ANZ RESEARCH

GLOBAL ECONOMICS & STRATEGY MACRO STRATEGY

STRATEGY FEATURE: INVESTING IN AN EXTENDED LOW NOMNINAL GDP 1 MAY 2013 INSIDE
Strategy Update: Weekly Feature What Were Watching Weekly Analytics - Positioning - Sentiment 2 7 9 11 11 12

GROWTH ENVIRONMENT

Our core investment view is that the global economy remains in an extended stable nominal GDP growth environment anchored by G3 central banks. This environment will continue to support global yield convergence with risks absorbed by central banks. The ANZ baseline is that cheap financing will support a synchronised recovery in global capital goods spending towards end 2013. To date inflation expectations have remained anchored and this has supported the effectiveness of central bank policy. A sustained behavioural shift to income over growth could become self-reinforcing if capital spending is shelved. Growth could then skid below the nominal GDP zone that supports riskier yield exposures.

CONTRIBUTORS
Kerry Duce Senior Strategist +61 2 9227 1101 Kerry.Duce@anz.com Warren Hogan Chief Economist +61 2 9227 1562 Warren.Hogan@anz.com Tom Kenny Senior Economist, +61 2 9227 1741 Tom.Kenny@anz.com Andrew McManus Economist, +61 2 9227 1742 Andrew.McManus@anz.com

WEEKLY FEATURE: EURO ZONE CREDIT CONDITIONS EASE BUT DEMAND SLUMPS FURTHER

The latest ECB lending survey (released 24 April) highlights a modest improvement in lending standards, albeit they remain restrictive. The survey also shows that the negative impact from the sovereign crisis on bank funding conditions has largely faded. This is where the good news ends. Poor growth prospects remain a major deterrent to credit demand (from households and enterprises) in the euro zone (EZ). The lack of credit demand points to further contraction in the region. This poor prognosis along with the disappointing read on Germanys PMI in April should see the ECB ease policy when it meets on 2 May we expect a 25bp cut in the key policy rate to 0.50%.

WHAT WERE WATCHING

The US labour market continues to be of great importance for Fed policy expectations and financial markets. We expect non-farm payrolls grew by 130k (private: +150k) and the unemployment rate remained at 7.6% in April.

POSITIONING/SENTIMENT

The consolidation in economic momentum through March and April has resulted in a modest easing in risk appetite. In particular, there have been corrections to commodity prices, while high yield spreads and non-commodity based equities remain relatively well supported.

CHART OF THE WEEK

FIGURE 1. AUSTRALIAN EQUITY RETURNS SHIFT FROM COMMODITY INFLATION TO ASSET INFLATION AS QE RAMPED UP

Sources: MSCI, Bloomberg, Thomson Reuters Datastream, ANZ

ANZ Macro Strategy / 1 May 2013 / 2 of 14

STRATEGY UPDATE
AN EXTENDED NOMINAL GDP ZONE: INCOME TRUMPS GROWTH Our core investment view is that global nominal GDP will remain stable through an extended moderate growth cycle anchored by sustained G3 policy support. Currently fiscal tightening and easing global growth momentum has lifted disinflation/deflation risks above inflation. The ANZ producer price monitor has corrected much more sharply than our lead indicator. In level terms ANZ producer prices are approaching the July 2012 cycle low when the ANZ lead indicator was substantially lower than at present. In this environment yield convergence will be sustained and income will continue to trump growth. This environment could become reinforcing if a synchronized lift in global growth does not unfold by 2015. Therefore disinflation/deflation remains the embedded risk and will provide the catalyst for additional policy support. INVESTING IN AN EXTENDED NOMINAL GDP ZONE: INCOME WILLTRUMP GROWTH Our core investment view is that global nominal GDP will remain stable through an extended moderate growth cycle anchored by G3 policy support. Currently we consider disinflation/deflation risks are moderately larger than inflation, although we see neither risk overwhelming steady and stable nominal growth over the foreseeable future. In this environment yield convergence will be sustained and companies (including growth companies) have an incentive to shift to dividends. The current loss of momentum in our ANZ global lead indicator is reinforcing the preference for income over growth. Clearly the risk is that this environment becomes reinforcing as capital spending plans are wound back to fund dividends. In essence central banks have postponed the adjustment by supporting an extended period of steady nominal GDP growth. The risk is that nominal growth skids below the lower bound of nominal GDP where inflation expectations are revised down. WILL FINANCIAL RISK APPETITE REMAIN RESILIENT AGAIN IN 2013? Despite the sharp loss of global growth momentum through 2012 ANZ global risk appetite inflation expectations remained very resilient through the slow down. However, while financial asset prices continued to surge through 2012 measures of producer and commodity prices eased sharply with the cycle (Figure 2). In short, financial risk has in part disconnected from the cycle on central bank policy support. The risk is that support becomes embedded without generating a synchronised recovery. Currently our ANZ global lead indicators are easing and (as was the case through 2012) our estimate of financial risk appetite remains buoyant. However, while producer and commodity prices declined through 2012 currently they are declining much more sharply than the cycle suggesting that disinflationary forces could be gaining traction. Finally, the key challenge is to identify when the current super cycle in financial asset prices peaks. We see two environments that would drive a peak: o o A sustained lift in inflation as growth finally lifts to a sustained synchronised recovery; or A sustained period of disinflation that edges towards deflation as nominal GDP falls to the lower bound of the zone.

To date inflation expectations have remained anchored despite large output gaps and rising unemployment. It has been the stability of inflation expectations and relatively steady nominal growth that remains the defining feature of the current economic environment.
FIGURE 2. FINANCIAL ASSETS REMAIN RESILIENT DESPITE LOSS OF ECONOMIC MOMENTUM

Sources: Markit, Bloomberg, Thomson Reuters Datastream, ANZ

AUSTRALIA: A MICROCOSM OF GLOBAL CAPITAL MARKETS The resilience of financial risk appetite and inflation expectations through an extended period of steady nominal growth (as was the case in 2012) remains the key driver of markets. In

ANZ Macro Strategy / 1 May 2013 / 3 of 14

STRATEGY UPDATE
our strategy feature this week we analyse this thematic through the prism of Australian capital markets (the safe high yielding Australian equity and corporate bond markets). The Australian equity market is essentially a barbell between global materials (mining) companies (leveraged to commodities via Chinese growth) and AA rated global banks (high quality financial assets that offer elevated safe yield). The Australian dollar clearly straddles both asset classes, although since the Q3 2012 and the Fed open ended asset purchase program it appears to be tilting more towards safe financial yield rather than commodity inflation. Overall in our strategy feature this week we identify the core theme driving markets as the continued transition from the commodity super cycle to the yield super cycle anchored by a stable moderate nominal GDP growth cycle. We date the peak in the commodity super cycle in late 2011 (likely earlier if we abstract from the large Chinese fiscal stimulus). Since late 2011 we have observed two commodity min-cycles. However, the peak in each mini cycle has been slightly lower than the previous high while mini cycle troughs tend to be lower. In contrast to the steady unwind of the commodity super cycle since late 2011, the financial asset super cycle (the global race to the bottom in yields) has printed each peak above the previous high while mini cycle lows have been shallower. AUSTRALIAN EQUITIES: THE GREAT DIVIDE BETWEEN INCOME AND GROWTH WIDENS We identify two structural shifts in the Australian equity market (and global capital markets) post the global financial crisis. 1. In late 2011 we observed a large structural capitulation in mining equity stocks that marked the peak of the commodity super cycle. Subsequent to the capitulation we have observed two mining mini cycles in late 2011 and again in late 2012. Both were a sell opportunity. 2. Since Q3 2012 (Fed announces open ended asset purchases) we have observed a relentless shift to global yield compression reflected in the Australian bond and equity markets. Each dip has marked a buy on the dip in yield. Subsequent to the collapse in the mining index in late 2011 returns to the materials sector lagged the
Sources: MSCI, Thomson Reuters Datastream, ANZ

returns to financial assets through to September 2012. However, since September 2012 when the Fed announced its open ended asset purchases the returns to mining have fallen sharply while the returns to the financial sector have surged. Clearly the market does not expect that open ended Fed purchases will fuel commodity inflation (yet). Figure 3 clearly shows that since April 2012 the total return Australian financial stocks have surged by some 40%. Over the same period returns to mining and materials have slumped by 15%. The gap between financials and mining has widened sharply since Q3 2012 when the Fed announce its open ended asset purchase program. In short, the race to the bottom in global yields spurred by the Fed and now the Bank of Japan has trumped the commodity super cycle since late 2011.
FIGURE 3. LARGE DIVERGENCE BETWEEN FINANCIAL AND MINING SECTORS BUILDS

In figure 4 we plot the relative performance of the Australian materials sector to financials against base metals (in USD) and the Australian US dollar cross since April 2011. This chart clearly shows the collapse in materials and base metals in August 2011 was largely ignored by the Australian dollar that has disconnected from commodities and is trading more in line with high safe yield. Subsequently, we have observed two commodity mini-cycles with lower peaks in December 2011 and December 2012. Both cycles were truncated.

ANZ Macro Strategy / 1 May 2013 / 4 of 14

STRATEGY UPDATE
FIGURE 4. THE MAJOR CORRECTION IN COMMODITIES OCCURRED IN AUGUST 2011
3

STRONG RETURNS TO AUSTRALIAN EQUITIES PRIMARILY DRIVEN BY YIELD COMPRESSION NOT EARNINGS As described in the previous section robust returns to Australian equities have primarily been driven by financial yield exposures and yield convergence (PE re-rating) rather than strong earnings growth. The decline in the implied earnings yield for the ASX 200 has largely coincided with the late 2011 correction in materials and mining and the subsequent race to the bottom in global yields spurred by the Fed open ended purchase program. Indeed, the implied earnings yield for the ASX 200 in December 2011 was around 9% as compared with 6.7% in April 2013. Over the same period the yield of an A rated corporate bond has fallen from 6% to 3.9%.
FIGURE 6. THE GAP BETWEEN THE IMPLIED ASX 200 EARNINGS YIELD AND A CORPORATE BOND HAS WIDENED SHARPLY

deviation from 12 month trend

2 1 0 -1 -2 -3 Apr 2010 Aug 2010 Dec 2010 Apr 2011 Aug 2011 Dec 2011 Apr 2012 Aug 2012 Dec 2012 Apr 2013

Base metals USD

ASX 300 mining to financials

AUD

Sources: MSCI, Thomson Reuters Datastream, ANZ

Overall, the peak in commodities occurred in Q3 2011 and since that time the pendulum has swung to financial assets and global yield convergence. This pattern broadly tracks the shifts in the level of both the ANZ global lead indicator and the ANZ producer price index since 2010 (Figure 5). The twin peaks in producer prices occurred in July 2008 and again in March 2011. To generate a peak above these levels we need to see the level of the ANZ global lead indicator above 150 for a sustained period (Figure 5). The announcement of the Federal Reserve open ended asset purchase program in Q3 2012 in conjunction with a large decline in the ANZ producer price index has driven the race to the bottom in global yields including Australian financial equities that offer high yield.
FIGURE 5. DECLINE IN PRODUCER PRICES SUPPORTS RACE TO THE BOTTOM IN YIELDS AS GROWTH MODERATES
170 160 150 140 130 120 110 100 90 80 70 30 20 50 40 70 60 90 80

Sources: Merrill Lynch Bank of America, MSCI , Thomson Reuters Datastream, ANZ

The decline in the implied earnings yield for the ASX 200 has been driven by sustained PE re-rating since late 2012. For the ASX200 in total the PE has risen even as earnings per share continue to fall. The wedge between the PE decline and decline in earnings per share is clearly shown in Figure 7.

ANZ global lead indicator (LHS)

ANZ global producer prices (RHS)

Sources: MSCI, Thomson Reuters Datastream, ANZ

ANZ Macro Strategy / 1 May 2013 / 5 of 14

STRATEGY UPDATE
FIGURE 7: PE RE-RATE (YIELD COMPRESSION) DRIVES THE ASX 200 SINCE LATE 2012 DESPITE FALL IN EARNINGS
30

FIGURE 9. BANK EARNINGS YIELD STILL WELL ABOVE CORPORATE YIELDS

% change year on year

20

10

-10 -20

-30 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

ASX 200 eps

ASX 200 PE re-rate

Sources: MSCI, IBES, Thomson Reuters Datastream, ANZ

The inflection point between earnings growth as a driver of equity returns and PE re-rate (yield compression) occurred around Q3 2012 in line with the Fed announcing its open ended asset purchase program. Indeed, over the year from April 2012 to April 2013 the ASX 200 PE is up around 25%, while earnings per share for the ASX 200 are down around 6%. The decline in earnings is heavily tilted to the mining sector. Despite the large decline in Australian yields since late 2012 Australian A rated corporate bonds still offer a yield around 4.3% as compared to 1.8% for an A rated US corporate bond.
FIGURE 8: AUSTRALIAN CORPORATE YIELDS STILL WELL ABOVE US CORPORATE YIELDS
8 7

Sources: Merrill Lynch Bank of America, Bloomberg, Thomson Reuters Datastream, ANZ

The peak in the implied bank earnings yield was around 11% in late 2011. Clearly the gap between the implied earnings yield and sovereign yields was excessive in late 2011 through to Q3 2012. The Fed open ended asset purchase program provided the catalyst for the massive yield compression rally. Figure 10 clearly shows the powerful yield compression that is supporting bank equity returns.
FIGURE 10. PE LIFT NOT EARNINGS KEY DRIVER OF AUSTRALIAN FINANCIALS
60 50 40

% change year on year

30 20 10 0 -10 -20

6 5

Yield

4 3

-30

ASX 200 banks eps growth Oct 2011 Apr 2012

ASX 200 banks PE re-rate Oct 2012 Apr 2013

2 1 Apr 2011

-40 Apr 2011

Oct 2011 US corporate bond A

Apr 2012

Oct 2012

Apr 2013

Sources: Bloomberg, Thomson Reuters Datastream, ANZ

Australian corporate bond A

Sources: Merrill Lynch Bank of America, Thomson Reuters Datastream, ANZ

DEFLATION IS THE ULTIMATE RISK TO THE YIELD CONVERGENCE SUPER CYCLE With global economic momentum easing we consider disinflation/deflation risk outweigh inflation for the foreseeable future. To date markets remain in a sweet spot for financial assets with G3 central banks providing strong support and inflation expectations and nominal growth modest but not collapsing to sustained deflation. We consider it has been the resilience of inflation expectations that has enhanced the effectiveness of G3 central bank policy.

AUSTRALIAN FINANCIAL YIELDS HAVE FURTHER SCOPE FOR COMPRESSION A sizeable wedge remains in place between the implied ASX 200 bank earnings yield around 7% and the corporate financial bond at 4% and the Australian government yield at 3.1%.

ANZ Macro Strategy / 1 May 2013 / 6 of 14

STRATEGY UPDATE
A period of sustained deflation and weakening nominal GDP would lift debt to GDP and for non-safe haven sovereign yields that rely on foreign financing would increase the cost of borrowing. Moreover, increased sovereign borrowing would crowd out private sources of capital. Overall, we see limited risk that deflation risk will emerge as a new thematic. Recent moves by the EZ to ease fiscal tightening; clear signs that the drivers of US growth have broadened and sustained G3 policy support are all acting to support inflation expectations. However, a synchronised lift in global growth momentum supported by capital spending on current cheap financing will need to evolve by 2015 to prevent nominal GDP skidding to the bottom of the current search for yield comfort zone.

ANZ Macro Strategy / 1 May 2013 / 7 of 14

WEEKLY FEATURE
EZ CREDIT CONDITIONS EASE BUT DEMAND SLUMPS FURTHER The latest ECB lending survey (released 24 April) highlights a modest improvement in lending standards, albeit they remain restrictive. The survey also shows that the negative impact from the sovereign crisis on bank funding has largely faded. Poor growth prospects remain a major deterrent to credit demand (from households and enterprises) in the EZ. The lack of demand for credit points to further contraction in the region. In conjunction with the disappointing read on Germanys PMI in April, this news adds to the case for the ECB to consider ease policy when it meets on 2 May. We are expecting the central bank to cut its key policy rate by 25bp to 0.50%. THE VICIOUS CYCYLE - POOR CREDIT DEMAND BEGETS WEAKER GROWTH Bank funding conditions and the Sovereign crisis. The negative impact of the sovereign crisis on bank funding conditions appears to have largely faded according to the latest bank lending survey. There has been a sharp moderation in the impact of sovereign debt tensions on banks funding conditions (Figure 11). This is largely owing to the actions of the ECB (e.g. LTRO, OMT) and to a lesser extent reform measures from the sovereigns.
FIGURE 11. IMPACT OF SOVEREIGN CRISIS ON BANKS FUNDING CONDITIONS
30 25 q2 2012 q3 2012 q4 2012 q1 2013

and the banks liquidity position actually contributed to an easing in standards. This improvement largely reflects ECBs non-conventional policy actions over the past year. There was a marked decline in banks perception that poor economic growth prospects being a hurdle to lending (from 26% in 4Q 2012 to 16% in Q1 2013 Figure 13). That said, this remains a major area of concern for banks setting credit policy. Moreover, the recent weakness in our inventory pulse for the EZ suggests that momentum is again starting to ease in the region after a pick up earlier in the year. This suggests that poor growth prospects will continue to be a major deterrent to lending standards. Banks expect a similar degree of tightness in credit standards to enterprises this quarter.
FIGURE 12. CHANGE IN CREDIT CONDITIONS LOANS TO ENTERPRISES
80

60

Tightening

Net response

40

20

-20 03 04 05 06 07 08 09 10 11 12 13 14

Total Actual

Total expected

Easing

Sources: Bloomberg, ANZ

net respondents %

20 15 10 5 0 -5

FIGURE 13. CHANGE IN CREDIT CONDITIONS LOANS TO ENTERPRISES

45 40 35 30 25
Axis Title
Costs related to bank's capital position Access to market financing Bank's liquidity position Expectation of general economic activity

Peak of sovereign crisis

20 15 10 5 0
Q1 2011 Q1 2013

Direct exposure

Value of sovereign

Other effects

Sources: Bloomberg, ANZ

-5 -10

Supply of credit to enterprises and households. The latest survey highlights that lending conditions to enterprises became less restrictive in Q1 2013 and are below their long-run average (Figure 12). Lending standards to households were also less restrictive, but remain above long-run averages (Figure 14). The moderation in credit standards to enterprises reflects further improvement in financing conditions for euro area banks both access to market funding

Sources: Bloomberg, ANZ

Lending conditions for households (both mortgages and lending conditions) eased slightly but remain restrictive. Poor economic and housing prospects continue to weigh on banks decision to lend. As with lending for enterprises, pressures from banks cost of funding contributed to an easing in standards.

ANZ Macro Strategy / 1 May 2013 / 8 of 14

WEEKLY FEATURE
FIGURE 14. CHANGE IN CREDIT CONDITIONS LOANS TO HOUSEHOLDS
50 40 30
Net response

FIGURE 16. EZ GDP GROWTH AND DEMAND FOR LOANS

40 30 20 10
Net response

Tightening

Increased

6 4 2
% y/y

20 10 0 -10 -20 03 04 05 06 07 08 09 10 11 12 13

0 -10 -20 -30 -2 0

Easing

-40 -50 -60 03

Decreased

-4 -6

04

05

06

07

08

09

10

11

12

13

Mortgages

Other personal

Household + Enterprise

GDP, rhs

Sources: Bloomberg, ANZ

Sources: Bloomberg, ANZ

Respondents indicated that lending standards to households will ease slightly in the coming quarter. We continue to expect that ongoing soggy demand amid an elevated unemployment rate will act as a constraint on European banks easing their lending standards (Figure 15) as this keeps repayment risk elevated.
FIGURE 15. UNEMPLOYMENT RATE AND HOUSING LENDING STANDARDS
50 40 30 20 10 0 -10 -20 03 04 05 06 07 08 09 10 11 12 13 14 13 12 11 10 9 8 7 6

The weakness in credit demand does not bode well for future activity. A simple weighted index (household + enterprise) of credit demand tends to lead GDP growth (Figure 16). This relationship points to a further contraction in EZ activity, and disappointingly, a renewed loss in momentum IMPLICATIONS FOR THE ECB The latest ECB lending survey highlights another decline in credit demand, particularly by households. This news does not bode well for EZ growth, particularly in conjunction with the poor flash PMIs for April (the headline slipped to 46.5 from 46.8 in March and the details point to a further loss in momentum). In addition, on a regional basis there is a worrying loss in momentum in Germany. At the April ECB meeting, President Draghi flagged his concern over the spreading of economic weakness to the core. Any easing from the ECB is unlikely to herald a seismic shift in policy. In the near-term, we expect the central bank will limit future policy action to conventional tools and a couple of non-standard measures (e.g. the collateral framework and fixedrate full allotment). Draghi will also emphasise that support is needed from elsewhere.

Net respondents

Lending standards

Unemployment rate, rhs

Sources: Bloomberg, ANZ

Demand for credit by households fell sharply in the quarter. The main factors contributing to the decline were poor housing prospects and subdued consumer confidence. Banks reported a decline in demand for loans to enterprises at a similar rate to the previous quarter. The lack of appetite for funding continues to be driven by an absence of fixed asset investment plans. Respondents expect credit demand from both households and enterprises to improve next quarter, albeit to still decline in absolute terms. We think this view is too optimistic, particularly for households.

ANZ Macro Strategy / 1 May 2013 / 9 of 14

WHAT WERE WATCHING

US LABOUR MARKET The US labour market continues to be a key driver of global financial markets due to its importance in setting US monetary policy. This week we preview the non-farm payrolls and JOLTS job openings releases. MACRO US non-farm payrolls ANZ Forecasts: Total payrolls: +130k (market +150k); Private payrolls: +150k (market +160k) Unemployment rate: 7.6% (market 7.6%) Model based view: The ANZ Non-farm payroll (NFP) forecast is based on our short-term employment model that includes the employment indices of the ISM surveys and initial jobless claims. We expect the 4-week moving average of initial jobless claims will return to below 350k this week after recent volatility around the Easter period saw them peak at 362K, while the ISM employment indices will indicate a modest loss of momentum since peaking in February. Risks around view: We consider the risks to our forecast as broadly balanced. o Upside. 1) Employers are stretching existing labour resources average weekly hours and overtime hours worked have risen in recent months and are at levels consistent with the pre-recession period. Further economic growth may result in improved hiring. 2) Construction employment growth is lagging the pick-up in housing starts and hiring in retail has eased recently despite solid retail sales. 3) The average rise in ADP and NFP employment growth are equal since inception. However, over the 3 months to March the ADP measure has averaged 20k higher than the NFP estimate. We expect these two series will realign in coming months. Downside. 1) The sequester cuts likely weighed on hiring in April and will way in coming months the CBO estimates 750K job losses from the government spending cuts. Policy: We expect the Fed to maintain its current pace of asset purchases (US 85bn) for the foreseeable future. FOMC members have stated sustained employment gains, a rise in hiring indicators and solid consumer spending would be required for a tapering in the existing program. The FOMC is likely to be cautious about tapering its asset purchases given the headwinds to activity from the sizable fiscal drag. We believe spending growth at above 2.5% annualised, payrolls growth averaging 170k/month and a pick-up in JOLTS job openings over a 6 month period would result in some tapering of the program. Our base case is for growth to pick up in Q4 2013 and into 2014 such that these economic indicators will warrant a tapering in the current program.

FIGURE 17. US NON-FARM PAYROLLS AND FORECAST (PUBLIC AND PRIVATE)

400 350 300 250 200 150 100 50 0 -50 -100 Jan-12 Apr-12
Private Long-term avg public

'000 m/m

Jul-12

Oct-12

Jan-13
Public

Apr-13

Long-term avg private

Sources: BLS, ANZ

FIGURE 18. US PRIVATE NON-FARM PAYROLLS (MODEL AND ACTUAL)

600

monthly change, 000s

400 200 0 -200 -400 -600 -800 97 99 01 03 05 Actual 07 09 Model 11 13

-1000

Sources: Bloomberg, Thomson Reuters, ANZ

ANZ Macro Strategy / 1 May 2013 / 10 of 14

WHAT WERE WATCHING

JOLTS Job Openings. As highlighted by recent FOMC members, job openings will be closely monitored as they tend to lead employment. JOLTS openings rose strongly in February. If solid momentum can be sustained over coming months, this would be a further sign that the recent loss of momentum will only be temporary.
FIGURE 19. JOLTS JOB OPENINGS AND NON-FARM PAYROLLS
5.0 4.5 4.0 139 137 135

mn

3.5 3.0 2.5 2.0

Job openings (6 month fwd)

mn

133 131 129 02 03 04 05 06 07 08 09 10 11 12 13

Non-farm employment, rhs

Sources: Bloomberg, ANZ

The breakdown between hirings and layoffs indicates the sustainability of recent employment gains. Throughout 2012 employment gains occurred predominantly due to a reduction in layoffs rather than an increase in hiring. Given the now low level of layoffs, a lift in hiring will be required for future sustainable employment gains. Like job openings, hires in February picked up strongly.

ANZ Macro Strategy / 1 May 2013 / 11 of 14

WEEKLY ANALYTICS

1. MARKET POSITIONING
FIGURE 20. UST 10-YEAR NON-COMMERCIAL POSITIONS
300 200 Net Long 4

Uncertainties around the US economic growth outlook and impact of the fiscal drag have supported sentiment towards US Treasuries.

'000 contracts

Sentiment towards UST has improved in recent weeks.

100 0 -100 -200 -300 Jan 10 Net Short Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Net speculative positions 10-year-yield, rhs

FIGURE 21. US MUTUAL FUND FLOWS

Net flows into US bonds and equities have remained solid since early January. As sentiment towards both asset groups has remained solid, this reflects a switch from other geographies or cash rather than a rotation from bonds to equities.
US$bn

40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 Nov 11

Feb 12

May 12
Equity

Aug 12
Bonds

Nov 12

Feb 13

May 13

Money Market

FIGURE 22. NON-COMMERCIAL COPPER POSITIONS

40 30 20

Net Long

11000 10000 9000

'000 contracts

Sentiment toward copper has waned in recent weeks. This likely reflects 2 factors: a stronger USD; and, a consolidation in momentum of global lead indicators.

10 0

8000 7000 6000 5000 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13
Net speculative positions Copper price, rhs

-10 -20 -30

Net Short

-40 Jan 10

FIGURE 23. NON-COMMERCIAL GOLD POSITIONS

350 300 250

Net Long

2000 1900 1800 1700 1600

Sentiment toward gold has continued to wane in recent weeks.

'000 contracts

200 150 100 50 0 Jan 10

1500 1400 1300 1200 1100 1000 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13

Net speculative positions

Gold price, rhs

Sources: Bloomberg, Thomson Reuters Datastream, ICI, ANZ

%
2 1
USD
USD

ANZ Macro Strategy / 1 May 2013 / 12 of 14

WEEKLY ANALYTICS
2. RISK SENTIMENT
FIGURE 24. US RELATIVE PERFORMANCE OF HIGH YIELD CORPORATE CREDIT
0.92 0.87 0.82 0.77 0.72 0.67 0.62 Jan 10

US credit spreads remain near post crisis lows. In particular, high yield credit has strongly outperformed since late 2011.In recent weeks high yield credit has continued to outperform despite the rally in US Treasuries.

Jul 10

Jan 11

Jul 11

Jan 12

Jul 12

Jan 13

Relative performance US MLBOA Corp HY to Corp AA 3-5 years

FIGURE 25. HIGH YIELD FLOWS & YIELDS

33 32 31 30

5.0 5.5 6.0 6.5

Sentiment towards high yield credit has remained positive despite the consolidation in other risk assets such as commodities in recent weeks.
USDbn

29 28 27 26 25 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 7.0 7.5 8.0 8.5

Junk bond ETF flows ML junk bond yield, rhs

FIGURE 26. US CORPORATE BOND ISSUANCE

180 150 120

60 50 40

US corporate bond issuance remained relatively strong through Q1, particularly high yield issuance.

USDbn

60 30 0 Jan 10

20 10 0 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 % high yield High yield, lhs

Investment grade, lhs

FIGURE 27. ANZ RISK APPETITE AND LEAD INDEX

Deviation from 12 month trend

2 1 0 -1 -2 -3 04 05 06 07 08 09 ANZ inventory pulse 10 11 12 ANZ Risk appetite 13

The divergence between our lead indicator and risk appetite measure has closed in recent months. Given the retracement in our lead indicators for March and April, we would expect some consolidation in sentiment near-term. However, over the medium-term sentiment is expected to remain supported by G3 central banks.

Sources: Bloomberg, Thomson Reuters Datastream, ANZ

90

30

ANZ Macro Strategy / 1 May 2013 / 13 of 14

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