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Economic Research
Week in Focus
16 January 2015
Switzerland says no to ECB policy
By decoupling the Swiss franc from the euro, the Swiss National Bank yesterday made
history. We demonstrate that in doing so the SNB has revealed its distrust of the ECB’s
ultra-expansionary monetary stance (page 2). The ECB will no doubt begin a new, risky
chapter in its monetary policy history next Thursday by agreeing to broad-based government
bond purchases. This is likely to take the form of national central banks buying up their own
country's bonds at their own risk (page 3). The euro can be expected to sustain further
losses.
SNB has dumped the euro
Swiss francs per euro, minute data of 15 January
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
0.80
09:00
10:00
11:00
12:00
13:00
14:00
15:00
16:00
17:00
18:00
Source: Bloomberg
China: CNY to strengthen in the second half of the year. Following its recent slide, we
look for the CNY to remain stable in the first half of 2015. In H2, other factors will become
more prominent – notably the current account surplus – which will drive CNY higher. Page 6
Oil price: An end to the horror. The oil price slide is primarily being driven by OPEC’s
efforts to flood the market in order to impact on the US shale boom. Against this backdrop,
the oil price should continue to drop further and hit bottom around 40 USD per barrel. But we
look for lower supply to drive the price towards 70 USD per barrel by year-end.
Page 7
Product Idea: Forward Extra on diesel. We recommend using current cheap diesel prices
to hedge against the expectation of higher prices later in the year.
Page 8
Outlook for the week of 19 to 23 January 2015
Economic data: Sentiment indicators in the euro zone should continue to climb next week
with the ZEW index and PMIs leading the way.
Page 11
Bond market: Expectations of a QE programme by the ECB will drive Bund yields to new
lows. This process is being exacerbated by globally falling inflation expectations. But the
Greek election might prevent a bigger decline in peripheral yield premiums.
Page 14
FX market: The SNB has surprisingly abandoned its policy of a minimum EUR-CHF rate,
which has prompted changes to our Swiss franc forecasts.
Page 15
Equity market: The DAX and MDAX should emerge as a winner from a weak euro and
declining commodity prices.
Page 16
Commodity market: The large number of net long positions held by speculative investors
suggests that oil prices have not yet reached their low. But metal prices may start to rally a
little from next week.
Page 17
For important disclosure information please see page 20.
research.commerzbank.com / Bloomberg: CBKR / Research APP available
Chief economist
Dr Jörg Krämer
+49 69 136 23650
[email protected]
Editor:
Peter Dixon
+44 20 7475 4806
[email protected]
Economic Research | Week in Focus
SNB allows franc gains – what now?
Dr Ralph Solveen
Tel. +49 69 136 22322
The Swiss National Bank has abandoned its floor for the EUR-CHF exchange rate, which
means that the Swiss franc is likely to make further gains versus the euro. What else does
the decision mean? The SNB is evidently no longer willing to follow the ECB's expected
further loosening of monetary policy. It is thus ready to accept a negative inflation rate in
order to avoid a further swelling of the real-estate bubble. However, the impact on the
economy should be rather limited.
After the SNB's surprise decision, there are grounds for expecting the Swiss franc to make
further gains versus the euro in the coming months. We have revised our EUR-CHF forecast and
now expect a rate of 0.98 at the end of the year (previous forecast 1.21, see also p.15 and p.18).
But what else does the decision signify? These are the main aspects as we see it:
•
SNB seems to fear asset bubbles more than negative inflation: The decision may have
been triggered in part by the expectation that the ECB will next week announce a
government bond purchasing scheme (QE), thus further relaxing the monetary reins. 1 The
SNB is evidently unwilling to follow this policy, given that the Swiss economy is in good
shape and that real-estate prices have already risen sharply. But this move does seriously
dent in the SNB’s credibility. It had after all consistently promised to prevent EUR-CHF
falling below 1.20 by whatever means needed.
The SNB is obviously more concerned about asset bubbles and the resulting threats to the
stability of the financial system than by the likelihood of a negative inflation rate over a
lengthy period of time – we now envisage consumer prices falling 1.5% this year (previously
-0.6%). This is an interesting deviation from the ECB's view that deflation is the greatest
threat to the euro zone economy. It remains to be seen whether other central banks (e.g. in
Scandinavia) that have tended to relax the monetary stance in order to prevent their
currencies appreciating too much, leading to subsequent disinflationary pressure, will follow
the lead of the SNB.
•
Scepticism about the euro: Relentless upward pressure on the Swiss franc and the SNB's
decision today show how widely the ECB is expected to continuing relaxing the monetary
stance even further after next week’s QE decision, rather than introducing a change of
course. This is in line with our expectation that the euro will remain weak.
•
Comparatively limited economic consequences: A much stronger Swiss franc obviously
undermines Swiss price competitiveness, but we envisage only a limited impact on the
economy, above all on account of its specific structure. Exports, for example, focus on highquality goods, the demand for which is unlikely to respond much to price changes. 2 We have
therefore modified our Swiss growth forecast only marginally, and now expect real GDP
growth of 1.3% this year (previous figure: 1.7%), with a similar result next year (see also p.
18).
•
Major SNB losses: As a result of its intervention in recent years, the SNB will likely have
amassed foreign currency reserves of over 500bn CHF. Since the currency has made
strong gains versus all other currencies, they now face serious losses when calculated in
Swiss francs. The SNB booked large profits last year, but is likely to end 2015 well in the
red. As this will reduce the transfer of central bank profits to the cantons (the SNB is legally
required to distribute two-thirds of its net profit to the cantons, many of which rely on this as
an important source of revenue), the SNB will no doubt come under political pressure.
1
2
2
See also "Swiss National Bank capitulates", Economic Briefing, 15 January 2015.
See also "Switzerland: the ice is melting", Economic Insight, 12 December 2014.
16 January 2015
Economic Research | Week in Focus
Dr Michael Schubert
Tel. +49 69 136 23700
ECB on track for QE: the main points
At next Thursday's meeting, the ECB will no doubt make good its promises and announce
broad-based government bond purchases (QE). We have examined how this programme
might look in detail. Above all, we expect national central banks will have to buy up their
own country's bonds at their own risk. This would ensure that a new Greek government
be cautious about advocating debt forgiveness, and could also result in greater support
across the ECB Council. The markets are likely to respond to the announcement with
cautious approval. Bund yields have probably not yet reached their lowest point, and the
euro can be expected to sustain further losses.
QE imminent
At its last press conference in early December, the ECB said that at the start of 2015 it would be
re-assessing the need for broad-based government bond purchases, i.e. QE. This course is
likely to be adopted at next Thursday's meeting, since the two pre-requisites for additional
measures named by the bank have now been met:
•
It has been clear since mid-December that the ECB will probably not manage to expand its
balance sheet as planned to around €3 trillion with the measures adopted so far (TLTROs,
ABS and covered bond purchases). Even the second TLTRO resulted in calls from the
banks for only €130bn, so that the volume of the first two TLTROs together only amounted
to just over half the possible allotment. Our view is still that in the absence of any additional
measures the ECB would fall more than €700bn short of its balance-sheet objective. 3
•
Longer-term inflation expectations have fallen again recently. The figure favoured by the
ECB – the expected inflation rate, derived from inflation swaps in five years' time for the
subsequent five years (5x5 expectation) – has subsequently reached an all-time low (see
chart 1).
At its meeting, the Council should also have the latest findings of the bank’s Survey of
Professional Forecasters (SPF). 4 These will no doubt reveal that from the standpoint of
those polled, the ECB is even more likely to fall short of its inflation objective. Since the debt
crisis hit in 2010, this probability has moved parallel to the (far more volatile) market-based
inflation expectation.
Greek election no obstacle
But is a vote for QE a good idea just three days before the election in Greece? At least one ECB
Council member (Hansson) has advised against it on the grounds that a possible new
government in Greece might be hoping for debt rescheduling. In that case, the ECB should not
CHART 1: Euro zone: mounting downside risks for inflation
Five-year inflation-linked future swap rate in five years, probability according to SPF of inflation rate below
1.5% in five years (inverted scale)
2.9
5
2.7
10
15
2.5
20
2.3
25
2.1
30
1.9
35
1.7
1.5
2005
40
45
2006
2007
2008
2009
market expectation (lhs)
2010
2011
2012
2013
2014
2015
Likelihood (inflation < 1.5%) (rhs)
Sources: ECB, Bloomberg, Commerzbank Research
3
" Euro zone – What you need to know about QE", Week in Focus, 14.11.2014.
For technical reasons, these will probably not be published until the day after the meeting, but the Council members
should have them at the meeting.
4
16 January 2015
3
Economic Research | Week in Focus
announce Greek government bond purchases at the same time, as to do so would be in breach
of the ban on monetary financing of the state, according to Hansson.
There is unlikely to be a majority on the Council in favour of Hansson's proposal that a decision
be postponed. After all, given the party landscape in Greece, a stable post-election government
is by no means certain either, and the ECB will be reluctant to put off a decision for even longer.
There is evidently a clear majority in favour of pushing ahead with QE, and as soon as possible.
Greater approval if risk of losses is not shared
The true motive for Hansson's proposal is probably his general unease about QE, something he
shares with a number of other Council members. According to a report in the Handelsblatt, at
least seven of the 25 members are critical of QE. It is against this backdrop that Executive Board
member Coeuré stressed recently that an essential aspect shaping QE was to win over as many
Council members as possible who have been warning of harmful side-effects.
The Council will no doubt have discussed a number of options. The most likely outcome is that
national central banks will buy up their own country's bonds at their own risk. This is not an ideal
approach as far as the peripheral central banks are concerned. Nevertheless, they will probably
vote in favour of it, as a programme of this nature substantially lowers the risk of losses from
state bankruptcy. At the same time, it should reassure the QE sceptics. Bundesbank president
Weidmann was the first to publicise the proposal in December. Klaas Knot warned at the turn of
the year that the ECB should not reallocate loss risks without parliamentary consultations. He
added that he would only vote for QE on stringent conditions. In addition, Ardo Hansson stated
recently that the proposal deserved consideration.
The ECB Council has reportedly discussed an option involving national central banks acquiring
the lion's share of their country's government bonds at their own risk, and the ECB taking only a
small share, with the risk of losses being borne equally. The Bundesbank might agree to this
approach, according to unnamed sources. Other sources say that ECB purchases would be
restricted to bonds with a very high rating (AAA or just below), i.e. the respective national central
banks would buy fewer bonds. These sources have also said that the German government might
accept this approach, and ECB President Draghi has probably made a recent bid for its support.
Bond purchases across the euro zone
Overall, though, bonds from all the euro countries are likely to be bought, as any proposal that
only bonds from certain countries be purchased would not find a majority:
4
•
Only bonds of countries with very high ratings: In taking this course, the ECB Council
would be contradicting its tacit objective of supporting highly indebted countries. Moreover,
ECB Chief Economist Praet issued a recent warning that if this path were chosen, the bank
would have to buy up seriously bigger volumes in order to achieve the desired impact on
inflation.
•
Only bonds from investment grade countries: This option would only exclude Greek and
Cypriot bonds, but this would hardly suffice to overcome the doubts of QE sceptics.
Moreover, the Greek and Cypriot central banks would no doubt oppose such a step as
would the representatives of countries whose bonds are only just classified as investment
grade (such as Portugal). Hence, this would rather reduce the majority within the ECB
Council for QE, instead of unifying it.
•
Only bonds from countries not subject to excessive deficit procedure: One argument
in favour of this option is that the countries in question would remain under pressure to
consolidate their finances. It will not be likely to achieve a majority on the ECB Council,
though. It is after all chiefly the heads of the central banks in those countries whose
economies and public-sector budgets are in dire straits who are hoping for relief from QE.
Moreover, the markets would be disappointed if this course were chosen, as it would be
seen as a retreat from broad-based bond purchases.
16 January 2015
Economic Research | Week in Focus
Government bond purchases in line with ECB capital key
In allocating bond purchases to the various euro zone countries, the ECB will for legal reasons
probably follow the ECB capital key. 5 For one thing, the German constitutional court in its
judgement on OMT specifically criticised the fact that OMT purchases were selective. Allocation
under QE should therefore be as fair and evenly distributed as possible. If the capital key were
observed here, 26% of the purchase volume would be accounted for by German government
bonds, 20% by French and 17% by Italian.
In contrast, we see little chance of a weighting by market shares, as has allegedly also been
discussed in the ECB Council. In this case, the ECB would buy even more government bonds of
countries that have issued the most. In other words, a marked willingness to incur debts would
be rewarded. The ECB could thus be accused of evading the ban on monetary state financing.
Non-committal approach the best
According to the press, the ECB is still undecided as to the scale of purchases and their time
frame. We expect the bank to be vague in what it says at the press conference in order to be
able to respond flexibly. It will probably just confirm its aim of expanding its balance sheet to the
desired €3bn more rapidly via QE. To achieve this, it would have to acquire bonds to the tune of
some €700bn.
From the ECB's point of view, flexibility is crucial. It will enable the bank to regulate the volume of
QE according to the success of the programmes already operating (TLTROs, ABS, covered
bonds). And it can then react flexibly to surprise economic data, inflation expectations and the
Fed's change of course which we envisage.
Not only government bonds, but 'broad-based'
The ECB will probably include in its purchase programme all paper broadly in line with ECB
eligibility criteria, i.e. both government bonds and bonds issued by supranational organisations,
local authorities and agencies, and above all corporate bonds. It is this very last category in
particular that QE sceptics such as ECB Council member Hansson have constantly demanded.
The ECB no doubt wants to indicate that it has not approved a programme of government bond
purchases only, as far as this is possible.
The ECB can be expected to acquire both floaters and index-linked bonds in order to avoid
market distortions. We do not envisage purchases being limited to particular maturities in order
not to restrict the potential volume of programme from the start.
The bank will probably only exclude individual segments: The purchase of government bonds on
the primary market contradicts the ban on monetary state financing, and that of foreign currency
bonds would be a breach of the G7 agreement on unilateral currency manipulation. A number of
Council members view the acquisition of unsecured bank bonds as problematic, since the ECB
also exercises a supervisory function.
Market implications: yield low not far off, euro depreciation
In the US, most of the decline in yields occurred before the various QE programmes were
officially announced by the Fed. We expect the same to happen with Bund yields, i.e. they have
probably almost reached their lowest point.
One important factor for yield premiums in the peripheral countries will no doubt be how a QE
programme is accepted by the market when the central bank in question is buying bonds at its
own risk. Will the response be positive because the resolution was passed by a large majority in
the ECB Council? Or will disappointment prevail because the decision not to distribute potential
losses will be seen as the disintegration of the euro zone? Given that there is still a high risk
premium in the peripheral countries, though, we see yield spreads as more likely to fall.
And the euro will continue to lose ground to the dollar, as an ECB decision in favour of QE would
again emphasise that monetary policy in the US and in the euro zone is likely to diverge for
some time. In addition, the pace of Fed rate hikes is probably still being underestimated by the
market.
5
16 January 2015
" ECB QE: Allocation probably by capital key", Week in Focus, 10 October 2014.
5
Economic Research | Week in Focus
Ashley Davies
Tel. +65 6311 0166
China: CNY to strengthen in the second
half of the year
The CNY has depreciated against the US dollar since mid-November (chart 2). Contrary to
the first quarter of 2014, the CNY was not deliberately pushed down by the Chinese
central bank (PBoC), but the current weakness is rather due to the general significant
USD strength. In the first half of 2015, the USD-CNY exchange rate is likely to remain
stable, whereas later this year other factors will take over again – among them, the
significant current account surplus – which will support a stronger CNY.
In mid-February last year USD-CNY rose from around 6.06 to a high just shy of 6.26 in early
May. Back then, the CNY was deliberately pushed weaker by the PBoC’s rapidly accumulation
of FX reserves. The central bank also undermined the currency by steadily setting a higher USDCNY fixing and widening the currency trading bands on March 19, from 1% either side of the
fixing to 2% either side. The motivation of the PBoC was to create two-way risk in the market
and deter investors from endlessly speculating on a stronger currency.
This time the weaker CNY seems to be primarily a function of US dollar strength, since it has
continued to appreciate against most other currencies in contrast to a year ago (chart 3). In
addition, some might speculate on monetary easing due to concerns about a significant
slowdown of the economy. Such strong CNY moves are possible since the PBoC has been
accepting stronger fluctuations since the widening of the trading band last March. Moreover,
according to the words of PBoC Deputy Governor Yi Gang on 11 October 2014 at an IMF
meeting, FX intervention by the PBoC was "basically" zero. Unlike in Q1 2014, though, the PBoC
has kept a relatively steady USD-CNY fixing with even a slight downward trend.
In the first half of the year, things will not change much. After all, the Fed is likely to raise interest
rates in the near future, which will lead to a stronger dollar. Therefore, we revised our forecasts
last week and now expect USD-CNY to remain at current high levels in the first half of the year.
If USD-CNY rises further and challenges the upper trading band on a sustained basis, the PBoC
may resort to a further widening in the bands, rather than tighten CNY liquidity and jeopardise
the economy via higher interbank yields.
In the second half of the year, though, after the Fed has started lifting interest rates, other factors
are likely to take over again as the main drivers which in recent years have led to an
appreciation trend for the CNY. An important factor is the significant Chinese current account
surplus, which is expected to increase this year and next. In addition, China continues to benefit
from considerable gains in productivity supporting the view of an appreciation trend in the CNY.
Consequently, we target USD-CNY at 6.22 by June and 6.13 by end 2015.
CHART 2:CNY has come close to the top of the bands
CHART 3: CNY stronger against most currencies
USD-CNY onshore spot versus trading bands
CNY nominal, trade-weighted index (1 January 2014 = 100)
st
106
6.70
6.60
104
6.50
102
6.40
6.30
100
6.20
98
6.10
6.00
2011
96
2012
2013
USD-CNY spot
Source: Bloomberg, Commerzbank Research
6
2014
2015
Trading range
94
Feb-13
Aug-13
Feb-14
Aug-14
Source: Bloomberg, Commerzbank Research
16 January 2015
Economic Research | Week in Focus
Eugen Weinberg
Tel. +49 69 136 43417
Oil price: An end to the horror
The massive price slide on the oil market is largely attributable to a change in policy by
some OPEC countries. Unlike in earlier similar situations, these countries do not want to
halt the slump in prices by reducing production. Instead, they are probably hoping that
the lower price will end the boom in unconventional oil production in North America.
Against this backdrop, the oil price should continue to drop further initially and not hit
bottom before levels around 40 USD per barrel. However, in the second half of the year,
the OPEC strategy can be expected to take effect. The price of oil should then pick up
again, on the back of lower supply, and top 70 USD per barrel on a sustainable basis by
the end of the year.
In the past few weeks, the price slide on the oil market has accelerated. Since the beginning of
the year, the price of a barrel of Brent has dropped by a further 20% to 45 USD per barrel, which
implies a fall of 60% since June. The main reason for the huge price slide was not weak
demand, however, as in most earlier oil price slumps, but rather oversupply; OPEC has
abandoned its role of “price regulator” and is presently focusing instead on defending its market
shares.
So far, this change of strategy has not paid off; neither production nor demand have reacted
noticeably to the lower oil price. Even so, OPEC is likely to maintain its strategy of “an end to the
horror is better than a horror without end“. Furthermore, since according to the CFTC most
financial investors are still betting on rising oil prices, i.e. are as “bullish” as in September 2014,
when the oil price was trading at around 100 USD per barrel, a necessary adjustment is still due
(chart 5). The price should therefore retreat further in the near term.
That said, we expect a clear recovery in the second half of the year. Unlike the US Energy
Information Administration, which predicts in its latest outlook for 2015 that daily US crude oil
production will rise by almost 700,000 barrels and again by a further 300,000 barrels in 2016, we
expect a significant fall in US oil production in the second half of this year. After all, unlike
conventional oil production, shale oil deposits are quickly exhausted. In only twelve months,
production falls by up to 70% of its initial peak. This makes “rolling” investments necessary just
to keep production levels stable. Even if the bulk of current oil production in North America
should be profitable despite lower oil prices, new investment is set to decrease considerably.
The first signs of this are already evident. The number of active oil rigs in the US has fallen as
sharply as seen in 1991. What’s more, there are already several struggling oil producers in the
USA which are close to collapse.
CHART 4: Strong rise of US oil production
CHART 5: Investors still betting on rising prices
Oil production, in million barrels per day
Speculative net-long positions, in thousand contracts; oil price: price
per barrel of Brent in US dollars
5.0
9.5
250
4.0
8.5
200
7.5
3.0
130
120
110
100
150
90
6.5
100
2.0
1.0
0.0
1986
80
5.5
4.5
3.5
1990
1994
North Dakota, lS
1998
2002
2006
Texas, lS
Source: EIA; Bloomberg, Commerzbank Research
16 January 2015
2010
2014
USA, rS
70
50
60
0
2012
50
2013
2014
Spec.net long pos.(LHS)
2015
Oil price (RHS)
Source: CFTC; Bloomberg, Commerzbank Research
7
Economic Research | Week in Focus
Product idea: Knock-into forward EUR-NOK
Eugen Weinberg
Tel. +49 69 136 43417
Locking in the attractive price level in diesel
In the wake of much lower oil prices, diesel has also cheapened noticeably. Whereas in
the near future oil prices will likely continue falling, we forecast a significant rise in the
second half of the year. Over the coming months, supplies should decline, causing both
the oil price and the diesel price to rise again. In addition to this is the expected
depreciation of the euro, which would additionally drive up prices in euro terms. For this
reason we recommend a long-term hedge for diesel prices at the attractive current levels.
Over the last six months, the massive fall in oil prices has nearly halved the European diesel
price from around €700 to €380 per tonne at present. This drop in oil prices is primarily
attributable to a change in OPEC’s strategy, which currently does not aim at stable prices but at
crowding out competition from shale oil production in the US. We assume that oil prices will fall
somewhat further in the near-term. But in the second half of the year, oil production in the US will
decline markedly due to the oil price fall, with the current oversupply disappearing, and so prices
will then probably rise markedly (see page 5).
Moreover, the OPEC countries still need much higher oil prices on a long-term perspective to
finance their public budgets. For this reason they will probably return to their former strategy of
price controls in the long run. We expect that by the end of the year oil prices will have risen from
the current level of USD 45 to more than USD 70 per barrel. Furthermore, the price decline
should revive worldwide diesel demand, while supply – especially in the US, the world’s biggest
diesel exporter at present – will probably decline due to the lower production of crude oil.
We forecast diesel prices to rise from USD 460 currently to USD 700 per tonne – i.e. some 50%
– by year-end. Simultaneously, the EUR-USD exchange rate should fall to 1.12. Accordingly, the
diesel price in euro terms should rise more strongly (to €625 per tonne). For this reason we
recommend a long-term hedge for diesel prices at their attractive current levels.
Forward Extra on diesel – Zero-cost hedge for raw material purchasers
Reference price: Diesel oil 10ppm FOB Barges ARA in EUR, Platts (AAJUS00, corr. to DIN EN
590), €/$ conversion at 4:30 p.m. Ldn. time
Maturity: 01.07.2015 – 30.06.2016
Reference quantity: 75 mT per month, 1,200 mT in total
Strike price: EUR 470.00 per tonne
Participation limit: EUR 660.00 per tonne
Comparable fixed price: Client pays EUR 447.00 per tonne
Prices will be averaged over all raw materials business days in the respective period, with
monthly payment based on the agreed reference quantity.
If the variable price for a period exceeds the strike price without reaching or exceeding the
participation limit, the client will receive a compensation payment in the amount of twice the
difference between the variable price and the strike price.
If the variable price exceeds the strike price and reaches or exceeds the participation limit, the
client will receive the single difference between the variable price and the strike price.
If the variable price is fixed below the strike price, the client will pay the single difference
between the strike price and the variable price.
In addition to diesel, Commerzbank AG also offers hedging instruments in the energy sector on
WTI and Brent as well as further middle distillates, coal, electricity and CO2
8
16 January 2015
Economic Research | Week in Focus
Major publications from 9 – 15 January 2015
Economic Briefing: ECJ on OMT – carte blanche for the ECB, but
BVG has the final say
The Advocate-General of the European Court of Justice has today practically given the ECB a
carte blanche for its OMT asset purchase programme. In his – legally non-binding – statements,
he declared that OMT is fundamentally compatible with EU law, the ECB merely has to meet
several conditions. The legal dispute thus continues, as the BVG (German Federal Constitutional
Court) has reserved itself the right to the final say even against the opinion of the ECJ. Quite a
lot of time will pass though until such a decision is taken. Today’s statements should not have
any impact on the ECB’s decision on QE, which we expect next Thursday. more
Economic Insight: ECB ignores Japan’s experience
Whenever ECB President Draghi gives hints of broad-based purchases of government bonds,
there is an implied warning that without bond purchases the euro zone could slide into deflation
– as Japan did. But the last 25 years have taught us that Japan’s problem was not a slight
decline in consumer prices at all, but so-called ‘zombification’. more
Economic Insight: What is now changing on the German labour
market
The introduction of a minimum wage, general applicability of collective agreements and
limitations on working time accounts suggest that much has changed on the German labour
market at the start of this year, and we are also likely to see restrictions on temporary
employment. We show that these changes, combined with the regular wage increases, will
probably drive German companies‘ labour costs up by more than 4% this year. The German
economy’s competitiveness is eroding, and in the long run this cannot be masked by the ECB’s
lax monetary policy. But it is government bonds from peripheral countries that will benefit
because competitive pressure on them will ease as German labour costs rise considerably. more
EM Briefing: India – RBI cuts on inflation drop; more to come
The Reserve Bank of India (RBI) surprised with an unscheduled 25bp cut in the repo rate to
7.75%. This is due to the steady decline in inflation over the past six months owing to 1) weak
demand conditions; 2) lower food and vegetable prices; and 3) the sharp collapse in oil prices. In
the December statement, RBI alluded to the possibility of a cut in early 2015 if the positive
development in inflation continued. Today’s cut was viewed as a fulfilment of that commitment.
RBI expects oil prices to remain low this year, barring any geo-political shock. With inflation to
remain well below RBI’s target of 6% by January 2016, we expect RBI to lower rates by another
75-100bp this year. On FX, we expect RBI to favour stability with USD-INR at 62 at end-2015.
We see GDP growth at 5.8% for FY2014-2015 and 6.2% for FY2015-16. more
FX Hotspot: ARPI² update – Uncertainty declined somewhat
Compared to last week, the ARPI² fell 0.2 index points. In particular, emerging-market, FX and
money-market risks declined somewhat. This was probably a counter-movement, as global risk
perception had increased markedly in the weeks before. more
Cross Asset Outlook Update – Time to lock in some of the gains
Strong and lasting relative trends tend to be rare during mid-cycles. In addition, the return/risk
relationship has deteriorated for most of our successful positions. Against this backdrop we
halve the commodity underweight and lock in some gains for commodity-related positions in
equities. With €-QE speculations expected to come to an end for the being in the near future we
reduce our equity overweight and are now neutrally positioned among European and US
sovereign bonds. more
16 January 2015
9
Economic Research | Week in Focus
Preview – The week of 19 to 23 January 2015
Time
Region Indicator
Period
Forecast
Survey
Last
Monday, 19 January 2015
No relevant data is due for release.
Tuesday, 20 January 2015
•
2:00
CHN
10:00
15:00
GER
USA
Industrial production
GDP
ZEW Index
NAHB Index
Dec
Q4
Jan
Jan
yoy
yoy
7.0
7.0
50.0
58
7.4
7.2
39.0
58
7.2
7.3
34.9
57
mom, k, sa
yoy
%, sa
SAAR, k
SAAR, k
%
-25.0
1.7
6.0
1040
1050
1.00
-25.0
1.7
5.9
1040
1054
1.00
-26.9
1.4
6.0
1028
1052
1.00
sa
%
k, sa
-10.0
0.05
300
-10.5
0.05
–
-10.9
0.05
316
99.0
48.0
50.0
52.0
52.5
51.0
52.0
0.2
4.2
-6.1
5.10
–
–
–
51.6
52.4
51.0
52.0
–
–
–
5.08
99.0
47.5
50.6
51.2
52.1
50.6
51.6
1.7
6.9
-6.9
4.93
sa
Wednesday, 21 January 2015
9:30
GBR
Claimant count change
Dec
Wages (three-month average)
Nov
Unemployment rate (ILO)
Nov
13:30 USA
Housing starts
Dec
Housing permits
Dec
CAD
BoC interest rate decision
WEF: World Economic Forum Annual Meeting in Davos (21 to 24 January)
Thursday, 22 January 2015
11:00
EUR
Consumer confidence
Jan
ECB interest rate decision
13:30 USA
Initial claims
17 Jan
• ECB set to announce QE programme during press conference (13:30)
Friday, 23 January 2015
•
7:45
8:00
FRA
8:30
GER
9:00
EUR
9:30
GBR
Business climate (Insee)
PMI, manufacturing
PMI, services
PMI, manufacturing
PMI, services
PMI, manufacturing
PMI, services
Retail sales
14:00 BEL
Business confidence
15:00 USA
Existing home sales
EUR: ECB releases Survey of Professional Forecasters
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Dec
Jan
Dec
sa
sa
sa
sa
sa
sa
sa
mom, sa
yoy
sa
SAAR, mn
Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 5 hours for EST. add 1 hour for CET). # = Possible release; mom/qoq/yoy: change
to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; • = data of highest importance for markets
10
16 January 2015
Economic Research | Week in Focus
Dr Ralph Solveen
Tel. +49 69 136 22322
Economic data preview:
Euro zone: Sentiment brightens further
Sentiment indicators in the euro zone should continue to climb next week overall. The
ZEW will probably show the greatest gain, though more important would be a further rise
in purchasing managers’ indices, as we expect, confirming the turnaround that appears
to be on the horizon. Factors pointing in this direction are the much lower oil price and
the weaker euro, which should both give a tailwind to companies in the euro zone. In the
USA, construction should have been strong in December, with the relatively mild weather
presumably helping as well.
For analysts, one thing is clear: cheaper oil and the weaker euro will give some stimulus at least
to the economy in Germany and the euro zone. In January, the responses to the Sentix survey
on the German economy were much better again than in December. We consequently also
expect the ZEW index to rise sharply again in January from 34.9 to 50.0 (consensus: 39.0; see
chart 6).
Of course, it would be more important if the better economic environment, shown also by our
Early Bird, would be reflected in stronger corporate business activity. As is usually the case with
an Early Bird that has been pointing upwards since the beginning of 2014, the Ifo business
climate appears to have already turned the corner, picking up in November and December. Less
clear were the signals recently from the purchasing managers’ indices for manufacturing. While
these have stabilised in both Germany and the euro zone, there can be no talk of a turnaround
yet. Even so, we expect the German index to climb from 51.2 to 52.0 (consensus: 51.6; chart 7).
For the euro zone, the rise should be slightly less, from 50.6 to 51.0 (consensus: 51.0). The
signs therefore point to economic recovery, though this would not be a signal of a strong
upswing.
USA: Improvement in construction
In a week with unusually little US data, the main focus will be on housing starts and existing
home sales in December. The mild weather is likely to have supported construction activity. We
expect housing starts to rise to 1040k (consensus 1040k). For existing home sales, the first
regional data are pointing upwards. We therefore also expect a slight rise to
5.1 million (consensus 5.08 million). All in all, construction is likely to have picked up in the fourth
quarter by an annualised growth rate of 6% on the previous quarter.
CHART 6:Germany – analysts more optimistic again
CHART 7: Germany – PMI lags behind Ifo somewhat
Sentix: Subcomponent of Sentix Index for institutional investors in
Germany; ZEW economic expectations
Ifo business climate for manufacturing; purchasing managers’ index
for industry (PMI)
50
100
25
50
0
0
65
115
60
110
55
105
50
-25
-50
100
45
-50
2009
-100
2010
2011
2012
Sentix (lhs)
Source: Bloomberg, Commerzbank Research
16 January 2015
2013
2014
ZEW (rhs)
40
95
2011
2012
PMI (rhs)
2013
2014
ifo business climate (rhs)
Source: Global Insight, Commerzbank Research
11
Economic Research | Week in Focus
Central Bank Watch (1)
Fed
With the labour market on a stable growth course, the
attention of the markets and Fed members has turned more
to inflation. The huge slide of oil prices will push the inflation
rate down towards zero in the first half of 2015. While the
Fed has repeatedly said that such effects that are regarded
as temporary will not unduly influence monetary policy, the
falling inflation rate and surprisingly weak pay growth
recently have led to a reassessment of monetary policy by
the financial markets. Fed funds futures are not now pricing
in an interest rate hike until October.
The significant fall in long-term interest rates is increasingly
causing headaches for the Fed. According to Narayana
Kocherlakota (Minneapolis Fed president), this suggests that
the supply of safe investment options is too small for
investors. US yields could therefore also remain very low in
the long term. This in turn could make it difficult for the Fed to
exit loose monetary policy, as rate hikes are likely to have a
much weaker impact on long-term interests in such an
environment. This constellation has already led to problems
in the past; continued lower yields after the start of rate hikes
in 2004 helped to drive the search for yield, with obvious
implications for financial market stability.
Bernd Weidensteiner
+49 69 136 24527
CHART 8: Expected interest rate for 3-month funds (USD)
2,5
2,0
1,5
1,0
0,5
0,0
current
Mrz 15
Jun 15
Sep 15
Dez 15
Mrz 16
Futures
16.01.15
09.01.15
Commerzbank
TABLE 1: Consensus forecasts Fed funds rate
Q1 15
Q2 15
Q4 15
Consensus
0.25
0.25
1.00
High
0.50
0.75
1.75
Low
0.25
0.25
0.25
Commerzbank
0.25
0.50
1.50
Source: Bloomberg, Commerzbank Research
ECB
Quite a few ECB Council members signalled that a QE
announcement is not far away: ECB Executive Board
member Coeuré said that “in any case, we will be able to
take a decision on 22 January.” He warned that “the
continuous decline in oil prices increases the danger that
people will lose confidence in our inflation objective”. "[The
Greek elections] have no influence on us whatsoever," he
said.
The risk of deflation in the euro zone should not be
underestimated and the best way for the ECB to deal with
the problem is buying government bonds, ECB’s Visco said.
The ECB should act sooner rather than later to address the
euro zone’s low inflation rates, ECB’s Nowotny said. ECB’s
Vasiliauskas said that in his view there is a “strong
consensus” within the Council about further measures.
At the same time, some QE critics repeated their concerns,
too: ECB Executive Board member Sabine Lautenschläger
confirmed her opposition to government bond purchases.
She argued that in light of already low interest rates
government purchases would boost credit provision in the
euro area and warned that it could seduce governments to
further increase debt levels. ECB’s Hansson said that
announcing a purchase programme including Greek bonds in
January was “problematic”.
Dr Michael Schubert
+49 69 136 23700
12
CHART 9: Expected interest rate for 3-month funds (EUR)
1,0
0,8
0,6
0,4
0,2
0,0
current Mrz 15
Futures
Jun 15
16.01.15
Sep 15
09.01.15
Dez 15
Mrz 16
Commerzbank
TABLE 2: Consensus forecasts ECB minimum bid rate
Q1 15
Q2 15
Q4 15
Consensus
0.05
0.05
0.05
High
0.05
0.05
0.05
Low
0.05
0.05
0.05
Commerzbank
0.05
0.05
0.05
Source: Reuters, Bloomberg, Commerzbank Research
16 January 2015
Economic Research | Week in Focus
Central Bank Watch (2)
Bank of England (BoE)
The unexpectedly sharp slowdown in inflation in December,
which posted a rate of 0.5% – the lowest since 1960 – has
changed the nature of the policy debate. Although Governor
Carney suggested that the BoE has “the ability to bring
inflation back to target” the UK in reality is being affected by
external factors over which it has no control. Following
comments by Mr Carney suggesting that inflation could slow
further in the near-term, markets have now priced out the
prospect of a rate hike this year. Indeed, the debate amongst
MPC members is set to turn interesting. The December
figures would have been made available to the MPC ahead
of the January vote, and in our view the position of the two
dissenters who have been pushing for a 25 bps rate rise now
looks untenable. Messrs McCafferty and Weale have argued
that labour market slack is limited, which may trigger a rapid
pickup in wage inflation. We have a different view. For one
thing, the unemployment rate does not accurately reflect the
margin of spare capacity due to various structural changes.
Moreover, weak inflation ought to act as a brake on nominal
wage gains. Thus, one or both of them are likely to change
their view in the coming months. We will get some more
insight with the release of the January minutes next week.
CHART 10: Expected interest rate for 3-month funds (GBP)
2,0
1,5
1,0
0,5
0,0
current
Mrz 15
Jun 15
Sep 15
Dez 15
Mrz 16
Futures
16.01.15
09.01.15
Commerzbank
Source: Bloomberg, Commerzbank Research
Peter Dixon
+44 20 7475 4806
Bank of Canada
The cautious optimism signalled by the Bank of Canada in
early December about a broader economic recovery has
vanished amid the huge oil price slump. Governor Poloz
established only a little later that the lower oil price will
probably dampen growth by 0.3 percentage points in 2015.
For the first time in quite a while, there is speculation on the
markets about a rate cut by the BOC, which has kept the key
interest rate at 1% for a good four years now.
In the run-up to the BoC meeting next week, deputy governor
Lane spoke last Tuesday about the economic impact of the
lower oil price, which would be outlined in more detail in the
new monetary policy report. While the global economy was
profiting, the overall effect for Canada was likely to be
negative. This was because the positive effects of higher
export demand, improved purchasing power of consumers or
more favourable price competitiveness of Canadian firms
following CAD depreciation were probably not enough to
offset the negative effects on corporate investment in the oil
sector, the labour market and income resulting from the
poorer relationship between export and import prices. We
expect the BoC to adjust its forecasts downwards and look
ready to act. It should keep the key interest rate at 1%.
CHART 11: Expected interest rate for 3-month funds (CAD)
2,0
1,8
1,6
1,4
1,2
1,0
current
Mrz 15 Jun 15
Futures
16.01.15
Sep 15
09.01.15
Dez 15
Mrz 16
Commerzbank
Source: Bloomberg, Commerzbank Research
Elisabeth Andreae
+49 69 136 24052
16 January 2015
13
Economic Research | Week in Focus
Rainer Guntermann
Tel. +49 69 136 87506
Bond market preview:
Decisive events ahead!
The coming ten days will see two landmark events, the ECB meeting and the
parliamentary election in Greece. The market is convinced that the ECB will announce a
purchase programme for government bonds. The details will decide how quickly Bund
yields fall to new lows. We expect to see new yield lows also because tailwinds from
globally falling inflation expectations appear to be intensifying. Although ECB purchases
will be positive for bonds from peripheral countries on a medium-term perspective, we
remain cautious near-term. Uncertainty about the outcome of the Greek election and bold
issuance activity should initially stand in the way of a marked decline in yield premiums.
TABLE 3: Weekly outlook for yields and curves
Bunds
US Treasuries
Yield (10 years)
Lower
Lower
Curve (2 - 10 years)
Flatter
Flatter
Source: Commerzbank Research
Outlook for the Bund
future, 19 – 25 January
Economy
↓
Inflation
↑
Monetary policy
↑
Trend
↑
Supply
↓
Risk aversion
↑
Bunds remain in demand, and their ten-year yields have fallen to nearly 0.40%. One reason for
this drop is speculation about an imminent programme for government bond purchases by the
ECB, which has been fanned by numerous official comments (see page 3). Also, uncertainty
about the outcome of the election in Greece has fuelled risk aversion. Whilst the Swiss National
Bank, having abandoned the exchange rate floor, will no longer be a buyer of German or French
government bonds in the near future, concerns about the global decline in inflation are
simultaneously mounting. Against this backdrop, the markets are obviously increasingly doubtful
that the Fed can continue to “look through” the plunge in the oil price and the resulting fall in the
inflation rate and initiate the reversal of interest rates in the middle of this year. As a
consequence, ten-year US Treasuries have outperformed Bunds by 30 basis points in yield
terms since the start of the year (chart 12). The 30-year US Treasury yield has traded below
2.44%, which was hitherto considered a floor even during the financial crisis, and for a time
pushed the yield of 30-year Bunds below the level of their Japanese counterparts (chart 13).
The ECB’s decision to buy government bonds will be a landmark event for the European bond
market next week. We assume that ECB President Draghi will remain ambiguous for now,
especially with regard to the pace and total volume of the purchases. As a result, this decision
will unfold its full effect on the market only gradually over time. As soon as bond markets in the
US return to normal and again take rising interest rate expectations into account, Bund yields
should also touch bottom. But near-term, the global situation argues for new yield lows in Bunds,
possibly below 0.30%.
CHART 12: US yields falling more steeply than Bund yields
CHART 13: Yields of 30-year bonds enter uncharted territory
Yield spread between ten-year Bunds and US Treasuries, in basis
points
Yields of 30-year government bonds, in percent
170
6
160
5
150
4
140
3
130
120
2
110
1
100
0
2007
90
Jan-14 Mar-14 May-14 Jul-14
Sep-14 Nov-14 Jan-15
Source: Bloomberg, Commerzbank Research
14
2009
Japan
2011
Germany
2013
2015
USA
Source: Bloomberg, Commerzbank Research
16 January 2015
Economic Research | Week in Focus
Esther Reichelt
Tel. +49 69 136 41505
Antje Praefcke
Tel. +49 69 136 43834
FX market preview:
The beginning of a new era
The Swiss National Bank (SNB) has surprisingly abandoned its policy of a minimum EURCHF rate, so that the outlook for the Swiss franc now looks very different. We have
therefore changed our forecast for EUR-CHF, as well as that for the euro versus the
Czech koruna.
TABLE 4: Trading ranges expected next week
Range
EUR-USD
Tendency
Range
1.1300-1.2000
EUR-GBP
0.7500-0.7950
EUR-JPY
132.00-140.00
GBP-USD
1.4900-1.5400
USD-JPY
113.00-120.00
EUR-CHF
0.9500-1.0800
Tendency
Source: Commerzbank Research
The announcement expected next week of government bond purchases by the ECB (see
page 3) is unlikely to have much impact on the euro. Now that a target has been set for the
ECB’s balance sheet total, the foreign exchange market has already braced itself for extensive
measures. From its point of view, the volume of additional liquidity is more important than
precisely how it is supplied to the market (chart 15).
On the other hand, the ECB’s forthcoming decision naturally had a profound impact on the Swiss
franc. This was probably a reason for the SNB’s decision to stop defending a minimum rate for
EUR-CHF (chart 14). After all, further massive interventions would be needed once the ECB
starts buying government bonds. For the foreseeable future, the exchange rate will be
determined by the general weakness of the euro resulting from the ECB’s policy and the safe
haven character of the Swiss franc. The Swiss franc should rise further as a result. We have
therefore adjusted our CHF forecast in line with the new situation and now expect EUR-CHF at
0.98 by the end of this year (previously: 1.21).
We have also revised our EUR-CZK forecasts. In light of surprisingly low inflation figures and
significantly cheaper commodities, the Czech central bank (CNB) has revised its inflation
forecasts downwards. Since the key interest rate is already virtually zero (0.05%), inflation can
only be lifted by a weaker koruna. The monetary policy committee so far has not agreed on a
raising of the lower limit for EUR-CZK, which currently stands at 27.00. However, in the coming
quarters EUR-CZK is likely to settle at a higher level of around 29.00 in any case, for the simple
reason that only this level is consistent with the CNB’s inflation target. And if the market does not
weaken CZK, the CNB will eventually do it by raising the lower limit. Therefore, CZK will be
weakened either passively by market forces or actively by the CNB.
CHART 14: SNB abandons minimum exchange rate
EUR-CHF 10-minute spot rate on 15 January 2015
CHART 15: Balance sheet target determines liquidity
supply
ECB balance sheet total in billions of euros
3500
1.2000
1.1500
3000
1.1000
2500
1.0500
1.0000
2000
0.9500
1500
0.9000
0.8500
1000
2011
0.8000
0:00
2:00
4:00
6:00
8:00
Source: Bloomberg, Commerzbank Research
16 January 2015
10:00 12:00 14:00
2012
total assets
2013
2014
2015
assumed balance sheet target
Source: ECB, Commerzbank Research
15
Economic Research | Week in Focus
Andreas Hürkamp
Tel. +49 69 136 45925
Equity Market preview:
DAX outperformance due to weak euro and falling oil price
The earnings of European equity markets are suffering from the falling oil price, and
earnings of US equity markets suffer from the falling oil price and the strong US dollar.
The DAX, by contrast, has a relatively low exposure to the tumbling commodity markets,
and the index is a winner from the weakening euro. In our scenario the DAX should
continue its recent outperformance against the Euro Stoxx 50 and the S&P 500.
TABLE 5: Equity Market with subdued start to 2015
Earnings 2015e
Performance (%) since
Index points
Growth (%)
P/E 2015e
Index
31/12
30/09
30/06
current
31/12
current
31/12
current
31/12
DAX 30
9,817
0.1
3.6
-0.2
777.5
779.7
10.1
10.2
12.6
12.6
MDAX
17,265
2.0
7.9
2.7
1052
1053
13.9
13.9
16.4
16.1
Euro Stoxx 50
3,090
-1.8
-4.2
-4.3
241.4
242.2
9.5
9.9
12.8
13.0
S&P 500
2,011
-2.3
2.0
2.6
124.1
124.7
7.2
7.6
16.2
16.5
Source: Commerzbank Corporates & Markets, I/B/E/S
Over the last quarter, 2015 earnings expectations for the MDAX were flat, and the DAX had
slight negative earnings revisions of minus 1.1%. For the S&P 500, by contrast, earnings
expectations have fallen by 3.5%, for the Euro Stoxx 50 by 4.0% and for the Stoxx 600 by 5.1%.
Both the DAX and the MDAX enjoy two relative tailwinds compared to the other indices:
•
Firstly, the DAX and the MDAX benefit from their low exposure to the falling oil price. For the
European Stoxx Oil & Gas, for example, the expected EPS 2015 has tumbled by 20% over
the last weeks. Within the Euro Stoxx 50, Eni suffered an EPS 2015 cut of 34% over the last
quarter, Repsol by 24% and Total by 23%. And in the US, the Dow Jones index suffered
from EPS 2015 earnings cuts of 37% for Chevron and 31% for Exxon.
•
Secondly, the DAX and the MDAX clearly benefit from the strong depreciation of the euro the euro has already weakened by 14% y-o-y against the US dollar, by 11% against the
Renminbi and by 6% against the British pound. Thanks to the weak euro German exports to
the US have risen by 8% y-o-y to €95bn over the last year, to the UK by 11% to €82bn and
to China by 12% to €74bn - three all-time-highs (chart 16).
As a consequence, the 12-month EPS trend of the DAX price index has started to outperform
the 12-month EPS trend of the Euro Stoxx 50 (chart 17). Therefore the recent outperformance of
the DAX (2015 target price 10,800) should continue against the Euro Stoxx 50 (target price
3,200) and the S&P 500 (target price 2,100), in our optimistic DAX view.
CHART 16: Record-high
exports to US, UK, China
German exports over the last year in €bn
CHART 17:
DAX earnings trend has started to outperform
DAX price index, Euro Stoxx 50: 12-month EPS trend, indexed
106
100
104
80
102
60
100
40
98
96
20
0
2001
94
2003
2005
US
2007
2009
UK
Source: Datastream, Commerzbank Research
16
2011
China
2013
92
Jul-12
Jan-13
Jul-13
DAX price index
Jan-14
Jul-14
Jan-15
Euro Stoxx 50
Source: Factset, Commerzbank Research
16 January 2015
Economic Research | Week in Focus
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
Drop in base metal prices excessive
The latest rally on the oil market is unlikely to last. On the contrary the large number of
net long positions held by speculative investors suggests that prices have not yet
reached their lowest point. However, the sharp dip in base metal prices is probably
exaggerated. Sound economic data from China and tight market balances could trigger a
counter-movement starting next week. Gold should benefit next week from the ECB
announcing a QE programme.
TABLE 6: Trends in important commodities
Per cent change
Tendency Commodity specific events
15Jan
1 week
1 month
1 year Short-term
Brent (USD per barrel)
46.2
-3.8
-19.8
-54.3
Copper (USD per ton)
5645
-7.5
-11.8
-23.2
1253
3.7
5.0
0.9
ILZSG: 19. ; WBMS: 21.
Gold (USD per troy
ounce)
Source: Bloomberg, Commerzbank Research
At just under $45 per barrel in mid-week, Brent has been at its cheapest level for six years, but
has since gained an unexpected $3. However, we do not see this as the end of oil's slide. The
repeated surge in US crude inventories is clear proof of a rising market surplus. Moreover,
speculators remain very optimistically positioned. However, there are some first signs of the
shale oil boom slowing down. The number of active oil rigs is already falling (see chart 18). The
number of rigs in the US reported each Friday by Baker Hughes is likely to shrink further in the
weeks ahead, supporting the price recovery we envisage as of the spring. As the surplus on the
oil market should decline in the medium term, prices should manage to stage a good comeback
in the second half of the year.
Most base metals have been pulled down by oil. Copper has lost almost 12% since the start of
the year, zinc and nickel roughly 7%. At $5,500 per tonne, copper is at its cheapest since
summer 2009 (chart 19). In contrast with the oil market, though, the low of the economic and
financial crisis of just over $3,000 is still a long way off. There is no apparent basic explanation
for the latest dip in prices. Admittedly, the combination of a strong dollar, greater risk aversion
and concerns about the Chinese economic slowdown, the world's number one consumer of
metals, is having an adverse impact on prices. However, in our view the severe losses of the last
few days are excessive. China’s economic growth, industrial output and the preliminary PMI
Index from HSBC due out next week should calm the pessimists. In addition, the latest
fundamentals from study groups and the World Bureau of Metal Statistics will continue to reveal
a slight supply shortfall. Prices should therefore soon start to pick up again.
CHART 18:: USA – oil output still rising, number of rigs
already falling
CHART 19:
Nosedive on copper market
000 USD per tonne
Active rig count, mill. barrels per day
2000
1600
10
11
9
10
8
9
1200
7
800
6
5
400
0
2008
4
2009
2010
2011
US oil rig count, l
2012
2013
US crude oil production, r
Source: EIA, Baker Hughes, Commerzbank Research
16 January 2015
2014
3
2015
8
7
6
5
4
3
2009
2010
2011
2012
2013
2014
2015
Source: LME, Bloomberg, Commerzbank Research
17
Economic Research | Week in Focus
Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)
Inflation rate (%)
2014
2015
2016
2014
2015
2016
USA
Canada
2.4
2.9
2.8
1.6
0.2
2.0
2.4
2.5
2.5
2.0
1.0
2.0
Japan
0.3
1.0
1.5
2.7
0.7
0.7
Euro area
0.8
0.8
1.0
0.4
-0.1
1.2
- Germany
1.5
1.1
1.5
0.9
0.7
2.4
- France
0.4
0.5
0.7
0.5
-0.1
0.7
0.7
- Italy
-0.3
0.1
0.5
0.2
-0.4
- Spain
1.4
2.3
2.3
-0.1
-0.7
0.5
- Portugal
1.0
1.5
2.0
-0.4
-0.9
0.5
- Ireland
5.2
3.5
3.5
0.4
0.3
1.4
- Greece
1.0
2.0
2.5
-1.2
-1.5
0.0
1.6
United Kingdom
2.6
2.4
2.4
1.5
0.8
Switzerland
1.9
1.3
1.3
0.0
-1.5
0.0
China
7.3
6.5
6.5
2.3
2.0
2.0
India
5.8
6.2
6.2
6.5
6.2
6.0
Brazil
0.3
0.9
2.3
6.3
6.5
6.0
Russia
0.6
-3.7
1.6
7.8
11.3
7.2
World
3.1
3.2
3.5
• The ultra-expansionary Fed policy is boosting
the US economy. At the same time, fiscal
policy is at least no longer a headwind. We
expect US growth to markedly accelerate.
• Growth in China is decelerating on decreasing
house prices and gradual policy adjustment.
• The recovery in the euro zone will only
continue at a slow pace. GDP growth will
remain markedly lower than that of the USA.
• EMU has survived the sovereign debt crisis,
but is gradually evolving into an “Italian-style
monetary union”.
• Despite its current weakness, the German
economy looks set to continue outperforming
the rest of the euro area – partly because ECB
target rates are much too low for Germany.
• High unemployment in most countries is
keeping inflation low for the time being. In the
long term, however, inflation is likely to rise, as
central banks have given up some of their
independence.
• We cut our GDP forecast for Russia on lower
oil prices and continued sanctions.
TABLE 8: Interest rates (end-of-quarter)
15.01.2015
Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
Federal funds rate
0.25
0.25
0.50
1.00
1.50
2.00
3-months Libor
0.25
0.30
0.75
1.25
1.75
2.15
2 years*
0.47
0.90
1.30
1.80
2.25
2.65
5 years*
1.28
2.20
2.60
2.90
3.10
3.30
10 years*
1.81
2.50
2.75
2.90
3.05
3.20
Spread 10-2 years
134
160
145
110
80
55
Swap-Spread 10 years
12
10
10
15
15
15
USA
Euro area
Minimum bid rate
0.05
0.05
0.05
0.05
0.05
0.05
3-months Euribor
0.07
0.10
0.10
0.10
0.10
0.10
2 years*
-0.15
-0.10
-0.10
-0.05
-0.05
-0.05
5 years*
-0.05
0.10
0.15
0.15
0.20
0.20
10 years*
0.48
0.70
0.80
0.90
1.00
1.10
Spread 10-2 years
62
80
90
95
105
115
Swap-Spread 10 years
30
25
30
35
35
35
United Kingdom
Bank Rate
0.50
0.50
0.50
0.50
0.75
0.75
3-months Libor
0.56
0.60
0.60
0.80
0.85
1.00
2 years*
0.40
0.65
0.80
1.00
1.20
1.35
10 years*
1.53
2.30
2.50
2.70
2.70
2.80
• Fed interest rate hikes are on the cards from
2015Q2, due to a continuously decreasing US
unemployment rate and the expectation that
inflation will gradually rise once the oil price
has stabilised.
• Since the Eurosystem balance sheet will
probably not expand as expected by the
central bank, and as inflation expectations are
likely to fall further, we expect the ECB to
announce broad-based government bond
purchases during the first half of 2015.
• 10y Bund yields are likely to stabilise around
1% later this year when the Fed
communication changes but mark new record
lows when the ECB announces QE in 2015.
Thereafter, yields should rise gradually. The
structurally low interest rate environment
remains intact.
• The focus on the Fed’s lift-off will put upward
pressure on US$ rates. A return to 3% for 10y
USTs is only on the cards for end-2015,
though. The curve is in for a textbook-style
flattening via the short-end in the coming
quarters.
• Risk premiums of peripheral government
bonds are set to decline further.
TABLE 9: Exchange rates (end-of-quarter)
15.01.2015
Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
EUR/USD
1.16
1.16
1.14
1.12
1.12
1.11
USD/JPY
117
117
120
122
125
127
EUR/CHF
1.05
1.01
1.00
0.99
0.98
0.97
EUR/GBP
0.76
0.78
0.77
0.76
0.77
0.77
EUR/SEK
9.41
9.20
9.10
9.00
9.10
9.15
EUR/NOK
8.87
9.50
9.60
9.40
9.30
9.20
EUR/PLN
4.30
4.35
4.35
4.35
4.30
4.30
EUR/HUF
322
310
315
317
317
318
EUR/CZK
27.93
28.50
29.00
29.00
29.00
29.00
AUD/USD
0.82
0.82
0.81
0.79
0.77
0.78
NZD/USD
0.78
0.75
0.73
0.71
0.70
0.69
USD/CAD
1.19
1.19
1.21
1.20
1.19
1.19
USD/CNY
6.19
6.22
6.22
6.17
6.13
6.08
• USD should further profit from expectations of
Fed interest rate normalization. Current USD
rates have not priced in the speed of rate
hikes that we expect.
• The discussion about an ECB QE programme
will not put much pressure on the euro for the
time being because the overall volume of ECB
liquidity measures is already known.
• CEE currencies are benefiting from a dovish
ECB backdrop, meaning central banks have
room to cut rates further. HUF remains the more
vulnerable currency, while PLN and RON trade
range-bound, and EUR/CZK continues to float
above the 27.0 floor set by the CNB.
• We see the PBoC “allowing” the CNY to
remain on the weaker side in H1, following its
rate cuts to support the economy.
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs
18
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