the credit suisse playbook
TRANSCRIPT
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4 November 2016 Global
Credit Suisse Research INSTITUTIONAL CLIENTS ONLY/DO NOT FORWARD
The Credit Suisse Playbook Research Analysts
Credit Suisse Research
Please see inside contributors of each section
Drumming up interest This edition of the Credit Suisse Playbook takes stock of the rates backdrop
and discusses the potential for and implications of a move higher in yields.
Long-term real yields are at all-time lows, and our US economists see low
term premia as a potential reflection of a market that has become complacent
about Fed rate hikes and future volatility. It is not their base case, but the risks
of an inflation shock or a more aggressive hiking cycle are high.
Our rates strategists acknowledge these vulnerabilities, but maintain that,
absent such a shock, the current economic and policy outlooks remain
consistent with a gradual, rather than sharp, move higher in yields.
Against a backdrop of rising yields, our global equity strategy team thinks that
equities can outperform bonds; the rally in financials can continue; and, from a
regional perspective, continental European and Japanese equity markets
should be beneficiaries of the bond sell-off.
Our FX strategists find that correlations between US yields and FX pairs are
unusually high. They expect this trend to continue, in a rising yields
environment, and see implied correlation in selected currency pairs as
attractive.
Our European bank strategists note that bank earnings benefit from both
higher rates and a steeper curve, but argue that at this point in time, higher
short rates are more important.
Our technical analysts look at market-based inflation expectations, where 10yr
TIPS Breakevens have seen a sharp rise to test our target and key resistance
at 172/175bps, which they expect to cap initially for a retracement lower. In
Europe, 5yr5yr EUR Swaps Breakeven spotlight remains on their target at
148/158bps.
4 November 2016
The Credit Suisse Playbook 2
Table of contents
Economics 3
Why so low? ............................................................................................................. 3
Rates 5
Gradually higher yields, barring shocks ................................................................... 5
Equity Research: Global EQ Strategy 8
What to do with bond proxies ................................................................................... 8
Equity Research: European Banks Strategy 13
Higher short-rates more important than steeper curve .......................................... 13
FX 16
FX correlation to yields on the rise ......................................................................... 16
Technical Analysis 19
A critical test for inflation Breakevens .................................................................... 19
Appendix 21
Calendar of key events ........................................................................................... 21
Credit Suisse Fixed Income and Economic forecasts ............................................ 22
4 November 2016
The Credit Suisse Playbook 3
Economics
Why so low?
Long-term real yields are at all-time lows. We see three main reasons for this. First, policy
rates remain historically low. Second, central bankers have convinced the market that the
path of rate increases is likely to be extremely gradual. Finally, low volatility in policy
expectations has driven a sharp decline in risk premiums. We describe these and other
fixed income anomalies in our recent chart pack “Why So Low?” (Figure 1)
Figure 1: Fixed income anomalies Current policy rates: Historically low
Expected future policy rates: Historically low
Expected policy rate volatility: Very low
Term premium: Lowest ever?
Long term real rates: Lowest ever?
Credit spreads: Normal
Inflation expectations: Low
Nominal GDP growth: Low
GDP-interest rate gap: Very high
Source: Credit Suisse
Figure 2: US long-term real yield
30yr rate deflated using an adaptive expectations estimate for inflation expectations that controls for wars and oil price shocks
Source: Credit Suisse, NBER, Thomson Reuters Datastream
We now expect the FOMC to raise its interest rate targets by 25bps in December. Fed
rhetoric and market expectations both point to December, and in our view, this decision
would be well-supported by US and global data.
The first release of Q3 US GDP growth came in at a strong 2.9%. US growth in recent
quarters had been weighed down by factors related to the global slump in 2015, which
was triggered by falling commodity prices. Investment in commodity-related sectors fell
sharply and dollar strength hurt some exporters. Much of that shock has now passed and
overall growth looks ordinary. Investment is still somewhat sluggish, consumption
continues to grow solidly, and this adds up to GDP growth trending near 2%.
Outside the US, the global tradeable goods sector has resumed trend-growth for the first
time since mid-2014, and risks appear balanced. We now forecast a choppy trend-like
growth path, with global industrial production achieving an underlying expansion of 2.5%-
3.0% p.a., compared with the multi-decade trend of 3.1% (Figure 3). PMI indicators,
including the ISM survey, are consistent with this. The economies hit hardest by last year's
energy slump are stabilizing. Europe faces significant political risks, but growth has held
up in recent months. Chinese growth appears to be slowing modestly, but concern about
China has decreased considerably in the past year.
0%
2%
4%
6%
8%
10%
12%
1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Fixed Income Research Analyst
James Sweeney
212 538 4648
4 November 2016
The Credit Suisse Playbook 4
Figure 3: Global Industrial Production's deviation from 3.1% trend
Source: Credit Suisse, Thomson Reuters Datastream
Figure 4: Global IP momentum vs. US 5y5y swap rate correlation
2-year rolling correlation between global IP momentum and detrended 5y5y swap rate.
Source: Credit Suisse, Thomson Reuters Datastream, Credit Suisse Locus
Normally, one might fear rising interest rates in such an environment, but unlike risky asset
prices, government yields have been mostly unresponsive to the acceleration in growth so
far. The recent sell-off could be the beginning of a normalization, but rates remain
extremely low both in absolute terms and relative to growth. The correlation between the
US 5y5y swap rate and Global IP momentum, which is normally strongly positive, has
recently dropped below zero (Figure 4).
Indeed, low term premiums appear to reflect a market which has become complacent
about Fed rate hikes and future volatility. Although markets are now priced for roughly a
75% probability of a Fed hike in December, this is followed by an extremely shallow path
for future hikes.
If inflation remains quiescent and growth does not continue to accelerate, then low rates
can persist as long as the policy trajectory does not change. In theory, low real rates at a
time of decent real growth should be inflationary, but nominal growth and inflation are not
clearly accelerating. Indeed, our base case sees little pickup in inflation or growth in the
near term amid normal cyclical conditions. Furthermore, the FOMC is likely to be a bit
more dovish next year, as the most hawkish members rotate off the committee.
However, given current market pricing, the risks of an inflation shock or a more aggressive
hiking cycle are high. Several macro drivers of inflation are showing positive signs. The
unemployment rate is near target, credit growth is strong, and energy prices have stabilized.
Growth could also surprise on the upside, shocking a vulnerable interest rate market.
-12%
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80 84 88 92 96 00 04 08 12 16
Estimate
-100%
-80%
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100%
96 98 00 02 04 06 08 10 12 14 16
4 November 2016
The Credit Suisse Playbook 5
Rates
Gradually higher yields, barring shocks
Long-term global yields have emerged from their post Brexit depths in what has become a
strikingly coordinated long-end steepening (Figure 5). Reasons given for the move have
included from risks of central bank tapering, to more accommodative fiscal policy, to rising
inflation risks. We suspect the true driver is some combination of factors, which have
combined to contribute to 10y Term premia rising 20bp in the last two months, a repricing
that we think is reflected by the global long-end steepening.
Will the sell-off morph into something more dramatic? We think the answer for now is no,
and anticipate only a gradual move higher in yields. Though we acknowledge that rates
are vulnerable to a positive surprise in either growth or inflation, acceleration in either is
not our base case. And while a reduction in central bank asset purchases can lead to
some repricing, there are factors that will likely moderate any taper-related rise in yields.
Figure 5: Global yield curves have steepened since the end of August, reflecting a rise in term premia in our view
Figure 6: The move higher in yields hasn't looked much like pricing for a taper, as it has been driven primarily by a rise in BEis rather than real rates
Change in 5s30s curve normalized to August 31 (bps) Composition of change in nominal yields since August 31 (bps)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
One factor underpinning this low rate, flat curve world is the assumption that sluggish
growth and tepid inflation are likely to persist. To the extent that this assumption continues
to be borne out, the market will continue to see the long-term neutral rate as structurally
and persistently lower. At least on the growth front, there may be reasons for some
optimism—our economists expect global growth will be more trend-like going forward,
though this recovery may be more subdued in the US. In the case of a sustained period of
a stronger, or at least more historically "normal," trend growth, the prevailing perception
about the extent of the structural slowing of growth would likely change, and could in turn
put sustained upward pressure on yields across the curve. However, at this point the
burden of proof remains on the data to deliver, and it will take more than a quarter
or two of near-trend growth in order to flip a key narrative that has at this point been
years in the making, but only this year truly accepted by markets and policy-makers alike
(Figure 7). Importantly, productivity trends tend to be persistent, and there isn’t at this
point any sign of improvement on this front, particularly given the low levels of business
investment this cycle.
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Jul-16 Aug-16 Sep-16 Oct-16
USUKGermanyJapan
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10y BEi
10y Real Rate
Fixed Income Research Analysts
Praveen Korapaty
212 325 3427
William Marshall
212 323 5584
4 November 2016
The Credit Suisse Playbook 6
The other critical fundamental factor at work has been the persistently lower inflation.
Longer-term inflation expectations are at historically low levels – 5y5y BEis are in just their
10th percentile, though they have recently come off even lower levels. We are reluctant to
attribute this recent rise to a recalibration of inflation expectations; instead, we
believe it is most likely reflective of a rebound in inflation risk premia, i.e., perception
of upside inflation risk has increased. At a fundamental level though, we do not see much
evidence to point to a meaningful rise in core inflation, at least over the next year. Absent
higher spot inflation, it will be hard to build high expectations longer term in the absence of
a radical shift in policy (for example, explicit monetization or significant fiscal expansion).
Figure 7: This year has seen a substantial shift lower in the Fed's neutral rate projection
Figure 8: Even if central banks slow their buying, they already own about 30% of outstanding duration
Median Fed longer run projection Share of US, EUR, UK & JPY sovereign duration outstanding not owned by the respective central bank
Source: Credit Suisse, Federal Reserve Source: Credit Suisse, Federal Reserve, ECB, BoJ, BoE
Indeed, despite talk of taper initially affecting yields following the September ECB
meeting, on a cumulative basis since then, the move has borne strikingly little
resemblance to a "taper tantrum"; rather than a real-rate sell-off, the bulk of the
driver of higher nominal rates has come from the inflation component (Figure 6),
which has taken US BEis from "crisis" levels to merely historically low. A sell-off driven by
fears that a reduction of central bank accommodation should not be to the benefit of
breakeven inflation; instead, we would expect an increase in real rates, coupled with
inflation underperforming. Given the recent BEi gains, we expect that from current
levels an actual taper decision would trigger greater underperformance amongst
inflation linkers than nominals.
Talk aside, how realistic is an actual taper decision by the ECB or BoJ? As we noted when
revising our yield forecasts higher, while speculation of an ECB taper is widespread, we
think the inflation backdrop will keep the ECB buying bonds for the foreseeable future.
Furthermore, even when the ECB does signal plans to step back, given that markets
already perceive the plan as finite, a tapering of purchases should be less of a shock. The
BoJ, by contrast, does appear to be more likely to initiate a taper in the near term,
particularly if it is serious about achieving its 10y nominal yield target. A significant
curtailing of purchases in Japan would certainly lead to repricing of global long-end yields,
but even here, the impact will likely be limited. This is because any meaningful sell-off in
10y US yields would offer an increasingly appealing pick-up – even after FX hedging costs
– when compared to 10y JGBs yields pegged at 0%.
0.0%
0.4%
0.8%
1.2%
1.6%
2.0%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Median Longer Run Dot
5y avg Productivity Growth (rhs)
65%
70%
75%
80%
85%
90%
95%
100%
Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
% of G3+ Sovereign DurationSupply Available to the Market
4 November 2016
The Credit Suisse Playbook 7
Where does this leave us overall? Risks to low rates are readily identified – rate vol is low,
implying little uncertainty around the Fed, and term premia remain at impressively
suppressed levels. But we think there is reasonable grounding for this. So far, the Fed hike
cycle has generally followed the exceedingly gradual path implied by the market, and the
delivery of a Fed hike in December is unlikely to prompt a reconsideration of that trajectory
absent some more fundamental shift. Furthermore, market positioning suggests
participants are already well situated for a near-term rate rise. It's also important to
consider the significant share of G3+ sovereign debt held by price insensitive buyers. The
years of QE purchases have left G3+ central banks – the Fed, ECB, BoJ and BoE –
owning about 30% of the total duration outstanding across their respective markets
(Figure 8). Additionally, as we discussed in our analysis of the risks of a JGB sell-off,
regulatory capture means that forced selling of rates in the event of a vol shock is likely to
be less than in the past.
One potential wildcard we haven’t brought up so far is next week's presidential election in
the US. We would be remiss if we didn't revisit our discussion of political risks as a
potential driver of higher yields. We see a Trump victory as a far greater potential
shock than a Clinton win, as detailed in our note, “Trumped up rates.” Broader risk
dynamics may well complicate the initial duration reaction, but the significantly larger fiscal
deficit projections under Trump's proposals, the heightened policy uncertainty, and
inflationary impact, suggest scope for a substantial rise in term premia – roughly 40bp on
10s – and long-end curve steepening – on the order of 20-25bp on 5s30s. Our base case
for Clinton is a relatively status quo one for the Treasury market, with the (low probability)
risk to that outcome being a Democratic landslide that allows democrats to engage in the
sort of fiscal expansion that would not be possible without such a mandate .
The bottom line is that the rates market is indeed vulnerable to a growth or inflation
acceleration, and were the balance of risks to shift in that direction, we would be
forced to reassess our outlook for yields. But until there is reason to anticipate
either one of those as a base case, our expectation remains that yields will remain
stuck in a low yield paradigm, and rise only in a gradual fashion.
4 November 2016
The Credit Suisse Playbook 8
Equity Research: Global EQ Strategy
What to do with bond proxies
Below is a summary of our piece What to do with bond proxies, 3 November 2016.
Why should yields rise further?
We agree with our interest rate strategists that bonds yields can rise further, and would
note the following factors supporting this view:
1. Globally, policy discussions are moving away from NIRP/QE toward fiscal easing
We believe 2017 could see a continuation of the gradual shift away from NIRP and QE,
which has characterised 2016, towards fiscal easing:
■ Euro area: Draghi noted that "countries that have fiscal space should use it".
Additionally, the Juncker plan has expanded in size to €620bn from €375bn, while
Spain and Portugal were not penalised for missing their deficit targets.
■ UK: Chancellor Hammond has called for a ‘fiscal reset’ and backed away from the goal
of a budget surplus by 2020.
■ US: Clinton has proposed $500bn of infrastructure spending and Donald Trump “at
least double”. Elsewhere in North America, Justin Trudeau has implemented a $60bn
fiscal programme.
■ Japan: the secretary general of the LDP now favours abandoning the balanced budget
amendment and if Abe were to call a snap election, we think some further fiscal easing
could be expected.
Moreover, there are logistical and political challenges arising from continued QE in both the
euro area and Japan. This would be quite a different event to the Fed’s 2013 taper, which
was offset by BoJ and ECB buying. With the ECB, our economists calculate that the central
bank will run out of German bunds to buy by end-2016; to continue QE at the current rate of
purchases would require either a deviation from the capital key (politically untenable in our
view) or an amendment to the issuer/issue limit or the deposit rate floor. With the BoJ, banks
and insurers are likely to breach their collateral requirements in either late 2017 or 2018.
2. Yields have not reflected the pick-up in growth
A number of proxies of macro momentum suggest that bond yields should have risen by
more: whether the recent rebound in global IP or upward trend of US macro surprises,
both suggest higher bond yields.
Figure 9: The rebound in IP momentum would normally be associated with higher yields…
Figure 10: …as would the level of macro surprises in the US
Source: Thomson Reuters DataStream, Credit Suisse Source: Thomson Reuters DataStream, Credit Suisse
Equity Research Analysts
Andrew Garthwaite
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Marina Pronina
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This section is an excerpt from
the following previously
published Equity Research
report, dated 03 November 2016:
Global Equity Strategy: What to
do with bond proxies.
Please refer to the linked report
for more information and
important disclosures.
4 November 2016
The Credit Suisse Playbook 9
3. Inflation is on the rise
In the US, but also globally, inflationary pressures seem to be brewing. Services inflation in the US (65% of the CPI basket) has been gradually accelerating, and should continue to do so as the labour market tightens further. The goods portion of the CPI basket, which has dampened overall inflation, looks set to see an acceleration in price increases – thanks to both the weaker dollar and stronger commodity prices.
Away from the US, China is no longer exporting deflation (for the first time in 2 ½ years) but, despite this, market-derived inflation expectations remain relatively low (1.8% in the US) and actually below the current core inflation rate (2.2%).
Figure 11: Accelerating wage growth is leading to service price inflation…
Figure 12: ...and the weakness in the USD is consistent with a strong pick-up in goods prices
Source: Thomson Reuters DataStream, Credit Suisse Source: Thomson Reuters DataStream, Credit Suisse
4. Populism is generally bond-negative
In our view, the current populist movements spreading across the developed world embody the following elements that tend to be negative for bonds:
■ Less immigration, which in turn threatens to push down unemployment rates and
therefore place further upward pressure on wage growth and inflation;
■ More protectionism and reshoring of production, pushing up prices;
■ More spending on social projects/infrastructure, which raises nominal GDP growth and
potentially increases the supply of bonds; and
■ Rising minimum wages. Hillary Clinton in the US, for example, is committed to a $12
per hour federal minimum wage from $7.25 (and Trump $10/hour) while National Living
Wage legislation has been enacted in the UK.
Equities
Considering the current level of bond yields, we remain positive on equities relative to bonds for three primary reasons:
1. Relative valuation is positive for equities
The ERP remains elevated – at 5.7% on our EPS numbers – versus a warranted ERP of 5.4% and long-run average of 4.2%. Thus, US yields could rise by a further c.30bps for equities to move to fair value against bonds. However, equity bull markets have almost always tended to end with the ERP on far more depressed levels (on average 3.4%).
4 November 2016
The Credit Suisse Playbook 10
2. Equities are a superior inflation hedge
Our judgement is that inflation will pick up over the coming quarters. Historically, a rise in US inflation has tended to be positive for global equity returns relative to bonds – we feel this is of particular relevance now that the correlation between inflation expectations and equity multiples is near decadal highs.
Figure 13: Accelerating inflation tends to support the performance of global equities relative to bonds
Figure 14: The correlation between inflation expectations and the valuation of US equities has risen back to highs
Source: Thomson Reuters DataStream, Credit Suisse Source: Thomson Reuters DataStream, Credit Suisse
3. There remains scope for an asset allocation shift
Since 2008, global bond funds have seen significant inflows while equity funds have seen essentially zero – over this time period, the only major buyer of equity has been the corporate sector. We think there are two key drivers which could catalyse a switch in this fund flow dynamic:
■ First, a rise in bond yields reminding investors that they can lose money on bonds. A
rise in bond yields tends to see equity fund flows pick up relative to bond fund flows.
■ Second, a rise in the bond yield might allow for a more aggressive asset allocation as it to
some extent reduces the value of long term liabilities for life companies and pension funds.
We acknowledge that higher bond yields could eventually become a headwind for equities.
We would argue that this point is reached when US 10-year government yields are at
c.2.5% and 10-year Bund yields at c.1.0%.
Regions
The primary observation we would make is that investors have been rotating out of regions which generally benefit from higher yields (Japan, Europe) and into those which benefit from lower yields (GEM).
■ Continental Europe, via its overweight in Banks, tends to outperform global equities as
yields rise and/or banks outperform;
■ Japan is an unloved beneficiary of rising yields, owing to its high operational leverage
and significant cyclical exposure;
■ GEM is admittedly tactically challenged by the rise in yields, but we remain a strategic
overweight and think GEM can remain resilient to both higher yields and a stronger
dollar (on the back of significant external position improvements cf. Taper Tantrum and
sharp currency undervaluation).
4 November 2016
The Credit Suisse Playbook 11
Figure 15: When banks outperform in Europe, Europe tends to outperform the world
Figure 16: Japanese equities have tended to outperform as TIPS yields rise
Source: Thomson Reuters DataStream, Credit Suisse Source: Thomson Reuters DataStream, Credit Suisse
Sectors
The most positively correlated European sectors to rising 10-year German Bund yields
have historically been financials and some of the deep cyclicals such as resources, capital
goods and semis, with consumer staples, healthcare and telecoms the most negatively
correlated. We make the following points in the note:
Stay overweight financials: Unlike other cyclicals, banks have only priced in the current
bund yield, they have not overshot it. They have lagged the performance of cyclicality, are
on attractive valuations and are lagging improving macro momentum. Dividend momentum
is also improving as the banks emerge as a yield story. We particularly like retail banks
and DM banks with EM exposure.
Figure 17: Europe sector correlation with bond yields (adj. for volatility of correlation)
Figure 18: The relative performance of European banks has tracked the bund yield
Source: Thomson Reuters DataStream, Credit Suisse Source: Thomson Reuters DataStream, Credit Suisse
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4 November 2016
The Credit Suisse Playbook 12
Selective on the defensive side: We are not uniformly negative on defensive stocks. We
remain positive on infrastructure stocks which can outperform as yields rise, is a non-
disrupted sector and are a play on construction and infrastructure spend increasing, which
we think it will. We also remain overweight telecoms. The sector is the most cyclical of the
defensive side of the market which also offers an attractive dividend yield/FCF yield trade off.
Pricing power for the sector is improving, and it is oversold. We also continue to like the
German real estate story: the sector has priced in a bund yield of c.50bps already, while
rising inflation within Germany should continue to support the real asset story within
Germany at a time when we believe domestic price levels will rise against a backdrop of very
low unemployment. German property remains both undersupplied and cheap.
Cautious on consumer staples and regulated utilities: Where we are cautious on bond
proxies it is where they have either not priced in rising yields, or where fundamentals are
deteriorating anyway. On staples, the negative correlation with the bund yield is now
close to an all-time high, while the sector is pricing in a bund yield of only around zero.
This is also a sector which underperforms when inflation expectations rise. Valuations for
the sector remain stretched even after a period of underperformance, and now some
revenue trends appear worrying with a number of companies having lowered guidance in
recent weeks. Regulated utilities are a classic bond proxy which appear very expensive,
have deteriorating earnings momentum and substantial regulatory and disruptive
challenges (thanks to renewables, battery technology and greater energy efficiency).
4 November 2016
The Credit Suisse Playbook 13
Equity Research: European Banks Strategy
Higher short-rates more important than steeper
curve
European banks, trading at 0.88x TBV, 17E, have outperformed by c.3% and the
German 10yr Bund yield is up by c.10bp, post ECB's meeting on 20 October. Investors
debate to what extent higher short-rates and/or a steeper yield-curve is positive for banks.
In particular, if ECB tapers the Asset Purchase Program (lifting the long end of the curve),
would banks benefit?
Bank earnings benefit both from higher rates and a steep curve, but at this juncture
higher short-rates are more important. Higher long bond yields would primarily benefit
banks with excess liquidity to make LT loans or invest in bonds with longer maturities,
although the latter could lead to Mark-to-Market losses and implies taking more interest
rate risk (a capital negative, due to higher Pillar2 add-on). Higher short-rates would benefit
the whole sector in a more meaningful way as 1) the float on (free) equity will rise,
2) Eurozone banks have EUR8.9tn deposits, of which c.60% have reached the zero bound
(have negative deposit margin); each 25bp higher short-rate is equal to c.3-4% EPS uplift,
provided that banks reprice loans, CSe, 3) if ECB move deposit rate from -40bp to 0bp,
this implies c.EUR3.0bn higher earnings and 4) a shift in monetary policy could (short-
term) boost activity in fixed income markets and benefit FICC revenues.
Banks – 'never' been more geared to macro. Bank earnings and performance looks to
be more geared to an economic turn-around than at any point in the past 25 years, as
1) earnings are depresssed by a negative rate environment not seen previously, 2) banks
are more geared to a rate rise, as free equity (c.EUR0.9tn) is almost 2x the level in 2008,
3) lending growth is 'too low' (at c.0.9% YoY), which exacerbates competition and 4) banks
trade at c.24% discount, above the c.17%, 10-year average. That said, we remain
selective as 1) growth remains subdued 2) our economist's view is that ECB is unlikely to
taper in March, rather the APP could be extended by six months (suggesting, negative
rates prevail well into 2018), and 3) regulatory uncertainty continues to cloud banks' return
and divi outlook.
Higher short-rates, more important than steeper yield-curve
European banks have outperformed by c.3% and the German 10yr Bund yield is up by
c.10bp, post ECB's meeting on 20 October, where any decision to amend the Asset
Purchase Program (APP) was pushed to December. Investors debate to what extent
higher short-rates and a steeper yield-curve is positive for bank shares. In particular, if
ECB tapers the APP (thereby lifting the long end of the curve), would banks benefit?
Generally, bank earnings benefit both from higher rates and a steep curve, but at
this juncture higher short-rates are a more important factor, we argue. Higher long
bond yields would primarily benefit banks with excess liquidity to make LT loans or invest
in bonds with longer maturities, although the latter could lead to MtM losses and implies
taking more interest rate risk (a capital negative, due to higher Pillar2 add-on). In addition,
any shift in monetary policy could increase activity levels in fixed income markets (at least
short-term) and benefit FICC revenues. We note the strong correlation (c.51% since 2013)
between banks' relative performance and movements in the long bond yields is a fairly
recent phenomena, Figure 19. As we discuss below, low(er) bond yields are a reflection of
subdued growth and a consequence of loose monetary policy (both negative for banks)
and bank performance is driven by this environment, rather than low bond yields per se.
We note that post the BOJ 21 September announcement to control the yield curve, by
keeping the JGB 10-year at 0%, Japanese banks have underperformed by c.3%, Figure 20.
This signals that the market either doubts BOJ's ability to control the curve or questions if
banks can benefit from it.
Equity Research Analysts
Jan Wolter
468 54 50 7921
Charmsol Yoon, CFA
44 20 7888 7063
Andrea Unzueta
44 20 7888 2692
David Da Wei Wong, CFA
44 20 7883 7515
Carlo Tommaselli
44 20 7883 3138
Thomas Dewasmes
44 20 7883 5059
Carlos Lopez Ramos
44 20 7888 1237
Jon Peace
44 20 7888 1387
Claire Kane
44 20 7883 5350
Hugo Swann
44 20 7883 2574
Victoria Cherevach
44 20 7883 4890
Marcell Houben
44 20 7888 6607
Specialist Sales: Nick Gough
44 20 7888 0125
This section is an excerpt from
the following previously
published Equity Research
report, dated 04 November 2016
European Banks Strategy (#14) -
Higher short-rates more
important than steeper curve.
Please refer to the linked report
for more information and
important disclosures.
4 November 2016
The Credit Suisse Playbook 14
Higher short-rates would benefit the whole sector in a more meaningful way as 1) the
float on banks' (free) equity will rise 2) Eurozone banks' have EUR8.9tn deposits, of
which we calculate c.60% have reached the zero bound and have negative deposit
margin 3) Banks' excess liquidity is at an all-time high of c.EUR1.1tn, Figure 21. If
ECB move deposit rate from -40bp to 0bp, this implies c.EUR3.0bn higher bank earnings.
For listed banks, each 25bp higher short-rate is equal to 3-4% higher EPS, we estimate,
see "European Banks – Remain selective in a zero rate world", 4 March, 2016. Finally, we
note, bank shares relative performance seems more sensitive to higher short-rates (c.25%
correlation), but less so to a steepening/flattening of the curve (a low -9% correlation),
Figure 22.
Figure 19: Banks' relative performance closely tied to long bond-yields is a relative recent phenomena
Figure 20: Japan Banks underperformed, post BOJ announced aim to control the yield-curve
Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service
Figure 21: Eurozone banks' excess liquidity is at an all-time high of c.EUR1.1tn. If ECB were to lift deposit rate from -40bp to 0bp*, this implies c.EUR3bn incremental profits for banks, CSe
Source: Credit Suisse Research, ECB. *Scenario analysis only and CS Economist view is that the ECB is unlikely to change rates before 2018
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
20%
40%
60%
80%
100%
120%
140%
19
90-0
9-0
1
19
91-1
1-0
1
19
93-0
1-0
1
19
94-0
3-0
1
19
95-0
5-0
1
19
96-0
7-0
1
19
97-0
9-0
1
19
98-1
1-0
1
20
00-0
1-0
1
20
01-0
3-0
1
20
02-0
5-0
1
20
03-0
7-0
1
20
04-0
9-0
1
20
05-1
1-0
1
20
07-0
1-0
1
20
08-0
3-0
1
20
09-0
5-0
1
20
10-0
7-0
1
20
11-0
9-0
1
20
12-1
1-0
1
20
14-0
1-0
1
20
15-0
3-0
1
20
16-0
5-0
1
European Banks relative performance & Long bond yields
EU Banks vs EU Market, indexed DE 10YR
95
97
99
101
103
105
107
109
20
/09
/20
16
22
/09
/20
16
24
/09
/20
16
26
/09
/20
16
28
/09
/20
16
30
/09
/20
16
02
/10
/20
16
04
/10
/20
16
06
/10
/20
16
08
/10
/20
16
10
/10
/20
16
12
/10
/20
16
14
/10
/20
16
16
/10
/20
16
18
/10
/20
16
20
/10
/20
16
22
/10
/20
16
24
/10
/20
16
26
/10
/20
16
Japan - Banks vs Market
Topix index (Sept 19 = 100) Japan Topix Banks (Sept 19 = 100)
0
200
400
600
800
1,000
1,200
08
/01
/19
99
08
/01
/20
00
08
/01
/20
01
08
/01
/20
02
08
/01
/20
03
08
/01
/20
04
08
/01
/20
05
08
/01
/20
06
08
/01
/20
07
08
/01
/20
08
08
/01
/20
09
08
/01
/20
10
08
/01
/20
11
08
/01
/20
12
08
/01
/20
13
08
/01
/20
14
08
/01
/20
15
08
/01
/20
16
Eurozone Banks' Excess liquidity at ECB,EURbn
EUR1,095bn
4 November 2016
The Credit Suisse Playbook 15
Figure 22: The current Top4 drivers of banks' relative performance are 1) delta in GDP growth (c.54% correlation), 2) changes in 10yr Bund (c.51% correlation), 3) moves in the short-rates and 4) Business confidence (PMI) improvement/weakness. Over time, short-rates explain 20-30% of banks' absolute performance (period post Tech bubble, an exception)
Source: Credit Suisse Research, the BLOOMBERG PROFESSIONAL™ service, ECB. *Correlation analysis with Euribor from 1999; yield-curve from 1998, GDP from 1996; Business confidence from 1996.
Figure 23: Delta in economic growth has historically explained c.26% of bank performance, but recently banks lagged => reasons are structural headwinds from negative rates and regulatory pressure
Source: Credit Suisse Economics Research, the BLOOMBERG PROFESSIONAL™ service
CORRELATION ANALYSIS: EU BANKS ABSOLUTE PERFORMANCE CORRELATION ANALYSIS: EU BANKS RELATIVE PERFORMANCE
Time
period Business cycle
vs Change
in Euribor
3m
vs Change
in Bund
10Y
vs EU
Yld
curve
vs EU Yld crv
Steepening (+)
/ Flattening (-)
vs Change
in GDP
growth
vs Change
in Business
confidence
vs Change
in Euribor
3m
vs Change
in Bund
10Y
vs EU
Yld
curve
vs EU Yld
crv
Steepening
(+) /
Flattening (-
vs Change
in GDP
growth
vs Change
in Business
confidence
1992-2016* Full period 25% 22% 25% -3% 26% 16% 12% 15% 5% -9% 8% 8%
1997-2006Mixed Growth &
recession period14% 31% 11% 16% 0% -16% -6% -1% 18% -4% -30% -25%
2003-2007Economic boom,
post Tech-bubble 4% -3% -2% -5% 4% 7% -16% -15% -7% -4% -35% 21%
2007-2013
Financial &
Sovereign crisis
incl. growth slump
24% 42% 43% -8% 34% 38% 13% 17% 22% -15% 14% 25%
2013-2016Muted, post crisis,
recovery scenario33% 28% 26% 10% 54% 48% 37% 51% 31% 32% 54% 35%
CORR RELATIVE PERF
OMXS
vs
SWE
10Y
NDA
vs
SWE
10Y
SHB vs
SWE 10Y
SEB vs
SWE 10Y
SWED vs
SWE 10Y
DANSKE
vs DEN
10Y
DNB vs
NO 10Y EU BANKS
NORDIC
BANKS NDA
SHB vs
SWE 10Y
SEB vs SWE
10Y
SWED vs
SWE 10Y
23% 33% 20% 33% 25% 10% 30% BOND YLD 25% 15% 23% -6% 21% 12%
YLD CURVE 14% #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
NO
10YR
STIBOR
3M
SWE
YLD
CURVE EU Banks
Nordic
Banks NDA SHB SEB SWED DNB DANSKE EU Banks
Nordic
Banks NDA SHB SEB
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
1995
-12
-01
1996
-11
-01
1997
-10
-01
1998
-09
-01
1999
-08
-01
2000
-07
-01
2001
-06
-01
2002
-05
-01
2003
-04
-01
2004
-03
-01
2005
-02
-01
2006
-01
-01
2006
-12
-01
2007
-11
-01
2008
-10
-01
2009
-09
-01
2010
-08
-01
2011
-07
-01
2012
-06
-01
2013
-05
-01
2014
-04
-01
2015
-03
-01
2016
-02
-01
2017
-01
-01
European Banks performance vs Macro model (1995-2016)
EU Banks GDP growth & Business confidence model (indexed and 2qtr lag)
100%
105%
110%
115%
120%
125%
130%
135%
140%
145%
150%
100%
110%
120%
130%
140%
150%
160%
170%
180%
190%
200%
2009
-06
-01
2009
-11
-01
2010
-04
-01
2010
-09
-01
2011
-02
-01
2011
-07
-01
2011
-12
-01
2012
-05
-01
2012
-10
-01
2013
-03
-01
2013
-08
-01
2014
-01
-01
2014
-06
-01
2014
-11
-01
2015
-04
-01
2015
-09
-01
2016
-02
-01
2016
-07
-01
European Banks abs performance vs Macro model (2009-2016)
EU Banks abs perf
GDP growth & Business confidence model (indexed and 2qtr lag)
4 November 2016
The Credit Suisse Playbook 16
FX
FX correlation to yields on the rise
The recent rise in global bond yields has emerged as a major theme driving markets, but
the relative nature of FX to some extent obscures the impact. When considering USD-
crosses in spot FX, is it changes in the local currency yield, the USD yield, or yield spread
that matters most? What about changes in the steepness of the curve, or the relative
steepness? FX strategists traditionally look at relative yield differentials as a driver of a
currency pair, and this is correct for most currencies, most of the time. But it is not always
the case, and this current episode does exhibit differences with the recent past.
In this piece we take a critical look at recent developments in correlation space.
Specifically, we look at the rolling two-month correlation between daily percentage
changes in the XXXUSD FX pair and the daily net change in yields (US yields, local yields,
or the yield spread). Our analysis indicates a few preliminary conclusions:
■ US yields currently are positively correlated to USD performance vs local currency
pairs. This is unusual, as the correlation is generally not statistically significant. These
correlations with USD yields in particular are dominating those with local currency
yields and the local-USD yield spread, which is also unusual.
■ Steepening in the USD curve is also unusually negatively correlated to local currency
performance.
■ Correlations in general are not very stable over time, and are themselves driven by
idiosyncratic themes in the markets.
■ Correlations between FX and yields tend to be strongest at the policy sensitive 2-year
tenor and progressively weaker at the 5- and 10-year tenors.
Figure 24: Correlations between FX and USD yields are close to their strongest levels in five years
Rolling 2m correlation between daily local currency moves and US 2yr government bond yields
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
FX and USD yield correlations
Figure 24 illustrates how these rolling correlations have changed over the last five years
for EUR, JPY and GBP. In the last two months, they’ve reached close to their most
negative levels in that slice of history. This is not unique to these currencies – Figure 26
shows where current correlations sit more generally for G10 and selected EM FX. The
orange bars indicate that the 5-year average tends to be close to zero (i.e., uncorrelated).
So the current situation (red diamonds), where correlations sit in the most negative region
of their range, is unusual.
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16
EUR JPY GBP
Fixed Income Research Analyst
Honglin Jiang
44 20 7888 1501
4 November 2016
The Credit Suisse Playbook 17
This is likely due (at least in part) to changes in USD funding conditions spilling over into local
markets everywhere – itself a consequence of the USD acting as the world’s premier reserve
and trade-settlement currency. Previous episodes where correlations had turned highly
negative include the “taper tantrum”, and to a lesser extent, the Fed hike in December 2015.
It also highlights the conundrum the Fed faces as it looks to hike rates again – USD
appreciation is likely to be broad based if yields keep rising, even if feedback loops back to
inflation mean that USD appreciation cannot be too deep.
There may be other channels which act to reinforce this dynamic – for example, if rising USD
yields also cause a rise in volatility risk premia, then this is likely to weigh on higher yielding
carry currencies. However, for now, the effect we observe is broad rather than specific.
Figure 25: FX/local bond yield correlations are currently idiosyncratically driven…
Figure 26: … while correlations with USD yields are more consistent
Rolling 2m correlation between currency and local 2-year yields. Grey bars indicate post-2011 range
Rolling 2m correlation between currency and USD 2-year yields. Grey bars indicate post-2011 range
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
FX and local currency yield correlations
By contrast, when correlations are run against local currency yields instead (Figure 25),
there is less of a consistent effect, which suggests that these correlations tend to be more
locally driven. Indeed, there is a significant divide between G10 FX, where local FX tends
to be positively correlated with local yields, and EMFX (ZAR, RUB, TRY and MXN) where
the opposite tends to be true.
What drives the difference between EM and G10? It is likely a function of several factors:
■ Foreign portfolio flows have traditionally played a bigger role in EM countries, so “hot
money” flows which purchase EM FX and bonds together can drive a negative
correlation between currency and yields.
■ Central bank policy in EM has tended to have to raise rates into a currency
depreciation to slow capital flight, while this is almost never the case in G10 anymore
(for example, Mexico in June 2016).
■ EM local currency bond yields carry more sovereign credit risk, which is closely related
to local currency performance.
FX and yield curve steepening
We also considered how FX correlates with changes in the yield curve (i.e., 10y – 2y
steepness). Similar to the case with just 2-year yields, correlations were mixed among
local currency steepeners, but more strongly negatively correlated to USD steepeners.
This is also abnormal – the usual situation (outside of JPY) is for local FX strength to be
weakly but broadly correlated to USD steepness.
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Current 2yr correlation local Average 2yr correlation local
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Current 2yr correlation USD Average 2yr correlation USD
4 November 2016
The Credit Suisse Playbook 18
To some extent, this reflects the fact that steepening of the yield curve on any given day
tends to be a bear-steepener – 2-year yields are themselves positively correlated with
steepeners. But intuitively, there is also a case for the current steepening move to be
interpreted as an acceleration of U.S. growth and inflation prospects relative to peers, and
justify the strengthening in the USD.
Figure 27: Correlations between FX and local curve steepness is limited
Figure 28: Correlation against USD curve steepness is more consistent
Rolling 2m correlation between currency and local curve steepness. Grey bars indicate post-2011 range
Rolling 2m correlation between currency and USD curve steepness. Grey bars indicate post-2011 range
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Observations from our analysis
The analysis presented here suggests that if yields continue to rise, the current correlation
structure between yields and FX can continue to be sustained. Correlation trades between
FX pairs may then prove attractive, such as dual digital structures, worst-of-options, or
correlation swaps.
For example, implied correlation between EURUSD and GBPUSD appears cheap, trading
close to its lowest levels in five years (Figure 29). A dual digital with strikes for EURUSD
lower and GBPUSD lower neatly captures some key FX themes:
■ FX correlations may rise as yields continue to trade higher.
■ Higher USD yields also drive USD higher against FX crosses (including vs EUR and GBP).
■ Heightened political risk around European elections and the triggering of Article 50 are
likely to see the two currencies share a common negative driver in terms of price action.
Figure 29: Implied correlation between EURUSD and GBPUSD appears cheap
3m implied correlation
Source: Credit Suisse Locus
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Current local 2s10s correlation Average local 2s10s correlation
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Current USD 2s10s correlation Average USD 2s10s correlation
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16
Implied correlation of (USD/GBP, USD/EUR)
4 November 2016
The Credit Suisse Playbook 19
Technical Analysis
A critical test for inflation Breakevens
We have been warning of a rise in inflation expectations for a while – Growing evidence of
an important reversal, 5th October – and 10yr US TIPS Breakevens have now extended
their rally to our target and what we see as key resistance at 172/175bps – the 2016 high
from April and the 38.2% retracement of the entire 2012/2016 bear trend. With
momentum at overbought levels, real yields trapped in a range, and Brent Crude Oil also
still capped at its key resistance at $54.32, we look for 175bps to cap for now, prompting a
retracement lower.
Support for a setback is seen at 169/167bps initially, a close below which is needed to add
weight to the view the best of the rise in inflation expectations has been seen for now, for a
fall to 160bps, potentially as far as 153/150bps.
Bigger picture though, should a close above 175bps be achieved, especially if this is
accompanied by Brent Crude Oil breaking above $54.32, this would establish a large
base, and would suggest a much more meaningful rise in inflation expectations has taken
place, clearing the way for a move to 192/195bps.
Figure 30: 10yr TIPS Breakevens - Weekly
Source: Updata, Credit Suisse
Fixed Income Research Analysts
David Sneddon
44 20 7888 7173
Christopher Hine
212 538 5727
James Lim
65 6212 3612
4 November 2016
The Credit Suisse Playbook 20
Figure 31: 10yr US Bond Yield - Weekly Figure 32: 5yr5yr EUR Swap Breakevens – Weekly
Source CQG, Credit Suisse Source CQG, Credit Suisse
We have been bearish 10yr US yields, a large part of which has been because of the
break higher in TIPS Breakevens, and the sell-off stays on course for 1.91%, then ideally
our 1.94/98% target – the 38.2% retracement of the entire 2013/2016 decline in yields and
high from April this year. With medium-term trend and price support seen just above at
2.00/2.02%, we would then look for buyers here. Indeed, if we are indeed going to see a
cap in breakevens, this should add weight to the scenario we should look to re-buy the
10yr around the 1.94/98% area.
Below 1.72% is needed to mark a near-term top for 1.64/62%. A break below 1.53/52% is
needed to turn the trend bullish again, for the 1.32% record low.
However, should 10yr TIPS Breakevens remove the key 175bps barrier, we suspect
this would put pressure on 10yr US yields to also break above 2.02%.
In Europe, 5yr5yr EUR Swap Breakevens have moved to their target and what we also
see as tougher resistance at 148/158bps – the 38.2% retracement of the June 2015/July
2016 fall and significant price resistance. We would look for this area to cap initially for a
retracement lower. Support is seen initially at 142bps with basing support at 138/36bps
expected to provide a floor.
Bigger picture should we see a closing break above 158bps this would establish a large
base and pave the way for a more meaningful rise in inflation expectations to a bigger
barrier seen at the downtrend from 2011 at 164bps.
10yr US yields aim at our 1.94/98% target
where we look for fresh buying to emerge
5yr5yr EUR Swap Breakevens' spotlight turns to our target at
148/158bps
4
No
ve
mb
er 2
01
6
Th
e C
red
it Su
isse
Pla
yb
oo
k
21
Appendix
Calendar of key events
Please see the Global Economics Weekly Calendar for an in-depth look at next week’s data.
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, ©2016 Thomson Reuters Limited, various national statistical sources. *Indicates our estimates for the maturities to be issued where they are not yet announced. ** Indicates syndication
Mon-07-Nov Tue-08-Nov Wed-09-Nov Thu-10-Nov Fri-11-Nov WEEKEND 12/13 Nov
15:00: US U. Michigan Sent. (Nov P) 13 Nov: 23:50: JN GDP (3Q P)
US Presidential Election
Japanese (1-3y, 3-5y & 5-10y buybacks)*
and Norwegian (buyback) auctions
Dutch (10y), ESM, German (10y linkers)*,
Japanese (10y), UK (20y) and US (3y)
auctions
German (2y), Latvian (3y), Portuguese
(5y)*, Swiss (10y)* and US (10y) auctions
Danish (DGB exchange), Japanese (30y),
Swedish (SGB linkers) and US (30y)
auctions
Italian (3y, 7y & 15y)* and Japanese (5-
10y, 10-25y & 25y buybacks)* auctions
Mon-14-Nov Tue-15-Nov Wed-16-Nov Thu-17-Nov Fri-18-Nov WEEKEND 19/20 Nov
9-14 Nov: JN Machine Tool Orders (Oct P)
2:00: CH Industrial Prod. (Oct), Fixed
Asset Inv. (Oct), Retail Sales (Oct)
4:30: JN Industrial Prod. (Sep F)
10:00: EA Industrial Prod. (Sep)
9:30: UK Inflation (Oct)
10:00: GER ZEW Survey (Nov)
10:00: EA GDP (3Q P)
13:30: US Retail Sales (Oct), Empire
Manuf. (Nov)
Japanese (1y, 1-3y & 3-5y)* buybacks Japanese (5y) auction
Danish (DGB), Japanese (5-10y & 10y
linkers buyback)*, Norwegian (5y)*and
Swedish (SGB) auctions
French (2y, 5y & 10y linkers)*, Japanese
(20y), Spanish (5y & 10y)*, UK (10y
linkers) and US (10y TIPS) auctions
Japanese (1-3y, 3-5y , 10-25y & 25y)*
buybacks
Mon-21-Nov Tue-22-Nov Wed-23-Nov Thu-24-Nov Fri-25-Nov WEEKEND 26/27 Nov
11-21 Nov: JN Machine Tool Orders (Oct
F)
9:30: UK Public Sector Borrowing (Oct)
15:00: EA Cons. Conf. (Nov A)
15:00: US Existing Home Sales (Oct)
9:00: EA Manuf. / Services / Comp. PMI
(Nov P)
13:30: US Durable Goods (Oct P), Initial
Jobless Claims
15:00: US U. Michigan Sent. (Nov F), New
Home Sales (Oct)
00:30: JN Nikkei Manuf. PMI (Nov P)
9:00: GER IFO (Nov)9:30: UK GDP (3Q P)
19:00: FOMC Minutes
Japan Markets closedUS Markets closed
Belgian (10y & 20y)*, Slovakian (5y &
15y)* and US (2y) auctions
ESM**, Japanese (1y, 1-3y & 3-5y
buybacks)*, UK (10y) and US (5y)
auctions
Danish (DGB exchange), German (10y),
Portuguese (10y)* and US (2y FRN & 7y)
auctions
Japanese (5-10y, 10-25y & 25y
buybacks)* and Swedish (linkers)
auctions
Italian (2y CTZ & BTPei) and Japanese
(40y) auctions
Mon-28-Nov Tue-29-Nov Wed-30-Nov Thu-01-Dec Fri-02-Dec UPCOMING
23:50: JN Retail Trade (Oct)
10:00: EA Cons. Conf. (Nov F)
13:30: US GDP (3Q S)
15:00: US Cons. Conf. (Nov)
23:50: JN Industrial Prod. (Oct P)
10:00: EA HICP Estimate (Nov)
13:15: US ADP Employment (Nov)
13:30: US Personal Income / Spending
(Oct)
14:45: US Chicago PMI (Nov)
US Total Vehicle Sales (Nov)
00:30: JN Nikkei Manuf. PMI (Nov F)
CH Manuf. PMI (Nov), Non-Manuf. PMI
(Nov)
1:45: CH Caixin PMI Manuf. (Nov)
9:00: EA Manuf. PMI (Nov F)
9:30: UK PMI Manuf. (Nov)
13:30: US Initial Jobless Claims
15:00: US ISM Manuf. (Nov)
13:30: US Non-Farm Payrolls (Nov)
19:00: US Fed's Beige Book
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL TM service
7:00: GER Factory Orders (Sep)
10:00: EA Retail Sales (Sep)
20:00: US Cons. Credit (Sep)
CH Imports/Exports (Oct)
7:00: GER Industrial Prod. (Sep)
9:30: UK Industrial Prod. (Sep)
11:00: US Small Business Optimism
(Oct)
15:00: US JOLTS Jobs Openings (Sep)
9:30: UK Claimant Count (Oct), ILO
Unemployment (Sep)
13:30: US PPI (Oct)
14:15: US Industrial Prod. / Capacity
Utilization (Oct)
10:00: EA HICP (Oct)
13:30: US CPI/Core CPI (Oct), Housing
Starts (Oct), Philadelphia Fed (Nov), Initial
Jobless Claims
11-21 Nov: JN Machine Tool Orders (Oct F)
7:45: FRA Industrial Prod. (Sep)
9:00: ITA Industrial Prod. (Sep)
13:30: US Initial Jobless Claims
10-15 Nov: CH New Yuan Loans (Oct)
Key Data Releases and Policy Events (GMT)
11-21 Nov: JN Machine Tool Orders (Oct F)
1:30: CH PPI / CPI (Oct)
5:00: JN Eco Watchers (Oct)
23:50: JN Machine Orders (Sep)
9-14 Nov: JN Machine Tool Orders (Oct P)
4 Dec: Italian constitutional referendum
8 Dec: ECB Main Refinancing Rate
15 Dec: BoE Asset Purchase Target
20 Dec: BOJ Policy Rate
10-15 Nov: CH New Yuan Loans (Oct)
4 November 2016
The Credit Suisse Playbook 22
Credit Suisse Fixed Income and Economic forecasts
Figure 33: Credit Suisse Interest Rate forecasts
US – Treasuries/ Swap Spreads Last 2016 4Q 2017 1Q 2017 2Q 2017 3Q 2017 4Q
Fed Funds 0.25-0.50 0.50-0.75 0.50-0.75 0.75-1.00 0.75-1.00 1-1.25
2-Yr Yield/ Swap Spread (bps) 0.85 / 23 0.95 / 14.5 1.00 / 16.5 1.10 / 17 1.15 1.20
5-Yr Yield/ Swap Spread (bps) 1.32 / 2 1.35 / -2 1.40 / 1 1.50 / 2 1.60 1.65
10-Yr Yield/ Swap Spread (bps) 1.84 / -16 1.80 / -12 1.85 / -9 1.90 / -7 2.10 2.15
30-Yr Yield/ Swap Spread (bps) 2.61 / -56 2.55 / -48 2.60 / -43 2.65 / -40 2.70 2.80
Source: Credit Suisse; Note: Last values as of 31 October 2016, 07:00 AM EST
Figure 34: Credit Suisse Interest FX forecasts
Source: Credit Suisse
vs. USD EURUSD USDJPY GBPUSD USDCHF USDCAD AUDUSD NZDUSD USDSEK USDNOK
3m 1.050 100.00 1.160 1.038 1.350 0.740 0.685 9.238 8.286
12m 1.050 100.00 1.170 1.019 1.350 0.720 0.667 9.048 8.095
vs. EUR EURJPY EURGBP EURCHF EURCAD EURAUD EURNZD EURSEK EURNOK
3m 105.00 0.905 1.090 1.418 1.419 1.532 9.700 8.700
12m 105.00 0.90 1.070 1.418 1.458 1.575 9.500 8.500
vs. USD USDCNY USDHKD USDINR USDIDR USDKRW USDMYR USDPHP USDSGD USDTHB
3m 6.890 7.750 66.50 12900 1170 4.250 50.00 1.395 34.60
12m 7.150 7.750 69.50 13600 1190 4.350 51.00 1.420 35.50
vs. USD USDRUB USDTRY USDZAR USDILS USDBRL USDMXN USDTWD
3m 61.00 3.220 14.05 3.85 3.300 18.50 31.00
12m 65.00 3.350 15.00 3.90 3.600 19.00 32.20
Major Currencies
Emerging Currencies
4
No
ve
mb
er 2
01
6
Th
e C
red
it Su
isse
Pla
yb
oo
k
23
Figure 35: Credit Suisse Global and Developed Economics forecasts
2016E 2017E Q4/Q4 Annual average
Q1 Q2 Q3E Q4E Q1 Q2 Q3 Q4 14 15 16E 17E 14 15 16E 17E
Global Real GDP (q/q ann) 2.4 2.2 3.2 2.6 2.9 3.2 3.3 2.8 2.7 2.6 2.6 3.1 2.8 2.8 2.5 2.9
Inflation (y/y) 2.8 3.0 3.3 3.8 4.3 4.1 3.9 3.7 2.5 2.4 3.8 3.7 2.8 2.1 3.3 3.9
DM Real GDP (q/q ann) 1.6 1.3 2.1 1.8 1.9 2.2 2.0 2.0 1.8 1.8 1.7 2.0 1.7 2.1 1.5 1.8
Inflation (y/y) 0.6 0.6 0.7 1.2 1.8 1.6 1.6 1.6 1.0 0.4 1.2 1.6 1.4 0.2 0.8 1.6
US Real GDP (q/q ann) 0.8 1.4 2.9 2.3 2.4 2.2 2.1 2.1 2.5 1.9 1.9 2.2 2.4 2.6 1.6 2.3
Inflation (y/y) 1.1 1.0 1.1 1.8 2.4 2.1 2.2 2.1 1.2 0.5 1.8 2.1 1.6 0.1 1.3 2.2
Japan Real GDP (q/q ann) 2.1 0.7 0.0 0.8 2.0 4.9 2.4 2.8 -0.9 0.8 0.9 3.0 0.0 0.5 0.5 0.6
Inflation ex. fresh food (y/y) 0.1 -0.3 -0.4 -0.3 -0.1 0.0 0.0 0.0 2.5 0.2 -0.3 0.0 2.7 0.6 -0.3 0.0
Euro Area Real GDP (q/q ann) 2.1 1.2 1.4 1.2 1.6 1.6 1.6 1.6 1.3 2.0 1.5 1.6 0.9 1.9 1.6 1.5
Inflation (y/y) 0.0 -0.1 0.3 0.7 1.4 1.2 1.1 1.0 0.2 0.2 0.7 1.0 0.4 0.0 0.2 1.1
UK Real GDP (q/q ann) 1.7 2.7 2.0 0.8 0.0 0.4 0.4 0.8 3.5 1.7 1.8 0.4 3.1 2.2 2.0 0.7
Inflation (y/y) 0.4 0.3 0.7 1.3 2.0 2.2 2.3 2.6 0.9 0.1 1.3 2.6 1.5 0.0 0.7 2.3
EM Real GDP (q/q ann) 3.8 3.6 4.9 4.1 4.7 4.9 5.4 4.1 4.2 3.9 4.1 4.8 4.5 4.1 4.0 4.7
Inflation (y/y) 6.2 6.9 7.5 7.9 8.2 8.0 7.5 7.2 4.7 5.7 7.9 7.2 5.1 5.0 7.3 7.6
NJA Real GDP (q/q ann) 5.9 6.0 7.0 4.9 5.8 6.4 7.4 5.0 6.2 5.9 6.0 6.1 6.4 6.0 5.9 6.1
Inflation (y/y) 2.5 2.4 2.1 2.2 2.4 2.6 2.6 2.5 2.2 2.0 2.2 2.5 3.2 1.9 2.2 2.5
China Real GDP (q/q ann) 6.5 7.1 6.7 6.6 6.1 7.4 7.4 6.1 7.1 6.8 6.7 6.8 7.3 6.9 6.6 6.8
Inflation (y/y) 2.2 2.2 1.8 1.8 2.1 2.3 2.2 2.1 1.6 1.5 1.8 2.1 2.0 1.4 2.0 2.2
India* Real GDP (q/q ann) 9.6 5.5 16.6 -0.6 9.0 7.7 16.6 -0.6 6.9 7.5 7.6 8.0 7.2 7.6 7.8 8.0
Inflation (WPI, y/y) 5.3 5.7 5.1 4.6 4.6 4.8 5.0 5.5 4.1 5.3 4.6 5.5 9.9 4.9 5.0 5.2
EEMEA Real GDP (q/q ann) -0.7 0.3 0.8 2.7 2.3 2.1 2.1 2.2 1.7 0.6 0.8 2.2 2.1 0.6 1.0 2.2
Inflation (y/y) 6.7 6.0 6.4 5.5 5.6 5.2 5.1 4.9 7.0 8.7 5.5 4.9 6.2 8.9 5.8 5.5
Russia Real GDP (q/q ann) 1.2 -1.9 0.8 2.4 1.6 1.6 1.2 1.2 0.0 -3.9 0.6 1.4 0.7 -3.7 -0.4 1.5
Inflation (y/y) 8.3 7.3 6.8 5.6 5.1 4.6 4.6 4.2 9.6 14.5 5.6 4.2 7.8 15.5 7.1 4.7
Turkey Real GDP (q/q ann) 2.6 1.2 -0.8 6.6 3.2 3.2 3.2 3.2 3.0 4.7 2.4 3.2 3.0 4.0 3.0 3.2
Inflation (y/y) 8.6 6.9 8.0 8.0 8.2 7.7 7.4 7.2 8.8 8.2 8.0 7.2 8.9 7.7 7.6 7.3
Lat. America Real GDP (q/q ann) -0.5 -2.5 0.7 2.0 2.5 1.5 0.8 2.7 0.3 -1.4 -0.1 1.9 0.6 -0.4 -0.8 1.6
Inflation (y/y) 20.5 25.4 29.7 32.4 33.4 31.4 29.0 27.3 10.7 17.2 32.4 27.3 10.3 13.6 28.3 29.6
Brazil Real GDP (q/q ann) -1.7 -2.3 -0.8 0.0 2.4 0.0 0.4 1.6 -0.7 -5.9 -1.2 1.1 0.1 -3.8 -3.0 0.8
Inflation (y/y) 10.1 9.1 8.7 7.5 6.6 5.7 5.5 5.7 6.5 10.4 7.5 5.7 6.3 9.0 9.0 6.0
Mexico Real GDP (q/q ann) 2.0 -0.7 1.4 2.5 3.0 3.0 3.0 3.0 2.6 2.4 1.3 3.0 2.2 2.5 2.2 2.5
Inflation (y/y) 2.7 2.6 2.8 3.2 3.2 3.3 3.4 3.6 4.2 4.2 3.2 3.6 4.0 2.7 2.7 3.6
Source: Credit Suisse estimates, Thomson Reuters DataStream. Note:USD nominal GDP weights are used to compute regional and global aggregate figures. *Annual figures for India are on fiscal year basis
4 November 2016
The Credit Suisse Playbook 24
GLOBAL FIXED INCOME AND ECONOMIC RESEARCH James Sweeney, Managing Director
Head of Fixed Income and Economic Research +1 212 538 4648
Dr. Neal Soss, Managing Director Vice Chairman, Fixed Income Research
1 212 325 3335 [email protected]
US / GLOBAL ECONOMICS AND STRATEGY
James Sweeney Chief Economist +1 212 538 4648 [email protected]
Xiao Cui +1 212 538 2511 [email protected]
Axel Lang +1 212 538 4530 [email protected]
Zoltan Pozsar +1 212 538 3779 [email protected]
Jeremy Schwartz +1 212 538 6419 [email protected]
Sarah Smith +1 212 325-1022 [email protected]
Wenzhe Zhao +1 212 325 1798 [email protected]
Praveen Korapaty Head of Interest Rate Strategy 212 325 3427 [email protected]
Jonathan Cohn 212 325 4923 [email protected]
William Marshall 212 325 5584 [email protected]
Jamie Nicholson-Leener Head of Latin America Credit +1 212 538 6769 [email protected]
Luis Serrano +1 212 325 3147 [email protected]
EUROPEAN ECONOMICS AND STRATEGY
Neville Hill Head of European Economics & Strategy +44 20 7888 1334 [email protected]
Anais Boussie +44 20 7883 9639 [email protected]
Peter Foley +44 20 7883 4349 [email protected]
Sonali Punhani +44 20 7883 4297 [email protected]
Veronika Roharova +44 20 7888 2403 [email protected]
Giovanni Zanni +44 20 7888 6827 [email protected]
David Sneddon Head of Technical Analysis 44 20 7888 7173 [email protected]
Christopher Hine 212 538 5727 [email protected]
James Lim 65 6212 3612 [email protected]
William Porter Head of European Credit +44 20 7888 1207 [email protected]
Chiraag Somaia +44 20 7888 2776 [email protected]
GLOBAL FX / EM ECONOMICS AND STRATEGY
Shahab Jalinoos Head of Global FX Strategy 212 325 5412 [email protected]
Honglin Jiang 44 20 7888 1501 [email protected]
Trang Thuy Le +852 2101 7426 [email protected]
Alvise Marino 212 325 5911 [email protected]
Bhaveer Shah 44 20 7883 1449 [email protected]
Kasper Bartholdy Head of Global EM Strategy +44 20 7883 4907 [email protected]
Ashish Agrawal +65 6212 3405 [email protected]
Daniel Chodos +1 212 325 7708 [email protected]
Nimrod Mevorach +44 20 7888 1257 [email protected]
Martin Yu +65 6212 3448 [email protected]
Berna Bayazitoglu Head of EEMEA Economics +44 20 7883 3431 [email protected]
Alexey Pogorelov +44 20 7883 0396 [email protected]
Carlos Teixeira +27 11 012 8054 [email protected]
Alonso Cervera Head of Latin America Economics +52 55 5283 3845 [email protected]
Juan Lorenzo Maldonado +1 212 325 4245 [email protected]
Casey Reckman +1 212 325 5570 [email protected]
Alberto Rojas +52 55 5283 8975 [email protected]
Nilson Teixeira Head of Brazil Economics +55 11 3701 6288 [email protected]
Paulo Coutinho +55 11 3701-6353 [email protected]
Iana Ferrao +55 11 3701 6345 [email protected]
Leonardo Fonseca +55 11 3701 6348 [email protected]
Lucas Vilela +55 11 3701-6352 lucas.vilela @credit-suisse.com
ASIA PACIFIC DIVISION Ray Farris, Managing Director
Head of Fixed Income Research and Economics, Asia Pacific Division +65 6212 3412
EMERGING ASIA ECONOMICS
Dr. Santitarn Sathirathai Head of Emerging Asia Economics +65 6212 5675 [email protected]
Vincent Chan Head of China Macro +852 2101 6568 [email protected]
Deepali Bhargava +65 6212 5699 [email protected]
Weishen Deng +852 2101 7162 [email protected]
Christiaan Tuntono +852 2101 7409 [email protected]
Michael Wan +65 6212 3418 [email protected]
JAPAN ECONOMICS
Hiromichi Shirakawa Head of Japan Economics +81 3 4550 7117 [email protected]
Takashi Shiono +81 3 4550 7189 [email protected]
Disclosure Appendix
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.