UNITED STATES: ISM VS INFLATION

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1 Survey data released this week point to stronger US growth in September This doesn t stop core inflation from declining Bond and currency markets expect the FOMC to focus on the growth indicators How good can it get? Better than you think. That s the impression one gets from key survey data released at the start of this month and which show the UNITED STATES: ISM VS INFLATION economic pulse for September. Although the global manufacturing PMI was stable at 53., the PMI for the eurozone rose to 58.1 (from 57.). This brings us close to the 17 year high of.5 reached in April. In the US, the ISM index for the manufacturing sector increased to.8 (from 58.8) with a big increase of the new orders series. The non-manufacturing ISM reached 59.8 (from 55.3 in August). As expected, this caused a jump in the real-time growth estimate ( nowcast ) produced by the Federal Reserve of Atlanta. Annualised quarterly real GDP growth for Q3 is now estimated at.8%. Yet the year over year change in the core personal consumption expenditures Manufacturing ISM price index has been on a declining trend since the start of the year. 1. Non-manufacturing ISM Although the monthly change has been stable for four months in a row, it 35 1 has been so at a very low level (.1%). It implies that the puzzling mix of Core PCE, y/y % (RHS) sustained good growth and subdued inflation continues, raising the question 3.8 about what it entails for monetary policy. Ongoing low inflation numbers going forward would intensify the debate with some arguing that inflation is bound to accelerate quite soon (at some point the slope of the Phillips Sources : ISM, BEA, BNP Paribas should steepen) and others defending the view that real factors like globalisation, technological change and price sensitivity of demand imply we re in a new era. Financial markets take the view that there are enough reasons available to justify a Fed rate hike and the probability of a December move has increased to 77%. The rise in treasury yields and the stronger dollar did not stop Wall Street from beating record after record, underpinned by the growth environment, low rates, a cautious central bank. Hopes about cuts in corporate taxes are an additional factor and they also support the corporate bond market: if companies were to repatriate earnings previously kept abroad this could lower bond issuance. Whereas Wall Street didn t bother about the dollar, Frankfurt will have welcomed the strengthening. With only three weeks to go to the crucial ECB meeting which should decide on QE in 18, the numerous references to the euro in the September meeting account released this week show the importance of this factor in the thinking of the governing council members. Markets Overview Pulse Economic scenario

2 Ecoweek 17-3 // October 17 economic-research.bnpparibas.com The essentials Week > CAC 5 33 } % S&P } % Volatility (VIX) 9.5 } % Euribor 3M (%) -.33 } bp Libor $ 3M (%) 1.33 } bp OAT 1y (%).75 } bp Bund 1y (%). } bp US Tr. 1y (%).33 } bp Euro vs dollar 1.18 } % Gold (ounce, $) 1 8 } % Oil (Brent, $) 57. } % Money & Bond Markets Interest Rates ECB.. at /1. at /1 Eonia at / -.37 at 5/ Euribor 3M at / at 1/ Euribor 1M at / at 8/9 highest' 17 lowest' 17 Yield (%) $ FED at 15/.75 at /1 Libor 3M at /1 1. at /1 Libor 1M at 15/3 1.8 at /1 BoE.5.5 at /1.5 at /1 Libor 3M.3.37 at 5/1.8 at 1/9 Libor 1M at 9/1.59 at /9 Commodities 1 y bond yield, OAT vs Bund Euro-dollar CAC -. 5 Oct Bunds OAT Oct Oct highest' 17 lowest' 17 1y bond yield & spreads AVG 5-7y..8 at 17/3.18 at 1/ 5.3% Greece 98 pb Bund y at 7/ -.9 at /.% Portugal 195 pb Bund 1y.5.57 at /7.9 at /1.1% Italy 19 pb OAT 1y at /.59 at 1/ 1.9% Spain 1 pb Corp. BBB at 1/ 1. at 7/9 $ Treas. y at 5/1 1.1 at / Treas. 1y.35.1 at 13/3.5 at 8/9 Corp. BBB at 1/ at 5/9 Treas. y.39. at 7/9.1 at 8/ Treas. 1y at /1.87 at 1/.73% France 8 pb.73% Belgium 8 pb.71% Ireland pb.% Austria 19 pb.3% Finland 18 pb.58% Netherland 13 pb.5% Germany Spot price in dollars lowest' 17 17( ) Oil (Brent, $) Gold (Ounce, $) CRB Foods Oil, Brent 57 at / -9.3% Gold (ounce) at 3/1 -.9% Metals, LMEX at 3/1 +7.% Copper (ton) 58 5 at 8/5 +8.5% CRB Foods at / -11.% 35 1 w heat (ton) at /1-8.% 3 3 Corn (ton) 1 1 at 18/9-1.1% Variations Exchange Rates 1 = 17 USD at 9/8 1. at 3/ % GBP at 9/8.8 at 19/ +.% CHF at 1/9 1. at 8/ +.9% JPY at 1/ at 17/ +7.3% AUD at 1/ 1.37 at 3/ +3.1% CNY at 3/8 7. at 3/1 +.% BRL at 9/8 3. at 15/ +.7% RUB at /8 59. at 17/ +.5% INR at / at 7/ +.5% Variations Oct Oct 3 5 Oct Equity indices highest' 17 lowest' 17 Index highest' 17 lowest' ( ) CAC at 5/5 79 at 31/1 +1.% +1.%.35.5 S&P at 5/1 39 at /1 +1.% +.% DAX at / at / +13.% +13.% Nikkei 9 9 at 5/ at 1/ +7.9% +.% China* at 5/1 59 at /1 +.3% +31.% India* at 18/9 5 at 3/1 +19.% +1.3% Brazil* at 5/ at 1/ +.% +1.8% Russia* 59 at 3/1 97 at / -.8% -11.9% Variations * MSCI index 335

3 Ecoweek 17-3 // October 17 economic-research.bnpparibas.com 3 Eurozone: Credit environment Bank lending environment remains favorable. The impulse stabilizes for households while demand for house purchase loans moderates somewhat and that for consumer loans slightly increases. The impulse improves marginally for non-financial corporations, which is consistent with a growing demand in a context where standards remain neutral (neither restrictive nor accommodative). 8 % ** Credit impulse* Households NFC -1 Private sector Real GDP, %, y/y Real GDP Growth vs Bank Lending 1 Annual growth rates**, % 1 Households NFC 1 Private sector Real GDP, %, y/y Net change Indicators preview ECB Bank Lending Survey, Expected Credit standards to firms Credit demand of firms Real GDP, %, y/y [RHS] *Credit impulse is measured as the annual change of the annual growth rate of MFI loans Source: ECB, ECB BLS, BNP Paribas calculations ** Adjusted for securitizations An important week for the US with the September FOMC minutes and the inflation numbers. They may influence market expectations about a December rate hike. Consumer confidence and retail sales will allow to assess how the US consumer is doing. Date Country Event Period Survey Prior 1/9/17 Germany Industrial Production SA MoM Aug --.% 1/9/17 France Bank of France Ind. Sentiment Sep /1/17 Japan Eco Watchers Survey Current SA Sep /1/17 France Industrial Production MoM Aug --.5% 1/1/17 United Kingdom Industrial Production MoM Aug --.% 1/1/17 United Kingdom NIESR GDP Estimate Sep --.% 1/11/17 United States FOMC Meeting Minutes Sep /1/17 France CPI EU Harmonized MoM Sep % 1/1/17 Eurozone Industrial Production SA MoM Aug --.1% 1/1/17 United States PPI Ex Food and Energy MoM Sep.1%.1% 1/13/17 United States CPI Ex Food and Energy MoM Sep.%.% 1/13/17 United States Retail Sales Advance MoM Sep 1.% -.% 1/13/17 United States U. of Mich. Sentiment Oct Net change ECB Bank Lending Survey, Expected -5 Consumer credit demand Consumer credit standards- Housing credit demand -5 Housing credit standards - Rea lgdp, %, y/y [RHS]

4 Ecoweek 17-3 // October 17 economic-research.bnpparibas.com UNITED STATES GDP growth keeps on a decent % pace and picked-up a bit in Q. However the fiscal outlook remains uncertain. A fiscal stimulus still is possible, but it would not be implemented before end-17. Potential effects are thus uncertain. The labour market is as buoyant as ever. Still, the support to households disposable income is not as strong as it looks as wage inflation remains limited. With inflation relatively muted at this stage of the cycle, the Fed is in no rush to increase rates. We forecast the Fed Funds target rates to come at 1.5% by year-end,.% by mid-18. CHINA After a period of stabilisation and slight recovery since Q 1, economic growth is expected to slow down moderately in the coming quarters. Exports should continue to rebound and infrastructure projects will continue to drive investment. However, downside risks are high due to the reduction in excess production capacity in the industry and given risks of a downturn in the property market and financial instability. The authorities will maintain an expansionist fiscal policy while the central bank should continue to tighten monetary conditions cautiously, especially to foster a deleveraging of financial institutions. EUROZONE The recovery is getting stronger and broader: the dispersion of economic performances among member states is receding. Despite the cyclical recovery, core inflation still shows no sign of a convincing upward trend. For the recovery to enter its inflationary phase the economy has to improve further, until the point at which wages will tend to increase. The level of slack remains uncertain though. Broader measures of labor underutilization reach 18%, double the level of the current unemployment rate. The ECB is expected to remain cautious. SUMMARY % 1 17 e 18 e 1 17 e 18 e Advanced United-States Japan United-Kingdom Euro Area Germany France Italy Emerging GDP Growth China India Brazil Russia Source : BNP Paribas Group Economic Research (e: Estimates & forecasts) INTEREST RATES & FX RATES Inflation Interest rates, % ##### ##### End of period Qe Q1e Qe Q3e Qe 17e 18e US Fed Funds Libor 3m $ T-Notes 1y Ezone ECB Refi Rate Euribor 3m Bund 1y OAT 1y UK Base rate Gilts 1y Japan BoJ Rate JGB 1y FRANCE A clear growth acceleration is underway. Higher rates of growth should resume. Households consumption is supported by the jobs recovery but restrained by the upturn in inflation. Investment and exports dynamics are favourable. Risks lie slightly on the upside. We expect the output gap to slowly narrow and the unemployment rate to progressively decline, containing the rise in inflation. Fiscal policy should continue to combine growth supportive measures and consolidation ones. The fiscal deficit should not be a lot more reduced but it should remain below the 3% threshold. Exchange Rates End of period Qe Q1e Qe Q3e Qe 17e 18e USD EUR / USD USD / JPY GBP / USD USD / CHF EUR EUR / GBP EUR / CHF EUR / JPY Source : BNP Paribas Group Economic Research / GlobalMarkets (e: forecasts)

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6 BNP Paribas (15). All rights reserved. Prepared by Economic Research BNP PARIBAS Registered Office: 1 boulevard des Italiens 759 PARIS Tel: +33 () Internet : Publisher: Jean Lemierre. Editor: William De Vijlder