1. society
2. work
3. unemployment

6 November 2014
Economics Research
The UniCredit
Weekly Focus
Economics, FI/FX & Commodities Research
Credit Research
Equity Research
Cross Asset Research
“
ECB: Ready to do more
No. 127
6 November 2014
”
– Focus: The BoE is increasingly using tentative signs of a growth slowdown as a reason to leave the Bank Rate at
its all-time low for longer. Our short-term forecasting model of GDP suggests that these concerns are overblown.
We continue to expect growth of 0.6% qoq in 4Q14, slightly higher than potential.
– Preview: The main event of the next week will be the release of GDP growth for 3Q14 for the euro area and the three
biggest member states. Euro area growth is likely to have been subdued in 3Q14 on the back of only a slight increase
in Germany and stagnation in Italy. The BoE will publish its quarterly Inflation Report. It will contain an updated set of
staff economic forecasts along with the MPC’s current thinking. The tone is likely to be “dovish” by emphasizing signs
of a growth slowdown, external headwinds and a lack of inflationary pressure from wages and prices.
– Review: The ECB seems to be preparing for further easing, although the timing of action appears to be highly
uncertain and data-dependent. If new easing comes, it will most likely involve purchases of non-financial corporate
bonds, while govie purchases remain off the ECB radar screen. During the press conference, the ECB also
provided some welcomed clarification of balance sheet rhetoric, and indications of unity of the GC. German
Finance Minister Schäuble announced a public investment package worth EUR 10bn (or 0.3% of German GDP).
German new orders in the manufacturing sector increased only slightly in September, but we do not think that
there is any reason to be overly disappointed. The increase in government investment will become effective from
2016 to 2018. Manufacturing PMIs brought mixed messages in October – in Italy, they came in weaker than
expected in October, while the UK release surprised to the upside. In the US, the manufacturing PMI index
matched the 3½ year high. The US trade deficit widened much more than expected.
Editor: Dr. Martina von Terzi, Economist (UniCredit Bank)
6 November 2014
Economics & FI/FX Research
Weekly Focus
The Focus of the Week
BoE fears of a slowdown are overblown
■
The BoE is increasingly using tentative signs of a growth slowdown as a reason to leave
the Bank Rate at its all-time low for longer.
■
Our short-term forecasting model of GDP suggests these concerns are overblown. We
continue to expect growth of 0.6% qoq in 4Q, slightly higher than potential.
Signs of a slowdown
The BoE has spent the last year moving the goalposts for increasing interest rates. In August
2013, it conditioned policy on the unemployment rate, in February it said it will set the Bank
Rate to eliminate spare capacity more broadly, in August it emphasized the weakness in
wages, and now most MPC members appear concerned about the growth outlook. Fears of a
slowdown are likely to figure prominently in the BoE’s November Inflation Report next week,
when we expect it to lower its growth forecasts.
Signs of a slowdown in the UK economy are most discernible in business surveys and the
housing market. In 3Q, the weakness in business surveys was confined to the small and more
tradable manufacturing sector, which is being hit by external headwinds. But a significant fall
in the services PMI in October is an early sign that the initial fillip from pent-up domestic
demand may also be waning (Chart 1). The housing market has been slowing down since the
start of the year, with price growth easing (Chart 2) and mortgage approvals falling. And there
are early signs that the rate at which spare capacity is closing will start to ease, with jobless
claims in September posting the smallest monthly fall in 17 months.
This has, in part, led the majority on the MPC to argue that it is better to wait before raising
interest rates. The minutes of the MPC’s October meeting said, “There were signs of a slight
loss in momentum from a number of indicators, including the housing market and surveys of
business expectations”. It added that, “Pessimism about the global economic outlook had
increased over the month”. Against this background, most members agreed that, “There were
some signs that the pace of growth was beginning to ease …the housing market appeared to
be cooling …[and] further downside news in the euro area had increased the risks to the
durability of the UK expansion in the medium term”. 1 Deputy Governor Jon Cunliffe recently
said, “The softening in the pay and inflation data, together with the weaker external environment
[emphasis added], for me implies that we can afford to maintain the current degree of monetary
stimulus for a longer period than previously thought.”
Is the UK economy on the cusp of a growth slowdown? In this week’s focus, we’ll delve into
our short-run GDP forecasting model to tell you the answer.
1
Not all MPC members agree. Ian McCafferty and Martin Weale – who have both voted for a 25bp hike since August – said, “While growth in the euro-area economy had been disappointing, so far, in contrast to 2011, the United Kingdom had not been affected by damaging financial contagion. The continued fall in the unemployment rate was consistent with the rapid absorption of slack and, even if the rate at which unemployment was falling were to ease markedly, it would nonetheless
reach its estimated medium-term equilibrium level by the middle of 2015”.
UniCredit Research
page 2
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6 November 2014
Economics & FI/FX Research
Weekly Focus
CHART 1: A MANUFACTURING SLOWDOWN
70.0
CHART 2: HOUSING ACTIVITY EASES
PMI indices
100
Manufacturing output
Construction
Percent balance
RICS house price
Services
New buyer enquiries minus new instructions
65.0
50
60.0
0
55.0
50.0
-50
45.0
40.0
Jan-11
Jan-12
Jan-13
-100
Jan-07
Jan-14
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Markit; RICS; UniCredit Research
Only a modest growth slowdown is on the cards
Each month a plethora of hard and survey indicators are released for the UK. These typically
contain some information about economic activity in the current and next quarter. But which
ones should you take notice of, and what weights should you attach to them? For example,
manufacturing output makes up just ten percent of the economy and yet it appears to get a lot
of attention perhaps because – rightly or wrongly – it is seen as a bellwether for turning points
in the wider economy. But is this true?
Table 1 displays some of the monthly indicators that Bloomberg lists in its UK economic calendar – in the order in which they are released during a typical month. All of these variables
have a long enough history to make them useable in an empirical study and are typically
associated with economic activity in some form. Incidentally, they are also indicators that
Bloomberg asks us for forecasts of each month and, therefore, presumably is what market
participants focus on.
The final two columns of Table 1 report how much of the variation in GDP growth can be
explained by each variable in the current quarter and next quarter (that is, one quarter ahead),
respectively. 2 Lags of the indicators are included to account for possible leading information
for GDP growth. Casual glance reveals that, to varying degrees, all indicators have some
explanatory power. In most cases, this explanatory power falls as the prediction horizon
lengthens from the current quarter to the next quarter.
Our short-term forecasting model for GDP growth chooses an optimal combination of the
variables in Table 1 (see Box 1). Right now, we have data for October (i.e. one-month of
within-quarter information for 4Q). Using this, our model predicts growth of 0.6% qoq in 4Q
and 0.5% qoq in 1Q15, slightly weaker than the 0.7% qoq growth in 3Q14 and in line with our
current forecasts.
2
More specifically, the explanatory power of an indicator for current quarter GDP growth is the r-squared adjusted from the following OLS regression:
RGDPGt = β ( L) xt + ε t , where RGDPGt
mial, and
is quarterly real GDP growth in quarter t,
xt
is a particular indicator variable,
β (L)
is a lag polyno-
ε
t is a disturbance term. Monthly indicator variables are aggregated to a quarterly frequency by averaging and, with the exception of the diffusion indices
and the unemployment rate, are expressed as quarterly growth rates. All series are seasonally adjusted by the source with the exception of GfK consumer confidence which we seasonally adjusted ourselves. The length of the lag polynomial is chosen to minimize the Schwarz information criterion. The explanatory power of
.
an indicator for next quarter GDP growth uses only lagged values of
x
UniCredit Research
page 3
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6 November 2014
Economics & FI/FX Research
Weekly Focus
TABLE 1: MONTHLY INDICATOR VARIABLES
Variable/ Series
Explanatory power
for next quarter GDP
growtha
Source
Start date
Manufacturing output PMI
Markit
1M1992
1 month
0.36
0.35
Construction PMI
Markit
4M1997
1 month
0.59
0.58
Services PMI
Markit
7M1996
1 month
0.45
0.44
Industrial production
ONS
1M1968
2 months
0.53
0.53
Manufacturing output
ONS
1M1968
2 months
0.46
0.46
Halifax
1M1983
1 month
0.45
0.45
RICS house price balance
RICS
1M1978
1 month
0.35
0.37
Exports, goods volume
ONS
1M1980
2 months
0.07
0.08
Imports, goods volume
ONS
1M1998
2 months
0.19
0.20
Jobless claims
ONS
1M1971
1 month
0.50
0.50
ILO unemployment rate
ONS
3M1971
2 months
0.29
0.28
Employment change
ONS
3M1971
2 months
0.19
0.18
Retail sales
ONS
1M1997
1 month
0.14
0.14
CBI
4M1977
No lag
0.19
0.24
ONS
1M1997
2 months
0.85
0.85
Reported sales
CBI
07M1983
No lag
0.23
0.24
Mortgage approvals
BoE
04M1993
1 month
0.32
0.28
Nationwide
1M1991
No lag
0.46
0.46
GfK
1M1974
No lag
0.54
0.54
Halifax house price index
Trends total orders
Index of services
Nationwide house price index
Consumer confidence
Release lag
Explanatory power
for current quarter
GDP growtha
a
Notes: See footnote 2 for the details. The sample is restricted to 1Q 1998-3Q 2014 in order to facilitate a comparison of explanatory power across indicators using
the same sample.
Source: UniCredit Research
BOX 1: Our short-term GDP forecasting model
An important question is what set of indicators should one use for forecasting GDP growth?
Statistically, explanatory power for the estimation period is non-decreasing in the number of
included variables, but this may result in overfitting of the estimation period to the detriment
of real-time forecasting accuracy. So there is an optimal set. And it is not necessarily those
with the highest explanatory power individually, as some of the indicators may convey similar information while others can add useful information in combination with others even if individually they do not appear to explain much.
Our short-term GDP forecasting model chooses both the combination and lagged structure
of the variables in an optimal way. 3 Also, our model uses the monthly indicators as soon as
they become available and estimates the remaining missing months of the quarter using
time-series econometric techniques.
It turns out that the model performs rather well. We replicate a real-time forecast as close as
possible by estimating the model recursively (that is, using data only up to period t to compute
a GDP growth forecast for date t+1). Table 2 displays the root mean squared forecast error of
the model for different information sets. Consider the model with one month of within quarter
data; its Root Mean Squared Forecast Error (RMSFE) of 0.25 roughly implies that with a confidence level of 67% you can expect the forecast to lie within +/- 0.25pp of the actual value.
You can see the forecast error gets smaller as more information within the month becomes
available. It also does a good job of picking up the turning points in GDP, as measured by the
correlation coefficients. The model with one-month of within-quarter information has a 64%
chance of picking up the turning points in GDP growth (based on Pearson’s correlation).
3
More specifically, it chooses the combination of the variables in Table 1 and the lag structure to minimize the Schwarz criterion. It continually updates the selection
with each new data point to ensure we are using the optimal set in real-time. The methodology is similar to that of Sédillot, F. and N. Pain (2003), “Indicator Models
of Real GDP Growth in Selected OECD Countries”, OECD Economics Department Working Papers, No. 364.
UniCredit Research
page 4
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6 November 2014
Economics & FI/FX Research
Weekly Focus
TABLE 2: FORECAST PERFORMANCE, 1Q 2010-3Q 2014
Model information set
RMSFE
Pearson’s correlation
Spearman’s rank correlation
Current
quarter
Next
quarter
Current quarter
Next
quarter
Current
quarter
Next quarter
Zero months of within-quarter data
0.30
0.35
60%
54%
65%
57%
One month of within quarter data
0.25
0.32
64%
59%
70%
60%
Two months of within quarter data
0.24
0.31
76%
59%
74%
65%
Three months of within-quarter
data
0.16
0.30
92%
60%
86%
65%
Source: UniCredit Research
Concluding remarks
The signs of a UK slowdown are, as yet, only tentative. If a modest slowdown is in store – as
we predict – then it was largely expected. The BoE itself expected the initial fillip from pent-up
demand to wane in the second half of the year and, if anything, it has been delayed until 4Q.
It is also natural that, as the unemployment rate is fast approaching its equilibrium rate, the
pace at which it can be expected to fall will ease. As for the external headwinds facing the
economy, yes these have undoubtedly increased in the last three months but the BoE didn’t
expect the global economy to give the UK much help when it upgraded its growth forecasts
again as recently as August. As for the slowdown in housing, this was largely engineered by
the BoE and presumably should therefore be welcomed by it.
It remains to be seen whether the UK can continue to decouple from the eurozone at a time
when it is the core of the euro area that is the new drag on growth. There are reasons to be
hopeful. The UK recovery was achieved despite only modest growth in the euro area, the
expansion has broadened towards business investment, increasing the chance that it will
prove more durable, and a re-escalation of the sovereign debt troubles in the euro area
seems remote. Our forecasting model agrees, at least in the near term.
You may be surprised to hear that, despite all the talk from a majority of MPC members about
signs of a slowdown (and they really have hammered this in recent weeks to argue it’s better
to wait), their own GDP forecasts for 4Q and beyond are even higher than ours. Indeed, the
October minutes said, “The slight loss of momentum in the monthly indicators in September
and a fall in some of the survey expectations balances were consistent with Bank staff’s expectation that GDP growth in the final vintage of data for Q4 would slow to 0.8%” (note the
BoE expects 3Q GDP to be revised up in the final vintage to 0.9% qoq from 0.7% qoq). Really? Slow to 0.8%? In our eyes, this barely constitutes a slowdown (and potential growth is at
best around 0.5% qoq).
As a result, there is now an even bigger disconnect between the communication of most MPC
members and their own forecasts. This reflects their desire to wait. In turn, that means there is
a high probability of them waiting a bit longer than they should, falling behind the curve and
then having to hike faster than priced in once they get going.
Daniel Vernazza, Ph.D., Economist
(UniCredit Bank London)
+44 20 7826 7805
[email protected]
UniCredit Research
page 5
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6 November 2014
Economics & FI/FX Research
Weekly Focus
The Week Ahead
GDP 3Q14 – Euro area, Germany, France and Italy
Summary
The main event of the next week will be a release of GDP growth for 3Q14 for the euro
area and the three biggest member states. Euro area growth is likely to have been subdued in 3Q14 on the back of only a slight increase in Germany and stagnation in Italy.
Although France is likely to be the best performer among the three largest eurozone
economies in 3Q14, in the medium term we see France systematically underperforming
the eurozone as a whole, mostly reflecting the lack of competitive adjustment and weak
corporate profitability.
Euro area
Euro area growth is likely to have been subdued in 3Q14, probably slightly weaker than the
0.3% qoq we had expected so far. Our GDP tracker indicates quarterly GDP growth of 0.2%
qoq, with risks tilted to the downside. We revise down our forecast accordingly. Industrial
activity is set for a mild contraction on the quarter, dragged down by the large drop recorded
in August (-1.8% mom). The rebound we expect in September (+0.6% mom) will not be
enough to offset previous weakness. The consumption leg of our Tracker shows ongoing
modest growth, consistent with a continuation of the slow recovery in household spending.
Construction activity is likely to have resumed growing, albeit only moderately, after the large
technical setback in 2Q. The contribution of net exports was probably broadly neutral. Looking
ahead, soft indicators show ongoing weakness in economic activity in 4Q14, but not real
danger of recession.
Germany
The so far available hard data signal that the increase in economic activity in 3Q14 will be far
less pronounced than we anticipated. Our GDP tracker currently signals a plus of 0.1% qoq
(instead of the envisaged +0.4%) after minus 0.2% in the previous quarter. We revise down
our 3Q14 qoq projection accordingly. Industrial production in July and August was down 0.8%
compared to the second quarter. Even if one assumes a strong increase of 2% mom in overall
production in September, industrial activity in 3Q14 as a whole still shrinks. On the expenditure
side, the picture was mixed. Retail sales in September came in surprisingly weak by posting
the strongest decline in more than seven years despite sound fundamentals. Furthermore, the
figure in the previous month was revised downwards markedly. As a result, private consumer
expenditures might not contribute to overall growth in the third quarter. In contrast, net exports
should support growth.
France
France is going to be the best performer among the three largest eurozone economies. Our
forecast for 0.2% qoq growth remains well on track, underpinned by a return of industrial and
construction activity into positive territory, and another decent performance of private
consumption. However, a renewed growth slowdown at the end of the year appears quite
likely. In our medium-term projections, France systematically underperforms the eurozone as
a whole, mostly reflecting the lack of competitive adjustment and weak corporate profitability,
both of which weigh on the outlook for investment and employment.
Italy
The Italian economy will probably continue to stagnate in 3Q14. Hard and soft data available
so far show that our forecast of a marginal expansion in the third quarter (+0.1% qoq) is
probably slightly optimistic and we are revising our GDP projection down to -0.1% qoq vs.
-0.2% qoq in the previous quarter. Industrial production is set for a further contraction in
3Q14, as we are assuming a decline in September (-0.2% mom). The services PMI, another
input of our GDP tracker, has weakened throughout the quarter. Car registration is the only
input of our model showing some signs of recovery. The renewed decline in the manufacturing
PMI in October points to further weakness in industrial activity in the final part of the year.
UniCredit Research
page 6
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6 November 2014
Economics & FI/FX Research
Weekly Focus
BoE Inflation Report likely to be “dovish”
Summary
Next Wednesday, 12 November, the BoE publishes its quarterly Inflation Report. It will
contain an updated set of staff economic forecasts along with the MPC’s current thinking.
The tone is likely to be “dovish” by emphasizing signs of a growth slowdown, external
headwinds and a lack of inflationary pressure from wages and prices.
We expect the largest forecast revisions to be to near-term inflation following the surprise fall in
inflation to 1.2% (0.5pp below the BoE’s projection in its August Inflation Report). The October
minutes said that for most members, “There remained insufficient evidence of prospective
inflationary pressure to justify an immediate increase in Bank Rate”. They added that, “CPI inflation
had fallen relative to an already weak outlook” and, “There remained few signs of inflationary
pressure in the UK economy, even after looking through the effects of a stronger sterling
exchange rate”.
The BoE will likely revise down slightly its near-term and medium-term growth forecasts and
emphasize strongly that the risks are now further skewed to the downside. In the minutes of the
MPC’s October meeting it noted, “The slight loss of momentum in the monthly indicators in
September and a fall in some of the survey expectations balances were consistent with Bank
staff’s expectation that GDP growth in the final vintage of data for Q4 would slow to 0.8%.” But
since then the easing in the services PMI for October may lead them to think that the initial fillip
from pent-up demand is starting to ease a bit more quickly. In October, most members agreed,
“Further downside news in the euro area had increased the risks to the durability of the UK
expansion in the medium term.”
Other Major Events & Data Releases
France
CPI Inflation likely bottomed out
4.0
3.5
% yoy
forecast
Thu, 13 November, 8:45 CET
CPI (% yoy)
3.0
2.5
2.0
0.5
0.0
-0.5
-1.0
2000
2003
2006
2009
2012
2015
UniCredit Consensus
0.4
Last
0.3
■
We expect CPI Inflation to re-accelerate by 0.1pp in October
to 0.4% yoy.
■
Inflation has probably bottomed out. However, the upward
trend will remain very slow going forward. The recent
large drop in oil prices suggests that inflation may hover
just above the September low for some time.
1.5
1.0
Oct
Source: Bloomberg, UniCredit Research
UniCredit Research
page 7
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6 November 2014
Economics & FI/FX Research
Weekly Focus
UK
Unemployment rate to fall to 5.9%
Unemployment change (3M/3M)
Jobless claims change - rhs
300
150
200
100
0
Wed, 12 November, 10:30 CET
6.0
100
Jobless claims change
(thousand)
Oct
-18.0
-18.6
50
Average weekly earnings
ex. bonus (3M % yoy)
Sep
1.1
0.9
-50
-200
-100
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Last
5.9
-100
Jan-08
Consensus
Sep
0
-300
Jan-07
UniCredit
Unemployment rate (%)
■
-150
Our model suggests that the unemployment rate will fall to
5.9% in the three months to September. The smallest
monthly fall in jobless claims for 17 months in September
will likely be repeated as the pace of decline eases. Regular
pay growth should pick up to 1.1%.
Source: ONS, UniCredit Research
US
US retail sales likely rose only moderately
3.0
Retail sales (Total, % mom)
Fri, 14 November, 14:30 CET
Core Retail sales (% mom)
2.0
Retail sales (Total, % mom)
1.0
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Last
0.3
-0.3
■
The rise in the headline number was held back by a sharp
decline in energy prices, which weighed on the nominal
sale of gasoline stations.
■
Car sales were flat in October, while same store sales
rose slightly.
-3.0
Jan-08
Consensus
0.1
US retail sales likely rose only a moderate 0.1% in October
after declining 0.3% in September.
-2.0
-4.0
Jan-07
UniCredit
■
0.0
-1.0
Oct
Source: Reuters Datastream, UniCredit Research
Dr. Martina von Terzi, Economist (UniCredit Bank)
Dr. Andreas Rees, Chief German Economist (UniCredit Bank)
Marco Valli, Chief Eurozone Economist (UniCredit Bank Milan)
Dr. Harm Bandholz, CFA, Chief US Economist (UniCredit Bank New York)
Chiara Corsa, Economist (UniCredit Bank Milan)
Dr. Loredana Federico, Economist (UniCredit Bank Milan)
Daniel Vernazza, Ph.D., Economist (UniCredit Bank London)
UniCredit Research
page 8
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6 November 2014
Economics & FI/FX Research
Weekly Focus
The Week in Retrospect
ECB: Ready to do more
Summary
The ECB seems to be preparing for further easing, although the timing of action
appears to be highly uncertain and data-dependent. If new easing comes, it will most
likely involve purchases of non-financial corporate bonds, while govie purchases
remain off the ECB radar screen. During the press conference, the ECB also provided
some welcomed clarification of balance sheet rhetoric, and indications of unity of the GC.
Highlights
■
The overall tone of the press conference was dovish. The ECB sees increased downside
risks to its baseline scenario for GDP and CPI, and hinted at upcoming downward revisions
to its forecasts at the December meeting. Moreover, the GC has tasked ECB and Eurosystem
staff with “ensuring the timely preparation of further measures to be implemented, if needed”.
Therefore, the ECB seems to be getting ready for further easing, although the timing of
action remains highly uncertain. The December meeting, with the publication of the new
forecasts, is one possibility, because in the recent past the ECB has often made policy
announcements coincide with downward revisions to its forecasts. Nevertheless, one
should consider that: 1. The ECB staff’s forecasts published in September appeared rather
optimistic from day one, and the monetary easing delivered on that occasion already
reflected the GC’s perception of downside risks to the staff’s estimates; 2. Several members of the GC would probably prefer to wait until after the allotment of the second TLTRO
before announcing new stimulus measures. Interestingly, Draghi revealed that there was
no discussion of further measures, because the focus was on assessing the impact of the
CBPP3 and the upcoming ABSPP. Overall, while new stimulus appears more likely than
not, the timing of its announcement is going to be very data dependent. Most probably,
new purchases would involve non-financial corporate bonds, while sovereign QE seems to
remain off the ECB radar screen.
■
Balance sheet expansion was a hot topic. There are two novelties on this front. First of all,
expectations that the ECB balance sheet will move “towards the dimensions it had at the
beginning of 2012” appear in the introductory statement for the first time. This is a nonnegligible detail, given that the introductory statement is signed off by all GC members,
while press leaks in the last few days had reported a clash within the GC on such an
explicit balance sheet “target”. Secondly, and more importantly, for the first time Draghi
used the Q&A to clarify that moving towards the “dimensions of the beginning of 2012”
implies increasing the balance sheet by approximately EUR 1tn, i.e. at the higher end of
the potential EUR 700bn-1000bn range. We recall that the ECB balance sheet is approximately
EUR 2tn, while its size was EUR 2.7tn in January 2012 and EUR 3tn in March 2012. This
frank statement is remarkable because last month Draghi refused to specify which part of
the EUR 700bn-1000bn range the ECB had in mind. Overall, we saw a welcomed attempt
by the ECB to clarify somewhat confusing balance sheet rhetoric so far, and dispel speculation
of rising discontent within the CG. If Draghi wanted to send a message of unity, his mission
was accomplished. Still, we remain convinced that it will be very difficult for the ECB to
push its balance sheet towards EUR 3tn in the next couple of years without resorting to
govie purchases, which we do not expect.
Germany to invest EUR 10bn
On Thursday afternoon, German Finance Minister Schäuble announced a public investment
package worth EUR 10bn (or 0.3% of German GDP). The increase in government investment
will become effective from 2016 to 2018.
There is good news as well as bad news behind this announcement. The good news is that,
finally, German policymakers acknowledged the need to expand government investment. The
bad news is that the envisaged amount is below what is actually needed.
UniCredit Research
page 9
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6 November 2014
Economics & FI/FX Research
Weekly Focus
Here are some numbers to chew on. Net public investment in Germany has been shrinking on
average since 2002 – an unprecedented pattern in the eurozone. As a result, substantial pentup demand has been building up in the meantime. In order to only bring the net public capital
stock back to the 2002 level, Germany would have to invest about EUR 15bn (or 0.5% of GDP).
Of course, simply maintaining the level is a conservative assumption. For example, Germany’s
infrastructure ranking in the World Economic Forum survey has deteriorated substantially in
the last few years. While being ranked fourth in the 2008-2009 survey (“quality of roads”),
Germany was at rank 11 in the 2013-2014 edition. Given substantially higher public investment
activity in other countries such as France in the last few years, just bringing back the public
capital stock to its old level is probably not enough.
If one recognizes the need of a moderate rise in net public investment, pent-up demand in
Germany is far higher. For example, assuming a steady increase of only 0.2% of GDP per
year since 2002 leads to 2.5% of GDP (or EUR 70bn in current prices). If one assumes a plus
of 0.4% per year which equals the historical average in the 1990s, pent-up demand nearly
doubles to EUR 125bn!
German new orders: Non-disappointing mini-rebound
Summary
German new orders in the manufacturing sector only increased 0.8% mom in September after plunging in the previous month. However, we do not think that there is any
reason to be overly disappointed. The significant upward revision of the August figure
(from minus 5.7% to minus 4.2%) and a renewed negative working-day effect in
September dampened the rebound. The (final) reversal of the summer-holiday effect is
good news for the October reading. Looking through all this monthly volatility, we
think that there is basically one fundamental message. While the German economy has
embarked on a cyclical slowdown in the second half of this year, a massive (and
sustained) contraction is unlikely. In 3Q14 as a whole, new orders basically stagnated
(+0.1% qoq).
German new orders in the manufacturing sector rose 0.8% mom in September. The figure in
the previous month was revised upwards from minus 5.7% mom to minus 4.2%. On a less
volatile quarterly average basis, new orders were up slightly by 0.1% in 3Q14 compared to
the second quarter. The mini-rebound in September was driven by foreign demand (+3.7%)
and here especially from non-eurozone countries (+4.4%; EMU: +2.5%). In contrast, domestic
demand was down again for the second consecutive month (-2.8%). Looking at major sectors,
the picture was mixed. While there were rises in the chemical, machinery and auto industry,
demand in the metal and electrical sector declined. The ministry of economics said that bigticket items were above average.
It is true that the latest increase only resembles a mini-rebound after the plunge in the previous
month. Furthermore, it was significantly below the consensus. However, and in line with our
more subdued forecast, we do not think that there is any reason to be overly disappointed.
Instead, the increase is “reasonable” for two reasons.
First of all, new orders in August were revised upwards significantly by 1.5pp, thereby
automatically eating into the September statistics. Put differently, without the upward revision,
new orders would have increased 2.3% mom (and yes, pretty much above our forecast and in
line with consensus).
Furthermore, there was still a negative working-day effect which dampened the September
increase. One can only properly understand this effect when looking at both the August and
September numbers. In August, the number of “effective” working days was already unusually
low due to the late summer holidays in some federal states. As a result, industrial activity was
artificially depressed, especially in the auto sector where some plants were temporarily shut
down. By the way, the new orders data in the car sector flag a decline of 6.3% mom in
August.
UniCredit Research
page 10
See last pages for disclaimer.
6 November 2014
Economics & FI/FX Research
Weekly Focus
Four weeks ago, the very same number was minus 10.9%, i.e. 1.2pp of the upward revision
for September came from the auto sector alone. In any case, it is important to keep in mind
one major thing. Standard procedures for adjusting swings in working days (in whatever
sector) cannot fully take into account extraordinary circumstances such as shifts in the timing
of vacation. Since the summer holidays partly continued in September, the number of working
days was still lower than usual (but not as low as in August). In other words, the latest
mini-rebound would have been much more pronounced when assuming “normal”
circumstances. This pattern is good news for the October reading, as a positive working-day
effect will support industrial activity.
Looking through all this monthly volatility, we think that there is basically one fundamental
message. While the German economy has embarked on a cyclical slowdown in the second
half of this year, a massive (and sustained) contraction is unlikely. In 3Q14 as a whole, new
orders basically stagnated (+0.1% qoq).
Italy: Manufacturing PMI flags ongoing weakness
Summary
Italy’s manufacturing PMI came in weaker than expected in October, falling to 49, the
lowest level since May 2013. Its decline below the 50-threshold nullifies the rebound
recorded in the previous month. Taken at face value, the weak October PMI is
consistent with an ongoing contraction in industrial activity at the beginning of 4Q14.
Overall, looking beyond the monthly volatility of business surveys, this week’s PMI
confirms our expectations of further weakness in economic activity in the final part of
the year.
More details
The breakdown shows that weakness involves all components, but it was particularly
pronounced in the new export orders sub-index. The (overall) new orders index declined by
3pt, hinting that domestic orders performed slightly better than foreign orders. Coupled with
the increase in the stocks of finished goods, the decline in new orders brought the new
orders-to-inventories index down to 0.91 from 0.99, pointing to further weakness down the
road. The output component was down to 49.4 from the previous 51.4, while employment
declined to 49.5 from 51.0.
The weak October PMI, consistent with an ongoing contraction in industrial activity, is not
surprising given the strong headwinds impeding the recovery. Before the positive surprise of
the September PMI, we were indeed expecting weakness in business surveys to persist in the
final quarter of the year, amid ongoing geopolitical tensions and persistent weakness in global
trade – and the very weak performance of the new export orders sub-index is a confirmation
that external factors are weighing on the performance of the economy at this stage. Overall,
looking beyond the monthly volatility of business surveys, this week’s PMI confirms our
expectations of further weakness in economic activity in the final months of the year.
UK: Manufacturing PMI bounces back
Summary
The UK manufacturing PMI surprised to the upside by rising to 53.2 in October from
51.5 in the previous month. The bad news is that the manufacturing sector continues to
face considerable external headwinds, as demonstrated by a further fall in export
orders. The good news is that domestic orders recovered strongly.
Interpretation
The rise in the headline PMI in October ended a run of three consecutive months of declines. The
index is now 3.4pts below its recent peak in June and 1.7pts above its historical average of 51.5.
The headline manufacturing PMI is a weighted average of sub-indices in new orders (up 4.4pts to
54.6), output (up 2.3pts to 54.0), employment (down 1.1pts to 51.8), stocks of purchases and
suppliers’ delivery times. The most interesting development was in new orders – a good indicator
of near-term momentum. In 3Q, both export and domestic orders had fallen sharply. But the October manufacturing PMI report shows a divergence: total orders jumped to 54.6 despite a fall in
export orders. The input price index rose to 48.1, while the export price index fell 0.8pts to 50.7.
UniCredit Research
page 11
See last pages for disclaimer.
6 November 2014
Economics & FI/FX Research
Weekly Focus
UK: Services sector shows signs of cooling
Summary
While the manufacturing PMI surprised to the upside, the UK services PMI eased
significantly. It is now at a 17-month low and not far above its historical average of
55.1. It’s early but this is the first sign of a modest slowdown in the dominant services
sector towards its long-run growth rate – until now signs of a slowdown were limited to
the smaller and more tradable manufacturing sector, which is being hit by external
headwinds. We continue to expect growth of 0.6% qoq in 4Q14, slightly weaker than
the 0.7% posted in 3Q14.
Signs of a modest slowdown to 56.2 in October from 58.7 in the prior month are also evident
in the detail of the services PMI report. New orders, future business expectations and
backlogs of work all eased. The only bright spot was an increase of the employment index,
while both input and output price indices dropped, the latter sharply to 49.8.
Easing in the services PMI report points to a broader and more traditional modest slowdown
as the initial fillip from pent-up demand wanes. This is the way that we and the BoE expected
a slowdown to occur at the turn of the year, rather than from the more unpredictable external
headwinds facing the economy.
US: Manufacturing ISM jumps as domestic strength outweighs external headwinds
Summary
This week’s ISM report was yet another sign that the US economy continues to power
ahead. Manufacturing PMI index rose to 59.0 in October, matching a 3½-year high
reached in August. The increase in the headline index was largely driven by a rebound
in new orders, which rose back to 65.8 from 60.0. The production index improved to
64.8, the highest level since May 2004. The indexes for employment and inventories
were up as well. New export orders, which do not enter the headline index, on the other
hand, declined to 51.5, the lowest reading since May 2013. Finally, the index for prices
paid dropped to 53.5, the lowest level since late 2013.
Interpretation
Even if we do not think that the historical correlation between the ISM and real GDP growth
holds anymore (according to the ISM’s own calculation, the October level of 59.0 “corresponds
to a 5.2% increase in real GDP”), there can be no doubt that this was a very encouraging report
full of strong details. This was not only reflected in the numbers, such as the production index
hitting a 10½-year high, but also in qualitative comments. The ISM’s press release quotes
several respondents who gave upbeat assessments of the situation and the outlook across various industries. These include strong demand as well as the positive impact of lower energy
prices on business conditions. The fly in the ointment in the last report was the drop in new
export orders to a 1½-year low. To be sure, even after the latest decline, the index level still signals ongoing growth in the level of exports. But the downward dynamic in export orders over the
past several months certainly warrants monitoring in the coming months. In that context, it is
worth emphasizing that the gap between new orders and new export orders widened to
14.3 points in October, the most since 1988 when the export series began.
Outlook
We continue to expect that real GDP growth will settle between 2½% and 2¾% over the next
several quarters. As highlighted previously, the sizeable growth contribution of net exports to
3Q14 growth looks a bit inflated to us. To the extent that this figure is not revised down, it
poses some downside risk to our current-quarter growth forecast of 2.8%. But the overall
growth outlook remains very resilient as the underlying strength in domestic demand clearly
outweighs potential external headwinds.
UniCredit Research
page 12
See last pages for disclaimer.
6 November 2014
Economics & FI/FX Research
Weekly Focus
US: Wider trade deficit will trigger downward revision to
3Q14 GDP growth
Data
Net exports contributed much less to 3Q14 GDP growth than assumed by the BEA in
its advance estimate. The BEA and Census Bureau jointly reported that the US trade
deficit widened to USD 43bn in September, much more than expected. Exports
declined 1.5%, the largest monthly contraction since February. The drop was broadbased as only exports of food & beverage managed to expand. Imports were flat, as a
sizeable increase in consumer goods (+4.2%) offset declines in many other categories.
The real goods deficit widened to USD 50.7bn, the largest since May, as real exports
dropped 1.8% and real imports edged up 0.2%.
Impact on 3Q14 GDP growth
For the short term, the most important takeaway from the report was that net exports contributed much less to 3Q14 GDP growth than assumed by the BEA in its advance estimate.
According to this estimate, net exports added no less than 1.2pp to GDP growth of 3.5%. To
get to such a sizeable contribution, the BEA assumed that the trade deficit had narrowed to
around USD 39bn in September. Using the new information, we calculate that net exports
added “only” 0.75pp to growth. While that is still a sizeable contribution, it is much smaller
than estimated thus far. The revision from the trade side alone is, therefore, large enough to
cut the 3Q14 GDP number by 0.5pp. Including the recent downward revision to construction
spending, 3Q14 growth is on track to be revised down to 2.8% or 2.9%, which was our initial
estimate. Of course, there is still more data to be released that might affect the revision; those
include, most importantly, inventories, retail sales and durable goods.
Interpretation & outlook
We think that the revised numbers are much more aligned with fundamental developments.
Already after the release of the advance GDP report, we highlighted that “the sizeable growth
contribution of net exports to 3Q14 growth looks a bit inflated to us”, and projected that going
forward net exports will likely be a drag on growth. “This primarily reflects the fact that the
consumption-driven growth model of the US remains highly reliant on foreign products.” This
view has been corroborated not only by the jump in the overall deficit, but also by the
composition of imports. As noted above, imports of consumer goods rose 4.2% in September.
And the real trade deficit for non-petroleum goods is hovering around an all-time high.
Dr. Martina von Terzi, Economist (UniCredit Bank Munich)
Dr. Andreas Rees, Chief German Economist (UniCredit Bank)
Marco Valli, Chief Eurozone Economist (UniCredit Bank Milan)
Chiara Corsa, Economist (UniCredit Bank Milan)
Dr. Loredana Federico, Economist (UniCredit Bank Milan)
Daniel Vernazza, Ph.D., Economist (UniCredit Bank London)
Dr. Harm Bandholz, CFA, Chief US Economist (UniCredit Bank New York)
UniCredit Research
page 13
See last pages for disclaimer.
6 November 2014
Economics & FI/FX Research
Weekly Focus
Major Data Releases & Economic Events To Look At Next Week
Date
7 - 15 Nov 2014
Time
(ECB)
Fri, 07 Nov
Mon, 10 Nov
Tue, 11 Nov
Wed, 12 Nov
Thu, 13 Nov
Indicator/Event
Period
UniCredit
estimates
Consensus
(Bloomberg)
Previous
2
3.2
2
3.2
-4
-5.8
BE
Belgium Sovereign Debt Rating May Be Published by Moody's
EC
EU Sovereign Debt Rating May Be Published by Moody's
PO
Portugal Sovereign Debt Rating Published by S&P
7:45
8:00
SZ
GE
Unemployment Rate (%)
Industrial Production (% mom)
Oct
Sep
8:00
GE
Exports (% mom)
Sep
2.7
8:00
GE
Imports (% mom)
Sep
1.1
8:45
FR
Budget Balance (EUR bn)
Sep
8:45
FR
Industrial Production (% mom)
Sep
9:00
11:00
EC
IT
EU Finance Ministers Hold Meeting in Brussels
Bank of Italy Report on Balance-Sheet Aggregates
14:30
US
Unemployment Rate (%)
Oct
5.9
5.9
14:30
US
Non-farm Payrolls (change in thousands mom)
Oct
235
248
15:15
US
Fed's Evans Speaks on Economy at Chicago Banking Conference
21:00
23:00
US
US
Consumer Credit (net change, USD bn)
Vitor Constancio Speaks at Internation Banking Conference
Sep
16.5
13.5
2:30
CH
Consumer Price Index, CPI (% yoy)
Oct
1.6
1.6
9:00
CZ
Consumer Price Index, CPI (% yoy)
Oct
0.7
9:00
TR
Industrial Production (% yoy)
Sep
10:00
IT
Industrial Production (% mom)
Sep
10:30
15:30
IT
EC
Bank of Italy Publishes Monthly Report `Money and Banks'
ECB Announces Covered-Bond Purchases
-1.3
-94.1
-0.6
-0.2
0
0.7
-1.4
-0.2
0.3
9:00
HU
Consumer Price Index, CPI (% yoy)
Oct
10:30
UK
Av. weekly earnings, ex bonuses (3M, % yoy)
Sep
1.1
0.9
10:30
UK
Jobless Claims (change thousands)
Oct
-18.0
-18.6
10:30
11:00
UK
EMU
Unemployment rate (3M, %)
Industrial Production (% mom)
Sep
Sep
5.9
0.6
6.0
-1.8
-0.3
-0.5
1:01
UK
House Prices (RICS, balance)
Oct
30
5:30
JP
Industrial Production (% yoy)
Oct
0.6
6:30
CH
Industrial Production (% yoy)
Oct
8:00
GE
Harmonized CPI (% yoy)
Nov
8:00
8:45
GE
FR
Consumer Price Index, CPI (national, % yoy)
Consumer Price Index, CPI (% yoy)
Nov
Oct
14:00
PL
Consumer Price Index, CPI (% yoy)
Oct
20:00
US
Federal Budget (USD bn)
Oct
BE
Belgium Sovereign Debt Rating Published by Fitch
SP
Spain Sovereign Debt Rating Published by S&P
FR
GE
Real GDP (% qoq)
Real GDP (% qoq)
Fri, 14 Nov
7:30
8:00
Sat, 15 Nov
Country
Q3
Q3
8
8
0.7
0.8
0.3
0.4
-0.3
-111.7
0.2
0.1
105.8
0.0
-0.2
8:45
FR
Non-farm Payrolls (% qoq)
Q3
9:00
CZ
Real GDP (% qoq)
Q3
0.1
9:00
HU
Real GDP (% qoq)
Q3
10:00
10:00
EC
PL
EU Finance Ministers Discuss Bloc's 2015 Budget in Brussels
Real GDP (% qoq)
Q3
10:00
IT
Real GDP (% qoq)
Q3
-0.1
-0.2
11:00
EMU
Core CPI (% yoy)
Nov
0.7
0.7
11:00
EMU
Consumer price index, CPI (% yoy)
Nov
0.4
0.4
11:00
EMU
Real GDP (% qoq)
Q3
0.2
14:30
14:30
US
US
Import Prices (% mom)
Retail Sales (% mom)
Oct
Oct
15:55
US
University of Michigan Consumer Confidence
Nov
16:00
US
Business Inventories (% mom)
Sep
EC
ECB Hosts Conference on Future of Bank Regulation, Supervision
0.4
0.4
0.3
0.3
0.8
0.6
0.0
0.1
-1.6
0.3
-0.5
-0.3
88.0
87.5
86.9
0.2
0.2
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted
UniCredit Research
page 14
See last pages for disclaimer.
6 November 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
0.2
0.1
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 15
See last pages for disclaimer.
6 November 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
0.08
0.83
0.05
0.05
1.10
0.05
0.09
0.86
0.05
0.05
1.30
0.05
0.08
0.90
0.05
0.05
1.50
0.05
0.08
0.95
0.05
0.05
1.75
0.05
0.09
0.99
US
Fed Funds Target Rate
3M USD Libor
10Y Treasuries
0.25
0.23
2.36
0.25
0.35
2.70
0.25
0.25
2.42
0.25
0.40
3.10
0.25
0.29
2.51
0.50
0.75
3.30
0.40
0.44
2.58
0.75
1.00
3.60
0.65
0.62
2.66
UK
Repo Rate
10Y Gilts
0.50
2.24
0.75
2.75
0.50
2.30
1.00
3.20
0.70
2.39
1.25
3.50
0.90
2.45
1.50
3.75
1.15
2.52
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
0.51
0.00
1.40
0.00
0.54
Russia
Reference Rate
3M Money Market Rate
9.50
9.23
8.00
9.30
8.45
8.00
9.30
8.55
7.75
9.00
8.15
7.50
8.75
7.90
Poland
Reference Rate
3M Money Market Rate
2.00
1.92
2.00
2.20
1.80
2.00
2.22
1.75
2.00
2.24
1.75
2.00
2.28
1.85
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
10.06
7.50
8.20
8.15
7.50
8.08
8.00
7.50
8.18
8.00
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
1.24
0.78
1.20
143
57.24
4.22
27.74
309
2.79
115
0.97
1.59
end-4Q
UniCredit
Forward
1.22
1.24
0.74
0.80
1.22
1.21
140
143
51.06
47.84
4.12
4.20
27.70
27.73
308
311
3.00
3.01
115
101
1.00
0.89
1.65
1.70
end-1Q
UniCredit
Forward
1.26
1.24
0.75
0.80
1.23
1.21
146
143
52.17
48.74
4.10
4.22
27.60
27.71
315
312
3.07
3.06
116
101
0.98
0.89
1.68
1.70
end-2Q
UniCredit
Forward
1.30
1.24
0.77
0.81
1.24
1.21
152
143
52.95
49.65
4.15
4.24
27.60
27.69
310
313
3.15
3.12
117
101
0.95
0.89
1.69
1.69
end-3Q
UniCredit
Forward
1.32
1.25
0.78
0.81
1.26
1.21
156
143
53.66
50.58
4.13
4.26
27.60
27.68
315
314
3.23
3.18
118
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
1143
82
*Bloomberg Consensus for central bank rates
UniCredit Research
Source: UniCredit Research
page 16
See last pages for disclaimer.
6 November 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,
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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
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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 17
See last pages for disclaimer.
6 November 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
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clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit
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that meet your expectations.
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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
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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.
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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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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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This document may not be distributed in Canada.
EFI e 4
UniCredit Research
page 18
See last pages for disclaimer.
6 November 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 19
See last pages for disclaimer.