economic adviser - nord/lb · 2018-06-22 · economic adviser ♦ february 2017 nord/lb economics...
TRANSCRIPT
Please take note of the special information on the final pages of this publication.
Special: Donald versus Ronald: Trade War instead of Cold War?
Source: Bloomberg, Chinese customs authorities, NORD/LB Economics
China's bilateral trade surplus with the United States could become a problem against the background of
the trade policy pursued by the new government in Washington. Donald Trump could seek conflict with
Beijing. Will it come to a trade war? � Turn to page 2 for our assessment of the situation.
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1999 2000 2001 2003 2004 2006 2007 2008 2010 2011 2013 2014 2016
China: Imports from U.S. (Bn. USD)
China: Exports to U.S. (Bn. USD)
China U.S. Trade Balance (Bn. USD)
Overview of contents
Special: Donald versus Ronald 2
USA: Trump versus Dollar 3
Euroland: ECB unimpressed by rising inflation 4
Germany: Economy grew by 1.9 percent in 2016 6
France: 2016 ends with strong plus in output 7
Italy: Aftermath of the December referendum 8
Spain: Ongoing political uncertainty 8
Switzerland: Deflationary phase drawing to a close 9
Japan: Off to a good start into the new year 10
China: PBOC in a quandary 11
Britain: May goes for a hard Brexit 12
Canada: Anxious glances southwards 12
Mexico: Trump makes for deep worry lines 13
Australia: Negative GDP in Q3 merely a blip 13
Total Returns: Yields to rise further in medium term 14
Stock markets: Dow 20k – great! 16
Overview of forecasts 17
Economics
Economic Adviser February 2017 • Date of issue: 30 January 2017
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 2 von 24
Special: Donald versus Ronald: Trade War instead of Cold War?
Donald Trump remains in campaign mode
Donald Trump is keeping the international finan-
cial markets on their toes with his remarks and
public appearances. The new president's inau-
guration speech in Washington made for certain
worry lines on the faces of many investors, for
example. Indeed, the investors missed the con-
ciliatory tones that were actually expected of
Trump. The new head of state, however, re-
mained in campaign mode in what was probably
a meticulously planned performance in Washing-
ton, and showed correspondingly little willing-
ness to compromise. Trump is evidently continu-
ing to envision pursuing an economic policy
strongly focussed on the domestic economy.
Despite what is already a positive employment
situation in the land of opportunity, it seems to be
a key economic objective in Washington to cre-
ate more jobs. The new administration clearly
intends to make use of protectionist measures to
this end. Accordingly, there is some concern
among investors as to, for example, the pro-
spects for the export-oriented German or Japa-
nese companies. However, Donald Trump ap-
pears to have two countries in his sights at pre-
sent which are accused of massively unfair for-
eign trade practices, namely Mexico and China.
Mexico as big loser from America's new trade
policy
The new US government is apparently continu-
ing to plan the expansion of the fortifications on
the border to southern neighbour Mexico. It is
even intended to finance this measure where
possible by way of a duty on money transfers by
Mexicans working in the United States. Besides
this, the decision-makers in Washington are
maintaining their demands for a renegotiation of
the North American Free Trade Agreement
(NAFTA). The aim of the new US administration
is to get Mexico above all – but also Canada – to
make concessions intended to help improve the
relative competitiveness of US companies. A key
trade policy measure towards securing the Unit-
ed States' economic partitioning from Mexico is
also likely to be that of imposing tariffs. The US
policymakers are expecting adjustments to
agreements with the two immediate neighbours
to make for additional job creation.
Given the high degree of economic dependence
on the United States, the political powers that be
in Mexico have merely limited possibilities for
meeting Donald Trump’s intended projects with
appropriate countermeasures. Moreover, the
country is in a difficult domestic situation – take,
for example, the recent "chaos days" in Mexico –
which could even further weaken its negotiating
position vis-à-vis the United States. Mexico could
in fact be a big loser from Donald Trump's elec-
tion victory, not only from an economic perspec-
tive.
Will Washington risk a trade war with China?
Significantly greater resistance is to be reckoned
with from China, on the other hand. The new US
government is evidently planning to brand the
Middle Kingdom as manipulator in the FX sphere
and take trade measures as reaction to this as-
sessment. There are apparently deep concerns
in Washington about the bilateral trade deficit
with China. US companies that are active in the
Middle Kingdom warn of what could then be an
impending trade war, however. The powers that
be in Beijing could even benefit from the with-
drawal of the United States from the TPP
agreement which, after all, had been conceived
by the Obama government as a kind of econom-
ic bulwark against China. It should also be borne
in mind that China continues to hold a large vol-
ume of US government bonds, which is probably
both a blessing and a curse for Beijing.
International division of labour in jeopardy?
Free trade leads to an international division of
labour and thus, globally speaking, boosts eco-
nomic prosperity. Politicians in the United States
now seem to feel strongly about promoting more
protectionism. This new political approach may
be of advantage for individual groups of Donald
Trump voters, but the consumers in the United
States will also suffer, for example, when a sim-
ple t-shirt costs thirty percent more in the near
future. It very much looks as if the new president
nevertheless really intends to risk a trade war
with a number of other countries and yet pursue
a policy of rapprochement with Russia. In doing
so, Donald Trump is taking a different approach
to that of the "cold warrior" Ronald Reagan.
Tobias Basse, Frederik Kunze, Bernd Krampen
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 3 von 24
USA Tobias Basse, Bernd Krampen
• Pronounced economic optimism
• Fed rather cautious
• Trump versus dollar
Pronounced economic optimism
Economic optimism in the US is very pro-
nounced at the present time, though a number of
observers are viewing the new government's first
concrete plans with some degree of scepticism.
Donald Trump is evidently set on putting protec-
tionist measures in place, and above all the US
companies with activities in China are critical of
this intention. The implementation of other of
Trump's campaign promises are being seen in a
far more positive light in the US economy. The
new decision-makers in Washington are evident-
ly sticking to the plan to cut corporate tax in the
USA considerably. This plan is going down well
in the markets and may help boost the readiness
of companies to invest.
The latest figures from various key sentiment
indicators are accordingly marked by great opti-
mism. The time series for the NFIB Small Busi-
ness Optimism indicator reflected what was vir-
tually a sort of euphoria, rising to over 105 points
in December as month under review. The polled
smaller-sized companies are evidently placing
their hopes above all in the measures an-
nounced by Trump to deregulate the US econo-
my. The new president most recently promised
major CEOs to reduce the bureaucratic con-
straints in the land of opportunity by 75 percent.
Questions as to the precise measurement con-
cept for the deregulation are simply not asked in
the new post-factual world, of course; the an-
nouncement alone is sufficient to brighten senti-
ment. The regional business surveys for January
in the USA consequently reveal an even more
improved mood among the companies. The
Philadelphia Index, for example, registered fur-
ther improvement of late; with an impressive
level of 23.6 points, the widely followed time
series is signalling a marked - even almost eu-
phoric – degree of economic optimism among
the polled respondents. The Richmond Fed's
sentiment indicator too continued its upward
trend at the start of the new year, actually reach-
ing a double-digit figure.
Above all the improved sentiment among the
economic agents in conjunction with the deregu-
lation can be expected to help accelerate the
pace of growth slightly in 2017. The likely tax
cuts ought to lead to positive effects in Q4/2017
at the earliest. Greater economic activity as re-
sult of the infrastructure projects aimed for by
Trump – but which are likely to find little support
in Congress – can first be reckoned with from
2018 onwards. Against this background, we are
therefore sticking to our GDP forecast for the
time being. The first figures on economic growth
in Q4/2016 reported on Friday last week are still
very prone to revisions. In conjunction with other
specific information on the new government's
economic policy, there could be a greater need
in the short term for adjustments to our current
projections, however.
Fed rather cautious
The recently reported data on the US economy
confirm the necessity for the Fed's rate hike in
December 2016. In 2017 the central bankers in
Washington will need to be a bit faster in the
normalization of their monetary policy. In our
view, there is more likelihood of two interest rate
hikes; only if the US economy were to run excep-
tionally well in 2017 would the central bankers
find themselves in a predicament and have to
make three adjustments to the Fed funds target
rate.
Trump versus dollar
The rate hike in the United States has undoubt-
edly helped the US currency. An explanation for
the slight pressure on the dollar at the present
time probably lies in Washington in the person of
the new president. The current government quite
obviously sees problems with the price competi-
tiveness of US companies – especially in the
manufacturing sector. Besides the classic pro-
tectionist measures of national trade policy, the
exchange rate policy can of course be a useful
tool as well at this point. What appears to be
wanted in the White House above all in this re-
spect is a weaker US currency in the short term,
so it will probably be a case of Donald Trump
versus the dollar for the time being. Moreover, as
from the 2nd half-year the euro could well benefit
from what will then be a more intensive tapering
debate within the ECB.
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 4 von 24
Fundamental forecasts, USA
2016 2017 2018
GDP 1.6 2.3 2.2
Private consumption 2.1 2.1 2.1
Govt. consumption 0.5 1.5 1.5
Fixed investment -1.0 3.0 3.0
Exports 2.5 1.5 1.0
Imports 0.5 0.5 1.0
Inflation 1.3 1.8 2.3
Unemployment rate 1 4.9 4.8 4.7
Budget balance 2 -4.2 -5.7 -5.9
Current acc. balance 2 -2.6 -2.6 -2.6
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Quarterly forecasts USA
I/16 II/16 III/16 IV/16 I/17
GDP ann. 0.8 1.4 3.5 2.0 1.9
GDP yoy 1.6 1.3 1.7 1.9 2.2
Inflation yoy 1.1 1.0 1.1 1.8 1.9
Change as percentage
Interest and exchange rates, USA
26.01. 3M 6M 12M
Fed funds rate 0.75 0.75 1.00 1.25
3M rate 1.04 0.95 1.10 1.30
10Y Treasuries 2.50 2.30 2.30 2.50
Spread 10Y Bund 202 200 180 170
EUR in USD 1.07 1.08 1.10 1.11
Coming Up…
Date Indicator Previous
value
30.01. Dallas Fed Index Jan 15.5
31.01. S&P CL CS 20City HPI m
Nov 0.6%
31.01. Consumer Confidence Jan 113.7
31.01. ADP Employment Jan 153K
31.01. Chicago PMI Jan 53.9
01.02. ISM PMI Jan 54.5
01.02. ISM Prices Paid Jan 65.5
03.02. ISM PMI Non-Manu Jan 56.6
03.02. Unemployment rate Jan 4.7%
14.02. NFIB Index Jan 105.8
15.02. Empire State Index Feb 6.5
15.02. NAHB Index Jan 67
15.02. Retail sales m Jan 0.6%
16.02. Philadelphia Index Feb 23.6
m mom, q qoq annualized, italics: preliminary result
Current forecasts in our weekly calendar
Source: Bloomberg, NORD/LB Economics
Euroland Christian Lips
• Solid growth in Q4/2016
• Leading indicators signal sustained
upswing
• ECB unimpressed by rising inflation
Solid growth in Q4/2016
Eurostat will be issuing its flash estimate for the
GDP trend in the eurozone for Q4/2016 in late
January. Contrary to custom, there have been no
preliminary results published as yet by the EU
member states. According to the indicators
available to date, anything but a continuation of
the economic upswing would be a huge surprise.
Indeed, we expect a slight acceleration in the
pace of growth (forecast: +0.5 percent qoq),
given that the two heavyweight economies Ger-
many and France registered significant expan-
sion at year-end 2016. Above all the industry
activity in both countries has picked up pace,
with corresponding effects on exports.
Moreover, we expect Spain to report similarly
high GDP growth as in the preceding quarters,
and Italy is not likely to have had a greater brak-
ing effect than usual. The indicators at the ag-
gregate level are pointing in the same direction.
This relates to the ongoingly solid performance
of consumption, strong growth in industrial out-
put and a correspondingly significant improve-
ment in business confidence. The upshot is that
2016 as a whole saw GDP in the eurozone up by
1.7 percent as against the preceding year.
Leading indicators signal sustained upswing
The leading indicators have improved quite sig-
nificantly in recent months, thus signalling a sus-
tained economic upswing. January saw the Mar-
kit PMIs register levels of 55.1 points (industry)
and 53.6 points (services) that were well inside
the growth zone, before which the sentix eco-
nomic index had improved markedly to 18.2
points. In addition, the ZEW economic expecta-
tions registered a level of 23.2 balance points –
its highest for more than a year.
And, with 107.8 points in December as month
under review, the Economic Sentiment indicator
reached its highest level since early 2011. This is
attributable to improvements in all subcompo-
nents. With the exception of Greece, the index
for business confidence in the meantime stands
above the long-term median (see chart). Com-
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 5 von 24
pared to mid-2016, optimism has grown to what
is in some cases a considerable degree – de-
spite Brexit and Trump!
Positive sentiment in the winter half-year
* Bars: historical span; Source: Bloomberg, Eurostat, NORD/LB Economics
ECB unimpressed by rising inflation
At its January meeting, the ECB's Governing
Council showed itself to be markedly unim-
pressed by the rise in inflation at year-end 2016.
The rate of inflation in Germany rose somewhat
more than had been forecast, to 1.7 percent in
year-on-year comparison. The rise to 1.1 percent
yoy in the single currency area as a whole was in
line with expectations, however, with base ef-
fects in the oil price playing a decisive role in this
respect. The signs are that January too will have
seen a continuation of the upward trend, and we
anticipate a year-on-year inflation rate around
the 2-percent mark for Germany and 1.6 percent
for the eurozone. The inflation rates can already
be expected to decline significantly in the spring,
however.
Primarily due to external special factors, inflation
is moving in the direction sought by the Govern-
ing Council, but its members have yet to see any
signs of a "convincing upward trend in core infla-
tion". Consequently, the ECB left its monetary
policy (key interest rates, purchasing volume)
unchanged. Instead, ECB President Mario
Draghi warned anew against downside risks for
the macroeconomic forecasts. A detail of the rule
adopted in December to modify the ECB's asset
purchase programme by removing the deposit
rate as minimum yield floor has now been con-
cretized, to the effect that "priority" will continue
to be given to securities with a yield above the
deposit rate. The ECB no doubt wishes to pre-
vent any further fuelling of the rise in long-term
government bond yields through the modifica-
tions to the rules.
Fundamental forecasts, Euroland
2016 2017 2018
GDP 1.7 1.6 1.7
Private consumption 1.8 1.5 1.3
Govt. consumption 2.0 1.8 1.5
Fixed investment 2.4 1.7 3.0
Net exports 1 -0.1 0.2 0.3
Inflation 0.2 1.6 1.5
Unemployment rate 2 10.1 9.6 9.3
Budget balance 3 -1.8 -1.8 -1.6
Current acc. balance 3 3.4 2.9 2.7
Change vs previous year as percentage; 1 as contribution to GDP growth; 2 as percentage of the labour force; 3 as per-centage of GDP
Quarterly forecasts, Euroland
I/16 II/16 III/16 IV/16 I/17
GDP qoq 0.5 0.3 0.3 0.5 0.4
GDP yoy 1.7 1.7 1.7 1.7 1.6
Inflation yoy 0.0 -0.1 0.3 0.7 1.7
Change as percentage
Interest rates, Euroland
26.01. 3M 6M 12M
Repo rate ECB 0.00 0.00 0.00 0.00
3M rate -0.33 -0.33 -0.34 -0.35
10Y Bunds 0.48 0.30 0.50 0.80
Coming Up…
Date Indicator Previous
value
30.01. Economic Sentiment Jan 107.8
30.01. Industry confidence Jan 0.1
30.01. Service confidence Jan 12.9
31.01. Unemployment rate Dec 9.8%
31.01. GDP q, initial report Q4 0.3%
31.01. HICP Flash Estimate y Jan 1.1%
02.02. Producer prices y Dec 0.1%
03.02. Retail sales m Dec -0.4%
06.02. Sentix Investor Confid. Feb 18.2
14.02. Industrial output m Dec 1.5%
14.02. ZEW expectations Feb 23.2
17.02. Construction output m Dec 0.4%
20.02. Consumer confid., prel. Feb -4.9
m mom, q qoq, y yoy, italics: preliminary result Current forecasts in our weekly calendar
Source: Bloomberg, NORD/LB Economics
60
70
80
90
100
110
120
130Index
Economic Sentiment indicator *
Level six months agoCurrent level (Dec. 2016)
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 6 von 24
Germany Christian Lips
• Economy grew by 1.9 percent in 2016
• Trump dampens business sentiment
• 2017 with continued upswing – inflation
temporarily above the 2-percent mark
Economy grew by 1.9 percent in 2016
The German economy gave a very solid showing
in 2016, with growth accelerating in spite of sev-
eral negative events (e.g. Brexit). The Federal
Statistical Office's flash estimate puts a figure of
1.9 percent on real GDP expansion as against
the preceding year. This means that the forecast
of 2.0 percent that we made a year ago has
proven quite accurate. A lack of data on Decem-
ber in some cases made it necessary for the
statisticians to rely on estimates for Q4. We ex-
pect the last three months of 2016 to have seen
quarter-on-quarter growth of at least 0.5 percent,
with industrial output and retail sales having
shown a healthy trend up to November. Both
consumption as well as net exports again con-
tributed to the German economy's growth.
Contributions to GDP growth
Source: Bloomberg, Destatis, NORD/LB Economics
Taking account of the fact that 2016 had one
working day more than the preceding year
makes for a calendar-adjusted growth figure of
1.8 percent (swda). As expected, domestic de-
mand was the mainstay behind the growth trend.
The key growth driver was private consumption,
with strong expansion of 2 percent, while public
consumption actually rose by an impressive 4.2
percent – its highest growth since 1992. The
main reason behind this trend lies in the gov-
ernment spending necessitated by the high influx
of refugees which, as was to be expected, had
the effect of a small stimulus package. With
growth of 3.1 percent, construction investment
too made a weighty contribution to Germany's
macroeconomic expansion. By contrast, net
exports and investment in equipment (+1.7 per-
cent) gave a disappointing showing over the year
as a whole. The former is attributable to the
modest economic momentum at the global level,
the latter to the diversity of political uncertainties.
Trump dampens business sentiment
The sentiment among German companies has
clouded to an unexpectedly significant extent at
the start of the year, as reflected in the ifo busi-
ness climate index which fell from 111.0 to just
109.8 points in January. It can at least be said
that the polled respondents again see the current
business situation in a somewhat better light
than in the month before (116.9 points), and the
sentix and ZEW surveys delivered similar re-
sults. The Markit PMI too is signalling a strong
growth trend in the industrial sector at the begin-
ning of the year. That said, the sharp decline
registered by the ifo expectations component
(103.2 points) is a source of some concern,
however. Indeed, it looks as if Germany's com-
panies were taken unawares by Trump's verbal
abuse. Hopes of a President Trump who acts
more moderately than candidate Trump have
been quickly dashed. The ifo export expectations
improved significantly, but in our view this trend
merely confirms the still high foreign demand at
present. Should Trump prove serious about his
protectionist intentions, there is every reason to
expect the global economic wind to turn icy. The
first days of Trump's presidency have already
seen him initiate America's exit from the TPP
and preparations for NAFTA renegotiations. This
means that the TTIP is virtually dead as well.
2017 with continued upswing – inflation
temporarily above the 2-percent mark
The German economy is fundamentally in a ro-
bust state, however, even if the headwind is
getting harsher. Besides the new element of
uncertainty in the person of Trump, the Brexit
negotiations will be commencing in the foresee-
able future as well. Moreover, Europe faces a
year of crucial elections, in the Netherlands,
France and Germany, the results of which could
be decisive for the future of the EU. The compa-
nies are likely to remain cautious with invest-
ments in light of this great uncertainty, for which
3.0
1.7
0.0
-0.7
1.20.7
3.73.3
1.1
-5.6
4.13.7
0.50.5
1.61.71.9
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
2000 2002 2004 2006 2008 2010 2012 2014 2016
PP, yoy
Net exports InventoriesGr. fixed capital form. Gov't. consumptionPrivate consumption GDP growth
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 7 von 24
reason we expect 2017 to see moderate GDP
growth of 1.5 percent. We anticipate inflation to
rise temporarily above the 2-percent mark after
already having risen to 1.7 percent yoy in De-
cember. Spring will already see the annual rate
drop back, however, and likely to stabilize below
the 2.0 percent yoy mark over 2017 as a whole.
Fundamental forecasts, Germany
2016 2017 2018
GDP 1.9 1.5 1.6
Private consumption 2.0 1.3 1.4
Govt. consumption 4.2 2.6 1.9
Fixed investment 2.5 2.0 3.2
Exports 2.5 3.5 3.7
Imports 3.4 3.5 4.2
Net exports 1 -0.1 0.2 0.1
Inflation 2 0.4 1.8 1.7
Unemployment rate 3 6.1 5.9 5.7
Budget balance 4 0.6 0.3 0.4
Current acc. balance 4 8.7 8.1 7.8
Change vs previous year as percentage; 1 as contribution to GDP growth; 2 HICP; 3 as percentage of the civil labour force (Federal Employment Office definition); 4 as percentage of GDP
Quarterly forecasts, Germany
I/16 II/16 III/16 IV/16 I/17
GDP qoq 0.7 0.4 0.2 0.6 0.4
GDP 1 yoy 1.5 3.1 1.5 1.4 3.2
Inflation yoy 2 0.1 0.0 0.4 1.0 2.0
Change as percentage; 1 not seasonally adjusted; 2 HICP
Coming Up…
Date Indicator Previous
value
30.01. HICP y, prel. Jan 1.7%
31.01. Retail sales m Dec -1.7%
31.01. Unemployment rate, sa Jan 6.0%
06.02. New orders m Dec -2.5%
07.02. Industrial output m Dec 0.4%
09.02. Trade balance (€ bn) Dec 22.7
09.02. Current account (€ bn) Dec 24.6
09.02. Exports m Dec 3.9%
09.02. Imports m Dec 3.5%
14.02. GDP q, prel. Q4 0.2%
14.02. ZEW expectations Feb 16.6
20.02. Producer prices y Jan 1.0%
22.02. ifo Business Climate Feb 109.8
23.02. GfK Consumer Confid. Mar 10.2
m mom, y yoy, q qoq, italics: preliminary result Current forecasts in our weekly calendar
Source: Bloomberg, Destatis, NORD/LB Economics
France Christian Lips
• 2016 ends with strong plus in output
• Sentiment significantly improved
• Fillon under pressure, quarrelling left –
Macron to have the last laugh?
Year-end 2016 saw the French economy with far
stronger growth than in the two preceding quar-
ters. In late January the INSEE statistical insti-
tute will issue a flash estimate on the GDP trend
in Q4/2016. We expect a quarter-on-quarter
growth figure of around 0.5 percent. The indus-
trial sector registered particularly strong expan-
sion, with manufacturing output up by an unex-
pectedly strong 2.3 percent mom. In addition,
there has been a considerable improvement in
sentiment. In January the Markit Composite PMI
registered its highest level since mid-2011, with
53.8 points, and the latest INSEE industry survey
too documented a brightening in business confi-
dence. Against this background the French
economy is likely to continue its positive trend in
Q1/2017. Whatever, the months ahead will be all
about France's political future. The current fa-
vourite to succeed Hollande, Francois Fillon, is
facing allegations of unjustified employment of
his wife at the state's expense. The first round of
the Socialists' primaries unexpectedly saw Be-
noît Hamon come in ahead of former prime min-
ister Manuel Valls. The chances of former econ-
omy minister Emmanuel Macron ("En marche!")
have gathered momentum in this environment,
and he has shown continuous improvement in
opinion polls. Given the degree of uncertainty
until the elections, the spread of French govern-
ment bonds to Bunds will remain elevated for the
time being. (Since going to press it is now known
that Mr. Hamon will be the Socialists’ candidate).
Fundamental forecasts, France
2016 2017 2018
GDP 1.2 1.3 1.6
Inflation (HICP) 0.3 1.4 1.4
Unemployment rate 1 9.9 9.4 9.1
Budget balance 2 -3.8 -3.6 -3.2
Current acc. balance 2 -1.2 -0.9 -0.7
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest rates and spreads, France
26.01. 3M 6M 12M
10Y 1.03 0.90 1.00 1.20
Spread 10Y Bund 54 60 50 40
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 8 von 24
Italy Frederik Kunze
• Aftermath of the December referendum
• Financial market as growth risk
• Investment reticence
There seems to be no end to the speculations as
to the possibility of early elections in the wake of
the failed referendum in December last year, the
resultant resignation of Matteo Renzi and the
subsequent formation of a new government un-
der former foreign prime minister Paolo Gentilo-
ni. This is naturally fuelling the political uncertain-
ty in the country – a situation that is without
doubt inconvenient since the domestic financial
market is already generating notable risks to the
economic expansion process. Indeed, there is
also the possibility that new elections could fo-
ment fears of Italy heading for an exit from the
EU. This scenario must continue to be seen as
being of a worst-case nature. Even so, the
aforementioned developments are weighing on
sentiment, which is also likely to be reflected in
the country's economic activity, with, above all,
negative impacts on the investment activities on
the part of the Italian business enterprises to be
reckoned with. All told, we are reckoning with
rather modest growth in 2017 and for 2018 as
well. All the same, the improving situation in the
labour market can be expected to generate sup-
portive stimuli in the direction of private con-
sumption. This view of things is underpinned by
the positive sentiment among the Italian con-
sumer surveys. That said, foreign trade has to be
considered a potentially negative factor.
Fundamental forecasts, Italy
2016 2017 2018
GDP 0.9 0.8 0.6
Inflation (HICP) -0.1 1.2 1.3
Unemployment rate 1 11.7 11.2 10.7
Budget balance 2 -2.5 -2.5 -2.5
Current acc. balance 2 2.6 1.8 1.5
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest rates and spreads, Italy
26.01. 3M 6M 12M
10Y 2.23 2.20 2.30 2.60
Spread 10Y Bund 175 190 180 180
Spain Frederik Kunze
• Spain (still) on an impressive growth path
• Ongoing political uncertainty
• Two-speed labour market
Spain can be expected to remain on its growth
path in 2017 as well, though the economic ex-
pansion process can be expected to lose mo-
mentum. Even if net exports are likely to contin-
ue generating positive contributions to the Span-
ish economy's growth for the time being, our
view is that foreign trade will follow a less dy-
namic trend as was the case in 2016. The do-
mestic market will remain the mainspring of GDP
growth for the moment, though the price trend
must not be ignored in this context. In Spain too,
the issue of inflation is back on the economic
policy agenda, and account must also be taken
of the risk of the ongoing state of political uncer-
tainty generating dampening effects on the coun-
try's economic activity. In actual fact, however, it
can safely be assumed that the signs of recovery
in the labour market will prospectively continue
bolstering growth on the domestic front. All the
same, it is important to note that the recovery on
the employment side is particularly attributable to
the service sector. In the manufacturing sector
and in the construction industry, however, there
are no notable signs of a turnaround in the la-
bour market, with account also to be taken of the
ongoingly high proportion of short-term employ-
ees. In sum, we expect to see GDP growth lose
pace at the latest in the course of 2018 while
nevertheless remaining substantial in compari-
son with the rest of the eurozone.
Fundamental forecasts, Spain
2016 2017 2018
GDP 3.2 2.3 1.9
Inflation (HICP) -0.3 1.9 1.3
Unemployment rate 1 19.8 18.0 16.4
Budget balance 2 -4.8 -3.6 -3.2
Current acc. balance 2 1.5 1.2 1.0
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest rates and spreads, Spain
26.01. 3M 6M 12M
10Y 1.57 1.50 1.60 1.90
Spread 10Y Bund 109 120 110 110
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 9 von 24
Switzerland Christian Lips
• Industrial output up in Q4
• Deflationary phase drawing to a close
• SNB: No rate change till late 2018?
Industrial Output up in Q4
Year-end 2016 saw the economic trend in Swit-
zerland recover some momentum, at least as
signalled by the majority of the currently availa-
ble indicators. The PMI for the manufacturing
sector registered an average level of almost 56
points in Q4 – its highest for three years. The
survey respondents saw particularly strong
growth in the subcomponents industrial output
(December: 58.9 points) and the order backlog
(December: 60.3 points). Values of this magni-
tude are as a rule only reached on the occasion
of cyclical boom phases. The depletion of the
inventories up to year-end was correspondingly
strong. That said, the healthy industrial activity
has not yet made for any stronger momentum on
the employment front.
Employment momentum merely slight at
present
Source: Bloomberg, NORD/LB Economics
Deflationary phase drawing to a close
The high level of demand is likely to have im-
pacted the purchase prices too in the meantime,
with the relevant PMI sub-index having climbed
to 59.5 points. Even so, we regard it as more
likely that it is primarily the higher oil price that is
reflected therein, having led almost everywhere
to a marked upward movement of the price in-
dex, both at the consumer price level as well as
at the upstream price levels. 2016 as a whole
saw the rate of inflation in Switzerland in the
negative zone again, with an annual average
year-on-year rate of -0.4 percent. But now, there
are gradual signs of this deflationary phase
drawing to a close, albeit very hesitantly and
slowly. 2017 and 2018 can be expected to at
least see a slightly positive rate of inflation again.
With year-on-year rates of 0.1 and 0.3 percent,
the price growth trend in the alpine republic re-
mains subdued, attributable in particular to the
ongoingly strong franc.
SNB: No rate change till late 2018?
The SNB is still prisoner of the ECB policy. After
the Governing Council's last meeting, ECB pres-
ident Mario Draghi had stated that, given the
latest inflation data, the ECB is not presuming
that the upward price trend is of a self-sustaining
nature. Accordingly, he strongly rebuffed any
modification of the roadmap for the central
bank's monetary policy just recently published in
December. Add to this a massive degree of polit-
ical uncertainty which has risen sharply again in
particular since Donald Trump's inauguration as
the 45th president of the USA. Both factors are
making for sustained upward pressure for the
Swiss franc against the euro, with the EUR/CHF
exchange rate falling below the mark of CHF
1.0700 per EUR in January. This confirms our
forecast that, above all in the first half-year, this
mark will be under repeated attack – despite all
interventions on the part of the SNB. Against this
background an interest rate change by the SNB
is becoming a more distant prospect. We are not
reckoning with any rate hike in Switzerland be-
fore late 2018, given that the ECB will only slow-
ly end its QE programme until year-end 2018,
but will not yet be adjusting the deposit rate.
Fundamental forecasts, Switzerland
2016 2017 2018
GDP 1.4 1.5 1.8
Inflation (CPI) -0.4 0.1 0.3
Unemployment rate 1 3.3 3.3 3.2
Budget balance 2 -0.1 0.2 0.1
Current acc. balance 2 10.5 11.0 11.0
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest and exchange rates, Switzerland
26.01. 3M 6M 12M
LIBOR target rate -0.75 -0.75 -0.75 -0.75
3M rate -0.73 -0.75 -0.75 -0.75
10Y -0.07 -0.30 -0.10 0.10
Spread 10Y Bund -56 -60 -60 -70
EUR in CHF 1.07 1.07 1.08 1.10
20
30
40
50
60
70-8
-4
0
4
8
12
1998 2002 2006 2010 2014
PointsThousand
Change unempl. Figure (mom)
PMI Employment (r/h scale, inverted)
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 10 von 24
Japan Dr. Stefan Grosse / Frederik Kunze
• Off to a good start into the new year
• Bank of Japan in focus
• Economic policy challenges
Off to a good start into the new year
It currently looks as if the Japanese economy
has got off to a good start into the new year.
Both the cheap yen as well as the revival of the
global economy have come to the assistance of
the exports-oriented companies in particular,
with exports accordingly up significantly in No-
vember and December. Even though the imports
trend remained considerably weaker, we can
likewise talk of a trend reversal in this case, and
this is also an indication of rising domestic con-
sumption. The prospects likewise appear to be
good, with, for example, the Nikkei Manufactur-
ing PMI yet again rising, this time from the pre-
ceding month's 51.3 points to a current level of
52.4 points – a trend that certainly indicates
strong momentum in the manufacturing sector.
There are signs of relatively lively economic ac-
tivity in the services segment as well: the Nikkei
Services PMI climbed by 0.5 to 52.3 points. All in
all, we are maintaining our assessment that the
world's third largest economy will grow by 1.3
percent in 2017. Although we are not currently
anticipating a renewed depreciation of the Japa-
nese currency against the US dollar, the weak
yen will make a positive contribution to growth in
the newly started year as well. Private consump-
tion will be the mainspring of the economic ex-
pansion process, which not least underlines the
importance of a stable labour market and dy-
namic growth in disposable income.
Bank of Japan in focus
Having first made for headlines in January 2016
with the introduction of negative interest rates,
the central bankers in Tokyo changed direction
in terms of their own monetary policy by initiating
yield curve control. The focus is now on the
BoJ's meeting set to start on 30 January. The
publication of the Japanese central bank's fore-
cast report in particular is likely to provide quite
some market-relevant information which, besides
the GDP growth forecast, will above all include
the outlook for price developments. The mone-
tary policymakers have after all been tardy in
delivering more dynamic consumer price infla-
tion. The BoJ's January meeting is unlikely to
see any changes made in terms of monetary
policy orientation – such as an adjustment of the
yield target for 10-year government bonds. In
particular the reactions in the international finan-
cial markets to the reports from the United States
are – not least due to the weaker yen – reducing
the pressure on the monetary policymakers
headed by central bank's governor Haruhiko
Kuroda.
Economic policy challenges
Having been set as the date for a meeting be-
tween the new US president Donald Trump and
Shinzo Abe, 10 February could be an important
date for the US-Japanese trade relations. 10
February could be an important day for the US-
Japanese trade relations. In particular Tokyo has
of late expressed readiness for quite far-reaching
agreements, and the negative attitude displayed
by Donald Trump towards the Trans-Pacific
Partnership (TPP) is the source of corresponding
headaches for the Japanese government. The
proposed trade agreement which, besides Japan
and the United States, would also have included
Asian countries such as Singapore, Malaysia
and Vietnam, would after all have come about
without Chinese participation, and Beijing could
now – to the detriment of Japan – strive for a
solution of its own. Abe will endeavour to prevent
this result.
Fundamental forecasts, Japan
2016 2017 2018
BIP 1.0 1.3 0.5
Inflation -0.2 1.0 1.9
Arbeitslosenquote1 3.1 3.2 3.6
Haushaltssaldo2 -5.5 -5.2 -5.0
Leistungsbilanzsaldo2 3.8 3.4 3.3
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest and exchange rates, Japan
26.01. 3M 6M 12M
Call rate 0.00 -0.40 -0.40 -0.40
3M -0.02 -0.05 -0.10 -0.10
10Y 0.09 0.07 0.08 0.15
Spread 10Y Bund -39 -23 -42 -65
EUR in JPY 122 123 124 129
USD in JPY 115 113 113 117
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 11 von 24
China Frederik Kunze
• China as champion of free trade?
• Robust economic activity
• PBOC in a quandary
China as champion of free trade?
It seems almost absurd at first glance that, in an
environment in which more and more market
observers fear US protectionism, Chinese Presi-
dent Xi Jinping of all people is presenting himself
as a champion of free trade. The motives behind
this are anything but far-fetched, however. Bei-
jing has an interest in there being as few barriers
as possible, bearing in mind both the significant
proportion of China's GDP accounted for by ex-
ports as well as the ambitious plans within the
framework of its own going-global strategy. That
said, at this point it ought not to be forgotten that
the decision-makers in China too are not exclu-
sively devoted to the global common good –
though there is not likely to be an openly de-
clared "China First" movement.
Robust economic activity
The statistical authorities have attested dynamic
year-on-year growth of 6.8 percent in Q4, which
makes for a GDP growth figure of 6.7 percent for
2016 as a whole. The previously released PMI
results – and the data on the price trend – are
likewise signalling robust economic activity, with
both the CFLP Manufacturing PMI and the SME-
focussed Caixin index indicating acceleration in
growth. The service sector is likewise registering
ongoingly positive sentiment. Indeed, the service
sector remains one of the biggest hopes as re-
gards the restructuring of the growth model. The
official statistics say that the tertiary sector made
the biggest contribution to GDP in Q4, account-
ing for 52 percent thereof and registering im-
pressive year-on-year growth of 8.3 percent.
With the industrial enterprises in mind, the price
trend can be understood as indicating a certain
easing of the situation in that sector of the Chi-
nese economy. The end of the downward trend
in producer prices is at least curbing the debate
as to an overcapacities-induced price decline.
December saw the PPI rise by 5.5 percent yoy,
and it will now be a matter of what leeway the
industrial companies have for passing on these
increases. We would not yet be inclined to over-
interpret the declining growth in corporate profits
in the manufacturing sector (from the previous
month's year-on-year figure of 14.5 percent to
2.3 percent) since the time series is quite highly
volatile.
PBOC in a quandary
The level of corporate debt remains a challenge
for the PBOC, with December registering a re-
newed pronounced lending volume. The new
RMB loans alone totalled RMB 1,040 billion in
that month, which suggests that the current eco-
nomic activity is still being bought with rising
debt. In conjunction with the trend towards over-
heating in the financial markets as well as the
globally rising interest rate levels, the pressure
on the PBOC is – at least theoretically – growing
to put a more restrictive monetary policy in place.
The raising of the rates for what is in monetary
policy terms the important Medium Term Financ-
ing Liquidity (MLF) as reported a few days ago
can be put in this context. Nevertheless, the
state of tension in which the PBOC currently
finds itself is reflected in the recent (temporary)
reduction of the minimum reserve requirements
for large state-owned banks. Above all touching
the key interest rates harbours highly unpredict-
able risks. Rising interest rates would ultimately
become a burden on the debt-ridden companies,
while falling rates would probably fuel the credit
channel further.
Fundamental forecasts, China
2016 2017 2018
GDP 6.7 6.4 6.3
Inflation 2.0 2.8 3.0
Unemployment rate 1 4.2 4.2 4.3
Budget balance 2 -3.5 -3.5 -3.6
Current acc. balance 2 2.5 2.5 1.9
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest and exchange rates, China
26.01. 3M 6M 12M
Deposit rate 1.50 1.50 1.50 1.50
3M SHIBOR 3.87 3.10 3.15 3.20
10Y 3.37 3.15 3.20 3.30
Spread 10Y Bund 289 285 270 250
EUR in CNY 7.35 7.61 7.87 8.05
USD in CNY 6.88 7.05 7.15 7.25
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 12 von 24
Britain Tobias Basse, Bernd Krampen
• May goes for a hard Brexit
• Q4 with very solid GDP growth
• Bank of England in a dilemma
Theresa May presented her notions of a hard
Brexit but left the concrete method of approach
largely open. She would like to see the country
leaving the single market in order to be able to
restrict the free movement of workers. The Prime
Minister is also aiming to leave the customs un-
ion and conclude new trade agreements ("Global
Britain"). Her words ultimately sounded a little bit
like "cherry-picking". Her aim is to trigger Article
50 by the end of March, and the Supreme
Court's decision that the government needs par-
liamentary approval to do so is not likely to stop
her. The British economy has proven remarkably
resilient in the meantime, as confirmed by robust
qoq GDP growth of 0.6 percent in Q4. All the
same, the fears among many consumers of ris-
ing prices and thus dwindling purchasing power
appear to be growing, as the decline in retail
sales could be indicating. The inflation rate in
consumer prices climbed in the wake of the
pound depreciation to a year-on-year level of 1.6
percent and will soon have a "2" in front of the
decimal point. The Bank of England thus finds
itself in a dilemma: on the one hand it has to
ensure price stability and, on the other, take over
the cushioning of the looming Brexit-induced
economic slowdown. The pound remains under
pressure.
Fundamental forecasts, Britain
2016 2017 2018
GDP 2.0 0.8 0.4
Inflation (CPI) 0.6 2.4 2.5
Unemployment rate 1 5.0 5.5 5.8
Budget balance 2 -3.9 -4.4 -5.0
Current acc. balance 2 -5.0 -5.0 -4.5
Change vs previous year as percentage; 1 as percentage of the labour force as per ILO concept; 2 as percentage of GDP
Interest and exchange rates, Britain
26.01. 3M 6M 12M
Repo rate 0.25 0.25 0.25 0.25
3M 0.36 0.40 0.40 0.40
10Y 1.52 1.40 1.50 1.60
Spread 10Y Bund 103 110 100 80
EUR in GBP 0.85 0.90 0.90 0.95
GBP in USD 1.26 1.20 1.22 1.17
Canada Tobias Basse, Bernd Krampen
• Solid growth in the second half of 2016
• Anxious glances southwards
• BoC remains in wait-and-see mode
The Canadians are continuing to keep a worried
eye on their southern neighbour where new
president Trump is preparing to sound out new
rules in trade with Canada as well. That said, the
Canadian economy is currently back in better
shape than a year ago, with Q3 registering an-
nualized quarter-on-quarter GDP growth of 3.5
percent and Q4 likely to have seen a solid trend
as well. This is suggested by the economic indi-
cators and the brightening mood in the corporate
sector. In particular the energy sector is experi-
encing a turnaround after the negative oil price-
induced effects, as reflected in an upward trend
on the investment front. Despite the rising oil
prices of late and Justin Trudeau's supportive
fiscal policy as positive factors, the outlook for
Canada remains precarious, however, given that
the country is strongly dependent on exports to
the USA with which there could well be trade
friction. On the other hand, the expansionary
fiscal policy to be expected there could also
generate stimuli for the Canadian economy.
While base effects are likely to make for a slight
rise in inflation, this trend can be expected to be
more moderate again in the second half-year.
The Bank of Canada is accordingly likely to re-
main in wait-and-see mode, so the capital mar-
ket rates too will only rise marginally. The loonie
will merely moderately depreciate.
Fundamental forecasts, Canada
2016 2017 2018
GDP 1.3 1.9 1.9
Inflation 1.4 1.9 2.0
Unemployment rate 1 7.0 6.9 6.7
Budget balance 2 -1.2 -1.6 -1.5
Current acc. balance 2 -3.5 -2.7 -2.1
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest and exchange rates, Canada
26.01. 3M 6M 12M
O/N target rate 0.50 0.50 0.50 0.50
3M 0.46 0.50 0.55 0.80
10Y 1.82 1.60 1.70 1.90
Spread 10Y Bund 134 130 120 110
EUR in CAD 1.40 1.43 1.47 1.51
USD in CAD 1.31 1.32 1.34 1.36
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 13 von 24
Mexico Tobias Basse, Bernd Krampen
• Banxico could well act again
• Trump makes for deep worry lines
• MXN remains under pressure
After five rate hikes totalling 250 bp in 2016,
Banxico could find itself forced to take renewed
action in early 2017. First, the depreciation of the
Mexican peso continued, a trend that could pro-
spectively make for increasing inflationary pres-
sure. Second, further inflationary pressure can
be expected as result of increases in the mini-
mum wage and petrol prices. While central bank
chairman Cartens stressed that the latter two
factors are merely having a temporary effect, we
can nevertheless well imagine a renewed 50 bp
rate hike being decided at the next meeting on 9
February, with the likelihood of a further two
moderate hikes in the further course of the year.
Sentiment in America's southern neighbour has
cooled significantly in the wake of the US presi-
dential election. There is considerable uncertain-
ty about Trump's intentions, and his announce-
ment that work is to soon start on the construc-
tion of a wall along the border is poisoning the
relations between the two countries. Mexico
would be hardest hit if protectionist measures
were to be implemented, and it remains to be
hoped that Congress will largely put paid to
Trump's interventions in trade policy. The rising
interest rates, Nieto's more restrictive fiscal poli-
cy and the reticence in investment are weighing
on the economy, however, though exports and
remittances could benefit from the weak peso.
Fundamental forecasts, Mexico
2016 2017 2018
GDP 2.1 1.7 1.8
Inflation 2.8 4.1 3.7
Unemployment rate 1 4.0 4.1 4.2
Budget balance 2 -3.0 -2.5 -2.5
Current acc. balance 2 -3.0 -3.0 -2.8
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest and exchange rates, Mexico
26.01. 3M 6M 12M
O/N target rate 5.75 6.25 6.50 6.75
3M 6.34 6.60 6.90 7.20
10Y 7.59 8.00 8.30 8.50
Spread 10Y Bund 711 770 780 770
EUR in MXN 22.66 22.68 24.20 24.42
USD in MXN 21.21 21.00 22.00 22.00
Australia Tobias Basse, Bernd Krampen
• Negative GDP in Q3 merely a blip
• RBA takes wait-and-see stance
• A$ stabilized of late – but just temporarily
Q3/2016 saw Australia register its first GDP
downturn after an impressive 21 consecutive
quarters of growth. That said, there are good
reasons for expecting a significant upturn in Q4,
as indicated by the sound monthly indicators:
retail sales grew in October and November, sup-
ported by low interest rates and growing assets,
not least attributable to generally higher real
estate prices. Consumption is registering a
healthy trend in the wake of a basic brightening
in the labour market, with the unemployment rate
down and employment growth continuing its
upward trend – albeit primarily driven by part-
time jobs. The sentiment in the corporate sector
has improved significantly, due not only to robust
domestic demand but also to rising commodity
prices and the stable growth situation in China.
Following two interest rate cuts in 2016, the Re-
serve Bank of Australia has seen no grounds of
late for any further action against a background
of falling inflation rates and, with inflation in mind,
rising house prices, a depreciation of the Austral-
ian dollar and, on the other hand, the global im-
ponderables. In this respect, both Trump's poli-
cies as well as China remain relevant for Down
Under.
Fundamental forecasts, Australia
2016 2017 2018
GDP 2.4 2.6 2.8
Inflation 1.3 2.1 2.2
Unemployment rate 1 5.7 5.7 5.6
Budget balance 2 -2.5 -2.2 -1.6
Current acc. balance 2 -3.1 -2.6 -2.3
Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP
Interest and exchange rates, Australia
26.01. 3M 6M 12M
Cash target rate 1.50 1.50 1.50 1.50
3M 1.77 1.75 1.75 1.75
10Y 2.75 2.75 2.75 2.75
Spread 10Y Bund 226 245 225 195
EUR in AUD 1.42 1.45 1.49 1.52
USD in AUD 1.33 1.34 1.35 1.37
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 14 von 24
Changes
Australia is included in our coverage as of now.
Please note:
The historical data given in this publication originate from Feri and Bloomberg (financial market time series). All
financial market time series (exchange and interest rates, yields) are shown on the basis of the closing rates.
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 15 von 24
Yields
(in %)
NORD/LB forecasts
for horizons
current 3M 6M 12M
3M -0.33 -0.33 -0.34 -0.35
1Y -0.62 -0.65 -0.65 -0.60
2Y -0.66 -0.70 -0.65 -0.60
3Y -0.66 -0.70 -0.62 -0.48
4Y -0.53 -0.60 -0.50 -0.33
5Y -0.38 -0.45 -0.35 -0.15
6Y -0.18 -0.30 -0.18 0.02
7Y -0.03 -0.15 -0.02 0.20
8Y 0.13 0.01 0.15 0.39
9Y 0.30 0.15 0.32 0.59
10Y 0.46 0.30 0.50 0.80
Source: Bloomberg, NORD/LB Economics
Assessment: Inflation picked up pace in December as expected. Above all base effects in oil prices con-
tributed to this trend. While Q1 can be expected to see this upward trend continue in the short term, a self-
sustaining upward trend in prices is not yet in sight, however, since the domestic price pressure remains
very slight. The yields on government bonds have climbed in parallel. The medium-term downward trend
where German Bunds (10Y) are concerned has stopped, for which reason a certain degree of caution is
advisable from a technical perspective. That said, declining inflation rates are to be reckoned with at the
latest in spring, which will without doubt put high political risks more intensively in the focus of investors. In
the wake of the most recent market movements we no longer see, also for the phase before the French
presidential election, the risk of a collapse in yields on Bunds being as high as in the preceding month. In
the medium term the long-term government bond yields can be expected to continue rising on occurrence
of our baseline scenario, even if the influence of the ECB remains limited. Positive total returns are not to
be expected against this background.
Total Returns (in %)
for horizons
3M 6M 12M
3M -0.08 -0.16 -0.34
1Y -0.13 -0.30 -0.62
2Y -0.11 -0.34 -0.71
3Y -0.06 -0.01 -0.78
4Y 0.22 -0.17 -0.68
5Y 0.43 0.03 -0.56
6Y 0.83 0.35 -0.34
7Y 0.97 0.37 -0.37
8Y 1.26 0.55 -0.35
9Y 1.65 0.67 -0.43
10Y 2.06 0.73 -0.66
Source: NORD/LB Economics
A total return is the absolute profit from an investment in the time period under consideration, with account being taken of the pro-
rata yields plus the price gains or losses to be anticipated on the basis of the forecast yield curve change.
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
3M 1 2 3 4 5 6 7 8 9 10
% Yield curve forecasts
Current 3M 6M 12M
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
3M 1 2 3 4 5 6 7 8 9 10
%Expected total returns
3M 6M 12M
Yield curve, Euroland
Portfolio strategies
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 16 von 24
3-month horizon
Expected total returns (as %) Expected total returns (as %)
in euro in national currencies
EUR USD GBP JPY CHF USD GBP JPY CHF
3M 3M
1Y -0.1 -0.8 -5.6 -0.5 -0.3 1Y 0.2 0.1 -0.1 -0.1
2Y -0.1 -0.4 -5.5 -0.5 -0.1 2Y 0.7 0.2 0.0 0.0
3Y -0.1 0.0 -5.4 -0.4 0.1 3Y 1.0 0.3 0.0 0.3
4Y 0.2 0.2 -5.2 -0.4 0.4 4Y 1.3 0.5 0.0 0.5
5Y 0.4 0.4 -5.2 -0.4 0.9 5Y 1.5 0.6 0.0 1.1
6Y 0.8 0.8 -4.8 -0.4 1.0 6Y 1.8 1.0 0.0 1.1
7Y 1.0 1.0 -4.7 -0.3 1.6 7Y 2.0 1.0 0.2 1.8
8Y 1.3 1.2 -4.6 -0.3 2.0 8Y 2.3 1.2 0.1 2.1
9Y 1.6 1.7 -4.4 -0.3 1.9 9Y 2.7 1.4 0.1 2.1
10Y 2.1 2.0 -4.1 -0.2 2.0 10Y 3.1 1.7 0.2 2.1
Short-term 3M strategy (in euro): Once again we see chances for positive total returns on investments in
European government bonds (Bunds) in the medium and long-term segments. Positive total returns are
also a likely possibility where investments in the US dollar and, above all, the Swiss franc are concerned –
in each case (virtually) along the entire maturity curve. No consideration should on the other hand be giv-
en to the Japanese yen and, above all, the pound sterling as investment alternatives.
12-month horizon
Expected total returns (as %) Expected total returns (as %)
in euro in national currencies
EUR USD GBP JPY CHF USD GBP JPY CHF
3M 3M
1Y -0.6 -2.9 -10.6 -5.3 -3.8 1Y 0.8 0.1 -0.3 -1.0
2Y -0.7 -2.5 -10.5 -5.4 -3.7 2Y 1.3 0.1 -0.3 -0.8
3Y -0.8 -2.0 -10.5 -5.4 -3.5 3Y 1.8 0.2 -0.4 -0.6
4Y -0.7 -1.5 -10.2 -5.4 -3.3 4Y 2.3 0.5 -0.4 -0.5
5Y -0.6 -1.4 -10.2 -5.5 -3.1 5Y 2.4 0.5 -0.5 -0.2
6Y -0.3 -1.2 -9.8 -5.5 -3.2 6Y 2.6 0.9 -0.5 -0.4
7Y -0.4 -1.0 -9.8 -5.3 -2.9 7Y 2.9 1.0 -0.3 -0.1
8Y -0.4 -0.8 -9.6 -5.2 -2.9 8Y 3.1 1.2 -0.2 0.0
9Y -0.4 -0.7 -9.4 -5.2 -3.4 9Y 3.2 1.4 -0.1 -0.5
10Y -0.7 -0.4 -9.1 -4.9 -3.6 10Y 3.5 1.7 0.1 -0.7
Source: NORD/LB Economics
Long-term 12M strategy (in euro): Seen from the longer-term perspective, European government bonds
(Bunds) are only likely to generate negative total returns. A necessary portfolio diversification is again a
difficult undertaking at the current time, however, with the total returns on the other currencies under con-
sideration in some cases lying well within the negative zone as well.
International yield curve overview – 3-month and 12-month horizons
Portfolio strategies
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 17 von 24
Level as at Status Performance since
26.01.2017 Prev. month Start of year Prev. month Start of year
DAX 11,848.63 11,481.06 11,481.06 3.20% 3.20%
MDAX 22,861.96 22,188.94 22,188.94 3.03% 3.03%
EuroSTOXX50 3,319.13 3,290.52 3,290.52 0.87% 0.87%
STOXX50 3,043.15 3,010.55 3,010.55 1.08% 1.08%
STOXX600 367.50 361.42 361.42 1.68% 1.68%
Dow Jones 20,068.51 19,762.60 19,762.60 1.55% 1.55%
S&P 500 2,298.37 2,238.83 2,238.83 2.66% 2.66%
Nikkei 19,402.39 19,114.37 19,114.37 1.51% 1.51%
Source: Bloomberg, NORD/LB Economics
Assessment: The mood in the international stock markets remains highly positive. Especially in the USA,
the market participants are apparently continuing to expect a positive development of the economy. The
chase after records continues. Against this background the S&P 500 has overstepped the 2,300-points
mark, and the Dow Jones Industrial Average now stands above the 20,000-points mark. Donald Trump
twittered "great!" on hearing about this. He is in fact not entirely uninvolved in this development. Hopes of
deregulation measures and tax cuts in the USA are bolstering the prices of stocks. In this environment, the
uncertainties in respect of the new government's trade policy are taking a back seat, particularly as re-
gards the US stock market. Seen from a fundamental perspective, however, common stocks in the United
States are now certainly no longer attractively valued. Based on the consensus earnings estimate for
2017, the S&P 500 price-earnings ratio currently stands at just above 17.5, for example. Above all a rise in
risk aversion among investors could become a problem in this environment. In our view, there are already
grounds for concern among investors, one example in this respect being the possibility of a trade war be-
tween the USA and China. Furthermore, a large number of market participants appear to be seeing the
US economy in what is a quite optimistic light. In particular, as we see it, no bets should be placed on the
new economic policy in Washington already making for sustained added growth in the USA in the course
of 2017. Positive effects of the tax cuts are hardly likely to be expected even in the second half-year. The
infrastructure measures (if implemented at all) will not be generating supportive effects on the economic
activity in the United States until 2018 at the earliest, for which reason risks are being largely factored out.
This makes the environment already hazardous for investors. Significant uncertainties arise for Asia as
well. The weak yen is at any rate prospectively likely to help the Nikkei.
Index NORD/LB forecasts
for the horizons
3M 6M 12M
DAX 11800 11000 11500
MDAX 22800 21600 22400
EuroSTOXX50 3350 3150 3300
STOXX50 3050 2900 3000
STOXX600 370 350 365
Dow Jones 19500 19300 19600
S&P 500 2225 2215 2250
Nikkei 19000 19100 19200
Source: Bloomberg, NORD/LB Economics. You will find further up-to-date news in our Strategy Weekly publication.
1300
1500
1700
1900
2100
2300
2500
2400
2600
2800
3000
3200
3400
3600
27.01.2016 27.04.2016 27.07.2016 27.10.2016 27.01.2017
EuroSTOXX50 200-day-line
S&P 500 (r/h scale) 200-day-line (r/h scale)
Stock market strategy – 3-month, 6-month and 12-month horizons
Portfolio strategies
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 18 von 24
Fundamental forecasts
in % GDP growth Rate of inflation Unemployment rate
1 Budgetary balance
2
2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018
USA 1.6 2.3 2.2 1.3 1.8 2.3 4.9 4.8 4.7 -4.2 -5.7 -5.9
Euroland 1.7 1.6 1.7 0.2 1.6 1.5 10.1 9.6 9.3 -1.8 -1.8 -1.6
Germany 1.9 1.5 1.6 0.4 1.8 1.7 6.1 5.9 5.7 0.6 0.3 0.4
France 1.2 1.3 1.6 0.3 1.4 1.4 9.9 9.4 9.1 -3.8 -3.6 -3.2
Italy 0.9 0.8 0.6 -0.1 1.2 1.3 11.7 11.2 10.7 -2.5 -2.5 -2.5
Spain 3.2 2.3 1.9 -0.3 1.9 1.3 19.8 18.0 16.4 -4.8 -3.6 -3.2
Japan 1.0 1.3 0.5 -0.2 1.0 1.9 3.1 3.2 3.6 -5.5 -5.2 -5.0
Britain 2.0 0.8 0.4 0.6 2.4 2.5 5.0 5.5 5.8 -3.9 -4.4 -5.0
Switzerland 1.4 1.5 1.8 -0.4 0.1 0.3 3.3 3.3 3.2 -0.1 0.2 0.1
China 6.7 6.4 6.3 2.0 2.8 3.0 4.2 4.2 4.3 -3.5 -3.5 -3.6
Canada 1.3 1.9 1.9 1.4 1.9 2.0 7.0 6.9 6.7 -1.2 -1.6 -1.5
Mexico 2.1 1.7 1.8 2.8 4.1 3.7 4.0 4.1 4.2 -3.0 -2.5 -2.5
Australia 2.4 2.6 2.8 1.3 2.1 2.2 5.7 5.7 5.6 -2.5 -2.2 -1.6
Change vs previous year as percentage; 1 as perc. of the labour force (Germany: as per Federal Employment Office definition);
2 as perc. of GDP
Source: Feri, NORD/LB Economics
Key rates Exchange rates
in % EUR
26.01.17 3M 6M 12M in... 26.01.17 3M 6M 12M
USD 0.75 0.75 1.00 1.25
USD 1.07 1.08 1.10 1.11
EUR 0.00 0.00 0.00 0.00 JPY 122 123 124 129
JPY 0.10 -0.40 -0.40 -0.40 GBP 0.85 0.90 0.90 0.95
GBP 0.25 0.25 0.25 0.25 CHF 1.07 1.07 1.08 1.10
CHF -0.75 -0.75 -0.75 -0.75 CNY 7.35 7.61 7.87 8.05
CNY 1.50 1.50 1.50 1.50 CAD 1.40 1.43 1.47 1.51
CAD 0.50 0.50 0.50 0.50 MXN 22.66 22.68 24.20 24.42
MXN 6.25 6.25 6.50 6.75 AUD 1.42 1.45 1.49 1.52
AUD 1.50 1.50 1.50 1.50
Source: Bloomberg, NORD/LB Economics
Interest rates (government bonds)
3M rates Yields 2Y Yields 5Y Yields 10Y
26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M
USD 1.04 0.95 1.10 1.30 1.22 1.10 1.15 1.45 1.97 1.85 1.90 2.10 2.50 2.30 2.30 2.50
EUR -0.33 -0.33 -0.34 -0.35 -0.65 -0.70 -0.65 -0.60 -0.36 -0.45 -0.35 -0.15 0.48 0.30 0.50 0.80
JPY -0.02 -0.05 -0.10 -0.10 -0.20 -0.20 -0.16 -0.05 -0.08 -0.10 -0.06 0.02 0.09 0.07 0.08 0.15
GBP 0.36 0.40 0.40 0.40 0.18 0.10 0.20 0.35 0.66 0.60 0.70 0.85 1.52 1.40 1.50 1.60
CHF -0.73 -0.75 -0.75 -0.75 -0.94 -1.05 -1.00 -0.90 -0.55 -0.80 -0.65 -0.50 -0.07 -0.30 -0.10 0.10
Source: Bloomberg, NORD/LB Economics
Spreads (bp)
3M EURIBOR 2Y Bunds 5Y Bunds 10Y Bunds
26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M
USD 137 128 144 165 187 180 180 205 233 230 225 225 202 200 180 170
JPY 31 28 24 25 44 50 49 55 28 35 29 17 -39 -23 -42 -65
GBP 69 73 74 75 83 80 85 95 102 105 105 100 103 110 100 80
CHF -40 -42 -41 -40 -29 -35 -35 -30 -19 -35 -30 -35 -56 -60 -60 -70
Source: Bloomberg, NORD/LB Economics
Overview of forecasts
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 19 von 24
NORD/LB Economics
Torsten Windels (Chief Economist): Tel. +49 (0) 511/361-2008, eMail: [email protected]
Tobias Basse (USA, Canada, Mexico, Strategy): tel. +49 (0) 511/361-9473, eMail: [email protected]
Dr. Stefan Grosse (Japan, Euroland, Germany, Strategy): tel. +49 (0) 511/361-2365, eMail: [email protected]
Dr. Jens Kramer (UK, Italy, Spain, Euroland, Germany, Strategy): tel. +49 (0) 511/361-6083, eMail: [email protected]
Bernd Krampen (USA, Canada, Mexico, Strategy): tel. +49 (0) 511/361-9472, eMail: [email protected]
Frederik Kunze (China, Strategy): tel. +49 (0) 511/361-5380, eMail: [email protected]
Christian Lips (Euroland, Germany, France, Switzerland, Strategy): tel. +49 (0) 511/361-2980, eMail: [email protected]
Your contacts
Date of going to press: 27 January 2017
The next English issue of Economic Adviser will be appearing on 27 February 2017.
Contact Dr. Jens Kramer: [email protected], Tel. +49 (0) 511/361-6083 Christian Lips: [email protected], Tel. +49 (0) 511/361-2980
Economic Adviser ♦ February 2017
NORD/LB Economics
Seite 20 von 24
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may reduce the yield on investments.
Analytical methods and updates
In the preparation of financial analyses, we employ economic models and use technics of fundamental financial
analysis, quantitative/statistical methods and models, as well as technical analytical methods as the basis for valua-
tions and for the regular updates. It should be noted that the results of analyses provide a snapshot overview and
that past developments do not constitute a reliable indicator for future profits. The basis of the valuations is subject
to unforeseen change at any time, potentially leading to different conclusions. The present report is prepared on a
quarterly basis. Recipients are not automatically entitled to receive report update publications.