Target mkt cap
Economic Research January 2015
Research Department ARC Research Team Tel: 966 11 211 9370, [email protected]
Global economy and markets
Global economy
The global economic data was largely positive over the last one month with the US registering robust growth in Q3 2014, although its real-time economic indicators have largely been mixed. On the other hand, indicators in the Eurozone point to a slowdown, whereas they were slightly disappointing in China, as the powerhouse seems to be stuck in a period of slowing growth. Meanwhile, Indian growth looks appealing in the coming years as its industrial growth revives and exports pick up, while the “current account deficit” remains in the manageable territory. Monetary policies look divergent across the Atlantic as the market expects a policy rate hike by the Fed in Q2 2015, whereas the ECB is preparing for QE this week. Meanwhile, a rate hike is also expected in the UK within one year. Sovereign yields in the US as well as Germany declined with the German bund 10-yr yield touching a record low, amid declining commodities prices dampening the outlook for inflation almost everywhere. Oil prices fell further as markets continue to be concerned by oversupply and weak global demand. Gold prices continued to trend lower amid a strong US dollar and tumbling crude prices. Global economic data: The US government released its third estimate for the Q3 2014 GDP growth at 5% revised up from 3.9%, mainly due to the upbeat consumer spending and business investment. Besides the upward revision in Q3 real GDP growth, job market data, ISM indices and other indicators were lower as compared to the prior months. However, more than 200k additions in non-farm payroll in each of the last twelve months and a multi-year low unemployment rate point to a positive outlook for the economy. On the other hand, manufacturing activity remained weak in China, as the country’s industrial output and manufacturing PMIs moderated in December, whereas better than expected December trade figures gave the government some reprieve. Meanwhile, activity in the UK production and construction sector slowed unexpectedly in November; however a bounce back in factory output and narrowing trade deficit suggest the economy could weather troubles in their biggest trading partner, the Eurozone. The Eurozone fell into deflation for the first time since October 2009, making it certain that the European Central Bank (ECB) will boost up the supply of cheap credit in the currency bloc despite German opposition. Monetary policy and markets: Although most central banks stayed put during their respective policy meetings last month, the strong Q3 2014 revised real GDP data in the US boosted the interest rate hike expectations from the Fed. However, a subdued inflation scenario could complicate the central bank’s aim to raise interest rates this year. On the other hand, deflation in the Eurozone is sparking the ECB to fast track its QE plan. The ECB is a step closer to implement QE measures at its upcoming meeting this week after the European Court of Justice gave its ruling approving the ECB’s Outright Monetary Transactions (OMT) program. Meanwhile, global bond yields were mainly lower on expectations of an expanded quantitative easing in Europe and rising deflationary risks. Commodity markets: The OPEC’s November 2014 decision to leave its oil production target unchanged, caused the non-reversal of significant price depreciation, following which the prices have broken below the ~US$50 barrel level. Crude oil prices are now near their six-year lows and have been a major factor in driving down inflation almost everywhere. The EIA in its latest report projects crude oil production in the US will increase to 9.3mbpd in 2015, which would translate into the highest US production since 1970. Moreover, the EIA projected a largely stable OPEC supply in 2014 and 2015. Meanwhile, a declining crude oil and a strengthening US dollar are putting pressure on gold prices that moved lower during Q4 2014. Gold closed on December 31 at US$1,184.1 down 2.3% on the quarter and 1.5% in 2014. The correction in the precious metal price has happened owing to tepid physical demand in 2014 and reduced interest in gold ETPs. Further, an economic slowdown in China and import restrictions in India hurt the yellow metal purchases in 2014.
Disclosures Please refer to the important disclosures at the back of this report.
1
Economic Research January 2015
Global economic data United States The US Department of Commerce reported in its final GDP estimate that the US economy grew at its quickest pace in 11 years in Q3 2014 at 5.0%, higher than the agency’s previous 3.9% estimate. This advance followed a Q2 where the economy expanded at 4.6%. The US has now experienced the two strongest back-to-back quarters of growth since 2003. The government’s final upward revision was largely driven by better growth in sales to domestic purchasers, which expanded at an annualized rate of 4.1% in the third quarter (previously estimated at 3.2%). Consumer spending, which accounts for about two-thirds of the US GDP, grew at a 3.2% annual rate instead of the previously reported 2.2% pace, which is also the fastest since Q4 2013. Growth in business investment was raised to 8.9% from 7.1% previously. Spending on residential construction as well as government outlays were also revised higher. However, export growth and imports were revised downward. Figure 1 Recent growth trend in US 6
% QoQ annualized
5 4 3 2
1 0 -1 -2 -3 Q1-12
Q2-12
Q3-12
Consumption
Q4-12 Investment
Q1-13
Q2-13
Q3-13
Net-exports
Q4-13
Government
Q1-14
Q2-14
Q3-14
Real GDP growth
Source: BEA, Al Rajhi Capital
Real time indicators: Economic indicators in the US have been mixed in the last one month. The most recent ones, the job market data slightly topped market expectations as the economy added 252k jobs in December, with the unemployment rate at 5.6%, the lowest since 2008. However, the average hourly pay slipped 5 cents (0.2%) in December, posting the biggest decline in at least eight years. During the month, manufacturing payroll added 17k, while the services sector took another 52k workers. However, ISM data disappointed in December as both manufacturing and nonmanufacturing PMIs fell to 55.5 and 58.0 from a reading of 58.7 and 59.3 in November. Further, factory orders fell for the fourth straight month in November, signals the economy lost some momentum in the fourth quarter. However, industrial production jumped 1.3% in November after a 0.1% increase in October, easing concerns of a sharp slowdown in Q4 2014. The growth outlook also received a boost from strong automobile sales in December and improved consumer confidence, propelled by favorable labor markets. Moreover, trade deficit in November unexpectedly shrank to US$39bn from US$42.2bn in October with an unexpected fall in imports.
Real time indicators remain mixed
Figure 2 Moderation in US ISM PMIs 60
Figure 3 Non-farm payrolls rose to about 3million, highest since 1999 350
Index
58
Thousand
8.0
%
300
7.5
56
250
54
7.0
200
52 150
50 48
100
46
50
44
0
6.5
6.0
ISM manufacturing
ISM non-mfg.
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
5.5
Nonfarm payroll
Unemployment rate-rhs
Source: Bloomberg, Al Rajhi Capital
2
Economic Research January 2015
Eurozone: Economic data points to slower contraction According to the final PMI reading, the private sector growth in the Eurozone accelerated in December, but missed an earlier flash estimate of 51.7. The composite PMI for the 19-nation region (including Lithuania) rose to a 2-month high of 51.4 in December as compared to 51.1 in November, since both manufacturing and services PMIs posted an increase. Meanwhile, inflation in the Eurozone reached below zero for the first time since October 2009 at -0.2% y-o-y in December from +0.3% y-o-y in November, indicating the need for a fresh injection of funds by the ECB. The main drag came from falling energy prices, which declined by 6.3% y-o-y. Meanwhile, the core inflation rate rose slightly to 0.8% y-o-y from 0.7% y-o-y in the prior month. The region’s retail sales rose by 0.6% for the second straight month in November, while unemployment held steady at 11.5% during the month.
Real indicators remain positive in Eurozone, but deflation piles up pressure on the ECB
58
Index
56
54 52 50
48 46 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
44
Germany mfg. PMI
Italy mfg. PMI
However, the economic dynamics in the region are different for large economies such as Germany and France on the one hand, and smaller and crisis-affected economies such as Italy, Spain on the other. Economic indicators in the largest economy were only slightly better than the average for the area. In Germany, both the manufacturing and service sector activity grew at a slightly higher rate in December, lifting the composite gauge to 52, while in France, the rate of contraction eased at 49.7, up from 47.9 in November. Citing weak growth prospects and high public debt, S&P cut Italy’s long-term credit rating to BBB-. Meanwhile, the unemployment rate in Germany dropped to a record low of 6.5% in December, while it tagged a new high of 13.4% in Italy, underscoring the vast differences within the moribund Eurozone economy.
Figure 4 Manufacturing PMI in Germany and Italy 58
Figure 5 Manufacturing PMI in the UK and Japan 60
Index
56
Index
57
54 54
52 50
51
48
48
46
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Germany mfg. PMI
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
45
44
UK's mfg. PMI
Japan mfg. PMI
Italy mfg. PMI
Source: Bloomberg, Al Rajhi Capital
Source: Bloomberg, Al Rajhi Capital
United Kingdom and Japan The final reading for annual GDP growth in the United Kingdom during Q3 2014 was sharply revised down by 0.4% to 2.6% due to revisions to growth figures of the previous quarters, while the q-o-q GDP growth remained unrevised at 0.7%. Moreover, there were new signs pointing to slowdown in momentum of the UK economy. The industrial production shrank by 0.1% on a monthly basis in November. The PMI for services, although still above 50.0, declined by 2.8 points to 55.8 in December, whereas the PMI for manufacturing and construction edged lower to 52.5 and 57.6, respectively. Meanwhile, the nationwide house price growth slowed further to 7.2% y-o-y in December as compared to 8.5% y-o-y in November. Japan’s industrial production and inflation continued to slow in November, while retail sales rose during the month. Further, the country’s exports rose lower than estimated, underlining the challenges for the central bank to steer the economy out of recession. Average consumer spending by households with two or more members also declined by 2.5% y-o-y in November, marking the eighth straight monthly decline. The world’s third-largest economy remains largely stagnant except its labor market (unemployment unchanged at 3.5% in November), indicating the depth of a slump caused by a national sales tax increase in April 2014.
Disclosures Please refer to the important disclosures at the back of this report.
3
Economic Research January 2015
Emerging economies China’s economy is set to miss 7.5% growth target for 2014
China's factory sector contracted in December for the first time in seven months, suggesting further stimulus is needed to halt a slowdown in the world’s second-largest economy. The official manufacturing PMI slipped to 50.1 in December, providing a soft end to the year that suggests the global powerhouse is likely to miss its 2014 economic growth target of 7.5%. However, there was better news from the country’s services sector, which accounts for nearly half of the economy, where the PMI rebounded to 54.1 from 53.9 reading in November. Job creation in the service sector has been peaking for more than a year. Meanwhile, industrial profits in China fell by 4.2% y-o-y in November, the biggest decline since August 2012. In the face of a risk of short-term slowdown, the Chinese policymakers have introduced an infrastructure stimulus package accounting for 18% of GDP to bolster growth that is in danger of slipping below 7%.
World Bank: India to grow at China’s pace India’s economic indicators remained largely positive. The HSBC/Markit manufacturing PMI rose to the highest level in two years in December at 54.5, while by FY17 the services sector PMI eased to 51.1. Employment levels in the Indian services sector increased in December, reversing the trend seen in the previous month. Meanwhile, inflationary pressures from both input and output prices remained modest, bolstering prospects of interest rate cuts this year.
Central Bank’s Monetary Policies Monetary policy ECB a step closer to its bond-buying program
The long-feared threat of deflation hit the Eurozone at the end of 2014, reinforcing market expectations that the ECB will soon provide an aggressive monetary stimulus. The ECB Governing Council will be meeting on January 22 for its policy meeting, when it could decide to start printing money for buying large amounts of government bonds to prevent deflation. The likelihood of a start on purchases of government bonds within a week has become clearer following the European Court of Justice’s ruling on the ECB’s OMT and rumors regarding a EUR500bn assets purchases program.
US Fed, BoE and BoJ maintain status quo on their monetary policies
The US Federal Reserve (Fed) made no changes to its monetary policy during its FOMC meeting last month, downplaying market expectations of rise in interest rates within the next couple of meetings, in January and March. The Fed left its key interest rate at the 0-0.25% level to revitalize the US economy from deep recession. Meantime, the Bank of England (BoE) maintained status quo on its interest rate by keeping the bank rate unchanged at 0.5% for the seventh consecutive month, even as inflation dropped to 1.2% in November after 1.5% in October, pointing to weakening demandside and cost pressures in the economy. Moreover, the BoJ also kept its monetary policy unchanged at its final meeting of 2014, in a move to assess the effects of the expanded stimulus program on the Japanese economy. Among emerging economies, the RBI cut its interest rates by 25bps amid signs of cooling inflation, while the PBoC reiterated the decision to maintain its prudent monetary policy.
Sovereign bonds and interbank rates Global bond yields were mainly lower on expectations of an expanded QE in Europe and rising deflationary risks
Yield for US 10-year Treasury matched the lowest levels since May 2013 as declining commodities prices dampened the outlook for inflation, fueling speculation that the Fed will take a cautious approach to raising interest rates. Moreover, yields on 30-year touched 2.46% last week, the lowest since July 2012, when the yield set a record low of 2.44%. Similarly, German and Japanese sovereign bond yields fell to new historical lows as investors hedged against deflation, while the yield on the 10-year UK government bond fell to the lowest level since 2012. US three-month and one-year rates have risen from their lowest levels in December by 2 basis points and 6 basis points to 0.253% and 0.622%, respectively. Meanwhile, GBP three-month rose by 1 basis point from its lowest levels in 2014. The BoE’s decision to maintain status quo on its policy rate at least until early 2016 pulled the 12-month interbank rate by 1.3 bps from its lowest level of 2014.
Disclosures Please refer to the important disclosures at the back of this report.
4
Economic Research January 2015
In the GCC, interbank rate has eased in Saudi Arabia. The 12-month and 3-month SAIBOR were at 1.05% and 0.87% at the start of December 2014, which have eased down to 1.03% and 0.86%, respectively this week. Meanwhile, in the UAE, the 12month EIBOR remained unchanged at 1.02%.
Commodities Crude oil Oil prices fell further due to concerns on oversupply and weak global demand
Crude oil prices remained under pressure across 2014 and have fallen significantly in the past couple of quarters. However, the OPEC’s November 2014 decision to leave its oil production target unchanged, caused the non-reversal of significant price depreciation, following which the prices have broken below the ~US$50 barrel level. Crude oil prices have been a major factor in driving down inflation in majority of the economies around the world. Amid rising production and weaker global demand, the prices have now declined to almost six-year lows. Moreover, the prices are unlikely to stabilize until the higher cost producers curtail their production and thus reduce the global supply glut. Meanwhile, the EIA in its latest report projects the US crude oil production to increase to 9.3mbpd and 9.5mbpd in 2015 and 2016. If the forecast comes true, it would be the highest production since 1970. Moreover, the EIA projects that the OPEC’s total supply will largely remain stable over the next couple of years and will not be able to accommodate the non-OPEC supply growth.
Gold Gold price continued to trend lower amid Gold prices have also moved lower along with low prices of other commodities such as strong US dollar and tumbling crude prices crude oil, during the fourth quarter. Gold closed at US$1,184.1 on December 31, down
2.27% q-o-q and 1.48% y-o-y in 2014. However, the precious metal has delivered a 318% return since the beginning of 2000. The long-term rally in gold continues to correct from the highs of US$1,920.7 made in September 2011. During 2014, gold traded in a range between US$1,130 and US$1,390 with the lows coming during the fourth quarter. The sharp correction in the precious metal price has happened due to the tepid physical demand in 2014, reduced interest in gold ETPs and a strengthening US dollar, with the latter trading at its highest level since March 2006. An economic slowdown in China and import restrictions in India also hurt gold purchases by the world’s largest consumers in 2014. Further, the subdued inflation outlook in major economies coupled with a change in risk appetite, is turning investors away from defensive exposures like gold.
Disclosures Please refer to the important disclosures at the back of this report.
5
Economic Research January 2015
Disclaimer and additional disclosures for Economic Research
Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
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Disclosures Please refer to the important disclosures at the back of this report.
6
Research Department ARC Research Team Tel: 966 11 211 9370, [email protected]
Global economy and markets
Global economy
The global economic data was largely positive over the last one month with the US registering robust growth in Q3 2014, although its real-time economic indicators have largely been mixed. On the other hand, indicators in the Eurozone point to a slowdown, whereas they were slightly disappointing in China, as the powerhouse seems to be stuck in a period of slowing growth. Meanwhile, Indian growth looks appealing in the coming years as its industrial growth revives and exports pick up, while the “current account deficit” remains in the manageable territory. Monetary policies look divergent across the Atlantic as the market expects a policy rate hike by the Fed in Q2 2015, whereas the ECB is preparing for QE this week. Meanwhile, a rate hike is also expected in the UK within one year. Sovereign yields in the US as well as Germany declined with the German bund 10-yr yield touching a record low, amid declining commodities prices dampening the outlook for inflation almost everywhere. Oil prices fell further as markets continue to be concerned by oversupply and weak global demand. Gold prices continued to trend lower amid a strong US dollar and tumbling crude prices. Global economic data: The US government released its third estimate for the Q3 2014 GDP growth at 5% revised up from 3.9%, mainly due to the upbeat consumer spending and business investment. Besides the upward revision in Q3 real GDP growth, job market data, ISM indices and other indicators were lower as compared to the prior months. However, more than 200k additions in non-farm payroll in each of the last twelve months and a multi-year low unemployment rate point to a positive outlook for the economy. On the other hand, manufacturing activity remained weak in China, as the country’s industrial output and manufacturing PMIs moderated in December, whereas better than expected December trade figures gave the government some reprieve. Meanwhile, activity in the UK production and construction sector slowed unexpectedly in November; however a bounce back in factory output and narrowing trade deficit suggest the economy could weather troubles in their biggest trading partner, the Eurozone. The Eurozone fell into deflation for the first time since October 2009, making it certain that the European Central Bank (ECB) will boost up the supply of cheap credit in the currency bloc despite German opposition. Monetary policy and markets: Although most central banks stayed put during their respective policy meetings last month, the strong Q3 2014 revised real GDP data in the US boosted the interest rate hike expectations from the Fed. However, a subdued inflation scenario could complicate the central bank’s aim to raise interest rates this year. On the other hand, deflation in the Eurozone is sparking the ECB to fast track its QE plan. The ECB is a step closer to implement QE measures at its upcoming meeting this week after the European Court of Justice gave its ruling approving the ECB’s Outright Monetary Transactions (OMT) program. Meanwhile, global bond yields were mainly lower on expectations of an expanded quantitative easing in Europe and rising deflationary risks. Commodity markets: The OPEC’s November 2014 decision to leave its oil production target unchanged, caused the non-reversal of significant price depreciation, following which the prices have broken below the ~US$50 barrel level. Crude oil prices are now near their six-year lows and have been a major factor in driving down inflation almost everywhere. The EIA in its latest report projects crude oil production in the US will increase to 9.3mbpd in 2015, which would translate into the highest US production since 1970. Moreover, the EIA projected a largely stable OPEC supply in 2014 and 2015. Meanwhile, a declining crude oil and a strengthening US dollar are putting pressure on gold prices that moved lower during Q4 2014. Gold closed on December 31 at US$1,184.1 down 2.3% on the quarter and 1.5% in 2014. The correction in the precious metal price has happened owing to tepid physical demand in 2014 and reduced interest in gold ETPs. Further, an economic slowdown in China and import restrictions in India hurt the yellow metal purchases in 2014.
Disclosures Please refer to the important disclosures at the back of this report.
1
Economic Research January 2015
Global economic data United States The US Department of Commerce reported in its final GDP estimate that the US economy grew at its quickest pace in 11 years in Q3 2014 at 5.0%, higher than the agency’s previous 3.9% estimate. This advance followed a Q2 where the economy expanded at 4.6%. The US has now experienced the two strongest back-to-back quarters of growth since 2003. The government’s final upward revision was largely driven by better growth in sales to domestic purchasers, which expanded at an annualized rate of 4.1% in the third quarter (previously estimated at 3.2%). Consumer spending, which accounts for about two-thirds of the US GDP, grew at a 3.2% annual rate instead of the previously reported 2.2% pace, which is also the fastest since Q4 2013. Growth in business investment was raised to 8.9% from 7.1% previously. Spending on residential construction as well as government outlays were also revised higher. However, export growth and imports were revised downward. Figure 1 Recent growth trend in US 6
% QoQ annualized
5 4 3 2
1 0 -1 -2 -3 Q1-12
Q2-12
Q3-12
Consumption
Q4-12 Investment
Q1-13
Q2-13
Q3-13
Net-exports
Q4-13
Government
Q1-14
Q2-14
Q3-14
Real GDP growth
Source: BEA, Al Rajhi Capital
Real time indicators: Economic indicators in the US have been mixed in the last one month. The most recent ones, the job market data slightly topped market expectations as the economy added 252k jobs in December, with the unemployment rate at 5.6%, the lowest since 2008. However, the average hourly pay slipped 5 cents (0.2%) in December, posting the biggest decline in at least eight years. During the month, manufacturing payroll added 17k, while the services sector took another 52k workers. However, ISM data disappointed in December as both manufacturing and nonmanufacturing PMIs fell to 55.5 and 58.0 from a reading of 58.7 and 59.3 in November. Further, factory orders fell for the fourth straight month in November, signals the economy lost some momentum in the fourth quarter. However, industrial production jumped 1.3% in November after a 0.1% increase in October, easing concerns of a sharp slowdown in Q4 2014. The growth outlook also received a boost from strong automobile sales in December and improved consumer confidence, propelled by favorable labor markets. Moreover, trade deficit in November unexpectedly shrank to US$39bn from US$42.2bn in October with an unexpected fall in imports.
Real time indicators remain mixed
Figure 2 Moderation in US ISM PMIs 60
Figure 3 Non-farm payrolls rose to about 3million, highest since 1999 350
Index
58
Thousand
8.0
%
300
7.5
56
250
54
7.0
200
52 150
50 48
100
46
50
44
0
6.5
6.0
ISM manufacturing
ISM non-mfg.
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
5.5
Nonfarm payroll
Unemployment rate-rhs
Source: Bloomberg, Al Rajhi Capital
2
Economic Research January 2015
Eurozone: Economic data points to slower contraction According to the final PMI reading, the private sector growth in the Eurozone accelerated in December, but missed an earlier flash estimate of 51.7. The composite PMI for the 19-nation region (including Lithuania) rose to a 2-month high of 51.4 in December as compared to 51.1 in November, since both manufacturing and services PMIs posted an increase. Meanwhile, inflation in the Eurozone reached below zero for the first time since October 2009 at -0.2% y-o-y in December from +0.3% y-o-y in November, indicating the need for a fresh injection of funds by the ECB. The main drag came from falling energy prices, which declined by 6.3% y-o-y. Meanwhile, the core inflation rate rose slightly to 0.8% y-o-y from 0.7% y-o-y in the prior month. The region’s retail sales rose by 0.6% for the second straight month in November, while unemployment held steady at 11.5% during the month.
Real indicators remain positive in Eurozone, but deflation piles up pressure on the ECB
58
Index
56
54 52 50
48 46 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
44
Germany mfg. PMI
Italy mfg. PMI
However, the economic dynamics in the region are different for large economies such as Germany and France on the one hand, and smaller and crisis-affected economies such as Italy, Spain on the other. Economic indicators in the largest economy were only slightly better than the average for the area. In Germany, both the manufacturing and service sector activity grew at a slightly higher rate in December, lifting the composite gauge to 52, while in France, the rate of contraction eased at 49.7, up from 47.9 in November. Citing weak growth prospects and high public debt, S&P cut Italy’s long-term credit rating to BBB-. Meanwhile, the unemployment rate in Germany dropped to a record low of 6.5% in December, while it tagged a new high of 13.4% in Italy, underscoring the vast differences within the moribund Eurozone economy.
Figure 4 Manufacturing PMI in Germany and Italy 58
Figure 5 Manufacturing PMI in the UK and Japan 60
Index
56
Index
57
54 54
52 50
51
48
48
46
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Germany mfg. PMI
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
45
44
UK's mfg. PMI
Japan mfg. PMI
Italy mfg. PMI
Source: Bloomberg, Al Rajhi Capital
Source: Bloomberg, Al Rajhi Capital
United Kingdom and Japan The final reading for annual GDP growth in the United Kingdom during Q3 2014 was sharply revised down by 0.4% to 2.6% due to revisions to growth figures of the previous quarters, while the q-o-q GDP growth remained unrevised at 0.7%. Moreover, there were new signs pointing to slowdown in momentum of the UK economy. The industrial production shrank by 0.1% on a monthly basis in November. The PMI for services, although still above 50.0, declined by 2.8 points to 55.8 in December, whereas the PMI for manufacturing and construction edged lower to 52.5 and 57.6, respectively. Meanwhile, the nationwide house price growth slowed further to 7.2% y-o-y in December as compared to 8.5% y-o-y in November. Japan’s industrial production and inflation continued to slow in November, while retail sales rose during the month. Further, the country’s exports rose lower than estimated, underlining the challenges for the central bank to steer the economy out of recession. Average consumer spending by households with two or more members also declined by 2.5% y-o-y in November, marking the eighth straight monthly decline. The world’s third-largest economy remains largely stagnant except its labor market (unemployment unchanged at 3.5% in November), indicating the depth of a slump caused by a national sales tax increase in April 2014.
Disclosures Please refer to the important disclosures at the back of this report.
3
Economic Research January 2015
Emerging economies China’s economy is set to miss 7.5% growth target for 2014
China's factory sector contracted in December for the first time in seven months, suggesting further stimulus is needed to halt a slowdown in the world’s second-largest economy. The official manufacturing PMI slipped to 50.1 in December, providing a soft end to the year that suggests the global powerhouse is likely to miss its 2014 economic growth target of 7.5%. However, there was better news from the country’s services sector, which accounts for nearly half of the economy, where the PMI rebounded to 54.1 from 53.9 reading in November. Job creation in the service sector has been peaking for more than a year. Meanwhile, industrial profits in China fell by 4.2% y-o-y in November, the biggest decline since August 2012. In the face of a risk of short-term slowdown, the Chinese policymakers have introduced an infrastructure stimulus package accounting for 18% of GDP to bolster growth that is in danger of slipping below 7%.
World Bank: India to grow at China’s pace India’s economic indicators remained largely positive. The HSBC/Markit manufacturing PMI rose to the highest level in two years in December at 54.5, while by FY17 the services sector PMI eased to 51.1. Employment levels in the Indian services sector increased in December, reversing the trend seen in the previous month. Meanwhile, inflationary pressures from both input and output prices remained modest, bolstering prospects of interest rate cuts this year.
Central Bank’s Monetary Policies Monetary policy ECB a step closer to its bond-buying program
The long-feared threat of deflation hit the Eurozone at the end of 2014, reinforcing market expectations that the ECB will soon provide an aggressive monetary stimulus. The ECB Governing Council will be meeting on January 22 for its policy meeting, when it could decide to start printing money for buying large amounts of government bonds to prevent deflation. The likelihood of a start on purchases of government bonds within a week has become clearer following the European Court of Justice’s ruling on the ECB’s OMT and rumors regarding a EUR500bn assets purchases program.
US Fed, BoE and BoJ maintain status quo on their monetary policies
The US Federal Reserve (Fed) made no changes to its monetary policy during its FOMC meeting last month, downplaying market expectations of rise in interest rates within the next couple of meetings, in January and March. The Fed left its key interest rate at the 0-0.25% level to revitalize the US economy from deep recession. Meantime, the Bank of England (BoE) maintained status quo on its interest rate by keeping the bank rate unchanged at 0.5% for the seventh consecutive month, even as inflation dropped to 1.2% in November after 1.5% in October, pointing to weakening demandside and cost pressures in the economy. Moreover, the BoJ also kept its monetary policy unchanged at its final meeting of 2014, in a move to assess the effects of the expanded stimulus program on the Japanese economy. Among emerging economies, the RBI cut its interest rates by 25bps amid signs of cooling inflation, while the PBoC reiterated the decision to maintain its prudent monetary policy.
Sovereign bonds and interbank rates Global bond yields were mainly lower on expectations of an expanded QE in Europe and rising deflationary risks
Yield for US 10-year Treasury matched the lowest levels since May 2013 as declining commodities prices dampened the outlook for inflation, fueling speculation that the Fed will take a cautious approach to raising interest rates. Moreover, yields on 30-year touched 2.46% last week, the lowest since July 2012, when the yield set a record low of 2.44%. Similarly, German and Japanese sovereign bond yields fell to new historical lows as investors hedged against deflation, while the yield on the 10-year UK government bond fell to the lowest level since 2012. US three-month and one-year rates have risen from their lowest levels in December by 2 basis points and 6 basis points to 0.253% and 0.622%, respectively. Meanwhile, GBP three-month rose by 1 basis point from its lowest levels in 2014. The BoE’s decision to maintain status quo on its policy rate at least until early 2016 pulled the 12-month interbank rate by 1.3 bps from its lowest level of 2014.
Disclosures Please refer to the important disclosures at the back of this report.
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Economic Research January 2015
In the GCC, interbank rate has eased in Saudi Arabia. The 12-month and 3-month SAIBOR were at 1.05% and 0.87% at the start of December 2014, which have eased down to 1.03% and 0.86%, respectively this week. Meanwhile, in the UAE, the 12month EIBOR remained unchanged at 1.02%.
Commodities Crude oil Oil prices fell further due to concerns on oversupply and weak global demand
Crude oil prices remained under pressure across 2014 and have fallen significantly in the past couple of quarters. However, the OPEC’s November 2014 decision to leave its oil production target unchanged, caused the non-reversal of significant price depreciation, following which the prices have broken below the ~US$50 barrel level. Crude oil prices have been a major factor in driving down inflation in majority of the economies around the world. Amid rising production and weaker global demand, the prices have now declined to almost six-year lows. Moreover, the prices are unlikely to stabilize until the higher cost producers curtail their production and thus reduce the global supply glut. Meanwhile, the EIA in its latest report projects the US crude oil production to increase to 9.3mbpd and 9.5mbpd in 2015 and 2016. If the forecast comes true, it would be the highest production since 1970. Moreover, the EIA projects that the OPEC’s total supply will largely remain stable over the next couple of years and will not be able to accommodate the non-OPEC supply growth.
Gold Gold price continued to trend lower amid Gold prices have also moved lower along with low prices of other commodities such as strong US dollar and tumbling crude prices crude oil, during the fourth quarter. Gold closed at US$1,184.1 on December 31, down
2.27% q-o-q and 1.48% y-o-y in 2014. However, the precious metal has delivered a 318% return since the beginning of 2000. The long-term rally in gold continues to correct from the highs of US$1,920.7 made in September 2011. During 2014, gold traded in a range between US$1,130 and US$1,390 with the lows coming during the fourth quarter. The sharp correction in the precious metal price has happened due to the tepid physical demand in 2014, reduced interest in gold ETPs and a strengthening US dollar, with the latter trading at its highest level since March 2006. An economic slowdown in China and import restrictions in India also hurt gold purchases by the world’s largest consumers in 2014. Further, the subdued inflation outlook in major economies coupled with a change in risk appetite, is turning investors away from defensive exposures like gold.
Disclosures Please refer to the important disclosures at the back of this report.
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Economic Research January 2015
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