Macro Highlights & Strategy
Macro Highlights & Strategy May 19th - 25th 2009
Our roundup: • • • •
US financial indicators are on the mend, but the longer-term outlook remains grim. The risk of a new dollar slide is looming larger. Brazil continues to show signs of recovery. The Japanese economy could be bottoming out, but the recovery will not last.
Prosperity beyond reach In the May 5th - 11th issue of Macro Highlights & Strategy, this column focused on the Bloomberg US financial conditions index that tracks spreads within the major asset classes. The index has nearly returned to its August 2008 level, particularly the money market component. The Ted spread, or differential between the Libor and the interest rate on T-bills, is now back below 0.5%. The VIX index of stockmarket volatility has also fallen dramatically. Risk aversion appears to have evaporated, despite the doomsday warnings issued only a few months ago. Is something amiss? Bloomberg index of financial conditions
Incisive intervention by central banks and governments has of course provided welcome relief–near term. For the moment, in any case, it has averted a deflationary maelstrom that could have led to a depression. What is less certain, however, is whether the authorities' actions will be enough to kindle a real economic recovery, followed by a new era of prosperity that would justify a new bull market in equities. It actually looks as though we are in a "square root" economic cycle (see chart above) where business activity will pick up again briefly but then stagnate for a long period.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 1 - 25/05/2009
Observers have been reassured by the upswing in US business sentiment and by signs that consumption has stopped falling. The American housing market may have bottomed out by now, and jobless claims could be peaking (see blue line in chart below). However, consumers' net worth has dropped considerably due to the financial crisis, and the temporary support provided by tax rebates will be offset in the longer run by an inevitable rise in taxes. US households are still deep in debt and have no choice but to save. Retail sales and consumer confidence cannot seem to get back in gear (see red and green lines in chart below) despite the broad upturn that many forecasters claim is taking shape.
We do not deny that the US economy indeed appears to have bottomed out and that a depression has probably been avoided. But what about the cost? Central banks have pulled out all the stops. If business activity slumps again in the near future, they will be powerless to act again. S&P 500
Marc Faber, author of "Gloom, Boom and Doom Report", a monthly newsletter, believes that the final crisis has not erupted yet. It will come in three to five years, he says, and take the form of government bankruptcies. Without being that pessimistic, we can nevertheless be sure that mounting public debt will drive up yields on sovereign bonds. This will gouge state budgets and crowd out corporations in need of financing. With unemployment persistently high, government expenditure will inevitably climb. Sooner or later, taxpayers will have to foot the bill and their purchasing
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 2 - 25/05/2009
power will be diminished. Thus, the "square root" configuration evoked on p.1 is even a bit hopeful: we could have suggested a more dire double-dip ("W") or a depression ("L") scenario instead. On the face of it, a "V"-style downturn and recovery is simply wishful thinking. Investment conclusions: After a 40% rally the S&P 500 index has priced in the near-term benefits of the authorities' economic and monetary stimulus. Disappointment now looms further down the road. We do not have what it takes for a bull market–not by any stretch.
The outlook for the US dollar is dimming The euro gained nearly 4% against the dollar last week (see left-hand chart below). It reached the 1.40 mark, a four-month high. Currencies Performances vs USD (% since 05/18/2009) --- €/$ Exchange Rate
Viewed the other way around, the dollar is down sharply–and not just against the euro (see right-hand chart above). It is being hurt by concern over the deep recession in America and by bleak economic forecasts issued recently by the Fed. We ourselves are worried much more by the prospect of a downgrade of US sovereign debt. The federal government, saddled with a budget deficit that will likely reach 13% of GDP this year, risks losing its AAA credit rating. Capital markets are on edge again following a move by Standard & Poor's to lower its outlook on Britain's public debt rating from "stable" to "negative". (This decision adds weight to our recommendation to steer clear of the pound even though it looks undervalued.) Moody's did not help matters by saying that America's triple-A rating was still stable but "not guaranteed forever". The resulting fears have been illustrated in recent days by an upturn in US bond yields and in the price of gold. The dollar is losing ground even though the US will be the first industrialised country to pull out of recession, thanks to a highly aggressive "policy mix". The government's present budget policy, featuring colossal fiscal stimulus, is extremely counter-cyclical. Monetary policy has been no less bold, with the Fed even printing money. The result will be, as we said earlier, a 13% federal budget deficit (see left-hand chart below). The Treasury will be forced to float more than $2 trillion of bonds during the current year. Not only is America's credit rating likely to suffer, but it will also become increasingly difficult to keep the supply of sovereign debt in line with demand.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 3 - 25/05/2009
5
5
--- 10-Year Bond Yield in USD 0
0
-5
-5
-10
-10 US Budget Deficit (% GDP) - Quarterly Data US Budget Deficit (% GDP) - Monthly Data
-15
-15 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
As proof, the yield on 10-year Treasuries has risen from 2% in January to 3.5% at present (see right-hand chart above). This is so despite the flight to the "quality" of US debt issues from the start of the credit crunch and even though the Federal Reserve is now buying $300 billion of long-dated Treasuries to prevent long-term interest rates from going up faster. Fed and Treasury officials will therefore have to be creative to make government bonds look appealing. Otherwise the economic recovery could be nipped in the bud. A top priority will be to reassure the People's Bank of China, which holds two-thirds of its forex reserves in US dollars and is beginning to wonder about the wisdom of this strategy. To help ease these tensions and bridge the yawning deficit, the Treasury is now issuing its "long bond" (redeemable in 30 years) every month instead of four times a year. It is also returning to 3- and 7-year paper (niches that it had abandoned for several years) to capture money available all along the yield curve. Strategy sessions are now focusing on the idea of creating a 50-year bond, although nothing has been decided as yet. But it is easy to understand why: if each new issue is not bought up in full, the markets could panic and make things worse. 1.7 1.6
1.7 €/$ Exchange Rate BPER Forecasts
1.6
1.5
1.5
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1
1.0
1.0
0.9
0.9
0.8
0.8 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
We do not wish to make things seem blacker than they are, but the risk of a new dollar slide is considerable. That is why since late last year we have been advising investors to hedge dollar positions. It is worth bearing in mind that a falling US dollar may pose problems for creditors everywhere else, but not for Americans. It would even be an excellent way for the US to revitalise its export industries and counter the risk of deflation. This, in turn, would offset the drag created by the inevitable rise in long-term interest rates. At times, it is the apparent loser who comes out ahead.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 4 - 25/05/2009
The news flow from Brazil remains upbeat Brazil's latest jobs figures turned out better than expected, bolstering the view that a recovery is gradually taking shape. The unemployment rate eased to 8.9% in April from 9% in March, as against a consensus forecast of 9.3%. On the face of it, the impact on the labour market has been much more moderate than in previous recessions, when unemployment had swelled to 12% (see left-hand chart below). The worst is now over as far as layoffs are concerned, according to the finance minister, Guido Mantega. Job creation is back on an upward path (see right-hand chart below). Although it will be difficult for growth to return to last year's levels, we should remember that these were obtained with the economy virtually overheating. As we pointed out a few weeks ago, domestic consumption played an important role as a buffer in the downturn and is now making a strong contribution to Brazil's recovery.
15
300'000
100'000
-100'000 10
-300'000
-500'000
-700'000
5 Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Dec-06 M ar-07 Jun-07 Sep-07 Dec-07 M ar-08 Jun-08 Sep-08 Dec-08 M ar-09
Oct-08
Brazil: Unemployment (%)
Brazil: Gov Reg Job Creation
Sources: Bloomberg, BLM
Salaries continue to trend upward, as illustrated by the recent 12% hike in the minimum wage (see left-hand chart below). This is providing substantial support for consumption. With inflation easing, disposable incomes are growing even faster. Retail sales growth remains in positive territory and was running at 1.9% in April (see right-hand chart below). 15 550
10
500
5
450
0
400 350
-5
300
-10
250
-15 200
-20
150 M ay-02 Feb-03 No v-03 A ug-04 M ay-05 Feb-06 No v-06 A ug-07 M ay-08 Feb-09
Jan-01
Jan-02
Brazil: Minimum Wage (BRL)
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Brazil: Retail Sales (YoY, %) Brazil: Industrial Production (YoY, %)
Sources: Bloomberg, BLM
The accommodative monetary policy pursued by the central bank will also spur growth in consumption and lending. For the record, the Bank of Brazil's key Selic rate now stands at 10.25%, an all-time low, and more downticks are expected in the coming months. Brazil is moreover increasing its volume of exports and seeking new trading partners. President Luiz Inácio Lula da Silva recently travelled to Saudi Arabia, China and Turkey to lead talks. China is now Brazil's foremost trading partner, ahead of the US. Trade among the emerging economies, one of our favourite investment themes, is becoming a major new axis of growth in view of the size of the countries concerned. Yet relations are also of a financial nature, as demonstrated by the agreement between Petrobras, Brazil's state-controlled oil company, and Beijing. China will lend the South
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 5 - 25/05/2009
American heavyweight $10 billion in return for shipments to China's petroleum refiner Sinopec amounting to 150,000 barrels this year and 200,000 in each of the nine coming years. The agreement diversifies Brazil's sources of financing and China's sources of energy supply. China's move to loosen restrictions on beef and chicken imports will also benefit Brazil, a major producer of both these commodities.
800
140
700
120
600 500
100
400
80
300 200
60
100 Dec-06
40 M ay-07
A ug-07
No v-07
Feb-08
M ay-08
A ug-08
No v-08
Brazil: Bovespa Stock Index
Feb-09
A pr-07
M ay-09
S&P 500 Index
A ug-07
Dec-07
A pr-08
A ug-08
Dec-08
A pr-09
CEMBI Brazil USD Spread (bp) JPM EMBI+ Brazil USD Spread (bp)
Source: Bloomberg,
While further confirmation of a recovery is needed, the way the various components of growth stack up points to rosy prospects for the Brazilian economy. The stock, bond and forex markets all appear to have got this message clearly, judging by the real's appreciation, the narrowing of credit spreads and the rally by the Bovespa equity index (see charts above). Although these movements are likely to slow somewhat, the long-term trend for Brazilian assets remains decidedly upbeat.
The worst may be over for Japan, but the upturn will be short-lived Japanese GDP (% ch. qoq nd yoy) 4 2 0 -2 -4 -6 GDP Real QoQ sa
-8
GDP Real YoY -10 1996
1998
2000
2002
2004
2006
2008
The Japanese economy registered a record 4% drop in GDP in the first quarter of 2009. Year on year the contraction was 15.2%. The year-on-year figure for the previous quarter was moreover revised downward to -14.4% from the previous estimate of -12.1%. Exports are still Japan's Achilles heel. They were down 26% in the first nine months of the current financial year, plunging the country into a recession unparalleled since the Second World War. Despite the devastating impact of dwindling overseas demand, however, domestic weakness is the main cause of the dramatic year-on-year drop in GDP. This component lopped 2.6% off the country's total output of goods and services in the first quarter, the worst showing since 1974.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 6 - 25/05/2009
Consumption, hammered by mounting job losses, fell 1.1%. Companies also cut spending, by 10.4%, to reduce overcapacity and draw down inventories.
Consumer confidence 55
15 15%
10
50
5
5%
45 0 -5%
40
-5 -10
35
-15% 6M avanced
-15
30
confiance de ménages
-25% -20
25
Japan investment Japan Core machine order (YoY) -35%
-25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1995
1997
1999
2001
2003
2005
2007
2009
Despite this sobering picture, the Tokyo stock market has been bid up in anticipation of a possible economic recovery in the coming months. There are indeed some signs of an upturn: ¾ ¾ ¾ ¾
Industrial production rose 1.6% in March. Consumer confidence improved for the fourth month in a row. Exports appear to be bottoming out. Demand for machines seems to be steadying as well, albeit at a low level.
On the other hand, it is difficult to foresee a sustainable upswing if the global economy remains weak– even if GDP strengthens during the current quarter. The brightening outlook will no doubt be temporary for the following reasons: ¾ ¾ ¾
Fiscal stimulus, amounting to 5% of the 2009 national budget, could have a significant impact on the second quarter but not beyond that point. Inventory reductions will lead to a rise in industrial production in the near future, but a lack of demand will limit the magnitude of the increase. Japanese exports are momentarily benefiting from a boom in Chinese infrastructure development. However, this upturn is being fuelled by fiscal stimulus and will not last.
Moreover, the spectre of deflation is stalking Japan again. Wholesale prices were down 3.8% year on year in April, their biggest fall in 22 years. Unemployment has surged and disposable incomes are shrinking, adding to the danger of a deflationary downspin. The only thing missing is a deadly flu epidemic.
Wholesales prices (% ch. yoy)
Average wage (% ch. yoy)
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 7 - 25/05/2009
Economic forecasts GDP growth and contributions to global expansion Country
GDP 2008
GDP 2009
GDP 2010
B PER Est imat es
B PER Est imat es
Country weights
Contribution 2009
United States
1.3%
-2.8%
1.5%
20.7%
-0.58%
Euro Area
0.7%
-3.1%
0.5%
15.7%
-0.49%
China
9.0%
7.4%
7.5%
11.4%
0.85%
Japan
-0.7%
-5.8%
1.2%
6.4%
-0.37%
India
7.3%
5.1%
6.5%
4.8%
0.25%
Russia
6.0%
0.0%
3.5%
3.3%
0.00%
United Kingdom
0.7%
-3.1%
0.2%
3.2%
-0.10%
Brazil
5.2%
2.5%
4.0%
2.9%
0.07%
Mexico
1.9%
-0.5%
2.0%
2.2%
-0.01%
Canada
0.6%
-1.2%
1.6%
1.9%
-0.02%
Others (FMI estim ates)
4.7%
2.0%
4.8%
27.2%
0.56%
WORLD
3.4%
0.1%
3.3%
100%
0.1%
% of the World total and BPER estimated GDP grow th
largest contributors
Comments: • The GDP growth rates shown above are actual for 2008 and projections for 2009 and 2010. • Each country's weighting has been translated into US dollars and is based on purchasing power parity as calculated by the IMF. This takes account of differences in prices and standards of living. • The countries are ranked by the size of their economy, in decreasing order. • Contributions to global growth are calculated as follows: the GDP growth of each country is multiplied by its size. The sum of the contributions works out to 0.5%, a good estimate of global GDP growth for the current year. • The list is limited to the 10 countries that contribute most to world economic expansion..
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 8 - 25/05/2009
Returns on financial markets to March 25th 2009 Changes % Bloom berg Equity Indices - local currency tickers DIA Equity DOW JONES Industrial QQQQ Equity NASDAQ 100 SXXE Index STOXX Euroland NKY Index NIKKEI 225, Japan UKX Index FTSE 100, UK FRESM I SW Equity SMI, Sw itzerland IBOV Index BOVESPA, Brazil 2828 hk Equity CHINA H Shares, HKD
1 w eek 0.1 0.5 0.9 3.4 0.4 1.7 -1.2 0.2
1 m onth 2.7 -0.4 5.3 7.3 5.0 7.0 8.7 9.0
3 m onth 14.0 17.3 24.0 25.3 13.4 16.6 33.0 36.8
Equity Indices - USD MSCI AC World S&P 500, ETF S&P Europe, ETF MSCI Japan, ETF MSCI Emerging Markets, ETF MSCI Brazil, ETF Lyxor Russia, ETF MSCI AC Asia X Japan, ETF MSCI Korea, ETF MSCI Taiw an, ETF FTSE China 25, ETF MSCI Singapore, ETF
1 w eek 0.8 0.3 6.1 0.6 5.6 7.9 7.6 4.2 3.3 6.6 3.0 6.0
1 m onth 7.6 2.7 12.2 5.7 13.3 16.2 22.5 12.3 8.4 17.9 7.3 24.9
3 m onth Year-to-D Last Year 25.7 5.1 -41.9 15.8 -1.4 -36.8 32.7 1.9 -43.4 23.5 -4.6 -27.0 45.9 27.2 -48.9 50.7 47.6 -54.3 87.0 58.6 -70.2 43.7 28.9 -49.4 58.7 28.4 -56.0 56.4 42.4 -45.2 36.0 19.3 -47.8 48.6 25.8 -46.1
1 w eek
1 m onth
3 m onth Year-to-D Last Year
-0.2 -0.6 -0.2 -0.7 -0.9 -2.4 0.0 -1.2
-0.1 -1.7 0.4 -1.3 -1.2 -3.7 0.7 -1.4
1 w eek 2.8 3.3 1.3 3.6
1 m onth 6.6 7.4 1.8 8.6
3 m onth Year-to-D Last Year 7.9 -1.4 5.7 10.1 0.2 -4.2 2.5 -4.6 23.1 12.0 9.0 -26.5
1 w eek 4.2 7.5 2.1 -2.8 5.0 2.8
1 m onth 4.7 16.5 12.6 1.9 10.0 -5.0 1.7
3 m onth Year-to-D Last Year 0.3 8.4 5.8 35.7 42.0 -55.5 23.7 8.8 -51.8 4.7 10.2 -37.5 35.3 -0.5 -7.3 19.3 -16.5 -37.0 1.4 2.6 -19.1
Bond Indices - local currency World Bond Market EFFAS CHF 3-5 YR. EFFAS CHF 7-10 YR. EFFAS EUR 3-5 YR. EFFAS EUR 7-10 YR. EFFAS USD 3-5 YR. EFFAS USD 7-10 YR. EFFAS GBP 3-5 YR. EFFAS GBP 7-10 YR. Currencies, spot $ CHF EUR JPY GBP
M XWD Index SPY Equity IEV Equity EWJ Equit y EEM Equity EWZ Equity LYRUS SW Equity IFFF SW Equit y EWY Equity EWT Equity FXI Equity EWS Equity
SZL2TR Index SZL4TR Index EUL2TR Index EUL4TR Index USL2TR Index USL4TR Index UKL2TR Index UKL4TR Index
CHF Curncy EUR Curncy JPY Curncy GBP Curncy
Com m odities, real estate, hedge funds (USD) Gold, USD GOLDS Comdty Oil price, Brent EUCRBRDT Index Commodities, ETF GSCIUSD SW Equity Commodities, ETF (EUR) GSUEEUR GR Equity World Real Estate X USA, ETF RWX UP Equity US Real Estate REIT, ETF VNQ Equity Hedge Funds, Tremont index HEDGNAV Index
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
-0.1 -1.6 0.5 -0.4 -1.1 -4.5 -0.2 -0.9
Year-toDate Last Year -5.3 -32.2 12.8 -41.7 2.0 -44.1 5.5 -41.1 -1.6 -28.0 -1.6 -32.5 35.4 -41.2 23.5 -49.7
1.6 -0.1 2.3 1.0 -2.4 -8.3 1.1 -1.1
8.1 10.7 8.8 11.3 12.9 20.2 11.8 16.0
Page 9 - 25/05/2009
Our roundup: • • • •
US financial indicators are on the mend, but the longer-term outlook remains grim. The risk of a new dollar slide is looming larger. Brazil continues to show signs of recovery. The Japanese economy could be bottoming out, but the recovery will not last.
Prosperity beyond reach In the May 5th - 11th issue of Macro Highlights & Strategy, this column focused on the Bloomberg US financial conditions index that tracks spreads within the major asset classes. The index has nearly returned to its August 2008 level, particularly the money market component. The Ted spread, or differential between the Libor and the interest rate on T-bills, is now back below 0.5%. The VIX index of stockmarket volatility has also fallen dramatically. Risk aversion appears to have evaporated, despite the doomsday warnings issued only a few months ago. Is something amiss? Bloomberg index of financial conditions
Incisive intervention by central banks and governments has of course provided welcome relief–near term. For the moment, in any case, it has averted a deflationary maelstrom that could have led to a depression. What is less certain, however, is whether the authorities' actions will be enough to kindle a real economic recovery, followed by a new era of prosperity that would justify a new bull market in equities. It actually looks as though we are in a "square root" economic cycle (see chart above) where business activity will pick up again briefly but then stagnate for a long period.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 1 - 25/05/2009
Observers have been reassured by the upswing in US business sentiment and by signs that consumption has stopped falling. The American housing market may have bottomed out by now, and jobless claims could be peaking (see blue line in chart below). However, consumers' net worth has dropped considerably due to the financial crisis, and the temporary support provided by tax rebates will be offset in the longer run by an inevitable rise in taxes. US households are still deep in debt and have no choice but to save. Retail sales and consumer confidence cannot seem to get back in gear (see red and green lines in chart below) despite the broad upturn that many forecasters claim is taking shape.
We do not deny that the US economy indeed appears to have bottomed out and that a depression has probably been avoided. But what about the cost? Central banks have pulled out all the stops. If business activity slumps again in the near future, they will be powerless to act again. S&P 500
Marc Faber, author of "Gloom, Boom and Doom Report", a monthly newsletter, believes that the final crisis has not erupted yet. It will come in three to five years, he says, and take the form of government bankruptcies. Without being that pessimistic, we can nevertheless be sure that mounting public debt will drive up yields on sovereign bonds. This will gouge state budgets and crowd out corporations in need of financing. With unemployment persistently high, government expenditure will inevitably climb. Sooner or later, taxpayers will have to foot the bill and their purchasing
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 2 - 25/05/2009
power will be diminished. Thus, the "square root" configuration evoked on p.1 is even a bit hopeful: we could have suggested a more dire double-dip ("W") or a depression ("L") scenario instead. On the face of it, a "V"-style downturn and recovery is simply wishful thinking. Investment conclusions: After a 40% rally the S&P 500 index has priced in the near-term benefits of the authorities' economic and monetary stimulus. Disappointment now looms further down the road. We do not have what it takes for a bull market–not by any stretch.
The outlook for the US dollar is dimming The euro gained nearly 4% against the dollar last week (see left-hand chart below). It reached the 1.40 mark, a four-month high. Currencies Performances vs USD (% since 05/18/2009) --- €/$ Exchange Rate
Viewed the other way around, the dollar is down sharply–and not just against the euro (see right-hand chart above). It is being hurt by concern over the deep recession in America and by bleak economic forecasts issued recently by the Fed. We ourselves are worried much more by the prospect of a downgrade of US sovereign debt. The federal government, saddled with a budget deficit that will likely reach 13% of GDP this year, risks losing its AAA credit rating. Capital markets are on edge again following a move by Standard & Poor's to lower its outlook on Britain's public debt rating from "stable" to "negative". (This decision adds weight to our recommendation to steer clear of the pound even though it looks undervalued.) Moody's did not help matters by saying that America's triple-A rating was still stable but "not guaranteed forever". The resulting fears have been illustrated in recent days by an upturn in US bond yields and in the price of gold. The dollar is losing ground even though the US will be the first industrialised country to pull out of recession, thanks to a highly aggressive "policy mix". The government's present budget policy, featuring colossal fiscal stimulus, is extremely counter-cyclical. Monetary policy has been no less bold, with the Fed even printing money. The result will be, as we said earlier, a 13% federal budget deficit (see left-hand chart below). The Treasury will be forced to float more than $2 trillion of bonds during the current year. Not only is America's credit rating likely to suffer, but it will also become increasingly difficult to keep the supply of sovereign debt in line with demand.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 3 - 25/05/2009
5
5
--- 10-Year Bond Yield in USD 0
0
-5
-5
-10
-10 US Budget Deficit (% GDP) - Quarterly Data US Budget Deficit (% GDP) - Monthly Data
-15
-15 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
As proof, the yield on 10-year Treasuries has risen from 2% in January to 3.5% at present (see right-hand chart above). This is so despite the flight to the "quality" of US debt issues from the start of the credit crunch and even though the Federal Reserve is now buying $300 billion of long-dated Treasuries to prevent long-term interest rates from going up faster. Fed and Treasury officials will therefore have to be creative to make government bonds look appealing. Otherwise the economic recovery could be nipped in the bud. A top priority will be to reassure the People's Bank of China, which holds two-thirds of its forex reserves in US dollars and is beginning to wonder about the wisdom of this strategy. To help ease these tensions and bridge the yawning deficit, the Treasury is now issuing its "long bond" (redeemable in 30 years) every month instead of four times a year. It is also returning to 3- and 7-year paper (niches that it had abandoned for several years) to capture money available all along the yield curve. Strategy sessions are now focusing on the idea of creating a 50-year bond, although nothing has been decided as yet. But it is easy to understand why: if each new issue is not bought up in full, the markets could panic and make things worse. 1.7 1.6
1.7 €/$ Exchange Rate BPER Forecasts
1.6
1.5
1.5
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1
1.0
1.0
0.9
0.9
0.8
0.8 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
We do not wish to make things seem blacker than they are, but the risk of a new dollar slide is considerable. That is why since late last year we have been advising investors to hedge dollar positions. It is worth bearing in mind that a falling US dollar may pose problems for creditors everywhere else, but not for Americans. It would even be an excellent way for the US to revitalise its export industries and counter the risk of deflation. This, in turn, would offset the drag created by the inevitable rise in long-term interest rates. At times, it is the apparent loser who comes out ahead.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 4 - 25/05/2009
The news flow from Brazil remains upbeat Brazil's latest jobs figures turned out better than expected, bolstering the view that a recovery is gradually taking shape. The unemployment rate eased to 8.9% in April from 9% in March, as against a consensus forecast of 9.3%. On the face of it, the impact on the labour market has been much more moderate than in previous recessions, when unemployment had swelled to 12% (see left-hand chart below). The worst is now over as far as layoffs are concerned, according to the finance minister, Guido Mantega. Job creation is back on an upward path (see right-hand chart below). Although it will be difficult for growth to return to last year's levels, we should remember that these were obtained with the economy virtually overheating. As we pointed out a few weeks ago, domestic consumption played an important role as a buffer in the downturn and is now making a strong contribution to Brazil's recovery.
15
300'000
100'000
-100'000 10
-300'000
-500'000
-700'000
5 Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Dec-06 M ar-07 Jun-07 Sep-07 Dec-07 M ar-08 Jun-08 Sep-08 Dec-08 M ar-09
Oct-08
Brazil: Unemployment (%)
Brazil: Gov Reg Job Creation
Sources: Bloomberg, BLM
Salaries continue to trend upward, as illustrated by the recent 12% hike in the minimum wage (see left-hand chart below). This is providing substantial support for consumption. With inflation easing, disposable incomes are growing even faster. Retail sales growth remains in positive territory and was running at 1.9% in April (see right-hand chart below). 15 550
10
500
5
450
0
400 350
-5
300
-10
250
-15 200
-20
150 M ay-02 Feb-03 No v-03 A ug-04 M ay-05 Feb-06 No v-06 A ug-07 M ay-08 Feb-09
Jan-01
Jan-02
Brazil: Minimum Wage (BRL)
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Brazil: Retail Sales (YoY, %) Brazil: Industrial Production (YoY, %)
Sources: Bloomberg, BLM
The accommodative monetary policy pursued by the central bank will also spur growth in consumption and lending. For the record, the Bank of Brazil's key Selic rate now stands at 10.25%, an all-time low, and more downticks are expected in the coming months. Brazil is moreover increasing its volume of exports and seeking new trading partners. President Luiz Inácio Lula da Silva recently travelled to Saudi Arabia, China and Turkey to lead talks. China is now Brazil's foremost trading partner, ahead of the US. Trade among the emerging economies, one of our favourite investment themes, is becoming a major new axis of growth in view of the size of the countries concerned. Yet relations are also of a financial nature, as demonstrated by the agreement between Petrobras, Brazil's state-controlled oil company, and Beijing. China will lend the South
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 5 - 25/05/2009
American heavyweight $10 billion in return for shipments to China's petroleum refiner Sinopec amounting to 150,000 barrels this year and 200,000 in each of the nine coming years. The agreement diversifies Brazil's sources of financing and China's sources of energy supply. China's move to loosen restrictions on beef and chicken imports will also benefit Brazil, a major producer of both these commodities.
800
140
700
120
600 500
100
400
80
300 200
60
100 Dec-06
40 M ay-07
A ug-07
No v-07
Feb-08
M ay-08
A ug-08
No v-08
Brazil: Bovespa Stock Index
Feb-09
A pr-07
M ay-09
S&P 500 Index
A ug-07
Dec-07
A pr-08
A ug-08
Dec-08
A pr-09
CEMBI Brazil USD Spread (bp) JPM EMBI+ Brazil USD Spread (bp)
Source: Bloomberg,
While further confirmation of a recovery is needed, the way the various components of growth stack up points to rosy prospects for the Brazilian economy. The stock, bond and forex markets all appear to have got this message clearly, judging by the real's appreciation, the narrowing of credit spreads and the rally by the Bovespa equity index (see charts above). Although these movements are likely to slow somewhat, the long-term trend for Brazilian assets remains decidedly upbeat.
The worst may be over for Japan, but the upturn will be short-lived Japanese GDP (% ch. qoq nd yoy) 4 2 0 -2 -4 -6 GDP Real QoQ sa
-8
GDP Real YoY -10 1996
1998
2000
2002
2004
2006
2008
The Japanese economy registered a record 4% drop in GDP in the first quarter of 2009. Year on year the contraction was 15.2%. The year-on-year figure for the previous quarter was moreover revised downward to -14.4% from the previous estimate of -12.1%. Exports are still Japan's Achilles heel. They were down 26% in the first nine months of the current financial year, plunging the country into a recession unparalleled since the Second World War. Despite the devastating impact of dwindling overseas demand, however, domestic weakness is the main cause of the dramatic year-on-year drop in GDP. This component lopped 2.6% off the country's total output of goods and services in the first quarter, the worst showing since 1974.
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 6 - 25/05/2009
Consumption, hammered by mounting job losses, fell 1.1%. Companies also cut spending, by 10.4%, to reduce overcapacity and draw down inventories.
Consumer confidence 55
15 15%
10
50
5
5%
45 0 -5%
40
-5 -10
35
-15% 6M avanced
-15
30
confiance de ménages
-25% -20
25
Japan investment Japan Core machine order (YoY) -35%
-25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1995
1997
1999
2001
2003
2005
2007
2009
Despite this sobering picture, the Tokyo stock market has been bid up in anticipation of a possible economic recovery in the coming months. There are indeed some signs of an upturn: ¾ ¾ ¾ ¾
Industrial production rose 1.6% in March. Consumer confidence improved for the fourth month in a row. Exports appear to be bottoming out. Demand for machines seems to be steadying as well, albeit at a low level.
On the other hand, it is difficult to foresee a sustainable upswing if the global economy remains weak– even if GDP strengthens during the current quarter. The brightening outlook will no doubt be temporary for the following reasons: ¾ ¾ ¾
Fiscal stimulus, amounting to 5% of the 2009 national budget, could have a significant impact on the second quarter but not beyond that point. Inventory reductions will lead to a rise in industrial production in the near future, but a lack of demand will limit the magnitude of the increase. Japanese exports are momentarily benefiting from a boom in Chinese infrastructure development. However, this upturn is being fuelled by fiscal stimulus and will not last.
Moreover, the spectre of deflation is stalking Japan again. Wholesale prices were down 3.8% year on year in April, their biggest fall in 22 years. Unemployment has surged and disposable incomes are shrinking, adding to the danger of a deflationary downspin. The only thing missing is a deadly flu epidemic.
Wholesales prices (% ch. yoy)
Average wage (% ch. yoy)
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 7 - 25/05/2009
Economic forecasts GDP growth and contributions to global expansion Country
GDP 2008
GDP 2009
GDP 2010
B PER Est imat es
B PER Est imat es
Country weights
Contribution 2009
United States
1.3%
-2.8%
1.5%
20.7%
-0.58%
Euro Area
0.7%
-3.1%
0.5%
15.7%
-0.49%
China
9.0%
7.4%
7.5%
11.4%
0.85%
Japan
-0.7%
-5.8%
1.2%
6.4%
-0.37%
India
7.3%
5.1%
6.5%
4.8%
0.25%
Russia
6.0%
0.0%
3.5%
3.3%
0.00%
United Kingdom
0.7%
-3.1%
0.2%
3.2%
-0.10%
Brazil
5.2%
2.5%
4.0%
2.9%
0.07%
Mexico
1.9%
-0.5%
2.0%
2.2%
-0.01%
Canada
0.6%
-1.2%
1.6%
1.9%
-0.02%
Others (FMI estim ates)
4.7%
2.0%
4.8%
27.2%
0.56%
WORLD
3.4%
0.1%
3.3%
100%
0.1%
% of the World total and BPER estimated GDP grow th
largest contributors
Comments: • The GDP growth rates shown above are actual for 2008 and projections for 2009 and 2010. • Each country's weighting has been translated into US dollars and is based on purchasing power parity as calculated by the IMF. This takes account of differences in prices and standards of living. • The countries are ranked by the size of their economy, in decreasing order. • Contributions to global growth are calculated as follows: the GDP growth of each country is multiplied by its size. The sum of the contributions works out to 0.5%, a good estimate of global GDP growth for the current year. • The list is limited to the 10 countries that contribute most to world economic expansion..
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
Page 8 - 25/05/2009
Returns on financial markets to March 25th 2009 Changes % Bloom berg Equity Indices - local currency tickers DIA Equity DOW JONES Industrial QQQQ Equity NASDAQ 100 SXXE Index STOXX Euroland NKY Index NIKKEI 225, Japan UKX Index FTSE 100, UK FRESM I SW Equity SMI, Sw itzerland IBOV Index BOVESPA, Brazil 2828 hk Equity CHINA H Shares, HKD
1 w eek 0.1 0.5 0.9 3.4 0.4 1.7 -1.2 0.2
1 m onth 2.7 -0.4 5.3 7.3 5.0 7.0 8.7 9.0
3 m onth 14.0 17.3 24.0 25.3 13.4 16.6 33.0 36.8
Equity Indices - USD MSCI AC World S&P 500, ETF S&P Europe, ETF MSCI Japan, ETF MSCI Emerging Markets, ETF MSCI Brazil, ETF Lyxor Russia, ETF MSCI AC Asia X Japan, ETF MSCI Korea, ETF MSCI Taiw an, ETF FTSE China 25, ETF MSCI Singapore, ETF
1 w eek 0.8 0.3 6.1 0.6 5.6 7.9 7.6 4.2 3.3 6.6 3.0 6.0
1 m onth 7.6 2.7 12.2 5.7 13.3 16.2 22.5 12.3 8.4 17.9 7.3 24.9
3 m onth Year-to-D Last Year 25.7 5.1 -41.9 15.8 -1.4 -36.8 32.7 1.9 -43.4 23.5 -4.6 -27.0 45.9 27.2 -48.9 50.7 47.6 -54.3 87.0 58.6 -70.2 43.7 28.9 -49.4 58.7 28.4 -56.0 56.4 42.4 -45.2 36.0 19.3 -47.8 48.6 25.8 -46.1
1 w eek
1 m onth
3 m onth Year-to-D Last Year
-0.2 -0.6 -0.2 -0.7 -0.9 -2.4 0.0 -1.2
-0.1 -1.7 0.4 -1.3 -1.2 -3.7 0.7 -1.4
1 w eek 2.8 3.3 1.3 3.6
1 m onth 6.6 7.4 1.8 8.6
3 m onth Year-to-D Last Year 7.9 -1.4 5.7 10.1 0.2 -4.2 2.5 -4.6 23.1 12.0 9.0 -26.5
1 w eek 4.2 7.5 2.1 -2.8 5.0 2.8
1 m onth 4.7 16.5 12.6 1.9 10.0 -5.0 1.7
3 m onth Year-to-D Last Year 0.3 8.4 5.8 35.7 42.0 -55.5 23.7 8.8 -51.8 4.7 10.2 -37.5 35.3 -0.5 -7.3 19.3 -16.5 -37.0 1.4 2.6 -19.1
Bond Indices - local currency World Bond Market EFFAS CHF 3-5 YR. EFFAS CHF 7-10 YR. EFFAS EUR 3-5 YR. EFFAS EUR 7-10 YR. EFFAS USD 3-5 YR. EFFAS USD 7-10 YR. EFFAS GBP 3-5 YR. EFFAS GBP 7-10 YR. Currencies, spot $ CHF EUR JPY GBP
M XWD Index SPY Equity IEV Equity EWJ Equit y EEM Equity EWZ Equity LYRUS SW Equity IFFF SW Equit y EWY Equity EWT Equity FXI Equity EWS Equity
SZL2TR Index SZL4TR Index EUL2TR Index EUL4TR Index USL2TR Index USL4TR Index UKL2TR Index UKL4TR Index
CHF Curncy EUR Curncy JPY Curncy GBP Curncy
Com m odities, real estate, hedge funds (USD) Gold, USD GOLDS Comdty Oil price, Brent EUCRBRDT Index Commodities, ETF GSCIUSD SW Equity Commodities, ETF (EUR) GSUEEUR GR Equity World Real Estate X USA, ETF RWX UP Equity US Real Estate REIT, ETF VNQ Equity Hedge Funds, Tremont index HEDGNAV Index
Michel Lagier, Stéphane Mayor, Bruno Jacquier & Lun Xu
-0.1 -1.6 0.5 -0.4 -1.1 -4.5 -0.2 -0.9
Year-toDate Last Year -5.3 -32.2 12.8 -41.7 2.0 -44.1 5.5 -41.1 -1.6 -28.0 -1.6 -32.5 35.4 -41.2 23.5 -49.7
1.6 -0.1 2.3 1.0 -2.4 -8.3 1.1 -1.1
8.1 10.7 8.8 11.3 12.9 20.2 11.8 16.0
Page 9 - 25/05/2009
