Deutsche Bank Research Global Economics Rates Inflation Date 6 February 2015 DB Inflation Report Weekly Inflation Update ________________________________________________________________________________________________________________ Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. Markus Heider Strategist (+44) 20 754-52167 [email protected]Alex Li Research Analyst (+1) 212 250-5483 [email protected]Global Carry for ILBs will be negative in March, but assuming a sustained stabilization in oil prices is expected to be to be significantly positive in April/May in the main markets, which should be supportive for B/Es. EUR inflation watch The Q1 SPF suggests that the downside risks to the price outlook are perceived to have risen further, albeit less than in previous editions. EUR The weakness in spot inflation remains a risk, but better data, a stabilization in oil prices and expected ECB support in our view justify a cautiously positive stance on cash B/Es. GBP The government contribution to inflation has declined strongly and more is likely to be in store this year. To some extent trends seem to be related to the electoral cycle, and some renewed pick-up looks possible from next year. USD We see value in the long-end of the B/E curve; for instance, the 10y/30y B/E slope looks too flat on various metrics. We expect USD9bn in a new TIPS 15- Feb-2045 this month. Inflation funds have seen inflows in recent weeks. Asia Inflation has been slowing quickly in Asia recently. We discuss the outlook. Inflation Markets Bond Yld BEI 1M fwd ASW ASW discnt ZC Rate Sprd ZC-BEI CPI/ RPI fcst US CPI TIIJan20 -0.12 1.55 1.70 3 19 5y 1.73 18 spot 0.8 TIIJan24 0.21 1.67 1.75 12 23 10y 1.95 28 Jun-15 -0.5 TIIFeb44 0.71 1.79 1.82 43 34 30y 2.13 34 Dec-15 1.0 EA HICPxt OATei20 -0.68 0.75 0.88 -13 13 5y 0.77 2 spot -0.2 OATei24 -0.51 1.05 1.12 4 14 10y 1.20 15 Jun-15 -0.3 OATei40 -0.17 1.42 1.45 66 43 30y 1.80 38 Dec-15 0.5 FR CPIxt OATi19 -0.72 0.71 0.78 -5 22 5y 0.92 21 spot 0.0 OATi23 -0.61 1.07 1.11 16 29 10y 1.35 28 Jun-15 0.0 OATi29 -0.38 1.25 1.28 59 54 20y 1.78 52 Dec-15 0.5 UK RPI UKTi19 -1.24 2.32 2.38 -5 23 5y 2.64 32 spot 1.6 UKTi24 -0.87 2.47 2.50 17 26 10y 2.83 36 Jun-15 1.2 UKTi44 -0.72 3.01 3.03 58 29 30y 3.22 20 Dec-15 1.9 Source: Deutsche Bank Change in breakevens, US & UK 0 2 4 6 8 10 12 14 16 5y 10y 20y 30y 5y 10y 20y 30y 1W change in BEI carry adjusted GBP USD Change in breakevens, EUR & FRF -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 5y 10y 20y 30y 5y 10y 20y 30y 1W change in BEI carry adjusted EUR FRF ILB rich/cheap v nominals 0 5 10 15 20 25 30 35 2014 2019 2025 2030 2036 2041 GBP DEM USD FRF Rich (-) / cheap (+) vs nominal Source: Deutsche Bank Source: Deutsche Bank Source: Deutsche Bank
Global Carry for ILBs will be negative in March, but assuming a sustained stabilization in oil prices is expected to be to be significantly positive in April/May in the main markets, which should be supportive for B/Es.
EUR inflation watch The Q1 SPF suggests that the downside risks to the price outlook are perceived to have risen further, albeit less than in previous editions.
EUR The weakness in spot inflation remains a risk, but better data, a stabilization in oil prices and expected ECB support in our view justify a cautiously positive stance on cash B/Es.
GBP The government contribution to inflation has declined strongly and more is likely to be in store this year. To some extent trends seem to be related to the electoral cycle, and some renewed pick-up looks possible from next year.
USD We see value in the long-end of the B/E curve; for instance, the 10y/30y B/E slope looks too flat on various metrics. We expect USD9bn in a new TIPS 15-Feb-2045 this month. Inflation funds have seen inflows in recent weeks.
Asia Inflation has been slowing quickly in Asia recently. We discuss the outlook.
Breakevens globally rose in flattening mode this week (chart 1), helped by a 10%+ rise in oil prices. Brent is back to the levels seen at the start of the year, while USD and EUR 5y B/Es are significantly above 1-January valuations (UK B/Es remain well below), reinforcing the view that inflation markets were pricing downside risks last month. A sustained stabilization in oil prices at current levels would be a significant positive for B/Es in our view. Carry for USD and EUR ILBs is negative in February and will be very negative in GBP, EUR and USD markets in March (about -1.6% ‘accrual’ for EUR ILBs next month), but CPI forecasts for February and March have been revised higher this week, and carry is expected to be significantly positive in April and May in the main markets. This sort of rise in short-term CPI momentum tends to be positive for B/Es.
That said, while shorter-end EUR and GBP B/Es continue to price downside risks to the baseline inflation and economic outlook, 1y1y or 2y1y USD B/Es are not cheap relative to our CPI forecasts. The USD B/E curve remains unusually flat given the level of inflation valuations (charts 2 & 3), or compared to past averages (chart 4). To some extent this may reflect institutional factors related to the richening in European bond markets, but it may also reflect concerns about downside risks to the longer-term inflation outlook in an environment of low spot CPI, subdued global inflation, a strengthening currency, wage growth still in the early stages of recovery and the Fed considering a start to policy rate normalization. In that context, above-trend economic data as well as evidence of a normalization in measures of domestic inflation (and in particular wages) are likely to be necessary conditions for some recovery in longer-end B/Es. We expect this to materialize in the coming quarters, although indirect effects from lower commodity prices as well as a strong USD are downside risks. Across markets, GBP B/Es have continued to underperform (chart 4). We would expect some stabilization in spreads from here, but are reluctant to overweight GBP B/Es.
Markus Heider (+44) 20 754 52167
3. USD 5y30y CPI swap slope v 5y CPI swap 4. B/E valuations v past averages
Oil prices have risen strongly since the end of last month, and at the time of writing stand more than 10% above their January average. Volatility remains high and the outlook uncertain, but should brent prices stay at current levels, retail petrol prices could be expected to rise markedly into March (chart 1). This has put some upward pressure on near-term HICP forecasts this week, and we are now expecting headline inflation unchanged in February, and 0.2pp or more higher in March.
Oil prices are also likely to have been the primary driver of the downward revisions to inflation forecasts in the Q1 edition of the ECB’s Survey of Professional Forecasters (SPF). The responses were collected between the 7 and 13 January, i.e. before the announcement of the ECB’s expanded asset purchase programme. Point HICP forecasts were down by 0.3p (to 0.8%) for 1y, 0.8pp (to 1.2%) for 2y and 0.03pp (to 1.77%) for 5y ahead expectations (chart 2). This was slightly more than suggested by trends in economic data and spot inflation alone, which (together with lagged SPF data) in the past have explained much of the variation in 2y ahead SPF predictions (chart 3). While this may reflect risks of a more structural downward adjustment in expectations, a large part of the deviation (from this model) can probably be explained by the strong decline in oil prices. The balance of risks to the longer-term inflation outlook was perceived to have shifted further to the downside, although less so than in previous editions (chart 4). The probability of inflation at 2.5% or above has actually increased marginally, but less so than the odds of inflation being below 1.5% (chart 4). Given the stabilization in oil prices, weaker exchange rate, better economic data and additional ECB action, point forecasts and risk assessment could start to show some stabilization in the Q2 edition.
Markus Heider (+44) 20 754 52167
3. More than implied by spot HICP, eco data alone 4. Balance of risks seen slightly lower again
1.1
1.3
1.5
1.7
1.9
2.1
2.3
Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14
EUR SPF 2y
fitted
-25
-20
-15
-10
-5
0
5
10
15
8
10
12
14
16
18
20
22
24
26
2001 2004 2007 2010 2013
SPF: prob infl >=2.5% 5y ahead
SPF: prob infl>=2.5% less prob infl<1.5% 5y ahead (rhs)
Source: Haver, Deutsche Bank
Source: Haver, Deutsche Bank
1. Oil prices rebound
-35
-25
-15
-5
5
15
25
-10
-8
-6
-4
-2
0
2
4
6
8
2006 2008 2010 2012 2014
EUR HICP fuels for trsprt
brent (rhs)% m/m
2. SPF point forecasts fall
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
1999 2002 2005 2008 2011 2014
1y 2y 5y
SPF HICP
expectations, EUR
Source: Haver, Deutsche Bank
Source: Haver, Deutsche Bank
6 February 2015
DB Inflation Report: Weekly Inflation Update
Page 4 Deutsche Bank AG/London
EUR EUR inflation markets rallied this week, with B/Es rising in flattening mode and real yields moving lower and steeper (chart 1). Support has come above all from a 10%+ rise in oil prices, but perhaps also from further signs of some pick-up in economic momentum. The strongest quarterly growth in retail sales since Q4 2006 suggests that private consumption growth has remained robust last quarter and altogether monthly indicators point to Q4 GDP growth of 0.3% q/q or higher (chart 2), which compares to consensus around 0.1/0.2% q/q; growth forecasts have started to be revised higher and data surprise indicators have risen into positive territory for the first time since early 2014. While B/Es had largely ignored economic data from last summer (chart 6), as falling oil prices (chart 5) and concerns about the longer-term inflation outlook (chart 4) dominated trends in valuations, with ECB support in place, a weaker currency and some signs of oil prices ‘stabilising’ this could change going forward. Chart 5 at face value suggests that the latter (sideways trend in oil) should be a positive for B/Es. While y/y spot inflation and business survey price indices are likely to remain low for now, B/Es are cheap relative to the latter (chart 3) and short-term HICP momentum should rise somewhat into the spring. Meanwhile, the ECB’s Q1 SPF (responses collected between 7-13 January), showed a further, albeit smaller, downward shift in the perceived balance of risks to the longer-term inflation outlook (chart 4), raising hopes that the improved macro backdrop could allow some stabilization going forward. In sum, while weakness in near-term spot inflation remains a risk, this context in our view on balance justifies a cautiously positive stance on cash B/Es, not least given expected support from ECB purchases. 5y B/Es have risen by more than 30bp since the lows seen in early January, and outperformed on the curve, but remain perhaps the clearest potential beneficiary from FX weakness and somewhat better economic data. In RV, we like the OATei18 and -24.
3. B/Es v PMI prices 4. Risks still seen on the downside
35
40
45
50
55
60
65
70
75
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
2003 2005 2007 2009 2011 2013 2015
OATei BEI 10y
PMI prices
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
-10
0
10
20
30
40
50
2002 2004 2006 2008 2010 2012 2014
SPF, skew: prob of infl. >=2% - <1.5% 5Y ahead
5y5y forward HICP swap
Source: Deutsche Bank Source: Deutsche Bank
5. B/Es helped by rise in oil 6. Economic data has been better than expected
GBP News this week were mostly inflation positive, and B/Es rebounded from the lows seen last week. Oil prices rose, and economic data were stronger than expected, with in particular higher January PMIs raising hopes that growth momentum could be stabilizing (at above–trend levels) after some weakening in Q4 last year (chart 1); employment indicators in particular were strong. PMI price indices weakened further, which is likely to reflect above all the decline in commodity costs seen over past months, with the services PMI press release quoting reports of higher salaries being offset by a reduction in fuel costs. While this week’s rise in oil prices has provided some support for RPI forecasts, headline inflation is expected to ease further in the near-term. Downward pressure is not only coming from lower commodities, a rise in the exchange rate and strong competitive pressures in retailing, but also from a declining government contribution to inflation. First, inflation for administered CPI items (such as water supply or railway fares) is currently running at 10y low (chart 4), and with water bills scheduled to fall by 2% in April a further slowdown looks likely in the coming months. Similarly, education inflation (currently around 10%) can be expected to fall sharply in October, when past tuition fee increases fall out of the yy comparison. Household energy prices, while not directly regulated by the government, still depend on government decisions about environmental or distributional charges which may have contributed to the decline in energy inflation since early 2014 (chart 3). Further price cuts have been announced for the coming months. Finally, upward pressure on indirect taxation seems to have eased over the past year or so, with the most recent budget decisions lowering fuel and alcohol taxes (chart 2); inflation of taxation-sensitive CPI components (such as tobacco or alcohol) has eased over the past couple of years (chart 3). To some extent these trends could be related to the electoral cycle (according to the IFS’ recent ‘Green Budget’ the last five elections have been followed by significant net tax rises). While the uncertainty remains high as to how any fiscal tightening would be distributed between spending reductions and tax increases—including how the government will compensate for the possible switch to CPI(H) indexation of indirect taxes—the risk is some renewed pick-up in the government contribution to inflation from next year. This could add to expected upward pressure from a stabilization in oil prices, a normalization in food inflation, rising wage growth as well as in RPI higher MIPs inflation. For now risks for inflation remain to the downside, but with B/E valuations lower than suggested by commodity, FX and spot inflation trends (chart 5), these downside risks seem priced and we would stay neutral on shorter-end B/Es for now. With oil prices stabilising, short-term RPI momentum could pick up into the spring, which should provide some support going forward.
4. Administered price inflation at lows 5. B/Es pricing in further downside risks
fitted, f(FX, commodities, spot RPI, formula effect dummy)
Source: Deutsche Bank
Source: Deutsche Bank
1. Eco data stabilizing: a positive
35
40
45
50
55
60
65
70
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1998 2000 2002 2004 2006 2008 2010 2012 2014
GBP BEI 5y
PMI composite (rhs)
2. Less pressure from indirect taxes..
OBR: recent excise duty announcements (GBPm)
2014-15 2015-16
Autumn 2013 Fuel Duty: cancel
2014 increase -415 -710
Budget 2014 Alc duty: 1p off pint
of beer, freeze cider -110 -110
Budget 2014 Alc duty: freeze
spirits duty, abolish
wine escalator -185 -185
Budget 2014 Tobacco duty:
continue 2% escalator
from 2015-16 0 40
3. …and from utility prices
-10
0
10
20
30
40
50
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2002 2004 2006 2008 2010 2012 2014
CPI items sensitive to duty changes
CPI HH energy (rhs)
Source: Deutsche Bank
Source: OBR, Deutsche Bank
Source: Deutsche Bank
6 February 2015
DB Inflation Report: Weekly Inflation Update
Page 6 Deutsche Bank AG/London
USD
The long end inflation market is undervalued given the recent flattening in the breakeven curve. For instance, the 10s/30s breakeven curve seems too flat on various regressions. The 5s/30s breakeven curve has flattened this year along with the stabilization and recovery in oil prices. Breakeven volatility has been high.
The Treasury will announce the February 30-year TIPS auction on Thursday, February 12. We expect a $9 billion new issue with a 2/15/2045 maturity.
There have been inflows into inflation funds in recent weeks. Primary dealer transaction volume in TIPS is in the high end of the range over the past two years.
In our updated inflation forecast, we expect the headline CPI to post a 0.7% decline in January from its December level, and the index level to bottom in January.
Cheap long end valuation
The long end inflation market is undervalued given the recent flattening in the breakeven curve. The 5s/30s breakeven curve has flattened this year along with the stabilization and recovery in oil prices. That curve ended 2014 at about +70bp, hit a low of +30bp early this week, and bounced to +33bp at the time of this writing. The carry on being long the five-year breakevens against the 30-year breakevens was about 13bp during this period. So net of carry, the breakeven curve flattener has made about 24bp this year.
The front end breakeven volatility has been high, with a daily volatility around 4bp at the five-year point. This is a major shift from a low inflation volatility environment in early 2014, when the daily volatility at the five-year point was between 1bp and 2bp.
The front end breakeven volatility has been high
The 5s/30s breakeven curve has flattened this year along
with the stabilization and recovery in oil prices
0.00
0.01
0.02
0.03
0.04
0.05
0.06
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
5yr BE daily vol
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1/1/13 7/1/13 1/1/14 7/1/14 1/1/15
5s-30s BE
Source: Bloomberg Finance LP and Deutsche Bank
Source: Bloomberg Finance LP and Deutsche Bank
The 10s/30s breakeven curve seems too flat on our regression models. When the breakeven curve is regressed on either outright breakeven levels or the slope of the 10s-30s Treasury curve, it appears too tight. For example, the 10s/30s breakeven curve tends to negatively correlate with the 10s/30s Treasury curve. However, the 10s/30s breakeven curve has compressed
6 February 2015
DB Inflation Report: Weekly Inflation Update
Deutsche Bank AG/London Page 7
despite a relatively stable Treasury 10s/30s curve this year. We recommend being long 30-year breakevens against the ten-year breakevens. The Treasury will announce the February 30-year TIPS auction on Thursday, February 12. We expect a $9 billion new issue with a 2/15/2045 maturity.
10s-30s TIPS breakeven curve is too flat relative to the Treasury curve
y = -0.2442x + 0.3235
R² = 0.3282
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.5 0.6 0.7 0.8 0.9 1.0
10
s-3
0s T
IPS
BE
Cu
rve
10s-30s Treasury Yield Spread
1yr data 2/6/2015
Source: Bloomberg Finance LP and Deutsche Bank
There have been inflows into inflation funds in recent weeks
-1,100
-900
-700
-500
-300
-100
100
300
500
1/1/12 7/1/12 1/1/13 7/1/13 1/1/14 7/1/14 1/1/15
EPFR: Bond Funds: North Amer: USA: Inf Protected: ETFs & Mut Fnds: Flow(Mil.US$)
Source: EPFR
There have been inflows into inflation funds in recent weeks. According to EPFR, the inflows have totaled about $385 million over the past four weeks. There was a brief period of outflows in September and October 2014. The recent inflows have been consistent with the high primary dealer transaction volume in TIPS. In the weekly Fed data, the daily average transactions in TIPS total about $16 billion.
6 February 2015
DB Inflation Report: Weekly Inflation Update
Page 8 Deutsche Bank AG/London
Primary dealer transactions in TIPS have been high
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
1/1/13 7/1/13 1/1/14 7/1/14 1/1/15
$M
Dealer Outright Transactions in TIPS
Source: Fed and Deutsche Bank
In our updated inflation forecast, we expect the headline CPI to post a 0.7% decline in January from December’s level. The index level bottoms in January in our forecast, although the year-on-year change of the NSA CPI will remain negative through September 2015.
US CPI-U NSA y/y, actual and forecast
MoM CPI-U, actual and forecast (non-seasonally-
adjusted)
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
%Y/Y
Projections
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6%MoM NSA
Projected
Source: Bureau of Labor Statistics and Deutsche Bank Source: Bureau of Labor Statistics and Deutsche Bank
Alex Li (+1) 212 250-5483
6 February 2015
DB Inflation Report: Weekly Inflation Update
Deutsche Bank AG/London Page 9
Declining inflation momentum in Asia
Inflation forecasts get revised downward; monetary policy turns dovish
Latest headline readings in most Asian economies are remarkable. With the exception of India and Indonesia, Asia is typically a low inflation zone, but even by such standards, inflation readings are exceptionally benign presently. Three economies are already in negative print territory (Singapore, -0.2%, Taiwan, -0.9%, and Thailand, -0.4%); China (1.5%) and South Korea (0.8%) are seeing steady disinflation; even the traditionally high inflation economies of India and Indonesia are on course to enjoy 300-400bps of disinflation. With gauges of pipeline price pressures (e.g. input price index and import price index) signaling further dissipation of inflation ahead, 2015 could well be one of the lowest inflation year for the region in history.
Perhaps even more striking is our measure of CPI inflation momentum, derived as seasonally adjusted, 3-month/3-month, annualized rates. By construction, this measure is a useful marker for forthcoming inflation prints. The charts below depict inflation momentum in six Asian economies. It is clear from these charts that inflation pressure is now the lowest in many years. Interestingly, the price developments are not energy specific. For instance, we know of no instance where food prices are a concern. Furthermore, core inflation is sticky or declining across the region. Consequently, inflation forecasts are being revised downward, central banks are turning dovish, and fixed income investors are continuing to be keen on Asian papers.
Considering that this was supposed to be the year of rate normalization in the region, these developments are rather incongruous. They may also reflect more than energy related supply side developments. We are concerned that the lack of inflation pressure also reflects demand deficiency worldwide, a key risk to our growth forecasts this year.
Momentum estimates suggest low or negative CPI in the coming months across Asia
-5.0%
0.0%
5.0%
10.0%
15.0%
2010 2011 2012 2013 2014 2015
Thailand Singapore IndiaCPI, SA,
3m/3m, ann.
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2010 2011 2012 2013 2014 2015
Philippines Taiwan KoreaCPI, SA,
3m/3m, ann.
Source: CEIC, Deutsche Bank
6 February 2015
DB Inflation Report: Weekly Inflation Update
Page 10 Deutsche Bank AG/London
Inflation momentum is falling sharply across the region
Central banks’ attempts to calibrate monetary and exchange rate policies create room for volatility The latest headline readings in most Asian economies are remarkable. With the exception of India and Indonesia, Asia is typically a low inflation zone, but even by such standards, inflation readings are exceptionally benign presently. Three economies are already in negative print territory (Singapore, -0.2%, Taiwan, -0.9%, and Thailand, -0.4%); China (1.5%) and South Korea (0.8%) are seeing steady disinflation; even the traditionally high inflation economies of India and Indonesia are on course to enjoy 300-400bps of disinflation. With gauges of pipeline price pressures (e.g. input price index and import price index) signaling further dissipation of inflation ahead, 2015 could turn out to be one of the lowest inflation year for the region in history.
Perhaps even more striking is our measure of CPI inflation momentum, derived as seasonally adjusted, 3-month/3-month, annualized rates. By construction, this measure is a useful marker for forthcoming inflation prints. The charts below depict inflation momentum in six Asian economies. It is clear from these charts that inflation pressure is now the lowest in many years. Interestingly, the price developments are not energy specific. For instance, we know of no instance where food prices are a concern. Furthermore, core inflation is sticky or declining across the region.
Consequently, inflation forecasts are being revised downward, central banks are turning dovish, and fixed income investors are continuing to be keen on Asian papers. Considering that this was supposed to be the year of rate normalization in the region, these developments are rather incongruous. They may also reflect more than energy related supply side developments. We are concerned that the lack of inflation pressure also reflects demand deficiency worldwide, a key risk to our growth forecasts this year.
Inflation momentum at the lowest seen in recent years
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2010 2011 2012 2013 2014 2015
Thailand Singapore IndiaCPI, SA, 3m/3m, ann.
Source: CEIC, Deutsche Bank
6 February 2015
DB Inflation Report: Weekly Inflation Update
Deutsche Bank AG/London Page 11
Inflation momentum is presently at the lowest seen in recent years
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2010 2011 2012 2013 2014 2015
Philippines Taiwan KoreaCPI, SA, 3m/3m, ann.
Source: CEIC, Deutsche Bank
Indonesia is no longer an outlier We have kept Indonesia outside the above analysis as it is undergoing an idiosyncratic phase with respect to price developments. Having taken a major decision to raised fuel prices by 33% in November, the Indonesian authorities are enjoying the fiscal and inflationary windfall of lower oil prices. Indeed, presently the economy is experiencing an unprecedented reversal in its inflation outlook. Just a month after a 33% fuel price hike pushed inflation up to 8.4%, global price declines and a newly announced automatic price adjustment formula has combined to eliminate not just risks of second round effect of the price increase, but the rate of inflation has begun to decline along with lower fuel and transportation prices.
Indonesia: Monetary policy rate call
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2013 2014 2015 2016
Inflation, left Forecast, left
BI rate, right Forecast, right
%
Source: CEIC, Deutsche Bank
As per January data, CPI inflation eased to 7% in January, helped by a 4% decline in the transportation/communication part of the index and 6.5% decline in the energy price index. Even more heartening was the fact that food inflation was benign, with the food and processed food components of the index up just 0.6%mom each. January is a high food inflation month in Indonesia, with the food component typically jumping by 2-3%mom; therefore this month’s developments are particularly striking. Core inflation remained steady at 5% (it was 4.8% nine months ago).
6 February 2015
DB Inflation Report: Weekly Inflation Update
Page 12 Deutsche Bank AG/London
Looking at the inflation trajectory for the rest of the year, inflation would hover around 6-7% through Q3, but decline sharply thereafter, assuming food and fuel prices remain steady. Indeed, as per our revised forecast, inflation could fall below 4% by December. This could pave the way for substantial rate cuts by BI in Q4, in our view. We see the BI rate declining to 7% by December (from the present level of 7.75%).
Recent developments
Count ry Release Per iod DB Expected Consensus Actua l Previous
Fr iday , Janua ry 30
Singapore Bank Credit Dec-YoY 8.0% NA 7.4% 8.4%
Unemployment Rate Q4 NA 2.0% 1.9% 2.0%
South Korea Industrial Production Dec-YoY -0.5% -1.7% 0.4% -3.6%
Service Industry Output Dec-YoY 2.0% NA 3.0% 2.3%
Sri Lanka CPI Jan-YoY 1.2% 1.6% 3.2% 2.1%
Taiwan GDP (Advance estimate) Q4-YoY 2.8% 3.3% 3.2% 3.6%
Thailand Current Account Balance Dec USD1.9bn USD2.5bn USD5.5bn USD1.7bn
Sunday , Februa ry 01
South Korea Exports Jan-YoY 5.3% -2.8% -0.4% 3.6%
Imports Jan-YoY -3.9% -6.2% -11.0% -0.9%
Trade Balance Jan USD5.0bn USD2.1bn USD5.5bn USD5.7bn
Monday , Februa ry 02
Hong Kong Retail Sales (value) Dec-YoY 3.8% 4.4% -3.9% 4.2%
2015 ytd 15 5.2 1.8 1 1 559.1 0.91 2 0 0 Source: Deutsche Bank * indicates respective fiscal year estimates. Figures are either official debt advisory or management agencies’ estimates or DB forecasts. All figures indicate nominal amount issued.
*As per Spanish Treasury, Indexed Linked bonds could be auctioned on these dates.
*Net-prcds is the net proceeds ASW margin vs 3M Libor in bp; z-sprd is the z-spread of the linker vs 3M Libor in bp; z-sprd diff is the z-spread of the linker and that of its nominal comparator; richness is the ‘CPI swap richness or the cheapness (+) or richness (-) of the linker relative to the underlying nominal government bond curve Source: Bloomberg Finance LP, Deutsche Bank
*Par/par is the par/par ASW margin vs 6M Libor in bp; z-sprd is the z-spread of the linker vs 3M Libor in bp; z-sprd diff is the z-spread of the linker and that of its nominal comparator; richness is the ‘CPI swap richness or the cheapness (+) or richness (-) of the linker relative to the underlying nominal government bond curve Source: Bloomberg Finance LP, Deutsche Bank
*Net-prcds is the net proceeds ASW margin vs 6M Libor in bp; z-sprd is the z-spread of the linker vs 3M Libor in bp; z-sprd diff is the z-spread of the linker and that of its nominal comparator; richness is the ‘CPI swap richness or the cheapness (+) or richness (-) of the linker relative to the underlying nominal government bond curve Source: Bloomberg Finance LP, Deutsche Bank
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