jul 16 erste group macro markets usa

8/9/2019 Jul 16 Erste Group Macro Markets Usa

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Macro MarketsUSA

Economy Interest rates Currency

- Growth slowing down in the second half ofthe year

- First interest rate hike getting more likely for

2011

- US dollar reacts to weaker US data

16 July, 2010


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Macro Markets USA Macro/Fixed Income Research 16 July, 2010

Erste Group Research Macro Markets Page 2

Macro data 2008 2009 2010f 2011f

Real GDP (grow th y/y %) 0.4 -2.4 2.7 2.3

Fixed Capital Formation (grow th y/y %) -7.3 -23.0 12.2 10.2

Private Consumption (grow th y/y %) -0.2 -0.6 2.0 2.3

Exports (grow th y/y %) 5.6 -9.5 9.5 6.7

Imports (grow th y/y %) -3.2 -13.8 8.6 6.6

Current account balance (% of GDP) -5.0 -3.2 -2.8 -3.1

CPI (y/y, average%) 3.9 -0.4 2.3 1.8

Unemployment (%) 5.8 9.0 9.5 8.5

Govt. budget balance (% of GDP) -5.9 -12.5 -10.0 -9.0

Public debt (% of GDP) 70.4 84.8 93.6 98.5 Sources: Erste Group Research

Economy

The most recent data have had a negative effect on the outlook for the US economy. After a couple of goodmonths, the recovery of the labour market has now lost quite a bit of momentum. Private consumption seems tohave been weak in the second quarter overall, and the expiry of the tax relief programme at the end of April wasmaking itself felt.

The development of consumer spending by households and of job creation in the second half of the year is highlydubious. At the same time a number of factors that will be having a dampening effect on the economy can beidentified. The tax incentive for the purchase of homes expired in April and had thus been available for one year.The May data already indicate a decline in home sales, although we will only get to see the full extent of the declinein the July data. This is due to the fact that purchases initiated in April may be finalised up to two months later andthus only enter the purchase statistics at that point. The crucial element for the economic outlook is that the taxincentives have front loaded demand, will be missed in the coming months.

The effects of the USD 750bn economic stimulus programme launched in 2009 will also decrease. The impact ofthe programme on economic growth and unemployment rate can only be quantified within broad bandwidths.

According to calculations by the US Congressional Budget Office, a governmental monitoring institution, the effectsof the economic stimulus package should have peaked out in the second quarter. Although the support will declineonly gradually, a comparison between 2010 and 2011 in the chart below highlights the significant change.

Estimated contributions of the stimulus package to economic

growth, bandwidths

0

1

2

3

4

5

2009 2010 2011 2012

Source: Congressional Budget Office

The aforementioned stimulus package was also partially geared towards the support of the various federal states.This financial support was meant to bring relief to painful cutbacks in the various state budgets. The funds arealmost exhausted now, but the state budgets are not balanced yet. This means that the federal states will have tofollow through with further austerity measures that might amount to as much as 1% of GDP.

The US economy will have to brace itself for brisk winds in the future, and not exactly under its wings. We do notexpect a relapse into recession, mainly because of the relatively good situation on the labour market. We do notenvisage a fast recovery of employment, but this is not even needed to keep consumer spending expanding.Crucial is that the adjustment in personnel capacities to the weaker demand has come to an end, which is shown


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by a massive rise in employee productivity. Too many jobs had been cut relative to the extent of the economicdecline in 2009. This means that employees are working at full capacity, currently and overall this should makethem feel safe in their jobs. We also expect employment to rise slightly because of the high productivity. Thereforethis front should give enough support to consumer demand to continue to rise, which should keep the economy asa whole on the growth path. However, a decline in growth rates will probably not be avoided.

Whether or not this has happened in the second quarter already will crucially depend on the changes ininventories. Final demand should have seen a rather more contained development. Monthly indicators suggest alower growth rate of private consumption than in the first quarter. Also, household investments i.e. the housingmarket will contribute negatively in view of the aforementioned expiry of the tax incentives in April. Capitalexpenditure in the corporate sector should have grown, and foreign trade has probably provided a marginallynegative contribution. Together with our expectations of a slightly positive contribution from inventories, this yieldsan overall growth rate of 0.6% q/q for the second quarter, i.e. slightly below the 0.7% of Q1. However, the changesin inventories (and thus our entire Q2 forecast) come with a certain degree of upward risk.

Monetary policy

The latest data suggest that the US economy has entered the second half of the year with relatively littlemomentum. Thus the chance that the decreasing effect of the governmental stimulus packages can becompensated completely is equally little, which in turn dampens the economic expectations and therefore theinterest rate expectations. At the latest meeting of the FOMC the participants revised their growth expectations for2010 slightly downwards. The lower end of the band of expectations was +3.0% for 2010 and +3.5% for 2011.These values are based on the annual rate of the fourth quarter rather than on annual averages. We regard bothestimates as optimistic. There will almost certainly be no change in the monetary policy at the next FOMC meetingon 10 August, which also refers the outlook that interest rates may be kept extremely low for an extensive period oftime. When will we see the first interest rate hike then? In their latest estimates, the FOMC members still assumean albeit small decrease in the unemployment rate until the end of the year, which should continue into the nextyear. So, from this side there is no contradiction to an increase in interest rates this year, as the unemployment rateis probably one of the most important determinants of monetary policy. At the same time it is clear that the USeconomy will be exposed to substantial downward risk in the second half of 2010, and it will take years to clear the

underutilisation of resources out of the US economy. For the time being we maintain our expectation of an initialinterest rate hike at the end of the year. But the probability of a later date has increased substantially. However,before revising our forecast we want to wait for one more set of data from the US economy. In any case, thecurrent data suggest that once the interest rate increases have started, they will progress at a very slow pace.

Bond marketThe slope of the yield curve reached its steepest point in March this year. Since then we have seen a continuousflattening. The following graph clearly illustrates the long-term trends at which the slope of the yield curve has beendeveloping. However, we believe that the slope should rise again before flattening further. The current level ofyields is partially due to the uncertainty in the markets. This should subside, which should then lead to rising yieldsespecially at the long end. On top of that, the rising US public debt should gradually turn into an important issue onthe markets especially if the medium-term growth expectations for the US economy should slow down, which

would then translate into worse debt ratios. The USA has so far taken next to no step at all towards budgetconsolidation, and the government relies on the economy to cut the deficit from 10% to 8% in terms of GDP nextyear. Whether the confidence of the markets in the USA is sufficient to finance deficits of this magnitude at 3%(10Y) and below is at the very least up for discussion. We expect US yields to rise. Should we postpone ourexpectations for the first interest rate hike, this would also result in a lower increase in yields than currentlyforecasted by year end.


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Slope of the yield curve (10y-2y)

2,85

2,742,61

-3

-2

-1

0

1

2

3

4

Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan -04 Jan-07 Jan-10

current:: 2,40

Sources: Bloomberg, Erste Bank Research

US dollar

The weaker US economic data along with the some good news from the financial sector of the Eurozone (e.g. thesuccessful auction of Spanish bonds) caused the euro to appreciate drastically. The relatively low turnover insummer may well put this development into perspective, but we still expect a continued appreciation of the euro inthe coming months. At this point we have repeatedly contended that the markets regard the situation in theEurozone as too bleak and that they have lost sight of the problems in the USA. We therefore seem to bewitnessing the correction of an earlier overshooting. Both economic areas are grappling with problems, whichmeans that neither currency takes a clear preference. That said, the Eurozone is clearly ahead of the USA in termsof budget consolidation; there, measures have at least been agreed on, and the average deficit is lower. We thinkthat the US budget deficit will become an increasingly dominating topic, especially if the economic outlook were todarken. Low growth and rapidly rising debt are an unpleasant concoction and should burden the US dollar vis--vis

the euro. Thus, a further depreciation until the end of the year seems likely.

Rainer [email protected]

Currently Sep 10 Dec 10

3M LIBOR 0.53 0.6 0.8

10Y yield 3.05 3.5 4.0

EUR/USD 1.28 1.30 1.35


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ContactsGroup ResearchHead of Group ResearchFriedrich Mostbck, CEFA +43 (0)5 0100 - 11902 Dumitru Dulgheru (Fixed income) +40 21 312 6773 1028CEE Equity Research Cristian Mladin (Fixed income) +40 21312 6773 - 1028

Co-Head: Gnther Artner, CFA +43 (0)5 0100 - 11523 Eugen Sinca (Fixed income) +40 21312 6773 - 1028Co-Head: Henning Ekuchen +43 (0)5 0100 - 19634 Raluca Ungureanu (Equity) +40 21311 2754Gnter Hohberger (Banks) +43 (0)5 0100 - 17354Franz Hrl, CFA (Steel, Construction) +43 (0)5 0100 - 18506 Research, SlovakiaGernot Jany, CFA (Banks, Real Estate) +43 (0)5 0100 - 11903 Head: Juraj Barta, CFA (Fixed income) +421 2 4862 4166Daniel Lion, CIIA (IT) +43 (0)5 0100 - 17420 Michal Musak (Fixed income) +421 2 4862 4512Christoph Schultes, CIIA (Ins., Util.) +43 (0)5 0100 - 16314 Maria Valachyova (Fixed income) +421 2 4862 4185Thomas Unger (Oil&Gas) +43 (0)5 0100 - 17344 Research, UkraineVera Sutedja, CFA (Telecom) +43 (0)5 0100 - 11905 Head: Victor Stefanyshyn (Fixed Income) +38 044 593 - 1784Vladimira Urbankova, MBA (Pharma) +43 (0)5 0100 - 17343 Svitlana Bazilevich (Equity) +38 044 593 - 9286Gerald Walek, CFA (Machinery) +43 (0)5 0100 - 16360 Maryan Zablotskyy (Fixed income) +38 044 593 - 9188International Equities Fixed Income & Credit Institutional SalesHans Engel (Market strategist) +43 (0)5 0100 - 19835 Group Institutional SalesStephan Lingnau (Europe) +43 (0)5 0100 - 16574 Head: Jaromir Malak +43 (0)50100 - 84254Ronald Stferle (Asia) +43 (0)5 0100 - 11723 Fixed Income & Credit Institutional Sales G7 Macro/Fixed Income Research Head: Thomas Almen +43 (0)50100 - 84323Head: Gudrun Egger, CEFA (Euroland) +43 (0)5 0100 - 11909 Institutional Sales AustriaAlihan Karadagoglu (Corporates) +43 (0)5 0100 - 19633 Head: Thomas Almen +43 (0)50100 - 84323

Rainer Singer (US) +43 (0)5 0100 - 11185 Martina Fux +43 (0)50100 - 84113Elena Statelov, CIIA (Corporates) +43 (0)5 0100 - 19641 Michael Konczer +43 (0)50100 - 84121Mildred Hager (SW, Japan) +43 (0)5 0100 - 17331 Margit Hraschek +43 (0)50100 - 84121Macro/Fixed Income Research CEE Institutional Sales GermanyCo-Head CEE: Juraj Kotian (Macro/FI) +43 (0)5 0100 - 17357 Head: Ingo.Lusch +43 (0)50100 - 84111Co-Head CEE: Rainer Singer (Macro/FI) +43 (0)5 0100 11185 Michael Schmotz +43 (0)50100 - 84114Editor Research CEE Institutional Sales LondonBrett Aarons +420 233 005 904 Antony Brown +44 20 7623 - 4159Research, Croatia/Serbia Lukas Linsbichler +44 20 7623 - 4159Head: Mladen Dodig +381 11 22 00 866 Simone Pilz +44 20 7263 - 4159Damir Cukman (Equity) +385 62 37 2812 Institutional Sales SlovakiaAlen Kovac (Fixed income) +385 62 37 1383 Head: Peter Kniz +421 2 4862-5624Iva Cerovsky (Fixed income) +385 62 37 1716 Sarlota Sipulova +421 2 4862-5629Davor Spoljar (Equity) +385 62 37 2825 Institutional Sales Czech RepublicResearch, Czech Republic Head: Ondrej Cech +420 2 2499 - 5577Head: David Navratil (Fixed income) +420 224 995 439 Pavel Zdichynec +420 2 2499 - 5590Petr Bartek (Equity) +420 224 995 227 Milan Bartos +420 2 2499 - 5562Vaclav Kminek (Media) +420 224 995 289 Radek Chupik +420 2 2499 - 5565Jana Krajcova (Fixed income) +420 224 995 232 Institutional Sales Croatia, Hungary, Romania

Radim Kramule (Oil&Gas) +420 224 995 213 Head: Jaromir Malak +43 (0)501 00 - 84254Martin Lobotka (Fixed income) +420 224 995 192 Institutional Sales CroatiaLubos Mokras (Fixed income) +420 224 995 456 Natalija Petljak +385 (0)6237 - 1638Research, Hungary Institutional Sales HungaryHead: Jzsef Mir (Equity) +361 235-5131 Istvan Kovacs +36 1 235 5846Bernadett Papp (Equity) +361 235-5135 Norbert Siklosi +36 1 235 - 5842Gergely Gabler (Equity) +361 253-5133 Institutional Sales RomaniaOrsolya Nyeste (Fixed income) +361 373-2830 Ruxandra Carlan +40 21 310-4449-612Research, Poland Ciprian Mitu +43 (0)50100 - 84253Head: Artur Iwanski (Equity) +48 22 330 6253 International & High End SalesMagda Zabieglik (Equity) +48 22 330 6250 Head: Zachary Carvell +43 (0)50100 - 83308Tomasz Kasowicz (Equity) +48 22 330 6251 Piotr Zagan +43 (0)50100 - 84256Piotr Lopaciuk (Equity) +48 22 330 6252 Ulrich Inhofner +43 (0)50100 - 84324Marek Czachor (Equity) +48 22 330 6254 Darko Horvatin +43 (0)50100 - 84259Tomasz Kasowicz (Equity) +48 22 330 6251 Ciprian Mitu +43 (0)50100 - 84253Wiktor Tymochowicz (Equity) +48 22 330 6253Research, RomaniaHead: Lucian Claudiu Anghel +40 21 312 6773

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Treasury - Erste Bank ViennaSaving Banks & Sales RetailHead: Thomas Schaufler +43 (0)5 0100 - 84225Equity Retail SalesHead: Kurt Gerhold +43 (0)5 0100 - 84232Fixed Income & Certificate SalesHead: Thomas Schaufler +43 (0)5 0100 - 84225Treasury Domestic SalesHead: Markus Kaller +43 (0)5 0100 - 84239Corporate DeskHead: Leopold Sokolicek +43 (0)5 0100 - 84601Alexandra Blach +43 (0)5 0100 - 84141Markus Pistracher +43 (0)5 0100 - 84100


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jul 16 erste group macro markets usa

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