Economic Research
Week in Focus
9 June 2017
Some you win, some you lose
After an extremely long election campaign, the Conservative Party remains the largest
parliamentary party but failed to achieve the enhanced parliamentary majority that Prime
Minister Theresa May hoped for when she called an early election in April. This has domestic
consequences as it will be difficult to form a stable government. Moreover, it hugely
complicates the Brexit negotiations, scheduled to begin in ten days’ time.
Page 2
The Week in Focus in 100 seconds
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UK: May lost majority
Seats as at 0630 BST with 639 of 650 constituencies having reported, majority: 326
350
331
310
300
260
232
250
200
150
100
56
34
50
12
8
23
23
0
Conservative
Labour
SNP
2017 (latest)
Lib Dem
Other
2015
Source: https://www.theguardian.com/politics/, Commerzbank Research
Fed will not be thrown off course
At its meeting next week, the Fed is set to raise interest rates again, making it the fourth
hesitant step in the normalisation of monetary policy. With inflation proving surprisingly low of
late, widespread doubts have arisen about the future rate path. The Fed views the drop in
core inflation as a one-off, and in the medium term expects higher inflation rates. Our analysis
of inflation pressure bears out this assessment. Consequently, the balance-sheet reduction
also moves closer, and the Fed will likely announce further details at the press conference
after the FOMC meeting.
Page 5
France: Absolute majority for Macron?
According to the latest surveys, “La Republique en marche” – the movement led by the new
French president – could win an absolute majority of seats in the National Assembly in the
forthcoming parliamentary elections. This would give Macron a free hand to implement his
reform plans.
Page 8
Outlook for the week of 12 to 16 June 2017
Economic data: The US economic data due for release are set to confirm that the economy
is on course for higher growth in the second quarter.
Page 11
Bond market: 10y Bund and Treasury yields are expected to rise again next week.
Page 14
FX market: Despite a timely interest rate hike being ruled out by Mario Draghi, EUR-USD is
not set to decline significantly.
Page 15
Equity market: DAX and MDAX gains are increasingly based on growing earnings
expectations rather than higher valuations.
Page 16
Commodity market: Oil prices should climb above $50 per barrel over the course of next
week.
Page 17
Chief economist:
Dr Jörg Krämer
+49 69 136 23650
[email protected]
For important disclosure information please see pages 20 and 21.
Editor:
Peter Dixon
research.commerzbank.com / Bloomberg: CBKR / Research APP available
+44 20 7475 4806
[email protected]
Economic Research | Week in Focus
Peter Dixon
Tel.: +44 207 475 4807
Some you win, some you lose
After an extremely long election campaign, the Conservative Party remains the largest
parliamentary party in the UK but failed to achieve the enhanced majority that Prime
Minister Theresa May hoped for when she called an early election in April. This has
domestic consequences as it will be difficult to form a stable government. Moreover, it
hugely complicates the Brexit negotiations, scheduled to begin in ten days’ time.
Interpreting the domestic politics
Although the final results are not yet in, we know that the Conservatives will not be able to
secure the parliamentary majority which was the primary objective of Prime Minister Theresa
May when she called the election in April. There are many reasons for this: The plan to focus the
campaign on Mrs May did not work as planned when she turned out not to be a particularly
fluent performer. She has also made a series of reversals on key policy issues which did not
accord with her image of projecting a “strong and stable” government.
On matters of policy, the Conservatives fought the election on the basis of continued fiscal
austerity whereas the opposition Labour Party offered a major tax-and-spend programme which
was perceived as a real alternative to five more years of fiscal grind. Whether it was the promise
of more spending on social care; the promise to abolish university tuition fees, or indeed
opposition to the government’s Brexit course, there is a sense that Labour’s policy captured the
electorate’s desire for change. We should not overlook the fact that Labour did not win the
election outright, but by proving the pollsters wrong – who for the most part had suggested that
the Conservatives would widen their majority to 60 seats – Labour have recorded their best
result since 2010 (chart 1).
Of course, the key reason for holding an early election in the first place was to give the prime
minister more of a buffer between the centre of the party and her domestic opponents, who are
less inclined to compromise with the EU during Brexit negotiations. But it is not just internal
Conservative Party divisions which are the problem. Potential coalition partners are likely to want
a different approach to Brexit, which threatens to become a domestic minefield. In addition, with
negotiations scheduled to begin in 10 days, it has suddenly become a lot harder for the UK to
form a coherent position.
Other notable developments were the collapse of the UKIP vote. A party which won 13% of the
vote share just two years ago (although just one parliamentary seat) appears on course to win
just 1.9% of the popular vote this time around (chart 2). In effect, the party which existed only to
win a referendum on Brexit now no longer has a role to play in the wider political sphere. The
Liberal Democrats, which were the only mainstream party to advocate a public referendum on
the final exit deal with the EU, remains on the periphery, looking likely to win only 12 seats in
Westminster. Meanwhile, the Scottish National Party is no longer as dominant north of the
border as in 2015, losing 22 seats, though it continues to do well enough to prevent Labour from
gaining enough seats to have a chance of forming a majority government.
CHART 2: The Conservatives’ vote share is up vs. 2015
CHART 1: Current state of the parties
As at 0630 BST with 639 of 650 constituencies having reported
350
310
331
300
260
232
250
200
150
100
34
50
56
12 8
23 23
Lib Dem
Other
0
Conser
vative
Labour
SNP
2017 (latest)
2015
Source: https://www.theguardian.com/politics/, Commerzbank Research
2
Share of vote at 0630 BST with 639 constituencies having reported
45
40
35
30
25
20
15
10
5
0
42.3
37.8
40.3
31.2
18
3.1
Conser
vative
Labour
4.9
SNP
2017 (latest)
7.1 8.1
Lib Dem
7.2
Other
2015
Source: https://www.theguardian.com/politics/, Commerzbank Research
9 June 2017
Economic Research | Week in Focus
Forming the next government
The difficult task ahead will be to figure out how to form a government. The largest party has he
first option. Assuming that the Conservatives are in this position, Theresa May can stay on as
prime minister while she tries to put a majority together. If she is unable to do so, whereas
Labour leader Jeremy Corbyn is, she will be expected to resign and Mr Corbyn would become
prime minister. Moreover, Mr Corbyn does not have to wait until Mrs May has tried and failed:
Even now, he is likely to be trying to figure out whether he can put together a workable coalition.
This will not be a rapid process: In 2010, it took five days to form a coalition. It will likely take
longer this time because there is less common ground between the parties thanks to Brexit.
Parliament is scheduled to reconvene on 13 June (i.e. next Tuesday). Official guidance issued
by the Cabinet Office means that if Mrs May is unable to form a government by that point, she
may be obliged to resign as prime minister. We should be in no doubt that Mrs May’s authority
has been fatally eroded. At this early stage, we view it as unlikely that she will quit immediately
as the party will likely give her the time to attempt to form a new government. In the event that
she is unable to do so, she will almost certainly resign – either voluntarily or involuntarily. Indeed,
the Conservative Party is ruthless in purging leaders who fail to live up to expectations (recall
that even Margaret Thatcher was forced out of office despite never having lost an election).
The next stage is figuring out which parties will cooperate with each other – a process which is
highly complicated. Unlike in 2010, the Conservatives cannot rely on the Liberal Democrats,
given their hugely different positions on Brexit. In any case, the Lib Dems are a much weaker
force than seven years ago. The SNP have ruled out cooperating with the Conservatives. Labour
could in theory lead a coalition with the SNP and Lib Dems – although Mr Corbyn has previously
ruled this out. Meanwhile, a Conservative-Labour coalition is almost unimaginable – only during
times of national emergency have such governments been formed – although in the current
environment of shifting positions, nothing can be ruled out.
Is a minority government a possibility?
Another alternative is that the government has no parliamentary majority, and operates from a
minority position. In this instance, the government will have to rely on doing deals with the
opposition on a case-by-case basis in order to pass legislation. Such a constellation has
occurred before but in practice such minority governments tend not to last long. In the modern
era, it first happened in 1924. A more recent precedent is February 1974 when the incumbent
Conservative administration lost its majority. In that instance, the then-prime minister was forced
to resign having failed to form a workable coalition and a minority Labour government assumed
office. In a second election in October 1974, Labour obtained a small majority of just three seats
which was soon eroded and it governed only with the help of the Liberal party until 1978, and
thereafter only with the help of ad hoc deals. Whilst a minority government is certainly possible,
the instability which results generally leads to another election sooner rather than later.
Domestic economic issues
From a timing perspective, this is not a good election to win. There are clear signs that the UK
economy is slowing, with the +0.2% q-o-q GDP growth rate recorded in Q1 the slowest across all
EU countries. The collapse in sterling last year is making its presence felt in the inflation data,
which is putting pressure on real wage growth, and matters are likely to get worse before they
get better. Although the deterioration in UK prospects is not expected to result in a huge crash in
activity, the predicted growth slowdown – in which GDP grows at a rate closer to 1.5% than the
2% predicted prior to the Brexit vote – is fully consistent with the analysis released in early 2016
which pointed out that Brexit would have adverse economic consequences. The slowdown which
appears to be kicking in probably came too soon to adversely affect Mrs May’s election
prospects, but if our forecast of sluggish growth over the next couple of years is realised, many
voters might start to feel the economic squeeze before too long.
Dealing with Brexit
Negotiations are set to commence with the EU In ten days’ time. But in the absence of a
government, it is possible that the UK will require a postponement. Having already used up more
than two months of the allotted two years of the Article 50 period, the government formation
process threatens to use up even more of the valuable time available.
Moreover, it is not even clear what the UK’s position will be in the event that a coalition is
formed. The SNP and Lib Dems will require far more concessions with regard to a soft Brexit in
order to ensure their participation in any government. Labour has already promised to guarantee
9 June 2017
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Economic Research | Week in Focus
the rights of EU citizens in their manifesto. This may also have an impact on the way the EU
approaches negotiations. If there is a willingness on the part of the UK to be more conciliatory
with regard to many of the key issues, this may make it easier to come to an arrangement on
matters such as trade, which is the UK’s overriding priority.
We suspect that the “hard” Brexit, which Theresa May’s government has advocated in recent
months, will not find sufficient support from other parties. This does not mean that the Brexit
decision will be reversed but it sends a signal that the Conservatives failed to understand the
subtleties of the message which emerged from last year’s referendum. The government tried to
“own” an issue which cut across party lines and as a result perhaps was too gung-ho in trying to
impose a form of Brexit which many people did not believe they voted for.
The market view
Sterling dropped sharply in the immediate wake of the exit polls yesterday evening and is down
by a good 1% versus the euro. This is perhaps not surprising since the government formation
process will be very difficult and the outcome is uncertain. Moreover, with the deadline for
leaving the EU already running, the current schedule is highly ambitious – and matters have
become even more difficult.
The currency collapse was, however, smaller than might have been predicted since the hung
parliament scenario was perceived as the worst of all possible worlds. But one reason for the
relative optimism is that the markets believe the “hard” Brexit option has been put on the back
burner for now. Equities have taken the result in their stride as well, with futures contracts
currently showing green. Indeed, despite all the uncertainty, there is at least some hope that a
collision course determined by Theresa May’s recent actions can be avoided even if she
succeeds in forming a government under a conservative leadership.
Last word: The vacuum needs to be filled
We should not be in any doubt that the forces unleashed in the wake of last year’s Brexit
referendum continue to make their presence felt. Far from being the unified country which Mrs
May had hoped for, the UK remains as divided as ever. It will now be tougher to sell Brexit
domestically if the government continues to press for the hard Brexit which it has increasingly
advocated in recent months. This will be particularly so if the economics continue to suggest
that the costs were greater than pro-Brexit supporters admitted in public. It is going to be a torrid
time for the UK political establishment, economy and the markets but there is in many quarters a
sense of relief that a collision with the EU can be avoided. It felt very different twelve months
ago.
4
9 June 2017
Economic Research | Week in Focus
Fed will not be thrown off course
Bernd Weidensteiner
Tel.: +49 69 136 24527
Dr. Christoph Balz
Tel. +49 69 136 24889
At its meeting next week, the Fed is set to raise interest rates again, making it the fourth
hesitant step in the normalisation of monetary policy. With inflation proving surprisingly
low of late, widespread doubts have arisen about the future rate path. The Fed views the
drop in core inflation as a one-off, and in the medium term expects higher inflation rates.
Our analysis of inflation pressure bears out this assessment. Consequently, the balancesheet reduction also moves closer, and the Fed will likely announce further details at the
press conference after the FOMC meeting.
Next rate hike on the way …
At first glance, the US labour market has seen a marked slowdown recently. In the three months
to May, only 121k new jobs on average were created, whereas in 2016 the monthly increase
averaged 207k. However, the loss of momentum can be explained by the fact that the reserves
of unemployed workers are now virtually exhausted. The unemployment rate has fallen to 4.3%,
a level the Fed equates with full employment. This means that essentially new personnel can
only come from population growth, which at best supplies only 100k new people a month. This
view of the labour market data is borne out by the fact that the corporate sector reported more
job openings in April than at any time since this data series started in 2000. In other words, the
US labour market is slowing down because it has reached the objective of full employment.
Even restrained job growth can cause the economy to overheat in these circumstances if the
Fed does not act in time. Consequently, next week it is likely to raise interest rates again and
raise the target corridor to 1.00% – 1.25 %.
… but falling inflation calls further steps into question
While the unemployment rate has dropped to a 16-year low and the Fed has thus reached its
employment goal, core inflation as measured by the PCE deflator is still below the desired 2%
rate. From January to April, it actually retreated from 1.8% to 1.5% (from 2.3% to 1.9% on the
basis of the CPI). It is thus difficult to see the clear upward trend towards target that the Fed
desires, giving rise to doubts about further rate hikes.
Inflation pushed down by one-off effect
The main reason for falling inflation is a price war in the telecommunications sector, with
providers introducing low charges with unlimited data volumes. This accounts for roughly half the
decline (see chart 3, p.6). Whilst prices are unlikely to rise, they are also unlikely to fall further,
especially since tariffs which already offer unlimited data will not result in any further increase in
performance.
In any case, the fall in prices in the mobile communications sector comes under the category
'good deflation', with technological progress leading to lower prices. This enhances consumers'
purchasing power, unlike what happens with 'bad deflation' as a result of shrinking demand. At
next week's meeting, the inflation data are therefore unlikely to deter the Fed from raising
interest rates, because it views the fall in inflation as a temporary phenomenon.
However, if inflationary pressure does not increase over the coming months, the Fed might
suspend the process of rate hikes.
Service prices: Tight labour market will (soon) show its face
However, we do not regard this as likely. One argument is the high degree of labour market
utilisation which is set to boost inflation in the relatively labour-intensive services sectors. The
core inflation rate in this sector tends to rise when labour-market utilisation is higher (i.e. the
difference between the unemployment rate and the natural unemployment as calculated by the
Congressional Budget Office declines, see chart 4, p.6). The corresponding correlation has been
present in all upturns so far, with the exception of the 1990s, when inflation only started to pick
up seven years after the labour market revived. At that time, though, inflation was held in check
by exceptional productivity growth, whereas now, productivity has proved disappointing in recent
years.
9 June 2017
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Economic Research | Week in Focus
The main reason for the recent decline in core inflation in the service sector, despite low
unemployment, is simply the one-off effect due to phone tariffs – not a decoupling of inflation
from the labour market. After all, inflation has never turned down ahead of the labour market.
And the unemployment rate can be expected to drop a bit more, as the trend is still for new jobs
to be created as new people enter the labour market.
End of dollar strength pushes up goods prices
A further argument against weakening core inflation is the end of the recent period of dollar
strength. Excluding oil, import prices have been rising rather more rapidly for some time, and this
should have an effect on US goods prices. In contrast to services, which are largely provided on
a domestic basis, import prices play a major role in the core inflation rate for goods. These are
frequently brought in from abroad or – if they were actually produced in the US – could be
sourced from elsewhere on the global market. (see chart 5, p.7). And these prices can be
expected to continue rising. For one thing, the global economy has improved, so that the
economy outside the US is also more likely to hit its capacity limits. Moreover, the strong dollar
gains are coming to an end. Since the start of 2016, the effective exchange rate has been
moving largely sideways, so is no longer depressing import prices. There are no signs as yet of
any significant renewed dollar appreciation.
So the Fed will press ahead
As a result, our analysis shows that underlying inflation pressure will probably start to increase
again soon. There is thus no reason for the Fed to abandon monetary normalisation stance after
only four rate hikes. Instead, normalisation will move into a new phase over the coming months.
So far, the Fed has been concentrating on interest rates, putting the reduction of its bloated
balance sheet on a back burner until the process of rate hikes is well underway (as the Fed has
put it). After the rate hike due next week, the process can be deemed to be “well underway”.
During the rest of the normalisation process, the Fed can thus pay more attention to balancesheet reduction. It remains to be seen how the Fed coordinates this with interest rate policy.
Lael Brainard of the Federal Reserve Board recently explained her ideas on the topic, and they
1
no doubt reflect the views of the entire Board. She said that the Fed stressed the federal funds
rate as the active instrument in its communications, to which the balance sheet had to take
second place. In practice, she added, the Fed will set the balance sheet to autopilot once it
launches the reduction process. As soon as a neutral level has been reached, it could again be
allowed to grow on a par with the requirement for cash throughout the economy.
CHART 3: Telecoms price war lowering inflation
CHART 4: Smaller labour reserves mean steeper rise in
service prices
Core inflation rate, change from January 2017 to April 2017, in
percentage points
Core inflation in services, change on year, unemployment rate minus
natural unemployment rate; quarterly percentages
Sources: Global Insight, Commerzbank Research
other
shelter
motor vehicles
medical care
communication
total
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
-0.35
-0.40
4.0
-2
3.5
-1
3.0
0
2.5
1
2.0
2
1.5
3
1.0
4
0.5
1995
5
1998
2001
2004
2007
2010
2013
2016
Core CPI, services (lhs)
Actual minus natural unemployment rate (rhs, inverted)
Sources: Global Insight, Commerzbank Research
1
See also Lael Brainard "Navigating the Different Signals from Inflation and Unemployment", speech held on
30 May 2017.
6
9 June 2017
Economic Research | Week in Focus
How rapidly will the balance sheet decline …
One open question is the pace of balance-sheet reduction and the target level, the neutral level
mentioned by Brainard. The minutes of the Fed's May meeting contain a proposal from Fed staff
for a gradual and foreseeable scaling-down of the Fed's securities portfolio, according to which
the FOMC would give a monthly upper limit for reduction. If more bonds matured than implied by
this upper limit, the corresponding amounts would be re-invested. Initially, the limit would be low,
and raised every third month until a certain maximum amount had been reached. This would
then be maintained until the balance-sheet target is reached.
We expect the Fed to kick off with around $5bn per month, increasing this reduction target by a
further $5bn after three months. During the final phase, monthly reduction of some $20bn can be
expected. The Fed might announce this at its September meeting which is a good argument for
it to stay its hand on interest rates, not acting again until December.
…and what is a 'normal' balance-sheet size for the Fed?
The Fed aims to return to a minimum size of the balance-sheet level which is needed to pursue
its monetary policy. Even once it has been returned to normal, though, the balance will be much
bigger than before the crisis (in 2006, the last pre-crisis year, the Fed had a balance-sheet total
of just under €900bn). The volume of currency in circulation – a Fed liability – has of course
since expanded considerably. Other Fed liabilities have likewise risen substantially:
•
The volume of currency in circulation currently amounts to some €1550bn ($795bn in 2006).
Despite all the imponderables regarding future payment practices, the volume will probably
increase further. We predict a rise of 7% p.a., roughly the same scale as in recent years.
•
Since 2015, the US Treasury Secretary has been holding much larger deposits with the Fed
than used to be the case, in order to cover any short-term interruptions to market access.
The Treasury account will have a minimum size of $150bn.
•
Other Fed liabilities (including the repo pool established with foreign central banks and the
reverse repos conducted with US banks) have risen from below $40bn in 2006 to roughly
$500bn.
•
Pre-crisis, when no interest was paid on reserves, bank reserves were very small. It is fair to
assume that in the longer term the reserves held will be much larger. We envisage a figure of
$200bn.
If these liabilities are added together, this implies a minimum balance-sheet total of $2.5 trillion.
A simulation based on the assumption that as of October 2017 the Fed will start scaling down its
portfolio ($5bn a month initially, then a maximum of $20bn a month), the balance-sheet total
would have returned to normal by the end of 2022. After that, it would rise again in accordance
with the need for currency in circulation (see chart 6).
CHART 6: Balance-sheet total to be normalised by 2023
CHART 5: More expensive imports point to rising goods
prices
Core inflation for goods, import prices excluding oil; change on year;
quarterly percentages
3
8
Fed's balance-sheet total in $bn. Simulation as of June 2017.
Assumed reduction of securities portfolio in $bn per month.
5000
6
2
4
1
2
0
0
-2
-1
-4
-2
-3
1995
4000
3000
-6
-8
1998
2001
2004
2007
2010
2013
core goods prices (lhs)
import prices ex petroleum (rhs)
Sources: Global Insight, Commerzbank Research
9 June 2017
2016
2000
2010
2013
2016
2019
Balance sheet
2022
2025
Simulation
Sources: Fed, Global Insight, Commerzbank Research
7
Economic Research | Week in Focus
Christoph Weil
Tel. +49 69 136 24041
France: Absolute majority for Macron?
According to the latest surveys, “La Republique en marche” – the movement led by the
new French president – could win an absolute majority of seats in the National Assembly
in the forthcoming parliamentary elections. This would give Macron a free hand to
implement his reform plans.
The first round of the parliamentary elections will take place this Sunday 11 June. If a candidate
receives an absolute majority of votes in their constituency (and the votes of at least 25% of
eligible voters), he will immediately secure one of the 577 seats in the National Assembly.
Otherwise, voting will go to a second round on 18 June, for which a relative majority is sufficient.
All candidates chosen by at least 12.5% of registered voters in the first round are allowed to
participate in the second round, but if fewer than two candidates achieve that, the two
candidates with the highest number of votes go through to the second round.
Macron’s movement is well ahead in the polls...
Based on the latest surveys, Macron’s movement “La Republique en marche” (REM) can expect
a good 30% of the votes nationwide, followed by the Republicans on 19% and the National Front
(FN) with 18% (chart 7). The socialists (PS) would then be relegated to fourth place with 9%.
However, in view of the majority voting system, the number of seats in the National Assembly
cannot simply be inferred from the percentages, particularly bearing in mind that, after the first
round of elections, in many electoral districts where the National Front is relatively strong, other
parties are likely to join forces to prevent the FN candidate from being elected in the second
round.
Although Macron’s movement will receive considerably less than 50% of the votes nationwide, in
view of the electoral system it can expect to win between 320 and 415 seats, giving it a clear
majority in the National Assembly (chart 8). The Republicans are forecast to win 105 to 165
seats. The National Front, which is only just behind the Republicans in the polls, would thus win
only 5 to 22 seats. The Socialists are likely to suffer a heavy defeat with 20 to 50 seats.
... which would accelerate the reform plans
An absolute majority for "La République en marche” would naturally make it much easier for
President Macron to implement his electoral programme. After all, he would not have to consider
potential coalition partners. This would undoubtedly speed up his reform agenda. But even then,
2
there is no prospect of a revolution, since his programme is anything but radical.
CHART 7: Macron’s movement is ahead in the polls …
CHART 8: … with a good chance of an absolute majority
Share of votes in percent, first round, average of recent polls
Projected seats in the National Assembly, solid bar: minimum
number, hatched bar: maximum number, average of recent forecasts,
absolute majority requires 289 seats
35%
Others
30%
Left
25%
20%
FN
15%
Republicans
10%
5%
REM
0%
REM
Republicans
FN
Source: Wikipedia, Commerzbank Research
2
8
PS
Greens
0
50
100 150 200 250 300 350 400 450
Source: Wikipedia, Commerzbank Research
See: ‘Macron is no saviour’, Week in Focus, 21 April 2017
9 June 2017
Economic Research | Week in Focus
Major publications from 1 to 8 June 2017
Economic Briefing: Germany – Good sentiment, sluggish orders
Orders received by the German manufacturing sector fell sharply in April, by 2.1% on the month.
Although this is primarily owed to an unusually low number of big-ticket orders, note that the
development of orders cannot explain the recent very good business sentiment. Despite a record
high for the Ifo, we should therefore expect that growth in Q2 will rather turn out somewhat
weaker than at the start of the year. more
Economic Briefing: Germany – Decent start into Q2
German industrial production rose in April by 0.8% on the month. Since the previous month was
revised slightly upwards at the same time, the April reading came in almost 1½% above the
average of Q1, sparking hopes for decent economic growth in Q2. With order intake having
lacked momentum recently, another notable increase in production is unlikely over the coming
months, though. The GDP growth rate should therefore come in slightly lower than in Q1. more
Economic Briefing: US – Fewer new jobs, but unemployment falls
further
The US economy created only 138k new jobs in May. Still, unemployment declined further and is
now lower than before the Great Recession. All in all, the data suggest another Fed rate hike is
likely at the meeting on June 14. more
FX Hotspot: ARPI² update – Uncertainty lower once again
Compared to last Wednesday, the ARPI² fell 0.1 index points. This was predominantly due to
somewhat lower money-market and emerging-market risks. One reason for the slightly lower
emerging-market risks could be a somewhat greater confidence that over the longer term, the
Fed will raise interest rates less than hitherto feared. Friday’s labour employment report
confirmed this view, as the US economy created only 138k new jobs in May. Developments in
Qatar so far had no visible impact on global risk perception. more
FX Hotspot: What is behind the new Chinese exchange rate
regime?
The Chinese central bank (Peoples Bank of China, PBoC) has changed its procedure for the
daily USD-CNY fixing once again. What is left is hardly more than a black box, which means that
Beijing is moving further away from its previous efforts to allow market forces to have a larger
effect. As usual the official explanations are vague at best, if not misleading. The main reason
that led the authorities to take this step is likely to be concerns about pronounced USD strength.
CNY reacted with strength to the step but we doubt whether it is sustainable. more
Economic Briefing: ECB meeting – carrot and stick
Today, the ECB brandished both carrot and stick. On the one hand, it described the economic
risks as balanced for the first time in a long while. On the other, stubbornly low inflation means
that the Bank still sees a need for a very relaxed monetary stance. All in all, the ECB will
probably not raise interest rates quickly after the enforced end to its bond purchases. Sadly, the
return to a normal monetary policy is set to drag out painfully slowly. more
Cross Asset Outlook Update – On course
Lacklustre performance of equity markets and investors focusing on carry were the key positioning
messages from last month’s outlook. And we got what we had asked for – equity market
performance was muted, and carry assets from the EM and the credit space outperformed
sovereigns. Still, we would only change our positioning substantially if developments over the last
month indicated a substantial change to our views. more
9 June 2017
9
Economic Research | Week in Focus
Preview – The week of 11 to 16 June 2017
Time
Region Indicator
Period
Forecast
Survey
Last
Sunday, 11 June 2017
FRA: General elections (first round. Second round takes place on 18 June)
Monday, 12 June 2017
0:50
9:00
JPN
ITA
Machinery orders
Industrial production
Apr
Apr
mom, sa
mom, sa
0.5
-0.5
0.7
–
1.4
0.4
0.4
2.9
20.0
-0.1
0.2
2.7
–
0.0
0.5
2.7
20.6
0.6
Tuesday, 13 June 2017
9:30
GBR
CPI
May
10:00
13:30
GER
USA
ZEW Index
PPI, final demand
Jun
May
mom
yoy
index
mom, sa
May
May
Apr
Apr
Apr
May
May
May
May
yoy
mom, k, sa
%, sa
yoy
mom, sa
mom, sa
mom, sa
mom, sa
mom, sa
6.5
15.0
4.6
2.4
0.3
0.0
0.1
0.0
0.0
1.25
6.4
–
4.6
2.4
–
0.0
0.2
0.1
0.2
1.25
6.5
19.4
4.6
2.4
-0.1
0.2
0.1
0.4
0.3
1.00
Retail sales
May
BoE, interest rate decision
Empire State Index
Initial claims
Philadelphia Fed Index
Industrial production
NAHB index
May
10 June
June
Apr
May
mom, sa
yoy
%
sa
k, sa
sa
mom, sa
sa
-0.8
1.9
0.25
3.0
240
26.0
0.5
70
-0.8
1.9
0.25
5.0
–
23.5
0.0
70
2.0
4.5
0.25
-1.0
245
38.8
1.0
70
May
May
May
May
Jun
%
yoy
yoy
SAAR, k
SAAR, k
sa
-0.10
1.4
0.9
1240
1200
97.0
-0.10
–
–
1250
1218
97.1
-0.10
1.4(p)
0.9(p)
1229
1172
97.1
Wednesday, 14 June 2017
3:00
9:30
CHN
GBR
10:00
13:30
EUR
USA
•
•
• 19:15
Industrial production
Claimant count change
Unemployment rate (ILO)
Average earnings (three month average)
Industrial production
CPI
CPI ex. food and energy
Retail sales
Retail sales ex autos
FOMC interest rate decision (upper bound)
Thursday, 15 June 2017
9:30
GBR
• 12:00
13:30
USA
14:15
15:00
Friday, 16 June 2017
#
10:00
JPN
EUR
13:30
USA
15:00
BoJ interest rate decision
CPI, final
CPI ex. food, energy, alcohol and tobacco, final
Housing starts
Building permits
Consumer confidence (University of Michigan),
preliminary
Source: Bloomberg. Commerzbank Economic Research; *Time BST (subtract 5 hours for EDST. add 1 hour for CEST). # = 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
9 June 2017
Economic Research | Week in Focus
Dr. Christoph Balz
Tel. +49 69 136 24889
Economic data preview:
USA: Revival in second quarter
A number of US data releases are due next week. They will no doubt show that the
economy, and above all the industrial sector, is expanding soundly, with inflation
pressure remaining modest. In Germany, the ZEW index should continue to move
sideways.
After a weaker first quarter, the issue is whether the US economy has picked up again? We
expect May figures next week that on balance should reveal solid second-quarter growth. This
will be especially the case for industrial output, which was already up 1.0% month-on-month in
April. Indicators for energy consumption and the production of oil, gas and coal suggest that
energy suppliers and mining in particular will have seen strong growth. Overall, we expect
industrial output to have risen 0.5% compared with April (consensus 0.0%).
We also envisage an upturn in residential construction. There were far more building permits
than housing starts in April, so we now expect an increase in housing starts from 1.172 million
(annual rate) to 1.2 million (consensus 1.218 million).
At first glance, retail trade has dropped off a little, resulting in stagnating turnover (consensus
0.1%). However, we do envisage at least a slight increase in the core business excluding autos,
building materials and gasoline. It will be balanced, though, by a decline in other areas. Sales of
building materials, for example, will probably have fallen on account of the weather. Moreover,
after adjustment for seasonal effects, gasoline prices are likely to have fallen sharply. This will
have hit nominal sales at gasoline stations.
The drop in gasoline prices will no doubt also have checked inflation in May, so that consumer
prices in May were probably flat (consensus 0.0%). Excluding energy and food, we expect a
slight rise in the core rate of 0.1% (consensus 0.2%). The main driver of inflation is rent. Apart
from this element, inflationary pressure has eased considerably. However, the price pressure
that is on the way at the producer price level is a signal that consumer prices are set to pick up
speed again soon (see chart 10), as in 2015, when the gap between producer prices and
consumer prices was about as wide as it is now.
Germany: analysts at a loss
For almost two years, the ZEW indicator for Germany, which is based on surveys conducted
among analysts and investors, has been moving sideways. This is an unusually long time for an
indicator that normally runs in strong cycles. The situation is unlikely to change in June, since the
comparable component of the Sentix index has fallen only marginally and is thus also moving
sideways (see chart 8). Analysts are evidently still expecting the German economy to maintain
its present pace of growth for quite some time.
CHART 9: USA – inflation pressure in the pipeline
CHART 10: Germany – ZEW moving sideways
Producer prices for consumer goods ex. energy and food, consumer
prices ex. energy, food and shelter, percentage change on year
ZEW index, subcomponent of the Sentix index for institutional
investors in Germany
5
3.0
40
80
4
2.5
30
60
3
2.0
20
40
2
1.5
1
1.0
10
20
0
0.5
0
0
-1
2000 2002 2004 2006 2008 2010 2012 2014 2016
producer prices (LS)
consumer prices (RS)
Sources: Global Insight, Commerzbank Research
9 June 2017
0.0
-10
2013
-20
2014
2015
2016
Sentix (LS)
2017
ZEW (RS)
Sources: Bloomberg, Commerzbank Research
11
Economic Research | Week in Focus
Central Bank Watch (1)
Fed
The Federal Reserve Board headed by Janet Yellen
accounts for seven of the twelve members of the Federal
Open Market Committee (FOMC). For a long time there have
been vacancies on the board; as many as three positions
have been vacant since Daniel Tarullo left in April.
According to press reports, President Trump is about to
nominate three new board members. One of them will
probably be Randall Quarles, who worked at the US Treasury
under President George W. Bush. He may follow Daniel
Tarullo in supervising banking regulation and is probably
intended for the influential newly-created position of vice
chairman for regulation. Compared to Tarullo, he is
considered to be much more critical of the tightened banking
regulation and believes it is too restrictive and a cost-driver (a
personal detail: the great uncle of his wife was Marriner
Eccles, Fed chairman from 1934 until 1948). Another
candidate is Marvin Goodfriend, a professor specialised in
monetary policy who has spoken out in favour of a more rulebased Fed policy. And finally, Robert Jones, the chairman of
a smaller regional bank, has been mentioned. All in all, these
nominations would probably not strengthen the hawkish
camp as much as many had expected in light of Donald
Trump’s remarks during the election campaign.
Bernd Weidensteiner
+49 69 136 24527
CHART 11: Expected interest rate for 3-month funds (USD)
2.5
2.0
1.5
1.0
0.5
current
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Futures
08.06.17
01.06.17
Commerzbank
TABLE 1: Consensus forecasts Fed funds rate
((upper bound)
Q3 17
Q4 17
Q2 18
Consensus
1.50
1.50
2.00
High
1.50
1.75
2.25
Low
1.00
1.00
1.00
Commerzbank
1.25
1.50
1.75
Source: Bloomberg, Commerzbank Research
ECB
As widely expected the ECB Council considers that the risks
to the growth outlook are now “broadly balanced”. In line with
this, the central bank revised upwards its growth projections
slightly. In addition, the ECB removed the statement that key
rates might be cut further from the bank’s forward guidance
because the deflation risk has disappeared, ECB president
Draghi argued.
At the same time, the ECB stressed that the economic
expansion has yet to translate into a stronger inflation
dynamic as underlying inflation continues to remain subdued.
A stronger core inflation rate would be a precondition for the
ECB to consider the exit, Draghi confirmed. A very
substantial degree of monetary accommodation is still
needed for underlying inflation pressures to build up, he
added. Moreover, Draghi confirmed that the Council stands
ready to increase its asset purchase programme in terms of
size and/or duration in case of need.
In coming quarters, the core inflation will probably be lower
than currently expected by the ECB. Therefore, we stick to
our view that the normalisation of monetary policy will take
longer than currently anticipated by the consensus and
market participants.
Dr Michael Schubert
+49 69 136 23700
CHART 12: Expected interest rate for 3-month funds (EUR)
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
current Sep-17
Futures
Dec-17
08.06.17
Mar-18
01.06.17
Jun-18
Sep-18
Commerzbank
TABLE 2: Consensus forecasts ECB minimum bid rate
Q3 17
Q4 17
Q2 18
Consensus
0.0
0.0
0.0
High
0.0
0.0
0.25
Low
0.0
0.0
0.0
Commerzbank
0.0
0.0
0.0
Source: Reuters, Bloomberg, Commerzbank Research
12
9 June 2017
Economic Research | Week in Focus
Central Bank Watch (2)
BoE (Bank of England)
Following the election-induced hiatus we will see a little more
policy activity next week in the form of the MPC meeting,
although the decision will not actually produce any action with
the BoE continuing to sit on its hands. The UK is now looking
like a growth laggard in international terms with the miserable
0.2% q/q growth rate in Q1 officially the lowest in the EU, but
with little room to ease monetary policy further. One
interesting question will be whether Kristin Forbes, who is
due to leave the MPC at the end of this month, will maintain
her vote for a rate hike, having held to this view since March.
Her position is based on the fact that with inflation rising and
economic activity remaining robust, there is no need to hold
rates at current emergency levels. Inflation is almost certain
to go higher, with CPI figures next week possibly showing a
rate close to 3%. But with real activity apparently having lost
momentum Ms Forbes’ case now appears less robust.
Indeed, with economic growth likely to remain on a slower
path for some time to come, we continue to look for the BoE
to remain on hold for the foreseeable future, despite the
inflation pickup which is likely to prove temporary in any
event.
CHART 13: Expected interest rate for 3-month funds (GBP)
1.0
0.8
0.6
0.4
0.2
0.0
current
Sep-17
Futures
08.06.17
Dec-17
Mar-18
01.06.17
Jun-18
Sep-18
Commerzbank
Source: Bloomberg, Commerzbank Research
Peter Dixon
+44 20 7475 1808
Swiss National Bank (SNB)
The SNB will probably adhere to its stance at its monetary
policy meeting next week. It will leave key rates on hold and
continue staving off a sharper appreciation of the Swiss
franc.
The inflation rate has been in positive territory again since the
start of the year, but this is not only due to much higher
energy prices in year-on-year terms, as the core rate of
inflation has also turned positive again. However, concerns
about the economic recovery have not yet abated. In Q1
2017, the Swiss economy again expanded only at a sluggish
pace (+0.3% q/q). Growth was mainly constrained by weak
private and public-sector consumption. Yet, an encouraging
fact is that investment (+1.7%) and exports (+3.6%) rose
sharply.
Thanks to the recent euro strength, appreciation pressure on
the Swiss franc has eased a bit. Still, the currency remains in
demand as a “safe haven” in light of political uncertainties.
The SNB will probably be forced to continue intervening on
the FX market so as to prevent a more massive appreciation.
This policy comes at the cost of a further increase in the
already extremely high FX reserves.
CHART 14: Expected interest rate for 3-month funds (CHF)
0.0
-0.5
-1.0
-1.5
current
Sep-17
Futures
08.06.17
Dec-17
Mar-18
01.06.17
Jun-18
Sep-18
Commerzbank
Source: Bloomberg, Commerzbank Research
Christoph Weil
+49 69 136 24041
9 June 2017
13
Economic Research | Week in Focus
Markus Koch
Tel. +49 69 136 87685
Bond market preview:
Fed in focus
Yesterday’s ECB policy and forecast update, the outcome of parliamentary elections in
the UK and in France this Sunday and mounting risks of a vote of secession in Catalonia
are dividing markets’ attention ahead of the Fed’s rate decision at mid-week. We look for
a small upwards correction in 10y bond yields over coming days, most of all for US
Treasuries, but also for Bunds.
TABLE 3: Weekly outlook for yields and curves
Bunds
US Treasuries
Yield (10 years)
Sideways to slightly higher
higher
Curve (2 - 10 years)
moderately steeper
steeper
Source: Commerzbank Research
Outlook for the Bund
future, 12 June to 16
June
Economy
↓
Inflation
→
Monetary policy
↓
Trend
↑
Supply
→
Risk aversion
↑
Investors will be chewing on the ECB’s latest policy statements for a while yet, most notably
long-term inflationary trends and the resulting ramifications for tapering. By contrast, the UK
elections will likely be shelved quickly. For the time being, political suspense may remain high,
with the first round of parliamentary elections in France set for this Sunday. If Emmanuel Macron
were to gain an absolute majority (p8), the new President could implement his reform agenda
more easily. In Spain, more underperformance of long-dated Spanish yields vs Bunds may
materialise if the Catalan regional government were to unilaterally set a specific date for an
unconstitutional vote of secession.
More importantly, though, the next hike in the Fed funds rate will engross investors’ attention
through mid-week (p5). So far, every rate hike during the current cycle has been a buying
opportunity at the long-end with yields rising in the run-up to the event and falling thereafter
(vertical arrows in chart 13 for the last two hikes). This time around, however, the signs are
different. In the run-up to the next rate hike, which is discounted with 90% probability, US
Treasury yields have fallen to the lowest since November. At the same time, speculative
positioning in US Treasury futures has swung from record short in the December-March period
close to record longs (note circles in chart 15). The room for further gains in US Treasuries thus
seems limited while set-back potential is on the rise.
Upward risks in 10y US Treasury yields will possibly also be bolstered by a number of firm
macro data releases out of the US during the week. More vigorous growth for industrial
production, housing starts and fairly resilient retail sales figures for May (p10) should add to this
notion. In the euro area, 10y Bunds are running into technical resistance which is why we switch
back to tactical duration shorts (chart 16).
CHART 15: Next Fed hike a buying opportunity again?
CHART 16: Bunds increasingly prone to a correction
10y US Treasury yields, in % (rhs); Fed funds mid target rate in %
(rhs); net speculative CFTC positions, in million contracts (l.s., inv.)
10y Bund yield in %
-0.5
2.75
-0.4
2.25
-0.3
0.51
0.45
0.39
-0.2
1.75
-0.1
0.33
0
1.25
0.1
0.2
0.27
0.75
0.21
0.25
0.15
05-Dec
0.3
0.4
Jun/16
Aug/16
Oct/16
Net positioning (l.s.)
Dec/16
Feb/17
10y UST yld
Source: Bloomberg, Commerzbank Research
14
Apr/17
Jun/17
05-Jan
05-Feb
05-Mar
05-Apr
05-May
05-Jun
Fed funds
Source: Bloomberg, Commerzbank Research
9 June 2017
Economic Research | Week in Focus
Ulrich Leuchtmann
Tel.: +49 69 136 43834
FX market preview:
What can weaken the euro?
At yesterday’s press conference, ECB-President Mario Draghi clearly stated that the ECB
has no intention to quickly raise interest rates. It is not to be expected, however, that the
euro will be in free fall following this statement. One factor arguing against such a
scenario is the dollar.
TABLE 4: Trading ranges expected for next week
Range
Trend
EUR-USD
1.1040-1.1360
EUR-JPY
121.50-125.25
USD-JPY
108.25-112.00



Range
Trend
EUR-GBP
0.8550-0.9000
GBP-USD
1.2450-1.3100
EUR-CHF
1.0800-1.0980



Source: Commerzbank Research
The ECB has significantly lowered its inflation forecast for 2018. After previously forecasting
inflation at 1.6% in 2017, it has now chopped it to only 1.3%. This is a far cry from a reliable reinflation process. Given an inflation trend that is utterly disappointing from the perspective of the
ECB, market participants are likely to wonder whether policymakers will in fact consider raising
rates next year at all. So far, however, FX markets are pricing in a probability of roughly 2/3 that
rates will be hiked.
In recent weeks, market expectations surrounding the ECB have already visibly changed. Only
two weeks ago, the market was pricing in a rate hike before mid-2018 as the most likely
scenario, higher rates before the end of 2018 were regarded as almost certain. Declining rate
expectations also have an impact on EUR-USD, as a breakdown of its movements into a EUR
factor and a USD factor illustrates (we have recently improved our methodology for this
process). Following from this analysis, the EUR factor no longer contributes to the rise in EURUSD over the past two weeks (chart 17). The reaction of EUR-USD to yesterday’s ECB meeting
was therefore substantial, albeit not massive. Obviously, Draghi’s statement did not come as
such a big surprise. It seems that the EUR factor is stabilised by the fact that real economic and
political conditions in the euro zone, at least, have brightened markedly of late. Even without
swift ECB rate hikes, a lower risk premium on EUR positions would be justified.
At present, however, major support for EUR-USD is coming from the dollar. On the one hand, it
is weakened by the political chaos in Washington. On the other hand, faith is dwindling that the
Fed will be able to normalise the Fed funds rate swiftly in the next few years (chart 18). These
two factors create an environment in which the USD strength following the US election is seen
as mistaken. This argues for further stabilisation of EUR-USD.
CHART 17: USD weakness rather than EUR strength
CHART 18: Fed – declining rate expectations for 2018
Breakdown of EUR/USD movements according to Commerzbank’s
new FX factor model
Fed funds, target corridor and market expectations for end-2017 and
end-2018 calculated on the basis of Fed fund futures
2.00
1.15
1.75
1.13
1.50
1.25
1.11
1.00
0.75
1.09
0.50
1.07
1.05
Oct 16
0.25
Dec 16
USD-Faktor
Source: Commerzbank Research
9 June 2017
Feb 17
Apr 17
EUR-Faktor
Jun 17
0.00
Sep 16
Nov 16
Zielkorridor
Jan 17
Mar 17
Ende 2017
May 17
Ende 2018
Source: Federal Reserve System, CBoT, Commerzbank Research
15
Economic Research | Week in Focus
Markus Wallner
Tel. +49 69 136 21747
Equity market preview:
DAX gains increasingly earnings-driven
Stronger global economic growth has prompted analysts to further raise their sales and
earnings expectations for most German companies. DAX and MDAX gains are therefore
increasingly based on growing earnings expectations rather than higher valuations. As
regards stock picking, investors should keep focusing on P/B ratios below or near the
historical average, and companies with stronger earnings momentum than the overall
market.
TABLE 5: MDAX keeps expanding its lead
Earnings 2017e
Performance (%) since
Index
Index points
Growth (%)
P/E 2017e
31/05
31/03
01/01
current
01/01
current
01/01
current
01/01
DAX 30
12,672
0.5
2.9
10.4
908.9
855.1
11.2
10.8
13.9
13.4
MDAX
25,247
0.5
5.6
13.8
1340
1308
12.8
14.4
18.8
17.0
Euro Stoxx 50
3,549
-0.2
1.4
7.9
237.4
233.3
10.6
11.8
14.9
14.1
S&P 500
2,433
0.9
3.0
8.7
129.0
130.4
10.5
11.6
18.9
17.2
Source: Commerzbank Research, I/B/E/S
Analysts' sales and earnings expectations for most German companies keep rising on the back
of stronger global economic growth. This benefits export-oriented companies such as Adidas
and Infineon, in particular. By now, increasing earnings explain 54% (63%) of the DAX (MDAX)
performance in the past twelve months (chart 19). Hence, more upbeat earnings expectations
have a dampening effect on valuation growth and this trend is likely to continue for now,
following the strong Q1 reporting season.
This is absolutely necessary as many German companies have already reached advanced
valuations:
•
Based on their price-to-book ratios, as much as 10% of DAX and 24% of MDAX companies
are trading at or close to their highest levels in the past ten years.
•
73% of the DAX and 76% of the MDAX companies are trading above their ten-year average.
Moreover, as regards stock picking, investors should continue focusing on price-to-book ratios
below or near the long-term average, as well as companies offering higher earnings momentum
than the overall market. This applies to BMW, HeidelbergCement and Krones, among others.
CHART 19: Earnings contribution to DAX performance on the rise
Contribution of earnings and valuation (P/E ratio) to year-on-year change in the DAX in percentage points
70
50
30
10
-10
-30
-50
2006
2007
2008
2009
earnings contribution
2010
2011
2012
2013
P/E multible contribution
2014
2015
2016
2017
DAX performance
Source: I/B/E/S, Commerzbank Research
16
9 June 2017
Economic Research | Week in Focus
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
Much ado about fundamentals
Oil prices are expected to rally over the course of next week. Both OPEC and the IEA will
likely be forecasting a huge supply deficit for the second half of the year. For most base
metals, too, the International Study Groups and the World Bureau of Metal Statistics are
expected to report a shortfall, which should support prices. In contrast, gold will probably
continue to benefit from the precarious situation in the Middle East.
TABLE 6: Tendencies in important commodities
Per cent change
Tendency Commodity specific events
8 June
1 week
1 month
1 year
Brent (USD a barrel)
48.6
-4.1
-1.6
-7.5
Copper (USD a ton)
5690
-0.2
3.7
24.3
Gold (USD a troy ounce)
1285
1.5
4.8
1.8
Silver (USD a troy ounce)
946
1.48
2.93
-6.40
short-term




DPR (12.). OPEC (13.). IEA (14.)
ILZSG. WBMS (14.)
ACEA (16.)
Source: Bloomberg, Commerzbank Research
A surprise increase in US oil inventories has sent the price of Brent down this week to almost the
year-low seen in early May. There is still no clear evidence of lower supply, especially since the
OPEC countries Libya and Nigeria are stepping up production and the US Energy Information
Administration (EIA) has been more optimistic about US oil production. At the start of next week.
the EIA should also confirm that shale oil production is likewise set to expand strongly in July
(chart 20). After the expected sluggish start to the week, however, oil should then start to pick up
again later on. OPEC and the International Energy Agency (IEA) will no doubt raise the prospect
of a serious supply-side shortage in the second half of the year. In addition, the IEA is expected
to report a reduction in inventories outside the US. And last but not least, it is likely for the first
time to predict another strong increase in the demand for oil in 2018. If the DoE's weekly report
also shows US oil stocks shrinking rapidly, making last week's increase a one-off, oil will
probably rise above $50 a barrel again.
Over the year so far, prices of platinum metals have moved in an unusual sequence. While
palladium almost hit a new three-year high, platinum barely moved (chart 21). As we see it, the
discrepancy between the two metals, frequently mined together, is exaggerated. Since the
demand for palladium depends far more on the auto sector than platinum, its price is no doubt
being depressed by a fading of the auto boom in the US and a loss of momentum in China.
While this will also hit the demand for platinum to some extent, it should be compensated by the
brighter prospects for European car markets where diesel models still account for a far larger
share of the total than elsewhere, which in turn will support catalytic converter production.
Moreover, the small mark-up versus palladium should make platinum a more attractive substitute
for palladium. In other words, platinum prices should rally, especially if the new registration
figures for Europe really do show the poor April result as the outcome of the number of public
holidays.
CHART 20: Rapid recovery of US shale oil production
Million barrels per day
1800
1600
1400
CHART 21: Platinum drops behind palladium
Index 1 Jan. 2016 = 100
6.00
160
5.50
150
140
1200
5.00
1000
800
600
400
120
4.00
110
3.50
200
0
Jan-13
3.00
Jan-14
Jan-15
shale oil production, r
Jan-16
Jan-17
drilling (6 months lagged), l
Sources: EIA, Baker Hughes, Bloomberg, Commerzbank Research
9 June 2017
130
4.50
100
90
80
Jan-16
Apr-16
Jul-16
Oct-16
platinum
Jan-17
Apr-17
Palladium
Sources: Bloomberg, Commerzbank Research
17
Economic Research | Week in Focus
Commerzbank forecasts
ABLE 7:
Growth and inflation
Real GDP (%)
Inflation rate (%)
2016
2017
2018
2016
2017
2018
USA
1.6
2.3
2.3
1.3
2.2
2.2
Japan
1.0
1.3
1.0
-0.1
0.5
0.7
Euro area
1.7
1.8
1.6
0.2
1.4
1.4
- Germany
1.9
1.6
1.5
0.5
1.7
1.6
- France
1.1
1.6
1.7
0.2
0.9
0.9
- Italy
0.9
1.2
1.1
-0.1
1.1
0.9
- Spain
3.2
3.0
2.5
-0.2
2.0
1.6
- Portugal
1.4
2.8
1.8
0.6
1.3
1.5
- Ireland
5.2
4.1
3.8
-0.2
0.6
1.3
- Greece
-0.1
0.2
2.5
-0.8
1.1
1.0
United Kingdom
1.8
1.6
1.5
0.7
2.8
2.8
Switzerland
1.3
1.2
1.7
-0.4
0.5
0.7
China
6.7
6.5
6.3
2.0
1.6
2.2
India
7.9
7.0
7.4
5.0
5.3
5.1
Brazil
-3.6
0.7
2.0
8.8
4.3
4.5
Russia
-0.2
1.3
2.0
7.1
4.5
4.5
World
2.9
3.4
3.4
•
Having corrected its imbalances, the US
economy continues growing at decent rates.
•
Growth in China is decelerating due, among
other things, to high corporate indebtedness
and industrial overcapacity.
•
The ECB’s expansionary monetary policy
glosses over the structural problems of the
euro zone and allows the economy to grow
more strongly.
•
EMU has survived the sovereign debt crisis,
but is gradually evolving into an “Italian-style
monetary union” – structural weaknesses are
preserved by the loose monetary policy.
•
The German economy is experiencing a
consumption-driven boom; below this glossy
surface, however, its competitiveness is
gradually eroding.
•
High unemployment in most EMU countries
is keeping inflation low for the time being.
•
With the Fed having almost reached its
targets, the speed of tightening has
increased. We expect two more hikes in
2017 by 25 bps each, followed by a further
three hikes in 2018.
•
Due to accelerating core inflation and Fed
rate hikes, US government bond yields
should rise somewhat.
•
As euro zone core inflation should stay
below ECB expectations, we forecast no
hike in 2017 or 2018.
•
Contrary to the US setting, 10y Bund yields
seem unlikely to increase significantly until
year-end.
•
The multi-year trend of falling periphery
spreads has run out of steam. With ECB
support reaching limits and political risks on
the rise, we anticipate rising risk premia.
•
For the medium term, the ECB beginning to
downscale bond purchases will support the
euro, which may fuel unjustified ECB rate
hike speculation. However, in the long run
USD outperforms the EUR as monetary
policy in the euro zone will in general remain
expansionary while the Fed continues its
cautious rate hiking cycle.
•
With a view to Brexit negotiations, our
working assumption is that ultimately there
will be an amicable agreement. However,
uncertainty will remain high for a long period
so that sterling will not recover for the time
being.
•
CNY seems set to further depreciate against
the dollar over the coming quarters.
TABLE 8: Interest rates (end-of-quarter)
08.06.2017
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Federal funds rate, upper bound
1.00
1.25
1.50
1.50
1.75
2.00
3-months Libor
1.22
1.45
1.65
1.70
1.95
2.20
2 years*
1.31
1.70
1.90
2.10
2.30
2.50
5 years*
1.75
2.50
2.60
2.70
2.80
2.90
10 years*
2.18
2.70
2.80
2.85
2.90
2.95
Spread 10-2 years
87
100
90
75
60
45
Swap-Spread 10 years
-4
-15
-15
-10
-10
-5
Minimum bid rate
-0.40
-0.40
-0.40
-0.40
-0.40
-0.40
3-months Euribor
-0.33
-0.30
-0.30
-0.30
-0.30
-0.30
2 years*
-0.73
-0.75
-0.75
-0.70
-0.65
-0.65
5 years*
-0.46
-0.45
-0.40
-0.35
-0.35
-0.35
10 years*
0.24
0.30
0.40
0.50
0.60
0.70
Spread 10-2 years
98
105
115
120
125
135
Swap-Spread 10 years
50
50
55
55
55
55
Bank Rate
0.25
0.25
0.25
0.25
0.25
0.25
3-months Libor
0.29
0.40
0.35
0.35
0.35
0.35
2 years*
0.10
0.15
0.20
0.20
0.25
0.30
10 years*
1.01
1.25
1.30
1.35
1.40
1.45
USA
Euro area
United Kingdom
TABLE 9: Exchange rates (end-of-quarter)
08.06.2017
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
EUR/USD
1.12
1.12
1.10
1.08
1.06
1.07
USD/JPY
110
110
112
115
110
108
EUR/CHF
1.08
1.09
1.08
1.07
1.06
1.00
EUR/GBP
0.87
0.90
0.91
0.90
0.89
0.91
EUR/SEK
9.78
9.55
9.40
9.30
9.20
9.10
EUR/NOK
9.52
9.50
9.40
9.30
9.10
8.90
EUR/PLN
4.20
4.20
4.25
4.25
4.30
4.35
EUR/HUF
308
310
312
312
315
315
EUR/CZK
26.27
26.50
26.00
25.50
25.00
24.50
AUD/USD
0.75
0.74
0.75
0.76
0.77
0.78
NZD/USD
0.72
0.69
0.70
0.71
0.72
0.73
USD/CAD
1.35
1.35
1.36
1.37
1.35
1.33
USD/CNY
6.80
7.00
7.10
7.15
7.20
7.25
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts
18
9 June 2017
Economic Research | Week in Focus
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Economic Research | Week in Focus
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