Macro Weekly
Group Economics
15 July 2016
Shrugging off Brexit, but… Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
• • • • • • •
Markets have been shrugging off worries about Brexit and other risks… …helped by more UK political stability, better global macro data… …and expectations of a central bank reflation wave However major challenges and risks remain… …negotiations between the UK and EU will likely be tough and long… …the UK is heading for recession, while the eurozone is slowing… …and Italian political and banking risks continue to loom
A more positive tone Over the last few days financial markets have generally been shrugging off any worries related to Brexit, European banks, politics more widely and global economic growth. For instance, the 5-day performance of equity markets around the world is a sea of green. Even the sterling exchange rate and high quality government bond yields have regained some traction. UK has more direction One of the factors behind this more constructive mood is that UK political uncertainty is ebbing, with a new government in place. Although the new Foreign Secretary Boris Johnson seems to have in the past insulted many world leaders, the UK has new Prime Minister – in Theresa May – much quicker than expected. As all other candidates dropped out of the process, the nine-week Conservative Party leadership election campaign was no longer necessary. A new cabinet, including a Secretary of State for Brexit, has been appointed. Macro data more encouraging In addition, global macro data has generally been encouraging. For instance, last week’s US labour market report was of the ‘not too hot not too cold’ variety. Employment growth seems to be holding up well enough to dispel any recession fears, while not being strong enough to suggest the Fed will hike any time soon. Similarly, China’s economy seems to be slowing at only a gradual pace, supported by the authorities’ stimulus measures. Indeed, China’s economic growth was stable at 6.7% in Q2. In addition, although investment spending continued to slow sharply in June, the growth rate of industrial production and retail sales edged up. Even the BoE’s decision to keep monetary policy on hold did not rock the boat too much. It was very clear from the MPC’s communication, that it wanted to wait for a full assessment of the outlook next month before easing policy. We expect the BoE
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Macro Week kly – Shrugging g off Brexit, bu ut… – 15 July 2 2016
to ann nounce a packkage of easing g measures in n August, incluude a 25bp ra ate cut, GBP 150bn n of extra asse et purchases and easier lending conditioons for comme ercial banks under its Funding for Lending scheme. Th he BoE asidee, financial markets m are expec cting other cen ntral banks to form a ‘globa al reflation waave’, starting with w the BoJ later th his month and d the ECB in September. S The UK-EU U negotia ations will be e tough Althou ugh there havve certainly been b positives over the laast few days, significant challenges and riskks clearly remain. Just beca ause there is a new UK government in place, that does nott mean the ne egotiations between the UK K and EU will be b a walk in the pa ark. The foreig gn, trade and Brexit ministers are all leaading Eurosce eptics. More importtantly, the EU U does not wa ant to give the UK full acccess to the single market withou ut free movem ment of people, while Prime Minister May has taken a to ough line on not alllowing free m movement. Cle early the negotiations will bee tough and could c take a long time. This will p prolong the un ncertainty. Europ pe’s economiic problems Meanw while, there ha as been more evidence thatt Brexit will like kely have a ma ajor econo omic impact on n the UK. The RICS housing g market surveey of surveyors reported a sharrp deterioratio on of home sales and price expectations e inn responses received r after the EU referen ndum. The surrvey for Londo on was particuularly weak, wiith price expec ctations falling to their lowes st level since th he financial crrisis. We continue to think the UK K economy is heading for re ecession. We still do not have e post referend dum data in th he eurozone (tthese come ne ext week). Thoug gh the pre-refe erendum data confirm that the eurozone eeconomy was set to slow signific cantly in Q2 in n any case, albeit following a strong Q1. F For instance, both industtrial production n and retail sa ales look set to o have shrunkk last quarter. The T uncerttainty following g the UK’s dec cision to leave e the EU will liikely have an adverse impac ct on business decisions to invest and hire e. This will havve a dampening effect on econo omic growth, w which will likely y remain mode est in coming quarters. Even with the US an nd China show wing resilience e, global econo omic growth reemains lacklus stre. Politic cal and bankiing risks With the eurozone sset for weak growth, core inflation very low w, and monettary policy facing constraints, tthe eurozone remains r very vulnerable v to nnew economic c shocks. Unforttunately it is no ot difficult to im magine where e these might ccome from. Po olitical risks loom large with anti -EU sentimen nt on the rise in n Italy, the Neetherlands, Austria, France e and to a lessser extent Germany. These e are all countrries that will have electio ons in 2017-20 018. Meanw while, Italy’s b banking sectorr faces large capital c needs ggiven its moun ntain of nonperforming loans, w while the Italian n government and Europeann authorities are a strugg gling on the wa ay forward. Ca apital needs could be well aabove the EUR R 40bn often reported. r Inde eed, we think EUR E 65-70bn is more realisstic. The comb bination of the ris se of the anti-E EU, anti-estab blishment Five Star party, baanking sector problems and weak w growth m make Italy a prime potential source s of risk for Europe. Especially
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Macro Week kly – Shrugging g off Brexit, bu ut… – 15 July 2 2016
given October’s con nstitutional refo orm referendu um, which mayy trigger early elections, if the go overnment lose es. The Nexus N betwee en the Fed and emerging markets m Finally y, we should n not completely y forget an area of vulnerabiility that has gone into the background recentlyy. The Fed’s refrain r from rate hikes, the rrecovery in commodity prices from their low ws and stabilis sing momentum in China haave all eased the t nearterm challenges c faccing many eme erging markets, with capital inflows return ning. Howev ver, high levells of debt remain a major prroblem in Chinna and beyond d. In additio on, although w we continue to o think the Fed d will be on ho ld this year, so ome FOMC officials seem to be pushing for fu urther rate hikes at every siggn of somewh hat better data. There T remainss a risk that if the Fed does eventually ressume its rate hike cycle, emerg ging market vu ulnerabilities will w come back k to the fore.
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Macro Week kly – Shrugging g off Brexit, bu ut… – 15 July 2 2016
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e
2017e
Unitted States
2.4
2.4
1.7
1.8
United States
Euro ozone
0.9
1.6
1.3
1.0
one Eurozo
Japan
3M int erbank rate
0 07/07/2016 14/07/20 016
+3M
2016e
+12M
0.66
0 0.68
0.7
0.70
1.00
2017e 1.5
-0.29
-0 0.30
-0.35
-0.35
-0.35
-0.35
-0.1
0.6
0.6
0.7
Japan
0.06
0 0.06
-0.1
-0.10
-0.10
-0.1
Unitted Kingdom
3.1
2.2
1.5
0.5
United Kingdom
0.52
0 0.50
0.3
0.30
0.30
0.3
Chin na
7.3
6.9
6.5
6.0 0 07/07/2016 14/07/20 016
Worrld
3.4
3.1
2.9
3.1
Inflation (%)
2014
2015
2016e
2017e
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4
1.9
US Treasury
1.39
1 1.53
1.4
1.40
1.60
1.8
Euro ozone
0.4
0.0
0.3
1.5
n Bund German
-0.17
-0 0.13
-0.2
-0.20
-0.10
0.1
Japan
2.8
0.8
0.0
1.0
Euro sw w ap rate
0.29
0 0.31
0.4
0.35
0.55
0.6
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
-0.28
-0 0.26
-0.2
-0.30
0.20
0.0
Chin na
2.0
1.4
2.0
2.0
UK giltss
0.78
0 0.80
0.8
0.50
0.30
0.2
Worrld
3.5
2.9
3.1
3.2
Key y policy rate
14/07/2016
+3M
2016e
2017e
0 07/07/2016 14/07/20 016
+3M
2016e
+12M
2017e
Fed deral Reserve
0.50
0.50
0.50
1.25
EUR/US SD
1.11
1 1.11
1.10
1.10
1.10
1.10
Euro opean Central Bank
-0.40
-0.40
-0.40
-0.40
USD/JP PY
100.8
10 05.3
100.0
103.0
105.0
110
Ban nk of Japan
-0.10
-0.30
-0.30
-0.30
GBP/US SD
1.29
1 1.33
1.27
1.20
1.25
1.35
Ban nk of England
0.50
0.25
0.25
0.25
EUR/GB BP
0.86
0 0.83
0.87
0.92
0.88
0.81
Peo ople's Bank of China
4.35
4.35
4.10
3.85
USD/CN NY
6.68
6 6.69
6.70
6.80
6.90
7.00
10Y intterest rate
ncies Curren
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Ma ain economic//financial forrecasts Day
Datte
Time
Country
Key Economic Indicators and Eve ents
Period
Latest ou utcome
Consensu us
ABN AMRO 62
M Monday
18/07/2 2016
16:00:00
US
ome builders' confidence index NAHB ho
Jul
60
60
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday
19/07/2 2016 19/07/2 2016 19/07/2 2016 19/07/2 2016 19/07/2 2016
10:00:00 10:30:00 11:00:00 13:00:00 14:30:00
EC GB DE TR US
ECB Ban nk Lending Survey CPI - % yoy y ZEW ind ex (expectation econ nomic growth) Repo ratte - % Housing starts - % mom
Jun Jul Jul 19 Jun
3 0.3 19.2 2 7.5 5 -0.3 3
0.4 51.5 7.5 -0.2
We ednesday We ednesday We ednesday We ednesday We ednesday
20/07/2 2016 20/07/2 2016 20/07/2 2016 20/07/2 2016 20/07/2 2016
06:30:00 10:30:00 10:30:00 16:00:00
NL GB GB EC BR
ex Consum er confidence - inde housands Change in claimant count - th ent rate - % Claimant count unemployme Consum er Confidence Policy ratte - %
Jul Jun Jun Jul A Jul 20
5 4 -0.4 2.2 2 -7.3 3 14.3 3
4.0 2.2 -8.3 14.3
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday
21/07/2 2016 21/07/2 2016 21/07/2 2016 21/07/2 2016 21/07/2 2016 21/07/2 2016 21/07/2 2016
07:30:00 10:30:00 13:45:00 13:45:00 14:30:00 15:00:00 16:00:00
NE GB EC EC US US US
Unemplo oyment rate Retail sa ales - % mom ECB Dep posit rate - % ECB Main Refinancing Rate - % phia Fed - business confidence - index Philadelp FHFA house price index - % mom Existing home sales - % mom
Jun Jun Jul 21 Jul 21 Jul May Jun
6.3 3 0.9 9 -0.40 0.00 0 4.7 7 0.2 2 1.8 8
-0.40 0.00 4.4 0.4 -1.0
-0.40 0.00 5.0 0.3
Friday Friday Friday Friday Friday
22/07/2 2016 22/07/2 2016 22/07/2 2016 22/07/2 2016 22/07/2 2016
10:00:00 10:00:00 10:00:00 10:00:00 15:45:00
EC EC EC EC US
nufacturing - index PMI man Compossite PMI output PMI servvices - index ECB Surrvey of Professional Forecasters F Markit - Flash F PMI
Jul P Jul P Jul P
52.8 8 53.1 8 52.8
52.0 52.3 52.5
52.0 52.3 52.0
Jul P
51.3 3
Sou urce: Bloomb erg, Re euters, ABN AMRO Group G Economics (we e provide own foreca asts only for selected d key variab les and events)
9.0 0.0 -2
-10
6.3
51.0