Macro Markets Themes for 2016

Transcription

1 The Goldman Sachs Group, Inc. Goldman Sachs Research Macro Markets Themes for 216 Francesco Garzarelli Co-Head of Global Macro-Markets Research and of European Economics +44(2) March 216 Goldman Sachs International Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Goldman Sachs Global Investment Research 1

2 A Look Back at 215 Goldman Sachs Global Investment Research 2

3 A Look-back at 215 Divergence Between, Convergence Within Monetary Policy Divergence Extends Ratio of narrow money base to nominal GDP Q4-27 = Index US Japan 35 Euro Area Bank Lending Rates in Euro Area Converging Bank lending rates to companies in respective countries US Dollar Strengthens in Trade-Weighted Terms Index Trade-weighted currency indices USD, JPY and EUR, Indexed at May-214 = 1 USD TWI JPY TWI EUR TWI Germany 3 France Italy Spain Target 2 Imbalances Still High Target2 balances in the Euro Area Banking System 1 EUR bn 8 Germany Italy 6 Spain 4 France May-14 Aug-14 Oct-14 Jan-15 Mar-15 Jun-15 Aug-15 Nov-15 Jan Source: Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 3

4 A Look-back at 215 Lower Crude Oil Prices Pull CPI Inflation Down Lower Energy Prices Is Subtracting More Than 1 from Headline CPI......Reinforcing Expectations of Protracted Low-flation Weighted average contribution of energy prices to headline CPI in G4 vs WTI $/bbl Weighted average contribution of energy component to headline CPI in G4 (LHS) WTI (RHS) US 1-year nominal yield and 1-year TIPS UST 1 Year Nominal Yield (LHS) 1 Year TIPS (RHS) Oil Price 'Crash' Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 4

5 Goldman Sachs Global Investment Research 5 Source: US NOAA, Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research A Look-back at 215 Four Global Unanticipated Shocks A Rational Bubble in German Bunds China s FX Depreciation year Bund Yield: Actual vs Model Fair Value Std. Dev USD/CNY: Spot, Forwards and GS Forecasts USD/CNY USD/CNY FWD GS Forecast DEM 1-yr yield Sudoku Misvaluation Aug-14 Nov-14 Feb-15 May-15 Aug-15 Greece s Confrontation with the Troika 6. Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 A Particularly Strong El Nino 7 65 Price Greek Government Bond Strip Price 57.5 Sep-Nov US Temperatures vs 19-2 Average Degrees F Greek Government Bond Strip Price 25 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Temperature: Sep-Nov Average Sep-Nov. Temperature

6 Where Are We Now? Goldman Sachs Global Investment Research 6

7 Where Are We Now Inflation Outlook Still Clouded Headline CPI Inflation Below Target in And in the Years Ahead in Several Advanced Economies Consensus Economics, GS Forecasts for World, Advanced and Emerging Economies in 216 GS CPI forecasts for USA, UK, Euro Area, Japan World - CE World - GS inflation target Adv- CE Adv - GS.8 1. Emerg - CE Emerg- GS USA UK Euro Area Japan Source: Consensus Economics, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 7

8 Where Are We Now China Slowing, Policy Easing CNY Has Appreciated vs EM Peers A Bumpy Deceleration is Underway in China Index China Real Trade Weighted Exchange Rate vs Other EM Majors GS Current Activity Indicator and GS Market Based China Growth Risk Factor EM FX Real TWI 9 CNY Real TWI We Expect a 'Managed' CNY Depreciation USD/CNY: Spot, Forwards and GS Forecasts 4. China CAI 7. USD/CNY 2. Market-based China Growth Risk Factor USD/CNY Spot FWD GS Forecast Source: Goldman Sachs Global Investment Research Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Goldman Sachs Global Investment Research 8

9 Where Are We Now Bonds as Stretched as in Early US Treasuries: Actual and Model Fair Value US Treasuries: Model Over/Undervaluation 5 US 1-yr yield Sudoku 'Fair' Value 4 Std.Dev Cheap 4 Current Market Pricing GS Forecast QE + forward guidance German Bunds: Actual and Model Fair Value On current -2 consensus macro forecasts, a 2SD even on TY1 is at Expensive 1-year UST Misvaluation +/- 1 Std. Dev +/-1 2 Std. Dev German Bunds: Model Over/Undervaluation 4 3 DEM 1-yr yield Sudoku 'Fair' Value Current Market Pricing GS Forecast 4 2 Std.Dev Cheap 2 1 QE + forward guidance Expensive 1-year Bund Misvaluation +/- 1 Std. Dev +/-1 2 Std. Dev Source: Haver Analytics, Bloomberg, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 9

10 Where Are We Now Low Neutral Rate, No Premium in Bonds Expectations on the Neutral Rate (R*) Usually Rise as Fed Hikes Term Premium Drops 2 Quarters After the First Hike, But From Much Higher Levels 5-yr- 5-yr risk neutral US $ rates estimated by Adrian, Crump and Moench (213) 5-yr- 5-yr term premium on US $ rates estimated by Adrian, Crump and Moench (213) Feb Feb t-4 t-2 t t+2 t+4 t+6 t+8 t+1 t+12 t+14 t+16 t+18 t+2 t+22 t+24 Months (t = Month of rate hike) -.3 t-4 t-2 t t+2 t+4 t+6 t+8 t+1 t+12 t+14 t+16 t+18 t+2 t+22 t+24 Months (t = Month of rate hike) Source: Federal Reserve, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 1

11 Where Are We Now Japan in the Driving Seat for Rate Rally Yields in G-4 Have Co-Moved Since Start of Year 1-Year bond yields in US, Germany, UK and Japan But JGBs have Been in the Driving Seat Cumulative rate shocks for yields of 1-year USTs, German Bunds, UK Gilts and JGBs, computed using Rigobon (23) methodology Cumulative standard errors UK US 1.4 Japan (RHS) Germany (RHS) 1.2 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan US UK -1 Japan -12 Germany -14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 11

12 Where Are We Now The Market Prices Persistent Low-flation Market Still Assigns High Probability to Moderate Inflation in the US...And Sees Very High Chance of Persistent Low-flation in the Euro area 1 Option-implied probability distribution of 5-year inflation by strike clusters : low inflation ( 1), medium, and high ( 3) 1 Option-implied probability distribution of 5-year inflation by strike clusters : low inflation ( 1), medium, and high ( 3) Probability low inflation Probability medium inflation 4 4 Probability low inflation Probability medium inflation 2 Probability high inflation 2 Probability high inflation Source: Bloomberg, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 12

13 Where Are We Now Or Discounts Crash Risk in Oil Prices 'Market-Implied' Pricing of Core-CPI is too Low Relative to GS Forecasts Market Pricing Sub-2 $/bbl Oil Prices for Core-CPI to stay at 2 US core CPI (YoY), market implied pricing of core CPI and GS forecasts WTI, GS Forecast, Oil Forwards and market implied path for WTI if Core-CPI has to stay at $/bbl US Core-CPI (YoY) GS Forecast.5 Market Implied Pricing of 'Core-CPI'. -.5 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep WTI GS Forecast 2 Oil Forwards Market Price Needed for Core-CPI at 2 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Source: Bloomberg, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 13

14 Where Are We Now ECB Gluing EMU Bond Markets Together ECB Absorbs Around Half of Overall Gross Issuance....Compressing Periphery-Core Spreads Estimated ECB purchases under PSPP for 216 as percentage of gross bond issuance Difference between Italy-Germany 3-year government bond spread and 5-year spread (in asset swaps) ECB purchases 216/government bond gross issuance 216 Germany France Italy Spain median Italy-Germany Term Structure of Spreads Source: Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 14

15 What to Expect Through 216 Goldman Sachs Global Investment Research 15

16 What Will Drive Macro Markets in 216 Europe Will Beat Its Growth Potential Distribution of US Growth Expectations Is Fairly Symmetric Heavy Left Tail in Distribution of Euro area Growth Forecasts US 216 Real GDP Growth: GS forecast vs kernel distribution of consensus projection Euro area 216 Real GDP Growth: GS forecast vs kernel distribution of consensus projection 2. Density 3. Density 1.5 Consensus 216 GS Consensus 216 GS Source: Consensus Economics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 16

17 What Will Drive Macro Markets in 216 The Services Sector Will Carry the Day US Tertiary Activity Continues to Expand In Face of an Industrial Slowdown......As Is the Case Across Most Economies US Manufacturing and Services PMI Global PMIs: Manufacturing and Services 62 6 Index US Manufacturing PMI 56 Global Manufacturing PMI US Services PMI 54 Global Services PMI Index Source: Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 17

18 What Will Drive Macro Markets in 216 The Fiscal Stance Will Turn More Expansionary US Government Sector Expected to Add to US Growth in From the End of Austerity (214-15) to A Synchronous Fiscal Expansion Contribution of US Government Consumption and Capex to US Real GDP Growth Estimates of contribution of fiscal policy annual real GDP growth in selected countries Contribution of US Government Spending to Real GDP Growth GS Forecast bp USA Euro Area Japan China Source: Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 18

19 What Will Drive Macro Markets in 216 ECB and BoJ Alleviate Debt Overhang BoJ on Course to Hold Almost Half of Japan s Public Debt Fiscal Deficit as of GDP (LHS) GS projections assuming QQE runs at 8trn Yen/year (RHS) BoJ Holding of JGB's as of Total (RHS) ECB QE Alleviates the Public Debt Overhang Outstanding stock of government bonds, ECB purchases and respective average maturities ECB purchases in year X as a of stock of bonds in end of year X 217 (LHS) 216 (LHS) 215 (LHS) Average Maturity of ECB Purchases (RHS) Average Maturity of Stock Outstanding (RHS) years GS Forecast Germany France Italy Spain..But Aggravates Bund Scarcity Concerns BoJ QQE Has Afforded Debt Maturity Extension years Average Maturity of JGBs in BoJs Balance Sheet (LHS) Forecast Average Maturity of JGBs in BoJs Balance Sheet (LHS) Average Maturity of JGB's at Issuance (RHS) years Amount of German government bonds eligible for PSPP under current programme parameters Eur Bn 33 of Eligible Stock Debt with Yield Above Deposit Rate Debt with Yield Below Deposit Rate Mar-1 Jan-11 Nov-11 Sep-12 Jul-13 May-14 Mar-15 Jan-16 Nov yr<2 2 yr<3 3 yr<4 4 yr<5 5 yr<6 6 yr<7 7 yr<8 8 yr<1 1 yr<1515 yr<3 Source: Japan Ministry of Finance, Haver Analytics, Bloomberg, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 19

20 What Will Drive Macro Markets in 216 Oil Prices will be Lower for Longer WTI Ranging Between US$ 4-5 In the New Oil Order Contribution of Energy to Variance of Headline CPI Variance Set to Decline Global Balance of Oil Demand-Supply and WTI Prices, Historical and GS Forecasts kbd Global Oil Imbalance WTI Price (RHS) $/bbl Decline in the variance of headline inflation attributable to energy Variance of Headline US CPI and Energy Component (weighted) bps Variance of Energy Component Variance of Headline Inflation The market imbalance estimates are based on IEA data and GS forecasts, as the WTI price projections. Source: IEA, Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 2

21 What Will Drive Macro Markets in 216 Central Banks Will Continue Reflating There are adverse global developments [making it difficult to reach] our objective. Is this a good reason to give up? No, it's not a good reason to give up. How do you give up? Either accepting a lower objective, which we don't do; or saying that this objective will be reached in a certain very large number of years, and we don't do that either. We don't give up. Mario Draghi, ECB President, January 216 Goldman Sachs Global Investment Research 21

22 What Will Drive Macro Markets in 216 We See US Domestic Inflation Accelerating... US Inflation Increase Led by Core Higher Trend in US Service Inflation US CPI Inflation: contribution by component and GS projections vs market Non energy industrial goods Energy Food Services Headline GS CPI Forecast Market Pricing Implied from Inflation Swaps 4 3 US service inflation trend estimated using Stock-Watson (27) procedure Jan-1 Feb-11 Mar-12 Apr-13 May-14 Jun-15 Jul-16 Aug-17 Sep-18 1 Inflation (yoy) 16-tile Trend 84-tile Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 22

23 What Will Drive Macro Markets in Setting the Fed s Flight Path The Market Prices that the Fed Will Struggle to Meet Its Inflation Target Oil Price Effects on Market Inflation: Strong, But Transient US 1-year Inflation Swaps: actual and estimates of fair value based on GS iswap model VAR estimate of the impact of a 1 crude oil price shock on US 1-year breakeven inflation bp Breakeven Inflation Level (set at 1.6 on shock impact) /- 2 Std dev +/- 1 Std dev Current US Inflation Swap Fair -4-6 Following a 1 decline in oil price Impact on Breakeven Inflation in bps (LHS) Trajectory of Breakeven Inflation (RHS) yr 2yr 5yr 1yr 15yr 2yr Source: Bloomberg, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 23

24 What Will Drive Macro Markets in 216 The Jury Is Still Out in the Euroarea and Japan Euro Inflation Below ECB Target Euro Area CPI Inflation: contribution by component and GS projections vs market Non-energy industrial goods Energy Food Services Headline GS CPI Forecast Market Pricing Implied from Inflation Swaps Euro area Service Inflation Stable at Low Levels 3 2 Euro-Area Service Inflation trend estimated using Stock-Watson (27) procedure Jan-1 Feb-11 Mar-12 Apr-13 May-14 Jun-15 Jul-16 Aug-17 Sep And Improving Very Slowly in Japan Japan CPI Inflation: contribution by component and GS projections vs market 1 Inflation (yoy) 16-tile Trend 84-tile Around Zero in Japan Japan Service Inflation trend estimated using Stock-Watson (27) procedure Non energy industrial goods Energy -2. Food Services HICP (sum of components) GS CPI Forecast Market Pricing Implied by Inflation Swaps -4. Jan-1 Feb-11 Mar-12 Apr-13 May-14 Jun-15 Jul-16 Aug-17 Sep-18 Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research -2 Inflation (yoy) 16-tile -3 Trend 84-tile Goldman Sachs Global Investment Research 24-1

25 What Will Drive Macro Markets in 216 EM Rebalancing Is Underway EM FX Has Entered Undervalued Territory Differential Impact of Commodity Price Slide on Exporters Historical EM FX performance vs. ex ante valuation signals Precious metals: Gold, Silver; Base Metals: Aluminium, Copper, Nickel, Zinc, Lead; Bulk Commodities: Iron Ore, Coal Overvaluation/depreciation Commodity exposure ( net exports of GDP) Greater exposure to metals/bulks Greater exposure to oil prices EM FX vs USD (rolling 2-year return) -2 Average Valuation signal (FEER/GSDEER) Note: v aluations are quarterly, and are adjusted f or 2-y ear-ahead (consensus) inf lation dif f erential; CE-4 currencies v aluations/dy namics are measured against the EUR; please see the main paper f or the v aluations relativ e to the latest spot Oil Precious metals Base metals Bulk commodities CLP ZAR PEN IDR BRL TWD MXN COP RUB NGN Source: Haver Analytics, Bloomberg, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 25

26 What Will Drive Macro Markets in 216 A Further Decline in EM FX Reserves A Projected 1 Decline in Foreign Official Sector Ownership of US Treasuries Trend in Net Foreign Purchases of USTs Negative to the Tune of US$2bn Foreign official sector holding of US Treasury bills and bonds as a share of total stock of Treasuries outstanding Trend component (estimated through a HP filter) of monthly net purchases of US Treasuries by the foreign official sector USD billions Peak in March Foreign Official sector holding of US Treasuries as a share of stock outstanding Projections based on past 12- month trend flows HPF-trend component of monthly net purchases of US treasuries by foreign official sector Source: Federal Reserve Board, US Department of Treasury, IMF COFER, Haver Analytics, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 26

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