Week in Focus How recessions actually evolve

Economic Research
Week in Focus
.
24 October 2014
How recessions actually evolve
Markets are still gripped by recession fears. We have looked at past recessions based on
the example of Germany and show that the economy only collapsed when the real economy
or financial markets were already overheated and a tight monetary policy ended the party.
We do not see such imbalances at present in the US or the euro zone. The Chinese
government has the means to avert an economic slump. We therefore believe the worries
about the global economy are exaggerated, although our economic forecasts are generally
more cautious than the consensus. Equity prices should further recover in the mid-term.
Page 2
The Week in Focus in 100 seconds
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Recession? In France less need for correction than in Spain
Unit labour costs relative to euro zone, index 1999 = 100
118
116
114
112
110
108
106
104
102
100
98
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Spain
France
Source: Global Insight, Commerzbank Research
Paradigm shift on the oil market. It seems that OPEC countries want to defend their
market share and are prepared to do so even at the cost of a price war. In the long-term,
prices are therefore likely to be lower than we had expected and we have cut our 2015 price
forecast from an average of USD 105 to USD 85 per barrel.
Page 6
Fed preview: QE3 ends, zero interest stays. At the meeting on 27/28 October, the Fed will
terminate its asset purchase programme (QE3) after more than two years although further
adjustments to monetary policy are not expected.
Page 5
Product Idea: Forward Extra on copper. We believe that copper supply in the current
year will again fail to meet demand. Prices are thus likely to increase again and we advise
our clients to hedge their copper needs against rising prices.
Page 7
Outlook for the week of 27 October to 31 October 2014
Economic data: Weak economic data are likely to fuel speculation about broad-based ECB
government bond buying next week. In contrast, US data should confirm that the reversal in
interest rates is drawing nearer.
Page 9
Bond market: Lingering market liquidity risks are unlikely to dissipate and we recommend a
neutral stance on peripheral markets.
Page 13
FX market. If the Federal Reserve sticks to its normalisation schedule as expected, this will
provide further support for the USD.
Page 14
Chief economist
Dr Jörg Krämer
+49 69 136 23650
jjoerg.kraemer@commerzbank.com
Editor
Peter Dixon
+44 20 7475 4806
peter.dixon@commerzbank.com
Equity market: The ongoing low-interest environment and changes in pension accounting
rules are impacting on many DAX companies' equity capital.
Page 15
Commodity market: Oil markets will remain over-supplied and the gold market recovery is
also at risk.
Page 16
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Dr Christoph Balz
Tel. +49 69 136 24889
How recessions actually evolve
Markets are still gripped by recession fears. We have looked at past recessions based on
the example of Germany and show that the economy only slumped when the real
economy or financial markets were already overheated and a tight monetary policy ended
the party. We do not see such imbalances at present in the US or the euro zone. While
house prices have indeed skyrocketed in China, the Chinese government has the means
to avert an economic slump. We therefore believe the worries about the global economy
are exaggerated, although our economic forecasts are generally more cautious than the
consensus.
Recessions in Germany
In a recession, economic activity drops significantly on a broad front and over a long period of
time. We have looked at the underlying causes of recessions in Germany over the past 40 years,
particularly because the German economy is closely linked with developments in other industrial
countries.
1974/75: Economy had already overheated before the oil crisis
In the Bretton Woods system of exchange rates, the D-mark was fixed to the US dollar.
Consequently, until the final collapse of Bretton Woods in spring 1973, the Bundesbank was
forced to more or less follow the Fed's lax monetary policy. This fuelled economic growth in
Germany (Chart 1). Labour shortages emerged and wages rose at double-digit rates. The
Bundesbank ultimately tried to dampen the economy, and hence inflation, with interest rate hikes
totalling 400 basis points, supported by the government's stability programmes. Public
expenditure was cut, a surtax was introduced and credit availability was reduced. These
measures had an effect: from mid-1973, the economy grew at a much slower pace. The
downswing turned into a recession when the oil price exploded in autumn 1973, withdrawing
purchasing power from consumers and impacting the economy in other industrial countries.
1980/82: Second oil crisis
By 1976, the German economy had emerged from the first oil crisis. Up to mid-1979, it expanded
at annual rates averaging around 4%. Capacity utilisation rose again, which again raised inflation
risks. The Bundesbank reacted in March 1979 with an initial rate hike from 3% to 4%. From June
1979, the oil price then climbed sharply again and the Bundesbank increased interest rates
further, to 7.5% by May 1980. Restrictive monetary policy and the oil price shock caused the
German economy to contract from the second quarter of 1980, as in other industrial countries.
1992/93: Recession hits after reunification euphoria
German reunification in 1990 carried the West German social insurance system over to the
federal states of former Eastern Germany and thus strengthened purchasing power there. At the
same time, the German government invested heavily in eastern infrastructure.
CHART 1: Germany: Five recessions in 40 years
CHART 2: USA: housing surplus has been worked through
GDP, in real terms, year-on-year change in per cent
Residential construction, housing starts, monthly figures, annual rate
in thousands
8
3000
6
2500
4
2000
2
1500
0
-2
1000
-4
500
-6
-8
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: Global Insight, Commerzbank Research
2
0
1950
1960
1970
1980
Housing starts
1990
2000
2010
Average 1950-2000
Source: Global Insight, Commerzbank Research
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24 October 2014
The West German economy benefitted most from the pickup in demand in the east, after having
already expanded at decent rates of 3.8% and 3.9% in 1988 and 1989 which put additional
strains on capacity margins. On the back of this surge in demand, the economy continued to
expand rapidly and inflation pressure increased, although the Bundesbank had already raised
the discount rate from 2.5% in 1988 to 6% by the end of 1989. To keep inflation risks in check, it
resumed interest rate hikes in early 1991. At their peak, rates reached a record level of 8.75% in
summer 1992. By this point, previous hikes had already driven the economy into recession,
especially since the global economy had been sluggish since 1991 and much investment in
former east Germany turned out to be a mistake.
2001/2003: End of the technology boom
The euphoria surrounding new opportunities in the Age of the Internet triggered a wave of
investment in the 1990s, particularly in the IT sector. Investment was easy for many companies
as capital was cheap on account of low interest rates and the booming equity market. When the
phase of cheap money ended – for example, the ECB increased key rates from 2.5% in April
1999 to 4.75% by autumn 2000 – the bubble burst and equity markets slumped. Heavily
indebted businesses had to consolidate their balance sheets and thus slashed investment. The
German economy slipped into recession in mid 2001.
2009: Recession had already begun before the Lehman bankruptcy
ECB rate cuts after the end of the New Economy boom helped the German economy to regain
momentum. At the end of 2005, the ECB viewed the economic recovery in the euro zone as
sufficiently strong to withstand higher interest rates intended to ward off growing inflation risks.
By mid 2007, the key interest rate had risen by 200 basis points. At the same time, the USA
slipped into recession at the end of 2007. Under the pressure of ECB interest rate hikes and
lower export demand, the German economy contracted in the second quarter of 2008. The
uncertainly shock posed by the Lehman bankruptcy on 15 September 2008 then accelerated the
slide into the severest recession of the post-war period – a phenomenon not confined only to
Germany.
How do things stand now? In the euro zone, the bubble has already
burst
These examples show that an economy slips into recession when central banks are forced to
pursue a restrictive monetary policy to fight inflationary excesses in the real economy or market
bubbles. Are investors therefore right to be worried about the global economy today?
In the euro zone, the bubble that formed as a result of overly expansionary monetary policy in
the periphery already burst in 2008. Countries like Spain, Ireland and Portugal have reformed
their economies and are working their way out of the trough. Of course, in France, unit-labour
costs have risen too sharply and private households have accumulated too much debt. But the
imbalances are much smaller than in Spain for example. Consequently, the need for correction
is not so high that it has to end in a recession. At the same time, the ECB is driving the economy
with ultra-loose monetary policy. Sooner or later, it is likely to pile the fire still higher with broadbased government bond purchases. This all suggests sluggish growth in the euro zone (2015:
0.8%) but not a recession.
Despite all the negative sentiment – the US economy is still looking
robust
We see no arguments for a recession in the US either. The imbalances that could trigger a
recession are not in evidence. The clean-up after the housing bubble is well advanced. In past
years, fewer housing units have been built compared to pre-recession norms (Chart 2, page 2).
Over-investment should therefore have been corrected. At the same time, house prices have
fallen noticeably from their peak and are at a more normal level relative to rents. Consumers
have adjusted their excess consumption, which was partly financed by rising home equity, and
have driven the household savings rate to 5.4% of disposable income. This is much higher than
before the crisis (3%) and appears to be an appropriate level given current circumstances. At the
same time, the level of private debt relative to disposable income has fallen significantly.
Of course, the other side of the coin is that the government has accepted a relatively high budget
deficit to cushion the reform of private households. This deficit has also decreased significantly
though; at the federal level, it is likely to come in at a relatively unproblematic 2% of GDP in the
24 October 2014
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3
current budget year (30 September 2015), compared to almost 10% in 2009. This progress is
attributable to the strong economy which has filled the government’s coffers. Spending cuts or
tax increases that could apply the brakes to the economy are not on the agenda.
At the same time, Fed monetary policy should continue to support the US economy for a while
yet. Although the Fed is set to stop asset purchases at the end of the month (QE3), this does not
alter the fact that its balance sheet, at 4.5 trillion dollars, has been hugely expanded compared to
pre-crisis times.
The focus in the meantime is naturally on prospective Fed interest rate increases and we expect
the first hike in June 2015. However, as the effects of this move will be felt only with a lag, this
step is hardly likely to dampen the economy before mid-2016. And the Fed will hike rates only if
the US economy proves to be robust, as we expect: US economic growth probably reached an
annualised 3½% in the third quarter, and this is after strong growth of 4.6% in the second
quarter. At the same time, all components of GDP likely contributed to growth in the last quarter,
but particularly investment. This suggests that the economic recovery is broad based. This is
also reflected in the labour market: irrespective of all short-term fluctuations in sentiment, the US
economy has created over 200,000 jobs in seven of the past eight months and the outlier to the
downside in August can be explained by special factors.
Greater risks in Emerging Markets, especially China
There are no signs of an imminent slump in emerging markets where the year-on-year rate of
industrial production and key leading indicators are moving sideways. There are dangers under
the surface though. The Bank for International Settlements (BIS) has pointed out that emerging
countries have been pursuing an overly expansive monetary policy for many years. In an
environment of a strong domestic economy and inflation risks, higher interest rates would have
been appropriate. Central banks sat tight though, because their currencies would have otherwise
depreciated. The flipside is that low interest rates allowed debt levels to rise markedly in many
countries.
This applies especially to China, where debt relative to GDP is much higher than in other
emerging countries, albeit not as high as in the G7 countries. Furthermore, the Chinese housing
sector is causing problems against a backdrop of oversupply. That said, most loans in China
were granted by state-owned banks, which could hope for government support if required. And
the central government at least should have the necessary fiscal scope to act. It is also
conceivable in our view that the government will loosen various restrictions to revive housing
demand. Moreover, the central bank could orchestrate lower mortgage interest rates, either by
an across-the-board interest rate cut or by allowing targeted interest rate cuts aimed at
mortgages.
In an environment of strong growth, it is also easier to service debt. The Chinese economy is still
expanding at above-average rates, even if the pace of 7.7% last year is unlikely to be achieved
this year (7.3%) due to property-related issues, and we envisage further weakening to 6.5% in
2015. The latest economic data for China (Q3 GDP growth of 7.3%, year-on-year) is in line with
this and suggest a gradual slowdown rather than a slump.
In short, no global recession in sight, equity prices have upside
potential
Some part of investors' recession fears could result from the fact that the global economy is
generally growing at a slower pace today than it was a few years ago, partly due ageing
populations in many countries with the result that growth rates are rather closer to the zero line
than they once were. We see few signs of a growth slump in major global regions or indeed
globally, provided that Chinese economic policy avoids any major mistakes. Instead, we are
likely to be witnessing a limited mid-cycle weakness.
Furthermore, the markets will profit when the ECB decides on further stimulus, as we expect,
and buys government bonds on a large scale (QE). Our equity strategists therefore believe that
indices have already priced in most of the negative news. Our Cross-Asset strategists
recommend a moderate pro-risk positioning. In the sample portfolio, equities, REITs (Real Estate
Investment Trusts) and commodities are overweighed, while bond investment in the USA, the
UK and emerging countries are underweighted.
4
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24 October 2014
Fed preview: QE3 ends, zero interest rates remain
Bernd Weidensteiner
Tel. +49 69 136 24527
At the meeting on 27/28 October, the Fed will terminate its asset purchase programme
(QE3) after more than two years. Further adjustments to monetary policy are not expected
and the US central bank will probably not change its “Forward Guidance”. Amid the latest
market turmoil, it will not want to drop the assurance that key interest rates will remain
close to zero for some time yet.
The Federal Open Market Committee (FOMC) will decide at its meeting next week to end QE3
completely. The central bank recently bought bonds on a scale of 15 billion dollars a month. All
in all, the Fed has purchased assets totalling 1.7 trillion dollars under the QE3 programme. The
Fed’s balance sheet has expanded to 4.5 trillion dollars in three rounds of quantitative easing,
and now corresponds to 26% of GDP. Since 2007, the central bank balance sheet has increased
fivefold.
The next step on the way to normalising monetary policy would be a departure from the zerointerest-rate policy conducted since the end of 2008. Of course, this is not expected in the near
term as the Fed has always indicated in its statements that key interest rates will remain at zero
for a “considerable time” after asset purchases end.
In recent weeks, significantly increased financial market volatility and signs of global economic
weakening suggest that the Fed will be very careful in making changes to its communication,
and is playing for time. We therefore believe that the FOMC will leave the phrase “considerable
time“ in its statement.
Federal Reserve Board chair, Janet Yellen, has punched enough holes into the calendar-based
Forward Guidance to make it largely irrelevant in any case in the past few months. Accordingly,
the central bank will not make its decision in terms of timing and will focus on the economic data.
The stable labour market recovery shows that the Fed has made considerable progress in
fulfilling the employment part of its mandate. Consequently, as long as the recovery does not
falter, and there as yet are no signs of it doing so, full employment should come within reach in
2015. It is therefore clear that key interest rates will rise in the not too distant future.
The precise timing of the “lift-off“, the first rate hike, should largely depend on whether inflation
gradually moves towards the 2% target. It is presently at 1.5% and the sharp fall in oil prices
should put downside pressure on inflation. The Fed will try and ignore short-term factors in
assessing the inflation trend and be guided by an estimation of the underlying price pressure.
This is better reflected by the core rate (i.e. the rate ex. volatile food and energy prices) which
currently also stands at 1.5%. According to John Williams, president of the San Francisco Fed,
an argument for a later lift-off would be if inflation “stuck” at 1.5%. So far, Williams has been
assuming a first rate hike in about nine months time, implying a point around mid-2015.
Williams' estimate probably reflect the Fed’s timetable quite well and is in line with our forecast.
There is therefore no hurry to adjust the communication and the US central bank can continue to
head towards normalisation of monetary policy slowly and methodically. We may see a larger
adjustment to the communication in December, when a press conference also takes place
following the last meeting of the year and Yellen would then have the opportunity to explain in
detail a new line of communication.
This is likely to be too slow for Philadelphia and Dallas Fed presidents, Plosser and Fisher who
might vote against the majority, as they did at the last meeting.
24 October 2014
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5
Eugen Weinberg
Tel. +49 69 136 43417
Carsten Fritsch
Tel. +49 69 136 21006
Paradigm shift on the oil market
Even with geopolitical unrest on several fronts, the oil price has continued falling in
recent months and is currently trading close to a four-year low. This could indicate a
paradigm shift on the oil market. OPEC countries obviously want to defend their market
shares and appear to be ready to do so even at the cost of a price war. Long-term, prices
are therefore likely to be lower than recently expected. We have significantly cut our price
forecast for 2015 from an average of USD 105 to USD 85 per barrel.
The price of Brent oil has lost around 25% over the past four months and is currently trading
close to a four-year low, at around USD 85 per barrel (chart 3). We believe recent events are
above all due to fundamental factors.
For one, global oil demand has decelerated significantly of late. With the euro zone economy
stagnating and emerging markets slowing considerably, the International Energy Agency (IEA)
has cut its forecast for demand growth this year to 0.65m barrels a day. This is the smallest
increase since the economic crisis in 2009. Even with an improvement in the demand outlook
next year, the IEA projects daily demand for OPEC oil at just 29.3m barrels, which is significantly
lower than OPEC’s current production level of just under 31m barrels a day (chart 4).
For another, global oil production expanded massively in recent months, despite a multitude of
risks. This has been helped by the return of Libya to the market and, above all, the massive rise
in US (shale) oil production. According to the US Energy Information Administration (EIA), US
crude oil production is expected to rise by around 1m barrels per day this and next year, and
reach an average of 9.5m barrels a day in 2015, which would be the highest level since 1970.
The rise in production of 4m barrels a day recorded since 2010 would be equivalent to a new oil
producer with the combined output of Iraq and Qatar entering the market.
In the past, OPEC has often implemented production cuts to rebalance the market and “defend”
certain oil price levels. To the surprise of most market players, however, such a reaction has not
materialised yet, putting additional pressure on the price of oil. Major OPEC countries have even
offered their customers the highest discounts on international benchmarks for November oil
deliveries since the start of the economic crisis in 2008. Unlike in the past, OPEC members'
primary aim obviously is to defend market share. By contrast, the price is no longer as much in
focus. The motivation behind this move is not clear yet, above all with regard to Saudi Arabia –
does it intend to discipline the other cartel members or weaken US shale oil producers and other
non-OPEC producers? Nevertheless, a true price war appears to be raging within OPEC at
present, so that in the long-term the price of oil should come in much lower than we had
previously expected. We have therefore revised our oil price forecast for 2015 from USD 105
down to USD 85 per barrel on average.
CHART 3: Price of Brent oil close to 4-year low
CHART 4: Risk of oversupply in case of no OPEC cut
In USD per barrel
OPEC oil production and IEA estimate on demand of OPEC oil for
2015 in million barrels per day
130
33
120
32
110
31
100
30
90
29
80
28
70
60
2010
2011
2012
Source: Bloomberg, Commerzbank Research
6
2013
2014
27
2007
IEA estimate for demand
of OPEC oil in 2015
2008
2009
2010
2011
2012
2013
2014
Source: IEA, Reuters, Commerzbank Research
research.commerzbank.com
24 October 2014
Product idea: Forward Extra on copper
Daniel Briesemann
Tel. +49 69 136 29158
Zero-cost hedging with participation in rising prices
The price of copper has fallen above all due to fears of a deceleration in Chinese
economic growth. Recent data have sounded the all-clear, though. Moreover, in contrast
to initial expectations, copper supply in the current year will again fail to meet demand.
We therefore expect prices to increase again and advise our clients to hedge their copper
needs against rising prices.
The price of copper recently dropped to just over USD 6,500 per tonne, i.e. its lowest level in six
months. This appears to have been mainly driven by higher economic pessimism, which was
also reflected in weak equity markets. Fears of a significant slowdown in the Chinese economy,
in particular, proved a drag given that China accounts for just over 45% of global copper
demand. Yet recent macro data have calmed markets a bit: the Chinese economy grew by 7.3%
year-on-year in Q3, which was somewhat better than feared. The strong increase in industrial
production in September also brightened the picture. Consequently, a slump in copper demand
should not be feared even though the ailing property sector likely to weigh on growth.
The global copper market is in any case tighter than indicated by the low price. At its autumn
meeting, the International Copper Study Group (ICSG) revised its market view significantly and
is now looking for the fifth consecutive supply deficit in 2014 which is expected to come in at
307,000 tonnes. Operating problems in mine production are weighing on supply growth. At the
same time, China apparently recorded strong demand in the first half. While the ICSG – on the
back of the weakening in global growth – is looking for a supply surplus of 393,000 tonnes next
year, it has often been too “optimistic” in recent years. We are looking for another supply
shortfall, which should drive up the price of copper medium- to long-term.
A near-term recovery in the price of copper would be possible if speculative financial investors
were to cover their high short positions. In recent weeks, investors were mostly positioned on the
short side. In the past, extreme positioning in one direction has been a good indication of an
upcoming countermove.
Overall, we expect copper prices to move much higher by the end of next year. While current
uncertainties on financial markets could drive prices lower in the near-term, the current price
level basically offers an attractive hedging opportunity, in our view. We therefore advise our
clients to hedge their copper needs against rising prices.
Forward Extra on copper in EUR – Zero-cost hedging for raw material purchasers
Maturity: January to December 2015, reference quantity 50 mt per month (600 mt in total)
Strike price: EUR 5,440.00/mt
Participation barrier: EUR 6,185.00/mt
Prices will be averaged over all commodity business days in the respective period, with monthly
payment based on the agreed reference quantity.
If the variable price of a period is above the strike price without reaching or exceeding the
participation barrier, the client will receive a compensatory payment amounting to double the
difference between the variable price and the strike price.
If the variable price exceeds the strike price and reaches or exceeds the participation barrier, the
client receives 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.
Comparable fixed price: EUR 5,275/mt (basis 3-month copper USD 6,649.00/mt, EUR/USD
1.2656)
In addition to copper, Commerzbank AG also offers hedging instruments in the base metals
sector on aluminium, lead, nickel, zinc, tin, iron ore fines and steel.
24 October 2014
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7
Major publications from 17 – 22 October 2014
Economic Insight: US – Will the rising dollar prevent US rate hikes?
The dollar has gained sharply in the last few months. If this continues, the hoped-for rise in US
inflation could be delayed and growth dampened. The “doves” in the Fed will therefore use the
dollar as a welcome argument to defer the turnaround on interest rates. In our opinion, a rate
hike in March 2015 is already off the agenda, though the lift-off has not been cancelled – merely
postponed – as this would require a labour market slump. more
Economic Briefing: Greece – new aid programme likely
Yields of ten-year Greek government bonds have climbed more than 300 basis points to 9%
after reaching a low in mid-September. Following this vote of no confidence by the markets
Greece will have no alternative but to accept another support programme in the form of a
precautionary ESM credit line. If it does, it is likely that private investors will again be willing to
lend the country money on acceptable terms. more
EM Briefing: China – No abrupt slowing in the economy
GDP data for Q3 showed that the economy slowed in year-on-year terms, but improved in
quarterly terms. Moreover, industrial production for September showed a healthy rebound from
the alarming slump recorded in August. However, the GDP expenditure components, retail sales
and fixed asset investment continued to slow. Overall the data eases fears of an abrupt slowing
in the economy, but does not change the broad trajectory of the economy. We still think that
weakness in the property sector will drag growth down and we continue to target GDP growth at
7.3% in 2014 and 6.5% in 2015. more
FX Hotspot: Time to buy EUR-JPY downside
Investors looking to profit from earlier than expected ECB quantitative easing should give
thought to buying downside strikes in EUR-JPY. Downgrades to global growth expectations can
easily lead to a period of JPY short covering meaning that EUR-JPY could experience a
significant pullback. With longer dated JPY volatility so cheap, there has rarely been a better
time to buy downside strikes in EUR-JPY. more
8
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24 October 2014
Preview – The week of 27 to 31 October 2014
Time
Region Indicator
Period
Forecast
Survey
Last
Monday, 27 October 2014
•
9:00
GER
Ifo Business Climate
Oct
sa
104.5
104.8
104.7
14:00
USA
Pending home sales
Sep
mom, sa
0.0
–
-1.0
Sep
Sep
Sep
Sep
Aug
Oct
%
yoy
yoy
mom, sa
mom, sa
yoy
sa
0.15
2.3
-1.4
0.0
0.5
5.2
87.0
0.05
–
–
0.3
0.5
5.7
87.0
0.25
2.0
-1.5
-18.2
0.7
6.8
86.0
%
86.0
0.25
–
0.25
86.0
0.25
qoq, sa
yoy
yoy
mom, k, sa
sa
sa
sa
k, sa
SAAR, qoq
0.5
1.6
-0.2
5
99.5
-6.0
3.0
278
3.5
–
–
–
5
–
–
–
–
2.9
0.6
1.2
-0.3
12
99.9
-5.5
3.2
283
4.6
Tuesday, 28 October 2014
8:30
9:00
SWE
EUR
Riksbank interest rate decision
M3
Loans to the private sector
12:30 USA
Durable goods orders
Durable goods orders excl. transport
13:00
Case-Shiller-index
14:00
Consumer sentiment (Conference Board)
EU-Commission: Autumn forecasts (1000)
Wednesday, 29 October 2014
•
7:45
18:00
FRA
USA
Consumer confidence
FOMC interest rate decision
Oct
EUR: Bank Lending Survey (0900 )
Thursday, 30 October 2014
8:00
ESP
8:55
10:00
GER
EUR
12:30
USA
13:00
GER
•
GDP, preliminary
Q3
Consumer prices (HICP)
Unemployed
Economic Sentiment Indicator
Business confidence, manufacturing
Business confidence, services
Initial claims
GDP
Oct
Oct
Oct
Oct
Oct
Oct 25
Q3
Consumer prices, first state results
Oct
mom
yoy
-0.1
0.9
–
–
0.0
0.8
3.2
-1.0
2.5
0.4
3.2
–
–
–
3.3
2.5
0.1
0.3
0.8
11.5
0.3
0.0
59.0
85.5
–
–
0.3
0.1
61.0
86.2
0.8
11.5
0.3
0.5
60.5
86.4
Friday, 31 October 2014
•
0:30
#
JPN
GER
CPI
Retail sales, volume
Sep
Sep
10:00
EUR
CPI, preliminary
Oct
yoy
mom, sa
yoy
yoy
Oct
Sep
Sep
Sep
Oct
Oct
yoy
%
mom, sa
mom, sa
sa
sa
CPI excl. food, tobacco, and energy
Unemployment rate
12:30 USA
Personal income
Personal spending
13:45
Chicago PMI
13:55
Consumer confidence (University of Michigan)
JPN: Monetary Policy Meeting
Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 4 hours for EDST. 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.
24 October 2014
research.commerzbank.com
9
Economic data preview:
Christoph Weil
Tel. +49 69 136 24041
Euro zone: QE remains an issue
Falling sentiment indicators, ongoing poor lending activity and persistent low inflation
look set to fuel speculation about broad-based government bond buying by the ECB next
week. This is in contrast to the USA where decent economic growth in the third quarter
will confirm that the reversal in interest rates is drawing nearer.
The euro-zone manufacturing purchasing managers’ index (PMI) surprisingly increased last
week. But this does not mean the end of bad news from the euro zone (yet). In Germany, the Ifo
business climate looks set to have dropped to 104.5 (consensus: 104.8). The deceleration in
emerging market growth is likely to have prompted export-oriented business to further lower their
expectations. In the euro zone as a whole, business sentiment also appears to have deteriorated
again. The Economic Sentiment Indicator, which had a one-month lag on the PMIs in the past,
should be in for another decline in October (Commerzbank forecast: 99.5).
The lacklustre euro zone economy is also reflected in bank lending. The ECB’s hopes for an
increase in lending should be disappointed once again (Commerzbank forecast: -1.4% y/y). And
the ECB is unlikely to be pleased by the inflation rate in October either. Originally, a marked
increase in inflation had been on the cards as last October’s slump in energy prices will drop out
of the year-on-year comparison. However, based on the recent fall in the oil price, October 2014
is also expected to come in with much lower energy prices (chart 5). We therefore believe the
rate of inflation will edge up only 0.1pp to 0.4%. Excluding highly volatile energy, food, drink and
tobacco prices, the rate of inflation should stick to 0.8%.
USA: Decent growth in the third quarter
The US economy is likely to have kept growing at a strong rate in the third quarter. Investment in
equipment and residential construction appears to have increased considerably based on
currently available data. A strong turnaround in net exports will offset the opposite trend in
inventory investment – following the strong inventory build-up in the second quarter, a weaker
trend appears likely in the third quarter. Finally, even with the trend slowing, household
consumption will also contribute to growth. Overall, we are looking for a 3.5% gain in real GDP
(on the second quarter, annualised; consensus: 2.9 %). Hence, the US economy is
outperforming its euro zone peer once more (chart 6).
CHART 5: Euro zone: Energy prices in October 2014 likely
to have fallen as much as in October 2013
CHART 6: USA – Clearly in the lead in terms of growth
Real GDP, annualised q/q growth in %, Q3 2014: forecast
Energy component of the HICP, m/m change in percent, oil price in €
1.5
90
5
1.0
85
4
0.5
80
0.0
75
-0.5
70
0
-1.0
65
-1
60
-2
-1.5
Jan-13
Jan-14
energy prices (lhs)
Source: Global Insight, Commerzbank Research
10
3
2
1
13.Q1
13.Q2
13.Q3
13.Q4
14.Q1
14.Q2
14.Q3
-3
USA
oil prices (rhs)
EMU
Source: Global Insight, Commerzbank Research
research.commerzbank.com
24 October 2014
Central Bank Watch (1)
Fed
One major argument of the Fed doves is that the rate of
inflation is hardly rising so far. The consumer price index in
September put the inflation rate at 1.7% and even excluding
energy and food prices, the rate remains the same. Since the
summer, the rate of inflation has even fallen slightly again.
The majority view among FOMC members is that this is due
to the still-muted trend in wages. Hourly wages have risen at
an annual rate of only 2% per year and this trend has not
gained traction, even with the rate of unemployment
slumping in recent years. More representative wage
indicators such as the employment cost index confirm that
wage pressure is low. The slack on labour markets thus
appears to be greater than indicated by the rate of
unemployment which has fallen below 6%. One such
indication is the still-large number of employees in
involuntary part-time work: 7.1m at present, which is 54%
higher than before the recession. However, an analysis that
focuses above all on wage pressure is at risk of identifying
inflation risks too late. After all, experience has shown that
wages react with a considerable lag to the economic
situation.
Bernd Weidensteiner
+49 69 136 24527
CHART 7: Expected interest rate for 3-month funds (USD)
2,0
1,5
1,0
0,5
0,0
current Dez 14
Futures
23.10.14
Mrz 15
Jun 15
16.10.14
Sep 15
Dez 15
Commerzbank
TABLE 1: Consensus forecasts Fed funds rate
Q4 14
Q2 15
Q4 15
Consensus
0.25
0.25
1.00
High
0.25
1.00
2.00
Low
0.25
0.25
0.25
Commerzbank
0.25
0.50
1.50
Source: Bloomberg, Commerzbank Research
ECB
According to press releases referring to undisclosed ECB
sources, the central bank is also considering corporate bond
purchases. This decision might be taken as soon as the
December meeting, with first purchases possible in early
2015, according to said sources. The President of the Belgian
central bank, Coene, said this had not been discussed in any
serious way although corporate bond purchases had been
mentioned in internal discussions. No concrete plans were on
the table, he went on.
The ECB has only started the recently agreed buying of
covered bonds and Pfandbriefe. Therefore, it is questionable
whether the monetary authority wants to expand its measures
so soon. Should the ECB primarily focus on the massive
expansion of its balance-sheet total, all these programmes
will be problematic as its purchases occur in a market that is
very fragmented and offers low liquidity. While, after all, the
ECB has mentioned an amount of around EUR 1.4trn as
“eligible marketable assets” with regard to corporate bonds,
these also include commercial paper and medium-term notes,
i.e. paper that does not necessarily qualify for a corporate
bond purchase programme. Sooner or later, the ECB is
therefore likely to buy government bonds.
Dr Michael Schubert
+49 69 136 23700
CHART 8: Expected interest rate for 3-month funds (EUR)
1,0
0,8
0,6
0,4
0,2
0,0
current Dez 14
Futures
Mrz 15
23.10.14
Jun 15
16.10.14
Sep 15
Dez 15
Commerzbank
TABLE 2: Consensus forecasts ECB minimum bid rate
Q4 14
Q2 15
Q4 15
Consensus
0.05
0.05
0.05
High
0.05
0.05
0.05
Low
0.05
0.05
0.05
Commerzbank
0.05
0.05
0.05
Source: Bloomberg, Commerzbank Research
24 October 2014
research.commerzbank.com
11
Central Bank Watch (2)
BoE
The minutes of the October MPC meeting did not produce
any new insight, with two external members of the Committee
maintaining their call for a 25 bps rate increase. Although the
meeting took place before the worst of recent market turmoil,
the minutes did highlight the potential impact of euro zone
weakness on the UK which reinforces the case for rates on
hold – particularly in view of the ongoing weakness of
inflation. This view was strengthened following a couple of
speeches by BoE officials. Chief economist Andy Haldane
pointed out that whilst there are reasons for economic cheer,
the storm clouds are gathering and he is "gloomier" about
near-term prospects. Deputy Governor Ben Broadbent took a
different tack by noting that one reason why central bank
rates are low may be due to the fact that the global
equilibrium interest rate has fallen – possibly as a result of the
Asian savings glut and demographic factors. In Mr
Broadbent's view, the global neutral rate is likely to remain
low for the foreseeable future and, by implication, the scope
for the BoE to raise UK rates is limited. As a result, markets
are now only fully pricing the first rate hike in Q3 2015.
Peter Dixon
+44 20 7475 4806
CHART 9: Expected interest rate for 3-month funds (GBP)
2,0
1,5
1,0
0,5
0,0
current
Dez 14
Mrz 15
Jun 15
Sep 15
Dez 15
Futures
23.10.14
16.10.14
Commerzbank
Riksbank (Sweden)
The negative inflation rate remains a headache for the
Riksbank. In September, inflation fell on a broad basis and
remained considerably below expectations. The minutes of
the latest meeting made clear that some council members do
not wish to tolerate such a decline, implying that they are
likely to vote for a rate cut next week. Additional arguments
for lower rates are the further deterioration of the global
growth outlook and the interest-rate environment which is
likely to remain low for longer. Thus, the ECB announced
unconventional easing measures.
When making its interest rate decision, however, the
Riksbank will also have an eye on Sweden’s relatively robust
economic data. For instance, the improved labour market
situation, higher unit labour costs, rising producer prices and
the krona, which has been weaker since early 2013, are
pointing to increasing pressure in the inflation pipeline. Add
to this improved consumer sentiment, as well as the high and
further growing debt burden of private households.
CHART 10: Expected interest rate for 3-month funds (SEK)
1.2
1.0
0.8
0.6
0.4
0.2
0.0
current
Dec-14 Mar-15
Futures
23.10.14
Jun-15
16.10.14
Sep-15
Dec-15
Commerzbank
Ultimately, however, concerns about the credibility of the 2%
inflation target, which the Riksbank recently clearly moved
into its focus, are likely to maintain the upper hand. We
expect the Riksbank to lower its policy rate by 10 basis
points and indicate a further rate move in its interest rate
outlook next week.
Elisabeth Andreae
+49 69 136 24052
12
research.commerzbank.com
24 October 2014
Bond market preview:
Rainer Guntermann
Tel. +49 69 136 87506
Bumpy sideways trend
The sharp rise in risk premiums for euro zone government bonds has given way to a bumpy
sideways trend. The results of the stress tests should further reduce uncertainty. However,
as market liquidity risks linger on despite speculation of further ECB measures, risk
appetite is unlikely to recover significantly going into year-end. We recommend a neutral
stance on peripheral markets, while fundamental impetus argues for stable Bund yields.
TABLE 3: Weekly outlook for yields and curves
Yield (10 years)
Bunds
sideways
US Treasuries
sideways
Curve (2 - 10 years)
neutral
neutral
Source: Commerzbank Research
Following the sharp rise in risk premiums for € government bonds last week, reminiscent of the
volatility during the height of the sovereign debt crisis, bond markets have calmed somewhat
again. Speculation about corporate bond buying by the ECB has helped risk appetite recover.
Outlook for the
Bund future,
27-31 October
Economy
↑
Inflation
→
Monetary policy
↓
Trend
→
Supply
→
Risk aversion
→
Going into the weekend, speculation about the upcoming results of the stress test could move up
yet another gear, with the detailed results due to be released by the ECB and the European
Banking Authority (EBA) on Sunday at noon. Apart from minor surprises, we do not expect to
see any systemic problems to flare up. Once market participants have digested the results, bond
markets should calm down further.
However, an analysis of market dynamics over recent weeks’ also indicates that periods of
extreme volatility may not remain one-offs, rendering tactical long positions in peripheral markets
until year-end unconvincing as market liquidity, in particular, can fade quickly. As a result, minor
imbalances in supply and demand can quickly produce major swings, with the trend of rising
spreads and larger bid/offer spreads re-enforcing each other. The prime reason for lower market
liquidity should be the vast number of forthcoming new regulatory requirements. Even though
some regulation is only planned for the future it is affecting business decisions and hence trading
conditions already today, particularly ahead of the balance-sheet dates.
Valuations on peripheral markets appear to have become more attractive after last week’s sharp
correction. While we turn a bit less cautious, significant overweights are still premature. A neutral
tactical positioning appears sensible for now. Only accounts able to look through year-end
volatility may start to consider adding to strategic longs. Bund yields should also stabilise at
current levels. The conflicting fundamental signals should largely offset each other. The
upcoming Fed meeting and solid growth figures will remind the market of the upcoming
turnaround in US interest rates, while euro zone data are more likely to provide food for the
doves on the ECB Council, further driving speculation of government bond purchases.
CHART 11:
CHART 12: Bund yield still close to its record low
Spread tightening is no one-way street
Yield spread of ten-year government bonds versus Bunds, in basis
points
Ten-year Bund yield, in percent
190
2.2
180
2.0
170
1.8
160
150
1.6
140
1.4
130
1.2
120
1.0
110
100
01/07/14
0.8
01/08/14
01/09/14
SPA
Source: Bloomberg, Commerzbank Research
24 October 2014
01/10/14
ITA
0.6
Jan 13
Jul 13
Jan 14
Jul 14
Source: Bloomberg, Commerzbank Research
research.commerzbank.com
13
FX market preview:
Esther Reichelt
Tel. +49 69 136 41505
Central bank crescendo
A total of four G10 central banks are due to take a monetary policy decision next week. If
the Federal Reserve Bank sticks to its normalisation schedule as expected that is likely to
support USD. The central banks in Sweden, New Zealand and Japan on the other hand are
struggling with inflation data that is lagging behind expectations.
TABLE 4: Expected weekly trading range
Range
Bias
Range
Bias
EUR-USD
1.2450-1.2850
Ô
EUR-GBP
0.7800-0.8000
Î
EUR-JPY
134.50-138.75
Î
GBP-USD
1.5850-1.6250
Ô
USD-JPY
106.25-110.00
Ò
EUR-CHF
1.2000-1.2120
Î
Source: Commerzbank Research
EUR-USD took a breather in its depreciation trend in October. The strong USD and concerns
about weaker global economic growth fuelled speculation that the Federal Reserve might
normalise its monetary policy more slowly than previously expected (chart 13). The FOMC
meeting on Wednesday might end this speculation for the time being, thus supporting USD.
Even though the Fed is likely to leave its communiqué largely unchanged, an end to bond
purchases would signal to the markets that the Fed is sticking to its normalisation course. That
would benefit USD and as a result we would expect slightly lower EUR-USD levels around 1.25
by year-end.
Riksbank on the other hand is a long way away from a normalisation of monetary policy. On the
contrary: following the low inflation data for September we expect a rate cut (chart 14). This
would probably weaken SEK against EUR only temporarily. Contrary to the ECB, Riksbank’s
threshold for unconventional measures is likely to be high due to high private debt levels. EURSEK is therefore dominated by downside risks.
The markets are also expecting dovish signals from New Zealand and Japan. In Q3 the New
Zealand inflation rate recorded a surprise fall to the lower end of the target range (1-3%). The
central bank will have to comment on the matter. There is no end in sight for the rate pause. As
a result there is hardly any upside scope in NZD-USD. The same cannot be said for USD-JPY:
the BoJ seemed optimistic recently that its monetary policy easing was having the intended
effects and that the Japanese economy continued to recover moderately. Like the majority of
analysts we therefore do not expect further monetary policy easing next week. However JPY will
be unable to benefit from this decision. As long as the BoJ’s optimism is not really reflected in
the data, markets will be dominated by JPY pessimism.
CHART 13: Doubts about rate hikes persist
Fed Funds rate: Fed expectations as dots and curves based on
market expectations of Fed Funds Futures at various dates, in
percent
2,00
1,75
CHART 14: Will a rate cut in Sweden bring about an
inflation reversal?
Swedish repo rate, consumer price inflation yoy, in percent
1,50
0,4
1,25
0,2
1,00
0,0
0,75
-0,2
0,50
-0,4
0,25
-0,6
1,50
1,25
1,00
0,75
0,50
0,25
0,00
Dez-14
Mrz-15
30/09/2014
Source: Bloomberg, FOMC
14
Jun-15
Sep-15
Dez-15
23/10/2014
0,00
Jan-13
Aug-13
Sweden Repo Rate (LHS)
Mrz-14
-0,8
Okt-14
CPI Inflation (RHS)
Source: Commerzbank Research
research.commerzbank.com
24 October 2014
Equity market preview:
Markus Wallner
Tel. +49 69 136 21747
Low interest rates drive up pension obligations, weighing on German
companies’ equity capital
Although most German companies’ pension obligations are only due to be paid out in the
distant future, the ongoing low-interest environment and changes in accounting look set
to result in additional charges. These would have to be offset against the respective
companies’ equity capital. The DAX companies particularly affected would include
ThyssenKrupp, Deutsche Post, Continental, Lanxess, BASF and Deutsche Lufthansa.
TABLE 5: DAX index recovering a bit
Earnings 2014e
Performance (%) since
Index points
Growth (%)
Current
31.12
P/E 2014e
Index
30.09
30.06
31.12
Current
31.12
Current
31.12
DAX 30
8,940
-5.6
-9.1
-6.4
707.1
731.1
1.7
11.6
12.6
13.1
MDAX
15,583
-2.6
-7.3
-6.0
933.8
994.2
27.2
41.6
16.7
16.7
Euro Stoxx 50
3,009
-6.7
-6.8
-3.2
222.1
242.3
4.8
12.1
13.5
12.8
S&P 500
1,927
-2.3
-1.7
4.3
116.9
119.3
7.7
9.9
16.5
15.5
Source: Commerzbank Corporates & Markets, I/B/E/S
Net pension obligations of most German companies which have their own pension fund, or
which have outsourced these obligations to a trustee, consist of two components: (i) gross
pension obligations, which must be reported as the discounted present value of employee’s
future claims and (ii) plan assets such as equities and bonds that are to fund those obligations.
The ongoing low-interest environment has a negative impact on both components. The lower the
discount rate for gross pension obligations, the higher the current present value of future pension
payments. Although DAX companies lowered their average discount rate from 4.8% to 3.8% at
the end of 2013, we do not expect this to be sufficient. We believe this rate will have to be cut
down to at least 3% as the current yield on European corporate bonds with high investment
grade (AA+/AA) is just under 1.4% and this low level of interest rates is likely to remain with us
for now. On the other hand, the allocation of fixed assets to cover gross pension obligations is
very much focused on fixed income securities. At the end of 2013, average holdings of fixed
income securities amounted to just under 52%. The ongoing negative impact of the current level
of interest rates on both components should further increase net pension obligations. Based on
the new accounting rules, this potential adjustment would have to be offset against the
respective company’s equity capital. The DAX companies particularly affected would include
ThyssenKrupp, Deutsche Post, Continental, Lanxess, BASF and Deutsche Lufthansa (chart 15).
CHART 15: DAX: Rising pension obligations keep weighing on equity capital
Change in equity capital in % in case of a potential increase in pension obligations
0
-5
-10
-15
-20
-25
-30
SAP
DB1
VOW3
ADS
SDF
DTE
FME
FRE
MUV2
EOAN
BEI
ALV
IFX
HEN3
CBK
MRK
RWE
DAI
DBK
BAYN
SIE
BMW
LIN
HEI
LHA
LXS
BAS
CON
TKA
DPW
-35
Source: Bloomberg, Commerzbank Research
24 October 2014
research.commerzbank.com
15
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
Put to the test
The price slump on the oil market has stalled of late. Yet we remain sceptical as to
whether the low has already been reached. In October, OPEC is likely to have produced
about as much crude oil as in the previous month. The market thus remains clearly
oversupplied. The gold market recovery is also at risk. However, stronger Chinese gold
imports from Hong Kong could lend support next week.
TABLE 6: Tendencies in important commodities
% change
23 Oct
1 week
Tendency Commodity specific events
1 month
1 year Short-term
EIA: “Availability of oil and oil products in
countries other than Iran” (30), news
Brent (USD per barrel)
84.8
0.3
-12.5
-21.4
Þ
Copper (USD per ton)
6682
2.0
-0.6
-6.8
Ö
1240
0.1
1.3
-7.0
Ö
Gold (USD per troy
ounce)
agencies’ production estimates
CHN: Gold trading with Hong Kong (Sep)
Source: Bloomberg, Commerzbank Research
The slump on the oil market has decelerated considerably this week. However, whether the price
of Brent oil will be able to actually form a base around USD 85 per barrel is likely to be put to the
test next week. At the end of the month, both the news agencies and the US Energy Information
Administration, in its quarterly report on the “availability of petroleum and petroleum products in
countries other than Iran,” will provide estimates on OPEC production. We believe the oil cartel
produced about as much crude oil in October as in the previous month: After all, swing producer
Saudi Arabia is unlikely to have reduced its supply to offset the considerable increase in Libya’s
production in recent months (chart 16). The largest oil producer by far is obviously keen on
defending market shares rather than supporting the price through production cuts (see p. 6). At
just under 31m barrels a day, however, OPEC production would keep outpacing demand (chart
4, page 6). Investors are likely to use Saudi Arabia's behaviour as an excuse for further selling.
Near-term, the price of Brent oil should thus drop further. As a result of this paradigm shift,
OPEC could decide no production cuts at its regular meeting at the end of November. Rather
than expecting prices to recover medium-term, we have therefore lowered our annual average
price forecast for 2015 from USD 105 to 85 USD per barrel.
The price recovery on the gold market, too, is currently being put to the test: A stronger dollar
and higher risk appetite recently sent the gold price lower again. It is thus still trading 4% above
its annual low in early October, though. A marked rise in Chinese gold imports from Hong Kong
could lend renewed support next week (chart 17). After all, China advanced to become the
world’s largest gold consumer last year. After Chinese demand in the first half of the year had
disappointed, net imports were back on the rise in August. Significantly higher gold exports from
Switzerland to Asia argue for another increase in September. A revival of physical demand
should also send prices on the gold market higher in the long-term.
CHART 16: Swing producer Saudi-Arabia is stubborn
CHART 17: Is China’s interest in gold back on the rise?
m barrels a day
Chinese net gold imports via Hong Kong, in tons
Source: Bloomberg, Commerzbank Research
Source: Hong Kong Statistical Office, Commerzbank Research
16
research.commerzbank.com
24 October 2014
Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)
Inflation rate (%)
2013
2014
2015
2013
2014
2.2
2.2
2.9
1.5
1.7
1.8
2.0
2.3
2.5
0.9
2.1
2.0
Japan
1.5
1.0
1.3
0.4
2.8
1.5
Euro area
-0.4
0.7
0.8
1.4
0.6
1.0
- Germany
0.1
1.3
1.3
1.5
1.1
2.1
- France
0.4
0.3
0.5
0.9
0.6
0.7
- Italy
-1.7
-0.2
0.3
1.2
0.4
0.6
USA
Canada
2015
- Spain
-1.2
1.4
2.3
1.4
0.0
0.5
- Portugal
-1.4
1.0
1.5
0.3
-0.2
0.8
- Ireland
0.2
5.2
3.1
0.5
0.6
1.4
- Greece
-4.2
1.0
2.0
-0.9
-1.3
0.5
United Kingdom
1.7
3.0
2.6
2.6
1.6
1.9
Switzerland
2.0
1.7
1.8
-0.2
0.0
0.5
China
7.7
7.3
6.5
2.6
2.3
2.5
India
4.7
5.8
6.2
6.3
6.5
6.2
Brazil
2.5
0.3
0.9
6.2
6.3
6.5
Russia
1.3
0.3
0.9
6.8
7.3
6.5
World
2.9
3.1
3.4
• The ultra-expansionary policy of the Fed
is boosting the US economy. At the
same time, fiscal policy is at least no
longer a headwind. We therefore expect
US growth to markedly accelerate.
• Growth in China decelerates further, also
due to decreasing house prices.
• The recovery in the euro zone will only
continue at a slow pace. GDP growth will
remain lower than that of the USA.
• EMU has survived the sovereign debt
crisis, but is gradually evolving into an
“Italian-style monetary union”.
• Despite its current weakness, the
German economy looks set to continue
outperforming the rest of the euro area –
partly because ECB target rates are
much too low for Germany.
• High unemployment in most countries is
keeping inflation low for the time being.
In the long term, however, inflation is
likely to rise, as central banks have given
up some of their independence.
TABLE 8: Interest rates (end-of-quarter)
23.10.2014
Q4 14
Q1 15
Q2 15
Q3 15
Q4 15
Federal funds rate
0.25
0.25
0.25
0.50
1.00
1.50
3-months Libor
0.23
0.25
0.30
0.80
1.35
1.90
2 years*
0.39
0.70
0.90
1.20
1.60
2.00
5 years*
1.47
2.10
2.40
2.70
2.95
3.20
10 years*
2.24
2.70
2.90
3.10
3.30
3.50
Spread 10-2 years
186
200
200
190
170
150
Swap-Spread 10 years
14
10
10
10
15
15
USA
Euro area
Minimum bid rate
0.05
0.05
0.05
0.05
0.05
0.05
3-months Euribor
0.09
0.05
0.05
0.05
0.05
0.05
2 years*
-0.05
-0.10
-0.10
-0.10
-0.05
0.00
5 years*
0.16
0.25
0.20
0.25
0.35
0.40
10 years*
0.88
1.10
0.80
1.00
1.20
1.35
Spread 10-2 years
93
120
90
110
125
135
Swap-Spread 10 years
25
15
25
30
35
35
United Kingdom
Bank Rate
0.50
0.50
0.75
0.75
1.00
1.25
3-months Libor
0.56
0.80
0.90
1.05
1.25
1.40
2 years*
0.67
1.00
1.25
1.30
1.35
1.55
10 years*
2.21
2.60
2.85
3.05
3.20
3.35
• The Fed is set to gradually reduce its
QE3 programme and end it in October
2014. Interest rate hikes are on the cards
from 2015Q2, due to a continuously
decreasing US unemployment rate and
gradually rising inflation.
• Due to the deteriorating growth outlook
and increasing downside risks for
inflation we expect the ECB to announce
QE within the next 12 months.
• 10y Bund yields are likely to stabilise
around 1% later this year when the Fed
communication changes but mark new
record lows when the ECB announces
QE in 2015. Thereafter, yields should
rise gradually. The structurally low
interest rate environment remains intact.
• The focus on the Fed’s lift-off will put
upward pressure on US$ rates. A return
to 3% for 10y USTs is only on the cards
for 2015, though. The curve is in for a
textbook-style flattening via the short-end
in the coming quarters.
• Risk premiums of peripheral government
bonds are set to decline further.
TABLE 9: Exchange rates (end-of-quarter)
23.10.2014
Q4 14
Q1 15
Q2 15
Q3 15
Q4 15
EUR/USD
1.27
1.25
1.22
1.19
1.17
1.15
USD/JPY
108
110
113
116
118
120
EUR/CHF
1.21
1.21
1.21
1.21
1.21
1.21
EUR/GBP
0.79
0.77
0.76
0.75
0.74
0.73
EUR/SEK
9.19
9.10
9.00
8.95
8.90
8.90
EUR/NOK
8.31
8.05
7.80
7.70
7.70
7.65
EUR/PLN
4.23
4.15
4.10
4.08
4.06
4.05
EUR/HUF
307
312
310
309
308
306
EUR/CZK
27.69
27.50
27.30
27.00
27.00
26.90
AUD/USD
0.88
0.87
0.85
0.83
0.81
0.80
NZD/USD
0.78
0.77
0.75
0.73
0.71
0.70
USD/CAD
USD/CNY
1.12
1.13
1.15
1.16
1.17
1.18
6.12
6.10
6.05
6.00
5.95
5.95
• USD should further profit from the
expectations of Fed interest rate
normalization. Current USD rates have
not priced in the speed of rate hikes that
we expect.
• The high yielding G10 currencies should
particularly suffer from US rate hikes.
• EUR will remain under pressure due to
increasing likelihood of an ECB QE
program. ECB wants a weaker EUR and
is active in achieving this goal.
• CEE currencies are generally benefiting
from the dovish ECB backdrop, meaning
central banks have room to cut rates
further. HUF, PLN and RON should trade
range-bound, while EUR/CZK will float
above the 27.0 floor set by the CNB.
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs
24 October 2014
research.commerzbank.com
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