1 Eric Chaney Chief Economist, AXA Group Head of Research, AXA IM [email protected]June 2014 (Update 17 June, 2014) Tracking the global recovery 2014 growth forecast cut to 3.3% US = leading; China = insurance against downside Emerging markets: regaining market confidence Central banks: Fed-ECB ever more dovish Euro area: risk of persistent low inflation
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Tracking the global recovery 2014 growth forecast cut to 3.3%
US = leading; China = insurance against downside
Emerging markets: regaining market confidence
Central banks: Fed-ECB ever more dovish
Euro area: risk of persistent low inflation
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logotype) 2 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM 2
The global macro outlook
Global GDP forecast trimmed from 3.5 to ≈ 3.3% ; US GDP from 2.8 to 2.2%
► Global trade and the US are recovering from 1Q dip, not fast enough to plug the gap
► China has taken an insurance on GDP growth, with a 7.0% floor
► The emerging markets cycle is lagging behind but should benefit from US growth
Fed: perceived as more dovish under Yellen than under Bernanke
► The new Chair is focused on the labour market, more than on financial stability
► Some FOMC members are ready to let inflation overshoot after having undershot
► Vice chair Stanley Fisher may take a more conservative view
The recovery in Europe is too sluggish to fully offset deflationist forces
► Weak and uneven, the cyclical recovery is nevertheless supportive for equities
► The ECB has delivered an easing package; targeted liquidity injection is the new plan
► Absent QE (unlikely), bank restructuring is a necessary condition to the recovery
Emerging markets: net capital inflows and market sentiment again positive
► Tapering being fully priced, the Fed’s dovish stance is –again- positive for EMs
► Country-specific political risks made things worse. They look less acute now
► The good news: emerging markets have proved resilient to capital flows gyrations
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logotype) 3 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
Central banks: a tentative calendar for exits
Bank of England: end 2014 / early 2015
Federal Reserve: end 2015 / early 2016
European Central Bank: 2017
Bank of Japan: 2018
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logotype) 4 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
Main macro risks
Short term (3 to 6M):
Markets challenging the Fed on its very dovish policy stance
Yellen’s Fed has become ever more dovish. A rise in inflation may question this stance
Political instability in the Middle East sending crude oil prices through the roof
Two conflicts are yet unresolved: Israelis vs. Palestinians and Sunnis vs. Shias
Political instability in Europe caused by votes on independence or EU membership
The rise in eurosceptic votes shows that tensions within the EU are building up
Policy mistakes by Chinese policymakers causing an unexpected hard landing
China has to reform on several fronts while keeping GDP growth above 7%. Challenging!
Medium to long term:
Very low inflation becoming entrenched in the euro area if bank restructuring is too slow
Following a large debt build-up, excessively low inflation would raise solvency issues
Further French / German growth and fiscal divergence, markets testing France
France is now moving toward supply side reforms – at a snail pace
Ill designed ‘exit strategies’ by big central banks (Fed/BoJ/BoE)
Inflating monetary bases to prevent deflation was easy. The opposite won’t be
Mismanagement of the rise of China as regional superpower
From India to Japan through Philippines and Vietnam, worries are building up
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logotype) 5 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
What equity markets say
Equities: supported by risk appetite and liquidity
Source: MSCI, AXA IM Research
Equity markets have shrugged off concerns
about Ukraine, China and oil (so far)
Performances are comparable across regions
The MSCI index has crossed the trend +1s.d.
line but valuations are not stretched (yet) and
risk appetite is strong
The trend growth rate of real total return is in
line with the post-1971 era (2.4%)
0.8
0.9
1.0
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1.2
1.3
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2.3Log (MSCI - World Equity Index*, inflation adjusted), 1=1970
*: Total return
Red line: real trend (non recursive HP filter, lambda = 10^11)
Dotted lines: +/- 1 standard deviation of
deviation from mean
Deflator interpolated from US PCE deflator
As of: 17/06/2014
World US EMU (€) EU ($) EM ($)
-40.3% -37.1% -44.3% -46.1% -53.2% Through 2008
30.8% 27.1% 28.7% 36.8% 78.7% Through 2009
12.3% 15.4% 3.3% 4.5% 19.2% Through 2010
-5.0% 2.0% -14.1% -10.5% -18.2% Through 2011
16.2% 16.1% 18.0% 18.7% 18.5% Through 2012
27.4% 32.6% 24.4% 26.0% -2.3% Through 2013
5.5% 6.0% 8.1% 6.2% 5.4% Since 01 Jan 2014
3.2% 3.9% 3.8% 1.4% 1.7% Last four weeks
MSCI total return indexes (source MSCI)
-3
-2
-1
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-3
-2
-1
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9MSCI World Equity
Index*Annualized real rate of return
*: Total returnAnnualized rate of growth of smoothed (non recursive HP filter, lambda = 10^11) inflation-adjusted total return index.Deflator interpolated from US PCE deflator
Long-term average
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logotype) 6 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
What our models say
Equities: Risk Appetite Barometer positive
Our in-house ‘Risk Appetite Barometer’ has increased further in June
Its cyclical component (US and € Surprise Gaps) is now firmly in positive territory, led by the US. Also:
* The 3M momentum component is rising and is now above zero
* The average pair-wise correlation of US stocks is low, a sign that herd behaviour is not a risk
* The low vs. high credit quality spread is record high: investors see a recession as highly improbable
Rescaled weighted
average of four scores
(AXA IM surprise
gaps, Corporate bond
spread of spreads,
Average pair-wise
correlation of stocks &
3-month equity price
momentum)
Cyclical risk: first
score /
Systematic risk:
weighted average of
the last three scores
Sources:
Bloomberg,
Datastream,
Reference
document:
Market sentiment
indicators: less is
more – Mathieu
L’Hoir – AXA IM
Research
– May 24th 2012
-1.0
-0.5
0.0
0.5
1.0
-1.0
-0.5
0.0
0.5
1.0
2009 2010 2011 2012 2013 2014
Risk appetite
Risk aversion
Weekly Risk Appetite Barometer (RAB)
Systematic risk appetite
Cyclical risk appetite
Risk Appetite Barometer (RAB)
Latest Data:
17/06/2014
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logotype) 7 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
What bond markets say
Bonds boosted by dovish talk; € decoupling from US
Markets see the first Fed hike in mid/late 2015, followed by 25bps hikes every two other FOMC meetings
The ECB rate cuts and announced TLTRO had a small negative impact on Bund yields. Depending on the
speed of the restructuring of the banking system, the ECB may have to keep rate at zero until 2017
The long term view: we are at the beginning of a secular bear market for US Treasuries. Once QE is over,
markets will reprice the term and inflation premia and reconsider the timing of rate hikes as time passes
In the euro area, a Japanese scenario is a possibility, although not the main case
Source: Datastream, AXA IM Research
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11
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11
1985
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2006
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2010
2011
2012
2013
2014
2015
USA
Germany
US trend
Japan
Main benchmark 10Y bonds, annual yields%
All time lows:US Treasuries: 1.40% on 24 July, 2012Bunds: 1.15% on 31 May, 2012JGBs: 0.43% on 13 June, 2003
Latest data:
17 June 2014
0.0
0.5
1.0
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2.0
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3.0
3.5
4.0
0.0
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1.0
1.5
2.0
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3.0
3.5
4.0
USA Germany
US trend Japan
%
First hint at
'imminent' tapering
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What bond markets say
Forward curves: hammered by Yellen and Draghi
UST curve: Since end 2013, medium-long-term forwards have fallen by up to 70bps, while shorter forwards
were stable, as if markets were pricing slower long term growth or a lower duration risk premium
The first speeches of Fed chair Janet Yellen have confirmed that she is on the dovish side re interest
rate policy. Yet, markets are trying to assess FOMC decisions, not only the chair’s views
German curve: over the same period, the whole forward curve has eased. Markets have postponed by one
year their rate hike expectations. The term premium is still in negative territory: for the markets, a Japanese
scenario is not excluded. The ECB may have to diverge from the Fed over 2015-16
Source: Datastream, AXA IM Research
-100
-50
0
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100
150
200
-100
-50
0
50
100
150
200
Average (1999-2012) TP for UST = 70bps
US Treasuries
German Bunds
A proxy for the term premium on 10Y UST and Bunds(basis points, estimated from zero-coupon curves)
The term premium is from the Kim-Wright (Fed) model for UST
The proxy is a linear function of the 1Y in 7Y forward rate0.0
US and Germany1Y forward rates derived from zero coupon curves%
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logotype) 9 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
What real bond markets say
Inflation futures: stabilisation
Medium term (5Y) expectations have stabilised in the four constituencies we are tracking, with Japan and the euro area at the low end, hovering around 1.2 / 1.3%
Longer term (5Y in 5Y) expectations are broadly stable in the US, between 2.75 and 3.0%, and in the UK, around 3.5%. They have declined to 2.0% in the €-area . If extended, this downward trend would challenge the ability of the ECB to “anchor long-term inflation expectations”.
With Fed, BoE and BoJ sailing in unchartered waters, investors may ask for a higher long term inflation premium, at some point in time. The longer exit strategies are postponed, the higher the premium.
Source: Datastream, AXA IM Research
-2.5
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2.0
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4.5
UK 5Y in 5Y US 5Y in 5Y
EUR 5Y in 5Y Japan 5Y in 5Y
Inflation swaps (breakevens), 5Y in 5Y
Latest data: 09/06/2014
-2.5
-2.0
-1.5
-1.0
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2.0
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UK 5Y US 5Y
EUR 5Y Japan 5Y
Inflation swaps (breakevens), 5Y
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What commodities markets say
Commodities: Chaos in Iraq may cause a spike
Base metal prices have been declining on trend since early 2011. The deceleration of headline growth in China together with sluggish recoveries in developed economies and ‘end of QE’ headwinds for emerging economies may fuel this downward trend further. Yet, at the moment, they are stable.
Crude oil (Brent): while markets shrugged off tensions between Russia and the West (use of strategic reserves by the US?), they are sensitive to the situation in Iraq. Long forwards indicate convergence toward $100/bbl, once stamped ‘fair price’ by Saudi Arabia...
Nominal trade-weighted exchange rate, 100 = average (99-13)
70
80
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110
120
130
140
70
80
90
100
110
120
130
140
2006 2007 2008 2009 2010 2011 2012 2013 2014
€ / JPY € / US$ € / UK £ € / CHF
Euro bilateral exchange rate, adjusted for inflation trends100 = average (99-13)
Str
ong
euro
We
ak e
uro
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What real economic indicators say
Global trade: roller coaster, weak underlying trend
Global trade contracted in 1Q 2014 (-0.8%Q), a payback after an abnormally strong 4Q 2013 (+1.6%Q)
The underlying trend (circa 3.5%) is significantly weaker than the longer trend (6%)
Unless trade sharply rebounds in the coming months, global trade growth will disappoint again in 2014
The elasticity of trade relatively to global growth has fallen from 1.5 before the global financial crisis to
less than 1 since then. Is this a structural shift? If it is, growth models based on exports would suffer.
Source: CPB, AXA IM Research
Volume
Price in US$
Glo
ba
l T
rad
e
75
85
95
105
115
125
135
145
25
45
65
85
105
125
145
1991
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1995
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1998
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2001
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2003
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2005
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2007
2008
2009
2010
2011
2012
2013
2014
Volumes (s.a.)
Prices / unit values in US$
March 2014
-21%
100 = 2005
Global trade in US$, 2008/06 to 2009/04: -32.5%
-15%
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What real economic indicators say
Inflation/deflation balance: deflation has an edge
Japan, the UK and a handful of emerging economies are operating above recent trends, by a small margin. China is close to potential, Brazil below trend.
Most of Europe is at or below trend, but the UK, which is now on a fast track
Short term, risks are still tilted toward disinflation
Bear in mind that the global component of inflation explains 70% of local inflation (*)
Source: Datastream, AXA IM Research
(*): More precisely, the share of inflation variance explained by a measure of global inflation is 71%, on
average, for Oecd economies. This share ranges from 60% for Germany to 68% for the US and 89% for
France. Source: Ciccarelli and Mojon, Global Inflation in The Review of Economics and Statistics, 2010.
Trend GDP is estimated with a non-recursive
HP filter, with lambda set at 10,000
(industrialised) or 5,000 (emerging)
-4
-3
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-1
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-3
-2
-1
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Japan
Hungary
Mala
ysia
UK
US
Denm
ark
Austr
alia
Canada
Indonesia
Germ
any
Turk
ey
Chin
a
Sw
eden
Kore
a
Rom
ania
Sw
itzerland
Chile
Mexic
o
Fra
nce
Belg
ium
Russia
*
Taiw
an
Arg
entina*
Italy
Pola
nd
India
Port
ugal
Irela
nd*
Spain
Bra
zil
Thailand
Neth
erlands
Gre
ece
Output Gaps, 1Q 2014 (* = 4Q 2013)
Actual minus trend GDP as % of trend GDP
Operating above trend Operating close to trend
Risk of deflationOperating below trend
1.0% < OG -1.0% < OG < 1.0%
-2.5% < OG < -1.0%
OG < -2.5%
-3.8
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logotype) 14 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
What real economic indicators say
Divergences within developed economies stabilised
Source: National Accounts, AXA IM Research
Since the bottom of the 2009 recession, recoveries in the developed world have been heterogeneous.
Canada, Switzerland and Sweden, all wide open economies, are doing better than others.
Among larger developed economies, the US is leading, followed by Germany. The UK is catching up
Japan has overtook France, where unemployment is still rising. Yet, mind the payback in 2Q
Along larger economies, Italy remains the most worrying case, with GDP still 9% below the 2008 peak
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110
86
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98
100
102
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106
108
110
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Canada US Germany
France Japan UK
Italy
Real GDP index100 = average 3 quarters around peak
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76
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108
110
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sweden
Switzerland
Belgium
Netherlands
Ireland
Spain
Portugal
Greece
Real GDP index100 = average 3 quarters around peak
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What real economic indicators say
China: deceleration under control; PBC role critical
China’s GDP decelerated further in 1Q (1.4%Q vs. 1.7% in 4Q 2014), hit
by weak exports. Industrial production growth has landed just below 9%
Thanks to the targeted stimulus decided by the government, the 7.0%
floor for GDP looks credible. We have cut our 2014 forecast to 7.2%.
Financial jitters are likely, as PBC raises the ante to force banks to clean
their balance sheet. Yet, liquidity is controlled by PBC and a credit hard
landing is unlikely, in the short term at least
Car sales are growing robustly (16%Y on trend), testimony of a re-
balancing toward consumer demand.
Source: NBS, Datastream, AXA IM Research
50
100
200
50
100
200
2006 2007 2008 2009 2010 2011 2012 2013 2014
Smoothed series
Raw series
China: vehicles production (volume index - log scale)
Subjective unemployment = 5.8+ 0.06 * (balance of opinion on current jobs - Conference Board)OLS, 1978-2013, R2=0.83
10.0%
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What real economic indicators say
US Consumers: the return of wealth
As long as the personal saving rate rises, consumer spending could not but disappoint. This is what
happened until 3Q 2010. As wealth rises and net debt declines, the savings rate may decline –again.
Based on 1Q net wealth data, the personal savings rate could fall by another 1 pp during the year, thereby
boosting consumer spending
The stabilisation of the debt/income ratio (at end-2002 level) is consistent with the wealth-based analysis
Source: BEA, AXA IM Research. Latest data: 1Q 2014 (NIPAs revised from 1929)
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2011
2013
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Household total credit market debt Debt trend
Gross saving rate (smoothed) Gross saving rate
Debt, % of disposable income Saving, % of disposable income
Debt trend (1975-1999)
Debt overhang: between 9% and -7%% of income,
as of Mar. 2014
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07
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11
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13
CORRELATION = - 0.71
Personal gross savings rate, % of personal disposable income (left
hand scale)
Ratio Net wealth / annual disposable income (right hand scale)
Consistent with 3.0% savings rate
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What monetary indicators say
US Fed: money gap positive, money multiplier declining
The Fed’s obsession: do not repeat the mistakes of 1930 Former chairman Bernanke was the first scholar to demonstrate that Milton Friedman, not JM Keynes, was right about
the cause of the 1930 depression: it was the contraction of money supply, not fiscal austerity
When QE3 ends, the monetary base will have increased 5 times compared to pre-Lehman
The test will come when the money multiplier, so far low and stable, starts rising. Then, the Fed will have to
shrink its balance sheet accordingly. This is not (yet) part of the official exit strategy of the Fed.
Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM Source: Federal Reserve Board, AXA IM Research
8.6
8.7
8.8
8.9
9.0
9.1
9.2
9.3
9.4
2
3
4
5
6
7
8
9
10
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
US: Broad money and money multiplier
Money multiplier (left hand scale)= M2 / Monetary base,
Ln (M2), right hand scale
Ratio log (US$ bn)
6%
Long term trend (5.5% p.a.)
0
2,000
4,000
6,000
8,000
10,000
12,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-0
4
Ma
y-04
Sep
-04
Jan-0
5
Ma
y-05
Sep
-05
Jan-0
6
Ma
y-06
Sep
-06
Jan-0
7
Ma
y-07
Sep
-07
Jan-0
8
Ma
y-08
Sep
-08
Jan-0
9
Ma
y-09
Sep
-09
Jan-1
0
Ma
y-10
Sep
-10
Jan-1
1
Ma
y-11
Sep
-11
Jan-1
2
Ma
y-12
Sep
-12
Jan-1
3
Ma
y-13
Sep
-13
Jan-1
4
Ma
y-14
Sep
-14
US: Monetary base and broad money
Bank reserves (left hand scale)
Monetary base (left hand scale)
US$ bn US$ bn
Monetary base:+$ bn
i.e. +
Broad money (M2):
+ 42%
M2 (right hand scale)
Lehman Bros bankruptcy
End o
f Q
E s
imula
tion
3,050
348%
Latest data: 01/05/2014
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What real economic indicators say
Japan: losing steam? Watch Capex
Master piece of Abenomics, the BoJ decision to double its monetary base and reach 2.0% inflation has
weakened the yen, boosted equity prices and raised companies as well as consumers’ expectations.
GDP growth took off in 1Q (6.7% annualised growth), as consumers tried to beat the 3pp tax hike. A
payback is due in 2Q, but the Tankan-based Surprise Gap is consistent with a re-acceleration in 3Q. Even
pricing in a 3.5% GDP dip in 2Q, our 1.7% GDP growth forecast for the full year looks reasonable.
Corporate investment (capex) was re-ignited by Abenomics: capex was up 11.6% in the last 12M. We
expect 1.7% GDP growth in 2014, after 1.5% in 2013.
EA Surprise Gap: Current production minus production plans 3 months ago
Recession warning Recovery signal
December 2008 : -2.4
August
2013
May 2011
Feb 2012
May 2012May
2014
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logotype) 25 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
What € bond markets say
€-Spreads: convergence at the long end? not quite
Consistent euro politics (LTROs + €-Summit + threat of OMTs) have reversed the dynamics of spreads, in
favor of Ireland, Spain and Italy, especially for short durations.
5Y in 5Y spreads have been declining on trend since July 2012. They are now fluctuating around 200 bps
for Italy and Spain. A significant credit risk and/or a smaller euro club in the longer term are still priced in.
This is not deterring yield-chasing investors.
Warning: the German Constitutional Court may cast doubts about the credibility of OMTs, depending on
its reaction to the European Court of Justice decision (expected this year)
Source: Bloomberg, Datastream, AXA IM research
0
100
200
300
400
500
600
700
800
0
100
200
300
400
500
600
700
800
Spain
Italy
Belgium
France
Austria
Netherlands
2Y spreads vs. German bonds
25 Nov. 2011
24 Jul. 2012
0
100
200
300
400
500
600
700
800
900
0
100
200
300
400
500
600
700
800
900
Spain
Italy
Ireland
Belgium
France
Finland
Netherlands
5Y in 5Y spreads vs. German bonds
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logotype) 26
What monetary indicators say
ECB: flat money supply hints at deflation risk
The ECB is struggling to boost money supply M3 is almost flat: +0.8% 3M/3M annualized in April 2014 (0.9% on a 3M vs. 3M previous year basis)
Against its long term trend, M3 is running 20% below. The ECB’s monetary base has fallen below its pre-crisis trend
The purpose of the upcoming TLTRO (targeted LTRO) is to boost credit to companies, thus money supply
‘Pure’ QE is very unlikely: high political costs vs. low and uncertain reward The ECB may opt for other assets (ABS for instance); this is unlikely to be large enough to kick start money supply
The most promising channel is the restructuring of the banking system, but this might take years
Source: ECB monthly bulletin Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
5
6
7
8
9
10
11
12
13
14
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
€ area: M3 and multiplier (M3/monetary base)
Money multiplier= M3/monetary baseLeft hand scale
Ln (M3), right
hand scale
Ratio log (€ bn)
Ln(M3) trend01/1999 to 12/2011[6.7% p.a.]
- 20%
(€ 2.5Tn)
0
100
200
300
400
500
600
700
800
900
1,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
01/2
00
1
01/2
00
2
01/2
00
3
01/2
00
4
01/2
00
5
01/2
00
6
01/2
00
7
01/2
00
8
01/2
00
9
01/2
01
0
01/2
01
1
01/2
01
2
01/2
01
3
01/2
01
4
01/2
01
5
Monetary base, left hand
Deposit facility, right hand scale
€ bn € bn
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What monetary indicators say
ECB: challenged by credit decline and acting
Sources: ECB, AXA IM Research
The endless decline of new loans to companies is a serious cause for concern
With the GDP weighted 10Y average government bond yield at 2.0%, vs. nominal GDP running at
1.8%Y (1Q 2014), monetary policy action aiming at lowering bond yields would be futile
The first wave of TLTROs (in 2014) will have little impact on credit supply, because of its weak
conditionality. On the other hand, it will contribute keeping bond yields low by subsidizing banks
After the publication of the stress tests, the restructuring of the banking system will accelerate and the
conditionality of the next wave of LTROs will be hardened. If all goes as planned by the ECB (as
supervisor and monetary authority), credit supply should start accelerating in the course of 2015.
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
Jan-9
9Jul-9
9Jan-0
0Jul-0
0Jan-0
1Jul-0
1Jan-0
2Jul-0
2Jan-0
3Jul-0
3Jan-0
4Jul-0
4Jan-0
5Jul-0
5Jan-0
6Jul-0
6Jan-0
7Jul-0
7Jan-0
8Jul-0
8Jan-0
9Jul-0
9Jan-1
0Jul-1
0Jan-1
1Jul-1
1Jan-1
2Jul-1
2Jan-1
3Jul-1
3Jan-1
4Jul-1
4
Bns EUR, Monthly flows Loans to non-financial corporations
April 2014
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
Jan-9
9Jul-9
9Jan-0
0Jul-0
0Jan-0
1Jul-0
1Jan-0
2Jul-0
2Jan-0
3Jul-0
3Jan-0
4Jul-0
4Jan-0
5Jul-0
5Jan-0
6Jul-0
6Jan-0
7Jul-0
7Jan-0
8Jul-0
8Jan-0
9Jul-0
9Jan-1
0Jul-1
0Jan-1
1Jul-1
1Jan-1
2Jul-1
2Jan-1
3Jul-1
3Jan-1
4Jul-1
4
Billions EUR, Monthly flows
Loans to households
April 2014
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logotype) 51 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
Long-term, structural themes
Debt: The post WWII US example
1946-1956
Debt/GDP
reduction: -60 pts
Contribution of real
growth: -18 pts
Contribution of
inflation: -17 pts
Contribution of
primary budget
balance: -13 pts
Source: BEA, OMB, AXA IM Research – Inflation is measured by the GDP deflator
Source: AXA IM estimates,
based on the first order
approximation of the
dynamic equation of the
debt.
-5.0
0.0
5.0
10.0
15.0
20.0
1941 1944 1947 1950 1953 1956 1959 1962 1965
0
25
50
75
100
125Federal debt, % of GDP
GDP growth, smoothed
Inflation, smoothed
1946 - 1956 :
Average real GDP growth: 3.6%
Average inflation: 3.3%
GDP, inflation, %Debt
19
46
: 1
22
%
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The optimal exit path: productivity (and labor force growth)
This is how US and Europe deflated the legacy debt burden
post WWII (US : innovation; Europe/Japan: catch-up)
1. Obama’s administration highly focused on innovation
2. Innovation: high return in developed economies, low return in
developing economies
3. Productivity and moderate inflation: best compromise
Long-term, structural themes
US: The inflation temptation
Simplistic arithmetic but food for thought:
7.0% nominal GDP growth
= 3.3% (inflation) + 3.6% (growth) [actual US mix post WWII]
= 4.0% (inflation) + 2.9% (growth) [possible post Great Recession path]
In both cases, initial debt burden halved in 10 years
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logotype) 53 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
Long-term, structural themes
Could 1970s stagflation come back?
Over 1971-1982, US CPI inflation averaged 8% and high inflation turned out to
be unemployment-proof. The same happened in Europe, with two notable
exceptions: Germany and Switzerland.
With the benefit of hindsight, three main factors explained stagflation:
#1. Vietnam war and end of ‘dollar standard’ (15 August 1971). Enters ‘fiat
money’, good bye gold.
#2. Misguided monetary policies (stripping CPI from ‘transitory components’,
illusion of jobs/inflation trade-off)
#3. Real wage rigidities (indexation to prices, c.o.l.a. and other scala mobile,
please note: no German word for indexation)
Factors #2 and #3 have all but vanished. Hopefully, Fed will be less focused on
‘core inflation’ (reminiscence of Arthur Burns’ stripping habit).
Factor #1 remains: Iraq, Afghanistan vs. Vietnam. Fiat money is here to stay.
My personal view: stagflation is a red herring
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Long-term, structural themes
Long term, Fed may tolerate mild inflation
Source: US Department of Commerce, Federal Reserve, AXA IM Research, latest data December 2009
US inflation (PCEPI) - 1960-2009
0
5
10
15
20
25
30
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
0
5
10
15
20
25
30Frequency, in %
Personal consumption
expenditure price index:
Mean: 3.7
Median: 3.1
Modes: 2.5; 4.0
Consumer price index:
Mean: 4.1
Median: 3.4
Modes: 2.8; 6.8
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Long-term, structural themes
Buba- ECB won’t tolerate inflation
Source: Destatis - Eurostat, AXA IM Research, latest data December 2009
(German inflation 1960-1997)
U (€-area inflation 1998-2009)
0
5
10
15
20
25
30
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
0
5
10
15
20
25
30Frequency, in %
Consumer price index
Mean: 3.0
Median: 2.6
Modes: 2.2 ; 5.9
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Long-term, structural themes
ECB not really scared by deflation
Source: Eurostat, AXA IM Research, latest data November 2013
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
Frequency distribution of euro area HICP inflation, 1998-2013(YoY change of HICP, monthly data)
HICPMean: 1.97
Median: 2.05Modes: 1.9; 1.1
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What about hyperinflation?
What is hyperinflation?
Phillip Cagan defines hyperinflation as CPI increasing more than 50% per
month. In theory, hyperinflation is associated with the value of money
converging toward zero (debasement of currency). At the limit, money does not
buy any tangible good, i.e. real money balances decrease to zero. Practically,
hyperinflation may start when the relevant period to measure inflation is a
month, not a year.
What are the roots of hyperinflation?
Hyperinflation is associated with governments deliberately increasing money
supply in order to finance unsustainable spending. Because several central
banks are deliberately increasing their monetary base by monetizing various
assets (including, possibly, government debt), hyperinflation is evoked as a
possible outcome. However, increasing money supply is neither a sufficient
condition (think of the US in WWII) nor even a necessary condition for
hyperinflation. The latter may happen if the utility of the stock of money rises
slower than real money balances decrease, in other terms if confidence in
money evaporates. I find reasonable to assume that hyperinflation is
generally the result of both deliberate fast money supply expansion AND a
loss of confidence in institutions such as the central bank or the Treasury.
Hyperinflation is a possible outcome in seriously destabilised emerging economies
In the current circumstances, and even if the Fed and the ECB monetize government debts (as the BoJ did to
fend off deflation), hyperinflation is in my view excluded, at least as long as these central banks are in charge.
Yet, emerging economies severely destabilized by BoP crisis leading to large scale defaults may well fall into
hyperinflation, which, in our world, turns rapidly into dollar- or euro-ization.
Germany: Weimar Republic, 1923
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Biography
Eric Chaney
Chief Economist AXA Group
Head of Research, AXA Investment Managers
Member of the Executive Committee, AXA
Investment Managers
Eric Chaney is chief economist for the AXA Group since 2008. His mission is
to provide a vision on the most likely scenarios for the global economy in the
medium to long term, as well as an assessment of the main macroeconomic
risks, for the group and its main entities.
Within AXA Investment Managers, Eric leads the Research and Investment
Strategy team and promotes a multidisciplinary approach of Research,
directed toward quality and helping investment decision. Eric has launched the
AXA IM Symposium (Paris 2010, London 2011 and 2012, Paris 2013) which
featured prominent speakers such as Stephen Roach, Francesco Giavazzi,
Jacques de Larosière, Charles Goodhart, Sushil Wadhwani, P.O. Gourinchas,
Stephen Li Jen, Thomas Huertas, Richard Koo, Tim Tacchi, Thomas
Kirkwood.
From 2000 to 2008, Eric Chaney was Chief economist for Europe at Morgan
Stanley, which he had joined in 1995. Previously, he headed the economic
forecasting unit of the French statistical office (INSEE). Before that, he was
responsible for global forecasts and analysis at the French Treasury.
He has been associate professor at the French School of Administration
(ENA). Since 1997, Eric has been a member of the French Economic Council
of the Nation, which advises the Minister of finances. He is an independent
member of the French Tax Council since 2010. He sits on the Scientific boards
of the AXA Research Fund and of the Autorité des marchés financiers (AMF),
the French financial market watchdog.
A former professor of Mathematics and editor of a mathematical journal of the
University of Strasbourg, Eric also holds a Master’s Degree in economics and
econometrics from the Paris Graduate School of Economics, Statistics and
Finance (ENSAE ParisTech).
Eric lives in Paris, is married and has five children.
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logotype)
Glossary
Backwardation: situation whereby future commodity prices are lower than spot prices
Breakeven: expected inflation extracted from inflation-proof bonds (also called linkers)
Contango: situation whereby future commodity prices are higher than spot prices
Convertibility risk: refers to the possibility that a country member of the euro club would leave the club
Credit risk: for a bond, risk of default by the issuer (coupon or principal)
Fair value: econometric estimate of the price of an asset, given economic fundamentals. Despite its name, the ‘fair
value’ is not intrinsic, since it is model-dependent
Forward rate: expected future short term interest rate (1Y for instance) derived from the yield curve
Log (MSCI): looking at the logarithm of an economic indicator allows to see whether its growth rate is constant (straight
line), accelerating (upward curved or concave) or decelerating (downward curved or convex)
OMT: Outright Monetary Transaction, a name invented by the ECB to qualify potential purchases of government bonds
of a country having required financial help from the European Stabilisation Mechanism (ESM). Has never been used.
Risk premium: premium on top of the price of a financial asset asked by investors to compensate for uncertainties
about the future (default, liquidity condition, counterparty risk, stock market crash...)
Term (risk) premium: risk premium investors are asking to compensate for the uncertainty on future monetary policy,
given the path of short term interest rates that they anticipate. Comes on top of the geometric average of expected rates
Surprise gap: A reversal indicator extracted from business surveys (Ifo, Insee, ISM, Tankan...). As for European
surveys, computes the difference between the assessment made by companies on current production growth with the
expectations they were expressing three months earlier, on harmonised data (z-score)
Yield curve: curve showing the yields of same nature bonds of various maturities, traditionally from 3M to 10Y.
Zero coupon (yield) curve: for any bond paying annual or semi-annual coupons, it is possible to calculate the price of
an equivalent zero-coupon bond. Doing so all along the yield curve gives a fairer idea of market expectations, especially
in terms of forward rates.
Z-score: normalised time series: (x-m)/s, where x is the original variable, m its mean and s its standard deviation. The
unit is thus 1 standard deviation.
5Y in 5Y: five-year yield in five-year extracted from 10Y and 5Y yields of similar bonds (for instance zero-coupon
bonds), considering that the 10Y yield is the geometric average of 5Y and 5Y in 5Y yields. Using both nominal bonds
and inflation proof bonds, it is possible to extract 5Y in 5Y inflation expectations.
59 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
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(logo placé à 2/3X du bord; X =
logotype) 60 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM 60
Recent research from AXA IM
AXA IM research documents are available on: http://www.axa-im.com/en/research
The important thing is to participate 28/05/2014
In this article, we start by exploring the broad set of labor market indicators that the Fed is looking at to evaluate the recovery in the job market.
China: continue the economic miracle 22/05/2014
We develop a 2-part report that investigates China's past growth, current problems, and future prospects.
Credit spreads tight, be selective 30/04/2014
Corporate credit fundamentals remain solid and technical supply demand imbalance remains supportive for credit in both the US and EUR IG space. However, returns
are getting squeezed and, as we continue to tighten in what sometimes feels like a relentless grind to the bottom, the reality is that returns will be weaker this year than in the past two years. Japan: one year on, still in midstream 24/04/2014
We review the effects of the "shock and awe" strategy implemented by the government since it took office and lay out our expectations for the short and medium term.
US monetary policy expectations and emerging credit growth 17/04/2014
Credit growth in Emerging Asia is more sensitive to expected changes in US monetary policy, since Emerging Asia receives the lions' share in US portfolio flows.
China: debunking the shadow banking system 03/04/2014
This note on Chinese shadow banking is designed to provide a holistic view of the sector by discussing the structural factors propelling its rise, and how the system
functions and what it contributes to China's overall financial reform.
Euro area inflation: trough in sight 26/03/2014
In this article, we dig into recent developments in euro area inflation and lay out our expectations for the coming quarters.
Japanese equities and the yen - An almost 2-for 1 relationship 20/03/2014
The yen has fallen by close to 25% against the US$ since January 2013, with Japanese equities up by 60% over the same period.
Portfolio diversification and the return of leveraged loans 13/03/2014
Having essentially disappeared during the height of the sovereign crisis, leveraged loans are also making a return in Europe as investors warm to the potential return
and relative protection they offer in a world of rising rates.
US yield curve: a change on the horizon? 27/02/2014
Our view is that a bear steepening bias will come first, followed by a mild bear flattening to emerge already in the latter part of 2014
The duration and breadth of the selloff in emerging markets reminded investors of the 1997 Asian crisis, but the resemblance was hastily denied by market consensus.
We remain more prudent relative to the consensus.
End of QE: a cross-asset impact assessment 23 July 2013
The first stage of monetary normalisation, QE tapering, should probably start in September, with QE expected to be over by mid-2014.
logotype) 61 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
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