Global daily insight 15 february

Daily Insight

Group Economics Macro & Financial Markets Research

15 February 2016

Downgrading our forecasts: less growth, more stimulus Nick Kounis Head of Macro and Financial Markets

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We have downgraded our global economic growth forecasts …

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…reflecting tighter financial conditions and heightened uncertainty, as well as negative effects of lower oil prices in some cases

Research Tel: +31 20 343 5616 nick.kounis @nl.abnamro.com

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We no longer expect the Fed to hike in 2016, whereas we expect the ECB (to -0.7%) and BoJ (-0.3%) to venture even deeper into negative rates

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As a consequence we have revised down our end year forecasts for 10y Bunds (now 0.5%), Treasury yields (2.2%), and revised up EUR/USD (to 1.05)

Lower economic growth We have become more pessimistic on the global economic outlook. This reflects the ongoing tightening of financial conditions and heightened uncertainty caused by the market turbulence and the past rise in the US dollar. In addition, oil prices have weighed on producers and global manufacturing and trade have remained in the doldrums. Finally, US profit growth has weakened, which could have knock-on effects on hiring and investment decisions.

Extending the soft patch We have reduced our 2016 economic growth forecast for the US (to 1.7% from 2%), eurozone (to 1.2% from 1.6%) and emerging markets (to 4.1% from 4.3%). Among the emerging market economies, we have left our projections for China (which assumes an ongoing gradual slowdown) and India unchanged, but have downgraded economies with exposure to oil, world trade or those facing country-specific challenges. Our new scenario sees a longer period of weaker global growth followed by a modest recovery later in the year, but no recession.

More stimulus Weaker growth will also help to cap underlying inflationary pressures especially given the prolonged period of very low headline inflation, which is being depressed by low oil prices.

Against this background, we expect central banks to step up their reflation efforts. Together with a gradual rise in oil prices during the course of the year, central bank actions should help to improve market sentiment, breaking the negative feedback loops to the economy

Insights.abnamro.nl/en

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Daily Insight – Downgrading our forecasts: less growth, more stimulus - 15 February 2016

and improving overall financial conditions. In short, central bank action should over time limit the downside for global economic growth.

Fed on hold in 2016, BoJ to step up stimulus We no longer expect the Fed to raise interest rates again in 2016. We think it will only resume its rate hike cycle once economic growth strengthens and the economy has absorbed the past tightening of financial conditions. In addition, the Fed would need to see signs that inflationary pressures are firming again. All this could take until next year to materialise. We previously expected the Fed to raise interest rates again in June and three times in total this year. Meanwhile, we expect the BoJ to cut its deposit rate further, to -0.3% from -0.1% currently, and to step up QE (to 100tr yen per month from 80tr), given the stronger yen and weaker economy.

ECB to move interest rates deeper into negative territory We also think the ECB will step up its monetary stimulus more significantly than we thought before. The growth and inflation outlook in the eurozone has deteriorated further, while the euro has strengthened as markets have scaled back their US rate hike expectations. We now expect the ECB to cut its deposit rate by a cumulative 40bp to -0.7% over the coming months. We previously expected 20bp of reductions. We see the reductions taking place in two steps of 20bp, in March and June.

This should be accompanied by measures to cushion the blow for the banking system. The most likely step is a move to a two-tiered deposit rate system, so that commercial banks pay the higher penalty rate on a smaller proportion of their excess reserves. Other possibilities to support the banking sector are refi rate cuts and new TLTROs. Finally, we continue to expect a stepping up of QE (of EUR 10bn per month). This should be facilitated by dropping the deposit rate floor for purchases, which would increase the eligible universe of government bonds the ECB could buy.

Bond yields lower for longer and less dollar strength The weaker outlook for growth and inflation and the prospect for easier monetary policy also means that bond yields will likely be lower for longer. We see 10y yields moving broadly sideways in the first half of this year before modest rises in the second half. We now see US 10y Treasury yields at 2.2% at year-end (previously 2.5%) and 10y Bund yields at 0.5% (previously 0.8%). Finally, the changes to our Fed forecasts mean we are likely to see less dollar strength this year, though the ECB and BoJ stimulus suggest the dollar’s upswing is not over just yet. We see EUR/USD at 1.05 (preciously: 1.00) and USD/JPY at 1.20 (previously: 130) at year end.

Our forecast changes will be explained in more detail in upcoming publications during the course of this week.

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Daily Insight – Downgrading our forecasts: less growth, more stimulus - 15 February 2016

Day

Date

Time

Country

Monday Monday Monday Monday Monday Monday

15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016

00:50:00 05:30:00 11:00:00 15:00:00

JP JP EC EC CN CN CN CN

GDP - % qoq Industrial production - % mom Trade balance Draghi speaks in EU Parliament Committee Exports Imports Aggregate financing - CNY bn New yuan loans - CNY bn

17/02/2016

Key Economic Indicators and Events

Period

Latest outcome

Consensus

4Q P Dec F Dec

-0.4 -1.7 21.0

-0.2

Jan Jan Jan Jan

-11.2 -18.8 1820 597.8

-2.0 -3.9 2200 1900.0

Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday

15/02/2016 16/02/2016 16/02/2016 16/02/2016 16/02/2016 16/02/2016

17/02/2016 10:30:00 11:00:00 14:30:00 16:00:00

CN GB DE US US KR

Money supply M2 - % yoy Jan CPI - % yoy Jan ZEW index (expectation economic growth) Feb Empire State PMI - Manuf. general business conditions - index Feb NAHB home builders' confidence index Feb Policy rate - % Feb 16

13.3 0.2 10.2 -19.4 60 1.5

13.5 0.3 0.0 -9.9 60 1.5

Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday

17/02/2016 17/02/2016 17/02/2016 17/02/2016 17/02/2016 17/02/2016 17/02/2016

00:50:00 10:30:00 14:30:00 14:30:00 14:30:00 15:15:00

JP GB GB US US US US

Machinery orders private sector - % mom Claimant count unemployment rate - % Change in claimant count - thousands Prod. prices index - % mom Prod. prices index excl food and energy - % mom Housing starts - % mom Industrial production - % mom

Dec Jan Jan Jan Jan Jan Jan

-14.4 2.3 -4.3 -0.2 0.1 -2.5 -0.4

3.9 2.3 -2.2 -0.2 0.1 1.8 0.3

Thursday Thursday Thursday Thursday Thursday Thursday

18/02/2016 18/02/2016 18/02/2016 18/02/2016 18/02/2016 18/02/2016

00:50:00 02:30:00 02:30:00 07:30:00 14:30:00 14:30:00

JP CN CN NE US US

Merchandise trade exports - % yoy CPI - % yoy PPI - % yoy Unemployment rate Initial jobless claims - thousands Philadelphia Fed - business confidence - index

Jan Jan Jan Jan Feb 13 Feb

-8.0 1.6 -5.9 6.6 269 -3.5

-11.3 1.9 -5.4

Friday Friday Friday Friday Friday Friday

19/02/2016 19/02/2016 19/02/2016 19/02/2016 19/02/2016 19/02/2016

10:30:00 14:30:00 14:30:00 14:30:00 14:30:00

NL GB US US US US

Consumer confidence - index Retail sales - % mom Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy

Feb Jan Jan Jan Jan Jan

4 -1.0 0.1 2.1 -0.1 0.7

ABN AMRO

-15 60 1.5

1.5

6.6 -2.7

-2.7 3

0.7 0.2 2.1 -0.1 1.3

0.1 2.0 0.0 1.3

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)

Find out more about Group Economics at: https://insights.abnamro.nl/en/

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