Macro Weekly
Group Economics
8 July 2016
Brexit confidence shock Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
• • • • • •
First data showing post-Brexit slump in UK confidence emerge… …we expect economy to enter recession in coming months Pre-Brexit reports in US and Europe holding up well Government bond yields collapse leading to rise in negative yield club… …reflecting investor concern and increasing likelihood of more QE Government bond investors appear complacent about political and banking risk in Italy
Brexit confidence shock emerging in the UK The first post-referendum surveys in the UK recorded sharp falls. The GfK consumer confidence indicator fell to -9 (taken 30 June – 5 July) from -1 earlier in June. This marked the biggest monthly drop since December 1994. Meanwhile, the Lloyds Business barometer fell to +6 after the vote from +32 in May, taking it to its lowest level since December 2011. Furthermore, the National Institute of Economic and Social Research reported that its monthly GDP estimate for June showed ‘an intensifying contraction across the board’. All this provides early evidence that the UK economy is heading for a recession. Pre-Brexit data elsewhere holding up Elsewhere in the world, there is hardly any economic data recorded post-Brexit, but the pre-Brexit data still look decent. In the US, nonfarm payrolls bounced back in June (+287K) after a very weak May outcome (+11K). The truth is somewhere in between the two, with headline payrolls trending around the 150K mark over the last three months, and private payrolls a bit below that. This represents a slowdown from a trend in payrolls of around 250K earlier this year. So the labour market is certainly cooling, in line with moderate growth and falling profits, but it is certainly not collapsing. At the same time, there is not much sign of inflationary pressure building in the labour market. Hourly wages were up only 0.1% mom and 2.6% yoy in June. The unemployment rate rose to 4.9% from 4.7% on higher labour supply. Apart from the blip in May, the unemployment rate has been moving sideways at 4.9-5% over the last nine months suggesting the labour market is not tightening further. We stick to the view that the Fed will remain on hold this year. A moderate recovery looks on the cards going forward.
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Macro Week kly – Brexit con nfidence shock k – 8 July 2016 6
In the eurozone, ha ard data have been b signaling g a slowdown in Q2 econom mic growth after the positive sta art to the yearr. For instance, German induustrial producttion, orders and ex xports were alll weak in May y. Meanwhile, business survveys for June for the eurozo one as a wholle softened mo odestly, but re emain consisteent with moderate econo omic growth. T The July data will w obviously give us some feel as to wha at extent the res st of Europe iss being hit by the type of Brexit confidencce shock that appears a to be ma aterialising in tthe UK. We think it will be much m less seveere and expec ct the eurozo one economy to continue to o grow, but at a modest pacce. Sterlin ng continues s collapse After a positive first week after Brrexit, concerns s in global finaancial markets s escalated this we eek. The reacction on equity y markets still looks l relativelyy benign, but the bigger moves s have been sseen in sterling g and in goverrnment bond m markets. Sterling fell to a 31-yea ar low againstt the dollar. Bo oE Governor Mark M Carney w warned the ec conomy was likely to t experience a marked slow wdown and hinted that the ccentral bank would w take action. Perhaps more impo ortantly, he hig ghlighted that the t portfolio floows necessarry to finance the UK K’s yawning cu urrent account deficit were waning. w Aparrt from slowing g portfolio flows into i debt and equity, Mr Carney also poin nted to declininng flows into commercial c real es state. This wa as also underlined by severa al asset managgers freezing their real estate e investment fu unds as investtors pulled outt money on thhe back of the deterio orating outlookk for commerc cial real estate e prices. We eexpect further downside in sterling as the abovve factors conttinue to weigh. The fa ast growing n negative rate club The co ollapse in govvernment bond d yields continued. There weere new recorrd lows for 10-yea ar yields in the e US, German ny, Japan, the UK and Austrralia among others. The negatiive yield club ccontinued to grow. g For insta ance, Switzerlaand's whole yield y curve fell below the zero m mark all the wa ay out to 50 years, while Fra rance's 9-yearr bond yield fell below zero for th he first time. The sh harp fall in yie elds reflects a continuation of o a number off market themes, which have only o intensified d since the UK K referendum.. Lower expecctations for eco onomic growth h and declinin g inflation exp pectations are an important factor. In addition, there has be een a related e expectation fo or an easier monetary policyy stance globa ally than previo ously expected d, with the BoE E and ECB set to launch annd step up ass set purcha ases, respectiively, and the Fed set to kee ep interest rate tes on hold forr a long period d. Scarcity of h high quality go overnment bon nds is also a faactor contributing to the fall in yields, given tthe weak supp ply outlook and d that central banks are sett to increase their purchases. p Fin nally, the turn in investor sen ntiment also sspurred safe haven deman nd. We se ee further dow wnside for 10y Bund (year-en nd target -20bbp) and especially gilt QE. US 10y Treasury (target 0.5%) yields on the back of o additional ECB E and BoE Q T yields are now roug ghly at our yea ar-end target (1.4%). We exppect the Fed to t keep rates on o hold until 2 2017, but further falls in US yields would pprobably need d to see marke ets pricing in a Fed U-turn back to an easing stance.
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Macro Week kly – Brexit con nfidence shock k – 8 July 2016 6
Italy risks r loom, bu ut bond inves stors sanguin ne Meanw while, Brexit sseems to be sh hinning a rathe er unfavourabble light on Italy’s trouble es. The Italian n government wanted to use e Brexit to alloow it to intervene to help its ban nks and circum mvent state aid d and bail-in rules. This wass pushed back k by the European Commisssion (EC) and the German government. g Itt is now follow wing a differe ent tact. It see ems that the government is trying to use aan exception to t the rule, which allows tempo orary state aid if regulatory stress s tests unncover a shortfall, specifically to inject capital into Banca Monte dei Paschi di S Siena. Italy is s reluctant to b bail-in bank bo ondholders, as s many are rettail investors. The talks between the Italian government and a EC are continuing, but tthere does not yet seem to be any a sign of a b breakthrough, though Bank of Italy Goverrnor sounded hopeful earlierr today. Given n high levels off non-performing loans in thhe Italian bank k sector, it seems s likely that ba anks will need a lot more capital. As we ell as banking rrisks, Italy is also a facing pollitical risks. Prrime Minister Renzi R is planning to hold a cconstitutional reform r referendum and if hee loses it could d trigger a Generral Election. A At the same tim me, the anti-EU U, anti-establisshment Five Star S Party has be een climbing i n the opinion polls, and wou uld be Italy’s bbiggest party according a to some of these surve eys. If this sce enario materialises, investorrs could start to t worry about ‘exit contagio on’ risk. Yet Ita alian governme ent bonds conntinue to perform well and spread ds versus Gerrman counterp parts are relatiively tight. Thiis may reflect speculation that ECB will take ssteps to increa ase the eligible e universe of ggovernment bo onds to facilita ate an expand ed QE progra amme. One option o would b e to move from m the capital key k weighting system (more e or less based d on GDP) for purchases to an outstanding debt weightting. Such a move m would be parrticularly bene eficial for Italy, as it has a hig gh debt ratio, so the nationa al central bank would w buy mu ch more of the e country’s bo onds than undeer the current scheme. Howev ver, we think tthe ECB would d likely chose other optionss to increase th he eligible univerrse instead. Th hese options include remov ving the rule thhat the ECB ca an only buy assets s yielding more e than the dep posit rate, or raising the issuuer limit for so ome countrries. As such, we think inves stors might be e too complaceent in having such s a positiv ve view on Itallian governme ent bonds.
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Macro Week kly – Brexit con nfidence shock k – 8 July 2016 6
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
Unitted States
2.4
2.4
2016e 1.7 ↓
2017e 1.8
3M inte erbank rate United States S
Euro ozone
0.9
1.6
1.3
1.0
Eurozone
3 30/06/2016 07/07/20 016
+3M
2016e
+12M
0.65
0 0.66
0.7
0.70
1.00
2017e 1.5
-0.28
-0 0.29
-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
K United Kingdom
0.56
0 0.52
0.3
0.30
0.30
0.3
Chin na
7.3
6.9
6.5
6.0 3 30/06/2016 07/07/20 016
Japan
Worrld
3.4
3.1 ↓
2.9 ↓ 2016e
3.1
Inflation (%)
2014
2015
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4 ↓
1.9
US Trea asury
1.49
1.39
1.4
1.40
1.60
1.8
Euro ozone
0.4
0.0
0.3
1.5
German n Bund
-0.13
0.17 -0
-0.2
-0.20
-0.10
Japan
2.8
0.8 ↓
0.0 ↓
1.0
Euro sw w ap rate
0.42
0 0.29
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
Chin na
2.0
1.4
2.0
2.0
UK giltss
Worrld
3.5
2.9 ↑
3.1 ↑
3.2
2017e
10Y intterest rate
0.35 ↓
-0.2 ↓
-0.30 ↓
0.1
0.55 ↓
0.6
0.20 ↓
0.0
0 0.78
0.8
0.50
0.30
0.2
3 30/06/2016 07/07/20 016
-0.23 0.87
-0 0.28 ↓
0.4 ↓
Key y policy rate
07/07/2016
+3M
2016e
2017e
+3M
2016e
+12M
2017e
Fed deral Reserve
0.50
0.50
0.50
1.25
EUR/US SD
1.11
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
103.3
00.8 10
100.0
103.0
105.0
110
Ban nk of Japan
-0.10
-0.30
-0.30
-0.30
GBP/US SD
1.34
1.29
1.27
1.20
1.25
1.35
Ban nk of England
0.50
0.25
0.25
0.25
EUR/GB BP
0.83
0 0.86
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
6.65
↑ 6 6.68
6.70 ↑
6.80 ↑
6.90 ↑
7.00
ncies Curren
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Ma ain economic//financial forrecasts Day
Date e
Time
Country
Sunday S S Sunday
10/07/20 016 10/07/20 016 10/07/20 016 10/07/20 016 10/07/20 016
03:30:00 03:30:00 15/07/2016 15/07/2016 15/07/2016
CN CN CN CN CN
Monday M M Monday
11/07/20 016 11/07/20 016
01:50:00 16:00:00
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday
12/07/20 016 12/07/20 016 12/07/20 016 12/07/20 016 12/07/20 016 12/07/20 016
We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday We ednesday
Periiod
Latest outcome e
Consensus
CPI - % yoyy PPI - % yoyy Money supp ply M2 - % yoy Aggregate financing f - CNY bn New loans - CNY bn
Ju un Ju un Ju un Ju un Ju un
2.0 -2.8 11.8 659.9 985.5
1.8 -2.5 11.3 1125.0 1015.0
JP US
o private sector - % mom Machinery orders Fed George e (v) Missouri
Ma ay
-11.0
2.7
03:30:00 12:00:00 15:15:00 15:35:00 16:00:00 23:30:00
US US US US US US
Fed Mesterr (v) Sydney Banking and a Financial Stabilitty NFIB small business optimisme e - index Fed Tarullo o (v) Washington Fed Bullard d (v) St. Louis U.S. Job Op penings by Industry Fed Kashka ari (nv) Town Hall Me eeting Marquette, MI
Ju un
93.8
93.8
93.0
Ma ay
5788.0
13/07/20 016 13/07/20 016 13/07/20 016 13/07/20 016 13/07/20 016 13/07/20 016 13/07/20 016 13/07/20 016
04:30:00 06:30:00 11:00:00 16:00:00 15:00:00
US JP EC CA US CN CN US
Fed Mesterr (v) Australian Busine ess Economists Industrial production p - % mom Industrial production p - % mom Policy rate - % Fed Kaplan n (nv) World Affairs Co ouncil of Houston Imports - % yoy Exports - % yoy U.S. Fed Re eserve Releases Beige Book
Mayy F Ma ay Jul 13
-2.3 1.1 0.5
-0.6 0.5
-1.0 0.5
un Ju Ju un
-0.4 -4.1
-6.2 -5.0
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
14/07/20 016 14/07/20 016 14/07/20 016 14/07/20 016 14/07/20 016 14/07/20 016 14/07/20 016 14/07/20 016 14/07/20 016
00:00L:00 13:00:00 13:00:00 14:30:00 14:30:00
US GB GB US US US KR US US
Fed Harkerr in Philidelphia Policy rate - % BoE size off asset purchase prog gramme - GBP bn Initial joblesss claims - thousand ds Prod. pricess index excl food and d energy - % mom Prod. pricess index - % mom Policy rate - % Fed Lockha art (nv) speaks on Ecconomy Idaho Fed George e (v) speaks on U.S. Economy in Oklahom ma
Jul 14 Ju ul Jull 9 Ju un Ju un Jul 14
0.50 375 254.0 0.3 0.4 1.25
0.25 375
0.25 375
0.1 0.3 1.25
1.25
Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday Friday
15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016 15/07/20 016
01:00:00 04:00:00 04:00:00 04:00:00 04:00:00 11:00:00 14:30:00 14:30:00
US CN CN CN CN EC US US US US US US US US US US
Fed Kaplan n (nv) in St. Louis Industrial production p - % yoy Retail saless - % yoy Fixed inves tments - % yoy GDP - % yo oy Core inflatio on - % yoy Inflation exccl food and energy - % mom Inflation exccl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy Retail saless - % mom Empire Sta ate PMI - Manuf. general business conditio ons - index Industrial production p - % mom Univ. of Micchigan cons. confiden nce - index Business in nventories - % mom Fed Kashka ari (nv) and Bullard (vv) at OMFIF Meeting St. S Louis
Ju un Ju un Ju un 2Q Q Jun nF Ju un Ju un Ju un Ju un Ju un Ju ul Ju un Jul P Ma ay
6.0 10.0 9.6 6.7 0.9 0.2 2.2 0.2 1.0 0.5 6.0 -0.4 93.5 0.1
5.9 9.9 9.4 6.6 0.9 0.2 2.2 0.3 1.1 0.1 5.0 0.2 93.4 0.1
20:00:00
17:15:00 19:15:00
14:30:00 14:30:00 14:30:00 15:15:00 16:00:00 16:00:00 19:15:00
Key Economic In ndicators and Events
Sou urce: Bloomberg, Re euters, ABN AMRO Group Economics (we ( provide own fore ecasts only for seleccted k ey variables and a events)
AB BN AMRO
6.6 0.2 2.3 0.3 1.2 0.2
93.0