Fed monetary policy amid a global backdrop of negative interest - - PowerPoint PPT Presentation

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Fed monetary policy amid a global backdrop of negative interest - - PowerPoint PPT Presentation

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Fed monetary policy amid a global backdrop of negative interest rates Kathy Bostjancic Head of US Macro Investor Services kathybostjancic@oxfordeconomics.com April 2016 Oxford Economics forecast highlights Baseline world GDP forecast

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Fed monetary policy amid a global backdrop of negative interest rates

April 2016 Kathy Bostjancic

Head of US Macro Investor Services kathybostjancic@oxfordeconomics.com

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Oxford Economics’ forecast highlights

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 Baseline world GDP forecast for 2016 cut to 2.3% from 2.6% in January – slowest pace of global growth since 2009. Forecast for 2017 cut further to 2.7% from 2.9%.  Sell-off in global financial markets since start of 2016 a factor; overall financial conditions tightened significantly since mid-2014 despite the rally in financial markets since mid-February.  Though near-term growth supported by recent rally in markets and still-healthy US and Eurozone. Slippage in consumer confidence has been modest compared to 2012-13 and 2008-09.  Central banks - e.g.. ECB & BoJ - increased use of unconventional policy tools also lends support to near-term growth and the financial markets.  Global economy looks likely to avoid recession, but risks lie on the downside  OE concerned that financial market slump could create negative credit and confidence shock and negative wealth effects

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Global forecast summary

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Oil supply/demand balance not restored until 2017?

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2013 2014 2015 2016 2017 2018 2019 2020 Global Demand 91.8 92.7 94.3 95.9 97.0 97.7 98.5 99.3 chg mb/d 1.2 0.9 1.6 1.6 1.0 0.8 0.8 0.7 Global Supply 91.3 93.7 96.3 96.5 96.8 97.4 98.2 99.0 chg mb/d 0.4 2.4 2.6 0.2 0.3 0.6 0.8 0.8

  • /w OPEC

36.2 36.2 37.4 38.0 38.1 38.3 38.8 39.4 ‐1.0 0.0 1.2 0.7 0.1 0.2 0.5 0.6

  • /w US

11.7 13.5 14.5 14.2 14.2 14.4 14.5 14.6 1.2 1.8 1.0 ‐0.3 0.1 0.2 0.1 0.1 Stock Build ‐0.6 0.9 2.0 0.6 ‐0.2 ‐0.4 ‐0.4 ‐0.3 Brent Oil Price 108.6 99.0 52.4 32.3 40.2 49.2 58.2 67.2

Source: Oxford Economics/ IEA

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US Outlook

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GDP forecast and breakdown for 2016

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Non‐res Residential GDP PCE Investment Investment Exports Imports Inventories 2016 (Change in Bil. $) Q1 0.8 1.8 ‐1.4 8.6 ‐1.2 1.6 17.0 Q2 2.5 2.7 3.0 7.1 3.8 2.1 14.8 Q3 2.3 2.4 4.0 8.2 2.9 1.7 11.4 Q4 2.4 2.7 3.6 6.2 2.6 2.7 9.5 (Annualized %)

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Domestic fundamentals remain quite strong

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Wage growth should pick up

Currently wage growth remains sluggish at 2.2% y/y in February

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Should support healthy consumer spending growth ~2.5%

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Housing activity continues to firm

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Core orders & shipments have slowed sharply

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Headwinds from strong $ and weak global growth

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Expansions end by overheating not old age

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More room for this expansion to run

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  • 12
  • 10
  • 8
  • 6
  • 4
  • 2

2 4 2000 - Q1 2002 - Q1 2004 - Q1 2006 - Q1 2008 - Q1 2010 - Q1 2012 - Q1 2014 - Q1

Alternate Gap OE Fed Source : Oxford Economics/Haver Analytics

US: GDP output gap estimates

%

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CRI model suggests no sign of recession

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Bond market continues to price in very low rates

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Market implied rate Fed Dot Plot Oxford Economics median rate forecasts forecast Month as of Apr-1-2016 as of Mar-2016 Mar-16

  • Dec. 2016

0.56 0.88 0.88

  • Dec. 2017

0.71 1.88 1.63

  • Dec. 2018

0.89 3.00 2.38

  • Dec. 2019

1.07 3.25** 3.13

Source: CME group, Federal Reserve, Oxford Economics *Adjusted for estimated risk and term premiums **Long-term forecast

Expectations of Fed funds rate (%) Eurodollar futures yield*

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Inflation is key focus – goal is 2%

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Inflation expectations move with oil prices

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Risk premia reduced further

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Spillover from ECB QE

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China in focus

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What is PBoC doing to the RMB?

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60 70 80 90 100 110 120 130 140 1995 1999 2003 2007 2011 2015

NEER REER Fair value trend REER

Index (2010=100)

NEER, REER and equilibrium REER

Source: Oxford Economics, CEIC Data

99 100 101 102 103 104 6.30 6.35 6.40 6.45 6.50 6.55 6.60 Nov 2015 Dec 2015 Jan 2016 Feb 2016 End 2014=100 RMB/US$

RMB exchange rate

Spot rate Fixing rate CFETS basket Source: Oxford Economics, CEIC Data Dec 12: announcement

  • n more focus on

trade weighted exchange rate

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Financial outflows have become very large

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2013 2014 2015

FX reserves stock 3,821 3,843 3,330 Change 510 22

  • 513

Valuation changes 78

  • 96
  • 123

Net FX flow 431 118

  • 389

Current account 148 220 247 Net FDI 218 209 170 Net financial flows 65

  • 311
  • 806

Source: Oxford Economics, CEIC Data

Balance of payments

(US$ bn)

  • 300
  • 200
  • 100

100 200 2007 2009 2011 2013 2015

Valuation effects Basic balance Net financial capital flows Change headline FX reserves

China: Capital flows and balance of payment

US$bn Source : Oxford Economics, CEIC Data

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How the CNY could shake the world

  • Modest CNY depreciation has recently been associated with sizeable repercussions on

global FX markets. We ran two scenarios. In one other currencies move only modestly. In the other the global FX response is in line with the more hefty response displayed during recent episodes of CNY depreciation, and it persists.

  • Simulations show that significant moves in the CNY against the dollar in themselves only

have a minor impact on global growth and inflation and China’s output does not benefit

  • significantly. But if there is a persistent response from other currencies, the effects on

global GDP are more substantial and differentiated: economies with currencies perceived as safe havens see lower growth.

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  • 1

1 2 3 4

Eurozone Argentina Japan India Chile Hong Kong Russia Brazil USA World UK Indonesia Philippines Malaysia Thailand China Turkey

  • S. Africa

Australia Singapore Taiwan Korea Mexico

10% USDCNY depreciation

World: GDP in FX spillover scenario

% difference in level of GDP vs baseline, 2016

Source : Oxford Economics

  • 2

2 4 6 8 10 12

USA Japan Chile Thailand Indonesia Brazil Singapore Korea Australia Taiwan

  • S. Africa

Philippines Mexico India Malaysia Turkey Argentina Russia

10% USDCNY depreciation

World: Policy rates in FX spillover scenario

absolute difference in policy rates vs baseline, 2016 eop

Source : Oxford Economics

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Europe

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Euro area forecast in a nutshell…

  • Growth slowed in H2 2015, momentum weaker at start of 2016
  • Domestic indicators still show resilience, but exports struggling since mid-2015

Momentum slowing; domestic resilience vs external slowdown

  • Oil prices have taken headline inflation to negative territory, will remain close to 0% in

2016

  • However, nominal rigidities in wages should prevent persistent deflation

Inflation likely very weak this year, gradual rise in 2017

  • ECB expands QE programme and cuts interest rates further
  • QE likely to work mainly through keeping euro weak and low bond yields

ECB loosens policy further

  • Monetary policy cannot replace the need for deep structural reforms to address a lack of

competitiveness and increase potential growth Reform agenda implies a decade long adjustment 26

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Downward forecast revisions to 2016 GDP

 We have lowered our GDP forecasts for this year. Forecasts for 2017 remain broadly stable.

27 1.0 1.2 1.4 1.6 1.8 2.0 2016 2017

Jan-16 Feb-16 Mar-16

Source : Oxford Economics

GDP forecasts

% y/y

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Weaker oil price points to slower rise in inflation

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  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2010 2011 2012 2013 2014 2015 2016 2017

Core Energy Food alcohol and tobacco Headline

Source : Oxford Economics/Haver Analytics

Eurozone: CPI Inflation (Bottom-up f'cast model)

% y/y / contribution Forecast

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Draghi deploys arsenal

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The ECB announced last week a comprehensive package of measures to combat slowdown and lift inflation

 Cuts to the refinancing rate to 0% and to the deposit rate to -0.4%  Expansion of QE to €80bn per month; now includes corporate debt  Four new TLTRO programmes with more favourable conditions for banks  Barring some massive shock, this represents the end of full-scale measures for the time being.

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As interest rates go more negative

  • Sweden’s Riksbank has just cut its repo rate to -0.5%, the ECB lowered its deposit rate

to -0.4% and the BoJ is the first non-European central bank to follow suit.

  • They key impact of negative interest rates seems to be on the exchange rate; but even

that is not given, as the Swedish example shows. Moreover, the more countries go negative, the less bang there is for the buck.

  • The feared move to cash has not materialised, for a number of reasons, incl. storage

space and costs. A bigger problem is that negative interest rates, unless passed on by banks, threaten to erode banks’ profits and thus balance sheets, slowing credit growth.

7.5 8.0 8.5 9.0 9.5 10.0 95 100 105 110 115 120 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15 Feb 16

KIX (trade-weighted EER), lhs Repo rate cuts Kronor/euro, rhs Source : Oxford Economics/Haver Analytics

Sweden: Exchange rate, daily

Index 18/11/92=100 SKr/euro

Highest denomination 1m3 $1bn = ?m3

USA $100 $85,951,413 11.3 Eurozone € 500 € 337,254,479 2.7 UK £50 £33,369,372 21.2 China ¥100 ¥74,147,947.00 88.0 Switzerland

  • Fr. 1,000
  • Fr. 660,710,581

1.5 Japan ¥10,000 ¥7,277,596,646 16.1 Source: Oxford Economics

Amount of cash that w ill take up 1 cubic metre

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Negative interest rate and yield curve

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Brexit lowers GDP growth moderately

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Brexit would weigh on the pound & stocks

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Thank you!

Any questions?

Kathy Bostjancic: kathybostjancic@oxfordeconomics.com