Corporate Economics Highlights Weekly: 03 Nov 2014

Corporate Economics Highlights Weekly The month ends with Ethan Harris shifting the timing of the first FED rate hike out to September from June next year on the basis of not expecting a rise in core inflation in 2015. The October US employment report is also likely to be strong with job growth of 235,000 and the unemployment rate holding at 5.9%. A solid 3.5% US GDP print confirms that the US can be an engine of growth. As equity returns enter its cyclically strongest part of the year we note high-yield funds saw their first inflow after eight consecutive weeks of outflows and the biggest inflows in 30 weeks while safer high-grade funds saw slowing inflows. Equity funds saw the biggest inflow in 20 weeks. The combined weekly inflow into equity and high-yield funds was the largest in 35 weeks. Our US Earnings Revision Ratio is now at comparable levels to the lows during the European sovereign debt crisis, we think the worst is behind us while the latest US GDP data suggested industrial equipment spending up 18%. At the same time the biggest impact of the Fed ending QE and the Bank of Japan expanded its QE program to ¥80 trillion/year from ¥60-70 trillion is a weaker yen relative to the dollar. However, CFTC data also suggests as USDJPY breaks to new highs, JPY short positioning is the smallest in more than three months. The risk remains for a weaker JPY. We also expect more monetary easing from China. China’s NBS Manufacturing PMI unexpectedly fell to 50.8 in October from 51.1 in September. Ting Lu expects more liquidity to be injected via SLF, PSL (directly longer-term lending by the PBoC to banks) and perhaps other programs. Expectations are increasing for the ECB to deliver greater easing this week. However, we do not detect any sense of urgency at the ECB and therefore see room for some disappointment. We would look to sell any Euro rally on Thursday, given the upside risks to the USD on our above consensus NFP call and short front-end rates view.    In Central Bank activity, we expect the ECB to stay on hold. The Reserve Bank of Australia will be very cautious to tighten policy once that cycle does eventually begin. A raft of more-dovish comments from Bank of England members recently leaves the hawks looking increasingly isolated. We expect no change in rates. We expect both the Bank of Thailand and Bank Negara Malaysia to stay on hold, leaving policy rates at 2.00% and 3.25%, respectively. In Romania, we expect a 25bp cut. In Poland, a very close call, but we think the Council may opt for another 50bp cut already in November instead of December. US Economic Weekly: We now expect no rise in core inflation next year. We see balanced risks around this forecast: on the one hand, a tightening labor market could trigger a slow upward drift in inflation; on the other hand, disinflationary pressures from overseas could push inflation even lower. We have also made minor revisions to our GDP forecast in light of the new 3Q data, recent movements in the dollar and oil prices. With the lower inflation forecast, we are also shifting the timing of the first rate hike out to September from June next year.  Click for full report China’s NBS Manufacturing PMI unexpectedly fell to 50.8 in October from 51.1 in September. The drivers of the unexpected drop include a decline in production, new orders and raw material inventory. The negative market impact could be limited as Beijing might add stimulus measures. This is especially the case as Beijing cares much more about the stock markets for launching the Shanghai-HK stock connect. On the other hand, investors have been increasingly looking to long term reform measures instead of short-term cyclical indicators. We believe the rapidly falling global commodity prices might lead to destocking and falling in new orders as purchasing managers expect prices to fall further. Click for full report The Thundering Word: The big 2015 bear hope is policy failure in Europe as endemic recession and lack of reform crush ECB QE hopes and central bank credibility in coming months. ECB QE could perversely provide the catalyst for a bear market if heralded by thematic outperformance of Growth, Yield & Quality versus small cap, wider French spreads versus Germany, and more volatility on Europe’s periphery. The big 2015 bull hope is policy success and “escape velocity” in the US. The end of QE is thus rendered null and void by macro recovery, structural growth in tech & energy, and a boom in Corporate America’s EPS. This is closer to the BofAML base case and would be a boon for the US dollar, US banks and global cyclical stocks in 2015. For EM & commodities, inflation would be a better backdrop than deflation. Click for full report US Rates Weekly: We believe that risk premium in the front end should be higher with a data dependent Fed. Further, demand for the front end is lower and positioning is cleaner. We recommend front end shorts and flatteners over the near term. We turn short on gamma and recommend selling delta-hedged 1m10y straddles given a hawkish Fed message, reduced policy uncertainty, and richness of short dated implieds. We continue to like USZ4 call spreads to position for the risk of short positioning capitulation at the back end of the curve. The FOMC conveniently ignored the decline in breakevens. We prefer the front end of the breakeven curve at these levels and remain neutral the long end.  We check in on our menu of swap spread drivers. Most themes remain: credit, riskoff, and mortgages. We still like owning 3y and 10y spreads. Click for full report Global Rates and FX Weekly: Until the December FOMC meeting, when the forward guidance language could see a more thorough edit, USD and US rates will remain sensitive to data, which pose some upside risks. We do not detect any sense of urgency at the ECB and therefore see room for some disappointment. We would look to sell any Euro rally on Thursday, given the upside risks to the USD on our above consensus NFP call and short front-end rates view. We think each month change in the timing of the first hike is worth about 5 bp in US 5y. In EUR rates, we like selling ERZ4 against receiving 1y1y Eonia. Our analysis shows that the FX impact of cross-border M&A announcements is uneven across currency pairs. GBP has been the most sensitive to cross-border inflows. Volatility in EUR/CHF is becoming stressed by the vote on gold scheduled for 30th November. Click for full report GEMs Macro Monthly: Global growth concerns have dominated markets and likely exacerbated the impact of a positive oil supply shock on energy prices. We shed light on the impact of these oil price dynamics and argue that lower energy prices should ease growth concerns. We maintain our EM 2014 GDP growth forecast of 4.4% but lower 2015’s to 4.7% (-20bp), mainly due to our large downward revision to Russia. We expect markets to shift Fed hike expectations forward as growth pessimism recedes. This could potentially pressure EMFX, and we therefore maintain a cautious stance. We remain relatively bullish on MXN and INR, but against non- USD G10 currencies; we also like short USD/CNY. Inflation in India and S. Africa should be sensitive to oil prices, but we like 1y payers in the former given aggressive easing priced and 5y receivers in the latter. Click for full report Click for Video Content Global Economic Weekly: A solid 3.5% GDP print confirms that the US can be an engine of growth. We think the recent weakness in several key economies is temporary. The fiscal and monetary policy backdrop remains supportive of growth. With recent signs of weakness in China, Japan and Europe clients are asking, why should growth pick up next year? And can the US really “decouple” from the rest of the world, with solid growth despite weakness elsewhere? Last week, we highlighted that our “nowcast” models already show that activity is either stabilizing or improving in the three largest economies. Here, we will build on that argument, looking at the growth outlook for key individual countries and at the supportive global policy environment. Click for full report Japan Watch: At its 31 October policy meeting, the BOJ decided, by a 5-to-4 vote, to expand quantitative and qualitative easing (QQE). It is very likely that the benchmark yield will be below the 0.4% at year’s end. Also, the BoJ plans to purchase so many more JGBs that its holdings are slated to hit ¥280 trillion as of end-2015 and the yield could even turn negative. However, downward pressure on the yield could ease, with the GPIF likely to become a seller of JGBs. Further, yields for sectors longer than 10 years could come under downward pressure because BoJ bond purchases will extend average duration. We favor taking 10y20Y flattener and 5y5y volatility (5y5y straddle) positions against today’s added easing. Long term, it widens the monetary policy gap between the BoJ and the Fed, and reinforces a scenario for further USD/JPY upside in 2015. Click for full report Japan Economic Weekly: Analysis using Flow of Funds data reveals the fall in Japan’s current account surplus reflects the decline in corporate net savings while foreign security investment has increased across a wide range of sectors. From here on, interest and dividends from overseas assets will rise thanks to the weaker yen, while the recent fall in the oil price is helping lift corporate earnings, which will in turn push up corporate savings, and we thus think the contraction in non-financial corporations' surplus will halt for now. Increase in foreign security investment by residents likely means that the process of rebalancing financial portfolios began as inflation turned positive and real interest rates turned negative. Signs that a capital outflow from Japan has begun at a time when the current account surplus is set to remain at its reduced level for a while longer suggests the gradual but persistent yen is a likely scenario. Click for full report  Europe Economic Weekly: We expect the ECB to stay on hold. We still think that data needs to worsen, particularly inflation, for the ECB to develop a sense of urgency that would push it to do more. We expect composite PMIs to decline marginally for Spain and to improve for Italy. We expect TLTROs to help rollover existing loans at better rates, rather than to increase new loans substantially. A raft of more-dovish comments from BoE members recently leaves the hawks looking increasingly isolated. Click for full report   Australia Economic Weekly: We expect the RBA will be very cautious to tighten policy once that cycle does eventually begin. In addition to the RBA Board meeting and its Statement on Monetary Policy,  labour force data releases in both Australia and New Zealand will be a key focus as the unemployment rate rises in the former and declines in the latter. There is also a spate of activity data released in Australia with reads on retail sales, building approvals and international trade being of most interest. These activity data are for September and will give initial indications on how quarterly GDP growth is shaping up. The RBNZ was not significantly more dovish in its communication but continues to keep downward pressure on the exchange rate through direct commentary and a cautious stance. We look for this tightening cycle to recommence around the third quarter of 2015. Click for full report  Asia Economic Weekly: We expect both the Bank of Thailand (Wednesday) and Bank Negara Malaysia (Thursday) to stay on hold, leaving policy rates at 2.00% and 3.25%, respectively. In Indonesia, GDP likely expanded 5.2% in 3Q, on resumption of ore exports and stronger investment (Wednesday). Export growth in Korea (Saturday), Indonesia (Monday) and Taiwan (Friday) probably moderated, while Malaysia’s exports (Friday), on the other hand, likely improved. Thailand’s inflation (Monday) probably eased in October on falling oil prices; while inflation in Indonesia (Monday), Korea (agricultural price hike) (Tuesday) and Taiwan (low base) (Wednesday) likely edged higher. Extended QE period has depressed Asian interest rates and sent capital flows into Asia, fuelling asset prices and credit growth. China, Korea and the financial centers of Singapore and Hong Kong led the rise in corporate leverage during QE; Thailand and Malaysia led the rise in household leverage. Click for full report

US Economic Weekly: Inflation’s flat tire keeps Fed stranded •   3Q GDP growth surprised to the upside, rising 3.5% qoq saar, but a 16% jump in defense spending added 0.7% to the number. •   We look for another strong 235,000 payroll gain on Friday. •   We expect no pick-up in inflation over the next year, and we have moved the first rate hike next year to September from June.  Click for full report*

China Economic Watch: October NBS PMI surprised to the downside •   China's NBS PMI unexpectedly fell to 50.8 in October from 51.1 in September due partially to falling commodity prices. •   Investors might be disappointed by the weaker PMI reading, but market impact could be limited as Beijing might add stimulus. •   We expect stabilization of PMI as Beijing to ramp up new stimulus measures and enforce implementation in coming months.  Click for full report*

The Thundering Word: The QE is Dead, Long Live the E! •   Our post-QE worlds...Deflationary Booms in the US, UK and many metropolitan "1% enclaves"; •   Deflationary Busts in Europe & Japan, and a Race to Reform in Emerging Markets. •   Ironically QE ends with investors pricing in deflation rather than inflation.  Click for full report*

US Rates Weekly: Life after QE3 •   We recommend front-end shorts. Fundamentals, demand indicators and positioning all point toward higher front-end yields. •   As the Fed put expires, we shift our breakeven longs to the front end. We continue to like 3y and 10y spread wideners. •   We turn short on gamma and recommend selling 1m10y delta hedged straddles.  Click for full report*

Global Rates and FX Weekly: As one QE door closes, will another open? •   As the fed finally exits QE3, attention turns to Europe. With further ECB action unlikely, the market risks disappointment •   In the US, next week's NFP report will be key for front-end rates, with forward guidance now explicitly data dependent •   With 2014 likely to be the strongest year for cross border M&A since the crisis, we find the FX impact is uneven across pairs  Click for full report*

GEMs Macro Monthly: Dark matter •   Global growth concerns have dominated markets and likely exacerbated the impact of a positive oil supply shock on oil prices. •   We argue that lower energy prices should ease growth concerns; the decline could boost EM GDP by 0.7pp. •   We are still neutral on FX but like MXN, INR against non-USD G10 and also CNY. We like payers in India, and receivers in SA.  Click for full report*

Global Economic Weekly: Decouple or happy marriage? •   A solid 3.5% GDP print confirms that the US can be an engine of growth. •   We think the recent weakness in several key economies is temporary. •   The fiscal and monetary policy backdrop remains supportive of growth.  Click for full report*

GEMs Flow Talk: China and Brazil boost foreign holdings •   Brazil posted huge inflows = 43% of total Sept increase; Brazil + China are most of the monthly increase; rest are small •   ** New ** updated chart on LDM region allocation shows money going into Asia •   LDM flows winner: Brazil, Czech Rep, India and Mexico weekly. LDM flows loser: No losers  Click for full report*

Japan Watch: BOJ policy meeting: Additional easing •   At its 31 October policy meeting, the BOJ decided, by a 5-to-4 vote, to expand quantitative and qualitative easing (QQE). •   The BOJ's inflation-targeting policy should become more credible and financial markets will be positively affected. •   10-year JGB yield will decline below the 0.4%. The BOJ's move introduces upside risk to our end-2014 USD/JPY forecast of ¥108  Click for full report*

Japan Economic Weekly: Japan's BoP seen from flow of funds •   Notable features of Japan's BoP are the fall in the current account surplus and an increase in external securities investment •   The fall in Japan's current account surplus reflects the decline in corporate net savings. •   Foreign security investment has increased across a wide range of sectors.  Click for full report*

Europe Economic Weekly: No urgency for ECB to loosen, or BoE to hike •   We expect the ECB to stay on hold next week. We think data needs to worsen, particularly inflation, for them to do more. •   A raft of more-dovish comments from BoE members recently leaves the hawks looking increasingly isolated. •   The ECB bank lending survey improved. But TLTROs may be used more to rollover existing loans than to write new loans.  Click for full report*

Australia Economic Weekly: Rates will eventually rise, but not by much •   The neutral interest rate in Australia is now likely lower than before; this should keep the eventual tightening cycle modest •   The RBNZ kept rates on hold this week, it wants the NZ$ lower and will keep rates on hold until the second half of 2015 •   A full calendar next week with the RBA and data on the labour force, retail sales, building approvals and international trade  Click for full report*

Asia Economic Weekly: Leverage pre- & post-QE •   The Fed's extended QE period (2009-14) depressed Asian interest rates, fuelling asset prices and credit growth. •   We take stock of corporate & household debt pre- and post-QE, as excessive leverage is seen as a key risk when US rates rise. •   China, Korea and financial hubs (Singapore & HK) led corporate leverage rise; Thailand and Malaysia led household debt rise.  Click for full report*

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