Global economy Research Department ARC Research Team Tel: 966 11 211 9370, devassyp@alrajhi-capital.com Global economy and markets Economic indicators of the global economy were largely mixed last month. US GDP growth for Q4 2015 slowed down to 0.7% (annual rate) in Q4 2015 (as per advanced estimates), as compared to 2% in Q3. Moreover, manufacturing sector continued to contract, although at a slower pace, while growth in services sector eased. Non-farm payrolls data also came in lower-than-expected. In Europe, Composite PMI fell in January, backed by slowdown in manufacturing and services sectors. However, as per preliminary estimates, rate of inflation is expected to increase slightly in January. UK s manufacturing sector witnessed a robust improvement during January. There was also some positive news out of Asia. India s manufacturing sector recovered from contraction mode as PMI rose above. However, inflation continued to rise and reached 17-month high, on the back of surging food prices. China s manufacturing PMI remained in the contraction territory, but edged up above its previous month s reading. Manufacturing PMI fell slightly in Japan but continued to remain above the -benchmark, supported by increase in production, employment and buying activity. On policy front, BoJ reduced its interest rates to -0.1% whereas Fed, ECB, BoE, PBoC and RBI have kept their monetary policies unchanged. In commodities, crude oil prices declined across all geographies, dragged down by concerns over China s flagging economy and expectations of increase in Iranian crude supply. Meanwhile, US dollar strengthened against all major currencies. On the equity market front, MSCI global equity index tumbled 6.1% m-o-m, driven down by rout in Chinese equities and weak oil prices. Global economic data: As per advance estimates, US economy grew at an annual rate of 0.7% in Q4 2015 as compared to 2% in Q3 2015. ISM manufacturing index edged up to 48.2 in January, while CPI advanced by 0.7% y-o-y in December. The Eurozone Composite PMI fell to 53.6 in January from 54.3 in the previous month, while CPI is expected to increase by 0.4% y-o-y in January, versus 0.2% y-o-y in December. As per preliminary estimates, UK Q4 GDP rose by 1.9% y-o-y as compared to 2.1% y- o-y in Q3 2015. Manufacturing PMI stood at a 3-month high of 52.9 in January from 52.1 in December. In Japan, manufacturing PMI fell to 52.3 in January, while services PMI rose to 52.4, versus 51.5 in the previous month. The inflation rate eased down to 0.2% y-o-y in December. The Caixin China manufacturing PMI rose to 48.4 in January, but continued to remain below the -mark level for the 11 th consecutive month. In India, the Nikkei India manufacturing PMI rose to 51.1 in January as compared to 49.1 in December, while rate of inflation rose to 5.7% y-o-y in January. Monetary policy: As per the meeting held on January 26-27, 2016, the US Fed kept its interest rates stable. The decision was largely in-line with market expectations as rout in global equities raised fears about a possible global economic slowdown affecting the health of the US economy. Further, the BoJ eased its monetary policy whereas ECB, BoE, PBoC and RBI left their monetary policies unchanged. Markets: In commodity markets, crude oil prices (Brent) declined 6.8% m-o-m to USD34.74/bbl at the end of January 2016, whereas natural gas (Henry hub) prices fell 1.7% m-o-m to USD2.3/mmbtu. However, gold prices increased 5.3% on a monthly basis in January 2016, primarily due to the slump in crude oil prices and global equities. In the forex market, the US dollar strengthened against all major currencies in January. 1 Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
Global economic data In Q4 2015, US GDP increased at an annualized rate of 0.7%, as per the advance estimates ISM manufacturing PMI remained in contraction territory for the fourth consecutive month whereas inflation advanced by 0.7% y-o-y in December Figure 1 US ISM PMIs 59 58 57 56 55 54 53 52 51 49 48 United States As per advance estimates released by the Bureau of Economic Analysis, Q4 2015 GDP increased at an annual rate of 0.7%, as compared to 2% in Q3 2015. The rate of growth in GDP eased down in Q4, primarily due to slow down in personal consumption expenditure, non-residential fixed investment, exports and state and local government spending. Additionally, for 2015 as a whole, the US economy grew at a rate of 2.4%, same as in 2014. Real time indicators: According to ISM, manufacturing activity in the US continued to contract for the fourth consecutive month, albeit at a slow pace as the index edged up to 48.2 in January from 48 in December. The rise in the index was backed by increase in new orders and production.. The US ISM non-manufacturing PMI declined to 53.5 in January from 55.8 in December. Further, non-farm payroll employment declined to 151,000 in January, (below consensus estimate of 190,000) versus 262,000 in December. On the inflation front, CPI advanced 0.7% y-o-y in December, up from 0.5% y-o-y in November. However, auto sales declined by 0.3% y-o-y in January 2016 versus an increase of 9% y-o-y in the previous month. Figure 2 Non-farm payrolls Thousand 3 300 2 200 1 100 0 Mfg ISM Non-Mfg ISM Non farm payroll Figure 3 US auto sales growth trend (y-o-y) Figure 4 US retail sales growth trend (y-o-y) 2 6.0% 15.0% 5.0% 1 4.0% 5.0% 3.0% 2.0% -5.0% 1.0% US Auto Sales Adjusted Retail & Food Services Sales 2
Figure 5 Inflation trend Figure 6 10-year US treasury yield YoY 2.7% 2.2% 1.7% 1.2% 0.7% 0.2% -0.3% 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% US CPI US 10 year treasury yield, CPI data for January is not yet released. Eurozone Composite PMI fell to a 4- month low, while inflation is expected to rise by 0.4% y-o-y in January Eurozone Economic growth in Europe eased to a 4-month low as witnessed by the Eurozone Composite PMI, which slipped to 53.6 in January from 54.3 in December, primarily due to the slowest growth in output in a year. Further, the Eurozone manufacturing PMI declined to 52.3 in January from 53.2 in December, while services PMI fell to 53.6 in January from 54.2 in the previous month. Germany s manufacturing PMI, too, declined in January to 52.3 from 53.2 in the previous month, whereas manufacturing activity in Spain showed robust improvement as the manufacturing PMI increased to 55.4 in January 2016 from 53 in December. Moreover, as per preliminary estimates, the Eurozone CPI is expected to increase by 0.4% y-o-y in January 2016, up from December s annual rate of 0.2%. Figure 7 Euro zone PMI trend Index 54 52 48 46 44 42 40 Figure 8 Euro zone inflation trend YoY 2.5% 2.0% 1.5% 1.0% 0.5% -0.5% -1.0% Mfg Service Composite CPI, CPI for January is a preliminary estimate. 3
Figure 9 Italy, Spain, and Greece manufacturing PMI trend Figure 10 France and German manufacturing PMI trend 55 45 40 35 30 Index Index 58 56 54 52 48 46 44 42 40 Italy Mfg PMI Spain Mfg PMI Greece Mfg PMI France Mfg PMI Germany Mfg PMI Q4 GDP growth rate was registered at 1.9% y-o-y, the slowest since early 2013 while manufacturing sector witnessed modest improvement Manufacturing activity in Japan continued to witness improvement while annual growth rate of inflation eased down to 0.2% y-o-y in December Figure 11 PMI manufacturing trend 58 56 54 52 48 46 44 42 40 United Kingdom and Japan UK: As per preliminary estimates released by the Office for National Statistics, GDP in Q4 2015 rose by 1.9% y-o-y versus 2.1% y-o-y in Q3 2015, marking the slowest rate of expansion since early 2013. For the full year 2015, the UK economy grew by 2.2%, down from 2.9% in 2014. However, growth in the UK s manufacturing sector improved moderately as the manufacturing PMI rose to a 3-month high of 52.9 in January, as compared to 52.1 in December. The growth in PMI was supported by an increase in new output due to rise in domestic demand. The UK s services sector continued to show robust improvement, chiefly backed by rise in new service oriented businesses. The services PMI inched up to 55.6 in January from 55.5 in the last month. Japan: The data released by Cabinet Office showed that Japan s Q4 2015 GDP contracted by 1.4% y-o-y, versus revised growth of 1.3% y-o-y in Q3 3015. In Q4 2015, the Japanese economy was primarily dragged down by fall in private consumption. The Nikkei Japan manufacturing PMI fell marginally to 52.3 in January from 52.6 in December but continued to remain in expansionary phase as there was robust growth in production, together with expansion in employment and buying activity. Meanwhile, services PMI rose to 52.4 in January, as compared to 51.5 in December, primarily supported by increase in new orders. The rate of growth in CPI fell to 0.2% y-o-y in December, as compared to 0.3% y-o-y in November, backed by the decline in fuel, light and water charges and prices of transport and communication. Figure 12 Inflation trend YoY 4.0% 3.0% 2.0% 1.0% -1.0% UK Mfg PMI Japan Mfg PMI UK CPI Japan CPI, Japan and UK s CPI data for January is not yet released 4
Emerging economies Manufacturing PMI in China continued to remain in contraction territory for the 11 th consecutive month Manufacturing sector in India recovered in January while the annual inflation rate reached a 17-month high of 5.7% y-o-y Figure 13 Inflation trend YoY 1 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% China: The manufacturing sector in China continued to contract for the 11 th consecutive month in January 2016, although at a modest rate. The Caixin manufacturing PMI moved up to 48.4 in January from 48.2 in December on the back of fall in total new business at the weakest rate in seven months. On the other hand, the services sector registered a solid growth in January as witnessed by rise in the services PMI to 52.4 from.2 in the previous month, mainly supported by growth in new service oriented businesses at the fastest pace in three months. India: As per data released by the Central Statistics Office, India s Q3 2015-16 GDP grew at a rate of 7.3% y-o-y, down from 7.7% y-o-y in Q2 2015-16, mainly because of slowdown in growth of gross fixed capital formation due to reduced private investments. The Nikkei India manufacturing PMI returned to the expansion territory and stood at 51.1 in January 2016, as compared to 49.1 in December. The rate of growth was the strongest in four months, backed by increase in domestic and international new businesses and revival of output at firms after December floods. Meanwhile, services sector also expanded at an accelerated pace in January as the services PMI reached 19- month high of 54.3, up from 53.6 in December. India s inflation reached a 17-month high of 5.7% y-o-y in January 2016, versus 5.6% y-o-y in the previous month, on the back of rise in food prices. Further, India s oil import bill declined by 33% y-o-y (+3.4% m-o-m) to US$6.7bn in December 2015. Figure 14 PMI manufacturing index 55 54 53 52 51 49 48 47 India China India China, China s CPI data for January is not yet released Figure 15 India s oil import trend USD bn 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Figure 16 China s oil import trend USD bn 25 20 15 10 5 0 India China, Data for January is not yet released 5
The BoJ reduced its interest rates to -0.1% whereas Fed, ECB, BoE, PBoC and RBI have kept their monetary policies unchanged Central banks monetary policies Monetary policy US: The US Federal Reserve, at its monetary policy meeting held on January 26-27, 2016, decided to leave interest rates unchanged between 0.25% and 0.5%. The US Fed s decision was largely anticipated as global markets, including US equities, plunged in January, which stoked worries that global slowdown could hamper US economic growth. However, the Fed officials stated that they might still raise interest rates, albeit at a slow pace, after considering the impact of developments in the world economy and markets on the US economic growth. Further, the policymakers also stated that the US labor market conditions had improved, although economic growth eased at the end of the year. Nonetheless, the market does not expect the US Fed to make any rate hikes this year. Eurozone: At its monetary policy meeting held on January 21, 2016, the European Central Bank (ECB) left its deposit rate unchanged at -0.3%. The interest rates on main refinancing operations and marginal lending facility were also left unchanged at 0.05% and 0.3%, respectively. The ECB president stated that the increased uncertainty about growth of emerging economies, coupled with turbulence in financial and commodity markets and geopolitical tensions, had raised downside risks to the Eurozone economy. He further noted that, in the current circumstances, inflation was likely to remain below the estimated levels. Moreover, the ECB chief hinted that more stimulus might be provided at their next meeting in March. UK: The Bank of England (BoE) at its meeting, which ended on February 3, 2016, decided to keep its benchmark lending rate unchanged at 0.5% and voted unanimously to maintain the size of its asset purchase programme at 375 billion. Further, the central bank expects the inflation to remain below 1% in 2016 and reach its target of 2% by 2018, primarily due to weak commodity and energy prices. The BoE also stated that wage growth had slowed down more than anticipated and lowered its wage growth forecast. It also reduced its GDP estimates to 2.4% and 2.5% in 2017 and 2018, respectively from 2.7% and 2.6%, as predicted earlier. Likewise, traders do not expect an increase in interest rates by BoE until third quarter of 2018. Japan: At its latest monetary policy meeting held on January 28-29, 2016, the Bank of Japan (BoJ) made a surprise move by reducing its interest rates to -0.1% from its earlier 0.1%, primarily to boost bank lending and inflation. However, they kept the pace of their annual bond buying programme unchanged at 80 trillion. The BoJ governor cited rout in financial markets, China s flagging economy and sliding crude oil prices as the main reasons supporting central bank s decisions. The central bank also postponed the timing for achieving 2% target inflation to the end of 2017. Further, the central bank chief also stated that interest rates would be reduced further, if necessary. China: As per the fourth quarter monetary policy report published on February 6, 2016, the People s Bank of China (PBoC) stated that it would adopt monetary policies, which support growth of its economy and try to keep the value of its currency stable. The central bank asserted that it would use various policy tools to maintain liquidity in its economy, and support credit growth and social financing. Prior to publishing the report, the central bank had injected 590 billion yuan into its financial system via open-market operations in the last week of January to prevent a cash crunch during the Lunar New Year holiday. India: The Reserve Bank of India (RBI), in its sixth bi-monthly monetary policy statement, published on February 2, 2016, decided to leave the repo rate and cash reserve ratio unchanged at 6.75% and 4%, respectively, in-line with market expectations, as the central bank preferred to wait until the release of the Union budget at the end of February. It indicated that further policy easing would be dependent on fiscal consolidation by the government and the assessment of effects of wage increases proposed by the 7 th Pay Commission on inflation. Moreover, the RBI specified a target of 5% inflation by the end of 2016-17. The market expects the Indian central bank to reduce rate by 25bps in its April meeting. 6
US 10-year treasury yield moved down, primarily due to sell-off in global equities and oil prices Sovereign bonds and interbank rates The US 10-year Treasury yield declined by 34.9 bps m-o-m to 1.92% at the end of January 2016, on the back of rout in global equities and oil prices. Also, weaker-thanexpected durable goods orders data led to the fall in treasury yields. Moreover, yields were also driven down by the US Fed s indication of delay in a rate hike and the Bank of Japan s decision to make its interest rates negative. Further, the yield on the UK 10 years gilt moved down by 40bps m-o-m to 1.56%, while the yield on the 10-year German bund fell by 30.4 bps m-o-m to 0.33%. Figure 17 10-year government yields Figure 18 One year government yields 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 1.0% 0.8% 0.6% 0.4% 0.2% -0.2% -0.4% -0.6% US Germany UK Japan US Germany UK Japan Crude oil prices fell in January due to investor worries over slowdown in China and prospect of increase in Iranian crude supplies Figure 19 Crude oil prices US$/bbl 120 110 100 90 80 70 40 30 20 Commodities Crude oil & natural gas Crude oil prices continued to decline across all geographies with Brent falling 6.8% m-om to USD34.74/bbl as of January 2016. The fall in crude prices can be attributed to worries over weak energy demand from China, coupled with expectations that Iran would increase its crude supplies, thus adding to the existing oil glut, as Iran sanctions were lifted during January 2016. Moreover, natural gas (Henry hub) prices also fell 1.7% m-o-m during January 2016 to end at USD2.30/mmbtu, primarily due to estimates of warmer weather in the US. Figure 20 Gas (Henry hub) prices trend US$/mmbtu 3.5 3 2.5 2 1.5 1 WTI Brent Arab Light Henry hub 7
Gold prices gained during January due to slump in global equities and oil prices Gold & Silver Gold prices climbed 5.3% m-o-m in January to end at US$ 1118.2 per ounce. Primary reasons for the rise in gold prices were a slump in global indices and a drop in crude oil prices. Gold prices were also boosted by the rise in geopolitical tensions in the Middle East at the start of the month. Further, silver prices, too, registered a monthly gain of 2.9% in January 2016 to end at US$ 14.26 per ounce. Figure 21 Gold prices trend US$/Ounce 1,0 1,4 1,400 1,3 1,300 1,2 1,200 1,1 1,100 1,0 1,000 Figure 22 Silver prices trend US$/Ounce 23 22 21 20 19 18 17 16 15 14 13 Equities MSCI global equity index fell in January, driven down by worries over China s economy and volatility in oil prices Figure 23 Benchmark Index return The MSCI global equity index tumbled 6.1% in January, driven down by a rout in Chinese equities, which raised fears about sluggishness in world s second largest economy. Moreover, volatility in oil prices also weighed on the index. The decline in the index was led by Germany, Japan, the US, and the UK, which fell 8.8%, 8%, 5.1%, and 2.5%, respectively. In the Middle East, Saudi Arabia tumbled 13.2%, followed by Kuwait, Abu Dhabi, Dubai, and Oman, which sank 8.9%, 5.9%, 4.9% and 4.2%, respectively. Figure 24 Fwd P/E chart mom -2.0% -4.0% -6.0% -8.0% -1-12.0% -14.0% 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x, Return calculated for the month of January 2016. 8
Figure 25 MSCI global Index Figure 26 MSCI global P/E movement chart Billion 180 1 140 120 100 80 40 20 0 Index 0 4 400 3 300 2 200 1 100 0 18.0x 17.0x 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x 7.0x 6.0x Volume LHS Index RHS Figure 27 MSCI global sectoral YTD performance Figure 28 MSCI regional YTD performance 140 130 120 110 100 90 80 70 130 125 120 115 110 105 100 95 90 85 80 Financials Industrials Energy Telecom Services Automobile US Europe Japan Emerging, Rebased 2015=100, Rebased 2015=100 Forex US dollar was strong in January 2016 against all major currencies The US dollar gained against all major currencies in January 2016. It rose 3.5% and 2.1% against the GBP and the CHF, respectively. Moreover, the dollar logged a monthly gain of 0.8% against the JPY, chiefly because of a rise in the USD on the last trading of the month after the Bank of Japan decided to lower its interest rates. Meanwhile, against the euro, the US dollar rose marginally by 0.3% m-o-m. 9
Figure 29 Euro/USD Figure 30 USD/CHF 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 1 1.05 1 0.95 0.9 0.85 0.8 Euro/USD USD/CHF Figure 31 USD/JPY Figure 32 GBP/USD 130.0 125.0 120.0 115.0 110.0 105.0 100.0 1.75 1.7 1.65 1.6 1.55 1.5 1.45 1.4 USD/JPY GBP/USD 10
Table 1 Real GDP growth Economies Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016E Q2 2016E Q3 2016E US 0.6% 3.9% 2.0% 0.7% 2.5% 2.6% 2.5% Europe 1.3% 1.6% 1.6% 1.5% 1.4% 1.5% 1.6% Japan 4.4% -0.5% 1.0% -1.4% 1.2% 1.4% 1.5% UK 2.5% 2.3% 2.1% 1.9% 2.2% 2.3% 2.5% India 7.5% 7.0% 7.4% 7.3% 7.7% 7.6% 7.6% China 7.0% 7.0% 6.9% 6.8% 6.7% 6.6% 6.4% Source: Al Rajhi Capital, forecasts are Bloomberg consensus Table 2 Inflation (CPI) Economies Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016E Q2 2016E Q3 2016E US -0.1% 0.1% 0.5% 1.4% 1.3% 1.5% Europe -0.3% 0.2% 0.1% 0.1% 0.4% 0.2% 0.7% Japan 2.3% 0.5% 0.1% 0.3% 0.3% 0.3% 0.4% UK 0.1% 0.1% 0.6% 0.8% 1.1% India 6.6% 5.9% 4.6% 6.4% 5.6% 5.5% 5.3% China 1.2% 1.4% 1.7% 1.5% 1.7% 1.6% 1.6% Source: Al Rajhi Capital, forecasts are Bloomberg consensus Table 3 Economic Calendar Country Event Name Period Start Date UK Consumer Price Index (YoY) January 16-Feb-2016 Eurozone ECB Non-monetary policy's ECB meeting Source: Al Rajhi Capital 17-Feb-2016 US FOMC minutes 17-Feb-2016 Japan Merchandise Trade Balance Total January 17-Feb-2016 China Consumer Price Index (YoY) January 18-Feb-2016 Eurozone ECB Monetary Policy Meeting Accounts 18-Feb-2016 US Consumer Price Index (YoY) January 19-Feb-2016 Eurozone Markit PMI Composite (Preliminary) February 22-Feb-2016 US Markit PMI Composite (Preliminary) February 22-Feb-2016 UK Inflation Report Hearings 23-Feb-2016 Eurozone Consumer Price Index (YoY) January 25-Feb-2016 US Durable Goods Orders January 25-Feb-2016 Japan National Consumer Price Index (YoY) January 25-Feb-2016 US Gross Domestic Product Annualized (Preliminary) Q4 26-Feb-2016 Japan Industrial Production (YoY) (Preliminary) January 28-Feb-2016 Japan Unemployment Rate January 29-Feb-2016 China Caixin Manufacturing PMI February 1-Mar-2016 US ISM Manufacturing PMI February 1-Mar-2016 Eurozone Producer Price Index (YoY) January 2-Mar-2016 Eurozone Markit PMI Composite February 3-Mar-2016 US ISM Non-manufacturing PMI February 3-Mar-2016 UK Consumer Inflation Expectations 4-Mar-2016 US Nonfarm Payrolls February 4-Mar-2016 US Unemployment Rate February 4-Mar-2016 China Trade Balance USD February 8-Mar-2016 UK Industrial Production (YoY) January 9-Mar-2016 UK NIESR GDP Estimate (3M) February 9-Mar-2016 Eurozone ECB Monetary Policy Statement and press conference 10-Mar-2016 China Industrial Production (YoY) January 12-Mar-2016 Japan BoJ Monetary Polci Statement 15-Mar-2016 11
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