October 28 th FX Market Headlines. United States. Euro Zone. United Kingdom. Japan. Australia

Transcription

1 October 28 th 2013 FX Market Headlines United States Euro Zone United Kingdom Japan Australia

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3 United States: Blackout Ends Without Clarity: Uncertainties in the immediate outlook are expected to keep the Federal Open Market Committee (FOMC) on hold this week. The resumption of hard economic data last week fell mostly in line with estimates that growth is on a moderate track around 2%. Given officials reduced confidence in labor market improvement last month, the latest employment figures are unlikely to sway them in a new direction. The base case expects March tapering. The updated economic forecast still anticipates a modest acceleration in growth to 3% next year, reflecting underlying cyclical forces, much diminished fiscal headwinds and continued Fed accommodation. Although the Fed s hesitancy to taper amid easy financial conditions is risking a policy mistake in our judgment, Citi analysts expect a resumption of stronger job gains in the first half of next year will steer them back on course, halting quantitative easing (QE) altogether by September. Despite the headline disappointment in September payrolls, the gain was well inside of confidence intervals consistent with the 185,000 trend. Weak summertime payrolls have been a recurring theme in first-reported data. But on that basis, both August and September first prints this year have been the strongest in more than a decade. Gains in construction outlays show signs of rebound in depressed state and local activity, while rising backlogs of capital goods orders point to stronger readings on factory output ahead. EURO ZONE: Italy and Spain Look Well Positioned For Job Growth: As sentiment surveys are continuing to recover across the euro area, some improvement in employment expectations suggests that job creation will become a feature of the economic landscape once again. Most member states have made some significant efforts to reform labour markets and lower the cost of labour, attempting to lower the threshold of GDP growth at which job creation becomes positive. However, Citi analysts argue that the improvement in demand forecasts will likely be the key determinant of job creation in the coming quarters, especially in member states where an important gap is opening up between demand and job expectation. Italy and Spain are Citi analysts top picks from the periphery, assuming that the recovery continues. The jobs recovery will nevertheless be modest and uneven, with a significant likelihood of high unemployment becoming a permanent feature of the euro area in Citi analysts view. United Kingdom: Growth Dividend For The Public Finances: The improving economy and recent fiscal data are likely to provide a favorable backdrop for the Autumn Statement (scheduled for December 4). Citi analysts expect this year s fiscal deficit (excluding financial interventions, and the APF and RM transfers) to total about 109bn, 6.6% of GDP and 11bn below the Office for Budget Responsibility s (OBR) forecast in the spring 2013 Budget. With the economy strengthening, the deficit will probably fall to about 89bn (5.1% of GDP) in 2014/15 and about 70bn (3.9% of GDP) in 15/16, undershooting by 19bn and 25bn respectively versus the OBR s forecasts. Citi analysts expect the public debt/gdp ratio will start to fall in 2016/17, a year ahead of the OBR s forecast. The Chancellor is unlikely to change fiscal policy significantly in the Autumn Statement. But, Citi analysts expect the Chancellor will introduce measures to tackle three key issues: easing upward pressure on household energy prices, improving SME finance and encouraging business investment alongside sizeable downward revisions to the UK s debt and deficit outlook. JAPAN: Rise in trade deficits going on longer than expected: Trade deficits have been more persistent than expected The customs clearance trade deficit (flash estimate) rose to trn, reaching a record high in September. With the cumulative positive impact of yen weakness versus the US dollar, Citi analysts had expected that the gap would start to decline in the second quarter of this year. However, the latest trade data suggest that the improvement will likely take a longer time than had been expected. Trade gap in the electronics sector appears to have become more structural Despite a 20%+ fall in the yen s effective exchange rate, the trade balance has yet to improve for information and communication electronics

4 equipment and electronic parts and devices. Given that global demand for ICT-related goods has remained solid, Citi analysts suspect the domestic ICT industry might be facing 1) weaker non-price competitiveness (e.g., brand power, design and quality) and 2) an irreversible production shift abroad. Together with rising mineral fuel imports due to minimal nuclear operations in Japan, the potential comparative disadvantage in the electronics industry might lead to a prolonged period of trade deficits. If nuclear plants are not allowed to restart, Citi analysts cannot deny the risk that a trade deficit may well remain in place. There is a risk of continued economic moderation in and after the fourth quarter Stagnant net external demand (exports - imports) not only poses a direct constraint on economic growth but also potentially has an adverse economic impact by way of limiting business investment growth at export-oriented manufacturers. Citi analysts note the risk that the economy could fail to pick up in and after the fourth quarter, following moderation in the third quarter. AUSTRALIA: Grappling with Global Events: No end in sight to major central banks stimulus tilt - Citi economists global growth forecasts are unchanged this month, at 2.5% for 2013 and 3.2% for 2014 (at current exchange rates). Over the last six months, Citi economists have cut EM growth forecasts by 0.5% for 2013 and 0.4% for 2014, while lifting AE forecasts by 0.1% for 2013 and 0.4% for 2014 with notably large upgrades for the UK, periphery EMU countries and Japan, only partly offset by lower US forecasts. Even with the modest improvement in advanced economy growth prospects, the slack created by prior economic weakness means that inflation is weak almost everywhere. IMF data show that the overall CPI inflation rate for advanced economies was just 1.3% YoY in August, versus 1.7% YoY a year earlier and 3.0% YoY two years earlier. Core inflation is well below the central banks targets in the US, EMU and Japan. In all, the IMF expects CPI inflation to average below 2.5% this year in 30 out of 35 advanced economies, and to be lower than last year in 29 of the 35 advanced economies. On both metrics (number of countries with inflation below 2.5%, number of countries with slowing inflation), this is the most disinflationary year of the last 30 years apart from 2009, when falling global oil prices pulled headline inflation rates sharply lower in many countries. The few exceptions to this broad disinflationary trend mostly reflect increases in indirect taxes or regulated prices, for example the UK and Netherlands. With such low inflation allowing central banks to prioritize growth, Citi analysts expect that the main advanced economy central banks will keep policy loose for a while and in some cases expand stimulus. For the US, the exact timing of the start of Fed tapering is very uncertain, amidst possible shutdown-related data volatility and uncertainties, plus the leadership transition. But, with private job growth slowing in Q3, Citi analysts now expect tapering to begin in March, with asset purchases not ending fully until late The ECB is likely to introduce a new LTRO in Q1, aiming to cap market rates and ensure banks have ample liquidity in case of any worries over capital needs during the during the Asset Quality Review period. The BoJ is likely to implement extra easing as an offset against the 2014 consumption tax hike, focused on purchases of risk assets (such as ETFs). In contrast, Citi economists expect the Chinese authorities to tighten financing conditions which would see some renewed slowing in China s growth by the end of the year. Nevertheless, so far money supply has continued to run ahead of the PBoC s targets. Implications for Australia - The changed outlook for US monetary policy has seen the AUD strengthen further, causing more headaches for the RBA. The Deputy Governor, Phil Lowe, this week again pointed to the role of a lower AUD in helping to rebalance the economy, but reflecting the uncertain financial outlook he stated Whether we will see a further realignment remains unclear. Lowe made a case for a lower AUD based on lower expected returns and investment in the mining sector. But he also noted that whether non-mining business investment picks up significantly will depend at least partly on other factors such as business confidence, strong population growth and low interest rates, all of which are relatively favorable. That said, the legacy of the GFC in the form of increased uncertainty about the pay-offs from investment is a constraining factor. Boards in many cases have preferred to reward shareholders through buybacks and dividends rather than invest aggressively. And where investments are being made, often this is to improve productivity by cutting costs rather than to expand capacity and to increase revenue. The RBA can still cut the cash rate further if needed. Further easing of monetary policy by another 25bp won t make much difference to the AUD given the still large gap between Australian rates and global peers, but it would

5 encourage a stronger appetite for borrowing by households and businesses. This could help housing construction and business investment but at the cost of further heating up the property market, particularly in Sydney. Last week s Q3 CPI wasn t a knock-out for the RBA. The Q3 CPI was higher than expected (1.2% vs. 0.8%) and the distribution of price changes in the central 70% of the CPI basket shifted towards more items with higher inflation than in Q2. However, fundamentals remain supportive of inflation remaining consistent with the RBA s sanguine views on the outlook (below trend economic growth, soft labour market, companies cutting costs, the high AUD, low global inflation). Underlying inflation in the past two quarters is running right in the middle of the RBA s 2%-3% target. Trends in money supply do not support upside pressure on underlying inflation. RBA view Citi analysts core view remains for no change in official interest rates. But they can t rule out a rate cut early next year if there is evidence that the elevated AUD (if it is still around current levels or higher) is slowing economic growth further. In Citi analysts view the probability of a rate cut in February 2014 has gone from 10% to something closer to 30%. By then, the RBA and the market should also have a view as to whether there is likely to be a repeat of the fiscal follies in Washington and the tapering timetable from the US Fed. The Treasurer was right to increase the RBA s capital reserves. This had been depleted under the former Treasurer to shore up the government s own balance sheet via increased dividend payouts from the Bank against a background of FX reserve losses from the appreciating AUD. The increase in reserves should make the international financial community more assured that the RBA can fulfil any required foreign exchange transactions and open market operations as they are required. Even though this has increased the government s budget deficit - The $A8.8bn grant to the RBA means a widening in the underlying cash deficit to $A38.9bn (2.5% of GDP) in FY14. The widening of the deficit is manageable and well within the performance of the last five years, i.e., the deficit is not blowing-out. The deficit widening has increased the requirement for Commonwealth government borrowings. Accordingly, Citi analysts FY14 forecast for end of year stock of issuance is higher at $A302bn. Our peak stock of issuance forecast rises to $A331bn in FY16. This remains below 20% of GDP. Importantly, Australian general government debt for Federal and State Governments is likely to remain well below international peers. Citi analysts forecast this to peak at 32% of GDP in FY15 before falling to 28% by FY17. The next update to Citi analysts Congressional Government Spending (CGS) forecasts will likely be when the Mid-Year Economic and Fiscal Outlook is released. The Government has previously said this could be delayed until late January 2014, although recently the Treasurer stated he hoped it could be released before year end. Although out of the norm compared with the usual November release of this publication, it is allowed under the Charter of Budget Honesty Act USD: The Week Ahead Oct 30, FOMC Rate Decision. Nov 1, St. Louis Fed President Bullard to speak to the St. Louis Chambers' Financial Forum about monetary policy. Nov 1, Minneapolis Fed President Kocherlakota to deliver opening remarks at Minnesota Healthy Communities Conference. Nov 1, Philadelphia Fed President Lacker to speak and be honored by the Global Interdependence Center in Philadelphia. Oct 28, September Industrial Production and Capacity Utilization (Percent Chg. Unless Noted): Total Citi 0.5 %, August 0.4 %, July 0.0 %, June 0.1 %; Capacity Utilization Citi 77.5 %, August 77.8 %, July 77.6 %, June 77.8 % - Industrial production likely jumped in September, due to a sharp rebound in utilities output. Utilities usage fell during the summer months as a warm start to the summer faded to an exceptionally cool August. The expected pickup in September represents a return back to trend, as the temperature in the month was relatively normal. Note: Citi analysts think manufacturing output settled back after the August surge. Factory hours worked dipped a little in September. Citi analysts forecast for manufacturing production would put the third quarter figure about 1.7% above the second quarter average. Oct 29, September Producer Price Index (Percent Change): Total Citi 0.1 %, August 0.3 %, July 0.0 %, June 0.8 %; Ex. Food & Energy Citi 0.1, August 0.0, July 0.1, June There has been little in the way of price pressures at the producer level throughout this recovery, but the weakness seems to have become more pronounced in the past year. Citi analysts expect more of the same in the September reading. Note: Core PPI has been extremely tame lately. In the past year, the index increased by just 1.2%, or 0.1% per month on average. In that time, there was a similar mild increase in core intermediate supply prices and an outright decline of 4.6% in core crude goods prices. Oct 29, September Retail Sales (Percent Change): Total Citi -0.1 %, August 0.2 %, July 0.4 %, June 0.7 %; Ex Autos Citi 0.3,

6 August 0.1, July 0.6, June Retail sales likely were dampened by a sharp drop in motor vehicle sales and a decline in gasoline prices. Together, these two sectors subtracted about a half point from headline retail sales. Otherwise, Citi analysts expect that retail sales continued to rise at a healthy pace. Citi analysts estimate would mean that core retail sales increased at a nearly 4% pace in the third quarter. Note: Automakers have indicated that the 5% decline in unit vehicle sales reflected a timing issue, as some sales during the Labor Day weekend were counted toward the August tally rather than September s. So any pullback in discretionary consumer spending as a result of the drop in vehicle purchases is likely to be short-lived. Oct 29, October Consumer Confidence: Citi 73.0, Sep 79.7, August 81.8, July 81.0, June 82.1 Citi analysts look for a large drop in consumer confidence this month. The October reading will include the entire government shutdown, which likely weighed on consumers. During the shutdown (which lasted longer), consumer confidence fell by more than 13 points, but rebounded shortly after resolution. Note: Citi analysts large forecast decline just brings sentiment down to the level that prevailed a year ago, illustrating just how much confidence has improved in the past year. Oct 30, September Consumer Price Index (Percent Change): Total Citi 0.2 %, August 0.1 %, July 0.2 %, June 0.5 %; Excl. Food & Energy Citi 0.1, August 0.1, July 0.2, June 0.2 Citi analysts look for another modest reading on consumer prices in September. Energy prices may have provided a small lift but we think prices were soft among core goods and services. The core CPI inflation rate is running at just 1¾%, so there do not seem to be significant price pressures at this time. The same can be said for producer prices. Note: The CPI survey was completed by the end of September, before the shutdown, so there should be no effect on the CPI print. However, Citi analysts are concerned about distortions to the October report. There was no data collection for the first half of the month, so the combination of a smaller sample and only late month readings could taint that report. Oct 31, October Chicago Purchasing Managers Index: Citi 56.0, Sep 55.7, August 53.0, July Citi analysts look for the Chicago purchasing managers index to remain roughly unchanged in October, in a relatively solid range. However, Citi analysts are well aware that the Chicago index tends to jump around a lot. This year the swings have been enormous (and seemingly unrelated to actual changes in activity). Note: The purchasing managers surveys have been fairly strong lately, which was perplexing given the poor pace of manufacturing production in the second and third quarters. However, recent orders reports show growing backlogs, indicating better activity in coming months, which may explain the strength in these surveys. Nov 1, October ISM Manufacturing Activity Index: Citi 56.0, Sep 56.2, August 55.7, July 55.4, June 50.9, May The manufacturing activity index likely held its September gains in the face of the government shutdown. Regional activity surveys suggest that manufacturing wasn t seriously impacted by the furloughing of federal workers and the debt ceiling circus. Note: Some regional surveys have shown further growth in October, and the new orders sub-index has been in the sixties for the past two months. These signals often point to an increase in the headline figure. However, at 56, the ISM index is already signalling strong growth in manufacturing, and would have difficulty rising further. AUD: 31 Oct, Private Sector Credit, Sep Forecast: 0.3%, Previous 0.3% - Hysteresis in this data series suggests that the September result will print at 0.3%. Risk of a slightly stronger number comes from the pick-up in housing activity that could lift housing credit growth by marginally more than Citi analysts expect. 31 Oct, Building Approvals, Sep Forecast: 0.5%, Previous -4.7% - After the sizeable August decline, Citi analysts expect only a small rebound in September s building approvals data. Housing finance approvals fell in the month and momentum in private approvals appears to have met some resistance, at least temporarily. Citi analysts place some upside risk to their forecast because of the rise in consumer confidence that has lifted sentiment towards the property sector. EUR: Oct 30, German Unemployment, Oct Forecast: +20K MM SA, -31K MM NSA Prior: +25K MM SA, -96K MM NSA Citi analysts expect the number of unemployed persons in Germany to tick upwards slightly on a seasonally-adjusted basis for the third month in a row (non-seasonally adjusted unemployment should fall). Unemployment is still very low in Germany and employment is in fact still growing modestly, but with relatively large inward migration it is growing slightly less fast than the labor force. Oct 30, Euro area Economic Sentiment, Oct Forecast: 97.2 Prior: Economic sentiment likely posted another gain in October, albeit a smaller one relative to previous months, bringing the ESI index closer its long-run average (albeit still slightly below it by 0.4 standard deviations). This suggests 2H GDP growth is likely to be in slightly positive territory but is unlikely to accelerate much relative to 3Q. Both industrial and consumer confidence indices likely edged higher in October. Oct 31, Euro area HICP, Oct P Forecast: 1.1% YY Prior: 1.1% YY - The HICP annual inflation rate probably remained unchanged at a multi-month low of 1.1% in October. Inflation stood at 2.5% on average in Part of the recent decline is due to falling energy prices, and in September in particular, to the reversal of previous price tensions in fresh food products. But core inflation (ex. fresh food and energy) has also been weakening from 1.6% YY at the end of last year to 1.2% in September (probably unchanged in October). Oct 31, Euro area Unemployment Rate, Sep Forecast: 12.0% Prior: 12.0% - The August unemployment rate likely remained unchanged for the second consecutive month at 12.0%, slightly below the record-high level of 12.1% reached in April-June. The recent stabilization is likely to be a temporary one, in Citi analysts view, reflecting positive seasonal hiring in Mediterranean countries, rather than an underlying improvement in the labor market. Citi analysts expect the unemployment rate to edge higher in 4Q. GBP: 1 Nov, Manufacturing PMI (Oct) Forecast: 56.5 Prior: The manufacturing PMI slipped back slightly last month after six consecutive gains, but remains far above average. Citi analysts expect another high figure this month, consistent with other signs that manufacturing output growth is buoyant. 5 Nov, Services PMI (Oct) Forecast: 60.0 Prior: The services PMI edged lower in September after eight consecutive gains the longest run of improving figures since Nevertheless, the September figure remains very high (3rd highest since the survey began in the mid-90s) and hence a figure anywhere close to current levels would continue to indicate very strong growth.

7 6 Nov, Industrial Production (Sep) Forecast: 1.2% MoM, 2.5% YoY Prior: -1.1% MoM, -1.5% YoY; Manufacturing Output (Sep) Forecast: 1.2% MoM, 0.8% YoY Prior: -1.2% MoM, -0.2% YoY - Surveys indicate that the trend in manufacturing output is buoyant and hence Citi analysts expect that the decline in August will be reversed this month. A figure in line with Citi analysts forecast would put manufacturing output up by 0.9% QoQ in Q3 after the 0.8% gain in Q2. 8 Nov, Trade Balance Goods & Services (Sep) Forecast: -2.5 billion Prior: -3.3 billion - The trade deficit has been disappointingly wide in the last couple of months, reflecting weaker export figures. But, with surveys suggesting that export orders have improved sharply, Citianalysts expect that the trade deficit will fall back this month. JPY: Oct. 29, Labor Data, Job Offers-to-Seekers Ratio (Sep) Forecast: 0.96, Previous: 0.95; Unemployment Rate Forecast: 4.0% of Workforce, Previous: 4.1% of Workforce - In September, Citi analysts expect to see moderately better readings for unemployment (4.0%) and the effective job-offers-to-seekers ratio (0.96). Citi analysts expect a gradual decline in joblessness to continue in the coming months as both labor demand and desire to find jobs pick up. The unemployment rate is expected to drop to the 3% range in the fourth quarter. Oct. 29, Real Household Spending, All Households (Sep) Forecast: 0.7% YoY; 0.5% SA MoM, Previous: -1.6% YoY; -0.5% SA MoM - Real spending of all households probably increased 0.7% YoY and 0.5% MoM in September. On a seasonally-adjusted basis, real core spending (excluding volatile items such as housing, car purchases, money gifts and remittance) likely rose 0.1% MoM in September after a 0.1% MoM gain in August and a 0.4% MoM fall in July. If Citi analysts are on the mark, real core spending dropped an estimated 0.6% QoQ in the third quarter. Based on available consumer-related data to date, Citi analysts expect real private consumption to drop 0.2% QoQ in the third quarter for the first negative reading in four quarters. Rush demand ahead of the consumption tax hike in April 2014 will likely support consumption growth in and after the fourth quarter, but it will inevitably be followed by a drop off in the second quarter of Oct. 29, Retail Sales, Overall (Sep) Forecast: 2.6% YoY; 1.3% SA MoM, Previous: 1.1% YoY; 0.9% SA MoM - Retail sales probably increased 2.6% YoY in September. According to already available industry statistics, department store and chain store sales increased 2.8% YoY and 0.4% YoY, respectively, in September both for a second consecutive monthly gain. On a seasonally-adjusted basis, retail sale likely increased 1.3% MoM in September. If Citi analysts are on the mark, retail sales would drop 0.3% QoQ in the third quarter for a first fall in three quarters, but sales are likely to resume meaningful growth in the fourth quarter as rush demand shifts into higher gear. Oct. 30, Industrial Production (Sep) Forecast: 1.6% MoM; 5.5% YoY, Previous: -0.9% MoM; -0.4% YoY - September industrial production likely increased 1.6% MoM (-0.9% MoM in August). The official projection points to a strong 5.2% MoM gain. Citi analysts projection suggests a 1.8% QoQ increase in the third quarter industrial production (+1.5% QoQ in 2Q). While Citi analysts expect moderate production growth to continue for now, a slow export recovery probably means that a notable pickup is unlikely. Oct. 31, Housing Starts (Sep) Forecast: 11.2% YoY; mn units SAAR - Previous: 8.8% YoY; mn Units SAAR Citi analysts expect September housing starts to stand at 973k (+11.2% YoY) on a seasonally adjusted annualized basis. According to media reports, building contracts surged towards the end of September as the tax hike in April 2014 was widely expected. These contracts will likely translate into housing starts in and after the fourth quarter, in Citi analysts view. Our previous experience in 1997 indicates that housing starts will likely peak in the third and fourth quarters of 2013, followed by a drastic fall in 2014.