US Economic Perspectives

Transcription

1 Deutsche Bank Research North America United States Asset Management: For institutional client and retail registered representative use. Not for public viewing or distribution. Date Economics US Economic Perspectives 10 November 2017 When do higher Treasury yields hurt growth Estimating a neutral 10y yield Matthew Luzzetti, PhD With the Fed sticking to their script of continued gradual rate hikes, attention has been focused on how high the fed funds rate will rise in the coming quarters. However, a more crucial question for growth and markets is how high the 10-year Treasury yield will rise, and at what level it would begin to restrain growth. Senior Economist Justin Weidner Economist Answers to these questions require having a view on the neutral level of the 10-year Treasury yield the level at which yields keep inflation at target, growth at potential and the unemployment rate at NAIRU. That is, the neutral 10-year yield is the level at which bond yields switch from being growth-supportive to growth-restrictive. We label this neutral 10year Treasury yield "10y-star", and take a first step in estimating it by extending a popular methodology for computing its analogue for the fed funds rate, r-star. Our estimates imply that 10y-star is currently around 1.5%, about 1.3 percentage points above current r-star estimates. Assuming that the Fed achieves its inflation target on average, this estimate is consistent with a nominal neutral 10-year Treasury yield around 3.5%. According to our analysis there is therefore considerable room for longerterm bond yields to rise without exerting a meaningful drag on growth. However, it is likely that the rate of change in bond yields not just the level also matters. As such, a sharp rise in yields even to levels below neutral could prove disruptive to markets and the economy, at least temporarily. Offsetting this possibility is the fact that financial conditions are now at the easiest (i.e., most growth supportive) levels on record according to our financial conditions index (FCI). There is room for loose financial conditions to absorb a rise in yields before it adversely affects growth prospects. 10y-star shares several similarities with r-star estimates. First, 10y-star trended lower over the decades prior to the financial crisis. Second, both estimates plunged to record lows in response to the financial crisis, and there are only tentative signs that they have risen from the post-crisis lows. Finally, as we have emphasized in recent work on r-star, there is also considerable uncertainty around 10y-star estimates. We highlight one additional source of uncertainty in our estimates the choice of inflation expectations to construct the real 10-year Treasury yield. Distributed on: 10/11/ :21:06 GMT DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/ bed7b6cf11c

2 Introduction With the Fed sticking to their script of continued gradual rate hikes, attention has been focused on how high the fed funds rate will rise in the coming quarters. As we have written recently, while there should be considerable uncertainty about the peak policy rate this cycle, markets and Fed officials have coalesced around a view that the key determinant of this terminal fed funds rate, the neutral policy rate (r-star), is currently very low and unlikely to rise meaningfully in the coming years. 1 Missing from this narrative is how the Fed s policy changes are transmitted through financial markets and eventually to the real economy. Indeed, tighter Fed policy through fed funds rate increases will only slow growth if it leads to tighter financial conditions. The first channel of this monetary policy transmission is through the yield curve, most importantly through longer-term interest rates like the 10-year Treasury yield. Long-term yields are a more important driver of risk asset valuations, including equities and credit, than the fed funds rate, and are also crucial for growth prospects, especially for the housing market where the 10-year Treasury yield drives mortgage rates. From this perspective, it may be more informative to identify the level of the 10- year Treasury yield at which rates switch from being growth-supportive to growthrestrictive and, by extension, negative for risk assets. We label this neutral level of the 10-year Treasury yield as 10y-star, and take a first step in estimating it by adapting a popular methodology for computing its analogue for the fed funds rate, r-star. There are three key takeaways from our analysis: 10y-star is currently around 1.5%. Assuming that the Fed achieves its inflation target on average, this estimate is consistent with a nominal neutral 10-year Treasury yield around 3.5%. There is therefore considerable room for longer-term bond yields to rise without exerting a meaningful drag on growth, though a rapid rise in yields from current levels would likely cause some disruptions for markets and the economy. From a historical perspective, similar to estimates of r-star, we find that 10y-star trended lower over the decades prior to the financial crisis and then fell sharply in response to the crisis. These estimates for 10y-star are about 1.3 percentage points above current estimates of r-star, reasonably close to recent comments from San Francisco Fed President John Williams. 2 What is 10y-star At this point the concept of the real neutral fed funds rate (r-star) is reasonably well known and is frequently discussed by Fed officials. Intuitively, r-star is the level of the real fed funds rate that would keep inflation at the Fed s target, real 1 See Deutsche Bank (26 October 2017), How confident should we be that r-star is very close to zero Not very. 2 See Williams, John C. (5 October 2017), Interest rates and the new normal, Remarks to the Community Banking in the 21st Century Research and Policy Conference. Page 2

3 GDP growth in line with potential growth, and the unemployment rate stable at NAIRU. It is thus neutral for the economy. If the real fed funds rate is above r- star, monetary policy is restrictive, and growth and inflation should fall while the unemployment rate should rise. Conversely, if the real fed funds rate is set below r-star, monetary policy is accommodative, and inflation and growth should rise while the labor market should tighten. We extend this concept to the 10-year Treasury yield and label it 10y-star. That is, 10y-star is a neutral level of the 10-year yield for the economy. If the real 10- year Treasury yield is above 10y-star, bond yields are restrictive, and growth and inflation should decline. The opposite holds when the real 10-year Treasury yield is below 10y-star. While this extension does not present any meaningful additional empirical difficulties in its estimation, it does raise some conceptual questions. For example, the 10-year Treasury yield is not dictated by the Fed and reflects forwardlooking expectations about monetary policy, growth, and other macroeconomic variables. As such, a lower 10-year yield may reflect weak growth expectations, not accommodative financing conditions. Though these are complications in interpreting 10y-star, we would argue that similar complexities arise when interpreting r-star. Indeed, the recent string of rate hikes is a good example, where financial conditions have actually eased considerably and growth has picked up as Fed tightening is not being transmitted significantly to other asset prices. Just as r-star estimates may tend to rise during such episodes, 10y-star estimates should tend to fall when lower 10-year yields represent weaker growth expectations instead of easier financing conditions. That is, 10y-star estimates should adjust accordingly to capture these complicating factors. Estimating 10y-star Since 10y-star is unobservable, it must be estimated. To do so, we start with the approach for estimating r-star by Laubach and Williams (2003) (hereafter LW) and Holston, Laubach and Williams (2017) (hereafter HLW). 3 This approach estimates several unobservable variables, including r-star and the potential growth rate of the economy, from a few simple macroeconomic relationships. These macroeconomic relationships include: (i) a link between the output gap and the Fed s policy stance (i.e., the difference between the real fed funds rate and r-star); (ii) a Phillips curve equation that links inflation to the output gap; and (iii) an equation which states that r-star is driven by potential growth and other permanent shocks, which the Fed has colloquially referred to as headwinds. We alter this approach in a few ways to estimate 10y-star instead of r-star. The primary adjustment we make is to consider the nominal 10-year Treasury yield rather than the fed funds rate in our estimation. Accordingly, the driver of the output gap becomes the difference between the real 10-year Treasury yield and 10y-star rather than the difference between the real fed funds rate and r-star. Arguably, the connection between the output gap and the 10-year Treasury yield should be tighter than the output gap and the fed funds rate as 10-year rates are more relevant for real economic activity. Indeed, when the Fed sets monetary 3 See Laubach, Thomas and John C. Williams (2003), Measuring the natural rate of interest. Review of Economics and Statistics, 85(4), , and Holston, Kathryn, Thomas Laubach, and John C. Williams (May 2017), Measuring the natural rate of interest: International trends and determinants. Journal of International Economics 108, S59-S75. Page 3

4 policy, it has in mind how changes in short-term rates should percolate through to long-term rates and thus out to the real economy. When the Fed hit the zero lower bound and lost its primary lever to affect long-term rates, it implemented quantitative easing to directly affect long-term rates and stimulate the economy. Another technical change to the HLW methodology we make is that we allow the relationship between 10y-star and the potential growth rate of the economy to be different than one-for-one by introducing an additional coefficient on potential growth that must be estimated. This more flexible approach was followed in the original LW paper but was subsequently dropped due to the fact that a one-forone relationship could not be rejected in estimation and was also supported by what economic theory would imply for the parameter. However, it is not obvious that this relationship should extend to the 10-year yield. We therefore choose to estimate this parameter. The final change that we make is how we calculate inflation expectations in order to deflate the 10-year nominal yield to convert it into real terms. HLW used a fourquarter moving average of actual inflation to compute the real fed funds rate, but again, it is not obvious that this is the correct measure of inflation for the 10- year yield. For our preferred measure of inflation expectations, we use an equally weighted average of the four-quarter moving average of actual inflation and longterm inflation expectations from the Survey of Professional Forecasters. We also explore how different measures of inflation expectations affect our estimates of 10y-star. Spotlight on the star 10y-star over time Using the above approach, we find that 10y-star estimates share many characteristics with estimates of r-star. First, 10y-star generally trended lower in the decades preceding the financial crisis. While 10y-star fluctuated around 4% throughout much of the second half of the 1980s, it then fell to about 3.5% in the mid-1990s, and then reached its lowest level in nearly four decades of 3% just prior to the crisis. Figure 1: 10y-star estimates % 10y* 1 standard deviation error bands Source: Holston, Laubach, and Williams (2017), Deutsche Bank Page 4

5 The second similarity to r-star estimates is a sharp plunge in 10y-star in response to the financial crisis. 10y-star dropped by more than two percentage points between Q and Q1 2009, when it came close to breaching 1% at its record low of about 1.25%. Since that time, there has been only limited evidence that 10y-star has risen from these historic lows. The most recent estimate for Q is 1.56%. The final similarity to r-star is that considerable uncertainty attends both estimates. The average standard error since the late 1960s is 1.38 percentage points, indicating that a range about 2.75 percentage points wide is needed to be two-thirds certain that the true value of 10y-star falls within the bounds. Recently, that range has widened to nearly 3.7 percentage points, from -0.28% to 3.45%. Decomposing 10y-star movements Similar to r-star, we can decompose 10-year star into its component parts: the part that is explained by growth in potential output and the residual, unexplained part, which Fed officials have typically referred to as "headwinds". The overall height of the bar in Figure 2 refer to 10y-star, with the different colors representing the components' relative contributions. As would be expected, potential growth comprises the lion's share of r-star. The decrease in 10y-star since the financial crisis, as well as the recent increases, can be almost completely attributed to the fall off and slight pickup in potential growth. For most of the time series, the part unexplained by potential growth has been positive, boosting 10y-star. However, in the last several years, the headwinds have been significantly negative, pulling 10y-star down by almost 60 basis points. The monetary stimulus provided by the enormous sizes of worldwide central bank balance sheets could be a significant factor behind these negative headwinds. Given that we are likely near the inflection point for global central bank balance sheets, we would expect these headwinds to fade going forward. Figure 2: Decomposition of 10y-star % Growth 5 Other Factors Source: Deutsche Bank How does 10y-star relate to r-star 10y-star and r-star have tended to move together over time, with the former generally running well above the latter, as would be expected given the presence of a positive risk premium for holding longer-term bonds. During the mid-1980s Page 5

6 and 1990s the spread between 10y-star and r-star fluctuated within a reasonably tight band of 0.5 and 1.2 percentage points, averaging 95 basis points over that period. Currently 10y-star is about 1.26 percentage points above r-star. There also appears to be a cyclical element to the spread: the gap tends to narrow around economic slowdowns and widen during recoveries. As we noted earlier, this likely reflects the fact that around recessions a low 10-year Treasury yield indicates expectations of slower growth and easier monetary policy and therefore does not necessarily represent a growth-supportive yield curve. 10y-star intuitively adjusts downward to capture this dynamic. Figure 3: 10y-star and r-star tend to move together % 10y* r* Source: Deutsche Bank How restrictive is the 10-year yield As we would expect to be the case, the real 10-year Treasury yield fluctuates around 10y-star over time. We show the real 10-year Treasury yield (nominal yield deflated by our measure of inflation expectations) as it compares with 10y-star. Periods in which the real 10-year yield is greater than 10y-star are periods in which the level of 10-year yields are growth-restrictive, and periods in which the 10-year yield is below 10y-star are periods where the 10-year yield is growthsupportive. We see that 10-year yields are generally growth-restrictive from the 1980s through the mid-1990s, with a switch around the early 2000s to a period where yields are generally supportive of growth. The 10y-star also gives us another lens through which to view monetary policy. The real fed funds rate gap, or the distance between the real fed funds rate and r-star, is often cited as a measure of the stance of monetary policy. If it is positive, ie. the real funds rate is above r-star, monetary policy is thought to be restrictive. If it is negative, monetary policy is accommodative. However, this characterization relies upon monetary policy's ability to transmit to the real economy. In other words, does an accommodative short rate policy actually translate into an accommodative long rate If this is indeed the case, then the fed funds rate and the 10-year yield should be above their respective neutral rates at the same time. As seen in Figure 4, this is largely true, though there are some notable deviations. Page 6

7 Figure 4: Real 10-year Treasury yield versus 10y-star % Real 10y 10y* Source: Deutsche Bank Figure 5: Real 10-year yield gap versus real fed funds rate gap % Real 10y - 10y* Real FFR - r* Source: Deutsche Bank While the fed funds rate gap is significantly negative in the early 2000's, which some Fed critics have pointed to as a precursor to the housing bubble, the 10- year yield gap is much closer to zero, indicating that the low fed funds rates over this period may have had less of an impact inflating the asset price bubble than previously thought. In addition, the different levels of the 10-year yield gap after the financial crisis line up reasonably well with the timing of the Fed's quantitative easing efforts. There is also some evidence that the 10-year yield gap has become less sensitive to the fed funds gap over time, as the former has fluctuated relatively little since the early 2000s despite large movements in the latter. How do inflation expectations affect our estimates of 10y-star Inflation expectations are a crucial component of the HLW methodology to compute r-star. They use a moving average of actual inflation to proxy for inflation expectations. This is an appropriate decision to estimate short-run real interest rates given that short-run inflation dynamics can be reasonably expected to proxy for how inflation is expected to evolve in the very near future. However, as the relevant time horizon expands, this is less likely to be true. As we mentioned previously, we used an average of survey based long-term inflation expectations and a moving average of recent inflation behavior as our measure of long-run inflation expectations to deflate the nominal 10-year Treasury yield. However, there is no consensus on the appropriate way to construct longterm inflation expectations. We present three versions of our estimates of 10y-star in Figure 5, holding everything the same except changing our measure of inflation expectations used. The darkest line is our preferred measure of 10y-star, using a mix of recent inflation behavior and survey estimates to measure inflation expectations. The lighter line uses only recent inflation behavior, as in HLW. Finally, the lightest line uses only the survey measures on long-term inflation expectations. All three measures are highly correlated. However, the inflation expectation measure influences the level of 10y-star. In the mid-1990s to the mid-2000s, when actual inflation and survey measures largely coincided, so do the estimates of 10ystar. Recently though, actual inflation has been below the median professional forecaster's opinion about the inflation rate over the next ten years, and as such the estimated 10y-star is higher when inflation expectations are based on the softer recent history. Page 7

8 Currently these measures have a range of about 60 basis points, from 1.24% to 1.86%. As we mentioned in our previous note about the uncertainty around r-star, different model methodologies would be expected to give different estimates, but even slight changes within the same class of model also produce some uncertainty in the estimates. Figure 6: 10y-star estimates using different inflation expectation measures % Blend Actual Inflation Survey Measure Source: Deutsche Bank Conclusion We take a first step in estimating the neutral level of the 10-year Treasury yield 10y-star by adapting a popular methodology for computing its analogue for the fed funds rate, r-star. Our results indicate that the current level of the neutral 10-year Treasury yield (10y-star) is around 3.5%. This implies that there is considerable room more than 100bp from current levels for longer-term bond yields to rise without exerting a meaningful drag on growth. However, it is likely that the rate of change in bond yields not just the level also matters. As such, a sharp rise in yields even to levels below neutral could prove disruptive to markets and the economy, at least temporarily. Offsetting this possibility is the fact that financial conditions are now at the easiest (i.e., most growth supportive) levels on record according to our financial conditions index. There is therefore some room for financial conditions to absorb a rise in yields before it adversely affects growth prospects. Page 8

9 Figure 7: US forecasts Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Real GDP (% q/q, AR) Nominal GDP (%q/q, AR) Headline CPI inflation (%y/y) Core CPI inflation (%y/y) Unemployment rate Fed funds rate Note: Annual figures are Q4/Q4 for GDP, inflation and unemployment rate. Source: Deutsche Bank Fed Watch The November FOMC meeting statement provided few surprises. We continue to expect the Fed to next raise rates in December, followed by three more in 2018 and four in Figure 8: Fed policy rate % Source: Deutsche Bank Figure 9: Key global macro and market forecasts GDP growth (%) Key market metrics F 2018F Current Q4-17F Q4-18F Q4-19F Global US 10Y yield (%) US EUR 10Y yield (%) Eurozone EUR/USD Germany USD/JPY Japan S&P 500 2,594 2,600 #N/A #N/A UK Stoxx #N/A #N/A China Oil WTI (USD/bbl) India Oil Brent (USD/bbl) EM (Asia) Current prices as of 08-Nov-2017 EM (LatAm) EM (CEEMEA) EM DM CPI inflation, YoY * (%) Central Bank policy rate (%) F 2018F Current Q4-17F Q4-18F Q4-19F US US Eurozone Eurozone Japan Japan UK UK China China * CPI (%) forecasts are period averages CEEMEA: Czech Rep., Israel, Egypt, Hungary, Kazakhstan, Nigeria, Poland, Romania, Russia, Saudi Arabia, South Africa, Turkey, UAE and Ukraine; LATAM: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela ASIA: China, HK, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam DM: Australia, Canada, Denmark, Eurozone, Japan, New Zealand, Norway, Sweden, Switzerland, UK, US Source: Deutsche Bank Page 9

10 Appendix 1 Important Disclosures *Other information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg, and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Aside from within this report, important conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Matthew Luzzetti, Justin Weidner Page 10

11 Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. Hyperlinks to thirdparty websites in this report are provided for reader convenience only. Deutsche Bank neither endorses the content nor is responsible for the accuracy or security controls of these websites. If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this report, or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche Bank may act as principal for its own account or as agent for another person. Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis, equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or otherwise. Deutsche Bank and/or its affiliates may also be holding debt or equity securities of the issuers it writes on. Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking, trading and principal trading revenues. Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank provides liquidity for buyers and sellers of securities issued by the companies it covers. Deutsche Bank research analysts sometimes have shorter-term trade ideas that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. Trade ideas for equities can be found at the SOLAR link at A SOLAR idea represents a high conviction belief by an analyst that a stock will outperform or underperform the market and/or sector delineated over a time frame of no less than two weeks. In addition to SOLAR ideas, the analysts named in this report may from time to time discuss with our clients, Deutsche Bank salespersons and Deutsche Bank traders, trading strategies or ideas that reference catalysts or events that may have a near-term or medium-term impact on the market price of the securities discussed in this report, which impact may be directionally counter to the analysts' current 12-month view of total return or investment return as described herein. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or estimate contained herein changes or subsequently becomes inaccurate. Coverage and the frequency of changes in market conditions and in both general and company specific economic prospects make it difficult to update research at defined intervals. Updates are at the sole discretion of the coverage analyst concerned or of the Research Department Management and as such the majority of reports are published at irregular intervals. This report is provided for informational purposes only and does not take into account the particular investment objectives, financial situations, or needs of individual clients. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst s judgment. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Prices and availability of financial instruments are subject to change without notice and investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties. The Deutsche Bank Research Department is independent of other business areas divisions of the Bank. Details regarding our organizational arrangements and information barriers we have to prevent and avoid conflicts of interest with respect to our research is available on our website under Disclaimer found on the Legal tab. Page 11

12 Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options, at If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important conflict disclosures can also be found at gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Deutsche Bank (which includes Deutsche Bank AG, its branches and all affiliated companies) is not acting as a financial adviser, consultant or fiduciary to you, any of your agents (collectively, "You" or "Your") with respect to any information provided in the materials attached hereto. Deutsche Bank does not provide investment, legal, tax or accounting advice, Deutsche Bank is not acting as Your impartial adviser, and does not express any opinion or recommendation whatsoever as to any strategies, products or any other information presented in the materials. Information contained herein is being provided solely on the basis that the recipient will make an independent assessment of the merits of any investment decision, and it does not constitute a recommendation of, or express an opinion on, any product or service or any trading strategy. The information presented is general in nature and is not directed to retirement accounts or any specific person or account type, and is therefore provided to You on the express basis that it is not advice, and You may not rely upon it in making Your decision. The information we provide is being directed only to persons we believe to be financially sophisticated, who are capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies, and who understand that Deutsche Bank has financial interests in the offering of its products Page 12

13 and services. If this is not the case, or if You are an IRA or other retail investor receiving this directly from us, we ask that you inform us immediately. United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and SIPC. Analysts located outside of the United States are employed by non-us affiliates that are not subject to FINRA regulations. Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany s Federal Financial Supervisory Authority. United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation are available on request. Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch or Deutsche Securities Asia Limited. India: Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India (SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations. Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No Member of associations: JSDA, Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's equity analysts are based on a 12-month forecast period. Korea: Distributed by Deutsche Securities Korea Co. South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Singapore: by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore , ), which may be contacted in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents. Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should independently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be Page 13

14 construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited, Taipei Branch may not execute transactions for clients in these securities/instruments. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no ) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no ) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box , Faisaliah Tower - 17th Floor, Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no ) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box , Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please refer to Australian specific research disclosures and related information at research-information.html Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent. Copyright 2017 Deutsche Bank AG Page 14

15 David Folkerts-Landau Group Chief Economist and Global Head of Research Raj Hindocha Global Chief Operating Officer Research Anthony Klarman Global Head of Debt Research Michael Spencer Head of APAC Research Global Head of Economics Steve Pollard Head of Americas Research Global Head of Equity Research Paul Reynolds Head of EMEA Equity Research Dave Clark Head of APAC Equity Research Andreas Neubauer Head of Research - Germany Spyros Mesomeris Global Head of Quantitative and QIS Research Pam Finelli Global Head of Equity Derivatives Research International locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) Deutsche Bank AG Mainzer Landstrasse Frankfurt am Main Germany Tel: (49) Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) Wall Street New York, NY United States of America Tel: (1) Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) Deutsche Securities Inc Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo Japan Tel: (81) I (11/17) For purposes of ERISA and the Department of Labor's fiduciary rule, we are relying on the sophisticated fiduciary exception in marketing our services and products through intermediary institutions, and nothing herein is intended as fiduciary or impartial investment advice.