Global Data Watch March 23 March 2015

Transcription

1 Economic Research Global Data Watch March 23 March 2015 The Week Ahead: US inflation in the spotlight, especially post-fomc US data: Core inflation expected to remain weak in February The focus will be on US February inflation this week. The headline figure is expected to turn positive in February, rising to 0.2% m-o-m from -0.7% in January, on the back of higher energy prices. However, the consensus is for core CPI to moderate to just 0.1% m-o-m in February. This is after the stronger-than-expected 0.2% m-o-m in January and given the USD strength. The tepid core inflation is central to our expectation of a September interest rate lift off. Notably, the FOMC has increasingly said that it will not raise rates until it is confident that inflation will return to its 2% target. Whilst the FOMC removed the word patient from its post-meeting statement last week, it reduced its inflation and growth outlooks and indicated a more gradual pace of rate increases. The strong USD was indicated as a key factor. A number of FOMC members are scheduled to speak this week, and should provide greater colour on the Fed s thinking. Economics Team Monica Malik, Ph.D. Chief Economist +971 (0) Monica.Malik@ Ketaki Sharma Economic Analyst +971 (0) Ketaki.Sharma@ Contents I. Recent Data 2 II. Economic Calendar 6 Eurozone: Gradual build up in momentum, Germany leads Eurozone data will focus on flash PMI outturns for March this week. The market expects the data to show continued improvement in economic activity, led by Germany and supported by the weak EUR and lower energy prices. These factors are also expected to support consumer confidence and Germany s March IFO business surveys. The IFO is expected to show an improvement in current conditions, though future expectations could be dampened by ongoing political uncertainties. The lack of progress in Greece s negotiations with its Eurozone and IMF creditors could again intensify this week. Moreover, markets will watch political developments in Spain closely, with regional elections starting in Andalusia on 22 March. The progress of newly formed parties Podemos and Ciudadanos will be of particular interest ahead of the general election later this year. Egypt: Strong international support strengthens outlook Egypt received substantial support at its Economic Development Conference, reducing short-term risks and bolstering the medium-term growth outlook. A total of c.usd50 billion was pledged, rising to c.usd140 billion if MoUs are included. We believe that the grants and deposits placed at the CBE should largely cover Egypt s short-term external financing requirements and provide fundamental support to the EGP. Moreover, the commitments point to a pickup in FDI into Egypt, and we expect investment to drive the strengthening in Egypt s economic activity. Egypt also ratified a revised Investment Law aimed at improving the invest environment, and announced an economic reform programme. Importantly, to build up FDI, Egypt will need to progress with its structural reform programme. This is likely to include further subsidy reforms to attract investment in the energy field, in our view. 1

2 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Global Data Watch March 23 March 2015 I. Recent Data A. MENA Egypt: Substantial support at the Economic Development Conference Egypt received substantial support at its Economic Development Conference (13-15 March), reducing short-term stability risks and bolstering the medium-term growth outlook. In total, Egypt received c.usd50 billion in pledges (equivalent to c.18% of GDP), rising to USD140 billion (c.47% of GDP) if MoUs are included. The support was in the form of aid, loan, grants, and planned investment into Egypt. GCC countries continued to play a strong role, with USD12.5 billion pledged (investment and central bank deposits), led by the UAE, Saudi Arabia, and Kuwait. This excludes planned investment from GCC corporates, especially from the UAE. There were also strong investment pledges from international companies, including Siemens, BP, and Coca- Cola. The majority of schemes will be in the energy & mining, housing, utilities, and transport & logistics sectors. There will also be investment opportunities in tourism, agriculture, and other areas. We believe that the grants and deposits at the CBE reduce short-term external funding risks, especially with the low FX reserve position. This should provide fundamental support for the EGP and sufficient FX liquidity to meet import needs, including essentials (food and energy). Nonetheless, we still see potential for a gradual weakening of the EGP against the USD in 2015, aimed at maintaining external competitiveness given the strong USD outlook. On the growth front, we expect fixed investment to drive the economic recovery. However, the actual sum of investment is likely to fall short of the amount pledged. Egypt expects real GDP growth to accelerate to 4.5-5% in FY (July-June), up from an estimated 4% (IMF) in FY To build up FDI, Egypt will need to progress with its structural reform programme. This is likely to include further subsidy reforms to attract investment in the energy field, in our view. Moreover, Egypt ratified a revised version of its Investment Law as part of its programme to make it easier for foreign companies to invest, alongside announcing an economic reform programme. This includes a number of revenue-raising measures, including broadening the tax base to reduce the fiscal deficit. Meanwhile, the income tax rate (corporate and individual) will be reduced to 22.5% from the current 25%, which should help boost domestic demand. USD50 billion pledged, rising to USD140 billion with MoUs Investments to lead economic recovery Ongoing structural reform required for meaningful rise in investment Fig. 1. Egypt: Low FX reserves since 2011 is a key short-term risk and will benefit from the grants USD billion (LHA); months import cover (RHA) Gross official reserves (USD bn) Total reserves in months of imports Fig. 2. Saudi: Oil exports rise to their highest level in 11- months in January 2015 Million bpd Source: Joint Organisation Data Initiative 2

3 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Global Data Watch March 23 March 2015 Saudi Arabia: Oil exports increase in January Saudi Arabia s crude oil exports rose 7.8% y-o-y in January to 7.5 million bpd, its highest level since February 2014, according to the Joint Organizations Data Initiative. Total production in January increased to 9.7 million bpd from 9.6 million bpd in December, with domestic use falling slightly. The strong exports were in line with OPEC s policy of maintaining market share following the sharp fall in oil prices from 4Q2015. The rising oil exports from Saudi Arabia contributed to a further fall in crude prices in January. Kuwait also saw an increase in crude oil exports in January, albeit by a much weaker level. We expect a rebalancing in the oil market in 2H2015, with lower shale output and a gradual increase in global demand. Oil exports increased in January to retain market share B. G4 Economies US: Fed remains patient in sprit, but not in wording The FOMC removed the word patient from its regular post-meeting statement on 18 March, in line with market expectations. However, expectations of a rate hike were tempered by a marked reduction in the dot plot (where meeting participants indicate their expected policy rate over the next three years), alongside a lowering in the growth and inflation forecasts. Moreover, the Fed said that it will wait for further signs of improvement in the labour market before raising rates. We believe that this includes wage growth and labour participation, which have thus far remained lacklustre despite the strong job-creation growth. We retain our expectation of a September lift off followed by a very gradual tightening cycle. Growth and inflation forecasts lowered Fig. 3. US: Fed would want to see further reduction in labour market slack % labour force participation Fig. 4. and confidence that inflation will return to 2% in order to hike policy rate % change y-o-y PCE Deflator, y-o-y PCE Core, y-o-y Overall, the statement and comments by Fed Chair Janet Yellen were more bearish than the market had expected. The word patient was effectively replaced by two points indicating a continued patient stance. Firstly, the FOMC indicated that an April rate hike was unlikely. Secondly, data dependence was emphasised in deciding the timing of the first rate hike. More notable were the sharp reductions in the dot plot from December The end-2015 median dot for the Federal Funds Target Rate (FFTR) was lowered to 0.625% from 1.125% in December. This implies only two hikes in Dot plot points to more gradual pace of rate increases 3

4 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Global Data Watch March 23 March , in line with our expectations. Moreover, the median for end-2016 dropped to 1.875% from 2.50%. The Fed s expectations are now more in line with market predictions. Real GDP growth was lowered from 2.8% to 2.5% y-o-y for end This points to a gradual pickup in economic activity from the impact of the harsh weather conditions in early Notably, the negative impact of the USD s strength on inflation and recent export performance was highlighted. A further reduction in labour-market slack and reasonable confidence that inflation will return to 2% were highlighted as key requirements for an increase in interest rates. Impact of USD strength on inflation and export competitiveness highlighted Industrial production: February IP growth was lacklustre (+0.1% m-o-m), albeit positive after two months of decline. There was support from utilities (+7.3% m-o-m), linked with the unseasonably cold weather; however, this also tempered construction output. The mining sector remained the main drag on IP, with drilling activity falling. While some of the factors resulting in the weak IP are temporary, the stronger USD outlook is likely to impact the pace of growth in Germany: ZEW index continues to reflect rising optimism The ZEW current situation index rose to 55.1 in March from 45.5 in February, stronger than market expectations of 52. The March reading was an eight-month high, likely bolstered by the ECB s QE programme and the weaker EUR. This reflects the rise in confidence and supports the outlook for a continuation in the recovery. The ZEW expectations index, however, rose more moderately, to 54.8 from 53, lower than the consensus of Greece developments likely dampened expectations. Stronger rise in current situation vs future expectations Fig. 5. Index Germany: ZEW continues to reflect rising optimism ZEW German Investor Confidence ZEW Current Situation Index Fig. 6. Japan: February trade deficit narrowed on exports JPY billion (LHA); % change y-o-y (RHA) Trade Balance (LHA) Exports (RHA) Imports (RHA) Japan: Monetary policy steady, indications of stronger wage growth The BoJ kept monetary policy steady at its March meeting, including its asset purchases (JPY80 trillion annually). Its assessment of the economy and growth remained broadly steady and optimistic, in our view. The key change was a reduction in the short-term inflation outlook due to the impact of lower energy prices. Governor Haruhiko Kuroda said that y-o-y inflation could turn negative in the coming months. However, he also said that the impact of the lower oil price is temporary. The BoJ is to look at the output gap and longer-term inflation expectations, and continues to BoJ still confident about reaching its inflation target 4

5 Global Data Watch March 23 March 2015 reiterate that it will reach its inflation target without the need for additional monetary stimulus. We believe that the BoJ will wait for a number of key developments before considering any additional measures, including the impact of the lower oil prices on core inflation and expectations. Moreover, the spring wage negotiations between unions and corporations will also be critical, alongside the impact of the weaker JPY on exports and investment. Thus far, the wage negotiations suggest stronger wage growth in 2015 than in previous years. However, the soft domestic demand environment and limited build up in underlying inflationary pressure could still require further easing in 2015, most likely towards the middle of the year. Trade balance: Japan s February trade deficit (JPY638.8 billion seasonally adjusted) came in substantially below the consensus of JPY1,231.4 billion. Export growth was stronger than expected at 2.4% y-o-y, though this was down from January, with a fall in export growth to China with the Lunar New Year. Exports to the US continued to see traction, driven by machinery and transport equipment. Imports fell in February for a second consecutive month as the average price of fuel imported into Japan fell. However, non-mineral fuel imports rose 15.3% y-o-y, indicating an increase in economic activity. This supports our expectation that the BoJ will wait and see before announcing additional measures. BoJ would like to see the impact of weaker JPY on the economy Strong export growth to US from Japan UK: No change in BoE voting pattern The minutes of the BoE s March meeting showed no change in the voting pattern, in line with expectations. All MPC members remained in favour of keeping interest rates on hold. The minutes indicated concerns over potential GBP appreciation linked with monetary policy divergence, though confidence remained over the pickup in the pace of growth. We do not expect a first interest rate hike until 4Q 2015 at the earliest. Moreover, recent labour market data also support a later start to the interest rate hiking cycle. Average weekly earnings growth decelerated to 1.8% y-o-y in January (3m/3m rolling basis) from 2.1%. Moreover, the unemployment rate remained at 5.7%. The consensus was for acceleration in wage growth to 2.2% and unemployment to move lower to 5.6%. We believe that the pace of wage growth will be a vital factor in the BoE s decision. Average weekly earnings in January disappoint C. Emerging Market Economies India: To import oil to build strategic reserves India is looking to import 8 million barrels of Iraqi oil to fill its first strategic petroleum reserve (SPR), Reuters reports. India is seeking to take advantage of the low oil prices for this one-off purchase in case of future supply disruptions or oil price fluctuations. India is the fourth largest consumer globally, and Basra crude suits refineries on India's east coast. India's purchases could help offset the impact of an expected pause in China's strategic stock build up and spring maintenance at Asian refiners. One-off purchase of 8 million bbl 5

6 Global Data Watch March 23 March 2015 II. Economic Calendar Fig. 7. Key Upcoming Events and Data Releases Time* Country Data point Period Prior Consensus Expected this week Sunday, 22 March Monday, 23 March Bahrain GDP Constant Prices, y-o-y 4Q 5.1% Bahrain M2 Money Supply, y-o-y Jan Kuwait CPI, y-o-y Feb 2.8% -- Qatar GDP Constant Prices, y-o-y 4Q 6% -- Bahrain CPI, y-o-y Feb 2.5% -- Saudi M2 Money Supply, y-o-y Feb 10.5% -- UAE Dubai Airport Cargo Volume, y-o-y Feb -5.5% -- Spain Regional Elections begin in Andalusia 19:00 Eurozone Consumer Confidence Mar A :00 US Fed Vice Chair Stanley Fischer Speaks in New York Tuesday, 24 March 5:35 Japan Markit/JMMA Manufacturing PMI Mar P :45 China HSBC Manufacturing PMI Mar P :30 Germany Markit/BME Germany Manufacturing PMI Mar P :00 Eurozone Markit Manufacturing PMI Mar P :30 UK CPI, y-o-y Feb 0.3% -- 13:30 UK CPI Core, y-o-y Feb 1.4% -- 16:30 US CPI, m-o-m Feb -0.7% 0.2% 16:30 US CPI ex-food and Energy, m-o-m Feb 0.2% 0.1% 17:45 US Markit Manufacturing PMI Mar P :00 US Richmond Fed Manufact. Index Mar 0 3 Wednesday, 25 March 13:00 Germany IFO Business Climate Mar :00 Germany IFO Current Assessment Mar :00 Germany IFO Expectations Mar :30 US Durable Goods Orders Feb 2.8% 0.6% Thursday, 26 March 11:00 Germany GfK Consumer Confidence Apr :45 France GDP, y-o-y 4Q F 0.2% -- 11:45 France GDP, q-o-q 4Q F 0.1% -- 12:35 US Fed's Bullard Speaks on U.S. Economy and Policy in Frankfurt 13:00 Eurozone M3 Money Supply, y-o-y Feb 4.1% -- 16:30 US Initial Jobless Claims 21-Mar :30 US Continuing Claims 14-Mar :00 US Fed's Lockhart Speaks on Economy in Detroit 17:45 US Markit Services PMI Mar P Friday, 27 March 3:30 Japan Natl CPI, y-o-y Feb 2.4% 2.3% 14:30 US Fed Vice Chair Fischer Speaks in Frankfurt 16:30 US GDP Annualised, q-o-q 4Q T 2.2% 2.4% 16:30 US Personal Consumption 4Q T 4.2% -- 16:30 US GDP Price Index 4Q T 0.1% 0.1% 16:30 US Core PCE, q-o-q 4Q T 1.1% 18:00 US U. of Mich. Sentiment Mar F *Abu Dhabi time Germany Retail Sales, m-o-m Feb 2.3% -- 6

7 Global Data Watch March 23 March 2015 Fig. 8. Last Week s Data Time* Country Data point Period Prior Consensus Actual GCC data Monday, 16 March Kuwait M2 Money Supply, y-o-y Jan 2.9% % UAE CPI, y-o-y Feb 3.7% % Qatar CPI, m-o-m Feb :30 India Wholesale Prices, y-o-y Feb -0.4% -0.8% -2.1% 16:30 US Empire Manufacturing Mar :15 US Industrial Production, m-o-m Feb -0.3% 0.3% 0.1% 17:15 US Capacity Utilization Feb 79.1% 79.5% 78.9% 22:45 Eurozone ECB President Mario Draghi Speaks in Frankfurt Tuesday, 17 March 14:00 Germany ZEW Survey Current Situation Mar :00 Germany ZEW Survey Expectations Mar :00 Eurozone ZEW Survey Expectations Mar :00 Eurozone CPI, y-o-y Feb F -0.3% -0.3% -0.3% 14:00 Eurozone CPI Core, y-o-y Feb F 0.6% 0.6% 0.7% 16:30 US Housing Starts, m-o-m 1% -2.4% -17% Wednesday, 18 March 3:50 Japan Trade Balance (Not Adjusted) Feb B B B 3:50 Japan BoJ Feb meeting minutes 13:30 UK Jobless Claims Change Feb -39.4K -30K -31K 13:30 UK ILO Unemployment Rate 3Mths Jan 5.7% 5.6% 5.7% 13:30 UK Bank of England Minutes 14:00 Eurozone Trade Balance SA Jan 23.3B 21.3B 7.9B 22:00 US FOMC Rate Decision (Upper Bound) 18-Mar 0.25% 0.25% 0.25% 22:00 US FOMC Rate Decision (Lower Bound) 18-Mar 0% 0% 0% Thursday, 19 March 8:30 Japan All Industry Activity Index, m-o-m Jan -0.3% 1.9% 1.9% 16:30 US Initial Jobless Claims 14-Mar 290K 293K 291K 16:30 US Current Account balance 4Q -$98.9B -$104.1B -$113.5B 18:00 US Philadelphia Fed Business Outlook Mar :00 US Leading Index Feb 0.2% 0.2% 0.2% Friday, 20 March 18:00 Eurozone Current Account balance Jan EUR22.5B EUR29.4B *Abu Dhabi time 7

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