Foreign Exchange Strategy Fixed Income Strategy Fixed Income Research Emerging Markets Strategy Portfolio Strategy Economics Weekly commentary on economic and financial market developments Global Views Corporate Bond Research Contact Us Global Views is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C October 10, 2014 Key Data Preview A1-A2 Key Indicators A3-A5 Global Auctions Calendar A6-A7 Events Calendar A8-A9 Global Central Bank Watch A10 Forecasts A11 Latest Economic Statistics A12-A13 Latest Financial Statistics A14 Forecasts & Data This Week’s Featured Chart Economics Make It Or Break It Week For Equities? 2-5 Derek Holt Canada’s Medium-Term Housing Outlook 6 Adrienne Warren Small Businesses Lead Hiring In Canada 7 Neil Tisdall Ottawa’s Good News 8 Mary Webb USD Impact On Trade Competitiveness Is Being Exaggerated 9-10 Derek Holt (Not So) Great Inflation Expectations 11-12 Dov Zigler The People’s Bank Of China’s Balancing Act 13-14 Frances Donald Vietnam’s Economic Outlook 15 Tuuli McCully and Neil Shankar The Irish Economy Should Continue To Outperform 16 Erika Cain Fixed Income Strategy UK Inflation — Fancy Another Wager? 17-18 Alan Clarke The German Economy Takes A Hit! Will It Last? 19-21 Frédéric Prêtet 0 50 100 150 200 250 300 350 2010 2011 2012 2013 2014ytd Source: Statistics Canada, Scotiabank Economics. annual change, 000s Canadian Employment on Pace to Surpass 2013?
Transcript
Foreign Exchange Strategy Fixed Income Strategy Fixed Income Research Emerging Markets Strategy Portfolio Strategy Economics
Weekly commentary on economic and financial market developments
Global Views
Corporate Bond Research
Contact Us
Global Views is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C
October 10, 2014
Key Data Preview A1-A2
Key Indicators A3-A5
Global Auctions Calendar A6-A7
Events Calendar A8-A9
Global Central Bank Watch A10
Forecasts A11
Latest Economic Statistics A12-A13
Latest Financial Statistics A14
Forecasts & Data
This Week’s Featured Chart
Economics
Make It Or Break It Week For Equities? 2-5
Derek Holt
Canada’s Medium-Term Housing Outlook 6
Adrienne Warren
Small Businesses Lead Hiring In Canada 7
Neil Tisdall
Ottawa’s Good News 8
Mary Webb
USD Impact On Trade Competitiveness Is Being Exaggerated 9-10
Derek Holt
(Not So) Great Inflation Expectations 11-12
Dov Zigler
The People’s Bank Of China’s Balancing Act 13-14
Frances Donald
Vietnam’s Economic Outlook 15
Tuuli McCully and Neil Shankar
The Irish Economy Should Continue To Outperform 16
Erika Cain
Fixed Income Strategy
UK Inflation — Fancy Another Wager? 17-18
Alan Clarke
The German Economy Takes A Hit! Will It Last? 19-21
Frédéric Prêtet
0
50
100
150
200
250
300
350
2010 2011 2012 2013 2014ytd
Source: Statistics Canada, Scotiabank Economics.
annual change, 000s
Canadian Employment onPace to Surpass 2013?
Economics
Global Views
October 10, 2014
2
Make It Or Break It Week For Equities?
Please see our full indicator, central bank, auction and event calendars on pp. A3-A10.
Canada — How Temporary?
After starting the week closed for Thanksgiving, the highlight of the week for Canadian markets from the standpoint of the currency and the Canada curve will be a pair of releases that further inform the debate over how temporary recent upsides to inflation and macro data really have been. After plateauing in July at 2.4% y/y, August’s 2.1% reading looked like it was playing into the BoC’s ‘temporary’ explanations for why inflation was slightly overshooting the 2% inflation target. Lower gasoline prices might further assist in bringing down inflation in Friday’s September release but year-ago CPI base effects may counter such efforts. Further, as chart 1 demonstrates, Canada is not getting the benefit of cheaper gasoline prices to the same degree as stateside. Beyond the headline print, there may be greater emphasis placed upon core inflation excluding the more volatile components. It had unexpectedly accelerated from 1.7% to 2.1% in the August reading and pointed toward broadened but still modest price pressures. As commodity prices tumble, a wave of cooler global inflation readings may lie in the cards but the extent to which this passes through into softer momentum in core prices is uncertain in magnitude and timing.
Thursday’s manufacturing shipments will find it tough to extend the gains following the biggest single-month rise in the value of shipments (August +2.5% m/m) since July of 2011 and with all of that occurring in volume terms (+2.8%). That doesn’t necessarily mean turning bearish on manufacturers again but, rather, recognizing that after a 10% surge in the volume of shipments in Q2 and a big gain in July, significant moderation is likely. This may play to the Bank of Canada’s view that manufacturing and trade gains may prove to be temporary. We already know that export volumes fell 2.2% m/m in August. That brought the quarterly growth rate in export volumes materially lower and will likely result in a lower growth rate for manufacturing shipment volumes than we were tracking with figures available up to this point (chart 2).
Although irrelevant to markets, at least in terms of any immediate release effect, housing observers will have an eye on home resale figures for September when they are released on Wednesday. They have risen in month-ago seasonally adjusted terms for seven consecutive months following a temporary swoon from last October through January of this year. Canada’s housing market remains very strong this year including on the resale side and that is likely to persist in the September release. This is based on a limited number of local real estate boards that have already reported but that do not seasonally adjust their figures. Vancouver’s resales were 17.7% higher than a year ago last month, 16.1% higher than the ten-year average and came in as the third highest print for a month of September over the past decade. The average price of a home in Vancouver was $633,500 for all types of homes and weighted down by more affordable condos, while the average price for a detached property was $990,300 and still rising by 7.3% y/y with $1 million likely to be crossed over coming months. Toronto’s resales were up by 10.9% y/y and 6.9% year-to-date with an average
price of $574k. Calgary sales were up 11.9% y/y and average price is $487,296 (+7.3% y/y). I maintain the view that, as the market goes higher, one should not drop one’s guard in the face of an uncertain outlook for the core drivers.
United States — Make It Or Break It Week For Equities
Recent softness in equities has been more about hype than substance as the S&P500 and the broader Wilshire 5000 are down by only about 4% from their peaks in mid-September. That’s a flesh wound, and not anywhere close to correction territory that — within reason — could actually prove to be healthy for equity markets over the longer haul by bringing in a new round of buyers reticent to buy over-valued bonds that would only become dearer in a correction. That said, the results of next week’s earnings parade will go a long way toward determining equity market risks over the duration of the year. Fifty-three firms listed on the S&P500 report Q3 earnings over the week and starting on Tuesday. Among the major names are financials like JP Morgan, Wells Fargo, Citigroup, BlackRock, Bank of America, Amex, Goldman Sachs, BoNYM, and Morgan Stanley. Key nonfinancial names include GE, Google, Delta, Mattel, eBay, Netflix, Intel and Johnson & Johnson.
US data risk will also be a factor overhanging global markets with a focus on the consumer and the industrial sector. Retail sales for September on Wednesday, plus housing starts (September) and the University of Michigan’s consumer sentiment gauge (October) on Friday will further inform our views on the health of the US consumer. We already have 3.6% growth in the volume of retail sales baked into the third quarter through the combined effects of the Q2 hand-off and data up to August. That’s significantly due to the 0.8% m/m rise in August. That said, the breadth of gains in the consumer sector is not terribly impressive and is focused on retail sales and, narrower yet, on autos as big-ticket spending in this category is motivated by generous financing and replacement demand for aging autos, and crowds out spending elsewhere. Total consumer spending in inflation-adjusted terms is only tracking a 1.9% annualized gain in Q3 with all but September in the books (and always possible revisions). Even as trade supports upside risks to our forecasts, the consumer points to mild downside risks to our Q3 GDP expectations but with the effects netting out somewhere near 3% under our current tracking. Nevertheless, supporting spending on autos is solid consumer confidence and the UofM metric lies only a half point away from its highest reading since 2007. We might also see this being reflected in stronger housing starts that are expected to follow building permits higher and cross back over 1 million at a seasonally adjusted and annualized pace following a volatile year-long pattern on either side of this psychologically important threshold.
Industrial sector data could depict the US as being at the leading edge of a global rebound in industrial output during September following weak headlines in August across countries as diverse as the US, Germany and Japan. Part of the problem concerns unusually timed auto plant closures in the United States and Germany that should turn the other direction in the September figures. What will also play into this is whether the Philly Fed business outlook survey softens further in the October reading compared to a peak in July. Ditto for the Empire manufacturing survey that hit the highest reading in five years in the September print. Even if these surveys do soften, we expect them to remain solidly in expansionary territory. This is a principally US-centric expansion story, as downside risks to the Eurozone matter but don’t have to be a deal-breaker. For many years, US growth has exceeded the troubled Eurozone (chart 3).
A monthly update on the US federal budget for September and the Fed’s Beige Book of regional economic conditions round out the schedule. Fed speak will cap off the week. It’s difficult to foresee
materially new information as the Federal Reserve is buying time and observing incoming data. Chair Yellen speaks on income inequality on Friday. Other Fed speakers will include Governor Tarullo, and Regional Presidents Williams, Evans, Plosser, Lockhart, Kocherlakota and Bullard.
Europe — Can Draghi Hint At More?
ECB President Mario Draghi will take to the podium three times next week and this may generate expectations that something material may be afoot by way of communicating policy expectations. His first appearance is on Saturday in Washington and includes a press conference as the IMF annual meetings wrap up. He then speaks in Frankfurt twice on Wednesday at two ECB-sponsored events. It’s possible he takes the debate at the October 2nd ECB meeting to the streets in an effort to counter public criticism of recent ECB initiatives by Bundesbank President and ECB Governing Council Member Jens Weidmann. Weidmann recently observed that “I see a risk that we will overpay for these assets [ed. ABS]. That would represent a transfer of risk from the banks and other investors to the central banks and ultimately to the taxpayers. What I cannot support or accept are measures that see the central bank straying into economic policy or fiscal policy territory. I have made it clear on many occasions that there are certain issues for which elected politicians, and not the Eurosystem, need to deliver solutions. The central bank cannot, and should not, make up for a lack of political resolve.” While I appreciate the gravity of the situation facing the ECB, I cannot help but sympathize with Weidmann’s case as ECB policy has crushed the term structure of rates, taken down any incentive to lend with it, thereby made a lending recovery more elusive, and in the process stalled regulatory and fiscal reforms through the easing of market pressures. Weidmann’s opposition is joined by Banque de France Governor Christian Noyer but for very different reasons in that Noyer believes the Banque de France’s expertise in ABS markets is being unwisely bypassed in rolling out new stimulus and therefore that raises execution risks.
It is hard to imagine how recent developments including policy divides at the ECB will arrest the decline in German investor confidence that has been in place throughout 2014. After coming into the year on a solid uptrend as Eurozone recovery prospects gained momentum, ZEW investor expectations (Tuesday) have slid back to where they sat nearly two years ago. Add-ups or revisions to European figures for industrial production, trade and CPI won’t carry much new information and round out the release schedule.
To what extent pound sterling appreciation and Eurozone growth challenges mitigate recent guidance from Bank of England Governor Mark Carney may become a little clearer in next week’s UK updates. Recall what Carney said at the end of September: “With many of the conditions for the economy to normalize now met, the point at which interest rates also begin to normalize is getting closer. While there is always uncertainty about the future, you can expect interest rates to begin to increase.” Inflation figures on Tuesday will be closely watched for signs of whether or not a renewed downdraft since June has further legs to it and as UK inflation tests the lowest reading in five years (chart 4). Simultaneous to this development, however, has been a plunging unemployment rate (chart 4 again) that is returning to 2008 levels and only a percentage point above the late 2007 level.
Asia — Exactly What Does ‘Targeted’ Mean?
China will be squarely in market sights next week as a combination of potential policy guidance and macro data may have a material impact upon global market confidence. Premier Li will speak this Saturday at a “China Meets Europe” forum in Hamburg, Germany. He just remarked that the government will
use “targeted measures” to prop up the economy. My colleague Frances Donald is of the view — which she will express in a column in this week’s Global Views report — that China will stay the course on broad reforms while only pursuing modest gestures toward addressing cooling property and credit markets. Such guidance from policy officials may come under mixed market pressures next week as export growth is expected to accelerate while inflation drops back down and aggregate financing continues to cool. Indeed, Chinese CPI is expected to come in at the softest year-ago reading since October 2012 and, at 1.7% y/y with potential further downside pressure in the face of falling global commodity prices, the near-term inflation outlook would be supportive of further limited stimulus measures. Export figures are expected to improve but lagged currency effects may still point to further erosion in the country’s current account surplus (chart 5). At the time of writing, the release schedule for aggregate financing figures is uncertain.
Consensus is split — so far — on what the Bank of Korea might do next week with half of the economists within a thin consensus expecting a 25bps cut to the 7-day repo rate and half expecting the central bank to stand pat. A mild rise in the unemployment rate to 3.5% from 3% at the start of the year (and with September on tap for next week) caused some concern about waning domestic momentum. Bank of Korea Governor Lee Ju Yeol had fed expectations for a further rate cut after he cut last month, and Finance Minister Choi Kyung Hwan recently remarked that global risks were mounting including a falling yen and shifting Fed policy.
India won’t affect the global market tone, but it will be watched for further signs that inflation is bottoming, although falling global commodity prices may put renewed downward pressure on global headline inflation readings (chart 6).
Source: Commodity Research Bureau BLS, Scotiabank Economics.
Chart 6
Economics
Global Views
October 10, 2014
6
Canada’s Medium-Term Housing Outlook
Ultra-low borrowing costs are fueling Canadian home sales for the time being, but broader cyclical, structural and demographic trends point to a more subdued pace of activity over the medium term.
Canada’s housing market remains quite buoyant. Despite persistently soft labour market conditions, home sales strengthened through the spring and summer, and are trending above their 10-year average (chart 1). Low borrowing costs — the 5-year posted mortgage rate has dropped roughly 50 bps this year — are maintaining affordability in the face of high home prices and modest income growth.
The Canadian housing market overall is well balanced. National sales and price trends are skewed by relatively strong activity in Canada’s largest and priciest housing markets — primarily Toronto, Calgary and Vancouver. The median house price increase across Canada’s major centres this year is just under 3% y/y, less than half the national average increase of 7%.
In the near term, the persistence of low interest rates points to continued upside risk to home sales, construction and prices. However, cyclical and structural factors suggest Canada’s housing sector has more downside than upside risk over the medium term. We expect home sales will slow in 2015 and beyond alongside a gradual upward drift in borrowing costs, tempering new and resale prices over the next several years.
Valuations are stretched in many markets, and the eventual shift to higher interest rates will reinforce the deterioration in affordability, particularly for first-time buyers in Canada’s largest urban centres. Rising borrowing costs, in the context of moderate gains in incomes and home prices, could result in a 5-10% decline in housing affordability by the end of 2015 (chart 2), with a further deterioration likely beyond next year. There is also the potential for additional macro-prudential policy tightening if market forces are unable to slow the housing market’s momentum.
The underlying pool of potential new buyers also appears more limited. Canada’s homeownership rate is at or near a record level across most age cohorts. Household debt-to-income is at record levels, but is showing signs of levelling off alongside a gradual pullback in credit growth.
Demographic trends also are expected to be less favourable for Canadian housing demand over the medium term. Population growth may remain close to recent trends because of continued sizeable immigration. However, the key first-time home-buying age cohort (25-34 years of age) is unlikely to be as supportive as it has been during the recent housing boom, while an aging population should reduce household formation and housing turnover.
Beyond the cyclical U.S.-led upswing in economic activity over the next couple of years, the outlook for Canadian growth remains subdued. This reflects a variety of factors, including ongoing competitiveness issues and a muted commodity price cycle owing to slower output gains in emerging markets. Large regional disparities in Canada’s housing market will likely persist, reflecting more positive economic and demographic factors in the resource-rich regions, and the strength in major urban centres which have benefitted from increasing service-related activity.
After a significant post-recession outperformance in Canadian employment, hiring has slowed and become more volatile as economic conditions have softened. However, a pick-up in Canadian small business hiring has been a bright spot amid a softening labour market. Employment at firms with less than one hundred employees accounts for roughly two-thirds of all private sector jobs in Canada (and the U.S. as well), highlighting the importance of this sector.
Canadian small business hiring is outpacing the U.S. performance. An important factor is the composition of the job market in each country. Manufacturing and construction, key drivers of small business employment, account for 17% of total jobs in Canada, but only 13% in the United States. Another factor is the U.S. suffered a sharper downturn in employment across all firm sizes and, while larger firms were able to ramp-up hiring during the recovery, smaller firms lacked the same access to credit and financing to rebuild their business operations and payrolls.
Accelerating demand for exports to the U.S. will further support small enterprise employment as manufacturing recovers. Hiring at small Canadian manufacturing firms is up 2.6% on the year, compared with a decline of 3.9% at medium and large firms. Payrolls are up 1.7% in the wholesale and retail trade sector, which encompasses about a fifth of all small firms in Canada. However, the growth potential of this large sector is mixed. Canadian retail sales are up 4.8% on the year due to a strong auto market, but stiff competition and waning consumer demand suggests some moderation ahead. Employment in the construction industry grew on average 3.3% since 2010, but has slowed in 2014. Solid residential housing starts are likely to weaken in 2015, but the industry will be buoyed by offsetting gains in the non-residential and engineering and repair sectors. Hiring at small business services companies has been soft this year, but should rebound alongside increased investment. Employment in the more recession-resistant health care sector is up 4.9% this year, and should continue to expand in 2015.
Self-employment is beginning to decline in Canada, a possible sign of a strengthening job market. The most recent report saw 74,000 new jobs created in September, with a decline of 56,000 self-employed positions. The U.S. has seen steady declines in self-employment over the last 4 years, and has posted strong increases in payroll employment.
There is considerable uncertainty about the global outlook, particularly in the resource sector where the slowdown in the large emerging markets is continuing. The U.S. economy is on a firmer growth path, allowing Canadian businesses with a higher exposure to our largest trading partner to perform reasonably well. This should continue to bolster prospects for small and medium sized firms.
At 0.3% of GDP, a diminished FY14 federal deficit begins to rebuild some fiscal flexibility.
Canada’s $5.2 billion final federal deficit for fiscal 2013-14 (FY14) was an upside surprise, a hefty $13.3 billion improvement on the FY13 shortfall. Revenues in FY14 climbed 5.9% (+$15.0 billion), while total expenditures edged up 0.6% (+$1.8 billion). Yes, one-time factors assisted the bottom line, including one-time current and prior-year tax assessments and the $1½ billion of interest & penalties associated with those tax receivables, a $1.3 billion realized gain on the sale of 30 million GM common shares and the Canadian High Commission property in London, a $0.5 billion jump in net foreign exchange revenues and a $1.2 billion decrease in federal disaster assistance for Alberta’s 2013 flood. Nevertheless, Ottawa, while maintaining scheduled growth in major transfers for individuals and other levels of government, has reined in its direct program spending, with annual declines averaging 1.4% over the past four fiscal years. A second freeze on Departmental operating budgets for FY15-FY16 is in place.
The government, first announcing a Small Business Job Credit and now doubling the limit on its Children’s Fitness Tax Credit to $1,000 as of 2014 and making it refundable beginning in 2015, already is pushing ahead with the tax relief promised once the deficit was eliminated. Details of more comprehensive tax cuts are rumoured for the government’s Fall Update, expected in late October. For FY15, instead of the government’s projected $2.9 billion FY15 deficit, black ink may emerge — net debt and the accumulated deficit are already edging lower relative to GDP. Important for the future is the Conservative government’s plan for allocating the significant surpluses outlined from FY16 to FY19 in its February Budget. In its forecast update this month, positive factors, including the strengthening U.S. economy, alongside negative developments, such as the recent softness in world oil prices, are expected to underline the degree of uncertainty still persisting.
Final FY14 results from seven Provinces have trimmed the aggregate provincial deficit from 0.8% of GDP to 0.7%, shifting it closer in absolute terms to the FY13 level. Revised estimates to date for FY15 have scaled back the red ink slightly, ahead of the substantial improvement outlined for FY16 in the spring Budgets. As the federal government’s austerity begins to ease, fiscal restraint is expected to continue across most Provinces, particularly in Quebec where substantive restructuring is planned.
$Chg vs $Chg vs $ Chg $ Chg $ Chg Budget $ Chg BalanceFinal Bud Rev Final Bud Rev Final vs Bud Final vs Bud. Rev. vs Bud. 2014 Rev. vs Bud. FY10 FY11 FY12 FY13 FY14r FY15r
Federal -55,598 -1,798 -33,372 2,828 -26,279 6,021 -18,415 2,685 -5,150 13,550 -2,900 n.a. n.a. -3.5 -2.0 -1.5 -1.0 -0.3 -0.1 FY16__________* Post-transfer balances, consolidated for AB (Fiscal Plan basis) and SK. Source: Budget documents; Statistics Canada; nominal GDP forecasts: Scotiabank Economics.
FY10 FY11 FY12 FY13 FY14r % of GDPFY15b
The Provinces' Budget Balances*
0
20
40
60
80
100
120
FY00 02 04 06 08 10 12 14
Federal Direct Program Spending
* Other Departments & agencies, Crown corp. and other transfers. Source: Finance Canada.
$ billions
Defence
Other*
Economics
Global Views
October 10, 2014
9
USD Impact On Trade Competitiveness Is Being Exaggerated
And few at the Federal Reserve are concerned.
Much of the focus on the USD’s appreciation and its potential to derail growth upsides seems misplaced. Further, the Federal Reserve’s concerns about the dollar’s rise have been exaggerated by commentators.
Little Change And Long Lags
Enter chart 1. The best way to look at a currency by way of influences on trade competitiveness is in trade-weighted terms and adjusted for relative rates of domestic and foreign inflation. A nation’s competitiveness is driven by how the prices of its products change relative to other global producers on a trade-weighted average and after adjusting for the nominal exchange rate. That concept differs markedly from just the nominal exchange rate which has sharply appreciated (chart 2). The so-called real effective exchange rate is little changed so far; it is up by about 7% since 2011 when it bottomed. This is at best a loose guide, however, given the enormous uncertainty governing how currency changes impact growth. For one example of the literature, go here.
As chart 1 shows, the optimal lag between USD movements and the broad current account balance of the US economy (on an inverted scale to make the connection easier to see) is about four years. The current account is the way to look at the USD impact on broad balance of payments dynamics since it has competing effects on imports and exports. So, at least thus far, we’re left with little change in the currency that will have effects spread out over multiple years into the future once lagged adjustments on trade channels fully work their way through. When the debate was genuinely more serious was in the 1980s when this definition of the exchange rate soared, and then again during the dot-bomb period and its aftermath; the result both times was to sharply raise the current account deficit. Today is hardly comparable by way of the currency swings we’ve witnessed thus far and we’d have to see double-digit rates of appreciation in this exchange rate to begin to treat it as a more serious risk.
Energy Development May Trump The Currency
Further, as the US continues to substitute domestic energy production for imports and raise its energy exports via development of shale and non-shale reserves on the path toward net energy self -ufficiency into next decade, the historical sensitivity of the current account balance to USD movements may be more muted (charts 3, 4). This is a classic supply-side shock and a favourable one at that from the standpoint of the overall health of the US economy and in ways that may override any effects of the currency on the broad trade account.
Few At The Fed Are Worried
Further, what the Federal Reserve has been saying about the currency’s effects has been distorted in some popular market commentaries on the minutes to the September 17th FOMC meeting. Minority views were incorrectly positioned as if to represent a significant cross-section of opinion as we argued here. The actual quotes from the FOMC minutes are below and the emphasis should be put on the choice of words like ’some’ and ’a couple’ etc., as opposed to using words like ’most’ or ’many’ or ’almost all’ which would have conveyed much greater concern:
Page 9: “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”
Page 10: “While most viewed the risk that inflation would run persistently below 2 percent as having diminished somewhat since earlier in the year, a couple noted the possibility that longer-term inflation expectations might be slightly lower than the Committee’s 2 percent objective or that domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar.”
Indeed, where majority FOMC opinion is signalled is in the following clip in discussing risks to the outlook:
Page 11: "A significant majority of participants continued to judge the levels of uncertainty about their projections for real GDP growth and the unemployment rate as broadly similar to the norms during the previous 20 years. Most participants continued to judge the risks to their outlooks for real GDP growth and the unemployment rate to be broadly balanced. A few participants viewed the risks to real GDP growth as weighted to the downside; one viewed the risks as weighted to the upside."
Recent comments on the USD by New York Federal Reserve President William Dudley were also often exaggerated by commentators. In a speech this past Wednesday, Dudley remarked:
“Of course, the appreciation of the dollar is likely due in part to increasing confidence that growth prospects in the U.S. have improved. Therefore, this development does not mean we should abandon the consensus forecast. Rather, as with the other issues I have discussed, I view this development as limiting the upside risk to that forecast."
Note that in the Sept projections, the Fed was already on the lower end of Bloomberg's consensus for US growth next year with a central tendency of 2.6-3% (Bloomberg 3%), 2.6-2.9% in 2016 (2.9% Bloomberg).
An Uncertain Outlook For The USD
Now of course at the end of the day, implicit to views on what the USD may or may not do to the US economy is the assumption that it will undergo a large change over coming years. For years we have heard that the Federal Reserve has been intent upon debasing the currency but for years there has been no evidence this has worked if it was truly their aim (which I strongly doubt). Chart 5 makes the point using multiple definitions of the exchange rate that debasement theories didn’t pan out. If debasement theories did not pan out over recent years, then perhaps one’s confidence that the USD will shoot to the moon as the Federal Reserve exits extraordinary stimulus should be tempered. In any event, what is encouraging is that the deep global imbalances of the pre-crisis period are gradually being reined in (chart 6) though perhaps replaced by financial sector froth and the risks this poses to global financial stability.
... In a Context of Falling Consumption & Rising Exports
U.S. Average Monthly Consumption & Exports
Barrels per Day,Millions
Exports, RHS
Petroleum Products Supplied
(Consumption Proxy), LHS
70
75
80
85
90
95
100
1.10
1.20
1.30
1.40
1.50
1.60
06 08 10 12 14
What USD Debasement?USD Flat Across Variety of Metrics
EURUSD
EUR, LHS
Source: Bloomberg, Scotiabank Economics.
DXY, RHS
Real Broad Effective
USD, RHS
index
-800
-600
-400
-200
0
200
400
2007 2014
Source: IMF, Scotiabank Economics
Current Account Balance. USD, Billions
A More Balanced World
Chart 4
Chart 5
Chart 6
Economics
Global Views
October 10, 2014
11
(Not So) Great Inflation Expectations
The recent decline in U.S. inflation expectations is too extreme.
The drop in 5-year inflation expectations manifest in the TIPS market to almost 1.5% is too extreme. Those expectations are unlikely to bear out over the next five years, even if realized inflation could fluctuate in that area in the short term depending on how commodity dynamics play out. Although the drop in market inflation expectations may partially have to do with liquidity premia or other market flows in both TIPS and nominal bonds, they are still reflecting a fundamentally unlikely inflation outcome.
It typically takes a depression — or a war
U.S. five-year inflation expectations are currently pricing in inflation in the 1.5% y/y area, on average, over the next five years. As chart 1 shows, U.S. inflation has only run below 1.5% y/y on average: a) during five-year periods that include massive recessions, i.e. following the Great Depression and the five-year period that included the recent global financial crisis, b) in the wake of WWI and WWII as the economy absorbed excess labor supply and benefitted from major technological developments during the wars, and c) in the late 50s/early 60s when there were a series of recessions within a short period. Ordinary recessions have not typically caused inflation to average 1.5% y/y over a five-year period.
Market liquidity a factor?
Market liquidity could be one factor explaining the drop in inflation expectations. Not only TIPS but also emerging markets debt and corporate credit have experienced some cheapening of late, perhaps reflecting apprehension over a potential shift in the Fed’s trajectory. The move in TIPS prices could be related — and therefore not offer a pure look at inflation expectations.
Oil prices weighing on CPI — for how long?
Even so, the drop in inflation expectations seems to be tied to a drop in oil (and U.S. gasoline) prices that has exceeded the normal seasonal declines (see chart 2). Three factors are behind this move: a) rising domestic crude oil production, b) rising global production, and c) lower demand forecasts due to softer European and Chinese economic growth (more on this below). Alas, gasoline prices in the U.S. are heavily seasonal and will bounce in all likelihood this Jan-March. Moreover, while there may seem to be an oil supply glut at the moment, OPEC remains a swing producer committed to regulating global supply, and Russia — the world’s other major swing producer — is locked at odds with Western Europe. There is no assurance that prices will continue to fall.
Imported deflation?
There is a case to be made that global inflation is fairly synchronous and, if European inflation is dipping and China is slowing— why wouldn’t U.S. inflation drop as well? While we think that there are risks to U.S. inflation from global disinflation, at least throughout 2014, U.S. and European inflation have headed in opposite directions. This is because an increase in the pace of U.S. services price growth has propelled U.S. inflation.
CPI Seldom Runs Below 1.5% Y/Y for Five YearsIt Takes a Depression - or a War
Economics
Global Views
October 10, 2014
12
… continued from previous page
U.S. growth outlook is positive
Services prices are rising in the U.S. due to an improving economy. Scotiabank’s outlook for U.S. economic growth is generally positive. We expect GDP growth in the 3% range for the next couple of years and for the momentum that we saw in Q2 2014 to persevere during Q3 and Q4. While the economy is far from back-to-normal, it is normalizing. The biggest distortions from the financial crisis are fading. Underemployment is falling as evinced by declines in the U-6 all-in unemployment rate, household net worth is growing, the quantity of households with underwater mortgages is falling, wages are growing (albeit slowly), etc. This dynamic has caused services prices to pick up, insulating the U.S. from disinflation risks on the goods side of the picture moving forward as services make up more than half of the U.S. CPI basket.
Cheap commodities mean more purchasing power
Even with respect to the drop in gasoline prices, lower U.S. energy costs, while disinflationary at first, ultimately have a benign impact on CPI as U.S. consumers spend less at the pump — and more everywhere else. The same is true with respect to soft agricultural commodity prices. The point is that while inflation may not skyrocket to new heights, the medium-term downside risks to U.S. inflation which animated policy makers (and markets) for the past five years are substantially less material at this point.
Dollar is a risk — but only somewhat
One risk comes from the higher dollar. Research done at the Federal Reserve points to an approximately 50% pass-through to U.S. import prices from exchange rate fluctuations over a 12-month horizon (see chart 4). That said, as chart 5 shows, import prices aren’t the only determinant of CPI and will only weigh on it moderately. Broad U.S. dollar strength could feed disinflationary pressure on the goods side of the inflation picture — and if the Fed does in fact hike its policy rate earlier than expected (our call is for Q2 2015 with risks weighted to earlier) then we could see the USD continue to perform very strongly. Should that situation materialize though, it would be a result of a stronger domestic economy — which would continue to stoke services inflation.
All-in-all, this means that inflation in the U.S. is likely capped in a moderate range in the medium term and unlikely to take off meaningfully above target. But that doesn’t mean that inflation will be as weak as it was during the past five years of recovery from the greatest recession since the Great Depression. Inflation expectations that are pricing in the latter scenario are too extreme.
Source: Scotiabank Economics, Federal Reserve (Auer & Schoenle, 2012)
High Pass-Through of USDto Import Prices
y = -0.0038x2 + 0.1492x + 2.6541R² = 0.4373
-3-2-101234567
-40 -20 0 20 40
But Import Prices Aren't the Only Determinant of CPI
Import Prices vs. CPI, Y/Y % Change
Source: Scotiabank Economics, Census Bureau, BLS
CPI, %, Y/Y
Import Prices,%, Y/Y
Chart 3
Chart 4
Chart 5
Economics
Global Views
October 10, 2014
13
The PBOC’s Balancing Act
The People’s Bank of China is becoming more active with targeted support measures, but its commitment to long-term financial reform still seems solid to us. The bad news is that this will pressure short-term growth and financial stability. The good news is that policymakers are still on the path to longer-term sustainable growth.
Over the past two years, President Xi Jinping, Premier Li Keqiang, and the People’s Bank of China (PBOC) have made important advances as they attempt to move China towards a more market-led economy. The process is lengthy and ambitious: it requires introducing adequate risk pricing, liberalizing interest rates, and opening the capital account, all of which will result in higher interest rates and periods of financial turbulence. It’s also the opposite of the typical prescription for an economy that is attempting to delever so the transition is best characterized as short-term pain for long-term gain. It also requires full commitment from policymakers. Yet, recent actions by the PBOC seem to suggest their commitment is waning. Is this really the case?
Short-term markets salivate at the idea of more credit stimulus which would temporarily support financial stability and buoy growth. In the long run, however, there are dangerous repercussions to reneging on reform commitments. Part of the PBOC’s objective has been to convince banks that they cannot rely on central bank intervention and must acquire more appropriate risk management methods. This was a bumpy transition in mid-2013 as banks adjusted to PBOC statements saying they should better manage their own liquidity. Eventually, however, interbank rates calmed. If the PBOC were to backpedal, the central bank risks exacerbating policy uncertainty and, worse, damaging its future credibility should it tell banks a second time they must fend for themselves.
The PBOC is engaged in targeted monetary easing
Over the past month, the PBOC has been actively supporting financial markets, leading some to believe that aggressive stimulus is back in the policy plan. On September 16th, state media announced that 500 billion yuan of 3-month liquidity would be provided by the PBOC via its Standing Lending Facility (SLF). One day later, the central bank again surprised with a 20 basis points cut to the 14-day repurchase agreement rate. Then, on September 30th, the PBOC eased a slew of mortgage rules.
Why is the PBOC guiding interest rates lower? One likely reason is the sharp slowdown in the property market. Yes, housing investment is a key pillar of growth, estimated at around 15% of GDP, but the sector plays an arguably more important role as the primary source of collateral behind financial products. Declining property prices reduce the value of collateral in the system, pressuring defaults and creating heightened financial instability. Moreover, property-related transactions are one of the few sources of revenue for local governments whose spending is another pillar of growth. The PBOC’s targeted mortgage measures are a clear and direct response to the downside risk created by a falling housing market.
The SLF liquidity injection, however, is likely targeted at a myriad of smaller liquidity concerns. In August, China’s money supply fell to 12.80%, below the 13% y/y target for only the third time in three years. It’s also common for liquidity to tighten in the run-up to national holidays (the weeklong Nation Day ran from October 1-7) as well as at quarter-end as banks shore up balance sheets to pass regulatory tests.
Ultimately, however, China’s financial reforms will create substantial volatility in interbank markets, so the PBOC needs calm seas before it rocks the boat with deregulation. Targeted easing buoys bank confidence and ensures there is sufficient liquidity in the system, thereby guaranteeing a more stable base for reforms. This is fundamentally different from credit-led stimulus intent on reviving growth.
Two key events in September also support the idea that officials are committed to financial reform despite engaging in targeted monetary stimulus. First, on September 12th, a few days before the PBOC’s large SLF liquidity injections (and likely another contributing factor), news surfaced that another financial product had defaulted. Up until last year, neither domestic nor international markets had witnessed the default of a financial product in China as third party solutions were consistently implemented when products faced insolvency. As a result, cash flowed towards high-interest (5-14%) paying products which carried an implicit guarantee instead of to bank deposits which pay at most 3% and a near-zero real rate. In 2014, however, news of several small partial and full defaults surfaced, including China’s first corporate bond default in the onshore market in March. Premier Li warned that there would likely be an increased number of defaults as the government pursued financial deregulation, sending a signal that shadow banking products should be pursued with caution. Yet, between March and September, it seemed default activity had stalled and we questioned whether eroding the implicit guarantee was still a priority. Last month’s fresh default signals that it is.
Secondly, news surfaced this past week that local governments would no longer be allowed to raise debt via their off-balance sheet financing vehicles. In addition, China’s cabinet sent a message that it would not bail out local governments if they fail to repay debts and that troubled local governments would be required to reduce spending. Local governments are certainly one of the worst offenders with respect to debt accumulation — debt grew almost 70% between 2010 and 2013 — though much of the spending was encouraged by the central government as a form of stimulus. Coupled with declining property prices which will reduce property-related transaction revenue, local governments will grow significantly more cautious with spending in the short run, putting downward pressure on economic growth. However, cutting local governments off from debt growth is a key step towards deleveraging and shows policymakers’ commitment to reforms, however painful.
One stall: interest rate reform
Interest rate liberalization is one area where there is a clear delay in reform momentum. In March this year, PBOC Governor Zhou Xiaochuan said he hoped to fully liberalize interest rates within two years, i.e., by March 2016, which he again re-iterated in July. Now, however, we are six months into that timeline and there has been no additional news. Several officials report that the next step — a motion to approve bank deposit insurance — has been in front of State Council for months with no action. Now, reports are surfacing that the PBOC governor, a champion of liberalization, may be on the outs over disagreements on the pace of the reform. Given the likelihood of defaults accelerating, the pressure being placed on local governments, and ongoing deterioration in the housing sector, it’s understandable that interest rate reform is stalled. Yet, the radio silence on the issue is noticeable.
Short-term pain for long-term gain
Ultimately, declining property prices and generally tighter financial conditions caused by new defaults and a slowdown in local government spending will pressure short-term output growth and result in financial volatility. Yet, the PBOC appears to remain committed to targeted easing which should help to keep a floor on markets and prevent a full blown financial crisis. In the long run, China does not yet seem to be reneging on reform and instead appears committed to reducing imbalances and achieving a more sustainable growth path.
Export sector gains in Vietnam will continue to underpin real GDP growth.
The Vietnamese economy will enjoy solid growth momentum by regional standards through 2015, though the pace of expansion will fail to reach the 7% average recorded over the past two decades. The country’s real GDP grew by 5.6% y/y in the first three quarters of the year and we expect output gains to average 5¾% y/y in 2014-15. Despite the riots that broke out in May 2014, targeting Chinese workers and companies, activity will continue to be underpinned by rapid gains in foreign investment. Furthermore, the export sector continues to perform strongly — shipments were up by over 14% y/y (in US dollar terms) in the first three quarters of the year — as Vietnam remains an attractive alternative to China for low-cost manufacturing given that the nation’s relatively young population offers a source of labour cost efficiencies. Meanwhile, banking sector challenges limit availability of credit in the economy, which has an adverse impact on domestic demand growth.
Inflationary pressures will likely intensify in 2015 from the prevailing low level. Consumer prices increased by 3.6% y/y in September, the slowest pace since October 2009. We expect inflation to accelerate towards 6% y/y by end-2015 on the back of recuperating domestic demand and the authorities’ continued attempts to support the export sector by devaluing the dong (VND). The central bank’s monetary policy focuses on promoting output growth and macroeconomic stability along with controlling inflation. The International Monetary Fund has encouraged Vietnam to redirect its monetary policy towards inflation targeting while allowing greater exchange rate flexibility.
Vietnam continues to maintain a crawling-peg system, linking the VND’s exchange rate to the US dollar (USD) and allowing it to fluctuate +/-1% from the rate set by the central bank. In June, the VND reached the existing ceiling; as a result, the central bank announced a 1% upward adjustment, setting the interbank average rate at 21,246 per USD. The devaluation of the VND will help further facilitate the growing export sector. Vietnam’s foreign exchange reserves will continue to rise at a strong pace due to favourable trade dynamics, having increased by US$10 billion since the end of last year to US$35 billion. We expect the VND to close the year at 21,350 per USD.
The banking system in Vietnam suffers from poor asset quality despite the government’s continuing attempts to cleanse the financial landscape. The non-performing loan ratio reported by the central bank was 4.1% in July; however, external estimates are significantly higher. Bank lending grew by 6.7% y/y in September, below the official target of 12-14%.
For further information regarding the country’s economic outlook, please refer to the Vietnam Executive Briefing report, published on October 7, 2014.
Supported by fiscal reform, household deleveraging and stronger consumer spending.
The Irish economy is showing signs of a sustainable recovery, after over six years of stagnation. Real GDP is forecast to expand by 3%this year and 2½% in 2015, making Ireland one of the fastest growing economies in the region. This largely reflects the progress Irish households and the government have made in deleveraging relative to its euro zone counterparts and an ongoing rebalancing towards consumption-driven growth.
Consumer spending is set to improve on a firm foundation of lower household debt, while ongoing gains in wages and employment support disposable income. Rising consumer confidence and home prices also bode well for consumer’s propensity to spend. Meanwhile, Ireland's slowly recovering property market should provide a boost to construction investment, and machinery and equipment expenditure will likely pick-up as businesses continue to restock their capital bases. Overall investment is forecast to grow at nearly a double-digit rate through 2015. While significant, this is from a very low base and will still be insufficient in bringing Ireland’s investment-to-GDP ratio, which is currently around 15%, back to its pre-recession 10-year average of roughly 23%. Exports are expected to remain steady on stronger demand from key trading partners in the U.S. and the UK. However, net exports will provide less of a boost to headline growth going forward, as the recovery in private sector demand drives up imports.
Ireland has made significant progress in fiscal reform and successfully exited its €85bn EU/IMF bailout. Budget cuts of €30bn since 2009 have helped narrow the fiscal deficit from a high of 29.4% in 2010 to a better-than-expected 4.2% this year — due to national accounts revisions and above-target tax revenues. The government is now within closer reach of meeting its deficit target of below 3% in 2015. This combined with the governing coalition’s poor showing at the EU Parliament elections in May and lack of EU/IMF bail-out program constraints, will likely pave the way for less austerity in 2015 ahead of the 2016 elections. However, with gross government debt at an elevated 116% of GDP in 2013 (up from 24% in 2007), government efforts to pare down debt and achieve a structural budget balance by 2018 will continue to present challenges. Ireland’s current account balance is forecast to remain in surplus through 2016, averaging roughly 3% of GDP.
However, inflationary pressures remain subdued. Consumer prices rose by a modest 0.4% y/y in August, bringing the year-to-date average to just 0.3% (down from 0.5% in 2013 and 1.7% in 2012). The disinflationary trend across the euro zone has been guided by moderate wage growth, high unemployment, and lower commodity prices. Against this backdrop, the ECB has announced unprecedented monetary accommodation, lowering its benchmark refinancing rate to 0.05% and embarking on a purchasing program of asset-backed securities and covered bonds to complement its Targeted Long-Term Refinancing Operations (TLTROs). The ECB has reaffirmed its commitment to taking further unconventional measures if necessary. Nevertheless, inflation in Ireland is forecast to accelerate only modestly towards the ECB’s target of below but close to 2% through 2016.
Source: Central Statistics Office Ireland, Scotiabank Economics.
forecast
Fixed Income Strategy
Global Views
October 10, 2014
17
UK Inflation — Fancy Another Wager?
Overview
There are two key issues that are likely to determine the timing of the first BoE rate hike — namely wage inflation and CPI inflation. The lack of wage inflation has been one of the biggest surprises over the past year and there is precious little evidence that this is changing. If the BoE hikes rates before wage inflation materialises, it is at risk of crushing household disposable income and killing off the recovery. The hawks judge that wage inflation will accelerate soon enough to justify hiking now. Other MPC members seem to be in less of a hurry to hike and want more concrete evidence of rising wage inflation before pulling the trigger.
Meanwhile, CPI inflation is low and will fall further — down to a low-point of 1% in our view. The MPC could still look through this especially if core inflation stays where it is (close to 2%). Against this backdrop the risks to our call that the first rate hike will arrive in February have risen significantly and May is looking like a better bet.
No Single UK Labour Market
The UK labour market is fragmented. The dovish angle is that low-skilled workers have accounted for the bulk of the increase in hiring over the last year. This has dragged down the average company pay bill and in turn subtracted close to ½% from headline average weekly earnings. The tone of the latest MPC minutes seems to suggest that this phenomenon is temporary — we are not so sure.
There is plenty of residual slack from this source. There are still more than 500,000 more people than there were pre-2008 who are working part time but would prefer to work full time. That is an enormous amount of potential supply / underemployment.
What about the REC/KPMG survey?
This survey is flying. It shows that new hires (i.e., the marginal worker) is enjoying a surge in wage inflation. Given the typical lead times with overall wage inflation, some believe that headline average weekly earnings is poised for a sharp correction higher.
Similarly, the fundamentals point to faster pay inflation. The ratio of the demand for workers (i.e. vacancies) versus the supply of workers (i.e. the level of unemployment) is shooting up. The Bank of England's recruitment difficulties survey says the same. All three signals would suggest that it is a matter of time before wages spike up. This is part of the reason why MPC members Martin Weale and Ian McCafferty say enough is enough. They believe that the Bank should hike interest rates now so that by the time the impact of rate hikes has fed through (18-24 months), wage inflation should be high enough to offset the squeeze on disposable income.
The most recent justification for hiking that has been offered has been the fact that job-to-job flows are picking up (Chart 2). The argument is that while the recovery was in its infancy, incumbent workers were reluctant to take the risky decision to move jobs. However, now that the recovery has become more entrenched, confidence has improved and workers are becoming more inclined to move jobs. Combined with the signal from the REC/KPMG survey — more job-to-job flows implies more marginal workers and hence more people enjoying bigger pay rises.
Chart 1: Underemployment - % of Part-Time Workers Who Would Prefer Full-Time Work
Fixed Income Strategy
Global Views
October 10, 2014
18
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However, life is seldom that simple. What if it is the case that pay rates for new joiners have had to rise substantially in an environment of fewer workers prepared to move jobs — i.e. a lack of supply. Why shouldn't it be the case that if job-to-job flows do pick up, since there is a greater supply of workers willing to move jobs, then firms don't actually have to offer such super attractive conditions to sign up?
There is also a case for arguing that the skills shortages and recruitment difficulties are specific to certain segments of the labour market - namely the higher-skilled. If this wasn't the case, then there wouldn't still be 500k frustrated part time workers (most likely lower-skilled) who want more hours and full-time jobs. If the recruitment difficulties are concentrated in the higher-skilled sector, then it may not turn into a UK-wide resurgence in pay inflation.
What Determines Wage Increases?
The CIPD (Chartered Institute of Personnel and Development) and IDS have both recently published some analysis on what the main motivations for pay rises are. Top of the CIPD's list is inflation. Inflation is at a multi-year low and likely to fall to as low as 1%. That is hardly screaming out for higher wage increases. The National minimum wage is scheduled to rise by 3% this month — could this cause ripple effects elsewhere in the labour market? According to the CIPD’s survey, this is one of the least important drivers of pay increases.
The ability to pay more is high up on the list. Productivity, or rather the lack of it, is potentially important here. 0% productivity growth implies a substantial dampener on profits. And if firms aren't making much profit then they aren't likely to be particularly generous when it comes to pay deals. There are tentative signs that productivity is belatedly recovering, but it could be too late to affect pay deals scheduled for early 2015.
Recruitment difficulties are seen as of medium importance. This suggests that we shouldn't pay too much attention to the recruitment difficulties surveys. It affects the marginal worker that moves jobs, but the incumbent labour force is probably less exposed to this influence.
Last but not least - auto enrolment in pensions are likely to present an ongoing dampener on wage inflation. I've talked about this at length so will avoid sacrificing a few more trees on this topic. In short, if firms are forced to pay into pensions on behalf of their workers then they are likely to be inclined to hold down wage increases.
Overall
We are less convinced than others are that wage inflation is poised for take-off. Furthermore, if wages are going to surge, then we are running out of time for this to happen by the time of the February MPC meeting. A crucial update will come in the February Bank of England Regional Agents’ report which typically contains a special investigation into pay agreements. While the MPC will have access to that report, the rest of us won’t - so we will have to keep guessing.
The recent string of disappointing German data has heightened fears that the Eurozone’s largest economy is losing steam.
While strong volatility in supply side indicators during the summer months are unsurprising due to the potential shift in holiday factory closures, August’s 5.8% m/m drop in exports was much greater than anticipated and the 4.0% m/m decline in industrial production proved to be the worst outcome since the Lehman collapse. Following weak new orders data, it raises substantial doubt to any recovery in German GDP growth in Q3 after an already disappointing Q2 outcome.
Given the magnitude of the decline, an upward payback in the September report looks likely. However, in view of the recent downward trend in all main German business surveys, it could prove rather limited.
All in all, in view of the recent hard and soft data:
The rebound in German Q3 GDP could be limited to a +0.2%/+0.3% q/q, mainly on the back of strengthening consumer demand and less drag from the construction sector.
The dynamic entering into Q4 is likely to be weak. This will create an unfavourable base effect for 2015; therefore, leading to a downward revision in next year growth scenario.
Surprising performance fragmentation between the US & German, why?
While weakness in German data was expected, the magnitude of the downside surprise came as a shock, given its historically positive correlation with US figures — reflecting the sensitivity of the German economy to the global growth cycle. Indeed, the correlation between the German Ifo and the US ISM manufacturing over the past decade is more than 0.5 and including the expectation component of this Ifo survey (the leading component of the survey) it is even closer to 0.8. While in September, US ISM manufacturing stood at more than one standard deviation above its long tem average, it was below this level for the Ifo expectations. The same is true when looking to hard data where the widening gap between German export orders outside the Eurozone and the bullish trend seen in the US ISM is striking!
Chart 1: Ifo does not point to any significant bounce back in industrial production
Fixed Income Strategy
Global Views
October 10, 2014
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It means that other negative factors have more than offset the traditional impact of US traction on German activity. Two factors at play include:
Rising geopolitical risk in Eastern Europe and Russian trade sanctions. Last year, German exports to Russia accounted for a small but not negligible 3% of total export — equivalent to Spain. In Q2, German exports to Russia collapsed around 15% y/y. We estimate that this likely dampened GDP growth by around 0.2% in Q2. As trade sanctions have since intensified — with EU sanctions in finance, defence, and energy exacerbated by Russian countermoves in agriculture — we expect it to have an even greater adverse impact on H2. However, given that German exports to the US are much larger, accounting for over 8% of the total exports, strengthening economic momentum in the US should, in theory, provide an offset to the weakening trend linked to Russia. However, Eastern European countries like Poland, Hungary, the Czech Republic or Slovakia are also important trading partners for Germany, accounting for 9% of total exports. While these trade ties partly reflect the strong link between corporations, German exporters are also likely to be adversely impacted by weaker demand in these countries, whose economies are also suffering from Russian sanctions.
The lagging impact of the past appreciation of the euro. Between June 2012 and March 2014, the euro nominal effective exchange rate appreciated by close to 10%. This factor works with a lag (up to two year), which will likely continue to temper activity in Germany as well as across the Eurozone this year.
Chart 2: Widening business sentiment between the US & Germany
Table: Export to Russia & the US
Chart 3: German export to the US vs. Russia
Fixed Income Strategy
Global Views
October 10, 2014
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After a cold summer, could the winter heat up?
On the first point, with little news, at this stage, of easing geopolitical tension, there is a risk that the adverse impact of Russian trade sanctions will last longer than just a few months.
However, on the second point, the sharp depreciation in the euro over the past six months could be a “game changer”. The euro nominal exchange rate is down 6%, erasing more than half its past appreciation. In theory, this could boost activity in the Eurozone by between 0.8% and 0.9% of GDP over a two year horizon. However, would it be enough to compensate for the adverse risks coming from the East?
At this stage, using the traditional lag, we can estimate that the first positive impact of the weaker euro on both German and Eurozone business sentiment will likely take place at the beginning of next year. In terms of export dynamics, after a soft patch in H2 of 2014, a weaker euro at a time when the US growth engine appears to be accelerating and Chinese activity data is showing signs of improvement, would lead us to believe that German exports should be on a stronger footing in H1 2015.
Chart 5: A positive bias on German export growth early next year?
Chart 4: Impact of the EUR/USD on business sentiment between US & Germany
Economics
Global Views
October 10, 2014
22
Key Data Preview
CANADA
Canadian inflation should be fairly muted in September, and we’re looking for a roughly flat monthly print of +0.1% m/m. September is not usually a major seasonal swing month, with declines in recreation prices typically playing off against higher back-to-school clothing prices. Interestingly, gasoline prices in Canada were fairly flat on the month (while they fell quite a bit in the U.S. — see chart), with perhaps the weak C$ a factor there. A 0.1% monthly number would leave CPI near 2.1% y/y.
Manufacturing sales for August should show some retrenchment, with sales likely to slip quite considerably. We’re looking for a -1.5% m/m number. The main factor should be soft auto output after a massive surge in July, and indeed U.S. vehicle assemblies fell in August and Canadian vehicle exports were on the very weak side (-11.2% m/m). Energy exports were also soft, as were exports of finished metals and industrial equipment. The only upside could come from the new order book, which was strong in the preceding months (see chart).
UNITED STATES
U.S. retail sales for September could take a step back as automotive sales fell quite substantially on the month according to Wards (-6.36% m/m to16.34m annualized vs. 17.45m in August — see chart). Gasoline prices were also quite weak (-2.3% m/m) which often results in a decline in sales at gasoline stations. Fundamentals weren’t great either, with the ICSC index dropping on average (-1.7% m/m) and consumer confidence as measured by the Conference Board slowing down the pace of its improvement. On the plus side, the U of M consumer confidence numbers picked up a bit on the month. The net leaves us looking for a -0.3% m/m number on headline and a better 0.1% m/m number ex-autos.
Housing starts could pick up some speed on the month after taking a breather in August. We’re looking for a 975k annualized print as the high quantity of building permits in the hopper points to construction start upside. Solid new home sales numbers also point to a resurgence in demand that ought to be giving some heart to developers.
After a weak August we’re looking for a 0.5% m/m bounce in industrial production driven by vehicle output. Car manufacturing has been a major plus for the economy all year, and generally speaking, companies continue to publish optimistic production schedules (with exceptions, of course). In terms of the details of the report, utilities output has been soft all year and we’re looking for a bounce — perhaps September will be the month.
Canadian Manufacturing Sales & OrdersNew Orders Volatility...
1
1.5
2
2.5
3
3.5
4
8
10
12
14
16
18
20
09 11 13
Auto SalesInventories (RHS)
Millions
Source: Bloomberg, Scotiabank Economics
Vehicle Sales Decline in Sept.U.S. Vehicle Sales & Inventories
Millions
Economics
Global Views
October 10, 2014
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EUROPE
The final euro zone HICP for September should confirm the flash estimate at 0.3% y/y, down from 0.4% y/y in August. The main components should also be roughly in line, with energy prices declining 2.4% y/y from -2.0%, core inflation at 0.7% y/y from 0.9%, and food prices at -0.3% y/y from -0.9%. However, details regarding core inflation will be worth watching. Indeed, while the stable trend in core inflation over the past six months suggested that the worst of the deflation risk could be behind us, September’s downside surprise in the flash estimate refuelled concerns.
In view of this and the available national reports, French inflation almost certainly decelerated in September. Indeed, we expect French domestic consumer price inflation to post a deceleration from 0.4% to 0.2% y/y. Energy prices should, once again, be a drag, down around 0.5% m/m as gasoline prices probably fell between 0.5% to 1.0% m/m. Combined with unfavourable base effects, the energy component should drop from -1.5% to -2.7% y/y. Clothing prices also look likely to correct from their surprisingly strong August outcome. The year-over-year pace for this component should shift down from +1.6% to around -0.5%. Also, the end of the holiday season should also push transport service prices down from 2.4% to 1.7% y/y in September.
LATIN AMERICA
Colombia will release its industrial production and retail sales figures for August on October 16th. We expect both indicators to reflect the ongoing strength in the Colombian economy, with August industrial production likely to expand by 3.5% y/y and retail sales to grow by around 6%. This performance is forecast to continue; however, oil accounted for about two-thirds of Colombian export income in 2013 and this growth streak may be interrupted if global oil prices soften further and remain muted for a prolonged period of time.
ASIA
China will release consumer and producer price inflation data for September on October 14th (EST). The country’s inflation outlook is manageable; consumer prices rose by 2.0% y/y in August, decelerating from the 2.3% gain a month earlier primarily on the back of smaller food price increases. We estimate that further easing took place in September, taking the inflation rate to 1.8% y/y. Persistent producer price deflation (-1.2% y/y in August; -1.5% y/y expected for September) due to industrial overcapacity should alleviate any concerns regarding significant upside pressure on prices. Accordingly, headline inflation will likely remain relatively low, below 2½% y/y over the next six months.
Country Date Time Indicator Period BNS Consensus LatestFR 10/14 02:45 CPI (m/m) Sep -- -0.3 0.4FR 10/14 02:45 CPI (y/y) Sep 0.2 0.4 0.4FR 10/14 02:45 CPI - EU Harmonized (m/m) Sep -- -0.3 0.5FR 10/14 02:45 CPI - EU Harmonized (y/y) Sep -- 0.4 0.5SP 10/14 03:00 CPI (m/m) Sep -- 0.1 0.2SP 10/14 03:00 CPI (y/y) Sep F -- -0.2 -0.2SP 10/14 03:00 CPI - EU Harmonized (m/m) Sep -- 1.0 0.1SP 10/14 03:00 CPI - EU Harmonized (y/y) Sep F -- -0.3 -0.3IT 10/14 04:00 CPI - EU Harmonized (y/y) Sep F -- -0.2 -0.2UK 10/14 04:30 CPI (m/m) Sep 0.3 0.2 0.4UK 10/14 04:30 CPI (y/y) Sep 1.5 1.4 1.5UK 10/14 04:30 DCLG House Prices (y/y) Aug -- -- 11.7UK 10/14 04:30 PPI Input (m/m) Sep -0.5 -0.5 -0.6UK 10/14 04:30 PPI Output (m/m) Sep -0.1 -0.1 -0.1UK 10/14 04:30 RPI (m/m) Sep 0.3 0.3 0.4UK 10/14 04:30 RPI (y/y) Sep 2.4 2.3 2.4
Economics
Global Views
October 10, 2014
2
Key Indicators for the week of October 13 – 17
Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics.
A4
Europe (continued from previous page)
Country Date Time Indicator Period BNS Consensus LatestEC 10/14 05:00 Industrial Production (m/m) Aug -- -1.6 1.0EC 10/14 05:00 Industrial Production (y/y) Aug -- -0.9 2.2EC 10/14 05:00 ZEW Survey (Economic Sentiment) Oct -- -- 14.2GE 10/14 05:00 ZEW Survey (Current Situation) Oct -- 15.0 25.4GE 10/14 05:00 ZEW Survey (Economic Sentiment) Oct 4.0 0.0 6.9
GE 10/15 02:00 CPI (m/m) Sep F -- 0.0 0.0GE 10/15 02:00 CPI (y/y) Sep F -- 0.8 0.8GE 10/15 02:00 CPI - EU Harmonized (m/m) Sep F -- 0.0 0.0GE 10/15 02:00 CPI - EU Harmonized (y/y) Sep F -- 0.8 0.8UK 10/15 04:30 Average Weekly Earnings (3-month, y/y) Aug 0.6 0.7 0.6UK 10/15 04:30 Employment Change (3M/3M, 000s) Aug 0.0 30.0 74.0UK 10/15 04:30 Jobless Claims Change (000s) Sep -35.0 -35.0 -37.2UK 10/15 04:30 ILO Unemployment Rate (%) Aug 6.1 6.1 6.2SP 10/15 Current Account (€ bn) Jul -- -- 0.5
EC 10/16 05:00 CPI (m/m) Sep -- 0.4 0.4EC 10/16 05:00 CPI (y/y) Sep F 0.3 0.3 0.3EC 10/16 05:00 Euro zone Core CPI Estimate (y/y) Sep F 0.7 0.7 0.7EC 10/16 05:00 Trade Balance (€ mn) Aug -- -- 21165.4
IT 10/17 05:00 Current Account (€ mn) Aug -- -- 6816.0
Asia Pacific
Country Date Time Indicator Period BNS Consensus LatestCH 10/12 22:00 Exports (y/y) Sep -- 12.0 9.4CH 10/12 22:00 Imports (y/y) Sep -- -2.0 -2.4CH 10/12 22:00 Trade Balance (USD bn) Sep -- 41.1 49.8NZ OCT 12-13 REINZ House Sales (y/y) Sep -- -- -16.3NZ OCT 12-13 REINZ Housing Price Index (m/m) Sep -- -- 1.1
IN 10/13 08:00 CPI (y/y) Sep -- 7.2 7.8JN 10/13 19:50 Japan Money Stock M2 (y/y) Sep -- 2.90 3.00JN 10/13 19:50 Japan Money Stock M3 (y/y) Sep -- 2.4 2.4SI 10/13 20:00 Real GDP (y/y) 3Q A 2.7 2.7 2.4CH OCT 13-18 Actual FDI (y/y) Sep -- -14.0 -14.0
IN 10/14 02:30 Monthly Wholesale Prices (y/y) Sep 3.7 3.3 3.7SK 10/14 19:00 Unemployment Rate (%) Sep 3.5 3.5 3.5AU 10/14 20:30 New Motor Vehicle Sales (m/m) Sep -- -- -1.8SK 10/14 21:00 BoK Base Rate (%) Oct 15 2.25 2.00 2.25CH 10/14 21:30 CPI (y/y) Sep 1.8 1.7 2.0CH 10/14 21:30 PPI (y/y) Sep -1.5 -1.5 -1.2PH OCT 14-15 Overseas Remittances (y/y) Aug -- 5.9 6.0
JN 10/15 00:30 Capacity Utilization (m/m) Aug -- -- -0.8JN 10/15 00:30 Industrial Production (y/y) Aug F -2.9 -- -2.9SI 10/15 01:00 Retail Sales (y/y) Aug -- 4.3 5.5JN 10/15 02:00 Machine Tool Orders (y/y) Sep F 34.8 -- 34.8NZ 10/15 17:30 Business NZ PMI Sep -- -- 56.5NZ 10/15 20:00 ANZ Consumer Confidence Index Oct -- -- 127.7
SI 10/16 20:30 Exports (y/y) Sep -- 2.5 6.0HK OCT 16-17 Composite Interest Rate (%) Sep 0.42 -- 0.42SK OCT 16-19 Department Store Sales (y/y) Sep -- -- 10.5
MA 10/17 05:00 CPI (y/y) Sep 2.8 2.6 3.3
Economics
Global Views
October 10, 2014
3
Key Indicators for the week of October 13 – 17
Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics.
A5
Latin America
Country Date Time Indicator Period BNS Consensus LatestBZ 10/15 08:00 Retail Sales (m/m) Aug -- 0.7 -1.1BZ 10/15 08:00 Retail Sales (y/y) Aug -- -1.4 -0.9PE 10/15 Economic Activity Index NSA (y/y) Aug -- 1.0 1.2PE 10/15 Unemployment Rate (%) Sep -- 6.1 5.9
BZ 10/16 07:30 Economic Activity Index SA (m/m) Aug -- 0.2 1.5BZ 10/16 07:30 Economic Activity Index NSA (y/y) Aug -- -1.0 -0.2CL 10/16 17:00 Nominal Overnight Rate Target (%) Oct 16 3.00 3.00 3.25CO 10/16 17:00 Industrial Production (y/y) Aug 3.5 -- 1.6CO 10/16 17:00 Retail Sales (y/y) Aug 6.0 5.7 5.2
Economics
Global Views
October 10, 2014
4
Global Auctions for the week of October 13 – 17
North America
Europe
Source: Bloomberg, Scotiabank Economics.
A6
Country Date Time EventUS 10/14 11:00 U.S. Fed to Purchase USD0.85-1.05 Bln NotesUS 10/14 11:30 U.S. to Sell 3-Month BillsUS 10/14 11:30 U.S. to Sell 6-Month Bills
US 10/15 11:00 U.S. Fed to Purchase USD0.95-1.15 Bln NotesUS 10/15 11:30 U.S. to Sell 52-Week BillsUS 10/15 11:30 U.S. to Sell 4-Week Bills
US 10/16 11:00 U.S. Fed to Purchase USD0.15-0.25 Bln Notes
Country Date Time EventIT 10/13 05:00 Italy to Sell Up to EUR3.5 Bln 0.75% 2018 Bonds
NO 10/13 05:00 Norway to Sell NOK3 Bln 336-Day BillsIT 10/13 05:00 Italy to Sell Up to EUR1.25 Bln 4.75% 2044 BondsGE 10/13 05:30 Germany to Sell EUR2 Bln 182-Day BillsIC 10/13 06:00 Iceland to Sell 182-Day Bills
NE 10/14 04:30 Netherlands to Sell Up to EUR3.5 Bln 0.5% 2017 BondsSP 10/14 04:30 Spain to Sell 6-Month and 12-Month BillsEC 10/14 05:10 ECB Main Refinancing Operation ResultSZ 10/14 05:15 Switzerland to Sell 91-Day BillsBE 10/14 05:30 Belgium to Sell 3-Month BillsBE 10/14 05:30 Belgium to Sell 12-Month BillsGE 10/14 05:30 Germany to Sell EUR1 Bln 0.1% I/L 2023 Bonds
MB 10/15 05:00 Malta to Sell BillsSW 10/15 05:03 Sweden to Sell SEK1.75 Bln 3.5% 2022 BondsGE 10/15 05:30 Germany to Sell EUR4 Bln 0% 2016 Bonds
SP 10/16 04:30 Spain to Sell BondsFR 10/16 04:50 France to Sell BondsUK 10/16 05:30 U.K. to Sell I/L 2024 BondsFR 10/16 05:50 France to Sell I/L Bonds
UK 10/17 06:00 U.K. to Sell 1-Month BillsUK 10/17 06:00 U.K. to Sell 3-Month BillsUK 10/17 06:00 U.K. to Sell 6-Month Bills
Economics
Global Views
October 10, 2014
5
Global Auctions for the week of October 13 – 17
Source: Bloomberg, Scotiabank Economics.
A7
Asia Pacific
Country Date Time EventSK 10/12 22:30 Korea to Sell KRW1.7 Tln 5-Year BondTH 10/12 23:00 Thailand to Sell THB15 Bln 28-Day Bills
MA 10/13 00:00 Malaysia to Sell MYR2 Bln 366-Day NotesMA 10/13 00:00 Bank Negara to Sell MYR2 Bln 182-Day Islamic NotesVN 10/13 05:30 Vietnam to Sell VND1 Tln 5-Yr Bond VN 10/13 05:30 Vietnam to Sell VND3 Tln 10-Yr Bond VN 10/13 05:30 Vietnam to Sell VND15 Tln 15-Yr Bond AU 10/13 20:00 Australia Plans to Sell Index Linked BondsTH 10/13 23:00 Bank of Thailand to Sell THB28 Bln 91-Day BillsTH 10/13 23:00 Bank of Thailand to Sell THB28 Bln 182-Day BillsHK 10/13 23:30 Hong Kong to Sell HKD30.474 Bln 91-Day Bills HK 10/13 23:30 Hong Kong to Sell HKD8 Bln 182-Day Bills
ID 10/14 05:00 Indonesia to Sell 9-Mo Treasury BillsCH 10/14 23:00 China to Sell 10-Year BondsJN 10/14 23:35 Japan to Sell 1-Year BillJN 10/14 23:45 Japan to Sell 30-Year Bonds
IN 10/15 05:30 India to Sell INR 90Bln 91-Day BillsIN 10/15 05:30 India to Sell INR 60Bln 364-Day BillsNZ 10/15 21:05 New Zealand Plans to Sell NZD300 Mln Nominal BondsTH 10/15 23:00 Bank of Thailand to Sell THB30 Bln Bonds Due 2016 JN 10/15 23:35 Japan to Sell 3-Month Bill
CH 10/16 23:00 China to Sell 1-Year BondsJN 10/16 23:45 Japan to Sell 5-Year BondsID 10/17 05:00 Indonesia to Sell 12-Mo Treasury Bills
ID 10/17 05:00 Indonesia to Sell 5-Yrs Govt BondID 10/17 05:00 Indonesia to Sell 10-Yrs Govt BondID 10/17 05:00 Indonesia to Sell 15-Yrs Govt BondID 10/17 05:00 Indonesia to Sell 30-Yrs Govt BondID 10/17 05:00 Indonesia to Sell Government Sukuk
Latin America
Country Date Time EventBZ 10/16 11:15 Brazil to Sell Bills due 04/01/2015 - LTNBZ 10/16 11:15 Brazil to Sell Bills due 10/01/2016 - LTNBZ 10/16 11:15 Brazil to Sell Bills due 07/01/2018 - LTNBZ 10/16 11:15 Brazil to Sell Fixed-rate bonds due 1/1/2021 - NTN-FBZ 10/16 11:15 Brazil to Sell Fixed-rate bonds due 1/1/2025 - NTN-F
Economics
Global Views
October 10, 2014
6
Events for the week of October 13 – 17
North America
Europe
Source: Bloomberg, Scotiabank Economics.
A8
Country Date Time EventUS 10/11 09:00 Fed's Tarullo Speaks on International Finance in WashingtonUS 10/11 10:30 Fed's Williams Speaks on Chinese Renminbi in WashingtonUS 10/11 14:00 Fed's Evans Speaks at Markets Conference in WashingtonUS 10/11 17:00 Fed's Fischer Speaks on the Global Economy in Washington
US 10/13 12:30 Fed's Evans Speaks on the Economic Outlook in Indianapolis
US 10/15 14:00 U.S. Federal Reserve Releases Beige Book
US 10/16 08:00 Fed's Plosser Speaks on the Economic Outlook in PennsylvaniaUS 10/16 09:00 Fed's Lockhart to Speak on Workforce Development at RutgersUS 10/16 10:00 Fed's Kocherlakota Speaks on Monetary Policy in MontanaUS 10/16 13:00 Fed's Bullard Speaks on U.S. Demographics in Washington
US 10/17 08:30 Fed's Yellen Speaks at Boston Fed Conference on Inequality
Country Date Time EventUK 10/11 09:30 BOE Deputy Governor Cunliffe speaks in WashingtonEC 10/11 12:00 ECB's Draghi Holds Press Conference in Washington
UK 10/12 08:00 Bank of England's Andrew Bailey speaks in WashingtonSW 10/12 11:05 Riksbank Governor Ingves participates in panel discussionEC 10/12 13:30 ECB's Constancio Speaks in Washington
EC 10/13 08:00 ECB's Praet Speaks in MunichEC 10/13 08:30 Euro-Area Finance Ministers Meet in Luxembourg
EC 10/14 03:00 EU Finance Ministers Meet to Discuss Draft 2015 BudgetSP 10/14 03:00 Prime Minister Mariano Rajoy Speaks at Conference in MadridIT 10/14 04:30 Bank of Italy Releases Revised Public Debt Series Up To Aug.GE 10/14 07:30 German Government Presents Fall Economic OutlookUK 10/14 11:00 Cameron Questioned by U.K. Lawmakers on ScotlandEC 10/14 EU Top Court Hears Case On Legality of ECB's OMT Decision
EC 10/15 03:00 ECB's Draghi Speaks in FrankfurtIT 10/15 05:00 Bank of Italy Releases the Quarterly Economic BulletinUK 10/15 07:00 Prime Minister's Question Time in House of CommonsEC 10/15 11:30 ECB's Nouy Speaks in FrankfurtEC 10/15 14:00 ECB's Draghi Speaks in Frankfurt
US 10/16 09:00 Bank of Italy's, ECB's Visco Speaks at OMFIF MeetingEC OCT 16-17 EU, Asian Leaders Hold Meeting in ItalyEC OCT 16-17 ECB's Weidmann Speaks at OMFIF Meeting in Frankfurt
EC 10/17 03:45 ECB's Constancio Speaks in FrankfurtAS 10/17 04:00 ECB's Nowotny Speaks at Gewinn Messe in ViennaPO 10/17 06:00 Portugal Reports Monthly Economic SurveyEC 10/17 06:00 ECB Announces 3-Year LTRO RepaymentEC 10/17 06:00 Eurostat Release First GDP Estimates After ESA 2010 Adoption
Economics
Global Views
October 10, 2014
7
Asia Pacific
Latin America
Events for the week of October 13 – 17
Source: Bloomberg, Scotiabank Economics.
A9
Country Date Time EventGE 10/11 06:30 China's Li Speaks at Business Conference in Hamburg
AU 10/13 18:30 RBA's Debelle Speech at Investment Conference
SK 10/14 21:00 BoK 7-Day Repo RateAU OCT 14-15 Australian Treasury Economist Gruen Speaks at OMFIFIN OCT 14-16 Indian President Mukherjee Visits Finland
GE 10/15 11:00 Vietnam Prime Minister Nguyen Tan Dung Gives Speech in Berlin
HK OCT 16-17 Composite Interest Rate
Country Date Time EventCL 10/16 17:00 Overnight Rate Target
Economics
Global Views
October 10, 2014
8
Global Central Bank Watch
NORTH AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Canada – Overnight Target Rate 1.00 October 22, 2014 1.00 --
Federal Reserve – Federal Funds Target Rate 0.25 October 29, 2014 0.25 0.25
Banco de México – Overnight Rate 3.00 October 31, 2014 3.00 --
EUROPERate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsEuropean Central Bank – Refinancing Rate 0.05 November 6, 2014 0.05 --
Bank of England – Bank Rate 0.50 November 6, 2014 0.50 0.50
Swiss National Bank – Libor Target Rate 0.00 December 11, 2014 0.00 --
Central Bank of Russia – One-Week Auction Rate 8.00 October 31, 2014 8.00 --
Hungarian National Bank – Base Rate 2.10 October 28, 2014 2.10 2.10
Central Bank of the Republic of Turkey – 1 Wk Repo Rate 8.25 October 23, 2014 8.25 --
Sweden Riksbank – Repo Rate 0.25 October 28, 2014 0.25 --
Norges Bank – Deposit Rate 1.50 October 23, 2014 1.50 --
ASIA PACIFICRate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsReserve Bank of Australia – Cash Target Rate 2.50 November 3, 2014 2.50 2.50
Reserve Bank of New Zealand – Cash Rate 3.50 October 29, 2014 3.50 3.50
People's Bank of China – Lending Rate 6.00 TBA -- --
Reserve Bank of India – Repo Rate 8.00 December 2, 2014 8.00 --
Bank of Korea – Bank Rate 2.25 October 14, 2014 2.25 2.00
Bank of Thailand – Repo Rate 2.00 November 5, 2014 2.00 2.00
Bank Indonesia – Reference Interest Rate 7.50 November 13, 2014 7.50 --
LATIN AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBanco Central do Brasil – Selic Rate 11.00 October 29, 2014 11.00 --
Banco Central de Chile – Overnight Rate 3.25 October 16, 2014 3.00 3.00
Banco de la República de Colombia – Lending Rate 4.50 October 31, 2014 4.50 --
Banco Central de Reserva del Perú – Reference Rate 3.50 November 13, 2014 3.50 3.50
AFRICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsSouth African Reserve Bank – Repo Rate 5.75 November 20, 2014 5.75 --
Fed: The Fed's Beige Book of regional economic conditions is out on Wednesday, and Chair Yellen will speak about income inequality on Friday. Regional Fed Presidents Williams, Evans, Plosser, Lockhart, Kocherlakota and Bullard are also speaking. Data-wise, retail sales and consumer confidence will give a better picture of the consumer, along with the Philly Fed business outlook. BoC: Friday's inflation numbers will give a sense as to whether price pressures are indeed transitory while manufacturing shipment volumes on Thursday may play into the BoC's view that manufacturing and trade gains are also temporary.
The Banco Central de Chile is expected to cut rates by 25 bps to 3.00% at its upcoming meeting on October 16th. Chilean economic momentum continues to struggle, with growth at a 4-year low. Monetary authorities hope that interest rate easing will provide the traction needed to get the economy moving again.
We maintain our view that the Bank of Korea will keep its benchmark interest rate unchanged at 2.25% following next week’s monetary policy meeting. However, potential for another rate reduction has increased lately as the government is becoming more concerned about the country’s growth outlook, thereby putting pressure on the central bank to act. Inflationary pressures are subdued in South Korea while domestic demand growth remains lackluster. Nevertheless, the central bank argues that in the context of the current accommodative monetary policy, a further rate cut would have a negligible impact on boosting economic growth while it might have an undesirable effect on the already high household debt burden.
North America
Europe
Asia Pacific
Latin America
Africa
Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics.
A10
Economics
Global Views
October 10, 2014
9
Forecasts as at October 1, 2014* 2000-12 2013 2014f 2015f 2000-12 2013 2014f 2015f
Output and Inflation (annual % change) Real GDP Consumer Prices2
1 World GDP for 2003-12 are IMF PPP estimates; 2013-15f are Scotiabank Economics' estimates based on a 2012 PPP-weighted sample of 38 countries. 2 CPI for Canada and the United States are annual averages. For other countries, CPI are year-end rates.
* See Scotiabank Economics 'Global Forecast Update' report for additional forecasts & commentary.
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Scotiabank Economics
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.
