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Economic Research

Week in Focus
30 April 2015
Chinas unavoidable slowdown
The decrease in Chinese house prices has subsided lately. However, the large oversupply
will keep house prices declining for a long time, despite the government having resolved on
incentives for house buyers recently. All of this does not only weigh on construction, but also
on urban infrastructure investment of local governments who are dependent on land sales
revenues that are waning. Additional risk arises from corporate debt which has soared. Our The Week in Focus in 100 seconds
already cautious growth forecast (2015: 6.5%) carries some downward risk. The renminbi Please follow this link for a video summary.

should remain weak against the dollar. Page 2

China: Equity market is booming as economy flags

Real GDP, seasonally adjusted, qoq change in per cent, annualised; Shanghai Composite equity
market index, monthly average

10 3500
5 2500
0 1500
2013 2014 2015
GDP (lhs) Shanghai Composite (rhs)

Source: Bloomberg, Commerzbank Research

Euro inflation expectations. Market-based inflation expectations have risen since January
but they are not firmly anchored. Consequently, the ECB is likely to fully implement its QE
programme and could even extend it. Page 5

Money market: Limited further downside. Further downside for euro zone money market rates
is limited and we consider it unlikely that three-month Euribor will fall below -0.02%. Page 6
Product Idea: Range Bet Forward in EUR-USD. We look for only modest volatility in EUR-
USD for the time being. This provides an opportunity for USD sellers to hedge by means of a
Range Bet Forward. Page 7

Outlook for the week of 4 to 8 May

Economic data: We believe weak US payrolls in March were an outlier and look for stronger
April figures albeit with gains still below 200,000. Page 10

Bond market: This weeks sharp moves are likely to be a foretaste of things to come in a
bond market where ECB purchases have reduced market liquidity. Page 13

FX market: A strong US labour market report should support the USD but not yet trigger a
renewed appreciation trend. Page 14
Equity market: Rising wage pressure will force German companies to restructure, and this
will only be partially offset by a persistently weak euro. Page 15

Commodity market: The longer the oil price defies the market oversupply, the bigger is the
risk of a marked correction. But no data that could get the ball rolling is due next week.
Page 16
Chief economist:
Dr Jrg Krmer
+49 69 136 23650

For important disclosure information please see pages 19 and 20. Peter Dixon
+44 20 7475 4806 / Bloomberg: CBKR / Research APP available
Economic Research | Week in Focus

Ashley Davies
Chinas unavoidable slowdown Tel. +65 6311 0166

Unfortunately, our cautious Chinese 2015 growth forecast of 6.5% seems to be on track
and it could even undershoot. House prices are still declining, and no end is in sight
despite the government having decided to introduce incentives for house buyers.
Additional risk arises from the fact that China today is among those emerging markets
with the highest private-sector debt levels and there have even been some corporate
defaults. As a reaction to the economy losing steam, the Peoples Bank of China (PBoC)
seems set to continue its loose monetary policy. The renminbi should thus remain weak
against the dollar. Despite all this, capital account liberalisation reforms are likely to

Chinese equities have soared since mid-2014 with the Shanghai Composite index up by around
120% on year-ago levels. This improved equity performance comes despite further evidence of a
slowing economy. GDP in Q1 slowed to 7.0% year-on-year, down from 7.3% in the previous
quarter and is the lowest rate of growth since Q1 2009. Moreover, seasonally adjusted growth in
this period came in at just 1.3% (an annualized rate of 5.3%). Other activity data confirms the
economic slowdown, with industrial production rising by just 7.1% year-on-year in Q1 after
double-digit increases over most of the past two years.

Falling house prices are a drag on construction

In our view, the primary reason for weakness in the economy is a slump in the property sector,
with house prices across 70 cities declining by 6.1% year-on-year in April. Weakness is most
pronounced in smaller cities, with third-tier city prices declining by 6.4%, while first tier cities
declined by 4.1%. The PBoC, together with local and central governments, have taken steps to
boost the housing market. These include lowering the down-payment required to purchase
properties and reducing mortgage rates. These steps may have had some positive impact as the
pace of decline in month-on-month terms has moderated. However, it is our belief that such
benefits will prove short-lived due to excess supply in the Chinese property sector. We have
previously estimated that the residential construction sector faces several years of excess
capacity due to existing inventory levels, excess property under construction and vacant
apartments held by investors.

and on government infrastructure spending

Another channel through which the property market crisis is acting to dampen economic activity
is via local government finances. Local governments are dependent on land sales revenue to
help pay off existing debt and fund additional urban infrastructure investment. Land transfer
revenue for all levels of government reached 7.8% of GDP in 2013 but fell to 5.2% in 2014.
Thus, less money for infrastructure spending is available to local governments. The PBoC is
attempting to ease financial conditions by encouraging banks to buy local government bonds,
but this is doing little to ease the financial strain.
CHART 1: Slowing growth CHART 2: The PBoC is cutting interest rates
China, real GDP, annualised per cent change qoq, , and yoy 12-month deposit and lending rates

12 7,0

10 6,0

2 3,0

0 2,0
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
qoq yoy
Deposits Lending

Source: Bloomberg, Commerzbank Research Source: CEIC, Commerzbank Research

2 30 April 2015
Economic Research | Week in Focus

High corporate debt is an additional risk factor

A considerable downside risk is the high levels of debt held by private companies, state owned
enterprises and local governments. Indeed, China is now one of the emerging markets with the
highest private sector debt levels. Hence, it came as no surprise when Chinas first corporate
debt default occurred in March last year, when Shanghai Chaori, a solar energy company,
missed its interest payments. However, a state-owned financial firm came to the rescue and
restructured the debt, with the result that bond holders were not forced to take a haircut. This
year, Kaisa has become the first Chinese property developer to default on its overseas debt.
Most recently, in April, China recorded its first default by a state-owned enterprise.

The government needs to walk a tightrope between bailing out companies, thus encouraging
moral hazard, and allowing defaults to occur which risks a re-pricing of credit in the economy.
The likelihood is that smaller firms will be allowed to default to send a signal to the market to
assign a higher price to risk but larger firms with higher debts will be rescued in some manner.

Governments growth target will be substantially missed

The ongoing problems in the housing market, and the consequent impact on local authority
construction and infrastructure investment, together with high levels of corporate indebtedness,
suggest that the government will not meet its 7% GDP growth target this year. Indeed, there are
even downside risks to our below-consensus projection for growth of 6.5%.

Further loosening of monetary policy

The PBoC has responded to evidence of a slowing economy by loosening monetary policy, both
by cutting benchmark interest rates as well as by cutting the reserve requirement ratio (RRR).
The PBoC cut the 12-month deposit rate and lending rates by a further 25bp in March to 2.5%
and 5.35% respectively, following interest rate cuts in November last year. The government has
also further deregulated interest rates by allowing banks to raise deposit rates relative to the
benchmark deposit rate. A deposit insurance scheme will be introduced in early May to further
facilitate interest rate deregulation.

Most recently the PBoC cut the RRR in April by 1 percentage point to 18.5%. This has freed
CNY 1.25 trillion (US$200bn) in deposits to be made available for lending given total banking
deposits in China of CNY125 trillion. However, the RRR cut is designed to offset the liquidity
impact from declining foreign exchange reserves, which fell by US$113 billion in Q1 and which
was the third straight quarterly decline. Foreign exchange reserves are falling as the central
bank intervenes in the currency market to sell foreign assets, thereby draining CNY liquidity.
Against this backdrop, the additional monetary effect of the cut in the RRR is relatively modest
when taking into account declining FX reserves.

CHART 3: Reserve requirement ratio has receded of lately CHART 4: Local governments face financial difficulties
Reserve requirement ratio (%) Land transfer revenue % of GDP

25 9
20 7
10 4

0 1
2003 2005 2007 2009 2011 2013 2015 0
2000 2002 2004 2006 2008 2010 2012 2014

Source: CEIC, Commerzbank Research Source: CEIC; Commerzbank Research

30 April 2015 3
Economic Research | Week in Focus

is an argument in favour of a weaker renminbi

Whilst Chinese monetary policy will be loosened further in the coming months, we also expect
US interest rates to begin rising in the autumn despite the weakness evident in recent US data .
Consequently, we expect USD-CNY to trade with an upward bias in the coming months and by
end-year we target an exchange rate at levels around 6.35.

Capital account liberalisation reforms to increase in H2

Despite the economic woes, the PBoC and the government are still pursuing capital account
liberalisation. PBoC Governor Zhou attracted attention in late March when he said that "by the
end of 2015, the last year of the 12 Five-Year Plan (2011-15), China plans to make the
renminbi capital account convertible. He also said that China will further expand cross-border
investment channels for individual investors, such as via a pilot program of Qualified Domestic
Individual Investors (QDII). He added that China will introduce a Shenzhen-Hong Kong stock
connect program, which would complement the existing Hong Kong-Shanghai stock connect

Last Friday it was announced that companies will be able to transfer funds in and out of China by
year-end, in either foreign or local currencies. At first, companies in the Shanghai free trade zone
(FTZ) will be allowed to shift capital in and out of China. This will then be rolled out to other FTZs
such as Tianjin and Guangzhou, and then expanded nationwide by year-end. It was not
revealed whether this would be limited to approved companies or subject to a quota system,
which we suspect would be the case.
Governor Zhou is also keen for China to have the CNY included in the IMFs Special Drawing
Rights (SDR) basket. The IMF has two criteria for SDR status: (1) the country has to be a major
trading nation; and (2) the currency has to be freely tradeable. Obviously, China satisfies the first
condition, as it is the largest exporter in the world. With regard to the second condition, the CNY,
via the CNH, is already the most liquid EM currency in Asia. However, China needs to further
relax capital controls and the exchange rate mechanism in order to truly claim that the currency
is freely tradeable. It is quite likely that the PBoC may further widen the USD-CNY trading band
from the current 2% either side of the fix, to 3% either side of the fix by year-end.

See US economy: not that strong after all?, Week in Focus, 10 April 2015

4 30 April 2015
Economic Research | Week in Focus

Dr Michael Schubert
Tel. +49 69 136 23700
Euro inflation expectations are higher
but not more firmly anchored
Since ECB government bond purchases were announced in January, market-based
inflation expectations have risen. However, our models show that this was primarily a
reaction to rising oil prices. This means that a reversal would occur if oil prices were to
fall again. It is thus too early to talk of inflation expectations being firmly anchored once
more, and partly for this reason the ECB will likely implement its QE programme in full,
and may even extend it.

The ECB appears to be satisfied for the time being since the economic recovery is gaining a
firmer footing, and inflation expectations are approaching a level more consistent with price
stability, according to ECB Chief Economist Praet a week ago.
However, we are less optimistic about trends in inflation expectations. This is not so much
because long-term expectations have so far risen only moderately, but is more to do with the
reasons why they have risen at all. It is striking, for example, that expectations for inflation in five
years' time for the following five years (5x5) have risen and fallen in tandem in the US and the
euro zone (see chart 5). This alone is reason to question whether the ECB's January QE
announcement really did push up expectations.
Moreover, our model analysis suggests that the higher 5x5 expectation is a result of rising oil
prices, so that it cannot by definition be regarded as firmly anchored. In the past, the situation
was rather different. While expectations were never 100% firmly anchored, they were well
established. It was possible to explain the 5x5 expectation (yellow line in chart 6) by means of a
model (black line) in which the explanatory factors of core inflation, oil prices and risk aversion
had only a very muted influence. If expectations were as well anchored as was the case up to
mid-2014, the model suggests that 5x5 expectations would now be at 2%, and not at present
levels just below 1.7%.
For roughly the past year, inflation expectations have been reacting more strongly to changes in
oil prices and risk perception (grey line in chart 6), and this has not changed recently. But oil
prices have been rising since January so that the 5x5 expectation is also rising.
Consequently, the ECB should not become too complacent about the latest developments, since
inflation expectations could suffer in the event of lower oil prices or a rise in risk aversion. And
since expectations are not sufficiently well anchored, we expect the ECB to implement its QE
programme in full or possibly even extend it.
CHART 5: Inflation expectations down not only in euro CHART 6:: as now responding more to oil prices and risk
zone aversion
5-year inflation-linked forward swap rate in 5 years, USA and euro 5-year inflation-linked forward swap rate in 5 years, model estimate
zone on basis of euro zone core inflation, oil price and global risk
perception (ARPI), short-term model: only oil price and ARPI

3.2 2.4 2.6

3.0 2.4
2.8 2.2
2.6 2.0
2.4 1.8

2.2 1.6 1.6

2.0 1.4 1.4

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
inflation expectation model short-term model
US (lhs) Eurozone (rhs)

Sources: Bloomberg, Commerzbank Research Sources: Bloomberg, Commerzbank Research

For model specification see "ECB: Quo vadis, inflation expectation?, Economic Insight, 18 February 2015.

30 April 2015 5
Economic Research | Week in Focus

Alexander Aldinger
Money market: Limited further downside Tel. +49 69 136 89004

Money market fixings are marking new all-time lows. For the first time in history, the three-
month Euribor dipped into negative territory last week. In the months ahead, Euribor rates
are likely to slip somewhat further, provided the euro finance ministers reach an agreement
with Greece, which would trigger a normalisation of the FRA/OIS basis spread. However,
with the EONIA forward rate only three basis points above the ECB deposit rate, further
downside is limited. We therefore consider it unlikely that the three-month Euribor will fall
below -0.02% on a sustainable basis.
The three-month money market rate has slipped into negative territory. On Tuesday, it marked a
new record low at -0.005% (-0.5 basis points). For June, a 3m Euribor rate of zero is priced into
money market futures, with the low expected in the summer of 2016 at -2 basis points (chart 7).
In the short-term, current concerns about Greece, in particular, argue against another marked
decline, as they could trigger a further widening of the FRA/OIS basis spread. Unlike in previous
stress episodes, however, this movement, which is owed to the ECBs expansionary policy
namely, its liquidity injections from bond purchases to full allotment tender operations ought to
remain more moderate going forward. This is even true if the liquidity situation in the Greek
banking sector continues to deteriorate.
The key driver of short-term financing rates ought to be gradually rising excess liquidity, which
has already been priced into forward rates. Rates are therefore likely to resume their downtrend
only if the Greek crisis is resolved. Provided the FRA/OIS basis spread normalises, we see the
low of 3m Euribor at -2 basis points.
However, if some panel banks, which are currently reporting positive fixings due to their institutional
rules, adjust their strategy, Euribor fixings might witness a more marked decline. We consider this
scenario unlikely, though, which argues against hedging clearly negative Euribor fixings.
Deposit rate limits downside in EONIA
For the new reserve period, which started last Wednesday, an average EONIA rate of -10 basis
points is expected, down another four basis points from the preceding reserve period. The
futures market currently implies a low of -0.17% for EONIA, which would be just three basis
points above the ECB deposit rate. This also illustrates that further downside in the money
market is limited, as ECB President Draghi recently made it clear that there would be no more
rate cuts.
CHART 7: Euribor and EONIA moving in sync
3m Euribor and 3m EONIA, actual and implied forward rates, in % p.a.







Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17
Euribor EONIA
Source: Bloomberg, Commerzbank Research

6 30 April 2015
Economic Research | Week in Focus

Ulrich Leuchtmann
Product idea: Range Bet Forward in EUR-USD Tel. +49 69 136 23393

From jeers to cheers

Recent fairly strong fluctuations in EUR-USD could encourage investors to bet on
extreme exchange rate levels. We, however, do not expect any sharp trend in the short
term, neither to the upside nor to the downside. When hedging through a Range Bet
Forward, this provides an opportunity for USD sellers to take advantage of exchange
rates which are history for now.

It is not so long ago that FX analysts worldwide were outdoing each other in forecasting that
EUR-USD would soon reach parity. After six weeks of sideways movement and a EUR-USD
exchange rate of over 1.11, an increasing number of analysts are now expecting a sharp decline
in USD and hence a mid-term appreciation in EUR-USD. This seems to be as exaggerated as
the previous forecast of impending parity.
The announcement effect of the ECBs QE bond-buying program is certainly behind us, and with
the ECB now implementing its policy, this should not be an argument against the European
single currency in a reasonably efficient market. In the long run, however, QE is likely to make
euro investments very expensive and thereby unattractive. This, in turn, will boost the
attractiveness of investment in other currencies and hence the underlying currencies
themselves. Moreover, it should be noted that the ECB wants the euro to weaken, as the
exchange rate channel is the only transmission mechanism through which it can still affect
inflation. While there is worldwide speculation whether the ECB might prematurely end its QE
program, a strong euro should immediately stifle such considerations within the ECB.
Against this backdrop, we believe that EUR-USD should trade sideways for now. Dramatic
fluctuations to either side are not as likely as some of the more outspoken forecasters suggest.
A USD seller who hedges their EUR-USD risk through a Range Bet Forward can benefit from a
moderately volatile sideways movement over the next three months, in the example below if
EUR-USD does not trade at or below 1.05, or at or above 1.15, in the coming three months.

Product idea: Range Bet Forward buy EUR / sell USD

Spot rate EUR-USD (sample calculation) 1.1000

Preliminary hedging rate 1.0700

Worst-case hedging rate 1.1200

Upside barrier (trigger) 1.1500

Downside barrier (trigger) 1.0500

Hedging nominal 500,000 USD

Maturity 3 months

Cost Zero cost

The Range Bet Forward offers a better preliminary hedging rate than a conventional FX
forward (1.07 versus 1.1014)., provided the EUR-USD exchange rate did not touch either
of the two barriers during the duration (1.05/1.15), or else a worse hedging rate will apply
(worst case: 1.12). If EUR-USD trades below the preliminary hedging rate upon maturity
(1.07) and if the barriers (1.05/1.15) were not touched during the duration, the clients can
further optimise their Range Bet Forward hedging rate (up to 1.0501) without having to
pay a premium. To hedge exchange rates through a Range Bet Forward no separate
premium expenditure is required.

30 April 2015 7
Economic Research | Week in Focus

Major publications from 24 29 April 2015

Commodity Spotlight Base Metals: Spring meetings of International
Study Groups
The spring meetings of the International Study Groups were held during the week of 20 to 24
April 2015. The availability of new data allowed them to update their 2015 appraisal of the
situation on the global copper, nickel, lead and zinc markets. However, there were no really big
surprises. We summarize the key results in this edition of our Commodity Spotlight. more

Turkey - Likelihood of rate hike is greater than the market thinks

We see increasing likelihood of a January-2014 style rate hike in Turkey: the market obviously
thinks this unlikely ahead of elections. However, we note that the last hike came two months
before 2014 local elections and a similar outcome is entirely possible this year. The market
does not see this risk, and is driving the lira in a manner which will likely force the CBTs hand.
We now assume a 150bps increase in the repo rate by June; we cut our optimistic 4.1% GDP
growth forecast for 2015 to 2.5%. more

FX Hotspot: I dont get why the market doesnt get it

The Riksbanks decision to significantly expand its QE program is a strong signal for a continued
easing path. The FX market clearly does not get it yet. more

FX Hotspot: G10 Carry: Ominous developments

In January we argued that the outlook for G10 carry trades was a barren one. In simplistic terms
higher volatility combined with materially lower carry implied that the risk reward from carry trade
strategies was demonstrably poor. In the meantime carry trade performance illustrates a slight
improvement, albeit that this is largely due to the choice of funding currency rather than
significant outperformance of traditional investment currencies. Going forward we think that
sustained USD strength (as distinct from USD demand) means that carry trade performance will
remain subject to significant drawdown risk. more

FX Hotspot: ARPI update risk perception fell after report on US

consumer confidence
Compared to last week, the ARPI declined by 0.2 points. In particular, FX and commodity risks
fell. Risk perception fell in particular after a disappointing US consumer confidence report. This
confirmed an earlier assessment that a cautious approach is likely by the Fed. Compared with
the marked changes during the second half of last year, recent oil price changes had been less
pronounced. Thus, the implied volatility of oil futures contracts declined during April, and this
tendency continued in recent days. more

8 30 April 2015
Economic Research | Week in Focus

Preview The week of 4 to 8 May 2015

Time Region Indicator Period Forecast Survey Last

Monday, 4 May 2015

8:15 SPA PMI, manufacturing Apr sa 54.5 54.3
8:45 ITA PMI, manufacturing Apr sa 53.5 53.3
9:00 EUR PMI, manufacturing, final Apr sa 51.9 51.9(p)
15:00 USA Industrial orders Mar mom, sa 2.3 2.1 0.2

Tuesday, 5 May 2015

5:30 AUD Interest rate decision of the RBA % 2.00 2.00 2.25
13:30 USA Trade balance Mar $bn, sa -40.0 -40.1 -35.4
15:00 ISM index (non-manufacturing) Apr sa 55.3 56.4 56.5
EUR: EU-Commission releases Spring Forecast.

Wednesday, 6 May 2015

9:00 EUR PMI, services, final Apr 53.7 53.7(p)
9:30 GBR PMI, services Apr 57.7 58.9
13:15 USA ADP employment change Apr mom, k, sa 180 185 189

Thursday, 7 May 2015

7:00 GER Industrial order intake Mar mom, sa 1.5 -0.9
yoy, wda 2.3 -1.3
7:45 FRA Industrial production Mar mom 0.0 0.0
yoy 1.1 0.6
9:00 NOR Interest rate decision of the Norges Bank % 1.25 1.25
13:30 USA Initial claims May 2 k, sa

Friday, 8 May 2015

7:00 GER Industrial production Mar mom 0.5 0.2
yoy 0.5 -0.3
Exports Mar mom, sa 1.0 1.5
9:00 ITA Industrial production Mar mom 0.5 0.6
yoy, ab 0.1 -0.1
13:30 USA Non-farm payrolls Apr mom, k, sa 180 223 126
Unemployment rate Apr %, sa 5.4 5.4 5.5
Source: Bloomberg. Commerzbank Economic Research; *Time BST (subtract 5 hours for EDST. add 1 hour for CEST). # = Possible release; mom/qoq/yoy: change
to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; = data of highest importance for markets

30 April 2015 9
Economic Research | Week in Focus

Dr Christoph Balz
Economic data preview: Tel. +49 69 136 24889

USA: Labour market heading for a moderate recovery

The weak US labour market in March was it an outlier or is the economy starting to
tumble again? We believe an outlier is more likely and expect data to come in better again
next week. However, we are more likely to see payrolls growth below 200,000. In
Germany, manufacturing order intake in March appears set for this years first month-on-
month increase.

For twelve consecutive months US payroll growth posted gains above 200,000. While this series
ended in March when payrolls increased by only 126,000, this is unlikely to mark the beginning
of a pronounced labour market downtrend:
Until recently, the number of initial jobless claims remained fairly low (chart 8). The four-
week average in April, which gives a better reflection of the trend, was reported at its lowest
level since 2000.
In February 2015, the number of vacancies was as high as last reported in January 2001
i.e. at the end of the technology bubble. And this situation is unlikely to have subsequently
changed fundamentally: After all, businesses are unlikely to have reduced hiring after just
having driven up the number of vacancies to a record level.
While the employment component of the ISM manufacturing index dropped to 50.0 in
March, its non-manufacturing peer was reported at 56.6 a level last seen in October 2014
and the services sector is much more important for the overall economy than
In view of these indicators we expect payrolls growth to come in much stronger again in April. At
180,000 (consensus 223,000), it is unlikely to match last years speed entirely though. After all,
the recent minor soft patch in the economy is unlikely to leave the labour market unaffected.
However, this should still be sufficient to drive down the rate of unemployment by one tenth to
5.4%, in line with the trend of the past 12 months (consensus 5.4%). Back in March, it had been
reported at 5.465% (unrounded).
In March, average hourly wages of all employees had increased a bit strongly than in February,
by 0.3%. However, this follows a month with a minor increase of 0.1%. So far, there has been
little indication that wage growth will increase on a sustainable basis and that inflation will come
in stronger soon as a result. We expect it to rise by 0.2% in April which would be roughly in line
with recent years' average.
Germany: Manufacturing data on the rise again
Recently, we noted two fairly strong slumps in German manufacturing order intake. However, in
March we are looking for a 1.5% increase versus February. Yet this is unlikely to change the fact
that order intake in the first quarter came in more than 1% lower than in the fourth quarter of
CHART 8: USA Initial claims still low CHART 9:: USA Businesses looking for labour
Initial jobless claims, in thousand Vacancies, in millions
350 6
330 5
280 3
260 2
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 2001 2003 2005 2007 2009 2011 2013 2015
claims 4-week average Job openings Most recent

Source: Global Insight, Commerzbank Research Source: Global Insight, Commerzbank Research

10 30 April 2015
Economic Research | Week in Focus

Central Bank Watch (1)

At its meeting on Wednesday the FOMC adjusted its CHART 10: Expected interest rate for 3-month funds (USD)
communication, as expected. Now, the Fed does not longer
promise to hold its key rates near zero for any period of time. 2,0
Instead, its policy will be directed by the data. That means
that the outlook for monetary policy gets more uncertain and 1,5
that the Fed now has a wider room for manoeuvre.
In its statement the Fed referred to the recent rather weak
economic data, especially to declining exports and stagnating 0,5
business investment. It is interesting, however, that the Fed
tries to look through the current soft patch. The Fed judges 0,0
current Jun 15 Sep 15 Dez 15 Mrz 16 Jun 16
that the current weakness is partly the effect of temporary
factors and it continues to expect ongoing moderate growth. Futures

The data flow makes a rate hike already at the June meeting 29.04.15 22.04.15 Commerzbank

extraordinarily unlikely. The option of lift-off in September,

TABLE 1: Consensus forecasts Fed funds rate
however, has been left on the table. Even if the Fed appears
(higher bound)
to be unmoved by the recent bout of weakness, the data
increase uncertainties concerning the underlying strength of Q2 15 Q4 15 Q2 16
the US economy. The realization of the Feds rather
optimistic baseline scenario which by and large is similar to Consensus 0.25 0.75 1.25
our outlook very much depends on the data to be released
over the next two to three months. After all, the hoped-for High 0.50 1.50 2.50
reacceleration of the economy should already have begun
Low 0.25 0.25 0.25
and would then be reflected in the coming data releases.
Bernd Weidensteiner Commerzbank 0.25 0.75 1.25
+49 69 136 24527
Source: Bloomberg, Commerzbank Research

In recent comments, ECB Council members stressed that the CHART 11: Expected interest rate for 3-month funds (EUR)
Banks bond purchase programme (QE) will be effective. ECB
executive Board member Coeur said that the most important 0,3
transmission channel of QE is the confidence that the ECB
will take its mandate to keep inflation below, but close to, 2% 0,2
seriously. He added that currently it is too soon to analyse 0,1
the effectiveness of the portfolio rebalancing channel.
According to Coeur, the exchange rate is another channel, 0,0
but he added that this is not an objective in itself. the -0,1
average term of the securities purchased as part of QE is
nearly nine years. So monetary policy is having more impact -0,2
current Jun 15 Sep 15 Dez 15 Mrz 16 Jun 16
than before on the financing conditions for long-term
investments, Coeur elaborated. He said that QE is reducing
29.04.15 22.04.15 Commerzbank
the risk of contagion in the euro zone. He concluded that on
account of the positive effects of QE there is no reason to TABLE 2: Consensus forecasts ECB minimum bid rate
worry about the euro area recovering in 2015 and 2016.
Q2 15 Q4 15 Q2 16
According to ECBs Liikanen, purchases are well underway,
and considering lowering QE volumes already would be Consensus 0.05 0.05 0.05
detrimental as the announcement of QE has raised
expectations, and now the ECB has to deliver. He compared High 0.05 0.05 0.05
QE with a marathon race: short-term effects should not be
overstated. Low 0.05 0.05 0.05

Dr Michael Schubert Commerzbank 0.05 0.05 0.05

+49 69 136 23700
Source: Reuters, Bloomberg, Commerzbank Research

30 April 2015 11
Economic Research | Week in Focus

Central Bank Watch (2)

BoE (Bank of England)
The MPC meeting which was scheduled for next week has CHART 12: Expected interest rate for 3-month funds (GBP)
been postponed until 11 May due to the fact that the general
election takes place on 7 May. Indeed, the political calendar is 1,5
the reason why BoE officials have operated well below the
radar screen in recent weeks with no public commentary
since 27 March. This lack of commentary may explain why the
unexpectedly weak Q1 GDP reading appears to have had
little impact on market interest rate expectations. Although the 0,5
Q1 growth rate of +0.3% q-o-q was the most sluggish
increase since Q4 2012, and considerably below consensus
expectations, a rate increase is still being priced with 100% current Jun 15 Sep 15 Dez 15 Mrz 16 Jun 16
probability for May 2016. This reflects two factors. In the first
place growth is projected to hold up over the next twelve Futures
29.04.15 22.04.15 Commerzbank
months, and there is every prospect that the Q1 figure will be
revised up. Second, inflation should begin to accelerate in the Source: Bloomberg, Commerzbank Research
second half of the year which will reduce the imperative to
hold rates at their emergency levels. That said, the weakness
of GDP growth does imply a slower reduction in the margin of
spare capacity which will buy the MPC more time before it
needs to consider tightening policy. We will get more colour
on these issues from the BoE after the election once the
normal communication process resumes.
Peter Dixon
+44 20 7475 4806

RBA (Australia)
The RBA's interest-rate decision next week is likely to be a CHART 13: Expected interest rate for 3-month funds (AUD)
very close thing. After its surprise rate cut in February, the
bank hasn't touched interest rates since then, leaving its key
rate at 2.25%. This too has surprised most market players,
who were expecting further moves. Lower rates could help to
weaken the Australian dollar and support the current 2,5
economic restructuring. The AUD has admittedly depreciated
since May 2013 on account of lower commodity prices, but in 2,0
the opinion of the RBA, this is not enough. Governor Stevens
emphasised recently in New York that rate cuts were not yet
off the agenda. current Jun 15 Sep 15 Dez 15 Mrz 16 Jun 16
The latest data do not really favour a rate cut. First-quarter
inflation was slightly above expectations; the situation on the 29.04.15 22.04.15 Commerzbank
labour market has improved; the leading indicators are
Source: Bloomberg, Commerzbank Research
pointing upwards and there is a threat of a real-estate bubble.
Moreover, in his address Governor Stevens pointed out that
there are limits to what monetary policy can do when interest
rates are already low, and that private households are already
heavily in debt.

From the RBA's standpoint, though, the decisive factor will no

doubt be the fact that the Australian dollar has made some
gains recently. Consequently, like the majority of market
players, we expect another rate cut next week.

Elisabeth Andreae
+49 69 136 24052

12 30 April 2015
Economic Research | Week in Focus

Rainer Guntermann
Bond market preview: Tel. +49 69 136 87506

Higher volatility ahead!

The Fed has ended its forward guidance, removing certainty that interest rates will remain
unchanged regardless of the data situation. At the same time, ECB bond purchases have
reduced market liquidity. Yesterdays sharp moves already gave a foretaste of higher
volatility in the period ahead, as the impetus remains mixed. A somewhat better ISM and
recovering payrolls growth should put the markets muted Fed rate hike expectations to the
test while support from massive redemption and coupon payments is fading.

TABLE 3: Weekly outlook for yields and curves

Bunds US Treasuries
Yield (10 years) Moderat ely higher Moderat ely higher
Curve (2 - 10 years) st eeper f lat t er
Source: Commerzbank Research

Outlook for the Bond markets are under pressure. Numerous single reasons could explain yesterdays sharp
Bund future, selloff. Yet we believe that this may be the beginning of a period of higher market volatility. The
1 - 8 May main reason is that ECB purchases have reduced market liquidity and the fundamental impetus
Economy remains mixed.

For one, US monetary policy will be more data-dependent, arguing for higher volatility in US
Inflation Treasuries. For the first time in a long while, the US central bank has dropped the part of its
Monetary policy statement confirming that its key rate would remain unchanged for now, regardless of the data
situation. A rate hike as early as June is not really a viable option, though, following the weak
Trend first quarter GDP growth. Tomorrow's ISM index and next weeks labour market report should
Supply however support hopes for more positive surprises in the second quarter, likely challenging the
markets muted expectations with regard to the first Fed rate hike (chart 14).
Risk aversion
Developments in Greece remain even more important for the European markets. The latest
developments suggest that the financial situation appears to be coming to a head sooner than
previously expected, though a somewhat more compromising setup on the part of the Athens
government has already given peripheral markets some relief. However, Grexit fears are
preventing a lasting spread tightening. A simple regression analysis shows that Greece indeed
has had a major impact on peripheral spreads this year. For instance, the collapse of Greek
government bonds since the change of government in January explains around 70% of the rise
in risk premiums of ten-year Italian government bonds over Bunds (chart 15).
Yields in the core countries are also more likely to edge up. After all, this weeks lopsided
supply/demand balance with coupon and redemption payments of 65bn versus 16.5bn in
gross issuance will not be repeated before July. In the weeks ahead, we are expecting positive
net euro government bond supply again. At the same time, the support from the significant
rebalancing in bond market indices around the turn of the month, which benefited the core
countries, in particular, will fade.
CHART 14: Reality check for US interest-rate expectations CHART 15: Greece dominating peripheral markets
Commerzbank US surprise indicator (lhs) and yields of ten-year US Yield of Greek government bond GGB Jul17 (lhs) and yield spread of
Treasuries, in % (rhs) ten-year Italian government bonds vs Bunds, in bp (rhs)

100 3,1 21 150

80 2,9 19 140
60 2,7 17 130
40 15 120
20 13 110
0 1,9 11 100
-20 1,7 9 90
-40 1,5
7 80
Jan 13 Jul 13 Jan 14 Jul 14 Jan 15
Jan 15 Feb 15 Mrz 15 Apr 15
US surprise indicator yield GR yield Spread BTP-Bund

Source: Bloomberg, Commerzbank Research Source: Bloomberg, Commerzbank Research

30 April 2015 13
Economic Research | Week in Focus

Thu Lan Nguyen

Tel. +49 69 136 82878
FX market preview:
Interest rate expectations steer the market
A strong US labour market report should support the USD but not yet trigger a renewed
appreciation trend. The RBA and Norges Bank face important decisions on interest rates.

TABLE 4: Expected trading ranges for new week

Range Bias Range Bias
EUR-USD 1.0850-1.1350 EUR-GBP 0.7050-0.7300

EUR-JPY 129.00-134.00 GBP-USD 1.5150-1.5700

USD-JPY 117.00-120.00 EUR-CHF 1.02-1.06

Source: Commerzbank Research

Next week, the market will keenly await the US employment report. Doubts about an imminent
normalization of US monetary policy have increased recently amid weaker economic growth in
the first quarter. This has also weighed on the USD. Strong job growth in April would reduce
these doubts and support the greenback. That said, one swallow does not make a summer. For
the USD to resume its appreciation trend, the subsequent economic data would also have to
confirm the FOMCs expectations that the recent weak growth is due to temporary factors. Only
then would the way be open for an interest rate hike.
The Reserve Bank of Australia (RBA) will decide on its key interest rate this coming Tuesday.
The majority of analysts believe the RBA will lower the key interest rate by 25 basis points,
though statements by RBA Governor Stevens, a strong labour market report and a recovery in
commodity prices have dampened rate cut speculation on the market lately. Even so, a rate cut
is still likely in our view. The decision therefore poses downside potential for the AUD. A weaker
AUD would suit the RBA in any case. It has been saying for some time that a depreciation of the
currency is necessary to stimulate the sectors outside of mining and thus achieve more
balanced growth.
Norges Bank then follows the RBA on Thursday, though the big question here is not whether but
when it will lower the key interest rate; it had already indicated a rate cut by June at its last
meeting provided that the economy weakens, as it expects, on the back of lower oil prices. The
disappointing Purchasing Managers Index for manufacturing, weak inflation in March and NOK
appreciation since the last meeting should be enough reason for Norges Bank to stick to a rate
cut. Whether the move on rates is already made next week or not until the June meeting should
be insignificant for the market. The downward potential in EUR-NOK remains limited.

CHART 16: Weak US data ends USD appreciation trend CHART 17: Norway: Purchasing Managers Index for
USD Index of ICE (DXY Index) manufacturing falls again

100 54

95 52

90 50

85 48

80 46

75 44
Jan-14 May-14 Sep-14 Jan-15 May-15 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Source: ICE, Commerzbank Research Source: NIMA, Commerzbank Research

14 30 April 2015
Economic Research | Week in Focus

Markus Wallner
Tel. +49 69 136 21747
Equity Market Preview:
Ongoing wage pressure should lead to more restructuring
The persistently weak euro and thus expectations of rising sales growth at German
companies should not blind us to the fact that many German businesses will be
undertaking restructuring amid the increasing wage pressure. This should be the case
especially for firms whose operating income responds relatively strongly to a change in
personnel costs. Deutsche Post and Lanxess, which have already started restructuring
measures, are good examples.
TABLE 5: DAX stabilizes at 11,800
Earnings 2015e
Performance (%) since Index points Growth (%) 2015e
Index 31/03 31/12 30/06 current 31.12 current 31/12 current 31/12
DAX 30 11,812 -1.3 20.5 20.1 774.3 779.7 11.2 10.2 15.3 12.6
MDAX 20,918 1.1 23.5 24.4 1040 1053 13.3 13.9 20.1 16.1
Euro Stoxx 50 3,715 0.5 18.1 15.1 231.8 242.2 5.1 9.9 16.0 13.0
S&P 500 2,115 2.3 2.7 7.9 117.1 124.7 0.9 7.6 18.1 16.5
Source: Commerzbank Corporates & Markets, I/B/E/S

Generally speaking, companies that show a high relationship between fixed costs and operating
income could profit from restructuring. As the personnel costs of most German companies
represent the largest portion of fixed costs, this is where the largest restructuring potential lies.
This is the case, for example, with Deutsche Lufthansa, where a reduction of total staff costs of
1% would increase operating income by 5%. If only domestic German personnel costs were
lowered by 1%, operating income would rise by about 3.8% (see chart 18).

The collective pay negotiations in which the union IG Metall achieved a pay rise of 3.4%, and the
mining, chemical and energy union secured a rise of 2.8%, should lead to additional cost
pressure in various sectors and trigger restructuring measures. This should apply in particular to
firms with a high portion of personnel costs in Germany. The introduction of the minimum wage
is strengthening these measures. The persistently weak euro, and rising expectations for
German companies sales growth as a result, can only soften the trend to a certain extent.
Restructuring should also lead to a higher valuation for companies that firstly have a relatively
low price/book ratio (i.e. where restructuring plans have not yet been fully discounted by the
price trend) and secondly where income would rise relatively sharply if fixed costs (personnel
costs, write-downs) are lower. This should be the case with Lanxess for example.
CHART 18: Reduction of personnel costs would increase the earnings of DAX companies
DAX companies, responsiveness of operating income in 2015 if personnel costs change by 1%















Total labour costs German labour costs

Source: Bloomberg, Commerzbank Research

30 April 2015 15
Economic Research | Week in Focus

Barbara Lambrecht
Commodities market preview: Tel. +49 69 136 22295

A silver lining?
The longer the oil price defies oversupply on the market and the more optimistically
short-term investors are positioned, the bigger will be the risk of a marked price
correction. But no data that could get the ball rolling is due out next week. Prices for base
metals should also move sideways, because Chinas copper imports in March are
expected to come in merely flat. The silver price ought to defy the Silver Institutes
disappointing review.
TABLE 6: Tendencies in important commodities
Per cent change Tendency Commodity specific events

29 Apr. 1 week 1 month 1 year short-term

Brent (USD a barrel) 64.5 2.8 14.3 -40.8
Copper (USD a ton) 6085 2.9 0.5 -9.4 CHN: trade April (8)
Gold (USD a troy ounce) 1205 1.5 0.6 -7.0
Silver (USD a troy ounce) 16.5 4.2 -2.9 -15.3 World Silver Survey (6)
Source: Bloomberg, Commerzbank Research

At nearly USD 64 per barrel, Brent oil is trading only just shy of its high for the year despite a
continued increase in oil stocks. Thus, the recent rally on the oil market has not yet run out of
steam. But the longer the market ignores the growing oversupply, the bigger will be the risk of a
price correction. In particular, speculative investors could abruptly exit their record-high net long
positions, exerting pressure on the oil price (chart 19). But in the week ahead the calendar holds
no event that could get the ball rolling.
Almost exactly four years ago, the silver price reached its all-time high at nearly USD 50 per troy
ounce. Since then, silver has declined almost continuously, initially quickly and then somewhat
more slowly. That this weakness was partially attributable to lower physical demand over the
past year should be suggested by the World Silver Survey released by the Silver Institute next
Wednesday. Industrial demand probably declined for the fourth consecutive year. But demand
for coins and bars, which had been surprisingly strong in 2013, also turned out disappointing,
mainly in the first half of 2014. It is therefore likely that the rising silver supply, due to record-high
mine production, far exceeded demand. Accordingly, the price reached a five-year low in
November. But it is largely due to this low base level that silver has performed better than gold
this year (chart 20) and is the precious metal with the largest year-to-date gain (nearly 5%). We
assume that silver will further expand its relative strength in the course of this year. Whilst
Chinas recent silver imports suggest that Chinese demand is losing momentum due to weaker
economic growth, low prices are currently also dampening the supply of silver scrap, and mining
supply is only rising slightly. For this reason we expect the silver price to rise to USD 18 per troy
ounce by the end of the year.
CHART 19: Too much optimism on the market? CHART 20:: Silver outperforming gold
In thousands of contracts, Brent oil price in USD a barrel USD a troy ounce, indexed: 1 Jan 2015 = 100

250 130 120

200 115
150 100 110

100 90
70 100
0 60
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 95
Jan 15 Feb 15 Mar 15 Apr 15
spec. net long positions, lS Brent ($/barrel), rS
Gold Silver

Source: ICE, Bloomberg, Commerzbank Research Source: Bloomberg, Commerzbank Research

16 30 April 2015
Economic Research | Week in Focus

Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%) Inflation rate (%)
2014 2015 2016 2014 2015 2016
USA 2.4 2.8 2.8 1.6 0.2 2.0 The US economy has reduced its imbalances
2.5 2.0 2.3 1.9 0.6 2.0 and seems set to continue growing at solid
rates, despite a soft patch in the first quarter.
Japan -0.1 0.5 1.3 2.7 0.5 0.7 Growth in China is decelerating partly on
Euro area 0.9 1.2 1.3 0.4 -0.1 1.2 decreasing house prices.
- Germany 1.6 1.8 1.8 0.9 0.5 2.4 The recovery in the euro zone will only
continue at a slow pace. GDP growth will
- France 0.4 0.9 0.9 0.5 0.0 0.7 remain markedly lower than that of the USA.
- Italy -0.4 0.1 0.5 0.2 -0.4 0.7 EMU has survived the sovereign debt crisis,
- Spain 1.4 2.3 2.3 -0.1 -0.7 0.5 but is gradually evolving into an Italian-style
monetary union.
- Portugal 1.0 1.5 2.0 -0.4 -0.9 0.5
The German economy is set to continue
- Ireland 5.2 3.5 3.5 0.4 0.3 1.4 outperforming the rest of the euro area partly
- Greece 1.0 0.2 2.5 -1.2 -1.5 0.0 because ECB key rates are much too low for
United Kingdom 2.8 2.7 2.5 1.5 0.1 1.5
High unemployment in most countries is
Switzerland 2.0 0.5 0.5 0.0 -1.0 0.5 keeping inflation low for the time being. In the
China 7.4 6.5 6.5 2.0 2.0 2.0 long term, however, inflation is likely to rise, as
central banks have given up some of their
India 7.5 7.9 8.4 5.5 5.0 4.0
Brazil -0.1 -1.5 1.3 6.3 8.0 7.2
Russia 0.6 -3.5 1.6 7.8 14.0 6.7
World 3.2 3.2 3.6

TABLE 8: Interest rates (end-of-quarter)

29.04.2015 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16

USA Fed interest rate hikes are on the cards from

2015Q3, due to a continuously declining US
Federal funds rate 0.25 0.25 0.50 0.75 1.00 1.25 unemployment rate and the expectation that
3-months Libor 0.28 0.30 0.55 0.80 1.05 1.55 wage growth will gradually rise.
The focus on the Feds lift-off will put moderate
2 years* 0.57 0.75 1.05 1.40 1.75 2.05
upward pressure on US$ rates. The curve is in
5 years* 1.43 1.55 1.80 2.10 2.45 2.75 for a textbook-style flattening in the coming
10 years* 2.04 2.15 2.30 2.40 2.60 2.75 quarters, led by rising short-end rates.
Since in 2016 euro zone economic growth and
Spread 10-2 years 148 140 125 100 85 70 core inflation should be significantly lower than
Swap-Spread 10 years 8 10 10 10 10 10 forecast by the ECB, there is a risk that the
central bank will purchase government bonds
Euro area
beyond September 2016 or will increase the
Minimum bid rate 0.05 0.05 0.05 0.05 0.05 0.05 volume of purchases.
3-months Euribor -0.01 0.00 0.00 0.00 0.00 0.00 10y Bund yields are likely to remain close to
their lows in Q1 owing to the ECBs QE.
2 years* -0.25 -0.20 -0.15 -0.15 -0.10 -0.05
Thereafter, yields should edge up slowly. The
5 years* -0.06 -0.10 -0.05 0.00 0.05 0.10 structurally low interest rate environment
10 years* 0.26 0.30 0.40 0.50 0.50 0.60 remains intact for longer.
Risk premiums of peripheral government
Spread 10-2 years 51 50 55 65 60 65 bonds over Bunds are set to decline further
Swap-Spread 10 years 32 45 45 45 45 40 amid ECB bond purchases.
United Kingdom
Bank Rate 0.50 0.50 0.50 0.50 0.75 0.75
3-months Libor 0.57 0.55 0.60 0.75 0.85 1.00
2 years* 0.54 0.45 0.60 0.75 0.95 1.15
10 years* 1.80 1.70 1.80 1.90 2.05 2.20

TABLE 9: Exchange rates (end-of-quarter)

29.04.2015 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16
EUR/USD 1.11 1.10 1.06 1.04 1.02 1.01 USD should further profit from the
USD/JPY expectations of Fed interest rate normalization.
119 120 122 125 127 129
Current USD rates have not priced in the
EUR/CHF 1.05 1.00 0.99 0.98 0.97 0.96 speed of rate hikes that we expect.
EUR/GBP 0.72 0.74 0.72 0.71 0.70 0.70 The euro is under pressure as a result of the
persistent deflation fears in the euro zone and
EUR/SEK 9.27 9.10 9.30 9.35 9.40 9.45
an ECB policy that could even expand
EUR/NOK 8.36 8.90 8.90 8.80 8.70 8.60 government bond purchases.
EUR/PLN 4.01 4.15 4.15 4.15 4.15 4.15 CEE currencies tend to devalue.
We see the CNY to remain on the weaker side
EUR/HUF 302 305 310 315 315 315 against USD, due to subsiding Chinese growth
EUR/CZK 27.45 29.00 29.00 29.00 29.00 29.00 and USD strength.
AUD/USD 0.80 0.76 0.74 0.73 0.73 0.74
NZD/USD 0.77 0.73 0.71 0.70 0.69 0.68
USD/CAD 1.20 1.26 1.28 1.30 1.32 1.30
USD/CNY 6.20 6.33 6.35 6.35 6.35 6.35
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs

30 April 2015 17
Economic Research | Week in Focus

Research contacts (E-Mail:

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Economic Research | Week in Focus

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Economic Research | Week in Focus

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20 30 April 2015