Eurobank Monthly Global Economic

& Market Monitor

September 2016

Olga Kosma, Research Economist

Paraskevi Petropoulou, Economic Analyst

Contents

Economics

II

FX Markets

IV

- USA
- Euro area
- UK
- Japan

Eurobank, September 2016

III

Eurobank
Forecasts
Overview

Fixed
Income
V

Disclaimer

I. Economics

Eurobank, September 2016

USA: Below trend growth on weak business investment

Private consumption rebounds,
but investment remains muted

%QoQ
AR

2.9

3.0

Q2 2016

GDP
1.6
1.1

2.0
1.0

1.6 Private
Residential
Investment
0.4

Q2 2015 - Q1 2016

0.3

Net
Exports
0.1

Private
Nonres.
Investment

0.0
Personal
Consumption -0.3

-1.0
-2.0

-0.3
-0.3
Government
Consumption
& Investment

-0.1 0.0
-0.5
-1.3
Change in
Inventories

The US manufacturing sector continues

to move broadly sideways
% yoy

Index
60

10

55

50

45

-5
ISM manufacturing survey, lhs

40

-10
Industrial production index, rhs

35
30
2009

-15
-20
2010

2011

2012

2013

2014

2015

According to the BEAs 2nd estimate, Q2 GDP growth was revised one-tenth
lower to 1.1%QoQ saar (1.2%YoY), supported by a sharp rebound in real
personal consumption growth (+4.4%QoQ saar) amid a positive payback in
durable goods from their first-quarter weak performance. Gross fixed capital
formation remained weak, with nonresidential structures still mirroring the
lagged effects of previous declines in energy prices. Inventory accumulation
constituted a drag for GDP growth for a fifth quarter in a row, while government
consumption dropped 2.2%QoQ saar vs. a 1.3% decline in the advanced
estimate, following five consecutive quarters of positive growth.
Recent high-frequency data have been rather mixed. Retail sales declined for
the first time in five months in August (-0.3%MoM), while industrial production
fell more than expected (-0.4%MoM) over the same month. Furthermore, the
ISM non-manufacturing index surprised negatively as well, dropping to a 61/2 low
of 51.4 in August and marking the biggest monthly decline since late 2008.
Meanwhile, the ISM manufacturing index fell in August below the 50-threshold
that distinguishes expansion from contraction for the first time since February
2016. On the flipside, August core CPI reversed some of the July softness
(+0.3%MoM), with its annual growth rising to 2.3%YoY. Strong domestic price
pressures, coupled with a stabilization in imported inflation, are expected to
drive core inflation higher towards the end of the year. A diminishing drag from
past decline in oil prices and USD strength is also expected to have an impact.
In our view, real GDP growth will likely average around 1.5% in 2016 from 2.6%
in 2017, dragged down by weak productivity and soft business investment. A
modest improvement towards 2.0% is expected in 2017, as the drags on growth
from the energy sector investment, inventories and trade gradually dissipate.
Personal consumption and housing activity are expected to continue supporting
growth, boosted by low interest rates and rising home prices.

2016

Source: US BEA, University of Michigan, Eurobank Economic Research

Eurobank, September 2016

Fed: Positioning for an interest rate hike in December

Projections of Federal Reserve Board Members and
Federal Reserve Bank Presidents, September 2016
Median* (percent)
USA

2016

2017

2018

Longer run

1.8

2.0

2.0

1.8

2.0

2.0

2.0

2.0

4.8

4.6

4.5

4.8

4.7

4.6

4.6

4.8

June projection
PCE inflation

1.3

1.9

2.0

2.0

June projection

1.4

1.9

2.0

2.0

Core PCE inflation

1.7

1.8

2.0

June projection

1.7

1.9

2.0

0.6

1.1

1.9

2.9

0.9

1.6

2.4

3.0

Change in real
GDP
June projection
Unemployment
rate

Fed Funds Rate

June projection

* For each period, the median is the middle projection when the projections
are arranged from lowest to highest. When the number of projections is
even, the median is the average of the two middle projections

Eurobank, September 2016

As widely expected, the FOMC held steady the Fed funds target rate at 0.25%0.50%, setting up the option for a continuation of its normalization process.
Following diminished risks in the July FOMC meeting, it currently appears that
near-term risks to the economic outlook are roughly balanced. The statement
acknowledges that the US labour market has continued to strengthen and
economic growth has picked up from the modest pace seen in the first half of
the year. Nevertheless, Fed Chair Janet Yellen highlighted that the delay in
raising interest rates is due to low inflationary pressures and labor market slack
that continues to be absorbed relatively slowly.
The Federal Reserve lowered the dots for the following two years, with the
median dot falling to 1.1% for year-end 2017 (from 1.6% previously) and to
1.9% for year-end 2018 (from 2.6% previously). Hence, Feds updated outlook
includes one rate hike in 2016, while the median dot for 2017 was downwardly
revised from three to two hikes, mirroring a shallower interest rate path. The
longer-run Fed funds rate was revised down once again to 2.875% from 3.00%
previously.
The FOMC seems to be very divided, as three voting FOMC members
dissented, preferring an immediate rate hike. Although Kansas City Fed
President George was against the Committees consensus for most of 2016, the
main surprise was that Cleveland Fed President Mester (previously voting with
the consensus although expressing her preference for a hike sooner rather than
later) and Boston Fed President Rosengren (a former dove) turned hawkish. In
our view, the disagreement between the FOMC members will probably fade with
a rate hike in December and the expected change in voting members during
2017 towards less hawkish regional Fed Presidents. Although a hike at the 2
November meeting cannot be entirely ruled out, we believe that the Fed would
not like to trigger an increase in market volatility that could influence the election
outcome one week later.

Euro area: Resilient growth in H1, modest deceleration in

H2
index
55

PMI Composite index at a 20-month low

amid weak services
Real GDP growth slowed to 0.3%QoQ in Q2 2016 from 0.5%QoQ in Q1, as
domestic demand decelerated significantly. Real personal consumption moderated
somewhat after the Q1 bounce (+0.2%QoQ), while government consumption
increased only marginally (+0.1%QoQ) due to sharp declines primarily in Spain and
secondarily in Italy and Greece. Business investment stagnated with contraction
recorded in Germany, France and Italy, while soft domestic demand weighed on
imports. Meanwhile, net trade was the main growth contributor adding 0.4pps to
overall GDP.

54
53
52
51
PMI Services

50

PMI Manufacturing

49

PMI Composite
Aug-16

Mar-16

Oct-15

May-15

Dec-14

Jul-14

Feb-14

Sep-13

48

Economic Sentiment Indicator (ESI) suggests that

the EA outlook is surrounded by great uncertainty
115

Index

110

105

Jul-16

Apr-16

Jan-16

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

95

Oct-15

Euro area
Germany
Italy
Spain

100

Forward looking indicators point to a modest deceleration in H2. Flash composite

PMIs fell to a 20-month low in September, slightly below market expectations at
52.6. In more detail, the services sector recorded the weakest reading since
December 2014 (52.1), while the manufacturing sector improved to a three-month
high of 52.6. In Germany, ZEW expectations index fell short of market expectations
in September, remaining unchanged at 0.5 after having recovered somewhat in
August (+7.3 points) from the Brexit-induced drop in July.
Euro area inflation continues to be weak (headline HICP at 0.2%YoY/core HICP at
0.8%YoY), as both tradable and non-tradable goods prices remain below annual
growth rates reached last year in the same period. Non-energy industrial goods
prices decelerated to 0.3%YoY in August from 0.4%YoY in the prior month, while
services prices declined to 1.1%YoY from 1.2%YoY in July. At the headline level,
energy price inflation continues to recover slowly, rising to -5.6%YoY from 6.7%YoY previously.
Overall, we expect real GDP growth to average around 1.5% in 2016 from 1.6% in
2015, with the outlook surrounded by increased uncertainty. Banking sector stress
could weigh on bank credit and, consequently, to economic growth, while the heavy
political agenda constitutes a noteworthy factor of potential slowdown in the coming
quarters.

Source: ECB, Eurostat, Eurobank Economic Research

Eurobank, September 2016

Euro area: Setting the ground for the next QE extension

EA inflation continues to be weak,

The ECB kept its key interest rates unchanged at the September 8th monetary
policy meeting and repeated its intention to continue its asset purchase programme,
dampening market expectations for an extension of the QE programme beyond its
currently scheduled expiration date of March 2017. Speaking in the post-meeting
press conference, President Mario Draghi noted that for the time being the changes
(in the updated forecasts) are not substantial, as to warrant a decision to act,
adding that the ECB Governing Council did not discuss an extension of QE.
Nevertheless, Mr. Draghi noted that the Governing Council tasked the relevant
committees with working on options to ensure that the QE programme is
implemented smoothly, increasing the odds for a time extension of QE along with
technical changes to the QE programme in the October or the December meeting.

3.0

2.3
1.5
0.8
0.0
core HICP YoY%
-0.8
2010

2.8 %

2011

2012

HICP YoY%
2013

2014

2015

2016

dragged down by persistently

low inflationary expectations

2.6
2.4

2.2
2
1.8
1.6

5y5y EUR inflation swap rate

1.4

US 10y breakeven inflation rate

Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16

1.2

We expect the ECB to extend its quantitative-easing programme beyond March

2017 by 6 to 9 months, most likely in its December meeting with the next round of its
macroeconomic forecasts, possibly accompanied by some modifications in QE
technical modalities in order to tackle the bond scarcity problem. Possible key ECB
options are the following: (i) increase of the 33% issue/issuer share limit in order to
raise the available pool of eligible assets, (ii) removal of the deposit-rate floor of 0.40% for QE purchases, which would de-link PSPP eligibility from yield levels and a
large amount of short end bonds trading at present below the ECB deposit rate
would be included again in the PSPP, (iii) shift the allocation of the PPSP purchases
between euro area countries based on the ECB capital keys to an allocation based
on the actual size of their outstanding debt. Nevertheless, the third option could raise
opposition by some Governing Council members, and particularly by those
originating from Germany, as countries with higher debt levels such as Italy and
France would be actually rewarded with higher purchases at the expense of
Germany, Netherlands and Finland. ECBs Jens Weidmann has recently criticized
this option, highlighting that increasing bond purchases from countries with high
indebtedness or bad credit ratings would distance the ECB further from its core
mandate.

Source: ECB, Eurostat, Eurobank Economic Research

Eurobank, September 2016

BoJ: QQE with yield curve control, with monetary policy

reaching its limits
Index

Japan Economy Watchers Survey

130
120
110
100
90
80

Leading

Coincident

Jan-00
Oct-00
Jul-01
Apr-02
Jan-03
Oct-03
Jul-04
Apr-05
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Oct-09
Jul-10
Apr-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15

70

Japan Tankan Business Conditions

Inflation indicators and expectations have sagged. Japans core consumer prices fell in July
at the fastest pace since Kuroda took the helm of the BoJ in March 2013. Market participants
this year have shrugged off Kurodas repeated vows that he would act whenever necessary,
helping drive the yen to long-term highs. The Bank will continue expanding the monetary
base until the year-on-year rate of increase in the observed CPI exceeds the price stability
target of 2% and stays above the target in a stable manner. Meanwhile, the pace of increase
in the monetary base may fluctuate in the short run under market operations, which aim at
controlling the yield curve. With the Bank maintaining this stance, the ratio of the monetary
base to nominal GDP in Japan is expected to exceed 100% (about JPY500tn) in slightly over
one year (at present, about 80% in Japan compared with about 20% in the United States and
the euro area). The Bank will make policy adjustments as appropriate, taking account of
developments in economic activity and prices as well as financial conditions, with a view to
maintaining the momentum toward achieving the price stability target of 2%.

Large Enterprises

Manufacturing

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

Non-manufacturing
2003

2002

2001

2000

40 % Balance, DI
30
20
10
0
-10
-20
-30
-40
-50
-60
-70

The Bank of Japan (BoJ) in its latest policy meeting shifted the focus of its monetary stimulus
from expanding the money supply to controlling interest rates. More specifically, BoJ
introduced the yield curve control target and focused on an inflation-overshooting
commitment. The BoJ kept the deposit rate at -0.10% and its annual JGB purchases at
JPY80trn, but it abandoned the 7-12 year average maturity target for bond buying and
replaced it with a yield target of 0% on the 10 year JGBs. Its policy of fixing 10-yr rates
around 0% obliges it to purchase whatever quantity of bonds is required to ensure rate
stability. By targeting the shape of its yield curve, the BoJ is tightening its stranglehold on
the bond market, after the fallout from unprecedented easing raised concerns over the nation
banks profitability. The changes are aiming to help the BoJ to manage the impact of its
purchases and negative interest rates on Japanese banks, whose profits have been
squeezed by a narrowing of short-term and long-term yields. Governor Kuroda recently
acknowledged that negative rates had cut into financial institutions profits by driving
long-term yields lower, while pointing out that borrowing costs for businesses and consumers
had also fallen. He also expressed concern about expected declines in returns on insurance
and pension products, and the impact that this could have on markets confidence.

Looking ahead, the BoJ may ease further by year-end (possibly with one more rate cut to
-0.20bp or -0.30bp) especially if inflation expectations continue to weaken. Adding to this,
there is a great chance that further easing could be used to stimulate inflation expectations
through the next springs wage negotiations.

Source: Economic and Social Research Institute (ESRI), Eurobank Economic Research

Eurobank, September 2016

UK: Though post-referendum data have generally yielded positive

surprises thus far, they point to slower economic activity
UK GDP: QoQ% (SA)
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2005 Q2
2005 Q4
2006 Q2
2006 Q4
2007 Q2
2007 Q4
2008 Q2
2008 Q4
2009 Q2
2009 Q4
2010 Q2
2010 Q4
2011 Q2
2011 Q4
2012 Q2
2012 Q4
2013 Q2
2013 Q4
2014 Q2
2014 Q4
2015 Q2
2015 Q4
2016 Q2

-2.5

Pro-Brexit deflation concerns likely to be replaced by

stagflation worries
3.5
CPI (YoY%)

3.0
2.5

Core CPI (YoY%)

2.0

1.3

1.5
1.0

0.6

0.5

The majority of survey indicators and hard data for the month of August that
have been released thus far - particularly indicators of consumption and
housing - surprised on the upside, suggesting that the immediate effect of the
Brexit vote was less pronounced than initially feared. Indicatively, all three
major PMI surveys (manufacturing. services, construction) recovered in
August from the initial post-referendum slump in July supported by, among
others: (i) the BoEs more aggressive than expected easing package at the
August policy meeting to cushion the Brexit impact on the domestic economy;
(ii) reduced political uncertainty following the appointment of a new Prime
Minister earlier than initially planned; (iii) the post-referendum deprecation of
the GBP; and (iv) the fact that Brexit negotiations have been effectively put on
hold.
Understandably, though the latest UK data contained somewhat initial market
concerns about a Brexit-recession in H2 2016, they point to a slowdown in
domestic economic activity. The UK is poised to face a lengthy period of
uncertainty as the timeline of the UKs withdrawal from the EU and the future
principles that will govern the countrys relationships with it are yet unclear.
UK Prime Minister Theresa May has publicly said she does not intend to
trigger Article 50 before the end of this year while European Council President
Donald Tusk expressed the view earlier this month that the UK government
may be in a position to commence formal Brexit negotiations in January or
February next year. Against this background, downside risks prevail and may
take longer than previously expected to materialize as it will take months
before the full Brexit impact on the underlying UK economic activity becomes
visible.

0.0
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16

-0.5

Post-referendum depreciation pressures on the GBP are expected to raise

import prices and, eventually, consumer prices with post-Brexit deflation
concerns being replaced by stagflation worries.

Source: Bloomberg, UK Office for National Statistics, Eurobank Analysis and Financial Markets Research
.

Eurobank, September 2016

III. FX Markets

10
Eurobank, September 2016

EUR/USD consolidation likely to prevail in the coming

sessions
The Fed decided to keep interest rates unchanged at the September 20th -21st
monetary policy meeting leaving, however, the door open for a rate hike in the
not too distant future. Three policy members dissented in favor of a rate hike
while the overall tone of the accompanying statement was more hawkish
compared to that in the prior meeting. The Committee judged that the case for
an increase in the federal funds rate has strengthened but opted, for the time
being, to wait for further evidence of continued progress towards its objectives.
All in all, barring significant negative developments, a rate hike is highly likely by
the end of the year, while the pace of rate tightening in the coming years will be
gradual, dependent on the US economic outlook as suggested by upcoming
data.

EUR/USD (spot)
1.18
1.16
1.14
1.12
1.10
1.08
1.06
1.04
1.02
18-Sep-16

24-Aug-16

5-Jul-16

30-Jul-16

10-Jun-16

16-May-16

21-Apr-16

2-Mar-16

27-Mar-16

6-Feb-16

12-Jan-16

18-Dec-15

23-Nov-15

4-Oct-15

29-Oct-15

9-Sep-15

21-Jul-15

15-Aug-15

1-Jun-15

26-Jun-15

1.00

USD DXY
100
98
96
94
92
12-Sep-16

29-Aug-16

15-Aug-16

1-Aug-16

18-Jul-16

4-Jul-16

20-Jun-16

6-Jun-16

23-May-16

9-May-16

25-Apr-16

11-Apr-16

28-Mar-16

14-Mar-16

29-Feb-16

1-Feb-16

15-Feb-16

4-Jan-16

18-Jan-16

90

Source: Reuters, Bloomberg, Eurobank Analysis and Financial Markets Research

Eurobank, September 2016

The ECB also stayed put on its monetary policy at the September 8th meeting
disappointing those who were posed for an extension of the Asset Purchase
Programme (APP) along with adjustments in the modalities of the technical
parameters of the programme to address scarcity issues. However, the ECB
remained cautious on the euro areas outlook, repeated the view of downside
risks and its willingness to use all instruments available within their mandate to
secure a return of inflation to levels consistent with the medium-term target.
More importantly, the Governing Council tasked the relevant committees to
evaluate options to ensure a smooth implementation of the QE programme,
sending a moderate signal of additional policy stimulus to come in the coming
months, probably in December, when the next round of macroeconomic
forecasts is due for release.
In the absence of clear signals over the Feds and the ECBs near-term policy
deliberations, EUR/USD consolidation within 1.1120-1.1370 will likely prevail in
the coming sessions/weeks. Further out, a lot will depend on economic and
political developments in the euro area and the US as well as on relevant
comments by ECB/Fed officials.

11

USD/JPY range trading expected short-term

The Fed voted to leave interest rates unchanged at the September policy
meeting and cut the longer run Federal funds rate to 2.9% from 3.0%
previously, while, based on the updated dot-pot, the median path of
appropriate monetary policy for 2017 shifted in a dovish direction. Yet, USD
losses have proved relatively limited thus far as the accompanying policy
statement signaled a strong bias to a rate hike by the end of this year, noting
that near-term risks to the economic outlook appear roughly balanced and
that the case for an increase in the federal funds rate has strengthened.
Furthermore, three participants dissented in favor of a rate hike, the highest
number of hawkish dissenters since late 2014.

USD-JPY (spot)

119

114

109

104

21-Sep-16

28-Aug-16

4-Aug-16

11-Jul-16

17-Jun-16

24-May-16

30-Apr-16

6-Apr-16

13-Mar-16

18-Feb-16

25-Jan-16

1-Jan-16

99

The BoJ also decided to keep interest rates unchanged at the September
meeting and proceed with certain amendments to its QQE program
introducing a new policy framework QQE with yield curve control. The new
regime consists of two components: (i) the BoJ will purchase 10-yr JGBs so
that that the yield will remain more or less at the current levels (around zero
percent); and (ii) the BoJ committed itself to expand the monetary base until
the YoY rate of inflation exceeds the price stability target of 2% in a stable
manner. With the BoJ refraining from cutting interest rates further or
expanding the monetary base, the JPY was left broadly unaffected by the
outcome of the September policy meeting.
With the Fed and the BoJ monetary policy meetings out of the way, market
participants seek guidance with respect to the Feds short-term policy
deliberations. In the meantime, the prevailing view is that the Fed may delay
further policy tightening beyond end-2016. Until there is more clarity on the
Feds deliberations, we see scope for USD/JPY consolidation within 100.00103.00 in the coming sessions/weeks.

Source: Reuters, Bloomberg, Eurobank Analysis and Financial Markets Research,

Eurobank, September 2016

12

GBP remains vulnerable to further weakness in the coming

sessions/weeks
GBP-USD (spot, lhs)

EUR-GBP (spot, rhs)

0.864

1.60
1.55

0.85

UK referendum

1.50

0.80

1.45

0.75

1.40
1.35

0.70

1.30

0.65
20-Sep-16

23-May-16
16-Jun-16

5-Apr-16
29-Apr-16

17-Feb-16
12-Mar-16

31-Dec-15
24-Jan-16

13-Nov-15
7-Dec-15

26-Sep-15
20-Oct-15

9-Aug-15
2-Sep-15

22-Jun-15
16-Jul-15

10-Jul-16
3-Aug-16
27-Aug-16

1.292

1.25

GBP TWI
86

82.65

84
82
80

78

75.52

76
74
72

73.46

72.85

21-Sep-16

11-Sep-16

1-Sep-16

22-Aug-16

12-Aug-16

2-Aug-16

23-Jul-16

13-Jul-16

3-Jul-16

23-Jun-16

13-Jun-16

3-Jun-16

24-May-16

70

After gaining some ground between mid-August and early September supported by a
string of firmer than expected UK data, the GBP resumed its downtrend over the last
few weeks amid heightened uncertainty about the impact of the UKs looming exit
from the EU. The trade-weighed (TW) GBP index has dropped c. 2.7% since early
September, giving back part of the c. 4% gains recorded between mid-August and
early September and remaining c.12.5% lower from levels recorded on June 23rd, a
day ahead of the announcement of the referendum outcome.
The UK faces a lengthy period of uncertainty and the government is still some
months away from invoking Article 50 of the Lisbon Treaty which lays down the
procedure for the withdrawal of a country from the EU. Meanwhile, recent comments
from EU and UK high level officials suggested that forthcoming Brexit negotiations
(expected in early 2017) will likely be tough and lasting. Until more clarity emerges
with regard to the timeline of the UKs exit from the EU and the future principles that
will govern their relationship, investor uncertainty is expected to remain elevated,
weighing on hiring and investment activity while the UKs ability to attract sufficient
investment flows to finance its wide current account deficit comes into question. Bear
in mind that, while UK data for the month of August released thus far surprised
positively, they still point to slower growth ahead. Against this background, the
prospect of further BoE policy easing in the coming months cannot be ruled out.
Indeed, the minutes from the September 14th BoE MPC meeting revealed that the
majority of the policy members are expected to support a further cut in Bank Rate
during the course of the year if the UKs economic outlook is judged to be broadly
consistent with the August projections (i.e., GDP growth to slow to 0.1%QoQ in Q3
2016 from 0.6%QoQ in Q2 2016).
Taking the above into account, GBP remains vulnerable to further weakness in the
coming sessions/weeks and a retest of recent lows vs. both the EUR and the USD
cannot be ruled out, especially if upcoming UK data start surprising negatively.

Source: Bloomberg, Reuters, Eurobank Research Analysis and Financial Markets Research

Eurobank, September 2016

13

II. Fixed Income

14
Eurobank, September 2016

German government bonds are expected to remain well

supported in the short-term
German government bonds

The ECB kept its key interest rates unchanged at the September 8th monetary
policy meeting and refrained from announcing both an extension of the Asset
Purchase Programme (APP) and adjustments in the modalities of the technical
parameters of its programme to address potential scarcity issues. In the press
conference following the conclusion of the meeting, President Mario Draghi noted
that for the time being the changes (in the updated forecasts) are not substantial,
as to warrant a decision to act adding that the Governing Council did not discuss
a potential extension of QE. The BoE which met near a week later (September
14th), also stayed put on its monetary policy following the adoption of a more
aggressive than expected stimulus package a month earlier. However, the
Committee left the door ajar to future policy easing during the course of the year if
the UKs economic outlook is judged to be broadly consistent with the August
projections.

ECB bond-buying threshold

2-yr
5-yr
8-yr
10-yr

(in
1.2

0.7

0.2

-0.3

Source: Bloomberg, Eurobank Analysis and Financial Markets Research

Eurobank, September 2016

21-Sep-16

28-Aug-16

4-Aug-16

11-Jul-16

17-Jun-16

24-May-16

30-Apr-16

6-Apr-16

13-Mar-16

18-Feb-16

25-Jan-16

1-Jan-16

-0.8

After hitting new multi-week highs in mid-September following the disappointing

ECB monetary policy decision, German bond yields moved lower over the last few
sessions in reaction to the dovish tone of the BoE September minutes,
approaching levels recorded ahead of the September 8th ECB policy meeting. The
BoJs decision at the September meeting to target a certain yield curve rather than
an outright steepening of the JGB yield curve, as was initially speculated, and the
Feds updated interest rate projections that pointed to a slower pace of rate
tightening ahead, were also behind the latest down move.
Persistently subdued euro area inflation pressures, expectations for a new round
of ECB policy easing by the end of the year and lingering worries over the spillover
effect of the looming Brexit may continue favoring German government bonds on a
multi session/week basis. Long-dated German yields will likely continue to
outperform potentially triggering some further bullish flatting in the 2/10 yield curve,
on the back of investors ongoing appetite for higher yielding paper.

15

Room for higher short-dated US Treasury notes, subject to

explicit signals for a December rate hike
US 2yr & 10yr bonds
(in bps)
2.5

US 10-yr yield (lhs)

US 2yr-yield (lhs)
2/10-yr yield spread (rhs)

170

2.0

150

1.5

130

21-Sep-16

28-Aug-16

4-Aug-16

11-Jul-16

17-Jun-16

24-May-16

30-Apr-16

70
6-Apr-16

0.0
13-Mar-16

90
18-Feb-16

0.5

25-Jan-16

110

1-Jan-16

1.0

Source: Bloomberg, Eurobank Analysis and Financial Markets Research

Eurobank, September 2016

After hitting new multi-week lows in early September following a weaker-thanexpected US non-farm payrolls report and dovish comments by several Fed
officials, US Treasury yields moved higher, partially affected by market rumors
suggesting that the BoJ could potentially introduce at the September 21st
meeting a new policy framework to trigger an outright steepening of the JGB
yield curve. The 10-yr Treasury yield hit a 3 month high near 1.73% on
September 13h before retreating to levels around 1.62% after the Fed decided
to leave policy rates unchanged at the September 20th-21st meeting,
presumably due to some policymembers uncertainty over the prospect of
inflation embarking on a sustained rising path towards reaching the 2% target
over the medium term. Adding to the improved tone for US Treasuries lately,
the updated Fed interest rate projections revealed that the median path of
policy in the dot-plot is consistent with one hike by the end of this year and
only two in 2017 compared to three expected earlier.
Fed Funds futures are currently assigning a probability of c. 60% for a 25bps
rate hike in December, little changed compared to expectations shortly ahead
of the September meeting. That said, investors are reluctant to reprice
upwards their short-term interest rate expectations in spite of the September
policy statements hawkish tone. Market participants keep their focus on
explicit signals for a December rate hike that could trigger a hawkish shift in
short-term Fed rate hike expectations pushing higher the 2-yr note yield
towards 0.80% recent peak (from levels around 0.77% on Sept. 23rd). Any
upward pressure in long-dated Treasuries is likely to prove relatively less
pronounced on investors appetite for higher yields. Under such a scenario,
we could see scope for some further flattening of the 2yr/10-yr yield curve.

16

IV. Eurobank Macro Forecasts

17
Eurobank, September 2016

Eurobank Macro Forecasts

GDP (YoY%)

Current Account
(% of GDP)

CPI (YoY%)

2015

2016

2017

2015

2016

2017

World

3.1

3.0

3.4

2.8

2.9

3.0

USA

2.7

1.5

2.0

0.1

1.3

Europe
Eurozone
Belgium
Cyprus
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
Switzerland
UK

1.6
1.4
1.6
1.3
1.5
-0.2
26.3
0.8
2.0
1.5
3.2
4.1
0.9
2.2

1.5
1.2
2.5
1.5
1.6
-0.5
4.8
1.1
1.8
1.4
2.6
3.4
1.1
1.7

1.4
1.3
2.7
1.2
1.2
2.3
4.4
1.3
2.0
1.6
2.1
2.9
1.6
0.9

0.0
0.6
-1.5
0.1
0.1
-1.1
0.0
0.0
0.2
0.5
-0.6
0.7
-1.1
0.0

0.3
1.7
-0.7
0.4
0.4
0.1
1.0
0.6
0.4
0.7
-0.4
0.9
-0.5
0.7

General Budget Balance

(% of GDP)

2015

2016

2017

2015

2016

2017

2.2

-2.6

-2.8

-2.8

-3.8

-3.6

-3.3

1.3
1.7
0.5
1.3
1.5
1.0
1.9
1.4
1.3
1.2
1.4
1.2
0.3
2.2

3.6
1.3
-3.6
-1.5
8.8
-0.1
10.2
2.2
9.2
-0.1
1.4
4.9
11.4
-5.2

3.7
1.8
-4.2
-1.1
8.5
0.8
4.2
2.2
8.9
0.3
1.5
5.8
9.3
-5.0

3.6
1.9
-4.6
-1.0
8.3
1.5
4.2
2.3
8.2
0.5
1.3
5.7
8.9
-4.0

-2.1
-2.6
0.0
-3.5
0.7
-7.2
-2.3
-2.6
-1.8
-4.4
-5.1
0.0
-0.2
-4.4

-1.9
-2.6
-0.4
-3.4
0.2
-3.1
-1.1
-2.4
-1.7
-2.7
-3.9
-0.4
-0.1
-3.4

-1.8
-2.3
-0.5
-3.2
0.1
-1.8
-0.6
-1.9
-1.2
-2.3
-3.1
-0.7
0.0
-3.0

Source: Eurobank Economic Research, IMF, EU Commission, Bloomberg

Eurobank, September 2016

18

Eurobank Macro Forecasts

GDP (YoY%)

Current Account
(% of GDP)

CPI (YoY%)

General Budget Balance

(% of GDP)

2015

2016

2017

2015

2016

2017

2015

2016

2017

2015

2016

2017

Asia/Pacific
Japan
Australia

0.5
2.5

0.5
2.8

0.8
2.8

0.5
1.5

-0.2
1.5

0.7
2.0

3.3
-4.8

3.8
-4.5

3.4
-4.0

-5.4
-1.9

-4.8
-2.4

-4.5
-2.0

Emerging
Economies
BRIC
Brazil
China
India
Russia

-3.8
6.9
7.3
-3.7

-3.5
6.5
7.5
-0.8

0.8
6.2
7.7
1.2

9.0
1.4
5.9
15.6

8.6
2.0
5.3
7.3

6.5
2.0
5.3
6.0

-3.2
3.0
-1.1
5.3

-1.0
2.8
-1.0
3.6

-1.2
2.5
-1.2
4.1

-8.2
-3.4
-3.5
-2.8

-8.5
-3.1
-3.9
-3.7

-7.7
-3.5
-3.5
-2.5

3.0
3.8
0.8

2.6
4.2
1.8

3.0
3.5
2.2

-0.1
-0.6
1.5

-0.5
-1.5
1.5

1.2
2.5
3.9

1.4
-1.1
-4.7

1.0
-3.0
-4.6

0.5
-3.2
-4.3

-2.9
-1.9
-4.1

-2.0
-2.8
-3.0

-1.4
-3.7
-2.6

CESEE
Bulgaria
Romania
Serbia

Source: Eurobank Economic Research, IMF, EU Commission, Bloomberg

Eurobank, September 2016

19

Eurobank FX Forecasts
2016

2017

Current (Sep. 22)

December (eop)

March (eop)

June (eop)

September (eop)

EUR-USD

1.1240

1.08

1.12

1.13

1.15

USD-JPY

100.70

105.00

101.00

100.00

97.00

EUR-JPY

113.30

110.00

114.00

115.00

113.00

GBP-USD

1.3080

1.27

1.25

1.27

1.30

EUR-GBP

0.8595

0.89

0.92

0.90

0.87

USD-CHF

0.97

1.00

0.97

0.97

1.00

EUR-CHF

1.0900

1.1

1.11

1.12

1.15

USD-CAD

1.303

1.34

1.31

1.27

1.32

AUS-USD

0.7660

0.71

0.76

0.77

0.75

NZD-USD

0.7330

0.75

0.70

0.71

0.70

EUR-SEK

9.5750

9.30

9.50

9.60

9.50

EUR-NOK

9.1550

9.05

9.20

9.50

9.40
20

Eurobank, September 2016

Source: FX Trading Desk, Eurobank Economic Analysis and Financial Markets Research

Eurobank Fixed Income Forecasts

2016

2017

Current (Sep. 22)

December

March

June

September

0.25-0.5%

0.45-0.7%

0.53-0.8%

0.68-0.95%

0.77-1.05%

1 m Libor (%)

0.55%

0.66%

0.76%

0.80%

0.85%

3m Libor (%)

0.86%

0.87%

0.98%

1.12%

1.24%

2yr Notes (%)

0.77%

0.90%

1.01%

1.12%

1.26%

10 yr Bonds (%)

1.64%

1.72%

1.85%

1.98%

2.09%

Refi Rate (%)

0.00%

0.00%

0.00%

0.00%

0.00%

3m Euribor (%)

-0.30%

-0.32%

-0.30%

-0.29%

-0.27%

2yr Bunds (%)

-0.67%

-0.58%

-0.54%

-0.52%

-0.51%

10yr Bunds (%)

-0.04%

-0.03%

0.03%

0.13%

0.22%

Repo Rate (%)

0.25%

0.15%

0.15%

0.15%

0.15%

3m Libor (%)

0.38%

0.26%

0.23%

0.23%

0.23%

10-yr Gilt (%)

0.74%

0.82%

0.93%

1.02%

1.10%

3m Libor Target (%)

-0.75%

-8.00%

-0.80%

-0.75%

-0.75%

10-yr Bond (%)

-0.46%

-0.44%

-0.35%

-0.26%

-0.17%

USA
Fed Funds Rate (%)

Eurozone

UK

Switzerland

21
Eurobank, September 2016

Source: Derivatives Trading Desk, Eurobank Economic Analysis and Financial Markets Research

Eurobank Economic Analysis and

Financial Markets Research
Dr. Platon Monokroussos: Group Chief Economist
pmonokrousos@eurobank.gr, + 30 210 37 18 903
Dr. Tassos Anastasatos: Deputy Chief Economist
tanastasatos@eurobank.gr, + 30 210 33 71 178
Research Team
Anna Dimitriadou: Economic Analyst
andimitriadou@eurobank.gr, + 30 210 37 18 793
Ioannis Gkionis: Research Economist
igkionis@eurobank.gr + 30 210 33 71 225
Stylianos Gogos: Economic Analyst
sgogos@eurobank.gr + 30 210 33 71 226
Olga Kosma: Research Economist
okosma@eurobank.gr + 30 210 33 71 227

Arkadia Konstantopoulou: Research Assistant

arkonstantopoulou@eurobank.gr + 30 210 33 71 224
Paraskevi Petropoulou: Economic Analyst
ppetropoulou@eurobank.gr, + 30 210 37 18 991
Galatia Phoka: Research Economist
gphoka@eurobank.gr, + 30 210 37 18 922
Theodoros Stamatiou: Senior Economist
tstamatiou@eurobank.gr, + 30 210 33 71 228

Eurobank Ergasias S.A, 8 Othonos Str, 105 57 Athens,

tel: +30 210 33 37 000, fax: +30 210 33 37 190, email: EurobankGlobalMarketsResearch@eurobank.gr
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22
Eurobank, September 2016

V. Disclaimer

23
Eurobank, September 2016

Disclaimer
This document has been issued by Eurobank Ergasias S.A. (Eurobank) and may not be reproduced in any manner. The
information provided has been obtained from sources believed to be reliable but has not been verified by Eurobank and the
opinions expressed are exclusively of their author. This information does not constitute an investment advice or any other
advice or an offer to buy or sell or a solicitation of an offer to buy or sell or an offer or a solicitation to execute transactions on
the financial instruments mentioned. The investments discussed may be unsuitable for investors, depending on their specific
investment objectives, their needs, their investment experience and financial position. No representation or warranty (express
or implied) is made as to the accuracy, completeness, correctness, timeliness or fairness of the information or opinions, all of
which are subject to change without notice. No responsibility or liability, whatsoever or howsoever arising, is accepted in
relation to the contents thereof by Eurobank or any of its directors, officers and employees.

24
Eurobank, September 2016