Economic Adviser - NORD/LB · 2018-06-22 · Economic Adviser ♦ February 2017 NORD/LB Economics...

Please take note of the special information on the final pages of this publication.

Special: Donald versus Ronald: Trade War instead of Cold War?

Source: Bloomberg, Chinese customs authorities, NORD/LB Economics

China's bilateral trade surplus with the United States could become a problem against the background of

the trade policy pursued by the new government in Washington. Donald Trump could seek conflict with

Beijing. Will it come to a trade war? � Turn to page 2 for our assessment of the situation.

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1999 2000 2001 2003 2004 2006 2007 2008 2010 2011 2013 2014 2016

China: Imports from U.S. (Bn. USD)

China: Exports to U.S. (Bn. USD)

China U.S. Trade Balance (Bn. USD)

Overview of contents

Special: Donald versus Ronald 2

USA: Trump versus Dollar 3

Euroland: ECB unimpressed by rising inflation 4

Germany: Economy grew by 1.9 percent in 2016 6

France: 2016 ends with strong plus in output 7

Italy: Aftermath of the December referendum 8

Spain: Ongoing political uncertainty 8

Switzerland: Deflationary phase drawing to a close 9

Japan: Off to a good start into the new year 10

China: PBOC in a quandary 11

Britain: May goes for a hard Brexit 12

Canada: Anxious glances southwards 12

Mexico: Trump makes for deep worry lines 13

Australia: Negative GDP in Q3 merely a blip 13

Total Returns: Yields to rise further in medium term 14

Stock markets: Dow 20k – great! 16

Overview of forecasts 17

Economics

Economic Adviser February 2017 • Date of issue: 30 January 2017

Economic Adviser ♦ February 2017

NORD/LB Economics

Seite 2 von 24

Special: Donald versus Ronald: Trade War instead of Cold War?

Donald Trump remains in campaign mode

Donald Trump is keeping the international finan-

cial markets on their toes with his remarks and

public appearances. The new president's inau-

guration speech in Washington made for certain

worry lines on the faces of many investors, for

example. Indeed, the investors missed the con-

ciliatory tones that were actually expected of

Trump. The new head of state, however, re-

mained in campaign mode in what was probably

a meticulously planned performance in Washing-

ton, and showed correspondingly little willing-

ness to compromise. Trump is evidently continu-

ing to envision pursuing an economic policy

strongly focussed on the domestic economy.

Despite what is already a positive employment

situation in the land of opportunity, it seems to be

a key economic objective in Washington to cre-

ate more jobs. The new administration clearly

intends to make use of protectionist measures to

this end. Accordingly, there is some concern

among investors as to, for example, the pro-

spects for the export-oriented German or Japa-

nese companies. However, Donald Trump ap-

pears to have two countries in his sights at pre-

sent which are accused of massively unfair for-

eign trade practices, namely Mexico and China.

Mexico as big loser from America's new trade

policy

The new US government is apparently continu-

ing to plan the expansion of the fortifications on

the border to southern neighbour Mexico. It is

even intended to finance this measure where

possible by way of a duty on money transfers by

Mexicans working in the United States. Besides

this, the decision-makers in Washington are

maintaining their demands for a renegotiation of

the North American Free Trade Agreement

(NAFTA). The aim of the new US administration

is to get Mexico above all – but also Canada – to

make concessions intended to help improve the

relative competitiveness of US companies. A key

trade policy measure towards securing the Unit-

ed States' economic partitioning from Mexico is

also likely to be that of imposing tariffs. The US

policymakers are expecting adjustments to

agreements with the two immediate neighbours

to make for additional job creation.

Given the high degree of economic dependence

on the United States, the political powers that be

in Mexico have merely limited possibilities for

meeting Donald Trump’s intended projects with

appropriate countermeasures. Moreover, the

country is in a difficult domestic situation – take,

for example, the recent "chaos days" in Mexico –

which could even further weaken its negotiating

position vis-à-vis the United States. Mexico could

in fact be a big loser from Donald Trump's elec-

tion victory, not only from an economic perspec-

tive.

Will Washington risk a trade war with China?

Significantly greater resistance is to be reckoned

with from China, on the other hand. The new US

government is evidently planning to brand the

Middle Kingdom as manipulator in the FX sphere

and take trade measures as reaction to this as-

sessment. There are apparently deep concerns

in Washington about the bilateral trade deficit

with China. US companies that are active in the

Middle Kingdom warn of what could then be an

impending trade war, however. The powers that

be in Beijing could even benefit from the with-

drawal of the United States from the TPP

agreement which, after all, had been conceived

by the Obama government as a kind of econom-

ic bulwark against China. It should also be borne

in mind that China continues to hold a large vol-

ume of US government bonds, which is probably

both a blessing and a curse for Beijing.

International division of labour in jeopardy?

Free trade leads to an international division of

labour and thus, globally speaking, boosts eco-

nomic prosperity. Politicians in the United States

now seem to feel strongly about promoting more

protectionism. This new political approach may

be of advantage for individual groups of Donald

Trump voters, but the consumers in the United

States will also suffer, for example, when a sim-

ple t-shirt costs thirty percent more in the near

future. It very much looks as if the new president

nevertheless really intends to risk a trade war

with a number of other countries and yet pursue

a policy of rapprochement with Russia. In doing

so, Donald Trump is taking a different approach

to that of the "cold warrior" Ronald Reagan.

Tobias Basse, Frederik Kunze, Bernd Krampen


NORD/LB Economics

Seite 3 von 24

USA Tobias Basse, Bernd Krampen

• Pronounced economic optimism

• Fed rather cautious

• Trump versus dollar

Pronounced economic optimism

Economic optimism in the US is very pro-

nounced at the present time, though a number of

observers are viewing the new government's first

concrete plans with some degree of scepticism.

Donald Trump is evidently set on putting protec-

tionist measures in place, and above all the US

companies with activities in China are critical of

this intention. The implementation of other of

Trump's campaign promises are being seen in a

far more positive light in the US economy. The

new decision-makers in Washington are evident-

ly sticking to the plan to cut corporate tax in the

USA considerably. This plan is going down well

in the markets and may help boost the readiness

of companies to invest.

The latest figures from various key sentiment

indicators are accordingly marked by great opti-

mism. The time series for the NFIB Small Busi-

ness Optimism indicator reflected what was vir-

tually a sort of euphoria, rising to over 105 points

in December as month under review. The polled

smaller-sized companies are evidently placing

their hopes above all in the measures an-

nounced by Trump to deregulate the US econo-

my. The new president most recently promised

major CEOs to reduce the bureaucratic con-

straints in the land of opportunity by 75 percent.

Questions as to the precise measurement con-

cept for the deregulation are simply not asked in

the new post-factual world, of course; the an-

nouncement alone is sufficient to brighten senti-

ment. The regional business surveys for January

in the USA consequently reveal an even more

improved mood among the companies. The

Philadelphia Index, for example, registered fur-

ther improvement of late; with an impressive

level of 23.6 points, the widely followed time

series is signalling a marked - even almost eu-

phoric – degree of economic optimism among

the polled respondents. The Richmond Fed's

sentiment indicator too continued its upward

trend at the start of the new year, actually reach-

ing a double-digit figure.

Above all the improved sentiment among the

economic agents in conjunction with the deregu-

lation can be expected to help accelerate the

pace of growth slightly in 2017. The likely tax

cuts ought to lead to positive effects in Q4/2017

at the earliest. Greater economic activity as re-

sult of the infrastructure projects aimed for by

Trump – but which are likely to find little support

in Congress – can first be reckoned with from

2018 onwards. Against this background, we are

therefore sticking to our GDP forecast for the

time being. The first figures on economic growth

in Q4/2016 reported on Friday last week are still

very prone to revisions. In conjunction with other

specific information on the new government's

economic policy, there could be a greater need

in the short term for adjustments to our current

projections, however.

Fed rather cautious

The recently reported data on the US economy

confirm the necessity for the Fed's rate hike in

December 2016. In 2017 the central bankers in

Washington will need to be a bit faster in the

normalization of their monetary policy. In our

view, there is more likelihood of two interest rate

hikes; only if the US economy were to run excep-

tionally well in 2017 would the central bankers

find themselves in a predicament and have to

make three adjustments to the Fed funds target

rate.

Trump versus dollar

The rate hike in the United States has undoubt-

edly helped the US currency. An explanation for

the slight pressure on the dollar at the present

time probably lies in Washington in the person of

the new president. The current government quite

obviously sees problems with the price competi-

tiveness of US companies – especially in the

manufacturing sector. Besides the classic pro-

tectionist measures of national trade policy, the

exchange rate policy can of course be a useful

tool as well at this point. What appears to be

wanted in the White House above all in this re-

spect is a weaker US currency in the short term,

so it will probably be a case of Donald Trump

versus the dollar for the time being. Moreover, as

from the 2nd half-year the euro could well benefit

from what will then be a more intensive tapering

debate within the ECB.


NORD/LB Economics

Seite 4 von 24

Fundamental forecasts, USA

2016 2017 2018

GDP 1.6 2.3 2.2

Private consumption 2.1 2.1 2.1

Govt. consumption 0.5 1.5 1.5

Fixed investment -1.0 3.0 3.0

Exports 2.5 1.5 1.0

Imports 0.5 0.5 1.0

Inflation 1.3 1.8 2.3

Unemployment rate 1 4.9 4.8 4.7

Budget balance 2 -4.2 -5.7 -5.9

Current acc. balance 2 -2.6 -2.6 -2.6

Change vs previous year as percentage; 1 as percentage of the labour force; 2 as percentage of GDP

Quarterly forecasts USA

I/16 II/16 III/16 IV/16 I/17

GDP ann. 0.8 1.4 3.5 2.0 1.9

GDP yoy 1.6 1.3 1.7 1.9 2.2

Inflation yoy 1.1 1.0 1.1 1.8 1.9

Change as percentage

Interest and exchange rates, USA

26.01. 3M 6M 12M

Fed funds rate 0.75 0.75 1.00 1.25

3M rate 1.04 0.95 1.10 1.30

10Y Treasuries 2.50 2.30 2.30 2.50

Spread 10Y Bund 202 200 180 170

EUR in USD 1.07 1.08 1.10 1.11

Coming Up…

Date Indicator Previous

value

30.01. Dallas Fed Index Jan 15.5

31.01. S&P CL CS 20City HPI m

Nov 0.6%

31.01. Consumer Confidence Jan 113.7

31.01. ADP Employment Jan 153K

31.01. Chicago PMI Jan 53.9

01.02. ISM PMI Jan 54.5

01.02. ISM Prices Paid Jan 65.5

03.02. ISM PMI Non-Manu Jan 56.6

03.02. Unemployment rate Jan 4.7%

14.02. NFIB Index Jan 105.8

15.02. Empire State Index Feb 6.5

15.02. NAHB Index Jan 67

15.02. Retail sales m Jan 0.6%

16.02. Philadelphia Index Feb 23.6

m mom, q qoq annualized, italics: preliminary result

Current forecasts in our weekly calendar

Source: Bloomberg, NORD/LB Economics

Euroland Christian Lips

• Solid growth in Q4/2016

• Leading indicators signal sustained

upswing

• ECB unimpressed by rising inflation

Solid growth in Q4/2016

Eurostat will be issuing its flash estimate for the

GDP trend in the eurozone for Q4/2016 in late

January. Contrary to custom, there have been no

preliminary results published as yet by the EU

member states. According to the indicators

available to date, anything but a continuation of

the economic upswing would be a huge surprise.

Indeed, we expect a slight acceleration in the

pace of growth (forecast: +0.5 percent qoq),

given that the two heavyweight economies Ger-

many and France registered significant expan-

sion at year-end 2016. Above all the industry

activity in both countries has picked up pace,

with corresponding effects on exports.

Moreover, we expect Spain to report similarly

high GDP growth as in the preceding quarters,

and Italy is not likely to have had a greater brak-

ing effect than usual. The indicators at the ag-

gregate level are pointing in the same direction.

This relates to the ongoingly solid performance

of consumption, strong growth in industrial out-

put and a correspondingly significant improve-

ment in business confidence. The upshot is that

2016 as a whole saw GDP in the eurozone up by

1.7 percent as against the preceding year.

Leading indicators signal sustained upswing

The leading indicators have improved quite sig-

nificantly in recent months, thus signalling a sus-

tained economic upswing. January saw the Mar-

kit PMIs register levels of 55.1 points (industry)

and 53.6 points (services) that were well inside

the growth zone, before which the sentix eco-

nomic index had improved markedly to 18.2

points. In addition, the ZEW economic expecta-

tions registered a level of 23.2 balance points –

its highest for more than a year.

And, with 107.8 points in December as month

under review, the Economic Sentiment indicator

reached its highest level since early 2011. This is

attributable to improvements in all subcompo-

nents. With the exception of Greece, the index

for business confidence in the meantime stands

above the long-term median (see chart). Com-


NORD/LB Economics

Seite 5 von 24

pared to mid-2016, optimism has grown to what

is in some cases a considerable degree – de-

spite Brexit and Trump!

Positive sentiment in the winter half-year

* Bars: historical span; Source: Bloomberg, Eurostat, NORD/LB Economics

ECB unimpressed by rising inflation

At its January meeting, the ECB's Governing

Council showed itself to be markedly unim-

pressed by the rise in inflation at year-end 2016.

The rate of inflation in Germany rose somewhat

more than had been forecast, to 1.7 percent in

year-on-year comparison. The rise to 1.1 percent

yoy in the single currency area as a whole was in

line with expectations, however, with base ef-

fects in the oil price playing a decisive role in this

respect. The signs are that January too will have

seen a continuation of the upward trend, and we

anticipate a year-on-year inflation rate around

the 2-percent mark for Germany and 1.6 percent

for the eurozone. The inflation rates can already

be expected to decline significantly in the spring,

however.

Primarily due to external special factors, inflation

is moving in the direction sought by the Govern-

ing Council, but its members have yet to see any

signs of a "convincing upward trend in core infla-

tion". Consequently, the ECB left its monetary

policy (key interest rates, purchasing volume)

unchanged. Instead, ECB President Mario

Draghi warned anew against downside risks for

the macroeconomic forecasts. A detail of the rule

adopted in December to modify the ECB's asset

purchase programme by removing the deposit

rate as minimum yield floor has now been con-

cretized, to the effect that "priority" will continue

to be given to securities with a yield above the

deposit rate. The ECB no doubt wishes to pre-

vent any further fuelling of the rise in long-term

government bond yields through the modifica-

tions to the rules.

Fundamental forecasts, Euroland

2016 2017 2018

GDP 1.7 1.6 1.7



Fixed investment 2.4 1.7 3.0

Net exports 1 -0.1 0.2 0.3




Current acc. balance 3 3.4 2.9 2.7

Change vs previous year as percentage; 1 as contribution to GDP growth; 2 as percentage of the labour force; 3 as per-centage of GDP

Quarterly forecasts, Euroland

I/16 II/16 III/16 IV/16 I/17

GDP qoq 0.5 0.3 0.3 0.5 0.4

GDP yoy 1.7 1.7 1.7 1.7 1.6

Inflation yoy 0.0 -0.1 0.3 0.7 1.7

Change as percentage

Interest rates, Euroland

26.01. 3M 6M 12M

Repo rate ECB 0.00 0.00 0.00 0.00

3M rate -0.33 -0.33 -0.34 -0.35

10Y Bunds 0.48 0.30 0.50 0.80

Coming Up…


value

30.01. Economic Sentiment Jan 107.8

30.01. Industry confidence Jan 0.1

30.01. Service confidence Jan 12.9

31.01. Unemployment rate Dec 9.8%

31.01. GDP q, initial report Q4 0.3%

31.01. HICP Flash Estimate y Jan 1.1%

02.02. Producer prices y Dec 0.1%

03.02. Retail sales m Dec -0.4%

06.02. Sentix Investor Confid. Feb 18.2

14.02. Industrial output m Dec 1.5%

14.02. ZEW expectations Feb 23.2

17.02. Construction output m Dec 0.4%

20.02. Consumer confid., prel. Feb -4.9

m mom, q qoq, y yoy, italics: preliminary result Current forecasts in our weekly calendar


60

70

80

90

100

110

120

130Index

Economic Sentiment indicator *

Level six months agoCurrent level (Dec. 2016)


NORD/LB Economics

Seite 6 von 24

Germany Christian Lips

• Economy grew by 1.9 percent in 2016

• Trump dampens business sentiment

• 2017 with continued upswing – inflation

temporarily above the 2-percent mark

Economy grew by 1.9 percent in 2016

The German economy gave a very solid showing

in 2016, with growth accelerating in spite of sev-

eral negative events (e.g. Brexit). The Federal

Statistical Office's flash estimate puts a figure of

1.9 percent on real GDP expansion as against

the preceding year. This means that the forecast

of 2.0 percent that we made a year ago has

proven quite accurate. A lack of data on Decem-

ber in some cases made it necessary for the

statisticians to rely on estimates for Q4. We ex-

pect the last three months of 2016 to have seen

quarter-on-quarter growth of at least 0.5 percent,

with industrial output and retail sales having

shown a healthy trend up to November. Both

consumption as well as net exports again con-

tributed to the German economy's growth.

Contributions to GDP growth

Source: Bloomberg, Destatis, NORD/LB Economics

Taking account of the fact that 2016 had one

working day more than the preceding year

makes for a calendar-adjusted growth figure of

1.8 percent (swda). As expected, domestic de-

mand was the mainstay behind the growth trend.

The key growth driver was private consumption,

with strong expansion of 2 percent, while public

consumption actually rose by an impressive 4.2

percent – its highest growth since 1992. The

main reason behind this trend lies in the gov-

ernment spending necessitated by the high influx

of refugees which, as was to be expected, had

the effect of a small stimulus package. With

growth of 3.1 percent, construction investment

too made a weighty contribution to Germany's

macroeconomic expansion. By contrast, net

exports and investment in equipment (+1.7 per-

cent) gave a disappointing showing over the year

as a whole. The former is attributable to the

modest economic momentum at the global level,

the latter to the diversity of political uncertainties.

Trump dampens business sentiment

The sentiment among German companies has

clouded to an unexpectedly significant extent at

the start of the year, as reflected in the ifo busi-

ness climate index which fell from 111.0 to just

109.8 points in January. It can at least be said

that the polled respondents again see the current

business situation in a somewhat better light

than in the month before (116.9 points), and the

sentix and ZEW surveys delivered similar re-

sults. The Markit PMI too is signalling a strong

growth trend in the industrial sector at the begin-

ning of the year. That said, the sharp decline

registered by the ifo expectations component

(103.2 points) is a source of some concern,

however. Indeed, it looks as if Germany's com-

panies were taken unawares by Trump's verbal

abuse. Hopes of a President Trump who acts

more moderately than candidate Trump have

been quickly dashed. The ifo export expectations

improved significantly, but in our view this trend

merely confirms the still high foreign demand at

present. Should Trump prove serious about his

protectionist intentions, there is every reason to

expect the global economic wind to turn icy. The

first days of Trump's presidency have already

seen him initiate America's exit from the TPP

and preparations for NAFTA renegotiations. This

means that the TTIP is virtually dead as well.

2017 with continued upswing – inflation

temporarily above the 2-percent mark

The German economy is fundamentally in a ro-

bust state, however, even if the headwind is

getting harsher. Besides the new element of

uncertainty in the person of Trump, the Brexit

negotiations will be commencing in the foresee-

able future as well. Moreover, Europe faces a

year of crucial elections, in the Netherlands,

France and Germany, the results of which could

be decisive for the future of the EU. The compa-

nies are likely to remain cautious with invest-

ments in light of this great uncertainty, for which

3.0

1.7

0.0

-0.7

1.20.7

3.73.3

1.1

-5.6

4.13.7

0.50.5

1.61.71.9

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014 2016

PP, yoy

Net exports InventoriesGr. fixed capital form. Gov't. consumptionPrivate consumption GDP growth


NORD/LB Economics

Seite 7 von 24

reason we expect 2017 to see moderate GDP

growth of 1.5 percent. We anticipate inflation to

rise temporarily above the 2-percent mark after

already having risen to 1.7 percent yoy in De-

cember. Spring will already see the annual rate

drop back, however, and likely to stabilize below

the 2.0 percent yoy mark over 2017 as a whole.

Fundamental forecasts, Germany

2016 2017 2018

GDP 1.9 1.5 1.6



Fixed investment 2.5 2.0 3.2

Exports 2.5 3.5 3.7

Imports 3.4 3.5 4.2

Net exports 1 -0.1 0.2 0.1

Inflation 2 0.4 1.8 1.7


Budget balance 4 0.6 0.3 0.4


Change vs previous year as percentage; 1 as contribution to GDP growth; 2 HICP; 3 as percentage of the civil labour force (Federal Employment Office definition); 4 as percentage of GDP

Quarterly forecasts, Germany

I/16 II/16 III/16 IV/16 I/17

GDP qoq 0.7 0.4 0.2 0.6 0.4

GDP 1 yoy 1.5 3.1 1.5 1.4 3.2

Inflation yoy 2 0.1 0.0 0.4 1.0 2.0

Change as percentage; 1 not seasonally adjusted; 2 HICP

Coming Up…


value

30.01. HICP y, prel. Jan 1.7%

31.01. Retail sales m Dec -1.7%

31.01. Unemployment rate, sa Jan 6.0%

06.02. New orders m Dec -2.5%

07.02. Industrial output m Dec 0.4%

09.02. Trade balance (€ bn) Dec 22.7

09.02. Current account (€ bn) Dec 24.6

09.02. Exports m Dec 3.9%

09.02. Imports m Dec 3.5%

14.02. GDP q, prel. Q4 0.2%

14.02. ZEW expectations Feb 16.6

20.02. Producer prices y Jan 1.0%

22.02. ifo Business Climate Feb 109.8

23.02. GfK Consumer Confid. Mar 10.2

m mom, y yoy, q qoq, italics: preliminary result Current forecasts in our weekly calendar

Source: Bloomberg, Destatis, NORD/LB Economics

France Christian Lips

• 2016 ends with strong plus in output

• Sentiment significantly improved

• Fillon under pressure, quarrelling left –

Macron to have the last laugh?

Year-end 2016 saw the French economy with far

stronger growth than in the two preceding quar-

ters. In late January the INSEE statistical insti-

tute will issue a flash estimate on the GDP trend

in Q4/2016. We expect a quarter-on-quarter

growth figure of around 0.5 percent. The indus-

trial sector registered particularly strong expan-

sion, with manufacturing output up by an unex-

pectedly strong 2.3 percent mom. In addition,

there has been a considerable improvement in

sentiment. In January the Markit Composite PMI

registered its highest level since mid-2011, with

53.8 points, and the latest INSEE industry survey

too documented a brightening in business confi-

dence. Against this background the French

economy is likely to continue its positive trend in

Q1/2017. Whatever, the months ahead will be all

about France's political future. The current fa-

vourite to succeed Hollande, Francois Fillon, is

facing allegations of unjustified employment of

his wife at the state's expense. The first round of

the Socialists' primaries unexpectedly saw Be-

noît Hamon come in ahead of former prime min-

ister Manuel Valls. The chances of former econ-

omy minister Emmanuel Macron ("En marche!")

have gathered momentum in this environment,

and he has shown continuous improvement in

opinion polls. Given the degree of uncertainty

until the elections, the spread of French govern-

ment bonds to Bunds will remain elevated for the

time being. (Since going to press it is now known

that Mr. Hamon will be the Socialists’ candidate).

Fundamental forecasts, France

2016 2017 2018

GDP 1.2 1.3 1.6

Inflation (HICP) 0.3 1.4 1.4





Interest rates and spreads, France

26.01. 3M 6M 12M

10Y 1.03 0.90 1.00 1.20

Spread 10Y Bund 54 60 50 40


NORD/LB Economics

Seite 8 von 24

Italy Frederik Kunze

• Aftermath of the December referendum

• Financial market as growth risk

• Investment reticence

There seems to be no end to the speculations as

to the possibility of early elections in the wake of

the failed referendum in December last year, the

resultant resignation of Matteo Renzi and the

subsequent formation of a new government un-

der former foreign prime minister Paolo Gentilo-

ni. This is naturally fuelling the political uncertain-

ty in the country – a situation that is without

doubt inconvenient since the domestic financial

market is already generating notable risks to the

economic expansion process. Indeed, there is

also the possibility that new elections could fo-

ment fears of Italy heading for an exit from the

EU. This scenario must continue to be seen as

being of a worst-case nature. Even so, the

aforementioned developments are weighing on

sentiment, which is also likely to be reflected in

the country's economic activity, with, above all,

negative impacts on the investment activities on

the part of the Italian business enterprises to be

reckoned with. All told, we are reckoning with

rather modest growth in 2017 and for 2018 as

well. All the same, the improving situation in the

labour market can be expected to generate sup-

portive stimuli in the direction of private con-

sumption. This view of things is underpinned by

the positive sentiment among the Italian con-

sumer surveys. That said, foreign trade has to be

considered a potentially negative factor.

Fundamental forecasts, Italy

2016 2017 2018

GDP 0.9 0.8 0.6

Inflation (HICP) -0.1 1.2 1.3





Interest rates and spreads, Italy

26.01. 3M 6M 12M

10Y 2.23 2.20 2.30 2.60

Spread 10Y Bund 175 190 180 180

Spain Frederik Kunze

• Spain (still) on an impressive growth path

• Ongoing political uncertainty

• Two-speed labour market

Spain can be expected to remain on its growth

path in 2017 as well, though the economic ex-

pansion process can be expected to lose mo-

mentum. Even if net exports are likely to contin-

ue generating positive contributions to the Span-

ish economy's growth for the time being, our

view is that foreign trade will follow a less dy-

namic trend as was the case in 2016. The do-

mestic market will remain the mainspring of GDP

growth for the moment, though the price trend

must not be ignored in this context. In Spain too,

the issue of inflation is back on the economic

policy agenda, and account must also be taken

of the risk of the ongoing state of political uncer-

tainty generating dampening effects on the coun-

try's economic activity. In actual fact, however, it

can safely be assumed that the signs of recovery

in the labour market will prospectively continue

bolstering growth on the domestic front. All the

same, it is important to note that the recovery on

the employment side is particularly attributable to

the service sector. In the manufacturing sector

and in the construction industry, however, there

are no notable signs of a turnaround in the la-

bour market, with account also to be taken of the

ongoingly high proportion of short-term employ-

ees. In sum, we expect to see GDP growth lose

pace at the latest in the course of 2018 while

nevertheless remaining substantial in compari-

son with the rest of the eurozone.

Fundamental forecasts, Spain

2016 2017 2018

GDP 3.2 2.3 1.9

Inflation (HICP) -0.3 1.9 1.3





Interest rates and spreads, Spain

26.01. 3M 6M 12M

10Y 1.57 1.50 1.60 1.90

Spread 10Y Bund 109 120 110 110


NORD/LB Economics

Seite 9 von 24

Switzerland Christian Lips

• Industrial output up in Q4

• Deflationary phase drawing to a close

• SNB: No rate change till late 2018?

Industrial Output up in Q4

Year-end 2016 saw the economic trend in Swit-

zerland recover some momentum, at least as

signalled by the majority of the currently availa-

ble indicators. The PMI for the manufacturing

sector registered an average level of almost 56

points in Q4 – its highest for three years. The

survey respondents saw particularly strong

growth in the subcomponents industrial output

(December: 58.9 points) and the order backlog

(December: 60.3 points). Values of this magni-

tude are as a rule only reached on the occasion

of cyclical boom phases. The depletion of the

inventories up to year-end was correspondingly

strong. That said, the healthy industrial activity

has not yet made for any stronger momentum on

the employment front.

Employment momentum merely slight at

present


Deflationary phase drawing to a close

The high level of demand is likely to have im-

pacted the purchase prices too in the meantime,

with the relevant PMI sub-index having climbed

to 59.5 points. Even so, we regard it as more

likely that it is primarily the higher oil price that is

reflected therein, having led almost everywhere

to a marked upward movement of the price in-

dex, both at the consumer price level as well as

at the upstream price levels. 2016 as a whole

saw the rate of inflation in Switzerland in the

negative zone again, with an annual average

year-on-year rate of -0.4 percent. But now, there

are gradual signs of this deflationary phase

drawing to a close, albeit very hesitantly and

slowly. 2017 and 2018 can be expected to at

least see a slightly positive rate of inflation again.

With year-on-year rates of 0.1 and 0.3 percent,

the price growth trend in the alpine republic re-

mains subdued, attributable in particular to the

ongoingly strong franc.

SNB: No rate change till late 2018?

The SNB is still prisoner of the ECB policy. After

the Governing Council's last meeting, ECB pres-

ident Mario Draghi had stated that, given the

latest inflation data, the ECB is not presuming

that the upward price trend is of a self-sustaining

nature. Accordingly, he strongly rebuffed any

modification of the roadmap for the central

bank's monetary policy just recently published in

December. Add to this a massive degree of polit-

ical uncertainty which has risen sharply again in

particular since Donald Trump's inauguration as

the 45th president of the USA. Both factors are

making for sustained upward pressure for the

Swiss franc against the euro, with the EUR/CHF

exchange rate falling below the mark of CHF

1.0700 per EUR in January. This confirms our

forecast that, above all in the first half-year, this

mark will be under repeated attack – despite all

interventions on the part of the SNB. Against this

background an interest rate change by the SNB

is becoming a more distant prospect. We are not

reckoning with any rate hike in Switzerland be-

fore late 2018, given that the ECB will only slow-

ly end its QE programme until year-end 2018,

but will not yet be adjusting the deposit rate.

Fundamental forecasts, Switzerland

2016 2017 2018

GDP 1.4 1.5 1.8

Inflation (CPI) -0.4 0.1 0.3


Budget balance 2 -0.1 0.2 0.1



Interest and exchange rates, Switzerland

26.01. 3M 6M 12M

LIBOR target rate -0.75 -0.75 -0.75 -0.75

3M rate -0.73 -0.75 -0.75 -0.75

10Y -0.07 -0.30 -0.10 0.10

Spread 10Y Bund -56 -60 -60 -70

EUR in CHF 1.07 1.07 1.08 1.10

20

30

40

50

60

70-8

-4

0

4

8

12

1998 2002 2006 2010 2014

PointsThousand

Change unempl. Figure (mom)

PMI Employment (r/h scale, inverted)


NORD/LB Economics

Seite 10 von 24

Japan Dr. Stefan Grosse / Frederik Kunze

• Off to a good start into the new year

• Bank of Japan in focus

• Economic policy challenges

Off to a good start into the new year

It currently looks as if the Japanese economy

has got off to a good start into the new year.

Both the cheap yen as well as the revival of the

global economy have come to the assistance of

the exports-oriented companies in particular,

with exports accordingly up significantly in No-

vember and December. Even though the imports

trend remained considerably weaker, we can

likewise talk of a trend reversal in this case, and

this is also an indication of rising domestic con-

sumption. The prospects likewise appear to be

good, with, for example, the Nikkei Manufactur-

ing PMI yet again rising, this time from the pre-

ceding month's 51.3 points to a current level of

52.4 points – a trend that certainly indicates

strong momentum in the manufacturing sector.

There are signs of relatively lively economic ac-

tivity in the services segment as well: the Nikkei

Services PMI climbed by 0.5 to 52.3 points. All in

all, we are maintaining our assessment that the

world's third largest economy will grow by 1.3

percent in 2017. Although we are not currently

anticipating a renewed depreciation of the Japa-

nese currency against the US dollar, the weak

yen will make a positive contribution to growth in

the newly started year as well. Private consump-

tion will be the mainspring of the economic ex-

pansion process, which not least underlines the

importance of a stable labour market and dy-

namic growth in disposable income.

Bank of Japan in focus

Having first made for headlines in January 2016

with the introduction of negative interest rates,

the central bankers in Tokyo changed direction

in terms of their own monetary policy by initiating

yield curve control. The focus is now on the

BoJ's meeting set to start on 30 January. The

publication of the Japanese central bank's fore-

cast report in particular is likely to provide quite

some market-relevant information which, besides

the GDP growth forecast, will above all include

the outlook for price developments. The mone-

tary policymakers have after all been tardy in

delivering more dynamic consumer price infla-

tion. The BoJ's January meeting is unlikely to

see any changes made in terms of monetary

policy orientation – such as an adjustment of the

yield target for 10-year government bonds. In

particular the reactions in the international finan-

cial markets to the reports from the United States

are – not least due to the weaker yen – reducing

the pressure on the monetary policymakers

headed by central bank's governor Haruhiko

Kuroda.

Economic policy challenges

Having been set as the date for a meeting be-

tween the new US president Donald Trump and

Shinzo Abe, 10 February could be an important

date for the US-Japanese trade relations. 10

February could be an important day for the US-

Japanese trade relations. In particular Tokyo has

of late expressed readiness for quite far-reaching

agreements, and the negative attitude displayed

by Donald Trump towards the Trans-Pacific

Partnership (TPP) is the source of corresponding

headaches for the Japanese government. The

proposed trade agreement which, besides Japan

and the United States, would also have included

Asian countries such as Singapore, Malaysia

and Vietnam, would after all have come about

without Chinese participation, and Beijing could

now – to the detriment of Japan – strive for a

solution of its own. Abe will endeavour to prevent

this result.

Fundamental forecasts, Japan

2016 2017 2018

BIP 1.0 1.3 0.5

Inflation -0.2 1.0 1.9

Arbeitslosenquote1 3.1 3.2 3.6

Haushaltssaldo2 -5.5 -5.2 -5.0

Leistungsbilanzsaldo2 3.8 3.4 3.3


Interest and exchange rates, Japan

26.01. 3M 6M 12M

Call rate 0.00 -0.40 -0.40 -0.40

3M -0.02 -0.05 -0.10 -0.10

10Y 0.09 0.07 0.08 0.15

Spread 10Y Bund -39 -23 -42 -65

EUR in JPY 122 123 124 129

USD in JPY 115 113 113 117


NORD/LB Economics

Seite 11 von 24

China Frederik Kunze

• China as champion of free trade?

• Robust economic activity

• PBOC in a quandary

China as champion of free trade?

It seems almost absurd at first glance that, in an

environment in which more and more market

observers fear US protectionism, Chinese Presi-

dent Xi Jinping of all people is presenting himself

as a champion of free trade. The motives behind

this are anything but far-fetched, however. Bei-

jing has an interest in there being as few barriers

as possible, bearing in mind both the significant

proportion of China's GDP accounted for by ex-

ports as well as the ambitious plans within the

framework of its own going-global strategy. That

said, at this point it ought not to be forgotten that

the decision-makers in China too are not exclu-

sively devoted to the global common good –

though there is not likely to be an openly de-

clared "China First" movement.

Robust economic activity

The statistical authorities have attested dynamic

year-on-year growth of 6.8 percent in Q4, which

makes for a GDP growth figure of 6.7 percent for

2016 as a whole. The previously released PMI

results – and the data on the price trend – are

likewise signalling robust economic activity, with

both the CFLP Manufacturing PMI and the SME-

focussed Caixin index indicating acceleration in

growth. The service sector is likewise registering

ongoingly positive sentiment. Indeed, the service

sector remains one of the biggest hopes as re-

gards the restructuring of the growth model. The

official statistics say that the tertiary sector made

the biggest contribution to GDP in Q4, account-

ing for 52 percent thereof and registering im-

pressive year-on-year growth of 8.3 percent.

With the industrial enterprises in mind, the price

trend can be understood as indicating a certain

easing of the situation in that sector of the Chi-

nese economy. The end of the downward trend

in producer prices is at least curbing the debate

as to an overcapacities-induced price decline.

December saw the PPI rise by 5.5 percent yoy,

and it will now be a matter of what leeway the

industrial companies have for passing on these

increases. We would not yet be inclined to over-

interpret the declining growth in corporate profits

in the manufacturing sector (from the previous

month's year-on-year figure of 14.5 percent to

2.3 percent) since the time series is quite highly

volatile.

PBOC in a quandary

The level of corporate debt remains a challenge

for the PBOC, with December registering a re-

newed pronounced lending volume. The new

RMB loans alone totalled RMB 1,040 billion in

that month, which suggests that the current eco-

nomic activity is still being bought with rising

debt. In conjunction with the trend towards over-

heating in the financial markets as well as the

globally rising interest rate levels, the pressure

on the PBOC is – at least theoretically – growing

to put a more restrictive monetary policy in place.

The raising of the rates for what is in monetary

policy terms the important Medium Term Financ-

ing Liquidity (MLF) as reported a few days ago

can be put in this context. Nevertheless, the

state of tension in which the PBOC currently

finds itself is reflected in the recent (temporary)

reduction of the minimum reserve requirements

for large state-owned banks. Above all touching

the key interest rates harbours highly unpredict-

able risks. Rising interest rates would ultimately

become a burden on the debt-ridden companies,

while falling rates would probably fuel the credit

channel further.

Fundamental forecasts, China

2016 2017 2018

GDP 6.7 6.4 6.3






Interest and exchange rates, China

26.01. 3M 6M 12M

Deposit rate 1.50 1.50 1.50 1.50

3M SHIBOR 3.87 3.10 3.15 3.20

10Y 3.37 3.15 3.20 3.30

Spread 10Y Bund 289 285 270 250

EUR in CNY 7.35 7.61 7.87 8.05

USD in CNY 6.88 7.05 7.15 7.25


NORD/LB Economics

Seite 12 von 24

Britain Tobias Basse, Bernd Krampen

• May goes for a hard Brexit

• Q4 with very solid GDP growth

• Bank of England in a dilemma

Theresa May presented her notions of a hard

Brexit but left the concrete method of approach

largely open. She would like to see the country

leaving the single market in order to be able to

restrict the free movement of workers. The Prime

Minister is also aiming to leave the customs un-

ion and conclude new trade agreements ("Global

Britain"). Her words ultimately sounded a little bit

like "cherry-picking". Her aim is to trigger Article

50 by the end of March, and the Supreme

Court's decision that the government needs par-

liamentary approval to do so is not likely to stop

her. The British economy has proven remarkably

resilient in the meantime, as confirmed by robust

qoq GDP growth of 0.6 percent in Q4. All the

same, the fears among many consumers of ris-

ing prices and thus dwindling purchasing power

appear to be growing, as the decline in retail

sales could be indicating. The inflation rate in

consumer prices climbed in the wake of the

pound depreciation to a year-on-year level of 1.6

percent and will soon have a "2" in front of the

decimal point. The Bank of England thus finds

itself in a dilemma: on the one hand it has to

ensure price stability and, on the other, take over

the cushioning of the looming Brexit-induced

economic slowdown. The pound remains under

pressure.

Fundamental forecasts, Britain

2016 2017 2018

GDP 2.0 0.8 0.4

Inflation (CPI) 0.6 2.4 2.5




Change vs previous year as percentage; 1 as percentage of the labour force as per ILO concept; 2 as percentage of GDP

Interest and exchange rates, Britain

26.01. 3M 6M 12M

Repo rate 0.25 0.25 0.25 0.25

3M 0.36 0.40 0.40 0.40

10Y 1.52 1.40 1.50 1.60

Spread 10Y Bund 103 110 100 80

EUR in GBP 0.85 0.90 0.90 0.95

GBP in USD 1.26 1.20 1.22 1.17

Canada Tobias Basse, Bernd Krampen

• Solid growth in the second half of 2016

• Anxious glances southwards

• BoC remains in wait-and-see mode

The Canadians are continuing to keep a worried

eye on their southern neighbour where new

president Trump is preparing to sound out new

rules in trade with Canada as well. That said, the

Canadian economy is currently back in better

shape than a year ago, with Q3 registering an-

nualized quarter-on-quarter GDP growth of 3.5

percent and Q4 likely to have seen a solid trend

as well. This is suggested by the economic indi-

cators and the brightening mood in the corporate

sector. In particular the energy sector is experi-

encing a turnaround after the negative oil price-

induced effects, as reflected in an upward trend

on the investment front. Despite the rising oil

prices of late and Justin Trudeau's supportive

fiscal policy as positive factors, the outlook for

Canada remains precarious, however, given that

the country is strongly dependent on exports to

the USA with which there could well be trade

friction. On the other hand, the expansionary

fiscal policy to be expected there could also

generate stimuli for the Canadian economy.

While base effects are likely to make for a slight

rise in inflation, this trend can be expected to be

more moderate again in the second half-year.

The Bank of Canada is accordingly likely to re-

main in wait-and-see mode, so the capital mar-

ket rates too will only rise marginally. The loonie

will merely moderately depreciate.

Fundamental forecasts, Canada

2016 2017 2018

GDP 1.3 1.9 1.9






Interest and exchange rates, Canada

26.01. 3M 6M 12M

O/N target rate 0.50 0.50 0.50 0.50

3M 0.46 0.50 0.55 0.80

10Y 1.82 1.60 1.70 1.90

Spread 10Y Bund 134 130 120 110

EUR in CAD 1.40 1.43 1.47 1.51

USD in CAD 1.31 1.32 1.34 1.36


NORD/LB Economics

Seite 13 von 24

Mexico Tobias Basse, Bernd Krampen

• Banxico could well act again

• Trump makes for deep worry lines

• MXN remains under pressure

After five rate hikes totalling 250 bp in 2016,

Banxico could find itself forced to take renewed

action in early 2017. First, the depreciation of the

Mexican peso continued, a trend that could pro-

spectively make for increasing inflationary pres-

sure. Second, further inflationary pressure can

be expected as result of increases in the mini-

mum wage and petrol prices. While central bank

chairman Cartens stressed that the latter two

factors are merely having a temporary effect, we

can nevertheless well imagine a renewed 50 bp

rate hike being decided at the next meeting on 9

February, with the likelihood of a further two

moderate hikes in the further course of the year.

Sentiment in America's southern neighbour has

cooled significantly in the wake of the US presi-

dential election. There is considerable uncertain-

ty about Trump's intentions, and his announce-

ment that work is to soon start on the construc-

tion of a wall along the border is poisoning the

relations between the two countries. Mexico

would be hardest hit if protectionist measures

were to be implemented, and it remains to be

hoped that Congress will largely put paid to

Trump's interventions in trade policy. The rising

interest rates, Nieto's more restrictive fiscal poli-

cy and the reticence in investment are weighing

on the economy, however, though exports and

remittances could benefit from the weak peso.

Fundamental forecasts, Mexico

2016 2017 2018

GDP 2.1 1.7 1.8






Interest and exchange rates, Mexico

26.01. 3M 6M 12M

O/N target rate 5.75 6.25 6.50 6.75

3M 6.34 6.60 6.90 7.20

10Y 7.59 8.00 8.30 8.50

Spread 10Y Bund 711 770 780 770

EUR in MXN 22.66 22.68 24.20 24.42

USD in MXN 21.21 21.00 22.00 22.00

Australia Tobias Basse, Bernd Krampen

• Negative GDP in Q3 merely a blip

• RBA takes wait-and-see stance

• A$ stabilized of late – but just temporarily

Q3/2016 saw Australia register its first GDP

downturn after an impressive 21 consecutive

quarters of growth. That said, there are good

reasons for expecting a significant upturn in Q4,

as indicated by the sound monthly indicators:

retail sales grew in October and November, sup-

ported by low interest rates and growing assets,

not least attributable to generally higher real

estate prices. Consumption is registering a

healthy trend in the wake of a basic brightening

in the labour market, with the unemployment rate

down and employment growth continuing its

upward trend – albeit primarily driven by part-

time jobs. The sentiment in the corporate sector

has improved significantly, due not only to robust

domestic demand but also to rising commodity

prices and the stable growth situation in China.

Following two interest rate cuts in 2016, the Re-

serve Bank of Australia has seen no grounds of

late for any further action against a background

of falling inflation rates and, with inflation in mind,

rising house prices, a depreciation of the Austral-

ian dollar and, on the other hand, the global im-

ponderables. In this respect, both Trump's poli-

cies as well as China remain relevant for Down

Under.

Fundamental forecasts, Australia

2016 2017 2018

GDP 2.4 2.6 2.8






Interest and exchange rates, Australia

26.01. 3M 6M 12M

Cash target rate 1.50 1.50 1.50 1.50

3M 1.77 1.75 1.75 1.75

10Y 2.75 2.75 2.75 2.75

Spread 10Y Bund 226 245 225 195

EUR in AUD 1.42 1.45 1.49 1.52

USD in AUD 1.33 1.34 1.35 1.37


NORD/LB Economics

Seite 14 von 24

Changes

Australia is included in our coverage as of now.

Please note:

The historical data given in this publication originate from Feri and Bloomberg (financial market time series). All

financial market time series (exchange and interest rates, yields) are shown on the basis of the closing rates.


NORD/LB Economics

Seite 15 von 24

Yields

(in %)

NORD/LB forecasts

for horizons

current 3M 6M 12M

3M -0.33 -0.33 -0.34 -0.35

1Y -0.62 -0.65 -0.65 -0.60

2Y -0.66 -0.70 -0.65 -0.60

3Y -0.66 -0.70 -0.62 -0.48

4Y -0.53 -0.60 -0.50 -0.33

5Y -0.38 -0.45 -0.35 -0.15

6Y -0.18 -0.30 -0.18 0.02

7Y -0.03 -0.15 -0.02 0.20

8Y 0.13 0.01 0.15 0.39

9Y 0.30 0.15 0.32 0.59

10Y 0.46 0.30 0.50 0.80


Assessment: Inflation picked up pace in December as expected. Above all base effects in oil prices con-

tributed to this trend. While Q1 can be expected to see this upward trend continue in the short term, a self-

sustaining upward trend in prices is not yet in sight, however, since the domestic price pressure remains

very slight. The yields on government bonds have climbed in parallel. The medium-term downward trend

where German Bunds (10Y) are concerned has stopped, for which reason a certain degree of caution is

advisable from a technical perspective. That said, declining inflation rates are to be reckoned with at the

latest in spring, which will without doubt put high political risks more intensively in the focus of investors. In

the wake of the most recent market movements we no longer see, also for the phase before the French

presidential election, the risk of a collapse in yields on Bunds being as high as in the preceding month. In

the medium term the long-term government bond yields can be expected to continue rising on occurrence

of our baseline scenario, even if the influence of the ECB remains limited. Positive total returns are not to

be expected against this background.

Total Returns (in %)

for horizons

3M 6M 12M

3M -0.08 -0.16 -0.34

1Y -0.13 -0.30 -0.62

2Y -0.11 -0.34 -0.71

3Y -0.06 -0.01 -0.78

4Y 0.22 -0.17 -0.68

5Y 0.43 0.03 -0.56

6Y 0.83 0.35 -0.34

7Y 0.97 0.37 -0.37

8Y 1.26 0.55 -0.35

9Y 1.65 0.67 -0.43

10Y 2.06 0.73 -0.66

Source: NORD/LB Economics

A total return is the absolute profit from an investment in the time period under consideration, with account being taken of the pro-

rata yields plus the price gains or losses to be anticipated on the basis of the forecast yield curve change.

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

3M 1 2 3 4 5 6 7 8 9 10

% Yield curve forecasts

Current 3M 6M 12M

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

3M 1 2 3 4 5 6 7 8 9 10

%Expected total returns

3M 6M 12M

Yield curve, Euroland

Portfolio strategies


NORD/LB Economics

Seite 16 von 24

3-month horizon

Expected total returns (as %) Expected total returns (as %)

in euro in national currencies

EUR USD GBP JPY CHF USD GBP JPY CHF

3M 3M

1Y -0.1 -0.8 -5.6 -0.5 -0.3 1Y 0.2 0.1 -0.1 -0.1

2Y -0.1 -0.4 -5.5 -0.5 -0.1 2Y 0.7 0.2 0.0 0.0

3Y -0.1 0.0 -5.4 -0.4 0.1 3Y 1.0 0.3 0.0 0.3

4Y 0.2 0.2 -5.2 -0.4 0.4 4Y 1.3 0.5 0.0 0.5

5Y 0.4 0.4 -5.2 -0.4 0.9 5Y 1.5 0.6 0.0 1.1

6Y 0.8 0.8 -4.8 -0.4 1.0 6Y 1.8 1.0 0.0 1.1

7Y 1.0 1.0 -4.7 -0.3 1.6 7Y 2.0 1.0 0.2 1.8

8Y 1.3 1.2 -4.6 -0.3 2.0 8Y 2.3 1.2 0.1 2.1

9Y 1.6 1.7 -4.4 -0.3 1.9 9Y 2.7 1.4 0.1 2.1

10Y 2.1 2.0 -4.1 -0.2 2.0 10Y 3.1 1.7 0.2 2.1

Short-term 3M strategy (in euro): Once again we see chances for positive total returns on investments in

European government bonds (Bunds) in the medium and long-term segments. Positive total returns are

also a likely possibility where investments in the US dollar and, above all, the Swiss franc are concerned –

in each case (virtually) along the entire maturity curve. No consideration should on the other hand be giv-

en to the Japanese yen and, above all, the pound sterling as investment alternatives.

12-month horizon

Expected total returns (as %) Expected total returns (as %)

in euro in national currencies

EUR USD GBP JPY CHF USD GBP JPY CHF

3M 3M

1Y -0.6 -2.9 -10.6 -5.3 -3.8 1Y 0.8 0.1 -0.3 -1.0

2Y -0.7 -2.5 -10.5 -5.4 -3.7 2Y 1.3 0.1 -0.3 -0.8

3Y -0.8 -2.0 -10.5 -5.4 -3.5 3Y 1.8 0.2 -0.4 -0.6

4Y -0.7 -1.5 -10.2 -5.4 -3.3 4Y 2.3 0.5 -0.4 -0.5

5Y -0.6 -1.4 -10.2 -5.5 -3.1 5Y 2.4 0.5 -0.5 -0.2

6Y -0.3 -1.2 -9.8 -5.5 -3.2 6Y 2.6 0.9 -0.5 -0.4

7Y -0.4 -1.0 -9.8 -5.3 -2.9 7Y 2.9 1.0 -0.3 -0.1

8Y -0.4 -0.8 -9.6 -5.2 -2.9 8Y 3.1 1.2 -0.2 0.0

9Y -0.4 -0.7 -9.4 -5.2 -3.4 9Y 3.2 1.4 -0.1 -0.5

10Y -0.7 -0.4 -9.1 -4.9 -3.6 10Y 3.5 1.7 0.1 -0.7

Source: NORD/LB Economics

Long-term 12M strategy (in euro): Seen from the longer-term perspective, European government bonds

(Bunds) are only likely to generate negative total returns. A necessary portfolio diversification is again a

difficult undertaking at the current time, however, with the total returns on the other currencies under con-

sideration in some cases lying well within the negative zone as well.

International yield curve overview – 3-month and 12-month horizons



NORD/LB Economics

Seite 17 von 24

Level as at Status Performance since

26.01.2017 Prev. month Start of year Prev. month Start of year

DAX 11,848.63 11,481.06 11,481.06 3.20% 3.20%

MDAX 22,861.96 22,188.94 22,188.94 3.03% 3.03%

EuroSTOXX50 3,319.13 3,290.52 3,290.52 0.87% 0.87%

STOXX50 3,043.15 3,010.55 3,010.55 1.08% 1.08%

STOXX600 367.50 361.42 361.42 1.68% 1.68%

Dow Jones 20,068.51 19,762.60 19,762.60 1.55% 1.55%

S&P 500 2,298.37 2,238.83 2,238.83 2.66% 2.66%

Nikkei 19,402.39 19,114.37 19,114.37 1.51% 1.51%


Assessment: The mood in the international stock markets remains highly positive. Especially in the USA,

the market participants are apparently continuing to expect a positive development of the economy. The

chase after records continues. Against this background the S&P 500 has overstepped the 2,300-points

mark, and the Dow Jones Industrial Average now stands above the 20,000-points mark. Donald Trump

twittered "great!" on hearing about this. He is in fact not entirely uninvolved in this development. Hopes of

deregulation measures and tax cuts in the USA are bolstering the prices of stocks. In this environment, the

uncertainties in respect of the new government's trade policy are taking a back seat, particularly as re-

gards the US stock market. Seen from a fundamental perspective, however, common stocks in the United

States are now certainly no longer attractively valued. Based on the consensus earnings estimate for

2017, the S&P 500 price-earnings ratio currently stands at just above 17.5, for example. Above all a rise in

risk aversion among investors could become a problem in this environment. In our view, there are already

grounds for concern among investors, one example in this respect being the possibility of a trade war be-

tween the USA and China. Furthermore, a large number of market participants appear to be seeing the

US economy in what is a quite optimistic light. In particular, as we see it, no bets should be placed on the

new economic policy in Washington already making for sustained added growth in the USA in the course

of 2017. Positive effects of the tax cuts are hardly likely to be expected even in the second half-year. The

infrastructure measures (if implemented at all) will not be generating supportive effects on the economic

activity in the United States until 2018 at the earliest, for which reason risks are being largely factored out.

This makes the environment already hazardous for investors. Significant uncertainties arise for Asia as

well. The weak yen is at any rate prospectively likely to help the Nikkei.

Index NORD/LB forecasts

for the horizons

3M 6M 12M

DAX 11800 11000 11500

MDAX 22800 21600 22400

EuroSTOXX50 3350 3150 3300

STOXX50 3050 2900 3000

STOXX600 370 350 365

Dow Jones 19500 19300 19600

S&P 500 2225 2215 2250

Nikkei 19000 19100 19200

Source: Bloomberg, NORD/LB Economics. You will find further up-to-date news in our Strategy Weekly publication.

1300

1500

1700

1900

2100

2300

2500

2400

2600

2800

3000

3200

3400

3600

27.01.2016 27.04.2016 27.07.2016 27.10.2016 27.01.2017

EuroSTOXX50 200-day-line

S&P 500 (r/h scale) 200-day-line (r/h scale)

Stock market strategy – 3-month, 6-month and 12-month horizons



NORD/LB Economics

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Fundamental forecasts

in % GDP growth Rate of inflation Unemployment rate

1 Budgetary balance

2

2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018

USA 1.6 2.3 2.2 1.3 1.8 2.3 4.9 4.8 4.7 -4.2 -5.7 -5.9

Euroland 1.7 1.6 1.7 0.2 1.6 1.5 10.1 9.6 9.3 -1.8 -1.8 -1.6

Germany 1.9 1.5 1.6 0.4 1.8 1.7 6.1 5.9 5.7 0.6 0.3 0.4

France 1.2 1.3 1.6 0.3 1.4 1.4 9.9 9.4 9.1 -3.8 -3.6 -3.2

Italy 0.9 0.8 0.6 -0.1 1.2 1.3 11.7 11.2 10.7 -2.5 -2.5 -2.5

Spain 3.2 2.3 1.9 -0.3 1.9 1.3 19.8 18.0 16.4 -4.8 -3.6 -3.2

Japan 1.0 1.3 0.5 -0.2 1.0 1.9 3.1 3.2 3.6 -5.5 -5.2 -5.0

Britain 2.0 0.8 0.4 0.6 2.4 2.5 5.0 5.5 5.8 -3.9 -4.4 -5.0

Switzerland 1.4 1.5 1.8 -0.4 0.1 0.3 3.3 3.3 3.2 -0.1 0.2 0.1

China 6.7 6.4 6.3 2.0 2.8 3.0 4.2 4.2 4.3 -3.5 -3.5 -3.6

Canada 1.3 1.9 1.9 1.4 1.9 2.0 7.0 6.9 6.7 -1.2 -1.6 -1.5

Mexico 2.1 1.7 1.8 2.8 4.1 3.7 4.0 4.1 4.2 -3.0 -2.5 -2.5

Australia 2.4 2.6 2.8 1.3 2.1 2.2 5.7 5.7 5.6 -2.5 -2.2 -1.6

Change vs previous year as percentage; 1 as perc. of the labour force (Germany: as per Federal Employment Office definition);

2 as perc. of GDP

Source: Feri, NORD/LB Economics

Key rates Exchange rates

in % EUR

26.01.17 3M 6M 12M in... 26.01.17 3M 6M 12M

USD 0.75 0.75 1.00 1.25

USD 1.07 1.08 1.10 1.11

EUR 0.00 0.00 0.00 0.00 JPY 122 123 124 129

JPY 0.10 -0.40 -0.40 -0.40 GBP 0.85 0.90 0.90 0.95

GBP 0.25 0.25 0.25 0.25 CHF 1.07 1.07 1.08 1.10

CHF -0.75 -0.75 -0.75 -0.75 CNY 7.35 7.61 7.87 8.05

CNY 1.50 1.50 1.50 1.50 CAD 1.40 1.43 1.47 1.51

CAD 0.50 0.50 0.50 0.50 MXN 22.66 22.68 24.20 24.42

MXN 6.25 6.25 6.50 6.75 AUD 1.42 1.45 1.49 1.52

AUD 1.50 1.50 1.50 1.50


Interest rates (government bonds)

3M rates Yields 2Y Yields 5Y Yields 10Y

26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M

USD 1.04 0.95 1.10 1.30 1.22 1.10 1.15 1.45 1.97 1.85 1.90 2.10 2.50 2.30 2.30 2.50

EUR -0.33 -0.33 -0.34 -0.35 -0.65 -0.70 -0.65 -0.60 -0.36 -0.45 -0.35 -0.15 0.48 0.30 0.50 0.80

JPY -0.02 -0.05 -0.10 -0.10 -0.20 -0.20 -0.16 -0.05 -0.08 -0.10 -0.06 0.02 0.09 0.07 0.08 0.15

GBP 0.36 0.40 0.40 0.40 0.18 0.10 0.20 0.35 0.66 0.60 0.70 0.85 1.52 1.40 1.50 1.60

CHF -0.73 -0.75 -0.75 -0.75 -0.94 -1.05 -1.00 -0.90 -0.55 -0.80 -0.65 -0.50 -0.07 -0.30 -0.10 0.10


Spreads (bp)

3M EURIBOR 2Y Bunds 5Y Bunds 10Y Bunds

26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M 26.01. 3M 6M 12M

USD 137 128 144 165 187 180 180 205 233 230 225 225 202 200 180 170

JPY 31 28 24 25 44 50 49 55 28 35 29 17 -39 -23 -42 -65

GBP 69 73 74 75 83 80 85 95 102 105 105 100 103 110 100 80

CHF -40 -42 -41 -40 -29 -35 -35 -30 -19 -35 -30 -35 -56 -60 -60 -70


Overview of forecasts


NORD/LB Economics

Seite 19 von 24

NORD/LB Economics

Torsten Windels (Chief Economist): Tel. +49 (0) 511/361-2008, eMail: [email protected]

Tobias Basse (USA, Canada, Mexico, Strategy): tel. +49 (0) 511/361-9473, eMail: [email protected]

Dr. Stefan Grosse (Japan, Euroland, Germany, Strategy): tel. +49 (0) 511/361-2365, eMail: [email protected]

Dr. Jens Kramer (UK, Italy, Spain, Euroland, Germany, Strategy): tel. +49 (0) 511/361-6083, eMail: [email protected]

Bernd Krampen (USA, Canada, Mexico, Strategy): tel. +49 (0) 511/361-9472, eMail: [email protected]

Frederik Kunze (China, Strategy): tel. +49 (0) 511/361-5380, eMail: [email protected]

Christian Lips (Euroland, Germany, France, Switzerland, Strategy): tel. +49 (0) 511/361-2980, eMail: [email protected]

Your contacts

Date of going to press: 27 January 2017

The next English issue of Economic Adviser will be appearing on 27 February 2017.

Contact Dr. Jens Kramer: [email protected], Tel. +49 (0) 511/361-6083 Christian Lips: [email protected], Tel. +49 (0) 511/361-2980


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Seite 20 von 24

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