Download Globalisation, Interdependence and Change

Unwinding the great
monetary experiment
Macro view for the bond markets
Kevin Stirrat, Head of Investment Strategy
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Disclaimer
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Content
• Global industrial cycle upswing underway
• United States employment outlook improving
• United States Federal Reserve to commence stimulus
reduction
• United States tightening still a long way off
• Macro suggestions why inflation could remain contained
• Bond market rout unlikely
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Slide 4
United States manufacturing – surging
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UK manufacturing – material up-turn
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Euro manufacturing recovering
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China looking more sturdy
China HSBC manufacturing PMI: Momentum is improving following the midyear slow-down
Source: Markit, Haver Analytics, Deutsche Bank Research
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United States unemployment rate
- key policy indicator
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Core United States inflation
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Corporate Inc. saving versus investing
Source: Forsyth Barr Research, BCA Research
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Excess global liquidity has not led to a
general increase in prices
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Advanced economies CPI
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Slide 13
United States Federal Reserve balance sheet
– the solution and the problem
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Slide 14
Employment
• Structural changes in employment
• Globalisation – first outsourcing and now “showrooming”
• Technology – robotics/3D Printing
• Under- employed (part-timers)
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Slide 15
United States employment growth mainly
part-timers
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United States labour force participation
rates in secular decline – mostly age related
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Demographics
Aging populations in the developed world
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Leading to lower aggregate demand
Declining workforce
Saving over investment
Income over growth
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Global fertility comparisons
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Europe working age population projections
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Developed markets’ share of population and
demographic
Source: Haver, UBS
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Implications for Bonds
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Normalisation of yields underway
Tapering doesn’t mean explicit tightening
Quantitative Easing to slow – not unwind (for many years)
United States long bonds to trade between 2-4%
United States 10 year bonds to trade around nominal GDP
Steeper curves to remain the norm
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Slide 22
United States long bond yields and
demographics
Source: Shiller, Haver, UBS
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Slide 23
United States 10-year bond and nominal GDP
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Slide 24
Demographics and nominal GDP - United States
Source: Haver, UBS
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Slide 25
Policy response
Inflation headwinds
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Technology and innovation impacting on employment
Globalisation – “showrooming”
Demographics
Debt/deleveraging
Lower nominal GDP
Policy Response will be to keep rates low for longer than
currently expected
In the absence of inflation, central bank balance sheets will
remain reflationary
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Thank you
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