Armin Mekelburg, FX Strategy
+49 89 378-14307
[email protected]
Roberto Mialich, FX Strategy
+39 02 8862-0658
[email protected]
Martin Rea, EM Fixed Income Strategist
+44 207 829-6077
[email protected]
Pavel Sobisek, Chief Economist, Czech Republic
+420 955 960-716
[email protected]
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*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan),
UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic (UniCredit Bank Czechia), Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Slovakia a.s. (UniCredit Slovakia),
UniCredit Tiriac Bank (UniCredit Tiriac).
EFI 11
UniCredit Research
page 21