5 February 2016 Monthly Economic Update - ing.nl · Monthly Economic Update February 2016 1 Global...

16
1 Monthly Economic Update Half and half Soft Chinese economic data is stoking fears of a hard landing, reinforcing global risk aversion and weighing heavily on stocks, commodity prices, and vulnerable EM currencies. But on top of further monetary easing by major central banks, or a delay in tightening by the Fed, Chinese fiscal policy may stabilise the macro-economy and markets. However, this may not be evident until mid-year, and we do not hold our breath for a strong rebound. US growth has shown a marked slowdown. And if this is a genuine loss of momentum, and not just one of those periodic ‘soft patchesthe US experiences, then it is not inconceivable that the US could slide back into recession. For now, this is not our base case, but we will be watching closely to see if there is a further contraction in business sentiment and investment, and if this spills over into labour demand and wages growth. Even if this is nothing more than a slowdown, the odds against further tightening of policy in 2016 are growing, and we have reduced our Fed funds forecast from two hikes to one this year, and will be closely monitoring to see if we need to revise further. Mario Draghi has hinted that more stimulus could be on its way from the European Central Bank (ECB). Recent activity data has shown that the Eurozone is not immune to financial market turmoil and weakness elsewhere, with recent numbers proving to be disappointing. At the same time, inflation is likely to be depressed by further declines in energy costs, with the ECB concerned that a prolonged period of negative headline CPI inflation may lead to further drops in inflation expectations. Another rate cut seems more likely than additional quantitative easing. The UK’s referendum on ongoing EU membership looks set to be held this year, with the uncertainty that it is likely to generate set to weigh on activity, asset prices and sterling. Should the UK vote to stay, then this scenario is likely to reverse quickly. If the UK votes to leave, then the country could face severe near-term pain, as investors, corporates and households take fright as the UK steps into the unknown, while the government negotiates the exit deal. China’s annual Central Economic Work Conference in December emphasised “supply- side structural reforms”, but the investor-friendly message was overshadowed by worries that the central bank was pursuing a policy of competitive devaluation. We do not believe they are doing so, but it requires action, not words, to persuade investors. The Bank of Japan’s surprise decision to introduce negative rates is likely to be followed by further action, perhaps as early as March, if the ECB cuts rates as is widely expected. More importantly, this move perhaps marks the first tentative step towards QQE tapering. The plunge in oil prices has been one of the main sources of market turmoil over the past few weeks, with Brent crude prices down by 17% since the start of the year. Although our base case for oil assumes a recovery in prices by 2H16, we consider a ‘lower-for-longer’ scenario in this report, which has prices averaging just US$31/bbl in 2017. We are now backing away from our call for EUR/USD at parity this year. A less confident Fed and less scope for higher rates at the short end of the US curve make it hard to now justify new highs for the dollar. Instead, a stand-off involving the Fed, the ECB and the BoJ over currency strength could serve to keep EUR/USD range-bound this year. Global Economics 5 February 2016 Mark Cliffe Head of Global Markets Research Rob Carnell Tim Condon Padhraic Garvey Hamza Khan James Knightley James Smith Chris Turner Peter Vanden Houte GDP growth (% YoY) Source: Macrobond, ING 10Y bond yields (%) Source: Macrobond, ING FX Source: Macrobond, ING -12 -10 -8 -6 -4 -2 0 2 4 6 -12 -10 -8 -6 -4 -2 0 2 4 6 00 02 04 06 08 10 12 14 16 Japan Eurozone US Forecasts 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 00 02 04 06 08 10 12 14 16 US Japan Eurozone Forecasts 60 80 100 120 140 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 00 02 04 06 08 10 12 14 16 EUR/USD (eop) USD/JPY (eop) Forecasts

Transcript of 5 February 2016 Monthly Economic Update - ing.nl · Monthly Economic Update February 2016 1 Global...

Page 1: 5 February 2016 Monthly Economic Update - ing.nl · Monthly Economic Update February 2016 1 Global Economics Monthly Economic Update Half and half ... Another rate cut seems more

Monthly Economic Update February 2016

1

Monthly Economic Update Half and half

Soft Chinese economic data is stoking fears of a hard landing, reinforcing

global risk aversion and weighing heavily on stocks, commodity prices, and

vulnerable EM currencies. But on top of further monetary easing by major

central banks, or a delay in tightening by the Fed, Chinese fiscal policy may

stabilise the macro-economy and markets. However, this may not be evident

until mid-year, and we do not hold our breath for a strong rebound.

US growth has shown a marked slowdown. And if this is a genuine loss of momentum,

and not just one of those periodic ‘soft patches’ the US experiences, then it is not

inconceivable that the US could slide back into recession. For now, this is not our base

case, but we will be watching closely to see if there is a further contraction in business

sentiment and investment, and if this spills over into labour demand and wages growth.

Even if this is nothing more than a slowdown, the odds against further tightening of policy

in 2016 are growing, and we have reduced our Fed funds forecast from two hikes to one

this year, and will be closely monitoring to see if we need to revise further.

Mario Draghi has hinted that more stimulus could be on its way from the European

Central Bank (ECB). Recent activity data has shown that the Eurozone is not immune to

financial market turmoil and weakness elsewhere, with recent numbers proving to be

disappointing. At the same time, inflation is likely to be depressed by further declines in

energy costs, with the ECB concerned that a prolonged period of negative headline CPI

inflation may lead to further drops in inflation expectations. Another rate cut seems more

likely than additional quantitative easing.

The UK’s referendum on ongoing EU membership looks set to be held this year, with the

uncertainty that it is likely to generate set to weigh on activity, asset prices and sterling.

Should the UK vote to stay, then this scenario is likely to reverse quickly. If the UK votes

to leave, then the country could face severe near-term pain, as investors, corporates and

households take fright as the UK steps into the unknown, while the government

negotiates the exit deal.

China’s annual Central Economic Work Conference in December emphasised “supply-

side structural reforms”, but the investor-friendly message was overshadowed by worries

that the central bank was pursuing a policy of competitive devaluation. We do not believe

they are doing so, but it requires action, not words, to persuade investors.

The Bank of Japan’s surprise decision to introduce negative rates is likely to be followed

by further action, perhaps as early as March, if the ECB cuts rates as is widely expected.

More importantly, this move perhaps marks the first tentative step towards QQE tapering.

The plunge in oil prices has been one of the main sources of market turmoil over the past

few weeks, with Brent crude prices down by 17% since the start of the year. Although our

base case for oil assumes a recovery in prices by 2H16, we consider a ‘lower-for-longer’

scenario in this report, which has prices averaging just US$31/bbl in 2017.

We are now backing away from our call for EUR/USD at parity this year. A less confident

Fed and less scope for higher rates at the short end of the US curve make it hard to now

justify new highs for the dollar. Instead, a stand-off involving the Fed, the ECB and the

BoJ over currency strength could serve to keep EUR/USD range-bound this year.

FINANCIAL MARKETS RESEARCH

Global Economics

5 February 2016

Mark Cliffe Head of Global Markets Research

Rob Carnell

Tim Condon

Padhraic Garvey

Hamza Khan

James Knightley

James Smith

Chris Turner

Peter Vanden Houte

GDP growth (% YoY)

Source: Macrobond, ING

10Y bond yields (%)

Source: Macrobond, ING

FX

Source: Macrobond, ING

-12

-10

-8

-6

-4

-2

0

2

4

6

-12

-10

-8

-6

-4

-2

0

2

4

6

00 02 04 06 08 10 12 14 16

Japan

Eurozone

US

Forecasts

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

00 02 04 06 08 10 12 14 16

US

Japan

Eurozone

Forecasts

60

80

100

120

1400.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

00 02 04 06 08 10 12 14 16EUR/USD (eop) USD/JPY (eop)

Forecasts

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US: Teetering… Last month, we expressed our reservations about the resilience of US growth. These

centred on the slowdown in profit growth as shown by GDP data, some evidence of

excess supply in the new homes sector, the prospects for some inventory-led slowdown

and some slower investment spending.

These reservations have rather quickly and worryingly received considerable support

from the latest US GDP figures: only 0.7% QoQ for 4Q15 (annualised rate), which is a

fairly dramatic, though not unprecedented, slowdown in activity. This slowdown has

raised a rather alarming question just one month after the first Fed funds rate hike in over

nine years: ‘Is the US headed for a recession?’

Fig 1 4Q15 GDP breakdown

Fig 2 Quarterly US GDP

Source: Macrobond Source: Macrobond

Although this is a virtually unanswerable question, it is not a frivolous one. The abrupt fall

in US growth momentum over recent quarters is at least partly a response to a slower

profile in consumer spending. Since oil prices began to decline at the end of 2014,

households have benefited from a fall in headline consumer price inflation, which has

lifted their real disposable incomes and boosted spending. One common, but misplaced

question is: ‘Why has the US consumer not benefited from the fall in oil prices?’. The

simple response to this is that they have, but are not doing so any longer.

Since mid-2014, real US consumer spending has grown by more than 3.0% pa. Nominal

wages growth has averaged less than 2.0% and employment growth has been c.1.0%. The

only reason that real spending has grown at greater than a 3.0% pa rate until the latest GDP

release, is because zero inflation, thanks to falling energy prices, has meant that real wages

have grown about as fast as nominal wages. That is no longer true as inflation picks up.

Even with further declines in oil prices, there is a limit to how much lower oil can go. This

means that the scale of the cost of energy’s drag on inflation and, therefore, the boost to

real incomes and spending, cannot realistically be repeated this year.

More plausibly, though perhaps not until the second half of the year, some stabilisation in

the overseas macroeconomic and financial situation is likely to help to push oil prices higher

again. As it does so, inflation is likely to rise, keeping real incomes and spending growth

below 2.0% this year and, perhaps, next.

Another area we highlighted last month was investment. This turned negative in 4Q15. A fall

in investment could be more of a problem than the loss of the oil-price windfall gains to

consumer spending. Business investment could have slowed for a variety of reasons:

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Personal consumption

Imports

Government Consumption

Gross private investment

Exports

GDP

4Q15 Annualised QoQ%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

QoQ% Annualised

We were already getting

nervous about US growth…

…when 4Q15 GDP came in at

a measly 0.7% QoQ

The ‘R’ word is back on

people’s lips…

…though if it comes, it is

likely to be led by lower

investment, not consumption

The boost from lower oil

prices is largely spent in

terms of consumption…

…and any stabilisation is

likely to weigh on household

spending

Negative investment is

another worry…

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because profit growth is stagnating; concerns about the global external environment; or

concerns over the outcome of the presidential election and the potential future corporate tax

environment.

Fig 3 Energy’s boost to consumer spending fading

Fig 4 10Y US Treasury forward curve and INGF

Source: Macrobond, ING Source: Bloomberg

We cannot say for certain which way business investment will go from here. But

investment is a sentiment-driven activity; sentiment is flighty, and the volatility of business

investment is sufficiently high to constitute one of the more vulnerable channels for any

future recession, though likely to pull consumer spending down with it, if it were to

contract sharply.

With growth slowing domestically and the external environment remaining challenged –

market risk aversion rising and macro developments in emerging markets not showing

any signs of calming down as yet, it is becoming increasingly difficult to imagine a

plausible scenario for the next rate hike. We have pushed back our profile for the Fed by

several quarters, which pushes out the second hike from 2016, leaving only one possible

hike this year. At this point, even that is looking rather far-fetched and we may end up

moving towards a ‘one-and-done’ forecast in coming months. This is a step too far for this

month’s forecast, and it is possible that we might see some more timely stabilisation,

which would require us to back pedal from a more aggressive adjustment this month. But

that is definitely the skew in risks for changes in forecasts for the month ahead.

We believe we need to see a number of things before the Fed reverses tack and starts to

loosen monetary policy again. It is not enough to see the unemployment rate move

higher. It could do so because of a surge in labour-force participation. But if it were to be

driven by a reversal in unemployment declines, maintained over several months, and

backed up by a marked slowdown or even reversal in non-farm payrolls gains, then it

could certainly follow. In the first instance, the December rate hike could be reversed. In

extremis, ‘QE4’ could be implemented. We think that the Fed will try to avoid going down

the negative rate route until all other channels are exhausted.

As a result of the Fed-rate forecast changes and lower inflation outlook, it is becoming

harder to justify an upward sloping Treasury yield profile. Our near-term profile, in fact,

sees further declines in bond yields, mainly reflecting our outlook for China, equity and oil

price weakness and a reversal of recent inflation increases. In the short term, our

forecasts undershoot the Treasury forward curve though they rise above forwards further

out, as we assume that the current gloom is overly depressing the outlook.

Rob Carnell, London

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

12 13 14 15

Employment growth

real wages (Boost fromenergy)

Real wages (non energycomponent)

Consumer spending, rhs

YoY%QoQ%

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

spot Jun-16 Dec-16 Jun-17 Dec-17 Dec-19

Forward curve

ING Forecasts

%

…there is no telling which

way it will go next, but its

decline is worrying

Justifying any Fed rate hikes

in 2016 is a tough act…

…but we need to see a labour

market reversal to see rates

cut and QE restarted

Bond yields should stay flat

or drop near term from here

before picking up

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Eurozone: Not done yet

The ECB is not done yet. President Mario Draghi surprised financial markets at the press

conference in January by stating that it was necessary to review and possibly reconsider

the monetary policy stance at the next meeting in early March. Indeed, the latest

economic indicators indicate that the Eurozone is not totally immune to the slowdown in

other parts of the world, while inflation remains too low on the back of depressed oil

prices.

The European Commission’s sentiment indicator fell back in January to a level below the

fourth quarter’s average. Industry confidence took a hit on the back of a less buoyant

order-book assessment, with export orders being hurt by the slowdown seen in the

emerging world. Consumer confidence also suffered slightly, though labour market

expectations actually improved. December’s unemployment rate stood at 10.5%, the

lowest level since September 2011. With low energy prices continuing to support

purchasing power and unemployment expected to fall further, we believe that

consumption will maintain some momentum.

While credit growth softened somewhat in December of last year, the Bank Lending

Survey reported a net easing of credit standards, with credit demand expected to pick up

further. Although the Italian banking sector has been under close scrutiny recently

regarding the amount of non-performing loans (with the Italian government actually

having to put in place a scheme to alleviate the issue), the credit easing trend within the

larger Eurozone countries was actually most prominent in Italy.

In all large member states, apart from France and the Netherlands, fixed investment was

an important factor in the growth in credit demand by enterprises. With capacity utilisation

in industry increasing to 81.9% in January, the fledgling business investment recovery

seems unlikely to peter out soon. So in terms of credit easing, an additional monetary

push does not appear to be required. There is even a worry that a further cut in the

deposit rate might hurt banks’ profitability (as they are often unable to pass on negative

interest rates to their customers), pushing them to increase their credit margins.

Fig 5 Latest economic news disappoints…

Fig 6 …while inflation expectations remain depressed

Source: Thomson Reuters DataStream Source: Thomson Reuters DataStream

While we do not see the recovery faltering, it is clear that external conditions have

worsened lately. We, therefore, scale back slightly our growth forecast to 1.5% for this

year. This still incorporates a slight growth acceleration in the second half of the year. If

this fails to materialise, GDP growth could actually be lower in 2016F than in 2015.

-100

-80

-60

-40

-20

0

20

40

60

80

Ja

n-1

5

Fe

b-1

5

Mar-

15

Apr-

15

May-1

5

Ju

n-1

5

Ju

l-15

Aug

-15

Sep

-15

Oct-

15

No

v-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Eurozone United States

Economic Surprise Index

-10

-5

0

5

10

15

20

25

30

35

Fe

b-1

1

May-1

1

Aug

-11

No

v-1

1

Fe

b-1

2

May-1

2

Aug

-12

No

v-1

2

Fe

b-1

3

May-1

3

Aug

-13

No

v-1

3

Fe

b-1

4

May-1

4

Aug

-14

No

v-1

4

Fe

b-1

5

May-1

5

Aug

-15

No

v-1

5

Consumers Industry Services

Inflation Expectations Survey

Mario Draghi has hinted that

more stimulus may be on its

way

Sentiment falls back, though

underlying fundamentals

remain good

Credit conditions continue to

ease

Rising capacity utilisation is

a hopeful sign for investment

No growth acceleration in H1

2016

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Despite the continuing subdued growth pace, Europe is not really working on a growth

strategy, as European leaders are consumed by other more pressing issues. The first

review of the third bail-out plan for Greece only started recently, with the Greek

government and creditors still quarrelling over pension reform. Meanwhile, the refugee

crisis continues to divide Europe. In Germany, Chancellor Merkel, who was facing rising

opposition within her own party, is now preparing to make a U-turn, where Germany will

no longer accept an unlimited number of new refugees. At the same time, Donald Tusk

presented a proposal to meet some of Britain’s demands regarding limits on the welfare

system for new migrants, to be discussed at the European summit on 18-19 February

(which could reduce the probability of a Brexit).

Headline inflation has fallen back to 0.4% in January, while core inflation rose to 1.0%.

Energy prices remain the driving force in this regard and headline inflation could,

therefore, drop below 0% in coming months. Although the ECB should look through these

short-term fluctuations, too long a period of low inflation might indeed dispel longer-term

inflation expectations. That point was advanced again by Mario Draghi in his speech to

the European parliament in February.

More easing, therefore, seems likely, although some members of the Governing Council

try to downplay this possibility to prevent financial markets from running ahead of

themselves again. ‘Hawks’ within the Governing Council are more willing to vote in favour

of a new rate cut than to beef-up monthly asset purchases. That said, we believe that a

small increase (at least €5bn) in monthly asset purchases will be hard to avoid. Apart

from that, another 10bp cut in the deposit-facility rate looks like a done deal. The ECB

could go even further to push the euro exchange rate lower, but then we believe that a

two-tier system will be introduced, mimicking the recent decision of the Bank of Japan. In

that event, existing excess liquidity is likely to be remunerated at the current deposit rate

and additional excess liquidity at the new deposit rate, which might then be at -0.50%.

Peter Vanden Houte, Brussels

UK: Planning for the future It appears likely that the UK will hold its referendum on ongoing European Union

membership this year, rather than delay it until the next. Following talks between Prime

Minister David Cameron and Donald Tusk, the head of the European Commission, there

are signs that a deal on the UK’s demands involving immigration, sovereignty, economic

governance and competitiveness are close to being agreed on. This is then due to be put

to a vote at the European Council meeting on 18-19 February, with David Cameron likely

to call a referendum soon afterwards, with 23 June being the favoured date, according to

press reports.

At present, opinion polls suggest the Brexit referendum will be incredibly close. In most

polls, the number of people wanting the UK to stay in is narrowly ahead of those wanting

it to exit, but it is important to note that there is a large proportion of people who are

undecided, typically c.20% of the total electorate. Consequently, the deal that David

Cameron clinches, how it is explained to the nation and possibly, most significantly, how

the press portrays it, is likely to be critical in determining whether the UK stays in the EU

or not. On this count, it is important to note that several popular newspapers could

formally back the UK leaving the EU. In the last referendum back in 1975, only the

communist newspaper The Morning Star campaigned against the UK’s EU membership.

We recently published a detailed note on the Brexit referendum (The shock from Brexit: A

sharp but short blow from a UK EU exit, 27 January 2016). The uncertainty that the vote

Opinion polls suggest it will

be a close vote…

…and much of the press

favours exiting the EU

It appears likely that the UK-

EU referendum will be held

this year

Political issues have not

disappeared…

…Merkel prepares to make a

U-turn…

…with ‘Brexit’ risk adding to

the usual worries

Inflation could fall again

below 0%...

…increasing the likelihood of

new easing

Two tiers deposit rate might

be contemplated

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6

may generate is likely to result in a loss of momentum in the UK economy, possibly paring

around a quarter of a percent off 2016F growth, relative to what might have been the

scenario if there was no referendum. Ahead of the referendum, UK and foreign businesses

are likely to take a ‘wait-and-see’ approach to hiring and investment, while consumer

spending and confidence could weaken modestly. The Bank of England is likely to ‘sit on its

hands’ and sterling is likely to continue softening in the build-up to the vote.

Fig 7 How the referendum could hit UK growth: A stylised path

Source: ING

Our base case is that the UK votes to remain a member of the EU and with the uncertainty

lifted, we expect to see sterling and UK asset prices recover, but they may not recoup all of

their declines immediately. Meanwhile, delayed investment and hiring is likely to be

implemented to some degree, likely leading to some strong activity readings in 4Q16F and

1Q17F.

We also feel that inflation could become an important issue post the Brexit referendum.

Sterling has already fallen by more than 7% since November on a trade-weighted basis and

we think it will fall further, nudging import costs higher. We also forecast a gradual increase

in commodity prices over the coming twelve months, while it is difficult to see the

supermarket food-price war exerting the same deflationary impulses it did in 2015. Add the

tight labour market and the possibility that wages do eventually respond (the number of job

vacancies broadly match the number of people claiming out-of-work benefits), and we could

see headline inflation start to rise swiftly. Indeed, we will not be surprised to see 3%+ CPI

readings in 2017. This leads us to believe that the Bank of England might have to tighten

monetary policy more swiftly than financial markets anticipate, from 4Q16F onwards.

If we are wrong and the UK does vote to exit, it is likely to have significant ramifications

for the UK and the EU. In the near term, the uncertainty that this will generate will

undoubtedly hurt confidence and likely lead to a retrenchment in activity. We see 2017F

UK GDP growth coming in c.1.5% YoY in such a scenario, versus 2.7% if the UK votes to

stay in the EU. Sterling’s plunge will elevate medium-term inflation risks, but we expect

the Bank of England to try to loosen monetary and financial conditions in such an

environment, with the Bank Rate being cut soon after the results are known. Sterling

could, therefore, test its 2011 lows, with EUR/GBP possibly touching 0.90 later this year.

James Knightley, London

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2016 2017 2018 2019 2020

Assumed referendum date

YoY% GDP deviation versus if there was no referendum

UK votes to remain part of EU

UK votes to leave EU

UK votes to leave EU and then Scotland leaves the UK

Businesses and households

may become more cautious

in the build-up to the

referendum

We think the UK will vote to

stay, leading to stronger

growth from 4Q16F onward

Inflation could become more

of an issue over the next

twelve months

Sterling weakness, wage

hikes and higher energy

costs could boost CPI above

3%

Should the UK vote to leave

the EU, confidence is likely to

be hit hard…

… with growth slowing

sharply…

… and sterling and UK

interest rates heading lower

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China: Negative feedback loop

The dip in China’s manufacturing PMI in January kept it in contraction territory for a sixth

consecutive month. Its Korean counterpart returned to contraction territory, where it had

been for 17 of the previous 24 months. Taiwan’s manufacturing PMI reversed half of

December’s two-point bounce and appears headed back into contraction territory, where

it spent eight months of 2015. The US manufacturing ISM remained in contraction

territory for a fourth consecutive month.

Manufacturing represents the leading edge of a global growth slowdown. We believe the

50% crash in global oil prices in the second half of 2014 caused the manufacturing slump

by depressing commodity producers’ spending. However, we think causality became two-

way in the third quarter of 2015, when China’s stock market crash and the ‘811’

devaluation turned China’s growth uncertainty into a driver of oil prices. The negative

feedback loop is straining public finances and external payments positions in commodity-

producing countries, forcing some (Azerbaijan and Nigeria, most recently) to seek

multilateral assistance.

Global oil prices, which were down 17% (on an average basis) in January and another

10% in the first two days of February on weak China PMI data, need to at least stabilise,

to prevent rolling balance of payments crises from sweeping through commodity-

producing countries with current account deficits, in our view. Stabilisation of China’s

manufacturing sector and/or USD depreciation will suffice, in our view. Based on ING’s

USD forecast, hope rests with China’s manufacturing sector.

The negative feedback loop is a powerful headwind to an export-led recovery. In fact,

data for Korea, a reliable guide to global trade, showed that trade plunged 19% YoY and

13% MoM in January, indicating to us that world trade growth was still slowing. A

spontaneous bounce in US spending growth could short-circuit the feedback loop and

spark an export-led recovery, but ING’s forecasts for the US do not warrant optimism (see

the section on the US above).

Instead, hope rests with fiscal policy, where the requirement is to reverse the 2015

slowdowns in infrastructure and real estate investment growth (Figure 8). There has not

been much new news on either front since we reported a month ago. To recapitulate, the

December Economic Work Conference identified improving weak links in infrastructure

and reducing the inventory overhang in the housing market as main tasks for 2016.

Funding issues may have contributed to the slowdown in infrastructure investment growth

in 2015. While state budget financing of fixed asset investment increased 22%, the

impact was nearly offset by a 5% decline in domestic loan financing. The anti-corruption

drive and creditworthiness concerns may have made banks reluctant to continue funding

local-government infrastructure projects.

The local-government debt swap specifically targets creditworthiness concerns by

enabling local governments to refinance maturing obligations, including those of financing

platforms, with low-interest, low risk-rated special government bonds. The programme got

off to a slow start in 2015, but gathered steam in the second half. According to press

reports, it is due to increase in size to CNY5tr (7.5% of GDP) in 2016, from CNY3.2tr last

year. The press also reported that the central government is due to increase bond

issuance for local governments from CNY0.6tr to CNY1tr and the fiscal deficit from 2.7%

of GDP to 3.0%.

Faster real-estate fixed asset investment growth requires halting the contraction in home

construction, which in turn requires reducing the inventory overhang (Figure 9). In late

January, in a first follow-up to the Central Economic Work Conference, Jiangxi became

Oil prices need to at least

stabilise, if not increase

No export-led recovery

Support for housing

… as the global slump

continued

Manufacturing was weak

almost everywhere in

January…

It’s mostly fiscal

Securing funding

Relieving bank concerns

about creditworthiness of

local governments

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8

the first province to offer farmers cash subsidies for their first city-home purchase. This is

a flanking policy supporting urbanisation through hukou supply-side reform. In a second

follow-up in early February, the PBOC and the CBRC jointly announced a cut in minimum

down-payment ratios for first and second home purchases. Housing support policy is a

watching brief, but our baseline is that after contracting by 15% for two years, housing

starts will be flat this year and that real-estate investment growth will accelerate.

“There is a communication issue” related to China’s exchange rate regime, IMF’s MD

Lagarde told a panel discussion in Davos. It has complicated the conduct of monetary

policy, in our view. We believe the authorities wish to reduce borrowing costs but do not

want a blowout in the USDCNH forward curve as that which followed the last policy

interest rate and RRR cuts; investors appeared to view them as acts of desperation. Also,

foreign exchange reserves, depleted in part by hot money outflows, are only US$330 m

above the US$3tr mark, which we consider to be a ‘line in the sand’.

We expect the authorities to increase their room to manoeuver by restricting international

capital flows. The first sign was last September’s macro-prudential measure, subjecting

banks’ forward foreign exchange positions to a 20% reserve requirement. This year, the

PBOC imposed the onshore RRR requirement on USDCNH accounts in an effort to

narrow the USDCNH premium to USDCNY. SAFE launched a personal foreign exchange

supervision system to crack down on the flight of capital. Banks have been given window

guidance about corporate-client USD purchases and SAFE recently instructed banks to

strengthen the management of foreign exchange business related to overseas direct

investment.

We expect tightened exchange controls and macro-prudential regulations to enable the

PBOC to cut interest rates, resist CNY depreciation pressure and keep foreign exchange

reserves above US$3tr. We forecast two 25bp PBOC policy interest rate cuts by year-end

(the Bloomberg median forecast is for one 25bp cut in the one-year lending rate to 3.85%

and two 25bp cuts to the one-year deposit rate to 1.00%). Our year-end USDCNY

forecast is 6.65, which keeps our version of the CFETS-NEER stable for ING’s

USD/Majors forecasts (spot 6.54; Bloomberg consensus 6.78; NDF 6.91).

Fig 8 China: Fixed Asset Investment (% YoY)

Fig 9 China: Residential Floor Space for Sale (months

of sales)

a/ Share of total investment in 2015 in parenthesis.

Source: Bloomberg, ING Bank

Source: EMED data service, ING Bank

Tim Condon, Singapore

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015

Total Manufacturing (33%)

Real estate (17%) Infrastructure (23%)0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 2014 2015

A communication issue…

The bottom line

Increasing policymakers’

room to manoeuvre

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9

Oil: The ‘lower-for-longer’ scenario

After a weak 2015, crude oil started 2016 on another bearish note, with Brent down 17%

since the start of 2016 to US$30.7/bbl on 2 February 2016. While our base case

considers a recovery in crude oil prices by 2H16F, we identify four key factors, which

justify the formulation of a ‘lower-for-longer’ scenario that has prices averaging just

US$31/bbl in 2017F.

1) Demand disappoints

IEA data shows that oil demand in Organization for Economic Cooperation and

Development (OECD) countries increased at a four-year-high rate of 1.7% YoY in 3Q15

to 46.7MMbbls/d, while global oil demand also increased at a four-year-high pace of 2.4%

YoY. However, demand growth is still lagging behind the 2.9% growth reported in global

oil supply.

In the US, although vehicle miles travelled have been increasing at a healthy pace of c.3-

4% YoY, the proportionate increase in fuel efficiency resulted in a stable-to-very-

moderate growth in gasoline demand. In China, a larger industrial slowdown has offset

positive growth in automotive fuel.

2) Supply lingers

OPEC crude oil production increased to a record high of 33.1MMbbls/d in January 2016,

with spare capacity at a five-year low, as Middle Eastern countries compete against each

other for market share. The Saudi and Iranian light oil discount to European buyers

increased to a five-year high of US$4.85/bbl, while Russia and the US have managed to

maintain production despite a pullback in prices, falling rig counts and labour cuts.

Political tensions between Iran and Saudi Arabia have increased since the start of the

year after the kingdom’s execution of prominent Shiite cleric Nimr Al-Nimr, hampering

concerted action by OPEC. Although high-cost producers, including Venezuela, appear

desperate for price support, options are limited, as any production cuts could be

compensated by non-OPEC producers (principally the US and Russia) without any

material support to prices.

3) Services remain cheap

The oil and gas price sell-off has resulted in significant contract renegotiation for oil field

service firms, including lower rig rates and labour costs. The impact is concentrated in

North America, where midstream operators have engaged in a wave of merger and

acquisition activity to yield lower costs. With midstream services remaining cheap,

producers across the world have an incentive to keep pumping oil.

4) Investors exacerbate trends

The net position held by money managers in the NYMEX WTI contract (the number of

long contracts held, minus the number of short contracts) has fallen to its lowest point

since 2009, suggesting that hedge funds, pension funds and other ‘smart money’

investors are betting on lower crude oil prices. With the number of paper contracts being

several orders of magnitude higher than physical barrels, speculator sentiment tied to the

dollar or equities can outweigh fundamental marginal price dynamics, depressing prices

even if demand rises and production falls.

Demand growth is still

lagging behind the growth

reported in global oil supply

OPEC crude oil production

increased to a record high in

January 2016

Oil field service firms have

engaged in significant

contract renegotiations

The net position held by

money managers is at a

multi-year low

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10

Fig 10 Crude oil demand/supply (YoY%)

Fig 11 OPEC crude oil production (MMbbls/d)

Source: Bloomberg, IEA Source: Bloomberg

Fig 12 Price forecasts (US$/bbl)

2015 2016F 2017F

1Q 2Q 3Q 4Q 1QF 2QF 3QF 4QF 1QF 2QF 3QF 4QF

Base case ICE Brent 55 64 51 45 30 30 35 40 50 55 60 65

NYMEX WTI 49 58 47 42 30 30 35 40 50 55 60 65

Bear case ICE Brent 55 64 51 45 25 20 20 25 25 30 35 35

NYMEX WTI 49 58 47 42 25 20 20 20 20 25 30 30

Source: Bloomberg, ING forecasts

Hamza Khan, Amsterdam

Japan: More to come

Last week, the Bank of Japan caught markets off guard and introduced negative interest

rates. The move, which will complement the existing QQE programme, takes the form of

a three-tier system, where only future current account balances are subject to a negative

rate (similar systems exist in Switzerland, Sweden and Denmark). This decision took

rates to -0.1%, although the overriding message was that this is likely to be just the first of

potentially many rate cuts to come.

Perhaps the biggest lesson of all of this is that the BoJ is more sensitive to JPY strength

than had been earlier thought. Heading into the meeting, the yen was stronger on a

trade-weighted basis than it was before the October 2014 meeting. Going forward,

currency movements are likely to be a key gauge of whether we can expect further cuts.

In March, this is likely to heavily depend on what the ECB delivers and, given that further

stimulus is widely expected, there is a high chance the BoJ will follow with a 10bp cut.

The case for near-term action is likely to be boosted by a further drop in consumer

inflation expectations (an important factor in the BoJ’s reaction function), which are driven

primarily by expected changes in food prices rather than oil. With the effect of a

significant yen depreciation in 2014 filtering out of the numbers, food inflation is set to fall

fairly noticeably over the next few months (Figure 13) and, in turn, weigh on expectations.

-1%

0%

1%

2%

3%

4%

5%

1Q11 1Q12 1Q13 1Q14 1Q15

Demand Supply

Falling inflation expectations

will keep pressure on the BoJ

to cut rates

The Bank of Japan surprised

markets with the introduction

of negative rates

JPY movements will be a

helpful barometer of any

further rate cuts

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11

Fig 13 Inflation expectations on a downward trend?

Fig 14 Trade-weighted JPY

Excludes impact of 2014 consumption tax hike

Inflation expectations based on Cabinet Office survey and calculated by respondents expecting prices to go up less those expecting prices to go down

Source: Macrobond, ING

Source: Macrobond

While the probability of a near-term cut seems fairly high, we do not think that this will

evolve into an aggressive easing cycle. The limitations of QQE are now well documented

and we feel that an acknowledgment of this was implicit in January’s decision (after all,

QQE would have been the go-to tool if it was seen as a viable option). Thus, rate cuts are

now the major weapon in the BoJ’s arsenal and they will be wary of running out of

ammunition too quickly. In the longer term, the BoJ is likely to have to consider scaling

back the pace of JGB purchases. While it is hard to pin down when this process will

commence, it could come as early as autumn (post-election) or, failing that, after the April

2017 consumption tax hike. Either way, when the decision is taken, it is likely to be

coupled with further rate cuts to dampen any adverse market impact.

James Smith, London

FX: Waving goodbye to parity

It looks increasingly difficult to forecast EUR/USD hitting parity this year. Our prior call for

a low of 0.98 in 2Q16 had been premised on higher US inflation and bearish flattening of

the US Treasury curve, which would drive the dollar side of this story. Yet, with the oil

profile a lot lower than we had expected and fears of the US slowdown spreading, we

now see 1.05 as the low point for EUR/USD this year.

When justifying the rate hike last year, Fed ‘neutrals’/‘hawks’ highlighted that neither the

dollar nor oil prices would continue to adjust at their 2015 pace forever. This meant that

their depressing influence on US headline would abate. The problem for the Fed,

however, is that oil prices have continued to plunge and the dollar has continued to surge

against major US trading partners, such that the expected return of inflation to target now

likely looks to be delayed.

Indeed, big early-year falls in Asian FX and NAFTA trading-partner currencies of CAD

and MXN have continued to propel the Fed’s broad trade-weighted dollar ahead at a 10%

pace. A Fed model released late last year suggested that such a move could knock 0.5%

off core inflation and up to 1.5% off GDP, but crucially, GDP is hit with a longer lag.

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

45

50

55

60

65

70

75

80

85

90

2012 2013 2014 2015 2016

Inflation Expectations (Balance) - 6M Lead lhs

Food CPI (YoY%) rhs

INGF

80

85

90

95

100

105

110

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Oct14

Jan15

Apr15

Jul15

Oct15

Jan16

Japan Narrow NEER4 April 2013 = 100

Start of QQE Level

QQE2 Level - October 2014

The move to negative rates is

the first tentative step

towards scaling back QQE

It looks increasingly difficult

to forecast EUR/USD hitting

parity this year

The dollar has continued to

surge against major US

trading partners

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12

Fig 15 USD trade-weighted $ has continued to surge

Fig 16 Impact of 10% USD rally on inflation & exports

Source: Bloomberg

Source: Federal Reserve Staff

What this all means is a less-confident Fed and US authorities possibly getting sucked

back into a global currency war. With ING dropping one Fed hike out of the profile this

year and contemplating whether to remove his other forecast hike as well, we can no

longer justify a view of US market interest rates driving the dollar to new highs.

Instead then, we see EUR/USD largely trapped in a 1.05-1.15 range this year, where the

top-side should be limited by the threat of more aggressive ECB action. That said, it

would probably take much more substantial QE from the ECB rather than a modest 10-

20bp cut in the deposit rate for the ECB to drive EUR/USD substantially lower (see our

recent FX Focus on the subject).

A similar scenario applies to USD/JPY. Here, it looks like the BoJ is prepared to cut rates

further into negative territory to avoid the JPY strengthening too quickly. The range

appears to be 115-125. We do see more downside risks to USD/JPY, however. If the US

slow-down were to accelerate, fears over the lack of available BoJ tools to address JPY

strength could see outside risk of a USD/JPY move to 110.

Chris Turner, London

Rates Strategy: Angst attack

The move of the 10yr Bund yield to 30bp is an echo of similar price action that we saw at

the beginning of last year, and that tailed out with a brief break below 10bp in April, but

then 1% was briefly touched in June. That is the range: effectively 0-1%. At 1% there is a

realistic expectation for future rate hikes, and this fits with a zero real rates environment

assuming that core inflation is running at c.1%. At 0%, there are no rate hikes discounted,

practically ever and the implied market discount for inflation and growth is dour, to say the

least. At 30bp on the Bund yield, we are closer to the latter than the former, which

equates to quite a negative market mood.

There is a lot of negative news already priced in, but just as the oil price at US$30/bbl

could hit US$20/bbl or lower, so too could the Bund yield pop back down to 10bp or

lower. We doubt it is structurally fundamentally justified down there, but that does not

mean it could not test lower. The path of least resistance is in that direction from a tactical

perspective given the remarkable start that we have had to the year from a cross asset

performance perspective. Note the following contrasts: (1) YTD Eurozone bonds have

-15

-10

-5

0

5

10

15

20

80

85

90

95

100

105

110

115

Jan 91 Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 09 Jan 12 Jan 15

% YoY change in Real Trade Weighted Dollar (RHS)

Fed's Trade Weighted Real Broad Dollar

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

0 4 8 12

Estimated Effect of 10% USD Appreciation on US Core Inflation

Estimated Effect of 10% USD Appreciation on US Net Exports, rhs

Deviation from baseline (pp), annual rate

Contribution to GDP (% deviation from baseline)

Quarters after shock

What this all means is a less-

confident Fed and US

authorities possibly getting

sucked back into a global

currency war

We see EUR/USD largely

trapped in a 1.05-1.15 range

this year

We do see more downside

risks to USD/JPY, however

Bund yield at 30bp is

discounting no rate hike,

practically ever

Core bond market total

returns running heavily

positive

Negative total returns in risky

bond markets, especially

high yield

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13

returned 2.0%; (2) German bonds have returned 2.9%; (3) US Treasuries have returned

2.5%; and, at the other end of the spectrum (4) USD High Yield has returned -2.0%; (5)

EUR High Yield has returned -1.3%; and (6) Local Currency Emerging markets have

returned -0.9% in USD terms, all YTD.

While stresses in high beta spread can persist given the uncertainties in play, questions

would increasingly have to be asked on the viability of sustained falls in German yields. A

move from 30bp to say 10bp would add in the region of an additional 1% to total returns,

at which point the logic of locking in a near 4% YTD return would look far too tempting to

ignore. This holds for strategic plays and also structural plays, all the way to pension

funds with receiver overlays that are heavily in the money. Fixed rate payer overlays and

a short duration preference becomes the dominant preference at that juncture. That is

unless there is the belief we are staring down the barrel of a depression, which is unlikely

in our opinion, and especially with the ECB fully engaged in the reflation game (and

importantly still with a strong degree of conviction).

Correlation with US rates remains a key ingredient too, especially as US macro

circumstances and Fed policy is typically a forward indicator for Eurozone rates. The US

core inflation environment remains in the 2% area, with wages growth a tad higher and

forward looking wage guesstimates a tad higher still. So, with the 10yr Treasury yield

some 10bp below 2% and the 10yr swap a further 15bp lower the market is quite

negative in terms of the fundamental discount, trading on a (mild) negative real yield. A

more neutral valuation would see the 10yr trade at the inflation rate plus a 50bp term

premium (ie, 2.5%) and even at that level real rates would be zero (which appears to be

the equilibrium for now, as alluded to by Janet Yellen at the Dec FOMC meeting).

The call for the Fed funds rate is important for framing where long term rates can get to

on the downside. This is so as, notwithstanding a term premium, the positioning of long

term rates is a function of expectations for short end rates (as priced via forward break-

evens). So, if the Fed were “one and done” an implication is the 10yr rate could be priced

as the Fed funds rate (50bp) plus a term premium (around 50bp) which equates to about

1%, or 1.25% if the term premium were 25bp higher, or 1.5% if the market were to

discount a mild eventual upside risk for the funds rate in the future. A bottom line

implication is a “one and done” Fed could well see the 10yr rate test 1.5% (or lower).

From that level, the push factor that could keep rates down could be a move into a lower

growth disinflationary phase (not our central view). In contrast the pull factor that could lift

rates could be a sustained 2% inflation environment and evidence of growth persistence

(our preferred view).

Our central judgment therefore centres on, 1. Momentum risk for more downside for core

yields in the coming weeks (and perhaps months), but then, 2. A trek back to levels that

we saw at the end of 2015 (US 10yr at 2.3% and German 10yr at 65bp). There are

however three headwinds that threaten the upside for core rates, centering on China, the

price of oil and performance of risky assets (Equities in particular, but also High Yield and

Emerging Markets bonds). As noted in this report, China poses a systemic threat

premised on its elevated leverage conditions / manufacturing recession combination, but

it’s a managed problem that implies mini painful but takeable hits, rather than one big

systemically damaging wallop. The oil price is a bigger unknown, as the leveraged energy

sector poses an elevated default risk in USD high yield space that could also spill over to

the banks. While we view this story as overblown, in a way there is far less certainty here

than on the China view, partly as if something did blow up here its ramifications are closer

to home, with contagion into the central macro picture posing a potentially bigger risk.

The growth / contagion threat coming from Emerging Markets is also front and centre

when it comes to framing core rates. Idiosyncratic risk factors have resulted in significant

net outflows from Emerging Markets spanning the likes of China, Brazil and Turkey.

Any significant rally in the

Bund yield from here paves

way for strong logic for

locking in total returns

US 10yr rates now trading

with implicit negative real

yields, thus straying from fair

value in the 2.5% area

However, if the Fed were to

be one and done the 10yr

rate can easily get to 1.5% or

lower

Headwinds include China,

the oil price and the

performance of risk assets

The HY / Oil dynamic is

potentially more troubling to

a managed China story

Emerging markets are

showing stress, but only in

selected centres

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There have also been prior net outflows from Russia in play which rocked the RUB, and

generally such stressed centres have suffered from capital flight. Turkey’s current

account deficit for example was only 50% financed by capital flows in 2015 compared

with 100% in previous years. Draconian measures being undertake in China are also

being enacted with a view to stemming net outflows. More recently, and at the other

extreme, we note that the likes of local currency Mexico had been pressured from a pure

carry perspective, with (now) concessional Brazil a beneficiary.

A typical barometer of stress at times like this comes from elevated balance of payments

deficit positions. Even if they are fully financed by capital flows today, that may not

necessarily be the case tomorrow. The usual suspects here include Turkey, South Africa,

Brazil, Colombia, Peru and to a lesser extent the likes of Indonesia, Ukraine, and

Kazakhstan. Of these the likes of Indonesia, Turkey, Colombia, South Africa and

Kazakhstan would have the lowest FX reserves as % of GDP, but not worrying low with

the exception of Ukraine, Nigeria and Argentina which have FX reserves of less than 10%

of GDP. So far however, such concern has found a fillip through FX depreciation where

needed, and there has not been a blowout apart from a build in FX concessions.

Risks are elevated, but not flashing at a burning red. The most likely route down a more

dangerous path is a correlation of circumstances, where a combination of China, the oil

price, Equities, USD HY and high beta EM together build a critical mass of negativity that

is elevated enough to act as a cumulative and significant drag on sentiment. Broadly

speaking this in fact is how January has played out, with most of the damage in fact away

from bond markets in equity market performance. Balanced bond portfolios have not

done too badly in relative terms, helped by core and semi-core performance.

In the coming weeks more of the same is probable. A subsequent rebuild of the Fed hike

discount would eventually signal a significant calming of concern. However, we need first

to get beyond the feeling that a big calamity lies just around the corner. That will take time

and is akin to running the gauntlet. Hence the continued near term bid to core bond

markets, the stability of front ends and the pressure on risky assets in turn a reflection of

capital outflow pressure, ranging from negative alpha to FX stress implications. Look for

valuations to become a bigger influence as we progress through Q1 though, with for

example Germany likely to overshoot to the downside in yield, and for value to get bought

into in the spreads environment on a selective basis. Certainly the pain of an eventual

uptick in core yields should be countered by fading longs into the breakeven protection of

selected spreads. Not there yet though as risk-off is set to persist a little longer.

Padhraic Garvey

No contagion as of yet, but

correlation is in play

The barometer of stress

centres on USD leverage and

ability to finance current

account deficits

Price action in January was

dominated by the fear factor

More of the same in prospect

in the coming weeks

Barring an actual calamity of

substance, core risks getting

too rich and spread too

concessional in due course

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15

Fig 17 ING global forecasts

2014 2015F 2016F 2017F

1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY 1Q 2Q 3Q 4Q FY

United States

GDP (% QoQ, ann) -2.1 4.6 5.0 2.2 2.4 0.6 3.9 2.0 0.7 2.4 2.2 1.9 1.6 2.3 1.9 2.2 2.6 2.1 2.2 2.2

CPI headline (% YoY) 1.4 2.1 1.8 1.1 1.8 -0.1 0.0 0.1 0.5 0.1 1.2 0.9 1.4 1.6 1.4 2.2 2.4 2.2 2.1 2.2

Federal funds (%, eop)1 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.25 0.25 0.50 0.50 0.50 0.75 0.75 1.00

Fed monthly average asset

purchase total

65.0 45.0 25.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

3-month interest rate (%, eop) 0.30 0.20 0.20 0.20 0.30 0.30 0.15 0.40 0.60 0.65 0.80 0.80 0.85 1.05 1.10 1.30

10-year interest rate (%, eop) 2.71 2.53 2.49 2.17 1.90 2.35 2.03 2.20 1.80 1.70 1.90 2.20 2.20 2.30 2.40 2.40

Fiscal balance (% of GDP) Fiscal Year 2014/15 -2.8 Fiscal Year 2015/16 -2.7 Fiscal Year 2016/7 -2.4 Fiscal Year 2017/18 -2.3

Fiscal thrust (% of GDP) 0.0 0.2 0.2 0.0

Debt held by public (% of GDP) 74.1 74.2 73.8 73.2

Gross public debt/GDP (%) 102.4 102.6 102.2 101.8

Eurozone

GDP (% QoQ, ann) 0.9 0.2 1.2 1.5 0.9 2.2 1.6 1.2 1.4 1.5 1.5 1.5 1.6 1.8 1.5 1.7 1.8 1.8 1.9 1.7

CPI headline (% YoY) 0.7 0.6 0.4 0.2 0.5 -0.3 0.2 0.1 0.2 0.1 0.3 0.2 0.5 0.8 0.5 1.3 1.5 1.6 1.7 1.5

Refi minimum bid rate (%, eop) 0.25 0.15 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05

3-month interest rate (%, eop) 0.28 0.21 0.08 0.08 0.02 -0.01 -0.04 -0.14 -0.19 -0.25 -0.26 -0.27 -0.25 -0.23 -0.22 -0.20

10-year interest rate (%, eop) 1.70 1.25 0.95 0.54 0.18 0.76 0.59 0.65 0.35 0.40 0.60 0.75 0.90 1.10 1.20 1.30

Fiscal balance (% of GDP) Fiscal Year 2014/15 -2.4 Fiscal Year 2015/16 -2.1 Fiscal Year 2016/17 -1.8 Fiscal Year 2017/18 -1.6

Fiscal thrust (% of GDP) -0.2 0.1 0.2 0.1

Gross public debt/GDP (%) 95.1 93.9 93.4 92.5

Japan

GDP (% QoQ, ann) 4.5 -7.6 -1.1 1.3 -0.1 4.4 -0.5 1.0 -1.2 0.6 1.5 1.7 1.4 1.9 0.8 4.7 -6.1 -0.4 1.3 0.6

CPI headline (% YoY)2 1.6 3.6 3.3 2.7 2.7 2.3 0.5 0.2 0.2 0.8 0.1 0.0 0.7 1.2 0.5 1.7 2.7 2.6 2.5 2.4

Excess reserve rate (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2

BoJ asset purchase total 213 227 249 270 290 310 330 350 370 390 410 430 450 470 485 500

3-month interest rate (%, eop) 0.15 0.15 0.15 0.15 0.17 0.17 0.17 0.17 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15

10-year interest rate (%, eop) 0.64 0.56 0.52 0.32 0.39 0.45 0.35 0.26 0.05 0.02 0.02 0.04 0.06 0.08 0.13 0.17

Fiscal balance (% of GDP) Fiscal Year 2014/15 -7.4 Fiscal Year 2015/16 -7.1 Fiscal Year 2016/17 -6.7 Fiscal Year 2017/18 -6.3

Fiscal thrust (% of GDP) 0.4 -0.8 0.0 0.0

Gross public debt/GDP (%) 211.0 212.0 212.6 213.0

China

GDP (% YoY) 7.4 7.5 7.3 7.3 7.4 7.0 7.0 6.9 6.9 7.0 6.7 6.6 6.5 6.3 6.5 6.7 6.6 6.4 6.4 6.5

CPI headline (% YoY) 2.3 2.2 2.0 1.5 2.0 1.2 1.4 1.7 1.5 1.5 1.5 1.4 1.6 1.5 1.5 1.5 1.3 1.4 1.7 1.5

PBOC 1yr deposit rate (% eop) 3.00 3.00 3.00 2.75 2.50 2.00 1.75 1.50 1.25 1.00 1.00 1.00 1.00 1.00 1.00 1.00

PBOC 1yr best lending rate (% eop) 6.00 6.00 6.00 5.60 5.35 4.85 4.60 4.35 4.10 3.85 3.85 3.85 3.85 3.85 3.85 3.85

7-day repo rate (% eop) 4.19 4.07 2.91 5.07 3.80 3.30 2.39 2.49 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00

10-year T-bond yield (%, eop) 4.54 4.09 4.07 3.62 3.60 3.62 3.27 2.86 2.75 2.50 2.50 2.50 3.30 3.40 3.50 3.60

Fiscal balance (% of GDP) Fiscal Year 2014/15 -2.0 Fiscal Year 2015/16 -3.5 Fiscal Year 2016/17 -3.2 -3.0

Fiscal thrust (% of GDP) n/a n/a n/a n/a

Public debt (% GDP), incl. local

govt.

56.6 60.2 60.0 60.0

UK

GDP (% QoQ, ann) 3.6 3.4 2.5 2.5 2.9 1.5 2.2 1.8 2.0 2.2 2.7 2.2 1.8 3.2 2.3 3.0 2.6 2.9 2.7 2.7

CPI headline (% YoY) 1.7 1.7 1.5 0.9 1.5 0.1 0.0 0.0 0.1 0.0 0.6 0.9 1.3 2.1 1.4 2.7 3.1 3.2 2.9 3.0

BoE official bank rate (%, eop) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.75

BoE Quantitative Easing (£bn) 375 375 375 375 375 375 375 375 375 375 375 375 375 375 375 375

3-month interest rate (%, eop) 0.50 0.55 0.66 0.55 0.55 0.58 0.58 0.65 0.60 0.65 0.70 0.90 1.20 1.50 1.70 1.95

10-year interest rate (%, eop) 2.74 2.67 2.42 1.76 1.90 2.00 1.75 2.00 1.70 1.90 2.10 2.20 2.40 2.60 2.70 2.90

Fiscal balance (% of GDP) Fiscal Year 2014/15 -4.9 Fiscal Year 2015/16 -3.7 Fiscal Year 2016/17 -3.0 Fiscal Year 2017/18 -1.5

Fiscal thrust (% of GDP) -0.9 -0.9 -1.5 -0.7

Gross public debt/GDP (%) 80.8 82.8 82.8 79.7

EUR/USD (eop) 1.38 1.36 1.26 1.21 1.05 1.10 1.12 1.09 1.08 1.05 1.05 1.10 1.12 1.15 1.18 1.20

USD/JPY (eop) 103 102 109 120 120 123 120 120 120 120 120 120 118 117 116 115

USD/CNY (eop) 6.21 6.20 6.14 6.21 6.20 6.20 6.36 6.52 6.67 6.72 6.66 6.60 6.57 6.55 6.53 6.50

EUR/GBP (eop) 0.83 0.80 0.78 0.78 0.71 0.71 0.74 0.74 0.75 0.78 0.76 0.76 0.76 0.77 0.78 0.80

Oil (US$/bbl, pa, eop) 108 110 103 77 55 64 51 39 30 30 35 40 50 55 60 65

1Lower level of 25bp range

2Includes effect of April 2014 and 2017 consumption tax increases

Source: ING forecasts

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Monthly Economic Update February 2016

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