Group Economics
Macro Weekly Will the bond rout continue?
Nick Kounis +31 20 343 5616
18 May 2015 A number of big macro themes continued to be in focus last week. The sharp sell-off in the government bond market, the risk of a Greek exit from the eurozone, the chance of a UK exit from the EU, better eurozone growth data and ongoing disappointments out of the US economy. We look at each of these issues in turn and assess the outlook and implications. Will the bond rout continue? No – at least not in the next few months. It is true that
German bond supply to turn negative again
government bond yields, especially in the core of the eurozone, are still far away from fundamentals. However, this reflects QE and it seems to us that ECB asset purchases are set to continue in the coming months. Indeed, ECB President
Net supply minus ECB purchases
10 0
Mario Draghi made this clear in a speech last week. He said that the ECB would implement the QE programme ‘in full’
-10
meaning at least until September 2016. In addition he judged
-20
that ‘quite some time is needed before we can declare
sustained basis’. We think Mr Draghi will stick to this message
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
long as needed for its objective to be fully achieved on a truly
-30
Jan
success, and our monetary policy stimulus will stay in place as
Net adjusted flow
at the press conference following the June Governing Council meeting.
Source: ABN AMRO Group Economics
The continuation of QE should see core bond yields falling
Is Greece any closer to a deal?
back over the next few months. Against the background of
Only slightly. Following the meeting of eurozone finance
weak supply and aggressive ECB purchases, we think that we
ministers, the statement had a somewhat more positive tone.
will see a scarcity of AAA government bonds that will keep
The Eurogroup “ welcomed the progress that has been
bond prices inflated compared to fundamentals. Indeed, one of
achieved so far”, while acknowledging that “the reorganization
the reasons yields have risen over the last few weeks is that
and streamlining of working procedures has made an
there has been some new supply by eurozone governments
acceleration possible, and has contributed to a more
over this period as they front-load their funding before the
substantial discussion”. However, “ more time and effort are
Summer. However, this will dry up going further forward, while
needed to bridge the gaps on the remaining open issues” .
ECB buys will continue.
Eurogroup head Dijsselbloem added that the negotiations were “more efficient, more positive, more constructive”, while “faster
Overall, we think that the bond market sell-off does not
progress” was being made.
represent the start of the big bond market correction but rather a false start. Having said that an eventual large adjustment is just a matter of time. We think that this will take place early next year when the end of QE or the QExit really comes into view. It seems unlikely to us that the ECB will continue QE beyond September of next year, and tapering could even come earlier in that year as growth and inflation rise.
Our base case remains that Greece and the EU will reach an agreement, probably at the last possible moment. The Greek government appears to be running out of cash. According to finance minister Varoufakis the liquidity issue had become “terribly urgent”, referring to a time period of “the next couple of weeks”. The official deadline of the current bailout extension is
Given these views and recent market developments, we have
the end of June, but we have serious doubts about whether the
raised our German 10y government bond yield forecast for this
country could wait that long for financial aid. Several payments
year by 20bp (to 0.3% at 3-months and 0.5% at year end). But
to the IMF are due in June (total around EUR 1.5bn). So we
we stick to our forecasts for 2016 (1.4% by year end).
think around the end of this month the pressure to reach an agreement will really become acute.
2
Macro Weeklly - 18 May 2015
Willl the UK leave e the EU?
Eurozone E GDP P in Q1 in sellected memb ber states
No, but the risk iss not negligible. With the Cons servatives win nning the elections and return ning to governm ment with a sm all
% % qoq
1.0
Eurozonee
ma ajority, the Brexxit issue has co ome into the lim melight. Prime Min nister David Ca ameron has pro omised to hold a referendum on UK K membership o of the EU by 20 017 at the lates st. Before that,
0.5
he intends to rene egotiate the UK K’s relationship p with the EU w with otiation Mr other countries. Iff there is a successful renego
0.0
Cameron would ssupport ongoing g membership in such a refe erendum. -0.5
It is s likely that the UK will vote to o stay in the EU U in our view. Opinion polls suggest that there e is a majority in n favour of
ES
R FR
NL
PT
IT
DE
BE
AT
FN
GR R
So ource: ABN AMRO O Group Economiccs
embership (alth hough as the election showed d – they can be e me wro ong). Furthermore, we think itt is likely that th he Prime Minisster
Is the US recov very coming offf the rails?
will achieve the ch hanges he is lo ooking for, as itt looks like his
o – but the data a is starting to test our patien nce. After the No
am mbitions in this rregard are quite modest. Muc ch of the politiccal
terrible first quarrter, the improvvement in econ nomic data has
esttablishment and d business are e likely to suppo ort the ‘in’ cam p.
be een disappointing. Indeed, rettail sales, cons sumer sentiment an nd industrial pro oduction all dissappointed lastt week. The strrong
K exit from the E EU would likelyy a be a negative for the UK UK
do ollar and falling g investment in the oil and gas s sector are
eco onomy as it wo ould lose free access a to the biiggest single
ce ertainly negativ ve for the indusstry. However, the t large dome estic
ma arket in the glob bal economy. This T would be bad b for UK
ec conomy should benefit from a stronger labour market, lowe er
exp porters as well as foreign dire ect investment into the countrry
oil prices and a pickup p in the hoousing market. Meanwhile,
with h of view to accessing the EU U. The uncertainty surroundin ng
ho ousehold and corporate c balannce sheets look k strong and
the e negotiations a and referendum m would likely weigh w on UK
fin nancial conditio ons remain acccommodative. Stronger S growtth
ass sets.
re emains the mos st likely trend ggrowing forward d. However, ec conomic reports need to turn soon for us to maintain our
t eurozone e economic rec covery for reall? Is the Yes s. GDP growth h firmed to 0.4% % in Q1 from 0.3% in Q4, whiich ma ay not be spectacular, but sho ows a gradual recovery r is und derway. In addition, there are e reasons to think that the eco onomy will pickk up some pace e in the coming g quarters. Firsst of all a , the drop in oil prices is prroviding a wind dfall to con nsumers of 1-1.5% GDP. Seccond, financial conditions havve eas sed with bank lloans becoming more availab ble as well as che eaper. Indeed, the ECB surve eys suggest tha at SMEs – the lifeblood of the ecconomy – are now n experiencing easier acce ess f Finallyy, the fall in the e euro will supp port exports. Ovver to finance. time, these initial triggers will ea ase but it the ho ope is that by the en companies w will be stepping g up hiring, inve estment and stockbuilding, leading to a virtuo ous circle of gro owth.
co onviction.
3
Macro Weeklly - 18 May 2015
Ma ain economic//financial fore ecasts GD DP grow th (%)
2013
2014
2015e
2016e
2.2
2.4
3 3.1
3.1
U United States
-0.4
0.9
1.8
2.3
E Eurozone
Jap pan
1.6
-0.1
1.1
1.2
Uniited Kingdom
1.7
2.8
2 2.8
2.6
Chiina
7.7
7.4
7 7.0
7.0
Wo orld Inflation (%)
3.2 2013
3.3 2014
3 3.3 2015e
3.8 2016e
Uniited States
1.5
1.6
0 0.2
2.5
U Treasury US
2.1 12
2.14
Eurrozone
1.3
0.4
0 0.4
1.7
G German Bund
0.3 36
Jap pan
0.3
2.8
0 0.8
1.4
E Euro sw ap rate
Uniited Kingdom
2.6
1.5
1.1
1.9
Chiina
2.6
2.0
2 2.0
2.5
Wo orld Key y policy rate
4.3 08/05/2015
4.0 +3M
3.7 3 2015e
3.8 2016e
Fed deral Reserve
0.25
0.25
0.75
2.25
E EUR/USD
1.1 12
1.12
Eurropean Central Bank
0.05
0.05
0.05
0.05
U USD/JPY
120.2
Ban nk of Japan
0.10
0.10
0.10
0.10
G GBP/USD
Ban nk of England
0.50
0.50
0.75
1.75
Peo ople's Bank of Chin na
5.10
5.10
4.85
4.85
Uniited States Eurrozone
3 interbank ratte 3M
+3M
+12M M
2015e
0.2 28
0.28
0.4
1.2 2
0.9
2.4
-0.0 01
-0.01
0.00
0.00 0
0.00
0.10
J Japan
0.1 17
0.17
0.2
0.2 2
0.2
0.2
U United Kingdom
0.5 57
0.57
0.6
1.2 2
1.0
2.0
01/05/201 15 08/05/2015
+3M
+12M M
2015e
20 016e
2.3
2.3 3
2.5
2.9
0.55
0.3
1.0 0
0.5
1.4
0.6 65
0.84
0.6
1.3 3
0.8
1.6
J Japanese gov. bonds
0.3 37
0.42
0.6
1.0 0
0.7
1.0
U gilts UK
1.8 84
1.88
1.6
2.3 3
2.0
2.7
01/05/201 15 08/05/2015
+3M
+12M M
2015e
20 016e
1.05
1.00 0
0.95
1.10
119.8
122
130 0
128
135
1.5 52
1.54
1.44
1.47 7
1.40
1.45
E EUR/GBP
0.7 74
0.73
0.73
0.68 8
0.68
0.76
U USD/CNY
6.2 20
6.21
6.25
6.40 0
6.35
6.45
1 interest rate 10Y e
C Currencies
01/05/201 15 08/05/2015
20 016e
Sou urce: Thomson Re euters Datastream m, ABN AMRO Grroup Economics.
KEY M MACRO EV VENTS Day
Da ate
Time
Country
Monday Monday Monday
18/05 5/2015 18/05 5/2015 18/05 5/2015
01:50:00 0 06:30:00 0 16:00:00 0
JP JP US
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday
19/05 5/2015 19/05 5/2015 19/05 5/2015 19/05 5/2015 19/05 5/2015
10:30:00 0 11:00:00 0 11:00:00 0 11:00:00 0 14:30:00 0
We ednesday We ednesday We ednesday
20/05 5/2015 20/05 5/2015 20/05 5/2015
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday
21/05 5/2015 21/05 5/2015 21/05 5/2015 21/05 5/2015 21/05 5/2015 21/05 5/2015 21/05 5/2015 21/05 5/2015 21/05 5/2015
Friday Friday Friday Friday Friday Friday Friday Friday Friday
Period
Late est outcome
Mach hinery orders privatte sector - % mom Industrial production - % mom NAH HB home builders' confidence c index
Mar Mar F May
-0.4 -0.3 56.0
GB EC EC DE US
CPI - % yoy Core e inflation - % yoy Trad de balance externall EU - EUR bn ZEW W index (expectation n economic growth) Housing starts - % mom
Apr Apr F Mar May Apr
0.0 1 2 22003.3 53.3 2.0
01:50:00 0 13:00:00 0 20:00:00 0
JP TR US
GDP P - % qoq Repo rate - % Fede eral Reserve releasses Minutes April FOMC F meeting
1Q P May 20
0.4 7.5
03:45:00 0 09:30:00 0 10:00:00 0 10:00:00 0 10:00:00 0 10:00:00 0 10:30:00 0 16:00:00 0 16:00:00 0
CN NL EC EC EC EC GB US US
PMI manufacturing - ind dex (HSBC) - flash Unemployment rate PMI manufacturing - ind dex PMI services - index Com mposite PMI output BOP P Current account - EUR bn Reta ail sales - % mom Phila adelphia Fed - bus iness confidence - index Exis ting home sales - % mom
May P Apr May P May P May P Mar Apr May Apr
48.9 7.0 52 54.1 53.9 13.8 -0.5 7.5 6.1
FR NL DE US US US US US JP
Busiiness confidence manuf. m - index Consumer confidence - index Ifo - business climate - index Inflation excl food and energy e - % mom Inflation excl food and energy e - % yoy Inflation (CPI) - % mom m Inflation (CPI) - % yoy Markkit - Flash PMI Policcy rate - %
May May May Apr Apr Apr Apr May P May 22
101.0 0 108.6 0.2 1.8 0.2 -0.1 54.1 80.0
22/05 5/2015 08:45:00 0 22/05 5/2015 09:30:00 0 22/05 5/2015 10:00:00 0 22/05 5/2015 14:30:00 0 22/05 5/2015 14:30:00 0 22/05 5/2015 14:30:00 0 22/05 5/2015 14:30:00 0 22/05 5/2015 15:45:00 0 22/05 5/2015 Field Not Appl A
Key Econo omic Indicators and d Events
Sou urce: Bloomberg, Reuters, ABN AM MRO Group Econo omics (we provide own forecasts on nly for selected k ey e variables and events) e
Conssensus
ABN AM MRO
0.4
7.0
2 0.1 1.7 0.2 0.0 0.0
4
Macro Weeklly - 18 May 2015
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