Macro Weekly. Is the Fed set for the exit? 25 February Group Economics Macro Research

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1 Macro Weekly Is the Fed set for the exit? Group Economics Macro Research 25 February 213 Big Picture: The minutes of the FOMC s January meeting caused unrest in financial markets. Investors interpreted the Committee s discussion in the minutes as signalling that the Fed would soon start to slow the pace of its asset purchases, from the current USD 85bn a month. However, with Fed Chairman Bernanke in the dovish camp, and the economy still fragile, we think that this is unlikely. Our central view is that the Fed will maintain purchases at the current pace until the end of this year. We expect Chairman Bernanke to strike a dovish tone in this week s testimony before Congress. Eurozone: The eurozone PMIs suggested that the economy is still struggling, which could bring discussion of a rate cut back on the table at the ECB. In any case, liquidity conditions look set to remain plentiful, which was emphasised by smaller than expected LTRO repayments. Today s Italian elections are likely to throw up a Bersani-Monti coalition, but there is a rising risk of an intractable hung parliament, which leads to new elections. US: Given the deadline of the 1st of March, there is now a high likelihood that the automatic spending cuts will take place, though the government could still put a stop to these cuts at the end of next month. If they go ahead, they will increase the amount of fiscal consolidation by.4% GDP, taking the total to 1.8%. Asia: Japan s government has nominated Haruhiko Kuroda as the next BoJ Governor. The news led to a weakening of the yen. Mr. Kuroda is in favour of additional stimulus, but aggressive monetary easing is already priced into financial markets, so we see a high likelihood of eventual disappointment. Main economic/financial forecasts GDP growth (%) e 214e 3M interbank rate 15/2/13 22/2/13 +3M +12M 213e 214e United States United States Eurozone Eurozone Japan Japan United Kingdom United Kingdom China World Inflation (%) e 214e 1Y interest rate 15/2/13 22/2/13 +3M +12M 213e 214e United States US Treasury Eurozone German Bund Japan Euro swap rate United Kingdom Japanese gov. bonds China UK gilts World Key policy rate 22/2/13 +3M 213e 214e Currencies 15/2/13 22/2/13 +3M +12M 213e 214e Federal Reserve EUR/USD European Central Bank USD/JPY Bank of Japan GBP/USD Bank of England EUR/GBP People's Bank of China USD/CNY , ABN AMRO Group Economics.

2 2 Macro Weekly - Is the Fed set for the exit? - 25 February 213 The Big Picture Is the Fed set for an early exit? The minutes of the FOMC s January meeting caused unrest in financial markets. Investors interpreted the Committee s discussion in the minutes as signalling that the Fed would soon start to slow the pace of its asset purchases, from the current USD 85bn a month. However, with Fed Chairman Bernanke in the dovish camp and the economy still fragile we think that this is unlikely. Meanwhile, the eurozone PMIs suggested that the economy is still struggling, which could bring discussion of a rate cut back on the table at the ECB. In any case, liquidity conditions look set to remain plentiful, which was emphasised by smaller than expected LTRO repayments. Finally, today s Italian election results are likely to throw up a Bersani-Monti coalition, but there is a rising risk of an intractable hung parliament, which leads to new elections. FOMC meeting minutes trigger concern The minutes of the FOMC s January meeting caused unrest in financial markets. Investors interpreted the Committee s discussion in the minutes as signalling that the Fed would soon start to slow the pace of its asset purchases, from the current USD 85bn a month. Risky asset prices generally fell, while the dollar gained some strength. The part of the minutes that grabbed the headlines was discussion about the costs of asset purchases, followed by the view expressed by several members that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as an evaluation of the efficacy and costs of such purchases evolved. However, a closer look at the minutes suggests that the discussion was actually much more balanced. There was also a discussion about the benefits of asset purchases, with most participants (judging that) asset purchases had been effective. In addition, several argued that the potential costs of reducing or ending asset purchases too soon were also significant. but early Fed exit not likely We think that an early Fed exit from it asset purchases is unlikely and we expect the FOMC to maintain the current pace of purchases until the end of the year. First of all, the Committee as noted above seems to be split on the issues of whether to tap off asset purchases, but some members are more equal than others. In particular, it seems highly likely that Fed Chairman Ben Bernanke is in the camp that wants to sustain purchases, and he will be very influential in ultimately Nick Kounis, tel deciding the Fed s policy direction. Second, the economy is actually not yet at what some commentators call exit velocity. The economy does not yet look strong enough to embark on a path of sustained strong economic growth. Although the outlook for cyclical catalysts such as jobs, investment inventories and housing is brightening, the economy is digesting the effects of sizeable tax hikes, while government spending cuts look to be coming soon. The economy actually contracted last quarter, and will likely grow by a meagre 1.5% this quarter. It does not make sense that the Fed would put the recovery at risk at this stage given all the actions it has taken so far to get to this point. Sure there are costs, but the FOMC knew that when it embarked on the current path. US Federal Reserve s balance sheet Total assets, USD, bn 3,5 3, 2,5 2, 1,5 1, Germany versus the rest The eurozone PMI surveys were weaker than expected in February. The whole-economy output index fell to 47.3 from 48.6 in January. At current levels, the indicator is consistent with ongoing contraction in the eurozone economy in Q1. The breakdown showed that the weakness was concentrated in services rather than manufacturing, suggesting that domestic drags are at play (fiscal tightening, rising unemployment, bank deleveraging) rather than the rise in the euro, which would be more visible in manufacturing. Euro strength, if sustained, could be another headwind to the economy, although it has recently fallen back and we expect that trend to continue. Our central scenario remains that the eurozone economy will stabilise in coming months before returning to modest growth in the second half of the year. The business surveys emphasise that the improvement in the eurozone economy will be an excruciatingly slow process. However, this picture will vary from country by country. In particular, it looks like it will be a case of Germany versus the rest. The German economy is

3 3 Macro Weekly - Is the Fed set for the exit? - 25 February 213 well placed because the government is not putting in place any fiscal consolidation this year, while domestic fundamentals are improving. This was very much the message of this week s business surveys, with the ZEW expectations and Ifo business climate indicators seeing big jumps in February, consistent with a strong rebound in GDP growth in Q1. Eurozone PMI in rate cut territory Index % Composite PMI (lhs) ECB refi rate, monthly change (rhs) left and centre coalitions, respectively. However, the rise of the Berlusconi-led centre right coalition and the anti-establishment, anti-euro Five Star Movement in the polls has created an outside risk of an intractable hung parliament. The official polls closed two weeks ago, but there are rumours of secret polls that now actually put the Five Start Movement second, which raises the risk of stalemate. In this case, new elections would most likely follow. An unclear election result would generate uncertainty and market instability, but it will continue to be limited by the ECB s sovereign safety net. The programmes of all parties are relatively vague on badly-needed structural reforms. The Monti coalition looks the most likely to deliver, but room for manoeuvre would be limited by the need to compromise with the larger Bersani block to form a government. A far-reaching reform programme does not seem to be on the cards. This means that Italy s lacklustre economic performance will continue. In turn, it will also make it difficult to sharply reduce the government debt. The polls close at 3pm today. An exit poll will follow immediately afterwards, while it will become increasingly clear what the result is in the hours that follow. ECB seen on hold, but rate odds are shortening The weak survey data for the eurozone as a whole, together with subdued inflationary pressures, raise the prospect that the ECB will once again consider easing monetary policy going forward. The dilemma the Governing Council faces is that it would need to reduce the deposit rate into negative territory to really have traction on interbank rates. However, a refi rate cut could have a positive impact on sentiment, reduce funding costs for peripheral banks and put some downward pressure on the euro by signalling that the ECB is nowhere near an exit from accommodative monetary policy. For now, we stick to our view that the ECB will keep interest rates on hold, but the odds of a rate cut as early as the March meeting are shortening. Meanwhile, the ECB reported that commercial banks planned to repay EUR 61bn of the second LTRO early. This is below the consensus estimate of EUR 122.5bn and follows a total repayment of EUR 15bn of the first LTRO. Although commercial banks are likely to make further repayments in coming weeks, it looks likely that the liquidity surplus in the system will remain large and therefore interbank rates will stay anchored just above the deposit rate. Bersani-Monti coalition likely, but risk of stalemate and new elections General elections are currently being held in Italy. They will usher in a new government, following the one-year stint of Mario Monti s technocrat government. The most likely scenario according to the last round of opinion polls seems to be a Bersani-Monti coalition, which would mark a joining of centre China starts to withdraw liquidity, with an eye on property The People s Bank of China withdrew RMB 91 bn from the financial system last week. The move was partly related to adjustments following the New Year holiday, but there also seems to be a desire to put in place some underlying tightening of financial conditions. This relates to two factors. First of all, there are signs that financial imbalances are starting to arise. Both credit growth and property prices have perked up recently. Second, the authorities have become slightly more concerned about the inflation outlook. China house prices perking up 7 medium and large cities, %mom Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

4 4 Macro Weekly - Is the Fed set for the exit? - 25 February 213 Eurozone Economy & Euro Composite PMI and GDP growth Index % qoq Composite PMI (lhs) GDP (rhs) European Commission s forecast for budget balance * % GDP * under the assumption of 'no policy change' DE FI AT IT EZ PT BE GR NL FR IR ES % Source: European Commission EUR/USD and yield ratio Level EUR/USD Ratio German 2-year/US 2-year yield (lhs) EUR/USD (rhs) Economy I Aline Schuiling, tel: Georgette Boele (FX), tel: The flash PMI for February came in below the expectations. The composite PMI output index declined from 48.6 to 47.3, with the services sector activity index falling from 48.6 to 47.3 and the manufacturing PMI roughly stable (from 47.9 to 47.8). The decline in the composite PMI signals ongoing weakness in the eurozone economy in the first quarter of the year, specifically in domestic demand. Still, we expect GDP to have passed the trough in 212 Q4, when it contracted by.6% qoq, as exports and industrial production are likely to have gained some momentum since then. Indeed, the details of the manufacturing PMI showed that the new export orders index rose to above the 5 boom-bust mark for the first time since June 211, while the orders/inventory-ratio in manufacturing rose to above 1 for the first time since that same month. Nevertheless, the ongoing weakness in domestic demand should prevent the economy from growing noticeably in Q1 and suggests GDP will merely stabilise or contract modestly. Economy II The European Commission published its new growth estimates last week. It has revised its 213 GDP growth projections for the eurozone lower, from +.1% to -.3% (it is now broadly in line with our own estimate of -.2% now). For 214, the Commission kept its forecast at 1.4%, somewhat above ABN Amro s (1%). The Commission has revised this year s growth estimates for most individual larger member states significantly lower, with the exception of Spain and Greece, for which it was already quite negative, and Ireland (stable forecast at 1.1% this year). With regard to the budget deficit, it made the sharpest upward revisions (i.e. higher deficit) for Spain, the Netherlands and Portugal, while it revised its estimates for the deficits of Greece and Ireland significantly downward. The Commission expects a large number of countries (e.g. France, Spain, the Netherlands, Ireland and Greece) to have budget deficits still well above the 3%-limit in 214, unless they announce further austerity measures. EUR/USD At the start of the week, EUR/USD failed to rally strongly on the better than expected German ZEW survey. This was a warning sign that the pressure would increase on EUR/USD eventually. When EUR/JPY also started to feel gravity, EUR/USD edged lower. The less dovish than expected FOMC minutes gave a boost to the US dollar across the board. The weaker-than-expected eurozone PMI data, downbeat comments from eurozone officials and downward adjustments in overall expectations on eurozone growth hurt the euro and also pushed German yields lower. Indeed, the euro and German yields continue to move in tandem. The positive surprise in the shape of Germany s Ifo only gave short-term support. The ECB said that banks will repay EUR 61.1 bn. This fell short of expectations and also hurt the euro as it implies a bigger ECB balance sheet and ongoing low short-term interest rates. Our forecast of 1.3 for EUR/USD at the end of March remains on track.

5 5 Macro Weekly - Is the Fed set for the exit? - 25 February 213 Eurozone Interest Rates EONIA rate futures Jul-12 Sep-12 Nov-12 Jan-13 % 6-month German government bonds 1 Y, % month Jul-12 Oct-12 Jan-13 ECB Watch Nick Kounis, tel: Ruben van Leeuwen (FI), tel: EONIA rate futures saw another sharp drop last week. This partly reflected the weak PMI data that have increased the prospect that the ECB will once again consider easing monetary policy going forward. For now, we stick to our view that the ECB will keep interest rates on hold, but the odds of a rate cut as early as the March meeting are shortening. A bigger impact on short-term interest rate expectations came following the ECB s report that commercial banks planned to repay EUR 61.1bn of the second LTRO early. This was below the consensus estimate of EUR 122.5bn and follows a total repayment of EUR 15bn of the first LTRO. Although commercial banks are likely to make further repayments in coming weeks, it looks likely that the liquidity surplus in the system will remain large and therefore interbank rates will stay anchored just above the deposit rate in coming months. On this basis, its not surprising that six-month and twelve-month EONIA futures have moved back closer to the current EONIA rate, of around 7 basis points. Government bonds and swaps Government bond yields of core eurozone countries decreased last week. The general risk-off sentiment on financial markets, triggered by perceptions of a less dovish Fed, was only a minor factor. Much more important are the Italian elections. First, this event caused a general flight to safety in the end of last week. The yield spread on (1-year) Italian government bonds versus Germany increased by 2 bps during the week, to a high of 2.9%. The yield on the 1-year Bund dropped 9 bps on balance, to a level of 1.58% on Friday afternoon. Second, the repayment of the second LTRO (see above) was much lower than expected. This caused a general decline in yields, especially for shorter dated government bonds. Also here the safety-first principle probably applies. With the Italian elections clearly regarded as event risk, banks are less willing to repay their cheap funding source at this moment. Swap rates followed the development of German government bonds closely, but the declines in swap interest rates were slightly less sizeable. The short term outlook for government bond yields and interest rates is dependent on the Italian election results.

6 6 Macro Weekly - Is the Fed set for the exit? - 25 February 213 US Peter de Bruin, tel Initial jobless claims s Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Initial jobless claims Initial jobless claims (four week moving average) GDP forecasts if automatic spending cuts take place %qoq saar Q1 213Q2 213Q3 213Q4 Fed balance sheet $bn 3,5 3, 2,5 2, 1,5 1, Economy I Data during the week suggested that a modest labour market recovery continues. Granted, initial jobless claims rose to 362K in the week ending February 16, (was 342K), but the weekly claims data have been volatile lately. It therefore makes more sense to focus on the four week moving average. This series rose by 8K to 36.75K, though the trend seems to be one of stabilisation at rates consistent with modest job growth. Last week s initial jobless claims report covered the survey week for February s official labour market figures, and compared to the survey week of January, the four week moving average moved broadly sideways. This suggests that we will see a similar outcome in February s labour market report as in January s. We are therefore forecasting a 15K gain in nonfarm payrolls in February. Meanwhile, manufacturing data were mixed. The Philadelphia Fed index unexpectedly slumped to in February, (was -5.8), though Markit s PMI, despite slipping to 55.2 (was 55.8) remained firmly above the boom-bust mark. Economy II Given the deadline of the 1 st of March, there is now a high likelihood that the automatic spending cuts will take place, though the government could still put a stop to these cuts when it needs to decide on the extension of the funding for government agencies, which will expire on the 27 th of March. The automatic spending cuts would reduce funding for government agencies by $85bn in fiscal year 213 ($24bn was postponed by the recent fiscal cliff deal) and by $19bn in FY214. According to the Congressional Budget Office, this would trim down government spending by $44bn in FY213 and by around $9bn in FY214, suggesting that in calendar year 213, government outlays will fall by $65bn (or.4% of GDP). This would bring the total amount of fiscal consolidation to 1.8% of GDP. As a result, the automatic spending cuts would lower our quarterly GDP growth forecasts for Q2 and Q3 by.5 percentage points. That said, even if this happens, we continue to expect that the recovery to gain momentum later in the year. Fed The Fed s meeting minutes struck a balanced tone, despite markets interpretation that the Fed is about to let its QE programmes taper off. Members were concerned about the risk of further asset purchases, as they could complicate the withdrawal of monetary stimulus, spark inflation, disrupt financial markets, or lead to potential losses. However, participants also continued to see benefits from the asset purchases, such as an easing of financial conditions, the prevention of inflation falling to too low levels and the provision of support to the housing and labour market recovery. Moreover, while the minutes gave the impression that the division between members favouring ongoing asset purchases and slowing the pace of asset purchases is evenly distributed, in practice, it is the Chairman who dictates policy. In our view, Bernanke believes that the benefits of ongoing QE outweigh the costs. We therefore expect to see a fairly dovish Chairman during this week s semi-annual Testimony, and think that the asset purchases will continue at a pace of $85bn a month until the end of the year.

7 7 Macro Weekly - Is the Fed set for the exit? - 25 February Y Treasury yields and Vix volatility index % index Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 1-Y Treasury yields (lhs) Vix volatility index (rhs) Interest rates Last week was a good one for Treasuries, with Treasury prices rising after a week of losses in the week before. In the beginning of the week, an increase in risk appetite, helped by a stronger-thanexpected ZEW index, reduced demand for Treasuries, but yields fell during the remainder of the week. Although the Treasury market weakened briefly on Wednesday, as January s FOMC minutes intensified fears that the Fed would stop its QE programmes before the end of the year, yields quickly started to fall, as the resulting drop in stock prices rekindled safe haven buying. Meanwhile, demand for Treasuries was further underpinned by the unexpected drop in the eurozone PMI on Thursday, while fears about the looming sequester cuts reduced yields further on Friday. As a result, 1-Y yields dropped by 4bp during the week to 1.96%. Looking further down the road, we think that yields will move broadly sideways in the coming months, before staging a modest rise in the second half of the year, when the economy gains a bit more momentum.

8 8 Macro Weekly - Is the Fed set for the exit? - 25 February 213 UK Joost Beaumont, tel: Government finances % GDP Debt (rhs) Budget deficit (lhs) Source: HM Treasury (212 budget deficit corrected for impact transfer Royal Mail) Economy Georgette Boele (FX), tel: Last week, the main news was Moody s announcement that it had cut the UK s AAA rating by one notch to Aa1, with the outlook being stable. The main reason for the downgrade is the medium-term outlook for sluggish growth, which poses a threat to the government s budget goals. Furthermore, these goals will only be reached if the next government continues with fiscal consolidation, which increases the implementation risk. Finally, all these factors combined have diminished the shock-absorption capacity of the economy, no longer warranting a AAA rating according to Moody s. The downgrade should however not come as a surprise, as Moody s had already put the UK on negative watch in February 212. It is also unlikely to have major impact on borrowing costs, as the factors behind the downgrade contain nothing new. In fact, last week s data suggest that the economy has staged a gentle recovery, with January (un)employment data better than expected, while less manufacturing companies saw a decline in order books in February. GDP and inflation % yoy GDP Inflation EUR/USD and EUR/GBP EUR/GBP ratio Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 GBP/USD (lhs) EUR/GBP (rev. ord., rhs) BoE/interest rates The minutes of February s MPC meeting were much more dovish than expected, with 3 of the 9 members (including Governor King) in favour of increasing the size of assets purchases by GBP 25 bn in February. Moreover, the MPC had a thorough discussion about measures that could stimulate the economy. In the end, it was decided not to do so, as monetary policy would on its own be insufficient to transform the outlook for growth, while providing more stimulus against the backdrop of inflation remaining above-target for longer could also risk inflation expectations getting dislodged. Moreover, the minutes showed that the MPC thought that other measures (besides the Funding for Lending Scheme) would be warranted to support credit growth, but that these were the responsibility of other UK authorities. Overall, it seems that the MPC is looking for additional measures to stimulate the economy, but that this is unlikely to come in the form of more asset purchases, given doubts about their effectiveness. GBP The more dovish BoE minutes as well as the downgrade by Moody's on Friday hit sterling last week, with EUR/GBP breaching recent highs. The outlook for sluggish growth, together with ongoing elevated inflation and ultra-loose monetary policy is taking its toll on sterling. However, we remain of the view that the BoE will eventually refrain from further QE, given doubts in the MPC about its effectiveness. This week, the manufacturing PMI as well as the second GDP estimate will be released. The market is positioned for weak data, while stronger-than-expected data may be ignored in the current environment. However if weaker-than-expected data fail to hurt sterling, this would be a sign that most of the negative news is in the price and a recovery of the sterling is around the corner. We keep our forecast of.82 for the end of March in place, although the risks are clearly to the upside.

9 9 Macro Weekly - Is the Fed set for the exit? - 25 February 213 Rest Europe - FX NOK/SEK EUR/CHF SEK and NOK Roy Wellington Teo, tel At the start of last week, the SEK strengthened against the EUR as employment numbers came in better than expected. But the weaker eurozone data later in the week resulted in fears that eurozone economic weakness may spill over to Sweden. The strength in the SEK has continued to limit inflationary pressures. This week, the Riksbank minutes will provide further clarity on their monetary policy bias. We expect a less dovish set of minutes and stronger-thanexpected local data will continue to support the SEK going forward. On the other hand, the NOK remains under pressure due to fears that the Norges Bank will cut interest rates if the strong NOK threatens to push inflation below the central bank s target. But Governor Olsen calmed market fears that the central bank has no plans to extend its monetary toolbox to include currency measures. We believe that cuts in interest rates are unlikely due to the strength in the economy and rising house prices. Overall, we stick to our targets for EUR/SEK of 8.5 and EUR/NOK of 7.5 for the end of Q1. EUR/CHF The CHF strengthened against the EUR due to weak economic data releases out of the eurozone and uncertainty due to upcoming Italian elections. The demand to hedge further strength in the CHF has also increased as a result. Though EUR/CHF is testing this month s low of , volatility expectations have continued to decline. This reflects that the options market continues to expect slow and gradual movements in the spot market. A break below the above mentioned support level is likely to trigger some stop loss orders and exacerbate the downside move more aggressively, pushing volatility expectations higher. SNB s President Jordan also warned that as long as fiscal and structural problems in the euro region are unresolved, there is still a risk that the CHF could regain strength. This week, Q4 GDP and the Kof leading indicator will provide further direction in the CHF. Looking ahead, we expect recent trading range in EUR/CHF to continue and maintain our 1.23 end of March target.

10 1 Macro Weekly - Is the Fed set for the exit? - 25 February 213 Japan Roy Wellington Teo, tel Inflation expectations within 5 years % Jan-1 Jan-11 Jan-12 Jan-13 BoJ minutes The minutes for the January s BoJ monetary policy meeting revealed that members agreed that the economy remained relatively weak. Industrial production is projected to be more or less flat in the first quarter of this year before picking up later this year due to improvement in exports and various stimulus measures. The employment and income situation remains severe. A few members also proposed to extend the maturity of government bond purchases under the Asset Purchase Program to around five years. On the bright side, the recent correction in the yen s appreciation and rise in stock prices have contributed to a pick-up in business sentiment. The recent depreciation in the yen could also be expected to have positive effect on prices through an improvement in economic activity and rise in inflation expectations. Indeed, the bond market s inflation expectation within the next five years has risen by 45bp to 1.2% since the middle of November. However, efforts to strengthen the economy are essential in order to achieve the 2% inflation target. Japan investment abroad and inflation expectations JPY bn % Jan-1 Jan-11 Jan-12 Jan-13 Japan portfolio investment abroad (lhs) Inflation expectations within 5y (rhs) Source: Japan MoF, Bloomberg USD/JPY, 2-year yield spread USD/JPY 2-year yield spread USD/JPY (lhs) 2-year US-JP yield spread (rhs) Investment flows Market speculation has increased that domestic investors would increase their portfolio investment out of Japan because of rising inflation expectations, which would fuel yen weakness. Data from the Ministry of Finance shows that outward investment declined in December, suggesting that Abenomics, which started in the middle of November, did not have an impact on outward investment. Given the lack of adequate available data since November, it may be too early to judge. Historically, overseas portfolio investment has a stronger correlation with global growth and rising interest rate differentials with Japan as compared to domestic inflation expectations. In the domestic bond market, rising inflation expectations have a larger impact though. Data from Japan Securities Dealers Association shows that domestic banks have reduced the maturity of their sovereign bond holdings due to fears that inflation would push interest rates higher. However, long term yields remain low due to continued market expectations that the BoJ would increase the maturity of its government bond purchases. JPY Early last week, the yen strengthened after Finance Minister Aso said that there are no plans to change the BoJ law and buy foreign bonds. However, the wider than expected trade deficit in January capped the strength in the yen. This morning, Japan s government nominated Asian Development Bank President Haruhiko Kuroda as the next BoJ governor, which led to a weakening of the yen. The nomination still needs to be supported by opposition parties as the ruling LDP does not have a majority in the Upper House Diet. Kuroda believes that the ideal timeframe to achieve the 2% inflation target is 2 years and has signalled that he is in favour of stepping up the pace of monetary easing. However, we judge that the market has already priced in that the new BoJ leaders would adopt more aggressive monetary easing measures, and we do not expect the BoJ to surpass these expectations. We therefore expect the yen to find some support towards 95 before strengthening towards 9 against the dollar in the coming months.

11 11 Macro Weekly - Is the Fed set for the exit? - 25 February 213 Asia ex. Japan China: New home sale prices in 7 major cities Number of cities Increase Unchanged Decline China: New loans Oct Nov Dec Jan RMB bn % 2, 1,5 1, 5 Jan-4 Jan-7 Jan-1 Jan-13 new loans l.h.s. total loan growth r.h.s Asian currencies spot returns against the USD % THB SGD TWD CNY KRW INR China I Maritza Cabezas, tel Roy Wellington Teo (FX), tel According to the National Bureau of Statistics, January s new home prices increased in 53 cities, stayed flat in 7 cities and declined in 1 cities. The cities that reported the highest prices were Beijing (2.1%mom), Guangzhou (2.% mom) and Shenzhen (2.2% mom). Meanwhile, home prices increased by 1% in January compared to the previous month (.2%mom) according to Soufan, a private real estate statistics provider, which surveys 1 cities. It is not surprising that the State Council announced lat week that it would maintain its property tightening policies and continue to crackdown on speculative housing demand among other measures. China s authorities have, for the past three years, implemented policies to reduce speculation in the housing market. We expect a modest increase of house prices this year given the authorities restrictive approach. This is also consistent with a moderate economic recovery in China. Our forecast is 8% yoy growth in 213. China II China s central bank s open market operations resulted in a significant withdrawal of repos this week for the first time in eight months. We have seen in the past week that new loans surged in January by more than 5% compared to the previous month and preliminary data for February corresponding to four large banks suggest that this could occur again this month. In the latest statement from the central bank, concerns about inflation were also mentioned. We see inflation pressures as manageable and inflation should end in 213 below the 4% target set by the authorities. As such, we think that this measure mainly helped smooth liquidity after the holiday and we expect monetary policy to be neutral this year. Finally, February s flash HSBC PMI released today showed that China s manufacturing expanded at the slowest pace in four months. This is still above the 5 level, and confirms that a moderate recovery is underway. Asia FX Price movements in Asian currencies were lacklustre early last week. However, they moved lower against the dollar after the less dovish FOMC minutes resulted in market speculation that monetary stimulus in the US will conclude earlier than expected. The Thai baht (THB) managed to receive some support after the Bank of Thailand left interest rates unchanged last week despite some market speculation that they will be pressured to cut rates to ease the currency s strength. The Singapore dollar (SGD) strengthened after Q4 GDP was revised higher. Though the Bank of Korea signalled that no interest rate cut is imminent, the South Korean won (KRW) continued to move lower due to worries that the government will adjust currency forwards and implement taxes on currency transactions. Domestic violence and labour strikes weighed on the India rupee (INR). Looking ahead, we remain positive on Asian currencies with the KRW, TWD and INR as our favourites.

12 12 Macro Weekly - Is the Fed set for the exit? - 25 February 213 Commodity exporters - FX Australia Capex QoQ; RBNZ inflation expectations Capex QoQ % Inflation expectations % Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Australia new capex QoQ % (lhs) RBNZ 2y inflation expectations (rhs) GDP and manufacturing sales mom Manufacturing sales mom% GDP mom % Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Manufacturing sales mom% (lhs) GDP mom % (rhs) Brazilian real and interest rate expectations Level % USD/BRL(lhs) Interest rate expectations January 214 (rhs) AUD/NZD Roy Wellington Teo, tel Georgette Boele, tel: Last week, the NZD gapped lower from.847 to.84 after RBNZ governor Graeme Wheeler said that the central bank is prepared to intervene in FX markets to weaken the NZD and warned investors that the NZD is not a one way bet. Wheeler acknowledged that they cannot determine the desired level of exchange rate but would attempt to smooth the peaks. This week, data on inflation expectations will give further direction in the NZD. A weaker print could add to the bearish tone in the NZD. We expect interest rates to remain unchanged until early 214. The AUD edged higher last week after the RBA minutes indicated that the pace of monetary easing might be at a lower pace. RBA governor Glenn Stevens also said that interest rates are not set to influence the currency, though monetary policy decisions take the strength in the AUD into account. This week s Q4 Capex numbers will provide further clarity on when the peak in resource investment will materialise. We expect a lower AUD/USD and NZD/USD towards 1. and.81 later this year. USD/CAD The CAD eased against the dollar last week due to weak economic data releases and lower oil prices. In the options market, volatility expectations and the demand to hedge further weakness in the CAD have increased as a result. Looking ahead, we expect the weak trend in the CAD against the dollar to fade towards the 1.25 level as the move in the exchange rate has been more aggressive than warranted by interest rate differentials between the US and Canada. Technical analysis also suggests that the CAD is oversold and hence a short term correction (stronger CAD) is likely. This week, December GDP numbers will be released. Growth is likely to contract mom after the weak manufacturing sales print in December. We believe the market has mostly priced in mom GDP contraction. As growth is expected to pick up this year, the CAD should strengthen against the dollar towards.96 later this year. USD/BRL The rally in the Brazilian real (BRL) came to a halt. USD/BRL traded in the to range. Central bank Governor Tombini said that policy makers could adjust monetary policy as needed. This fuelled speculation of a rate hike this year and supported the BRL. The unexpected drop in retail sales triggered some profit taking on BRL longs. However, comments from Finance Minister Mantega provided renewed support for the BRL. He said that the exchange rate can float and there is no need to take additional measures to intervene in currency markets. The BRL is currently very sensitive to domestic data releases and there a number of key reports coming up. This week, inflation data GDP, unemployment rate and trade balance will be released. Data showing firming momentum is likely to push interest rates and the BRL higher. The BRL remains one of our top picks for this year. Our year-end target is 1.8

13 13 Macro Weekly - Is the Fed set for the exit? - 25 February 213 WEEKLY ECONOMIC CALENDAR Day Date Time Country Market indicator Period Latest outcome ABN AMRO Expectation consensus Monday 25/2/213 2:45: CN PMI manufacturing - index (HSBC) - flash Feb Monday 25/2/213 6:: SG CPI - % yoy Jan Monday 25/2/213 1:3: GB BBA mortgage approvals - units Jan Monday 25/2/213 13:59: GB Nationwide house prices - % mom Feb Tuesday 26/2/213 1:3: ZA GDP - % yoy 4Q Tuesday 26/2/213 12:: GB CBI retail sales - balance (%) Feb Tuesday 26/2/213 15:: US FHFA house price index - % mom Dec Tuesday 26/2/213 15:: US S&P/Case Shiller house price index Dec Tuesday 26/2/213 16:: US Bernanke testifies at Senate Banking Committee Tuesday 26/2/213 16:: US New homes sold - % mom Jan Tuesday 26/2/213 16:: US Conference Board cons. confidence - index Feb Tuesday 26/2/213 18:: FR Total jobseekers - thousands Jan Wednesday 27/2/213 8:45: FR Consumer confidence - index Feb 86. Wednesday 27/2/213 9:: CH Leading economic indicator - index Feb 1.1 Wednesday 27/2/213 1:: EC M3 growth - % yoy Jan Wednesday 27/2/213 1:: BE CPI - % yoy Feb Wednesday 27/2/213 1:3: GB GDP - % qoq 4Q P Wednesday 27/2/213 11:: EC Consumer confidence - index Feb F Wednesday 27/2/213 11:: EC Economic sentiment monitor - index Feb Wednesday 27/2/213 14:3: US New durable goods orders - % mom Jan Wednesday 27/2/213 16:: US Bernanke testifies to House Financial Services Committee Wednesday 27/2/213 16:: US Pending home sales - % mom Jan Thursday 28/2/213 :5: JP Industrial production - % mom Jan P Thursday 28/2/213 1:1: GB GfK Consumer confidence - index Feb Thursday 28/2/213 6:3: IN GDP - % yoy 4Q Thursday 28/2/213 7:45: CH GDP - % qoq 4Q.6 Thursday 28/2/213 8:45: FR Consumer spending - % mom Jan. -.3 Thursday 28/2/213 9:55: DE Unemployment - % Feb Thursday 28/2/213 9:55: DE Unemployment change - thousands Feb Thursday 28/2/213 11:: EC Core inflation - % yoy Jan Thursday 28/2/213 14:: DE CPI - % yoy Feb P Thursday 28/2/213 14:3: US GDP - % qoq annualised 4Q S Thursday 21/2/213 14:3: US Initial jobless claims - thousands Feb Thursday 28/2/213 15:45: US Chicago Fed - business confidence - index Feb Friday 1/3/213 :: NL PMI manufacturing - index Feb Friday 1/3/213 :: RU PMI manufacturing - index Jan 52. Friday 1/3/213 :3: JP Unemployment - % Jan Friday 1/3/213 :3: JP CPI - % yoy Jan Friday 1/3/213 2:: CN PMI manufacturing - index Feb 5.4 Friday 1/3/213 2:45: CN PMI manufacturing - index (HSBC) Feb 52.3 Friday 1/3/213 9:3: SE GDP - % qoq 4Q.5 Friday 1/3/213 1:3: GB PMI manufacturing - index Feb Friday 1/3/213 11:: EC Unemployment - % Jan Friday 1/3/213 11:: EC CPI - % yoy Feb Friday 1/3/213 12:59: RU Policy rate - % Mar Friday 1/3/213 13:: BR GDP - % yoy 4Q Friday 1/3/213 14:3: CA GDP - % yoy Dec 1.3 Friday 1/3/213 14:3: US Consumer spending - % mom Jan Friday 1/3/213 15:55: US Univ. of Michigan cons. confidence - index Feb F Friday 1/3/213 16:: US ISM manufacturing - index Feb Friday 1/3/213 16:: US Construction spending - % mom Jan.9.6 Friday 1/3/213 23:: US Auto sales total - millions annualised Feb , Reuters, ABN Amro Group Economics If you would like to receive this calendar by on Friday, please send a message to abn.amro.group.economics@nl.abnamro.com. 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