Download Five Macro Themes for 2017

Five Macro Themes for 2017
Chief Analyst
Allan von Mehren
+45 45 12 80 55
[email protected]
Senior Analyst
Pernille Bomholdt Henneberg
+45 45 13 20 21/+44 20 7410 8157
[email protected]
Senior Analyst
Mikael Olai Milhøj
+45 45 12 76 07
[email protected]
1 December 2016
Investment Research
www.danskebank.com/CI
Important disclosures and certifications are contained from page 24 of this report.
Five Macro Themes for 2017
1. Synchronised recovery
2. Reflation
3. European policy uncertainty
4. Trump – what policies and when?
5. ECB policy - tapering or not?
1
1. Synchronised recovery
2017 starts with recovery across the regions of the world
The global economy is entering 2017 with synchronised recovery
Strongest global recovery since 2013
First synchronised recovery since 2009
We look for global growth at 3.5% in 2017
2017
2018
% y/y
D a ns k e
B a nk
C o ns e ns us
D a ns k e
B a nk
C o ns e ns us
USA
2.2
2.2
2.8
2.2
Euro area
1.5
1.3
1.5
1.5
Japan
0.8
0.8
0.7
0.7
China
6.6
6.4
6.3
6.0
Global
3.5
3.4
3.6
3.4
Source (all charts): Macrobond Financial, Danske Bank Markets
3
Investments to drive recovery as drag from energy investments fades
Investment growth to recover from weak levels
US economy hit by falling investments
Investments have been the weak link since the crisis
Drag on the US from oil investments is easing now
Source (all charts): Macrobond Financial, Danske Bank Markets
4
In this part of the business cycle equities and US yields increase
Leading indicator
1
2
100
3
Equities move higher in the Blue phase
4
We are currently in the Blue
phase of the business cycle,
which is characterised by
global growth recovery with
negative output gap
So do US bond yields
Source (both charts): Macrobond Financial, Danske Bank Markets, Bloomberg
5
2. Reflation
Reflation case is strong in the US – less so in the euro area
Reflation case is strong in the US – less so in the euro area
The US can tick all the boxes on the reflation check
list currently – the euro area still has slack left
Rise in US inflation towards 2% is persistent.
Euro area inflation mainly higher on commodities. Will fall back to just above 1%
Source (both figures): Macrobond Financial, Danske Bank Markets
7
US output gap almost closed – euro area has more slack
Wage inflation up in US – but not in the euro area
Both US and euro area recovering, but the output
gap has closed in the US – not in the euro area
Core inflation to rise in US – stay low in euro area
Source (all charts): Macrobond Financial, Danske Bank Markets
8
Rising commodity prices pushing up inflation
Change in oil price drives most of short-term
change in inflation. To push up inflation in next 6
months
Metal prices rising at strongest pace since 2011.
Likely to push up producer prices. Rise driven by
recovery of China construction and infrastructure
Source (both charts): Macrobond Financial, Danske Bank Markets
9
Fed leans towards letting the economy run a bit hot
‘Fed’s 2% inflation target is
not a ceiling’
‘The natural next question is to
ask whether it might be possible to
reverse these adverse supply-side
effects by temporarily running a
”high-pressure economy,” with
robust aggregate demand and a
tight labor market’
Fed Chairman, Janet Yellen, October
2016
William Dudley, November 2016
Fed Vice-chairman
‘I see benefits to trying to engineer
policy to allow for the strong
possibility of inflation
overshooting its target’
Charles Evans, October 2016
Chicago Federal Reserve
Source: Federal Reserve, Bloomberg
10
The Fed taking a dovish twist in 2017 – we look for only two hikes
2016
Hawkish
Neutral
Dovish
Vacant
Lacker
Lacker
Richmond
George
George
Kansas city
Mester
Mester
Cleveland
Rosengren
Rosengren
Boston
Harker
Harker
Philadelphia
Lockhart
Lockhart
Atlanta
Williams
Williams
San Francisco
Powell (B)
Powell (B)
Board
S. Fischer (B)
S. Fischer (B)
Board, Vice chair
Kashkari
Kashkari
Minneapolis
Kaplan
Kaplan
Dallas
Yellen (B)
Yellen (B)
Chairman
Tarullo (B)
Tarullo (B)
Board
Evans
Evans
Chicago
Dudley
Dudley
New York
Bullard
Bullard
St. Louis
Brainard (B)
Brainard (B)
Board
Vacant (B)
Vacant (B)
Board
Vacant (B)
Vacant (B)
Board
Voting member
Source: Federal Reserve, Danske Bank Markets
2017
7 out of 10 voters
in 2017 will be
doves – only one
hawk left with
voting rights
(B) Board Member
11
3. European policy uncertainty
EU-sceptic parties to acquire power, not control – the recovery
continues with political uncertainty
Political uncertainty the main euro theme in 2017
Time for anti-establishment parties to gain
power:
• EU-sceptic parties are likely to acquire
some power in 2017 after having gained in
opinion polls, but we do not expect them to
take control of the euro area.
EU-sceptic parties have gained in polls
DE: Alternative for Germany
FR: Front national
IT: Five Star
SP: Podemos
NL: Dutch Freedom Party
• It is hard to imagine further euro area
integration in coming years, but we believe
the UK will be the only country to leave the
EU, while the euro will not lose any
members.
• The growing EU scepticism has so far had
limited economic impact, but more actual
power to anti-establishment parties could
result in postponed investments and
consumption decisions. On the other hand,
it could boost fiscal spending, but at the
same time threaten fiscal sustainability.
BE: Vlaams Belang
AT: Austrian Freedom Party
FI: Finland's Finns Party
GR: Syriza
GR: Golden Dawn
PT: Left Bloc
IE: Sinn Fein
UK: UK Independence Party
SE: Sweden Democrats
DK: Danish People's Party
0%
Latest polls (Oct-Nov)
10%
20%
Last national election
30%
EP 2014
40%
EP 2009
Source: Danske Bank Markets
13
Italian referendum – market reaction dependent on political path
Referendum on Italy’s
constitutional reform
‘ YES’
‘NO’
Initial positive market
reaction
Initial negative market
reaction
Renzi continues growth
reforms. Work on new
electoral law
Within the next week, the first major political event in the euro area will take
place with the Italian constitutional referendum
• In our base case, the Italians vote ‘No’ and PM Renzi steps down but without
it resulting in ‘Italexit’ or a major sell-off in Italian government bonds
• There is broad political support in favour of changing the new electoral law
– ‘Italicum’ – into being less beneficial for a single party like the antiestablishment Five Star Movement (M5S) before calling snap elections
• A revised electoral law makes a coalition government most likely, which
should limit M5S power given its opposition to forming coalitions
Renzi stays PM
Renzi steps down
President Mattarella
rejects Renzi’s
resignation
Strong support for
Renzi government
Election in 2018
based on revised Italicum
Weak support for
Renzi’s government
New government/coalition
serving as placeholder
until election in 2018
Focus on new
electoral law. No
reform progress
Renzi gets second term
with more government
power
Positive market reaction. No/little
uncertainty about Italy’s future in euro / EU
Source: Danske Bank Markets
Renzi is not likely to take
part in new government
President Mattarella
accepts Renzi’s
resignation
Care-taker government
and snap election
Snap election in H2 2017
based on revised Italicum
Coalition government
The Five Star Movement
emerges into power
Snap election in H1 2017
based on current Italicum
Strong reform
progress. Work on
new electoral law
Negative market reaction. Uncertainty about
Italy’s future in the euro / EU
14
French presidential election – are opinion polls unreliable?
Presidential election
(by universal suffrage in two stages of voting)
Front National:
Marine Le Pen
Socialist candidate
Independent candidate
Emmanuel Macron
The Republicans:
Francois Fillon
First round
(absolute majority necessary to win)
Deeply unpopular, unlikely to enter
run-off
Unlikely to enter run-off
Second round run-off
between two top candidate in first round
(simple majority sufficient to win)
Polls show Fillon winning run-off against Le Pen with 67% against 33%
Risks to our base case that Marine Le Pen will not become the next French president:
• In the past, voters have united to prevent the far-right from winning, but nothing can be ruled out given the current populist,
anti-establishment mood in Europe and the high degree of uncertainty around opinion polls
• With his socially conservative and liberal reform programme, Francois Fillon lacks the broad appeal to both voters on the
right and left and may struggle to unite them against Le Pen.
Source: Danske Bank Markets
15
4. Trump – what policies and when?
Trump’s fiscal easing to support reflation case but his overall
policy remains a risk factor
The political and economic consequences of the Trump presidency
Donald Trump as US President
Possible regime shifts in US policies but actual policy changes should be more modest than proposed due to likely
Overall political resistance from Congress even within the Republican party. However, Trump's room for manoeuvre is larger as the
Republican party will also control Congress
outlook
Uncertain how he will act as President as he has no political background.
Overall
economic
outlook
Q4 16-Q3 17: The election to be broadly neutral for US growth, which we expect at around 2.25% annualy
Q4 17 - 2018: More expansionary fiscal policy to boost GDP growth from late 2017 to nearly 3% annually.
2018+: More uncertain, but the negative effects from more protectionism and a tougher immigration policy may
outweigh possible positive effects from less regulation, lower taxes and infrastructure spending. Hence structural
growth may fall.
Fiscal policy
Short to medium term: large tax cuts and infrastructure spending; in sum, fiscal easing of up to 2.2% of annual GDP
Long run: worsen public financial sustainability as net debt will rise dramatically.
Trade policy
More protectionist, risking a global trade war.
Withdrawal of the US from TPP
Renegotitate the NAFTA to get 'a lot better terms', otherwise withdraw from it.
No comments on TTIP but given Trump's protectionist stance does not bode well.
Tougher line against China.
Protectionism will lower US potential growth.
We expect that the Fed will hike rates in December and twice a year afterwards, i.e. a total of five hikes from now until
Monetary policy year-end 2018. We expect Fed to only partly offset Trump's expansionary fiscal policy.
Trump to replace Fed chair Yellen in 2018 and likely appoint more hawkish Governors in 2017.
Foreign policy
Immigration
Trump has more power on foreign policy.
Very uncertain how he will act but has hinted at a significant regime shift.
Has said that China is the enemy, not Russia. Wants NATO countries to contribute more.
Trump has softened his tone but is likely to be substantially more hawkish than previous administrations on immigrants.
Will likely take measures to reduce illegal immigration and send criminal immigrants home.
Anti-immigration could lower US potential growth.
Source: Donald Trump’s speeches, Danske Bank Markets
17
Trump to boost growth through infrastructure spending and tax
cuts
Increasing
infrastructure
spending
Estimated multipliers in the range
[0.5 ; 2.5] over several quarters
Higher
employment
Estimated multipliers in the range
[0.3 ; 1.5] over several quarters
Lower
corporate
taxes
Higher
consumer
saving
Higher
disposable
income
Personal tax
cuts
Firms increase
employment
and
investments
Higher
consumer
spending
We expect the Fed to only
partly offset growth impact
through rate hikes
(tighter monetary policy
lowers multiplier effect)
Multiplier effect
Source: Danske Bank Markets
18
Biggest growth impact in 2018 due to policy lags
There is a lag before fiscal policy affects the economy
Q1 17
IDEA
Q2 17
DECISION
Comprehensive and permanent economic plan?
Smaller and more temporary economic plan?
Takes time for the politicians to pass the necessary legislation – Trump
probably needs to make compromises with Republican members of
Congress
Q3 17
IMPLEMENTATION
Takes time to implement the policy (projects may not be ‘shovel-ready’ so
projects have to be defined and designed first)
GROWTH IMPACT
Earliest from late 2017
Infrastructure: Longer policy lag but bigger growth impact
Tax cuts: Smaller policy lag but smaller growth impact
Q4 17
2018
Biggest growth impact in 2018
Source: Danske Bank Markets
19
5. ECB tapering or not?
Premature to price ECB hiking cycle and discuss tapering – we
look for (at least) one QE extension
ECB set to continue QE as inflation is not on a sustainable path
Inflation above 1.0%, but due to the oil price
• We expect the ECB to extend its QE programme by six months and maintain the
EUR80bn monthly purchases as inflation
is not on a sustainable path towards 2%.
• Prominent ECB members have expressed
concern about the lack of upward pressure
on underlying prices, which together with a
considerable downward revision to the
ECB’s core inflation projection should
convince enough ECB members that it is
too early to discuss tapering.
• We believe it is premature to price rate
hikes from the ECB and see a more than
50% likelihood that QE purchases will be
extended again next year, which is not
consensus.
Source: ECB, Macrobond Financial, Danske Bank Markets
21
Lack of upward trend in core inflation is a concern to the ECB
Core inflation is far from the ECB’s forecast
Philips curve: ECB’s wage forecast is hopeful
ECB 2018
Wages: 2.2%
Unemp: 9.6%
ECB 2017
Wages: 1.8%
Unemp: 9.9%
Core inflation on a downward
trend during 2016 – no longer
support from a weakening euro
Source: ECB, Eurostat, Danske Bank Markets
ECB 2016
Wages: 1.2%
Unemp: 10.1%
Source: ECB, Eurostat, Danske Bank Markets
22
ECB end-of-easing is wrong – QE extension becoming more likely
ECB action in December - extension and minor PSPP tweaks (hawkish wording)
Trump sell-off has reduced
tapering risks - not increased due to:
- Two-sided risk to inflation - and pricing still very, very low
- Higher real rates
- Periphery spread widening
- QE restrictions not binding in the near term
- Increased political risk in Europe
- Higher protectionism (US repatriation)
- (Not weaker effective euro)
The market has gone from ‘cut’ to ‘hike’ in 2m
10 bp
ECB dated Eonia swaps
(assuming neutral Eonia is
5bp above deposit rate)
6.1
5.0
5
3.8
2.7
ECB extension (and possible tapering options)
6 month EUR80bn extension
(tapering options)
- We expect the ECB to announce a six month QE extension in
December
- No pre-announcement of QE tapering, but a reiteration that QE
will not exist forever
- The programme’s end date will remain dependent on the
inflation outlook
- The first ECB rate hike will not follow until ‘well past the horizon
of the QE purchases’
- (Risk of some form of tapering: 1) EUR80 bn will include reinvestment of redemptions; 2) 'Tapering' in countries that hit
restrictions (Germany, Finland, Portugal & Ireland); 3) Step-down
to EUR60bn per month; 4) EUR5bn or EUR10bn reduction per
month)
0.2 0.3 0.4
0.3
0.3
0.9
1.7
0
0.0
-0.2 -0.2 -0.2 -0.3 -0.3 -0.1
-5
-10
PSPP tweaks (also important for exit strategy)
- Allowing some deviation from Capital Key - but NOT introducing
a new buying scheme (enough German Bunds are eligible for a 36M extension - but if market rally German/Finnish purchases will
More PSPP flexibility still
be reduced as is already the case with Ireland/Portugal)
needed if core FI rally again (not - IF buying below depo is allowed actual buying will be quite low
really needed at current yield
(ECB will buy Schatz down to -80bp)
level)
- Lifting issue/issuer limit is possible, but actual buying in ISINs
with holdings above 33% will be quite low. We see risk tilted
towards ECB rather reducing longer dated purchases as holdings
in longer dated German bonds approach the limit
-15
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
ECB
ECB
ECB
ECB
ECB
ECB
ECB
ECB
ECB
28/11/2016
29/09/2016
Source: ECB, Eurostat, Danske Bank Markets
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Disclosures
This research report has been prepared by Danske Research, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Allan von
Mehren, Chief Analyst, Pernille Bomholdt Henneberg, Senior Analyst, Mikael Olai Milhøj, Senior Analyst.
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