Daily Insight
Group Economics Macro & Financial Markets Research
14 July 2016
BoE set to cut interest rates Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
BoE preview - We expect the BoE to cut its Bank Rate by 25bp taking it to 0.25% from 0.5%. The UK economy had been slowing already before the UK's vote to leave the EU and early surveys following the referendum suggest there has been a major hit to business and consumer confidence. Indeed, it looks likely that the UK economy is heading for a recession. Although the sharp fall in sterling will push headline inflation above the BoE's 2% inflation target early next year, we expect the BoE to put more weight on the weakness in the economy. This is because the impact of the fall in sterling on inflation will eventually dissipate and the medium to long-run outlook for inflation will be determined by the economic outlook, which has deteriorated sharply. We expect the BoE to follow up with additional monetary easing next month. By then it will have more information on the early hit to the economy from the Brexit vote, and it will publish its new forecasts for growth and inflation and the risks surrounding them. We expect the BoE to re-launch its asset purchase programme in August. The bulk of the buys will once again be gilts, however we think the BoE could also include riskier assets, such as credits. The BoE could also enhance its Funding for Lending programme by making the borrowing conditions for commercial banks more attractive. (Nick Kounis) Eurozone government bonds - Germany became the first eurozone country to sell a new 10 year bond with a zero percent coupon at a negative yield of -0.05%. Total demand fell short of the amount that the German Treasury wanted to sell. Nonetheless, the negative yield signals another landmark for the European government bond market. On Tuesday, the UK DMO sold a bond with a maturity of 60 years at a record low yield of 1.44%. Yields of sovereign bonds dropped to these low levels due to the Brexit, the instability in the Italian banking sector and because of low growth and low inflation expectations. Increased speculation that several central banks will need to step up their stimulus measures are dampening upward pressures. However, it is remarkable that bond yields in the eurozone have recovered somewhat in the past few days. In our view, this can be mostly attributed to supply. Several large issuers, like the Netherlands, Portugal, Italy and the ESM entered the market to sell debt. Despite the lackluster reception of the new 10 year German sovereign bond and the slight upward correction in bond yields, we expect that demand for high quality assets will not fade away as risks for the economic outlook are tilted to the downside and due to QE. We therefore expect a turnaround in the 10 year German sovereign bond yield and stick to our forecast of -20bps for the end of the year. (Kim Liu) Macro Eurozone - Eurozone industrial production fell by 1.2% mom in May, following a 1.4% rise in April. The 3m-o-3m growth rate declined to -0.4%, down from +0.1% in April. This is in line with our view that eurozone GDP growth slowed down significantly in Q2 after it was surprisingly strong in Q1 (+0.6% qoq). Indeed, if production were to stabilise or even grow by around 1% mom in June, it would still have fallen slightly during Q2 as whole (in Q1 it grew by 0.8% qoq). Added to this, private consumption (up by 0.6% qoq in Q1) also seems to have slowed down noticeably in Q2. The weighted average growth rate of new car registrations and retail sales (a good proxy for private consumption) contracted by 0.1% 3mo-3m in May. Our overall GDP tracker (which matched GDP growth in Q1) dropped to -0.2% 3m-o-3m in May. Although it will probably move somewhat higher in June, it still signals a
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Daily Insight - BoE set to cut interest rates - 14 July 2016
sharp slowdown compared to Q1, which would fit our base case scenario for the eurozone economy of modest growth at a rate somewhat below the trend. (Aline Schuiling) Macro China - China’s notoriously volatile trade data remain weak, but still point to a gradual bottoming out. Import growth in value terms remained negative in June (-8.4% yoy, compared to -0.4% in May), but this contraction is shallower than the average contraction of over 14% seen in 2015. Remarkably, import volumes of several key commodities are holding up pretty well, particularly copper ore. Iron ore imports have picked up since late 2015, but capacity reductions in the steel sector and seasonal effects could depress demand in the near term. Oil import demand accelerated throughout 2015 and early 2016, but clearly slowed in June (payback from strategic buying in previous months). Meanwhile, despite an ongoing CNY depreciation, export growth also remained in negative territory (4.8% yoy in June). This illustrates the still subdued state of global demand. In terms of destination, exports in June were particularly weak to Brazil (-22% yoy) and the US (10.5%). Going forward, the negative effect from Brexit on global growth and trade may prove another headwind for China’s exports. You will find a more elaborate view in our monthly China Watch to be released soon. (Arjen van Dijkhuizen)
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Daily Insight - BoE set to cut interest rates - 14 July 2016
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Daily Insight - BoE set to cut interest rates - 14 July 2016