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Economic Research
Week in Focus
24 February 2017
Germany: Housing overpriced but boom continues
House prices in Germany keep on rising. According to our new model, they are now overpriced
by around 10%. Only a marked rise in interest rates would be likely to end this boom and such
a move is nowhere in sight. House prices should therefore continue to climb for the time being.
This does not pose a great danger for the economy at present as the building sector is not yet
over-inflated and the rise in private debt has been limited so far. However, the longer the boom
lasts, the greater the risk that major imbalances will emerge whose correction would hit the
German economy hard.
Page 2
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CHART: German property prices are climbing sky high
BulwienGesa house price index: from 1975 to 1999; house price index of the Federal Statistical Office:
from 2000 until Q3 2016; estimates based on the IMX: Q4 2016, index: 2000 = 100; percentage changes
on the year
10
135
125
115
5
105
95
85
0
75
65
55
-5
1975
45
1980
1985
1990
1995
change on the year in % (lhs)
2000
2005
2010
2015
house price index (rhs)
Source: BulwienGesa AG, Federal Statistical Office, Immobilienscout24, Commerzbank Research
Outlook for the week of 27 February to 3 March 2017
Economic data: Euro zone inflation in February may well see a two before the decimal point
for the first time in four years. While this could drive inflation expectations further up, it is likely
that the inflation rate will soon fall again as underlying inflation pressure remains weak.
Page 7
Bond market: The long-end of the curve is increasingly impacted by the Bundesbank’s sizeable
€QE purchases in the one-year maturity sector. Moreover, investors remain nervous regarding
political risks in France and Italy, while ample redemptions need to be reinvested. We therefore
continue to expect Bund yields to trend downward amid a steeper curve.
Page 10
FX market: Strong support in polls for the eurosceptic French presidential candidate Marine
Le Pen continues to weigh on the euro. Speculation that strong US inflation will prompt higher
rates continues to support the USD.
Page 11
Equity market: High DAX valuations, notably inflated P/B ratios, have increased the
importance of selective stock-picking. We favour companies with credible restructuring plans;
that have a high share of sales in the USA and whose earnings react positively to a stronger
dollar.
Page 12
Commodity market: In the week ahead, the price of a barrel of Brent oil should remain
range-bound around USD 55. Survey-based estimates of OPEC production are expected to
confirm that the agreed output cuts have been largely implemented. Further support should
come from upbeat sentiment indicators.
Page 13
Chief economist:
Dr Jörg Krämer
+49 69 136 23650
[email protected]
For important disclosure information please see pages 16 and 17.
Editor:
Peter Dixon
research.commerzbank.com / Bloomberg: CBKR / Research APP available
+44 20 7475 4806
[email protected]
Economic Research | Week in Focus
Germany: Housing overpriced but boom continues
Dr Marco Wagner
Tel. +49 69 136 84335
House prices in Germany keep on rising. According to our new model, they are now
overpriced by around 10%. Only a marked rise in interest rates would be likely to end this
boom and such a move is nowhere in sight. House prices should therefore continue to
climb for the time being. This does not pose a great danger for the economy at present as
the building sector is not yet over-inflated and the rise in private debt has been limited so
far. However, the longer the boom lasts, the greater the risk that major imbalances will
emerge whose correction would hit the German economy hard.
The housing boom is in full swing
In Germany, prices for residential property are on an apparently unstoppable uptrend. House
prices in the third quarter of 2016 – the latest data published by the German Federal Statistical
Office – were more than 6% above year-ago levels (see chart on title page). This is the sharpest
price rise in 25 years. In the final quarter of 2016, the increase was likely to have been at a
similar pace, on the basis of data from the Internet Portal Immobilienscout24.
Housing is overvalued by 10% …
In view of these figures, an increasing number of people are warning that a bubble is developing
on the housing market. And indeed, our newly developed model (see box, page 4) does show
that since 2011, German house prices have been rising at a faster rate than is justified on the
basis of private household incomes; interest rates; building costs and demographic trends. While
the beginning of the upturn was initially a correction to the previous undervaluation of residential
property in Germany, since the beginning of 2015 house prices have increasingly been above
the “fair” level determined by our model (chart 1) and latest estimates put the degree of
overvaluation at about 10%.
… unlike in earlier booms
Consequently, the current boom differs from earlier periods when house prices rose strongly in
that, according to our model, there has not been a similar degree of overvaluation. At the end of
the 1970s and again at the end of the 1980s, house prices rose largely in line with the “fair“
house price (chart 2). The strong economy at that time boosted private household incomes and
stimulated the labour market. At the beginning of the 1990s, a demographic component was
added when there was a rise in the percentage of the population aged between 25 and 44 years,
who typically start a family and look to buy their own home (chart 3, page 3). These factors
fuelled the demand for home ownership despite relatively high interest rates and caused house
prices to soar. The price correction between the mid-1990s and mid-2000s was also explained
by the fundamental data; unemployment was climbing, real household incomes came under
pressure and the demographics turned negative from the property market perspective.
CHART 1: House prices are overvalued by 10% …
CHART 2: … unlike in earlier boom phases
Actual prices for residential property and “fair” house prices (Box,
page 4), Index 2010 = 100
Actual prices for residential property and “fair” house prices (Box,
page 4), Index 2010 = 100
130
130
125
120
120
110
115
100
110
90
105
80
100
70
95
60
90
2005
2007
2009
2011
actual house prices
2013
2015
2017
"fair" house prices
Source: Statistical Office, German Bundesbank, Commerzbank Research
2
50
1975
1985
actual house prices
1995
2005
2015
"fair" house prices
Source: Statistical Office, German Bundesbank, Commerzbank Research
24 February 2017
Economic Research | Week in Focus
“Fair” prices continue to rise …
For a good ten years, “fair“ prices have been rising. However, an average growth rate of 1½% in
the past three years means that their rise is much more modest than in earlier boom phases.
This is partly due of course to much lower consumer price inflation, but also because private
income is rising at a much slower pace than in the 1970s and 1980s. Furthermore, until recently
– and unlike in the first half of the 1990s – the percentage of 25 to 44 year olds in the total
population has decreased.
Moreover, the pace is set to change very little this year and next. Although the percentage of 25
to 44 year olds is likely to increase somewhat in the next few years (chart 3), real interest rates
are barely likely to fall (chart 4) and the inflation rate will probably only pick up slowly at best.
… and the overvaluation of prices is increasing
At 4½% per year, house prices in the past three years have risen at a much stronger rate than
was justified according to the model. Favourable financing costs alone cannot explain this; low
real interest rates are incorporated in the model’s calculation of “fair” prices so this is already
factored into their rise.
Not considered in the model, however, is the wide uncertainty in Germany about the long-term
consequences of the prolonged low-interest phase resulting from the ECB’s liquidity flood,
particularly with regard to pension provision and the long-term inflation outlook. Many view the
general outlook for European Monetary Union with some scepticism, which has allowed
“concrete gold” to gain favour with investors.
Since a solution to the problems of EMU and a move by the ECB towards a less expansionary
monetary policy will not happen in the next couple of years, whilst a further rise in “fair” prices is
likely, the property boom in Germany can be expected to continue in the near term.
But what if the bubble bursts?
The boom would end at some point if the situation in the euro zone improved significantly, thus
alleviating German concerns. A more likely trigger, however, is higher real interest rates which
would reduce the “fair” price via rising financing costs and act as a dampener on the economy
(and thus income and the labour market).
If the boom were to end quickly, the consequences for the overall economy would be limited.
Like in the last two episodes, house prices would be unlikely to slump, but would more likely fall
slightly at worst. The debt of private households has only risen moderately (chart 5, page 4) and
CHART 3: Percentage of potential home owners has been
on the decline for a long time
Percentage of 25 to 44 year olds in total population, in per cent;
model forecast from 2017
CHART 4: Real interest rates bottoming out
Effective interest rates for housing loans to private households with
an initial fixed interest rate for 10 years, deflated by consumer price
inflation (excluding energy), in per cent
33
9
32
8
31
7
30
6
29
5
28
4
27
3
26
2
25
1
24
1975 1980 1985 1990 1995 2000 2005 2010 2015
0
1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Federal Statistical Office, Commerzbank Research
24 February 2017
Source: Statistical Office, German Bundesbank, Commerzbank Research
3
Economic Research | Week in Focus
CHART 5: Loans for house purchases rising moderately
CHART 6: Building investment is still below-average
Existing volumes of loans for house purchases (all tenors) to private
households, percentage change on year, and in relation to disposable
income
Investment in housing in per cent of GDP; black line: mean since
1975
10
66
8
64
7.5
7.0
6
62
6.5
4
60
2
0
-2
2003
8.0
2005
2007
2009
2011
in % on the year (lhs)
2013
6.0
58
5.5
56
5.0
2015
in % of income (rhs)
Source: German Bundesbank, Commerzbank Research
4.5
1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Federal Statistical Office, Commerzbank Research
most housing loans have a long fixed interest rate. 97% of current residential property loans
have an original maturity of five years or more. Consequently, high interest rates would only
slowly increase the interest burden and there would be far fewer emergency sales than in Spain,
for example, at the end of the housing boom. Furthermore, building investment is at a belowaverage level (chart 6) which suggests there is no risk of a slump and job losses on the scale of
Spain or the USA.
That said, the longer the current boom lasts, the larger the risks that substantial imbalances will
develop whose correction would greatly harm the economy. The gap between actual and “fair”
prices will continue to widen, increasing the risk of a big correction in prices. What’s more, the
building sector, in which capacity utilisation is already very high, is likely to begin to expand
capacity at some point amid the continued high demand. Consequently, if – in several years’
time – the property boom were to end abruptly, this could result in huge job cuts. Lastly, the
marked upward trend in private household debt since 2010 is set to continue and if prices then
slumped, this could lead to problems for borrowers and the banks financing them.
Box: Estimating the "fair" level of house prices
To quantify the level of tension on the German property market, we have developed a model –
based on studies from the ECB and BIS – to help us arrive at an estimate of the "fair" level of
1
house prices. Temporary deviations from this level imply an over- or undervaluation of German
residential property. The "fair" value is calculated from the long-term correlation between real
property prices and the following economic fundamentals:
• real disposable per-capita income;
• real construction costs;
• real interest rates;
• the rate of unemployment and
• the share of those aged 25 to 45 in the overall population.
Real house prices and the explanatory variables follow an I(1) process, with the Akaike
information criterion suggesting a three-period lag. Moreover, a Johansen trace test implies two
cointegrating relationships (rk=2). Based on a Chow break-point test there was nothing to
indicate a structural break in the time series, implying that the estimate can easily be run over
the entire 1975 to 2016 period. Based on these features, estimates from a vector error correction
model seem appropriate where both the long-term (cointegration) and near-term correlations of
the variables are taken into account.
1
We essentially follow the approaches of Gattini, Luca and Paul Hiebert: “Forecasting and assessing euro
area house prices through the lens of key fundamentals“, ECB Working Paper 1249, 2010, and Égert,
Balázs and Dubravko Mihaljek: “Determinants of house prices in central and eastern Europe”, BIS Working
Paper 236, September 2007.
4
24 February 2017
Economic Research | Week in Focus
Major publications from 17 – 23 February 2017
Economic Insight US: Changing of the guard – Trump can realign
the Fed
Donald Trump will soon be able to appoint almost a whole new leadership of the Fed, including
the Chair of the Federal Reserve Board. The Republicans in Congress will be keen to select
personnel that bind the Fed more tightly to the rules but Trump is unlikely to follow these wishes
and the monetary policy course may therefore change less than feared. That said, the new team
may well cut back regulation of the financial system quite significantly. more
Economic Insight: Euro area loans – Still sluggish
Even after two years of government bond purchases by the ECB, lending momentum remains
modest in the euro area, and this is unlikely to change much in the coming quarters. For one
thing, companies have little demand for credit in light of sluggish investment. For another, the
positive effects coming from credit supply should ebb. This is one reason why the ECB will
probably reject calls for an exit from its expansionary monetary policy. more
EM Briefing: China – Property slowdown looming on the horizon
China's nationwide property price slowed in January, as the authorities tightened both property
and monetary policies. Clearly, property prices have peaked, and a property slowdown is
looming on the horizon. more
FX Hotspot: Banxico’s hedge plan to support peso
Banxico announced that it will offer up to $20 billion in forex hedges, starting with a first auction
of up to $1 billion on March 6. With these new measures that seem to work similar to NDFs (nondeliverable forwards), the Central Bank has beefed up its toolkit to support the peso without
using FX-reserves. more
FX Insight: The BoJ’s course …
We expect that the Bank of Japan will have to taper its bond purchases before year-end. As it is
still a long way from reaching its inflation target it will once again have to adjust its monetary
policy course, otherwise it risks renewed yen appreciation. more
FX Insight: KRW rally overdone
The KRW has been one of the best performing EM currencies despite a subdued economic
outlook. The outperformance reflects the improvement in EM risk sentiment, positive export data
and ongoing political risks. That said, expectations of monetary divergence with the US are likely
to put the KRW under renewed pressure. Against this backdrop, we expect USD-KRW to re-test
1,200 by year-end. more
FX Hotspot: Why we expect higher EUR-HUF this year
The German Ifo recorded another upbeat reading. Our own indicator for German economic
activity has also recently risen to its highest since 2012, making it likely that the consensus will
have to revise up 2017 GDP forecasts. We see some improvement in CE3 (Poland, Hungary,
and Czech Republic) economic prospects too, but there are good reasons to remain cautious. A
failure of growth to accelerate strongly would be a reason to expect weaker exchange rates later
this year, especially in Hungary. more
FX Hotspot: RON – Political crisis weighs on Romanian leu
It took the new government only six weeks to stumble into its first political crisis. Its attempt to
impede the judiciary’s anti-corruption campaign triggered the largest protests in Romania since
the end of communism. Despite plans for a referendum to settle the issue, demonstrations and
calls for the government to step down continue. Ongoing uncertainty over the political situation is
likely to continue to weigh on the Romanian leu. more
24 February 2017
5
Economic Research | Week in Focus
Preview – The week of 27 February to 3 March 2017
Time
Region Indicator
Period
Forecast
Survey
Last
Monday, 27 February 2017
9:00
EUR
USA
M3 money supply
Loans to the private sector
Economic sentiment indicator (ESI)
Business confidence (industry)
Business confidence (services)
Durable goods orders
Jan
Jan
Feb
Feb
Feb
Jan
yoy
yoy
sa
sa
sa
mom, sa
4.7
2.1
108.0
1.0
13.0
1.0
–
–
–
–
–
2.0
5.0
2.2
107.9
0.8
12.9
-0.5
JPN
Durable goods orders ex transport
Pending home sales
Industrial production
Jan
Jan
Jan
mom, sa
mom, sa
mom, sa
0.2
0.0
0.0
0.5
0.9
0.4
0.5
1.6
0.7
Q4
Q4
Dec
Feb
Feb
qoq
SAAR
yoy
sa
sa
0.4
2.0
5.3
54.0
110.0
–
2.1
–
53.0
111.0
0.4
1.9 (p)
5.3
50.3
111.8
51.1
56.0
53.5
-10.0
55.5
55.8
0.6
2.1
0.2
0.2
0.2
57.0
51.1
–
–
–
–
–
–
–
0.3
0.3
0.3
55.8
51.3
55.6
53.0
-26.0
55.5 (p)
55.9
-0.6
1.9
0.3
0.5
0.1
56.0
0.50
17.8
–
17.6
0.50
17.48
10:00
•
13:30
15:00
23:50
Tuesday, 28 February 2017
8:45
13:30
14:00
14:45
15:00
FRA
USA
GDP, preliminary
GDP, real (2nd estimate)
Case Shiller house price index
Chicago PMI
Consumer confidence (conference Board)
Wednesday, 1 March 2017
•
1:00
8:15
8:45
8:55
9:00
9:30
#
CHN
SPA
ITA
GER
EUR
GBR
GER
PMI manufacturing
PMI manufacturing
PMI manufacturing
Unemployed
PMI manufacturing, final
PMI manufacturing
CPI, first state results
Feb
Feb
Feb
Feb
Feb
Feb
Feb
15:00
USA
Personal income
Personal spending
PCE excl. food & energy
ISM index (manufacturing)
Jan
Jan
Jan
Feb
sa
sa
sa
mom, k, sa
sa
sa
mom
yoy
mom, sa
mom, sa
mom, sa
sa
Feb
%
SAAR, mn
Unemployment rate
CPI, preliminary
Jan
Feb
%
yoy
9.6
2.0
–
1.9
9.6
1.8
CPI excl. food, tobacco, and energy, prelim.
Initial claims
CPI
Unemployment rate
Feb
Feb 25
Jan
Jan
yoy
k, sa
yoy
%
0.9
245
0.4
3.1
0.9
–
0.3
3.0
0.9
244
0.3
3.1
Jan
Feb
Feb
Feb
mom, sa
sa
sa
sa
1.5
55.6
55.8
56.5
–
–
–
56.5
-0.9
55.6 (p)
54.5
56.5
•
CAD
BOC interest rate decision
#
USA
Auto sales
USA: President Trump speaks before Congress (2 a.m.)
Fed releases beige book (19:00)
Thursday, 2 March 2017
10:00
EUR
13:30
23:30
USA
JPN
•
Friday, 3 March 2017
#
9:00
9:30
15:00
GER
EUR
GBR
USA
Retail sales, volumes
PMI services, final
PMI services
ISM index (non-manufacturing)
Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 5 hours for EST. add 1 hour for CET). # = Possible release; mom/qoq/yoy: change
to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; (p) = preliminary; • = data of highest importance for markets
6
24 February 2017
Economic Research | Week in Focus
Christoph Weil
Tel. +49 69 136 24041
Economic data preview:
Euro zone: Inflation rate reaches ECB target
The discussion about the ECB’s exit from its ultra-expansionary monetary policy should
continue to gain momentum next week, as the inflation rate in February will probably see
a two before the decimal point for the first time in four years. While this could further
drive up inflation expectations, it remains to be seen how sustainable the higher inflation
expectations will turn out to be. After all, it is likely that the inflation rate will soon fall
again, and underlying inflation pressure remains weak for now. In the US, the ISM index
for the manufacturing sector should even exceed its high January level.
The inflation outlook in the euro area has changed significantly since last autumn. The large
jump in the inflation rate from 0.5% in November to 1.8% in January has propelled inflation
expectations of companies, consumers and investors sharply upwards (see chart 7). And the
rise in the inflation rate to 2.0% that seems to be on the cards for February should drive them up
still further (consensus forecast: 1.9%).
The ECB may welcome this, but a quick exit from its ultra-expansionary monetary policy is
unlikely as weak underlying inflation pressure remains in play. In February, the core rate of
inflation – i.e. the year-on-year rate CPI inflation excluding the volatile prices for energy, food,
alcohol and tobacco – probably remained at 0.9% (consensus forecast: 0.9%). Even if the ECB’s
hopes are fulfilled and the higher inflation expectations are reflected in higher pay deals, it will
take one or two years for this to drive the core rate of inflation noticeably upwards. Moreover, the
inflation rate will decline again in the coming months, which could dampen inflation expectations
a bit. The reason for this is that the sharp rise in energy prices from spring 2016, which is
unlikely to be repeated this spring, will then fall out of the year-on-year comparison. On the
contrary, we even expect crude oil prices to fall slightly in the course of the year, pushing the
inflation rate down to nearly 1% by year-end.
USA: Sentiment in manufacturing at a high
The uptrend in US industry continues. Although the ISM index already climbed to 56 in January,
another increase seems on the cards for February. At least this is what the regional survey of the
Philly Fed and the Empire State Index of the New York Fed suggest (chart 8). We forecast a
reading of 57.0 (consensus: 55.8). Yet, this means that the surveys overstate the strength of the
revival as measured by hard data. While production rose in each of the last five months, total
output was only 0.5% higher than a year earlier.
CHART 7: Euro zone: Inflation expectations are rising with
inflation rate
Consumer: Expected price trends over the next 12 months, balance,
Manufacturing: Selling price expectations for the months ahead,
balance, Consumer price index, y-o-y in %
CHART 8: USA – ISM has probably continued rising
Regional purchasing managers’ indices for manufacturing (average
of the Philly Fed and Empire State indices), ISM index for
manufacturing at the national level
15
2
25
60
10
1,5
20
58
1
5
0,5
15
56
10
54
5
0
0
-5
-0,5
-10
-1
2014
2015
Consumer (lhs)
2016
2017
Industry (lhs)
Source: Global Insight, EU Commission, Commerzbank Research
24 February 2017
CPI (rhs)
52
0
50
-5
-10
2012
48
2013
2014
regional indices (LS)
2015
2016
2017
ISM index (RS)
Source: Global Insight, Commerzbank Research
7
Economic Research | Week in Focus
Central Bank Watch (1)
Fed
According to the minutes of the last FOMC meeting, many
meeting participants were of the opinion that another rate
hike could be appropriate “fairly soon”. Some even pointed to
the upcoming meetings. However, this does not necessarily
mean that the Fed will raise rates as early as its next meeting
in mid-March. It is likely that it was the hawks among the 12
regional Fed presidents who were pressing for a quick rate
move. They often dominate the public debate and also try to
steer the discussion at the Fed in their direction. Note that not
all meeting participants have voting rights. Votes on
monetary policy are the responsibility of the FOMC, where
the regional Fed presidents hold 5 seats. In 2017, only one of
them is probably a hawk – Patrick Harker from the
Philadelphia Fed. The 5 Board members currently on the
FOMC prefer to proceed rather cautiously anyway.
Therefore, the minutes also show that many “members”
(which means the voting FOMC members; the “meeting
participants” also include the 7 non-voting Fed presidents)
see only a low risk of the economy overheating. They
therefore take the view that there is enough time to react to
any inflation pressure. This does not point to a quick rate
hike.
Bernd Weidensteiner
+49 69 136 24527
CHART 9: Expected interest rate for 3-month funds (USD)
2,0
1,5
1,0
0,5
current
Mrz 17
Jun 17
Sep 17
Dez 17
Mrz 18
Futures
23.02.17
16.02.17
Commerzbank
TABLE 1: Consensus forecasts Fed funds rate
((upper bound)
Q1 17
Q2 17
Q4 17
Consensus
0.75
1.00
1.25
High
1.00
1.25
1.75
Low
0.75
0.75
0.75
Commerzbank
0.75
1.00
1.25
Source: Bloomberg, Commerzbank Research
ECB
ECB Executive Board member Lautenschläger who has
occasionally criticised the ECB’s expansionary measures
welcomed the inflation rise but said that it would be too soon
for rate move: “it is really important to see a trend, that it is
certain that inflation really has come back”. "If inflation rates
continue as they were in January, then I would not want to
wait until next year [to start tapering]," she said.
In the same vein, ECB’s Hansson said that it would not be
wise to start exiting from expansionary monetary policy now,
as the central bank only decided in December to extend the
QE programme. “The central bank should be a factor of
stability in this situation of political unrest rather than adding
to turbulence.”
According to ECB’s Vasiliauskas, “TLTROs are a very good
instrument … I would be very flexible regarding that
instrument in the future”. (Note that the ECB will offer its last
TLTRO in March). He argued that TLTROs cannot be a
permanent measure because they “remain an emergency
tool” and “a healthy system in normal times should be
financed by the markets”. That said, in Vasiliauskas’ view the
ECB might reintroduce TLTROs if there were “for example
drastic changes in lending”. Any discussion of an exit from
QE “would be pretty premature”, he stressed.
Dr Michael Schubert
+49 69 136 23700
8
CHART 10: Expected interest rate for 3-month funds (EUR)
0,0
-0,1
-0,2
-0,3
-0,4
-0,5
current Mrz 17
Futures
Jun 17
23.02.17
Sep 17
16.02.17
Dez 17
Mrz 18
Commerzbank
TABLE 2: Consensus forecasts ECB minimum bid rate
Q1 17
Q2 17
Q4 17
Consensus
0.0
0.0
0.0
High
0.0
0.0
0.0
Low
0.0
0.0
0.0
Commerzbank
0.0
0.0
0.0
Source: Reuters, Bloomberg, Commerzbank Research
24 February 2017
Economic Research | Week in Focus
Central Bank Watch (2)
BoE (Bank of England)
Although the data tend to be volatile, the market probability
assigned to a rate hike by end-2018 continues to drift
downwards, with the five-day moving average now showing a
probability below 50% for the first time. Indeed, around the
turn of the year the markets were even pricing an increase in
2017 as a 50-50 chance. But despite the apparent buoyancy
of the economy over the last six months, there are indications
that some of the optimism is dissipating in the wake of rising
inflation which will take the edge off growth. Indeed, the BoE
will likely to have make a decision whether to prioritise slower
growth or higher inflation in 2017. Markets increasingly tend
towards the former option. The view of the MPC is harder to
discern. Governor Carney gave no significant indications
following this week’s parliamentary testimony, refusing to
confirm whether the BoE remains neutral on the direction of
the next rate move. Indeed, one of the issues at the hearing
was whether the BoE remains committed to its forward
guidance policy. This certainly is an important question,
because although the BoE has not formally abandoned the
policy, it is not clear at present what signals it is trying to
communicate other than that the MPC remains in wait-andsee mode for now.
CHART 11: Expected interest rate for 3-month funds (GBP)
1,0
0,8
0,6
0,4
0,2
0,0
current
Mrz 17
Jun 17
Sep 17
Dez 17
Mrz 18
Futures
23.02.17
16.02.17
Commerzbank
Source: Bloomberg, Commerzbank Research
Peter Dixon
+44 20 7475 1808
BoC (Canada)
The Bank of Canada (BoC) has no reason to change its
monetary policy next week. Instead, it will leave the key
interest rate at 0.5% and, like in January last year, stress the
uncertainty and resulting risks for the economic outlook.
Indeed, information is still lacking on the fiscal, tax and trade
policy of the new US president. Without this, the BoC will not
be able to estimate the consequences for growth and inflation
in Canada stemming from the country’s close trade ties with
the USA. Furthermore, the substantial excess capacities in
the domestic economy pose downsides risks for inflation in
the BoC’s view. These risks are being increased by the
strong Canadian dollar, which is additionally reducing the
competitiveness of Canadian companies and therefore
dampening the outlook for the export sector.
CHART 12: Expected interest rate for 3-month funds (CAD)
1,5
1,0
0,5
0,0
current
Mrz 17
Futures
23.02.17
Jun 17
Sep 17
16.02.17
Dez 17
Mrz 18
Commerzbank
Source: Bloomberg, Commerzbank Research
Antje Praefcke
+49 69 136 43834
24 February 2017
9
Economic Research | Week in Focus
Michael Leister
Tel. +49 69 136 21264
Bond market preview:
Bunds: How to save face at the Eurogroup meeting?
The short end of the curve will remain in focus, but the long-end is increasingly impacted
by the Bundesbank’s sizeable €QE purchases in the one-year maturity sector. Moreover,
investors remain nervous regarding political risks in France and Italy, while ample
redemptions need to be reinvested. We therefore continue to expect Bund yields to trend
downward amid a steeper curve.
TABLE 3: Weekly outlook for yields and curves
Bunds
US Treasuries
Yield (10 years)
Sideways
Sideways to higher
Curve (2 - 10 years)
Neutral
Neutral
Source: Commerzbank Research
The continuing improvement in fundamental indicators and new highs in equity markets
notwithstanding, the market environment for Bunds could hardly be better at present. The
Bundesbank continues making ample use of its option to buy bonds with a yield below the depo
rate for its €QE purchases. This has compressed 2y Schatz yields by around 25 basis points
since the end of January and driven them to new all-time lows below 0.90% (see chart 13). This
is where the present situation differs from the Schatz rally at the end of last year, which was
mainly driven by private investors’ demand for German general collateral (GC).
Outlook for the Bund
future, 27 February – 4
March
Economy
↓
Inflation
→
Monetary policy
→
Trend
→
Supply
↑
Risk aversion
↑
The Bundesbank’s purchases have underpinned the steepening trend of the Bund curve. In view
of very low two-year yields, the medium and longer maturity segments should also increasingly
benefit from the downward pull arising from the Bundesbank purchases. Moreover, political
concerns still remain in focus, prompting additional demand for Bunds. The risk premiums of
French bonds had widened to new highs before the latest headlines about an alliance between
the moderate candidates Macron and Bayrou provided some relief (chart 14).
We doubt, however, that the latter marked a turning point. Instead, the “redenomination risk”
connected with Le Pen should still keep risk premiums high, especially as an election in Italy is
possible as early as June according to press reports.
In turn, the safety premium included in Bund yields should thus remain pronounced for at least
three months yet. Moreover, Bunds should increasingly profit from sizeable reinvestment needs,
as an aggregate €33bn in redemptions by France and coupon payments by Italy could be parked
in safe havens for the time being. We therefore continue to expect curves to steepen and Bund
yields to trend lower.
CHART 13: QE purchases ensure “rate cut” at short end
CHART 14: Turning point for French OATs?
Yield of two-year Bunds, ECB deposit rate, in % p.a.
Yield premium of 10y French government bonds (OATs) versus
corresponding Bunds, on a daily basis, in basis points
85
0,4
0,2
80
0,0
-0,2
75
-0,4
-0,6
70
-0,8
-1,0
Jan 14
Jul 14
Jan 15
Jul 15
Jan 16
Jul 16
Jan 17
65
15-Feb 16-Feb 17-Feb 20-Feb 21-Feb 22-Feb 23-Feb
ECB depo rate
Source: Bloomberg, Commerzbank Research
10
2y Schatz
Source: Bloomberg, Commerzbank Research
24 February 2017
Economic Research | Week in Focus
Antje Praefcke
Tel. +49 69 136 43834
FX market preview:
EUR-USD under downside pressure
Strong support in polls for the eurosceptic French presidential candidate Marine Le Pen
has awakened fears of a breakup of the euro zone and is weighing on the euro. On the
back of strong US inflation data the FX market is also speculating about higher interest
rates in the US, with the USD gaining slightly as a result.
TABLE 4: Expected trading ranges for next week
Range
Trend
Range
Trend
EUR-USD
1.0400-1.0750

EUR-GBP
0.8300-0.8550

EUR-JPY
117.50-121.00

GBP-USD
1.2350-1.2750

USD-JPY
111.00-115.00

EUR-CHF
1.0550-1.0725

Source: Commerzbank Research
Growing support in polls for French presidential candidate Marine Le Pen has exerted strong
downside pressure on the euro in February. On a trade-weighted basis, the euro has fallen to its
lowest level since March 2016 (see chart 15). The FX market fears an election victory of the
eurosceptic candidate, who wants to hold a referendum on France’s EU membership and
replace the euro with a basket of national currencies. Political support for the common currency
is thus crumbling. With a lack of stimulus from the real economy, the euro remains on the back
foot for now. An acceleration of the euro area inflation rate in February to 2.0% will not support
the euro. The ECB has already committed to continuing its bond purchases at least until yearend and will not be inclined to start the discussion about an adjustment of its monetary policy,
given that critical elections are coming up. This means positive stimuli for the euro will be lacking
near-term.
At the same time, the dollar has seen gains since early February after various Fed officials had
spoken out clearly in favour of a cautious tightening of monetary policy. Support for this came
from strong consumer price data in January (chart 16). This inspires hope that the personal
consumption expenditure deflator, which is due for release on Wednesday, is gradually moving
towards the Fed’s inflation target. The dollar should also continue benefiting from the positive
economic environment, as order intake and the second estimate of US GDP growth in Q4 2016
will probably turn out solid. But USD investors beware: At the end of the day, prospects for
growth and for the Fed’s interest rate policy strongly depend on the fiscal policy plans of the new
US government. And the dollar outlook thus remains fraught with risk as long as more precise
information on the tax plans or the planned government expenditure is not available.
CHART 15: Trade-weighted EUR exchange rate at its lowest
level since March 2016
Multilateral EUR exchange rate index versus the 19 most important
trading partners
97
CHART 16: US inflation is approaching the target
Consumer price index (CPI) and personal consumption expenditure
deflator (PCE), in each case core index excluding energy and food,
percentage change on year
2.4
2.2
96
2.0
95
1.8
1.6
94
1.4
93
1.2
92
91
Jan-16
1.0
Jan-14
Apr-16
Jul-16
Source: ECB, Commerzbank Research
24 February 2017
Oct-16
Jan-17
Jul-14
CPI
Jan-15
Jul-15
PCE
Jan-16
Jul-16
Jan-17
Fed Target
Source: BEA, BLS, Commerzbank Research
11
Economic Research | Week in Focus
Markus Wallner
Tel. +49 69 136 21747
Equity market preview:
DAX reaches two-year high
Driven partly by a weak euro, the DAX marked a new two-year high this week. On account
of current high valuations, selective stock-picking will gain in importance. We still favour
companies that harbour hopes of restructuring, have a high share of sales in the USA and
whose earnings react positively to a stronger dollar. Furthermore, the price/book value of
the stocks should be around the long-term average and earnings should be rising at an
above-average rate. This is the case, for example, with Bilfinger, Osram,
HeidelbergCement and BMW.
TABLE 5: DAX reaches two-year high
Earnings 2017e
Performance (%) since
Index
Index points
Growth (%)
31/01
01/01
30/06
current
01/01
P/E 2017e
current
01/01
current
01/01
DAX 30
11,999
4.0
4.5
24.0
864.1
855.1
7.5
10.8
13.9
13.4
MDAX
23,613
5.1
6.4
19.0
1318
1308
14.0
14.4
17.9
17.0
Euro Stoxx 50
3,339
3.4
1.5
16.6
234.7
233.3
10.1
11.8
14.2
14.1
S&P 500
2,363
3.7
5.5
12.6
129.1
130.4
10.2
11.6
18.3
17.2
Source: Commerzbank Corporates & Markets, I/B/E/S
After the price rise of recent weeks, the P/B ratios of 7 for DAX and 9 for MDAX companies are
close to their highs of the last 10 years. They are certainly above the average of the last 10
years in the case of 20 DAX and 36 MDAX companies (see chart 17). Six months ago, these
figures were considerably lower.
At this high valuation level, selection stock-picking becomes even more important. We still prefer
companies that have restructuring aspirations, a high share of sales in the USA and earnings
that respond positively to a stronger dollar. What’s more, the P/B value of the stocks should be
around the long-term average and earnings should have above-average upward momentum.
Examples of such stocks are Bilfinger, Osram, HeidelbergCement and BMW.
CHART 17: Valuations of DAX companies have risen further
Price/book value of DAX companies, in per cent of the peak and average of last ten years
260
220
180
140
100
60
20
EOAN
TKA
ADS
IFX
DPW
DTE
MRK
HEN3
FRE
BAS
SIE
HEI
PSM
FME
CON
LIN
ALV
BAYN
LHA
DB11
BEI
MUV2
DAI
SAP
BMW
VNA
VOW3
RWE
DBK
CBK
-20
Per cent of average
Per cent of peak
Source: Datastream, Commerzbank Research
12
24 February 2017
Economic Research | Week in Focus
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
Discipline remains high, for now …
In the week ahead, the price of a barrel of Brent oil should remain range-bound around
USD 55. Survey-based estimates of OPEC production ought to confirm that the agreed
output cuts have been largely implemented. Further support should come from upbeat
sentiment indicators. The latter are likely to also push forward the timing of our expected
price correction in base metal markets, particularly because some of them such as
copper are currently struggling with supply problems.
TABLE 6: Trends in important commodities
Per cent change in %
23 Feb
1 week
Tendency Commodity specific events
1 month 1 year short-term
Brent (USD per barrel)
56.6
1.7
2.5
70.1

Copper (USD per tonne)
5977
-0.4
3.1
28.7

Gold (USD per troy oz.)
1239
0.0
1.7
1.1

Cocoa (GBP per tonne)
1611
-1.8
-7.7
-24.2

Estimates of OPEC production (around 28)
CHN. Gold imports from Hong Kong (27)
ICCO: Quarterly report (around 27)
Source: Bloomberg, Commerzbank Research
Since the end of November, the price of a barrel of Brent oil has been hovering around USD 55.
Of late, volatility has declined further, to the lowest level since the price plunge in 2014. In the
week ahead, all should remain calm. In February, OPEC cartel members look set to have stuck
to the agreed production cuts for the second month in a row, as the news agencies‘ surveybased estimates of OPEC production should show. This is above all due to Saudi Arabia, which
trimmed back its daily output by 500k barrels in January (see chart 18). Thus the largest
producer by far in the cartel looks set to have exceeded its contribution in February as well, thus
ironing out the weakness of others. Iraq, for instance, only met half of its target in January.
Although short-term news is supporting prices, we stick to our expectation of a medium-term
correction. This view is corroborated by the fact that the gradual rise in US production should
weigh on oil prices, particularly because the market is vulnerable due to record-high net long
positions of speculative investors. Around mid-year, we see the price of Brent oil at USD 50 per
barrel again.
For two weeks, gold prices have been unchanged. The recent strength of the US-dollar has
prevented a further recovery. In euro, gold has meanwhile climbed to a 3½-month high. Given
severe political uncertainty, demand for gold as a safe haven should remain strong. Weaker
demand from China in January, which will be reflected in lower imports from Hong Kong, should
be short-lived.
The International Cocoa Organization, which will present initial estimates for 2016/17 in its
quarterly report, looks set to forecast oversupply in the global cocoa market. This is unlikely to
further depress prices, though. In London, these are trading at levels last witnessed in mid-2013,
after plunging by 40% since last summer. In New York, prices in US-dollar are even down to the
lowest level since 2008 (chart 19).
CHART 18: Saudi Arabia ironing out the weakness of others
CHART 19: Cocoa prices have already taken a sharp plunge
Implementation of agreed production cuts in %
in USD per tonne resp. GBP per tonne
140%
4000
3000
120%
3600
2600
100%
3200
80%
60%
2800
40%
2400
20%
2000
2200
1800
0%
OPEC-11
Venezuela
U.A.E.
Saudi Arabia
Qatar
24 February 2017
Kuwait
Iraq
Gabon
Ecuador
Angola
Algeria
Source: OPEC, Commerzbank Research
1400
1000
1600
1200
2007
600
2009
2011
2013
in New York, l
2015
2017
in London, r
Source: ICE, Bloomberg, Commerzbank Research
13
Economic Research | Week in Focus
Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)
Inflation rate (%)
2016
2017
2018
2016
2017
2018
USA
1.6
2.3
2.3
1.3
2.5
2.5
Japan
1.0
1.0
1.0
-0.1
1.0
1.0
Euro area
1.7
1.8
1.6
0.2
1.3
1.2
- Germany
1.9
1.6
1.5
0.5
1.8
1.6
- France
1.3
1.6
1.7
0.2
0.6
0.8
- Italy
0.8
1.0
1.1
-0.1
0.7
0.9
- Spain
3.3
3.0
2.5
-0.5
1.3
1.4
- Portugal
1.2
1.2
1.1
0.6
1.3
1.5
- Ireland
4.4
3.5
3.0
-0.2
0.8
1.3
- Greece
0.4
2.1
2.3
-0.8
0.7
1.0
United Kingdom
1.8
1.6
1.7
0.7
2.4
2.8
Switzerland
1.5
1.5
1.7
-0.4
0.4
0.8
China
6.7
6.5
6.3
1.8
2.0
2.2
India
6.8
7.3
7.4
5.2
5.3
5.1
Brazil
-3.4
0.1
2.0
8.8
5.0
4.9
Russia
-0.6
1.3
2.0
8.0
5.5
5.5
World
2.8
3.3
3.4
•
Having corrected its imbalances, the US
economy continues growing at decent rates.
•
Growth in China is decelerating due, among
other things, to high corporate indebtedness
and industrial overcapacity.
•
The ECB’s expansionary monetary policy
glosses over the structural problems of the
euro zone and allows the economy to grow
more strongly.
•
EMU has survived the sovereign debt crisis,
but is gradually evolving into an “Italian-style
monetary union” – structural weaknesses are
preserved by the loose monetary policy.
•
The German economy is experiencing a
consumption-driven boom; below this glossy
surface, however, its competitiveness is
gradually eroding.
•
High unemployment in most EMU countries
is keeping inflation low for the time being.
•
With the Fed having approached its targets,
the speed of rate hikes seems set to
increase. We expect two hikes in 2017 by
25 bps each.
•
Mr Trump’s election victory exerts upward
pressure on US long-end yields via higher
inflation expectations and a looming supply
increase.
•
As euro zone core inflation should stay
below ECB expectations, we forecast the
ECB will take further measures.
•
Contrary to the US setting, 10y Bund yields
seem unlikely to increase significantly.
•
The multi-year trend of falling periphery
spreads has run out of steam. With ECB
support reaching limits and political risks on
the rise, we anticipate rising risk premia.
•
Initially the monetary policies of the Fed and
ECB will continue to drift further apart,
putting pressure on the EUR-USD exchange
rate. The ECB will be forced to reduce the
volume of its monthly bond purchases
towards year-end 2017, however. That will
have a positive effect on EUR short term.
•
With a view to Brexit negotiations, our
working assumption is that ultimately there
will be an amicable agreement. However,
uncertainty will remain high for a long period
so that sterling will not recover for the time
being.
•
Basically, CNY seems set to further
depreciate against the dollar over the coming
quarters.
TABLE 8: Interest rates (end-of-quarter)
23.02.2017
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Federal funds rate, upper bound
0.75
0.75
1.00
1.00
1.25
1.25
3-months Libor
1.05
1.00
1.15
1.25
1.40
1.40
2 years*
1.21
1.10
1.30
1.50
1.70
1.90
5 years*
1.90
1.80
2.10
2.30
2.50
2.60
10 years*
2.41
2.50
2.60
2.70
2.80
2.85
Spread 10-2 years
120
140
130
120
110
95
-2
-20
-15
-15
-15
-10
Minimum bid rate
-0.40
-0.40
-0.40
-0.40
-0.40
-0.40
3-months Euribor
-0.33
-0.30
-0.25
-0.25
-0.25
-0.25
2 years*
-0.88
-0.60
-0.65
-0.65
-0.65
-0.60
5 years*
-0.53
-0.30
-0.35
-0.35
-0.30
-0.30
10 years*
0.27
0.50
0.25
0.30
0.40
0.50
Spread 10-2 years
115
110
90
95
105
110
Swap-Spread 10 years
47
35
35
35
35
35
Bank Rate
0.25
0.25
0.25
0.25
0.25
0.25
3-months Libor
0.36
0.40
0.40
0.40
0.35
0.35
2 years*
0.10
0.20
0.20
0.20
0.30
0.30
10 years*
1.19
1.70
1.70
1.75
1.80
1.85
USA
Swap-Spread 10 years
Euro area
United Kingdom
TABLE 9: Exchange rates (end-of-quarter)
23.02.2017
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
EUR/USD
1.05
1.05
1.03
1.04
1.04
1.03
USD/JPY
113
112
114
116
118
120
EUR/CHF
1.07
1.06
1.05
1.04
1.00
1.00
EUR/GBP
0.85
0.86
0.86
0.87
0.87
0.87
EUR/SEK
9.49
9.40
9.35
9.30
9.30
9.20
EUR/NOK
8.81
9.05
9.00
8.95
8.95
8.85
EUR/PLN
4.31
4.35
4.40
4.45
4.50
4.55
EUR/HUF
308
310
315
317
320
325
EUR/CZK
27.02
27.00
27.00
25.50
25.00
25.00
AUD/USD
0.77
0.74
0.72
0.73
0.73
0.74
NZD/USD
0.72
0.70
0.68
0.69
0.69
0.70
USD/CAD
1.31
1.35
1.35
1.34
1.34
1.33
USD/CNY
6.88
6.95
7.05
7.10
7.15
7.20
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts
14
24 February 2017
Economic Research | Week in Focus
Research contacts (E-Mail: [email protected])
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Dr Jörg Krämer
+49 69 136 23650
Economic Research
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+49 69 136 23650
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+49 69 136 22322
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+49 69 136 21264
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+49 69 136 82878
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+49 69 136 29158
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+49 69 136 24889
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+49 69 136 87506
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+49 69 136 43834
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+49 69 136 21006
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+44 20 7475 4806
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+49 69 136 87508
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+49 69 136 41505
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+49 69 136 84335
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+49 69 136 24527
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(Head Covered Bonds and
Financials)
+49 69 136 87571
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Switzerland)
+49 69 136 24041
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15
Economic Research | Week in Focus
In accordance with ESMA MAR requirements this report was completed 24/02/2017 08:41 CET and disseminated 24/02/2017 08:42 CET.
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Economic Research | Week in Focus
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