this weekly has been produced by the market economics team · this weekly has been produced by the...

This weekly has been produced by the Market Economics team

www.GlobalMarkets.bnpparibas.com Please refer to important information at the end of the report.

Page GLOBAL OUTLOOK: Sunny outlook, rain later

We have revised up our global growth forecast for 2018, reflecting a stronger end to 2017. Advanced economies should generally see slower growth in 2019, led by the US.

2–8

THEMES OF THE WEEK

US and eurozone: Reading the yield curves 9–10 Yield curves are steepening in the eurozone and flattening in the US. We see this as signalling continued eurozone boom conditions but brewing conditions for a US slowdown, which may start to bite next year, probably in H2.

US FOMC: Teeing up a dovish hike 11–12 As far as rate hikes go, December’s could be very dovish, especially if the FOMC leans toward the view of seeing inflation progress before taking real rates above zero.

Japan: Reversal interest rate 13–14 The Bank of Japan might be feeling the need to start laying the groundwork for tightening, but our base case is that it will keep policy rates on hold for the foreseeable future.

China: Asset-management guidelines to tackle financial risks 15–16 A new set of draft asset-management policy guidelines is concrete evidence of China’s determination to rein in financial risk by bringing all financial activities under a unified set of regulations and controls.

DATES AND DATA

One-week calendar 17–19 Global inflation watch 25–27 Contacts 29

Key data preview 20–22 Recently published research 28 Disclaimer 30

Central bank watch 23–24

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Macro Matters 23 November 2017

@MortimerLeePaul www.GlobalMarkets.bnpparibas.com All forecasts are preliminary. Please see full Global Outlook for finalized forecasts.

Global Outlook: Sunny outlook, rain later

We have revised up our global growth forecast for 2018, reflecting a stronger end to 2017.The eurozone is in the midst of a boom, while inflation rises, slowly.

Advanced economies should generally see slower growth in 2019, led by the US. The UK,however, is forecast to slow in 2017 and 2018 but to pick up in 2019.

The Fed will likely hike in December, we think, then three more times in 2018. The ECB looks set to continue QE until end-2018 and to hike the depo rate to −20bp in June 2019.

We are bearish on bonds, reflecting good growth, higher inflation, less accommodation andless global QE. The US dollar is in a downtrend, after near-term supportive conditions.

The global economic outlook has continued to brighten and we have revised up our global growth forecast for 2018 by 0.2pp to 3.7%, in line with the latest IMF forecast. Much of this reflects a stronger end to 2017 than we had expected. The revisions were widespread, including in the US, eurozone, Poland, UK and Turkey. The biggest revisions within the advanced economies were to the eurozone, which appears to be in the boom phase of the cycle. We now expect the eurozone to grow by 2.3% this year and 2.4% in 2018, the latter number being an upward revision of 0.5pp from our previous forecast. China’s growth rate was 6.9% y/y in H1 2017 and 6.8% in Q3, the latter 0.2pp above our forecast three months ago.

For 2019, we expect slower growth in advanced economies (with the exception of the UK), led by the US: we are significantly below the consensus and 0.4pp below the IMF on global growth. We see a wide range of indicators – financial and real – recently clocking figures not seen since before the last recession. This suggests we might be nearing a peak. The ISM manufacturing index is at its highest level since 2004 and the non-manufacturing ISM since August 2005 (Chart 1). Easy financial conditions are helping (Chart 2). The volume of private equity issuance is the highest since the financial crisis and asset valuations look stretched. All this look suspiciously like top-of-the-cycle stuff.

We are, therefore, a little concerned that cracks that appear to be idiosyncratic, such as financial weakness in Turkey and in junk bonds, could be harbingers of something worse and the start of a correction. Are these canaries in the coal mine? At this stage, we would attach only about a 15% probability to that being true, but we are monitoring a wide range of data for signs of nascent problems. US GDP growth appears to have accelerated in H2 2017, with 3.0% q/q aar in Q3, despite a hurricane setback, and very strong leading indicators such as the ISMs.

Author: Paul Mortimer-Lee Chief Market Economist and Head of US Economics New York, BNP Paribas

Securities Corp

@MortimerLeePaul

Global growth forecast revised up to 3.7% y/y

Chart 1: US PMIs Chart 2: US ISM and Financial and Monetary Conditions

Index (FMCI)

Source: ISM, Macrobond, BNP Paribas Source: ISM, Macrobond, BNP Paribas

The forecasts reported here are the product of close teamwork in the BNP Paribas Global Markets Research team and also reflect valuable discussions with

others within the Group, including Group Chief Economist William De Vijlder.

Advanced nations could see slower growth in 2019

US economy seen expanding 2.9% in 2018

2

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Macro Matters 23 November 2017

@MortimerLeePaul www.GlobalMarkets.bnpparibas.com All forecasts are preliminary. Please see full Global Outlook for finalized forecasts.

We have projected another 3.0% growth rate for Q4 and 2.9% for 2018 as a whole, though we expect residual seasonality to subdue Q1 2018 to a mere 2.0% q/q aar.

We continue to see tax cuts – our long-standing non-consensus, high-conviction call – being legislated in Q1 2018. This gives us 4.0% growth q/q aar in Q2 and a robust Q3. By end-year, however, we see growth slowing and in 2019 we project average growth of only 1.9% y/y, with Q4 2019 on Q4 2018 registering just 1.3% y/y.

We think the seeds of the slowdown have already been sown, with the tax cuts likely to delay the inevitable. The slowdown stems from:

a lower rate of decline in the savings ratio as stock price increases decelerate (the savingsratio fell from 6.1% in 2015 to 4.9% in 2016, and we estimate only 2.7% this year; with anexpected 2018 average ratio of 2.3%, compared with 3.1% in Q3 2017, the fall is decelerating);

a squeeze on profits – as a result of slowing consumption and a very tight labour marketpushing up wages and squeezing margins – which is likely to curb investment growth; and

the cumulative effect of higher interest rates, with our forecasts seeing hikes in December2017 and in March, June and September 2018. Higher bond yields should also slow activity,especially if credit spreads widen during the next year or so.

It could be a harder landing than we project, because we see the unemployment rate falling to just 3.5% in early 2019, the lowest since the late 1960s. Taking this back up to the Fed’s median equilibrium estimate of 4.6% without causing a recession will require a huge amount of skill from new Fed chair, Jerome Powell.

The eurozone is in the middle of a boom, with leading indicators suggesting this is set to continue (Chart 3). Consumption and employment are in a virtuous feedback circle. Consumption remains stronger than we had expected a few months ago, despite higher headline inflation (Chart 4). We expect consumption growth to rise at a pace just below 2% in coming years. Investment, meanwhile, is in catch-up mode after years of underinvestment during the crisis, which has left capacity utilization much higher than in the US; we expect eurozone investment to grow by about 3.8% this year and 3.7% next, with 2019 still close to 3.0%. Add to these bullish factors favourable financing conditions, a still cheap euro and quickening global trade growth and we have a recipe for continued very robust growth; hence our upward revisions.

ECB President Mario Draghi’s determination to continue QE until inflation shows signs of a self-sustaining rise is an important factor, in our view, not only in the inflation process, but also in promoting growth and a rapid closure of the output gap – if anyone looks determined not to take the punch bowl away too early, it is Mr Draghi.

In 2019, the economy should start to slow more noticeably as a result of both tighter supply conditions – the economy should be at its full employment rate around the end of 2018 – and weaker demand, as the US and global economies decelerate and as the euro rises towards 1.30 against the USD, slowing exports and investment.

Chart 3: Leading indicators Chart 4: Eurozone contributions to growth (% y/y)

Source: Markit, Macrobond, BNP Paribas Source: Eurostat, Macrobond, BNP Paribas

US unemployment rate seen at 3.5% in early 2019

Eurozone growth expected to remain robust

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Macro Matters

23 November 2017

@MortimerLeePaul

www.GlobalMarkets.bnpparibas.com All forecasts are preliminary. Please see full Global Outlook for finalized forecasts.

Strong growth on the mainland of Europe is helping to support activity in the UK. But the consumer still looks to be suffering from reduced real wages that have been the result of inflation rising to 3%. Uncertainty continues to weigh on investment and exports, despite soft sterling and booming global trade (Chart 5). Therefore, we view growth as being likely to be only 1.5% this year and 1.2% in 2018 before picking up to 1.8% in 2019 as some of the Brexit effects – especially slower consumption – fade.

Chinese growth has surprised slightly to the upside this year, despite signs that the tightening of credit is biting on housing, for example. We attribute this largely to the political effects of October’s party congress and strong exports due to the synchronized global growth recovery. However, we continue to be concerned that the debt burden in the economy is mounting from already high levels. In the short term, financial deleveraging and intensified regulation are likely to tighten monetary and financial conditions and increase debt defaults. On top of limited fiscal flexibility after a few years of aggressive policy, we believe China’s growth will continue to soften, reaching a trough next year. We forecast growth of 6.8% this year, 6.4% in 2018 and 6.5% in 2019.

Japan, along with the US and the eurozone, is growing well above potential (which we peg at 0.7%). After growing by 1.0% in 2016, our new forecast is for an expansion of 1.5% this year, decelerating to 1.3% in 2018. In 2019, slower external growth and a stronger yen are expected to pare growth back by about half, to 0.6% y/y. Despite an influx of foreign workers in recent years (see Japan: Will the surge in foreign labor continue?), the unemployment rate continues to fall and we envisage this will continue; our low-point forecast is 2.4% in H2 2018, which would be the lowest level since June 1994.

In emerging markets, Turkey’s growth has received a big boost this year from a credit guarantee scheme, which may result in Q3 GDP increasing at a double-digit pace, lifting the growth rates in 2017 and 2018. Credit growth is slowing, however, according to figures until the end of October, and a record-weak lira will boost inflation, hurt real incomes and raise uncertainty, threatening growth. Our forecasts for South Africa, Brazil and Mexico are unchanged from three months ago. The first two project growth picking up in 2018 from 2017 (from 1% to 3% for Brazil and from 0.8% to 1.0% for South Africa). The South African ANC leadership elections at the end of this year could encourage a more or less optimistic outlook, depending on the way the result goes. In Mexico, a presidential election looms, which we have assumed will lead to no major policy shift. Nonetheless, we expect growth to dip from 2.0% this year to 1.5% in 2018. We have assumed no sweeping changes in NAFTA.

In terms of our picture on global inflation, the outlook is little changed, despite the very good growth outlook, which says something about the flatness of the global Phillips curve and also testifies to inflation expectations being well anchored in many countries. Changes in the picture overall compared with our previous forecast are minor, though there have been offsetting changes within the group.

We have continued to see US inflation come in lower than expected, with core inflation surprising on the downside in six out of the last seven months. While wages popped up in September, normal service was resumed the next month, with average hourly earnings (AHE) clocking 2.4% y/y in October (Chart 6). We reckon that AHE growth just below 3% is needed to

UK growth is slowing

Japan growing well above potential

US headline CPI to average at 2.2% next year

Little change in global inflation outlook

Chart 5: UK contributions to GDP (% y/y) Chart 6: US core inflation and wages (% y/y)

Source: Eurostat, Macrobond, BNP Paribas Source: BLS, Macrobond, BNP Paribas

China to slow next year and pick up again in 2019

Strength in emerging markets; Mexico lags

US inflation has surprised on the downside in 2017

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Macro Matters

23 November 2017

@MortimerLeePaul


hit core inflation of 2% (with the exchange rate, import prices and price expectations all playing a role and making this a pretty rough estimate). We see wage growth accelerating over our forecast period, picking up to 3% by Q2 next year.

The headline CPI inflation rate, 2.0% y/y as at October 2017, is expected to dip a little over the coming months due to base effects, reaching a projected low of 1.4% y/y in February 2018. We expect this to rise to 2.2% by mid-year, with the 2018 average coming in at 2.0% after 2.1% in 2017. We mark 2019’s forecast at 2.2%.

Core inflation follows a smoother path. We forecast that the recent exceptionally weak run of numbers will fade over time, aided by the upward drift of inflation and the pass-through of an earlier somewhat weaker dollar. Consequently, the core PCE deflator, currently 1.3% y/y, should accelerate to 1.7% y/y in Q2 as base effects drop out and to 2.0% by end-2018; we expect the 2019 average to be 2.1%.

In the eurozone, core inflation has fluctuated this year. We expect the year-on-year reading in Q4 to be 1.0% but to pick up steadily during 2018, delivering an average of 1.3% for the year, which should rise further to 1.7% in 2019. Headline inflation we forecast at 1.5% this year, 1.6% in 2018 and 1.7% in 2019. Behind this is a rapid narrowing of the output gap, with GDP eventually extending beyond potential, the unemployment rate falling to 8.2% in 2018 and to 7.8% in 2019. This is against the OECD’s equilibrium unemployment rate estimate of 8.6%, suggesting a tightening in labour market conditions and hence a faster rate of increase in wages (we see growth in compensation per employee picking up from 1.6% y/y this year to 2.1% in 2018 and 2.5% in 2019; see Chart 7).

While normally there is a strong relation between Chinese PPI inflation and price developments abroad (see Chart 8), this has been less so this year. The PPI deceleration we envisage next year (from 6.2% y/y to 3.1%) should be of limited significance. The underlying picture we have of both the PPI and GDP deflator inflation in China is for growth of close to 3% y/y in 2018 and 2019. CPI inflation should be more restrained, with our projections being for a rate of 1.6% y/y in 2017, 2.3% in 2018 and 2.5% in 2019.

Earnings of part-time workers have accelerated in Japan as the labour market has tightened, but low quit rates among full-time employees and a pickup in the number of foreign workers have muted the wages of full-timers. Nonetheless, with the unemployment rate forecast to fall to 2.5% in 2018, we expect the rate of wage increases to pick up from 0.4% this year to 0.8% in 2018 before the slowdown we forecast for 2019 knocks the rate back to 0.4%.

After taking account of productivity growth, core CPI inflation is nowhere near fast enough to get the rate to 1%, never mind the target of 2%. After headline CPI inflation of 0.3% this year, we expect a tentative upward drift to 0.6% in 2018 and 0.8% in 2019.

The pickup in UK inflation from 0.6% in 2016 to the most recent reading of 3.0% y/y has been driven mainly by the pass-through of the sterling weakness. While higher import prices should continue to buoy inflation, we see only a little further to go in the year-on-year rate, with 3.1% in Q4 this year being the peak, in our view. Nonetheless, with our forecast being for wages to catch up somewhat eventually – rising by 3.4% and 4.0% in 2018 and 2019, respectively, after just 2.2% in 2017 – inflation is likely to be slow to subside. We forecast CPI inflation at 2.7% on average in 2018, the same as we expect for this year, and 2.4% in 2019.

Wages might rise in Japan before falling back again

Chart 7: Eurozone wages and labour shortages Chart 8: China PPI and US CPI (% y/y)

Source: DG ECFIN, Eurostat, Macrobond, BNP Paribas Source: BLS, NBS, Macrobond, BNP Paribas

Chinese CPI inflation drifting upwards

UK inflation is likely to be slow to subside

Eurozone headline inflation at 1.7% in 2019

US inflation to trough in February

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Macro Matters

23 November 2017

@MortimerLeePaul


Turkey’s inflation is coming in stronger at the end of this year than we had expected, with a bigger impact on our average inflation forecast for 2018, which we have revised up from 8.5% y/y to 9.7%, than for 2017, where our forecast has edged up by 0.2pp to 11.0%. A softer exchange rate and stronger growth help explain the shift. With the currency recently having nosedived, risks look to be on the upside.

Poland is another country where we have revised up our inflation forecast. The pickup we have been expecting as the result of a very tight labour market and faster wage growth seems to be arriving sooner than we had expected, with this year’s forecast of 1.9% y/y being 0.2pp up on our previous projection, whereas next year’s 2.6% y/y forecast is an increment of over a full point. We expect a further drift up in 2019 to 2.7% y/y.

Elsewhere in emerging markets, we have revised down our Brazilian and Mexican inflation forecasts. In 2018, we expect Brazil’s current 3.5% rate to persist, edging up to 3.9% in 2019. In Mexico, we have revised down our forecast for average annual inflation by half a point in 2018 to 3.5% and by 0.1pp in 2019 to 3.2% as the effects of a previously weak peso fade. For South Africa, we project inflation at 5.3% this year, slowing to a below-consensus 4.8% in 2018 and 5.2% in 2019.

Turning to global monetary policy, we think above-trend growth and output beyond potential but only a slow drift up in underlying inflation add up to a moderate withdrawal of monetary accommodation, but not outright restrictive policy, especially given the risks that a sharp correction of asset prices could take us back into recessionary territory.

We thus expect the Fed’s tightening cycle to extend into 2019 but not beyond, with a peak rate of 2.00–2.25% being reached in Q3 2018, which corresponds to what we perceive to be the neutral real rate, around zero. There is a risk of a further hike that year, depending on how the high-frequency data fall in the run-up to the December meeting, but our take is that Mr Powell will be cautious about taking the economy past the tipping point that could be reached around the turn of 2018/2019. The backup in the 10y bond yields to 3.0% by the end of next year, a level last touched in early 2014, may also lead to tighter conditions coming from risk markets by then. We expect the Fed will back off fairly quickly in its forward guidance once signs of economic and more serious financial strains begin to show.

In the eurozone, the ECB is stretching out the adjustment process in policy. QE at a rate of EUR 30bn a month is now policy until September 2018 and we envisage a further three-month extension beyond that, with purchases gradually tapered to zero. We take the ECB’s commitment not to start raising rates until well after QE ends to mean a minimum of six months between the last net bond purchase and the first adjustment in the depo rate. We, therefore, pencil in the first move, from −0.40% to −0.20%, to come in June 2019, with a further shift to zero in December.

In Japan, we expect the policy to remain unchanged until the end of our forecast, with the depo rate remaining at −0.10% and the target for 10-year rates at zero until past the end of 2019 because inflation remains below 1%. Were the JPY to weaken through 115 against the USD and to threaten to go as far as 120, it is possible that the depo rate might be edged up to zero; but otherwise, we would expect the Bank of Japan to sit on its hands.

The UK rate hike earlier this month seemed unwarranted, given the weakness in activity and the fact that inflation is very near its peak. The fact that we do not expect the Bank of England to be able to follow with another hike until Q4 2018 underlines this, as do weaker retail sales figures.

In emerging markets, our forecast is for unchanged rates in China throughout our projection horizon. Turkey’s central bank is expected to edge down market rates to 11.50% by the end of 2018 and to 11.00% at end-2019 as the recent peak in inflation passes. We expect Poland to be going in the opposite direction, given building inflation pressures, with a rise from the current 1.50% policy rate to 2.00% by end-2018 and to 2.50% a year later.

In terms of bond markets, it seems to us that the long, secular bond market rally is over (at least until the next recession) and that with less accommodation in the US and Europe, the trend in yields is now up. The key question in the forecast is the extent to which the reduction in the Fed’s balance sheet and the scaling back and eventual end of the ECB’s QE will push up long rates, which will affect the level and shape of the curve.

Fed’s tightening policy not to extend beyond 2019

Turkey has an inflation problem

Brazilian, Mexican inflation forecasts revised down

Polish inflation has surprised on upside

First ECB rate hike could come in June 2019

BoJ on permahold

BoE may have to think twice before hiking again

Long, secular bond market rally is over

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Macro Matters

23 November 2017

@MortimerLeePaul


In the US, there has been a flattening in the curve so far in the tightening cycle; normally, this would proceed further with the 100bp of rate hikes we have forecast for the Fed. But this is not a normal tightening cycle, as global QE has depressed term premia. This should begin to reverse in 2018 as the Fed starts shrinking its balance sheet and ECB purchases slow; therefore, we expect the US curve to steepen as yields rise (Chart 9). We project the 2y, currently at 1.7%, will rise to 2.2% by the end of next year. Meanwhile, our forecast for the 10y, currently at 2.4%, is for a rise to 3% by end-2018. In 2019, a slowing economy and speculation that the next move from the Fed may be an ease is likely to reduce yields slightly, to 2.1% for the 2y and to 2.9% for the 10y.

Our eurozone bond forecast has the 2y rate becoming increasingly less negative next year as we get closer to the time when the ECB will start raising rates: we foresee the 2y German government bond yield at 0% by end-2018 and 0.4% by end-2019 (Chart 10). As for the 10y, we see this on an upward path too, rising from its current spot rate of 0.36% to 1.5% at end-2018 and to 1.8% by end-2019. In terms of the spread between the US and the eurozone, the shift in the ECB’s policy stance is the most profound, whereas the Fed’s is a continuation of a theme that is already in play. With the change in the balance sheet being larger for the ECB than for the Fed between now and the end of the forecast period, we expect the spread to narrow from some 200bp currently to 150bp at the end of 2018 and to 110bp at end-2019.

In terms of spreads within the eurozone, we expect some fluctuation within narrow ranges, for example around the time of the Italian elections. There may be some tendency for widening once QE ends, given the directional nature of spreads in the past. But such tendencies should be contained by good growth and current account surpluses in Spain and Italy, indicating that domestic savings are more than sufficient to meet domestic investment requirements. The 10y spread of the UK to the eurozone, currently at 94bp, is forecast to be 80bp at the end of 2018 and 100bp at the end of 2019.

Japanese 10y yields are expected to rise to 0.08% next year, from around 0.03% now, as US and eurozone bond yields rise, but should sink back to zero by end-2019 as yields abroad pare back and the global cycle slows.

In terms of currencies, we feel that the cyclical peak of the USD has passed. However, the fact that the Fed is likely to keep on hiking in 2018 while the ECB winds down its QE but refrains from rate rises means that the gap between the 2y rates in the USD and EUR markets should widen in favour of the USD, and it is this section of the curve that we think is more relevant to FX. While rate differentials have been a poor guide to key USD pairs so far this year, over long time horizons front-end rate differentials have proved a consistently good guide to FX behaviour, and have a very real impact on hedging costs and investment decisions.

Thus, we think that the EUR might suffer a temporary setback to 1.13 over the next couple of quarters, aided by the passage of US tax reform. Thereafter, as the US begins to show signs of slowing and the ECB edges closer to starting its own tightening, the USD should weaken again, ending 2018 at 1.22 against the EUR and at 1.30 at end-2019, which our models suggest is close to long-term fair value.

Euro spreads to fluctuate within narrow ranges

2y and 10y eurozone rates on upward track

Global QE gives steeper Treasury curve

Chart 9: US yields (%) Chart 10: Eurozone yields (%)

Source: Macrobond, BNP Paribas Source: Macrobond, BNP Paribas

EUR could suffer temporary setback

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Macro Matters

23 November 2017

@MortimerLeePaul


Similarly, we expect the USD to strengthen versus the JPY in the first half of next year, but to weaken thereafter. We project USDJPY rising to 117 before ending 2018 at 112. Thereafter, as the US economy slows, we see the yen gaining ground more quickly, ending 2019 at 105 against the dollar. Due to the tendency for the USD to strengthen as growth picks up to 3% next year, we expect it to make some headway against the RMB as well, with the RMB likely to weaken to 6.85 against the USD by the end of next year before rallying to 6.72 by end-2019 as the US economy stutters in 2019.

Elsewhere in emerging markets, the TRY looks to be among the most vulnerable currencies, with high inflation and a wide current account deficit. In Latin America, our forecast for the USDBRL is 3.20 at the end of next year and 3.30 at end-2019. For the USDMXN, we see today’s spot of 18.9 shifting to 18.0 at the end of next year and to 18.2 by end-2019.

TRY looks vulnerable in emerging markets

Yen may fall against the USD before rising

8


Macro Matters

23 November 2017

@MortimerLeePaul


Table 1: BNP Paribas GDP growth forecasts (% y/y)

Change since last

Forecasts1 Global Outlook (pp) Previous forecasts

2015 2016 2017 2018 2019 2017 2018 2019 2017 2018 2019

US 2.9 1.5 2.3 2.9 1.9 0.2 0.2 0.0 2.1 2.7 1.9Eurozone 2.0 1.8 2.3 2.4 1.8 0.1 0.5 0.4 2.2 1.9 1.4China 6.9 6.7 6.8 6.4 6.5 0.2 0.0 0.0 6.6 6.4 6.5Japan 1.1 1.0 1.5 1.3 0.6 0.1 0.2 0.1 1.4 1.1 0.5UK 2.3 1.8 1.5 1.2 1.8 -0.1 0.2 -0.2 1.6 1.0 2.0Turkey 6.1 3.2 6.5 4.0 5.0 1.0 1.0 1.0 5.5 3.0 4.0Poland 3.8 2.7 4.2 3.5 2.7 0.2 0.3 0.1 4.1 3.1 2.6South Africa 1.3 0.3 0.8 1.0 1.3 0.1 0.0 0.0 0.7 1.0 1.3Brazil -3.8 -3.6 1.0 3.0 2.5 0.0 0.0 0.0 1.0 3.0 2.5Mexico 2.6 2.3 2.0 1.5 2.5 0.0 0.0 0.0 2.0 1.5 2.5Global2 3.4 3.2 3.7 3.7 3.4 0.2 0.2 0.1 3.5 3.5 3.3

1 Forecasts are provisional and subject to change

2 Global growth forecasts are based on IMF country weightings and BNP Paribas country estimates, which account for roughly 60% of the IMF share of world

Source: IMF, national statistical agencies, Macrobond, BNP Paribas

Table 2: BNP Paribas CPI inflation forecasts (% y/y)

Change since last

Forecasts1 Global Outlook (pp) Previous forecasts

2015 2016 2017 2018 2019 2017 2018 2019 2017 2018 2019

US 0.1 1.3 2.1 2.0 2.2 -0.1 -0.2 -0.3 2.2 2.1 2.5Eurozone 0.0 0.2 1.5 1.6 1.7 0.0 0.2 0.1 1.5 1.4 1.6China 1.4 2.0 1.6 2.3 2.5 0.0 0.0 0.0 1.6 2.3 2.5Japan 0.8 -0.1 0.3 0.6 0.8 -0.1 0.0 0.3 0.4 0.6 0.5UK 0.1 0.6 2.7 2.7 2.4 0.0 0.0 0.0 2.7 2.7 2.4Turkey 7.7 7.8 11.0 9.7 8.8 0.2 1.2 0.2 10.8 8.5 8.6Poland -0.9 -0.6 1.9 2.6 2.7 0.2 1.1 0.4 1.8 1.5 2.3South Africa 4.6 6.3 5.3 4.8 5.2 0.1 0.2 -0.1 5.1 4.7 5.3Brazil 9.0 8.7 3.5 3.5 3.9 0.0 -0.3 -0.2 3.5 3.8 4.1Mexico 2.7 2.8 6.0 3.5 3.2 0.3 -0.5 -0.1 5.7 4.0 3.3

1 Forecasts are provisional and subject to change

Source: National statistical agencies, national central banks, IMF, Macrobond, BNP Paribas

Table 3: BNP Paribas end-period interest rate forecasts Table 4: BNP Paribas end-period FX forecasts

% Spot1 Q2 18 Q4 18 Q4 19

US

Fed funds 1.00-1.25 1.75-2.00 2.00-2.25 2.00-2.252-year 1.73 2.10 2.20 2.1010-year 2.35 2.75 3.00 2.90Eurozone

Refi 0.00 0.00 0.00 0.252-year2 -0.76 -0.50 0.00 0.4010-year2 0.36 0.75 1.50 1.80Spreads to Germany (bp)

France (10y) 34 25 20 20Italy (10y) 147 125 120 140Spain (10y) 118 110 110 130Japan

IOER -0.10 -0.10 -0.10 -0.102-year -0.20 -0.15 -0.15 -0.1810-year 0.03 0.08 0.08 0.00

Spot1 Q2 18 Q4 18 Q4 19

EURUSD 1.18 1.13 1.22 1.30EURJPY 132 132 137 137USDJPY 112 117 112 105USDRMB 6.63 6.98 6.85 6.72

1 Spot rates as at 17 November 2017

2 German benchmark

Source: BNP Paribas (Market Economics, Interest Rate Strategy)

1 Spot rates as at 17 November 2017

Source: BNP Paribas (FX Strategy)

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@MortimerLeePaul

23 November 2017 Macro Matters

www.GlobalMarkets.bnpparibas.com

US and eurozone: Reading the yield curves

Yield curves in the US and Europe are moving in different ways: steepening in the eurozone and flattening in the US.

An important part of the story is differences in rate action and forward guidance – the Fed signaling continuing hikes and the ECB stretching out QE and refraining from hike signals.

We see this as signaling continued eurozone boom conditions but brewing conditions for a US slowdown, which may start to bite next year, probably in H2.

The US yield curve continues to flatten while the eurozone curve has been steepening (Chart 1). The eurozone curve is now slightly steeper than that in the US. Why is this happening and what does this tell us about future activity?

Curve flattening is normal in a tightening cycle. As spot policy rates shift up, expected future rates also tend to rise, but by a bit less. At the same time, as short rates rise, the term premium tends to reduce because the higher short rates go, the less likely are they to increase a great deal further so that the risks associated with holding longer-dated bonds declines (Chart 2). Term premia tend to be at their highest in the cycle around the trough of policy rates and tend to be at their nadir close to the peak of policy rates.

Thus what we are seeing in the US curve should not be surprising – the risk-neutral 10-year rate has moved up as the Fed has tightened (from 2.41% at the end of 2016 to 2.81% now) and the 10-year term premium has declined (from +14bp at the end of 2016 to -42bp now). For the two-year, the risk neutral rate has more fully moved in line with Fed funds – from 1.43% to 2.11% while the two-year term premium has decreased by less – from -0.24% to -0.41%. Thus the curve has flattened. Fed rhetoric, promising more tightening to come, has encouraged the flattening, while the shift in the Fed’s estimate of the terminal rate should have had more effect on the 10-year risk neutral rate than on the two-year equivalent, also aiding flattening.

In the eurozone, the ECB has extended QE for longer than the market had expected originally (at least until September next year whereas many had expected the latest extension to end in June). A further mini-extension until end-2018 is quite possible.

At the same time the ECB has gone out of its way to dampen rate-hike expectations, saying that the first hike will only come well-past the end of QE (which means at least six-months in our view). There is no ECB equivalent to the Fed’s “dotplot” in the Survey of Economic Prospects (SEP), thus maintaining flexibility and avoiding the market pricing in too much tightening too soon. The ECB, in other words, is going out of its way to dampen short rate hike expectations. With the economy surprising on the upside and the planned scale-back of QE likely to hurt long yields more than short, it is no surprise that the curve there is steepening.

Author: Paul Mortimer-Lee

@MortimerLeePaul

Chief Market Economist and Head of US Economics

New York BNP Paribas Securities

Corp

Chart 1: 10-year less 2-year yield (%) Chart 2: US 10-year yield and fed funds (%)

Source: Macrobond, BNP Paribas Source: FRB, Macrobond, BNP Paribas

Curve flattening normal in tightening cycle

ECB could extend QE until end-2018

US, eurozone yield curves moving in opposite paths

Risk-neutral part of US 10-year rate has moved up

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@MortimerLeePaul



Going forward, the run-down in the Fed’s balance sheet and the scaling back and eventual cessation of the ECB’s QE is likely to put upward pressure on the longer maturities in both bond markets, magnifying steepening in the eurozone and muting, and perhaps reversing, the tendency for the US curve to flatten as rate hikes proceed.

The purpose of this note is, however, not to forecast how the curves may evolve but rather to examine what the curve movements so far tell us about the economy.

In the US and eurozone, the highest correlation between curve shape (the 10s-2s yield differential) and y/y GDP growth is at a lag of five to six quarters.

While recent growth acceleration in the US has run counter to what the yield shape would have led us to believe, the message from the curve, that we will see a slowdown in underlying growth in the US, seems quite firm. The message seems to be of a quite marked slowdown in growth to 1% or less. We believe the timing of tax cuts will ultimately prove decisive in determining when the US slowdown comes.

We forecast a slowdwon beginning in late 2018 and delivering Q4/Q4 growth of only 1.3% by Q4 2019. The sources of the slowdown we envisage to be:

Continued slower payroll growth as the labour market uses up slack and firms become more constrained by a lack of suitable quality labour;

A slower fall in the savings ratio (which has been responsible for about half of the growth in consumption in the last year); and

A squeeze on unit profits as real wages rise ahead of productivity as a result of the tight labour market.

In contrast, the eurozone curve foretells of a mild strengthening of growth, if anything, over the next year or so, which runs against our forecast and the forecasts of many others that growth may slow a little. In any case, the curve and forecasts agree that eurozone growth will continue well above trend.

Forecasting is always an imprecise art, and that extends to the yield curve as much as well as to formal models. However, the message we read in the evolution of the curves seems very clear – the US will slow, probably in H2 2018 or early 2019 while the eurozone seems likely to keep bombing along and may even strengthen. That has implications for a wide range of assets, including the currency. The shifting fortunes of the US growth relative to the eurozone is one reason why we forecast EURUSD at 1.23 at end-2018 and at 1.30 at the close of 2019.

US growth will probably slow in H2 2018

Chart 3: US curve and growth (%) Chart 4: Eurozone curve and growth (%)

Source: BEA, Macrobond, BNP Paribas Source :Eurostat, Macrobond, BNP Paribas

XXX

XXX

XXX

Tax cuts to determine when US slowdown comes

Upward pressure on longer maturities

11

@MortimerLeePaul



US FOMC: Teeing up a dovish hike

The FOMC sees near-term economic momentum building but remains uncertain on the inflation outlook. It looks likely to hike in December.

The inclusion of alternative policy frameworks in the discussion suggests there could be a major policy battle emerging between inflation doves and hawks at the Powell Fed.

As far as rate hikes go, December’s could be very dovish, especially if the Committee leans toward the view of seeing inflation progress before taking real rates above zero.

While much will depend on the views expressed by Chair-in-waiting Powell, the debate on inflation and price level targeting suggests there is a push to make the Fed more dovish.

The November FOMC Minutes showed a Committee that sees economic momentum building in the near term but remains uncertain about the inflation outlook. We continue to expect that a December hike is baked in, but as far as rate hikes go, we think December’s could be one of the most dovish.

The Committee was effectively as it stood in September regarding a near-term (ie, December) hike. “Many” participants still think one is warranted if the medium-term outlook remains more or less unchanged. “Several” said their decision would be contingent on whether upcoming data increased their confidence that inflation was headed toward target. And “a few” (which we see as meaning three or four) advocated deferring until data confirms inflation to be on a clear path toward the target.

The Committee upgraded its economic assessment in the November statement to “solid’ from “moderate”. The Committee appears increasingly confident on both the consumer and business investment. Participants “expect solid growth in consumer spending in the near term,” citing September’s strong 0.9% m/m spending outturn as “consistent with that outlook.” Participants also anticipate “appreciable increases in business fixed investment.”

After tax cuts were largely cut from or marked down in participants’ previous forecasts, “a few” participants at the November meeting thought the likelihood of tax cuts to have increased, thinking it could give “additional impetus” to the expansion in business investment.

On the inflation front, much of the same division remained from the September Minutes. “Many” participants still judge recent weakness as reflecting idiosyncratic factors, while at the same time “many” observe that more persistent developments could also be at play. Others expressed the more traditional concerns that tight resource utilization could drive up inflation and that undershooting full employment by too much could be costly to reverse and might result in financial instability (Chart 1). Chair Yellen, herself warned on Tuesday about boom and bust in arguing for a moderate pace of increase in rates.

Authors: Paul Mortimer-Lee

@MortimerLeePaul

Chief Market Economist and Head of US Economics

Andrew Schneider Economist, US, Canada

New York, BNP Paribas Securities

Corp

Chart 1: Risks to undershooting on unemployment rate Chart 2: Set to be at neutral real rates

Source: BLS, CBO, Macrobond, BNP Paribas Source: Laubach-Williams, Federal Reserve, BEA, Macrobond, BNP Paribas

Better on economy, still uncertain on inflation

Committee still looks on for December

Increasingly confident on the economy

12




@MortimerLeePaul



In terms of those expressing dovish views on inflation, several arguments went further than they had in September. While “several” participants expressed concern that persistently low inflation could risk a decline in inflation expectations, in November “the possibility was raised that monetary policy actions or communications over the past couple of years, while inflation was below the Committee’s 2 percent objective, may have contributed to a decline in longer-run inflation expectations below a level consistent with that objective.” We made the same argument back in October in US: Blame the Fed for low US inflation.

Janet Yellen, speaking on Tuesday night, said she was “very uncertain” about the Fed’s inflation forecasts and talked about the possibility of something more endemic being at play. Doubts about inflation and what to do about it are clearly front and centre in the Fed’s deliberations at the moment. Given the changes afoot at the top, this raises important questions about the future strategy and tactics of the Fed.

In the minutes, it was notable that there was a discussion from “a couple” of participants about alternative frameworks for monetary policy (probably Evans and Kashkari, in our view). One suggestion (we would guess from Evans) was on shifting to price level targeting. In our view, this would imply catch-up for previous undershoots and would be extremely dovish. This idea has been floated before (by Evans), but our belief is Yellen would have been likely to have opposed it as risking muddying the inflation target and possibly increasing the volatility of inflation expectations. That the debate is re-emerging now suggests that there may be an developing – and very important – battle brewing over the future framework that the Powell Fed will follow.

Bernanke has suggested temporary deviations from the 2% inflation target might be appropriate in some circumstances. The discussion in the minutes may suggest this is more of a live possibility than might have been thought. If the Fed were to contemplate a temporary overshoot in inflation at some stage, this would help to raise inflation expectations short-term and smooth the passage to achieving the target. Paradoxically, planning to miss the target may be the only way to hit it.

A shift in this direction would mean softer policy for longer, a weaker USD and a steeper curve and higher break-evens. It would mean that the chances would rise of the Fed not acting to choke off the extra demand that tax cuts could bring. Where does Powell stand on this? It remains to be seen, as does the composition of the Board.

President Trump has the opportunity to shape the Fed and possible shift its response function in an important way. We have always believed that “past dot plots are no guarantee of future performance” as far as monetary policy actions are concerned. With wholesale changes afoot at the Fed, that is truer than ever.

Several commentators have speculated, with tax cuts being more likely, and with unemployment already almost half a point below the Fed’s estimate of the equilibrium rate, that the December Survey of Economic Projections (SEP) could see a rise in the number of interest rate hike “dots” in 2018 from three to four. Given that “many” thought that inflation might remain sub-2% for longer than they had expected, the chances look decent for some downward revision in the inflation “dots” in December. That does not seem to us to be consistent with a rise in the planned number of rate hikes.

Indeed, it is possible that as far as rate hikes go, December’s could be one of the most dovish. The reason is the considerable unease many have about hiking when inflation keeps surprising on the downside. Moreover, reaching 1.25 to 1.50% for rates when core PCE is at 1.3% is likely to see real fed funds at the level of 0% that many at the Fed consider neutral in the short run (see Chart 2). Thus, it is possible that when the hike is delivered in December that Committee as a whole comes round to the view that it wants to see actual progress on core inflation before taking real rates higher (effectively into slightly restrictive territory).

Much will depend on the views expressed at that time by Chair-in-waiting Powell. But the debate on inflation and price level targeting in the November meeting suggests there is a push to make the Fed more dovish. We would not be wholly surprised if upcoming nominations took us in that direction.

Inflation could see downward dot revisions

Price-level targeting would be initially very dovish

December could be a very dovish hike

Still divided on inflation

Discussion of alternative policy frameworks

13

https://rss-globalmarkets.bnpparibas.com/r?t=BGSDE6RyPdnVLVu8DfzhB



Japan: Reversal interest rate

The Bank of Japan’s mentions of the risks associated with excessively low rates should not be seen as a signal for a policy shift in the near future, in our view.

In a recent speech, Governor Haruhiko Kuroda referred to the ‘reversal interest rate’ beyond which further declines will produce unintended monetary contracting effects.

One aim of the governor was probably to pre-empt calls for additional easing.

The BoJ might feel the need to start laying the groundwork for tightening, however, as it probably thinks inflation can reach 1% and stabilise at or above it within the next year or so.

We do not see stable 1% inflation in our 2018–19 horizon. It also seems unlikely that financial intermediation will become impaired while the cyclical recovery continues.

As a base case, we expect the BoJ to keep policy rates on hold for the foreseeable future.

Officials at the Bank of Japan have recently started to make more mention of the side effects of monetary easing. In particular, comments made by Governor Haruhiko Kuroda in a speech in Zurich on 13 November grabbed people’s attention. Mr Kuroda did not explicitly mention side effects, but referred to the concept of the ‘reversal interest rate’.

The reversal interest rate is the interest rate level beyond which further declines will, contrary to intention, produce monetary contracting effects. When the policy rate declines, banks can realise capital gains because they are able to finance the fixed rate long-term assets that they hold at lower short-term rates, but their margins shrink for new lending. If the positive effects of the former are negated by the negative effects of the latter and undermine banks’ capital, their risk-taking capacity will fall and bank lending may be restrained as a result.

A paper cited by Governor Kuroda in his speech (Markus Brunnermeier and Yann Koby, The

Reversal Interest Rate: The Effective Lower Bound of Monetary Policy, 2017) notes that the capital gains effects resulting from financing long-term debt at lower interest rates will decline as those debts are redeemed, while the effects from shrinking margins on new lending will steadily continue. Thus, policy side effects can get the upper hand if the ultra-low interest rate is prolonged. In other words, the reversal interest rate should creep up over time.

With this mechanism in mind, Mr Kuroda noted:

“In Japan's case, financial institutions have a solid capital base and credit costs have fallen sharply, so that at present their financial intermediation function is not impaired. However, because the impact of the low interest rate environment on financial institutions' soundness is cumulative, the Bank will continue to pay attention to this risk as well.”

According to the Summary of Opinions for the meeting on 30–31 October, several board members mentioned side effects, with one of them arguing that:

“If the Bank takes an extreme measure only for the purpose of hastening to achieve the price stability target, side effects such as an accumulation of financial imbalances and an impaired functioning of financial intermediation could arise”.

Of the broadly two kinds of potential side effects of super-low interest rates identified above, the accumulation of financial imbalances can be seen as a risk that monetary easing becomes too effective (in the financial and asset markets). The second, the impairment of financial intermediation, is the risk that monetary easing becomes ineffective. The argument of the ‘reversal interest rate’ that Mr Kuroda brought up this time concerns the latter side effect.

This is not the first time the BoJ has shown its awareness of the risk of impaired financial intermediation. One of the main reasons behind the September 2016 policy shift from QQE to yield curve control was to lessen the adverse impact that very low interest rates were having on

Authors: Ryutaro Kono Head of Economics, Japan Chief Japan economist Hiroshi Shiraishi Senior Japan economist

BNP Paribas Securities (Japan)

Limited

BoJ ready for prolonged campaign

Things could deteriorate over time

Low rates could hurt financial intermediation

Governor discusses ‘reversal interest rate’

Two types of side effects

14

https://www.boj.or.jp/en/announcements/press/koen_2017/ko171114a.htm/

https://scholar.princeton.edu/sites/default/files/markus/files/17e_reversalrate.pdf.

https://scholar.princeton.edu/sites/default/files/markus/files/17e_reversalrate.pdf.





financial institutions. Closer attention to side effects was due to the increasingly apparent prospect that monetary easing would have to stay in place over the long haul while 2% inflation remained elusive. The basic stance of the current BoJ leadership is tenacious prolongation of monetary easing, while keeping an eye on the impact on financial institutions and fine-tuning policy if really needed.

From this standpoint, we think it would be a mistake to interpret Mr Kuroda’s latest remarks as signalling a pivot towards a policy exit. Rather, the governor probably aims to pre-empt calls for additional easing. Although the BoJ’s current leadership has said additional easing is not necessary, the policy board’s newest member, Goushi Kataoka, has been calling for further action. Moreover, the process of considering new BoJ leaders will begin in earnest shortly, as the terms of Mr Kuroda and both deputy governors expire in April (all three are eligible for reappointment). Ahead of this, Mr Kuroda might also be trying to foster a broader social consensus that additional easing is not warranted.

That said, the BoJ’s leadership probably thinks that if stable inflation of roughly 1% comes into view, some policy adjustments to rein in a build-up of financial imbalances would be warranted. And while probably acknowledging that the inflation forecasts in the Outlook Report were too optimistic, the board members are likely to be thinking that there is a good chance that inflation actually reaches 1% and stabilises at or above that level within the next year or so. But if the BoJ begins to move towards monetary tightening when inflation is only around 1%, the market could construe that as meaning that the BoJ deems that to be sufficient inflation, with the result that inflation expectations could stall. Thus, the BoJ leadership might be starting to feel the need to gradually saturate the market with the logic that keeping interest rates excessively low for a long time can hurt the economy.

We, however, do not expect stable 1% inflation during the current expansion phase. At this point, we also do not attach much probability to the scenario that the BoJ would raise its policy rates solely out the concern for damage to financial intermediation. The harm that the prolonged low-interest-rate environment has on bank profits looks set to accumulate; but as long as the Japanese economy continues to expand on the back of the global one, it is hard to imagine financial intermediation being seriously impaired as banks’ credit costs should remain suppressed.

Moreover, even if the squeeze on profits from reduced margins prompts banks to be increasingly concerned about their capital, it does not necessarily follow that bank lending will be adversely affected in the manner assumed in the ‘reversal interest rate’ theory, as banks might actually increase their loan balances to make up for the impact on profits from reduced margins. Concerns over deteriorating capital could, conversely, make banks more aggressive in risk taking. So long as growth and inflation expectations do not pick up much, lending growth is unlikely to accelerate, because demand for funds will not pick up. But if banks maintain a positive attitude towards lending, a significant slowdown seems unlikely.

We will monitor data around bank lending. As it stands, there is little evidence to suggest that banks are or soon will be cutting back lending because of ‘excessively low rates’ – and it is hard to see persuasive evidence of such an effect emerging within a year or so. Thus, as a base case, we do not envisage a hike in policy rates in our forecast period to end-2019. If we are wrong, it is more likely to be because inflation turns out to be stronger than expected rather than because the adverse impact of low rates on financial intermediation becomes much more prevalent.

We do see a decent chance, however, that the BoJ will reduce its purchases of exchange-traded funds within the year. The BoJ sees ETF buying as part of the policy package aimed at realising the 2% inflation target by reducing risk premiums. If the risk premiums remain suppressed and the equity market continues to rally, the need for continuing this policy will become increasingly dubious. Indeed, it might look like fostering financial imbalances.

But the BoJ is likely to tread carefully on this front, too: if it cuts ETF buying, there is a risk that the market would start speculating that policy rates will also be raised soon. For now, we attach a probability of about 50% to a reduction in ETF buying within a year.

If it does go ahead, the BoJ would be likely to try to cut its buying without upsetting the equity market. One way to do this could be to announce that it will halve the annual pace of purchases to JPY 3trn so long as the economy keeps doing well but will retain JPY 6trn as an annual quota. It could pledge to carry over the unused part of the quota to subsequent years so that it has room to increase purchases if the economy falters.

BoJ likely to tread carefully on this front, too

We see decent chance of a cut in ETF buying

Our base case remains no hike

Unlikely to see adverse impact on lending soon

We do not envisage stable 1% inflation

BoJ probably considers 1% inflation realistic

Looking to pre-empt calls for more easing

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23 November 2017 Macro Matters www.GlobalMarkets.bnpparibas.com

China: Asset management guidelines to tackle financial risks

The People’s Bank of China and four other financial regulatory authorities have jointlyreleased a set of draft asset-management policy guidelines, requesting a public response.

The guidelines are concrete evidence of China’s determination to rein in financial risk by bringing all financial activities under a unified set of regulations and controls.

The new policy guidelines are also seen as a critical step by China in cleaning up its ownback yard before the country opens up its financial sector wider to the outside world.

The guidelines will fundamentally affect the asset-management market. Challenges andrisks need to be highlighted in the transitional or grace period leading to June 2019.

On 17 November, China’s central bank, the People’s Bank of China, released a jointly drafted set of asset-management policy guidelines for public comment. The draft was drawn up by the PBoC, China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), China Insurance Regulatory Commission (CIRC) and State Administration of Foreign Exchange (SAFE). The PBoC has indicated the draft will be revised by late December after it has collected responses from the public, and though it was not specific, we anticipate the new policy guidelines are likely to be published and implemented from the beginning of 2018.

At this stage, the new guidelines are seen as concrete evidence of China’s determination to rein in financial risk by bringing all financial activities under a unified set of regulations and controls. The objective is to prevent new risks from developing, while allowing time for existing risks to be resolved. The policy puts into effect a decision made by the Central Financial Work Conference last July.

This is also a critical step in cleaning up China’s back yard, before it widens access to its financial sector to the outside world. On 10 November, as one of US President Donald Trump’s achievements during his visit to China, Vice-Finance Minister Zhu Guangyao revealed that China has drawn up a new timetable for opening up the country’s financial sector. First, China will allow foreign shareholding of up to 51% in securities brokerage, asset management and futures, and the investment ceiling will be removed in three years. Second, China will remove the cap on investing in Chinese commercial banks and Chinese asset-management companies of 20% for single foreign investors or 25% for total foreign investment, meaning that foreign investors will be treated the same as Chinese investors. Third, China will raise the level of foreign investment allowed in insurance companies to up to 51% over the next three years and the ceiling will be removed in five years.

Asset management has developed rapidly over the past decade and especially since 2012. The first wealth management product (WMP) was issued by commercial banks in 2004. By 2016, a total of RMB 102trn had been invested in asset-management products under the name of WMP, by commercial banks as well as fund management, securities, futures, trust and insurance companies.

This suggests that asset management products grew by 49% each year between 2012 and 2016. The amount invested was RMB 21trn in 2012, RMB 32trn in 2013, RMB 49trn in 2014 and RMB 78trm in 2015. The growth rate has been far higher than the aggregate deposits. The annual growth of total deposits was just 12%, from RMB 94trn in 2012 to RMB 150trn in 2016. Asset-management products grew to 137% of GDP and 68% of total deposits in 2016, from 39% and 22%, respectively, in 2012. (Chart 1).

But such speedy growth in asset management has occurred during a period of poor regulation, operational disorder and amid accumulation of financial risk, in our opinion. The new asset-management sector development guidelines consist of 29 articles, aiming to deal with five problems:

Author: Xingdong Chen Chief China Economist

BNP Paribas (China) Ltd.

New policy guidelines for asset management

Policy aims to rein in financial risk

Back-yard clean-up before widening market access

The policy guidelines target five problems

16



The new guidelines clearly define asset-management products and set unified standards andregulations for each category of asset-management product, no matter which regulatoryauthority that the financial institution issuing the product operates under (eg, the CBRC, CSRC,CIRC or SAFE). Non-financial institutions are prohibited from issuing or selling asset-management products to investors.

The PBoC, CBRC, CSRC, CIRC, SAFE and local regulatory departments are given clearfunctions and roles. Under the leadership of the State Council Financial Stability andDevelopment Committee, the authorities will coordinate regulation and supervision so as toeliminate regulatory arbitrage.

The guidelines restrict multi-hierarchical and nested investments and ban any operation tryingto circumvent regulation (so-called “Tongdao” operations in Chinese).

The guidelines set strict leverage ratios for different classes of asset-management products.This aims to resolve the problem of unclear or excessive leverage levels.

Most importantly, an asset-management product is defined as off-balance-sheet financialbusiness. Financial institutions are prohibited from offering guaranteed repayment with aguaranteed return. Fund-pooling schemes are strictly banned. Instead, financial institutions willprice their asset-management products based on mark-to-market net asset value .

This is the first time China will have had a unified set of policy guidelines for the asset-management industry. It will greatly improve the way the financial sector develops, with transparent rules, regulation and penalties. However, eliminating disorder, correcting distortion and bringing risks under control are likely to have serious implications.

First, forbidding institutions from offering guaranteed WMP returns, and instead pricing according to net asset value, is likely to hurt commercial banks, in our view, as they would be unable to issue new WMPs with guaranteed returns. In contrast, the new policy guidelines should benefit professional fund-management institutions.

Second, we believe retail investors are likely to find it harder to make investment decisions under the new wealth-management practices. Some liquidity may be put back into deposit accounts in commercial banks. A large amount of investment liquidity is likely to move around the market, possibly crowding into the stock market, bond markets, property (which faces different restrictions) or other asset classes.

Third, given this and a relatively short supply of new investment opportunities, investment returns are likely to decline, in our view, along with market interest rates.

Fourth, though investors would be able to hold their old asset-management products until maturity until 30 June 2019, many asset-management products should face refinancing issues due to maturity mismatches. The risks of default or collapse of small financial institutions may rise, in consequence, in our view.

Last but not least, a contraction in the asset-management market is likely to alert investors, foreign investors in particular, to take conservative and protective measures and stay away from asset markets for a certain period. They are, however, likely to return once the uncertainty settles down by Q4 2018.

Table 1: Financial asset composition in China Chart 1: Structure of asset-management products

RMBtrn share %

1 Claims on financial insititutions 199.3 45.1

1.1 Cash 6.8 1.5

1.2 Deposit 153.8 34.8

1.3 Financial bonds 23.6 5.3

1.4 Insurance 15.1 3.4

2 Claims on non-financial insititutions 148.9 33.7

2.1 Loans 108.8 24.6

2.2 Government bonds 22.6 5.1

2.3 Corporate bonds 17.5 4.0

3 Equities 50.8 11.5

4 Outward investment 22.4 5.1

5 Foreign assets 20.6 4.7

Total 442.0 100.0

Bank WMPs 28.4%,

RMB29.1tr

Brokers 17.2% RMB17.6tr

Trust 17.1%RMB17.5tr

Funds & subsidiary

16.5%

RMB16.9tr

Private-placed fund 10.0% RMB10.2tr

Public-placed fund 9.0% RMB9.2tr

Insurance Co. 1.7%

RMB1.7trn

Futures Co. 0.3%, RMB0.3tr

Source: PBoC, CEIC, Wind financials, BNP Paribas Source: PBoC, CEIC, Wind financials, BNP Paribas

Possible impact …

… on commercial banks

… on retail investors

.. on investment returns and interest rates

… on market movements

17



Economic calendar: 24 November- 1 December

HIGH-INCOME ECONOMIES

GMT Local Previous Forecast Consensus

Fri 24/11 09:00 10:00 Germany Ifo business climate: Nov 116.7 116.5 116.7

09:00 10:00 Ifo current conditions: Nov 124.8 124.7 125.0

09:00 10:00 Ifo expectations: Nov 109.1 108.9 108.8 10:30 11:30 Eurozone ECB’s Nouy speaks at Handelsblatt Jahrestagung conference, Frankfurt

12:30 13:30 ECB Vice-President Constancio speaks at Banco de Espana conference in Madrid

18:15 19:15 ECB's Coeure speaks at Banque de France conference in Paris

Mon 27/11 07:00 08:00 Germany Retail sales (real, sa) m/m : Oct 0.5% 0.1% -

07:00 08:00 Retail sales (real, sa) y/y : Oct 4.1% 2.5% -

10:00 11:00 Italy Istat consumer confidence : Nov 116.1 116.4 -

15:00 10:00 US New home sales : Oct 667k 625k 624k

18:30 18:30 UK BoE’s Dave Ramsden speaks in London

00:00 19:00 US NY Fed’s Dudley speaks on US economy: 10 years after crisis

Tue 28/11 07:45 08:45 France INSEE consumer confidence : Nov 100 101 -

09:00 10:00 Eurozone M3 y/y : Oct 5.1% - -

09:00 10:00 M3 3m y/y : Oct 111.0 110.3 -

10:00 11:00 Italy Istat business confidence : Nov 10.7 10.8 -

12:00 13:00 Germany GfK consumer confidence : Dec 10.7 - -

13:30 08:30 US Advance goods trade balance : Oct USD -64.1bn USD -65.0bn USD -66.3bn

15:00 10:00 Consumer confidence : Nov 125.9 123.0 123.5

15:00 10:00 Senate Banking Committee confirmation hearing on Fed Chair nominee Powell

Wed 29/11 06:30 07:30 France GDP (prel) q/q : Q3 0.5% (p) 0.5% -

06:30 07:30 GDP (prel) y/y : Q3 2.2% (p) 2.2% -

07:45 08:45 Consumer spending m/m : Oct 0.9% -0.4% -

08:00 09:00 Eurozone Bundesbank presents 2017 financial stability report

08:00 09:00 Spain HICP (flash) y/y : Nov 1.7% 1.9% -

09:30 09:30 UK Mortgage approvals : Oct 66.2k 65.0k -

09:30 09:30 Net consumer credit : Oct GBP 1.6bn GBP 1.5bn -

10:00 11:00 Eurozone Economic sentiment: Nov 114.0 114.4 -

10:00 11:00 Industrial sentiment: Nov 7.9 8.0 -

10:00 11:00 Consumer sentiment: Nov 0.1 (p) 0.1 -

13:00 14:00 Germany CPI (prel) m/m : Nov 0.0% 0.3% -

13:00 14:00 CPI (prel) y/y : Nov 1.6% 1.8% -

13:00 14:00 HICP (prel) m/m : Nov -0.1% 0.4% -

13:00 14:00 HICP (prel) y/y : Nov 1.5% 1.9% -

13:30 08:30 US GDP (second, saar) q/q 3.0% 3.2% 3.2%

13:30 08:30 NY Fed’s Dudley speaks about US economy

15:00 10:00 Chair Yellen appears before Joint Economic Committee of Congress

17:45 12:45 SF Fed’s Williams speaks at economic forecast luncheon in Phoenix

19:00 14:00 Beige Book

Thu 30/11 23:50 (29/11)

08:50 Japan Industrial production (prel, sa) m/m : Oct -1.0% 1.9% 1.8%

07:45 08:45 France CPI (prel) m/m : Nov 0.1% 0.1% -

07:45 08:45 CPI (prel) y/y : Nov 1.1% 1.2% -

07:45 08:45 HICP (prel) m/m : Nov 0.1% 0.1% -

07:45 08:45 HICP (prel) y/y : Nov 1.2% 1.3% -

08:00 09:00 Eurozone ECB’ Yves Mersch speaks in Rome at joint ECB/Banca d'Italia conference

18




HIGH-INCOME ECONOMIES


Thu 30/11 08:00 09:00 Spain GDP (final) q/q : Q3 0.8% (p) 0.8% -

(cont) 08:00 09:00 GDP (final) y/y : Q3 3.1% (p) 3.1% -

08:55 09:55 Germany Unemployment (chg, sa) : Nov -11k -9k -

08:55 09:55 Unemployment rate : Nov 5.6% 5.6% -

10:00 11:00 Eurozone HICP (flash) y/y : Nov 1.4% 1.6% -

10:00 11:00 Core HICP (flash) y/y : Nov 0.9% 1.0% -

10:00 11:00 Unemployment rate : Oct 8.9% 8.8% -

10:00 11:00 Italy CPI (prel) m/m: Nov -0.2% 0.0% -

10:00 11:00 CPI (prel) y/y: Nov 1.0% 1.1% -

10:00 11:00 HICP (prel) m/m: Nov 0.0% 0.0% -

10:00 11:00 HICP (prel) y/y: Nov 1.1% 1.3% -

13:30 08:30 US Initial claims 239k 240k -

13:30 08:30 Personal income m/m : Oct 0.4% 0.2% 0.3%

13:30 08:30 Personal spending m/m : Oct 1.0% 0.2% 0.2%

13:30 08:30 Real personal spending m/m : Oct 0.6% - 0.2%

13:30 08:30 PCE price index m/m : Oct 0.4% 0.1% 0.1%

13:30 08:30 PCE price index y/y : Oct 1.6% 1.5% 1.6%

13:30 08:30 Core PCE price index m/m : Oct 0.1% 0.1% 0.2%

13:30 08:30 Core PCE price index y/y : Oct 1.3% 1.4% 1.4%

14:45 09:45 Chicago PMI : Nov 66.2 62.0 62.0

18:00 13:00 Dallas Fed’s Kaplan speaks in Dallas

Fri 01/12 23:30 08:30 Japan Core CPI national y/y : Oct 0.7% 0.8% 0.8%

23:30 08:30 Core CPI Tokyo y/y : Nov 0.6% 0.6% 0.6%

23:30 08:30 Household consumption y/y : Oct -0.3% 0.2% 0.1% 23:30

(30/11) 08:30 Unemployment rate (sa) : Oct 2.8% 2.8% 2.8%

09:00 10:00 Eurozone Markit manufacturing PMI (final) : Nov 60.0 (p) 60.0 -

09:30 09:30 UK CIPS manufacturing : Nov 56.3 57.5 -

14:05 09:05 US St. Louis Fed’s Bullard speaks in Little Rock, Arkansas

14:30 09:30 Dallas Fed’s Kaplan speaks in McAllen, Texas

15:00 10:00 US Construction spending m/m : Oct 0.3% 0.5% 0.5%

15:00 10:00 ISM manufacturing : Nov 58.7 58.5 58.3

Release dates and forecasts as of close of business prior to the date of publication; (p) = preliminary; (r) = revised Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies

China


Mon 27/11 01:30 09:30 Industrial profits y/y: Oct 27.7% 23.0% - Thu 30/11 01:00 09:00 Official manufacturing PMI: Nov 51.6 51.2 51.5


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CEEMEA


Fri 24/11 South Africa S&P and Moody’s ratings reviews Tue 28/11 10:00 12:00 South Africa BER business confidence index: Q4 35 40 - Wed 29/11 06:00 08:00 South Africa Private sector credit y/y: Oct 5.59% 6.00% - Thu 30/11 09:00 10:00 Poland GDP sa (final) q/q: Q3 1.1% (p) 1.1% - 09:00 10:00 GDP nsa (final) y/y : Q3 4.7% (p) 4.7% - 09:30 11:30 South Africa PPI m/m: Oct 0.7% 0.4% - PPI y/y: Oct 5.2% 4.7% - 12:00 14:00 South Africa Trade balance ZAR bn: Oct 4.0b - - 13:00 14:00 Poland CPI (flash) y/y: Nov 2.1% 2.2% - Fri 01/12 08:00 09:00 Poland Manufacturing PMI: Nov 53.4 54.0 - 09:00 11:00 South Africa PMI manufacturing: Nov 47.8 49.0 -


LATAM


Mon 27/11 14:00 08:00 Mexico Trade balance: Oct USD -1.9bn - Tue 28/11 14:00 08:00 Mexico Unemployment rate: Oct 3.6% - Wed 29/11 12:30 10:30 Brazil Fiscal report: Oct BRL -21.3bn - 12:00 09:00 Chile Manufacturing production y/y: Oct -1.4% 5.6% 18:30 12:30 Mexico Mexican central bank inflation report Thu 30/11 19:00 16:00 Argentina Industrial production y/y: Oct 2.3% - 19:00 16:00 Construction activity y/y: Oct 13.4% - 11:00 09:00 Brazil National unemployment rate: Oct 12.4% 12.1% - 12:00 09:00 Chile Unemployment rate: Oct 6.7% 15:00 10:00 Colombia National unemployment rate: Oct 9.2% 9.5% - 15:00 09:00 Mexico Net outstanding loans: Oct MXN 3895bn - 20:30 14:30 Budget balance YTD: Oct MXN 63.2bn - Fri 01/12 Argentina Government tax revenue: Nov ARS 219.7bn - 11:00 09:00 Brazil GDP q/q: Q3 0.2% 0.5% - 11:00 09:00 GDP y/y: Q3 0.3% 1.5% - 11:00 09:00 GDP 4 quarters accumulated: Q3 -1.4% -0.3% - Trade balance monthly: Nov USD 5.2bn USD 4.2bn 11:00 08:00 Chile Commercial activity y/y: Oct 3.8% 12:00 09:00 Retail sales y/y: Oct 3.5% Release dates and forecasts as of close of business prior to the date of publication; (p) = preliminary; (r) = revised Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies

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Key data preview: North America

US: Conf. Board consumer confidence (November) BNP Paribas forecast: Confident now

Nov (f) Oct Sep Aug

Conference Board index 123.0 125.9 120.6 120.4

RELEASE DATE: Tuesday 28 November We expect the Conference Board measure of consumer confidence todecline in November by about 3.0 index points after reaching a new cycle-high in October. The index jumped 5.3 index points in October – its largest one-monthrise since March 2017, its previous cycle high. Notably, the expectations index topped out in March; rising confidencein the present situation has largely driven consumer sentiment since then.

Source: Conference Board, Macrobond, BNP Paribas

US: Personal income and spending (October) BNP Paribas forecast: Soft

% m/m Oct (f) Sep Aug Jul

Personal income 0.2 0.4 0.2 0.3 Personal spending 0.2 1.0 0.1 0.4 Real personal spending 0.1 0.6 -0.1 0.3 PCE prices 0.1 0.4 0.2 0.1 PCE prices (y/y) 1.5 1.6 1.4 1.4 Core PCE prices (m/m) 0.14 0.13 0.10 0.10 Core PCE prices (y/y) 1.35 1.33 1.30 1.42

RELEASE DATE: Thursday 30 November Personal income is projected to have increased by 0.2% m/m inOctober, reflecting flat earnings and hours worked in the month. We expect nominal personal spending to have slowed, after a 1.0%m/m rise in September, bringing real spending and income growth to just 0.1% m/m. We expect PCE prices to have remained subdued, projecting core PCEprices to be up just 1.4% year-on-year for the month.

Source: BEA, Macrobond, BNP Paribas

US: ISM manufacturing survey (November) BNP Paribas forecast: Elevated

Index Nov (f) Oct Sep Aug

Manufacturing ISM 58.5 58.7 60.8 58.8

RELEASE DATE: Friday 1 December (ISM manufacturing) We expect the manufacturing ISM index essentially to stay put inNovember after a nearly 2.0 index point pullback in October. Business sentiment measures have been buoyant, with tailwinds fromrecent past USD weakness and tax cut/deregulatory expectations. We expect business sentiment to remain robust in the near term, withthe prospect for achieving tax cuts supporting the currently raised levels.

Source: ISM, Macrobond, BNP Paribas

21


Key data preview: Japan

Japan: Industrial production (October) BNP Paribas forecast: Trending higher

70

75

80

85

90

95

100

105

110

115

120

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(201

0=10

0, s

a)

% m/m Oct (f) Sep Aug Jul

Industrial production 1.9 -1.0 2.1 -0.8

RELEASE DATE: Thursday 30 November We expect industrial production to have increased 1.9% m/m inOctober, after falling 1.0% in the previous month. The industrial production index has been volatile of late, probablybecause of problems with seasonal adjustment. In trend terms, production has picked up in the past few quarters. Demand for Japanese goods is being boosted by the improvement inthe global tech cycle and the recovery in global demand for capital goods. This trend is likely to be continuing in Q4 2017.

Source: METI, BNP Paribas

Japan: CPI inflation (October) BNP Paribas forecast: Slightly faster

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2010 2011 2012 2013 2014 2015 2016 2017

(% y

/y)

Core CPI

Core CPI excluding energy % y/y Oct (f) Sep Aug Jul

Core CPI inflation 0.8 0.7 0.7 0.5 CPI inflation 0.1 0.7 0.7 0.4

RELEASE DATE: Friday 1 December Based on Tokyo CPI data for October, we estimate that the nationalcore CPI that month should have improved by 0.1pp to 0.8% y/y, reflecting faster growth of energy prices (thanks to base effects and rising gasoline prices) and improvement in the new core CPI, which we expect to rise 0.1pp to 0.3%. But the core CPI will likely peak out shortly, because the boost givenby the base comparison to energy prices is ending and price hikes reflecting rising payroll costs are still not spreading.

Source: MIC, BNP Paribas

Key data preview: CEEMEA

South Africa: Private-sector credit (October) BNP Paribas forecast: Higher

-10

-5

0

5

10

15

20

25

30

35

40

2005 2007 2009 2011 2013 2015 2017

Household credit (% y/y)

PSCE (% y/y)

Corporate credit (% y/y)

% y/y Oct (f) Sep Aug Jul

Private-sector credit 6.0 5.6 6.0 5.7

RELEASE DATE: Wednesday 29 November We expect headline private-sector credit growth to have ticked higherto 6.0% y/y in October from 5.6% in September. Still resilient growth in corporate credit extension is likely to continue toprop-up the headline figure amid a still relatively subdued pace of growth in household lending in both secured and unsecured lending.

Source: SARB, BNP Paribas

22


Key data preview: Latam

Chile: Manufacturing production (October) BNP Paribas forecast: Temporary improvement

-30

-20

-10

0

10

20

30

-6

-3

0

3

6

Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17

3m/3m, saar (RHS)

y/y 3m MA y/y

% y/y Oct (f) Sep Aug Jul

Manufacturing production 5.6 -1.4 1.6 2.5

RELEASE DATE: Wednesday 29 November We forecast the pace of manufacturing to have accelerated sharply to5.6% y/y in October, following a modest contraction in September. The improvement relies on benign base effects (manufacturing output contracted sharply in October 2016) while the month-on-month performance is expected to have been neutral. Thus, the jump in year-on-year growth is expected to prove temporary and we forecast a modest pace of expansion for the remainder of Q4. Manufacturing output is expected to advance only slightly (by less than1% y/y in 2017). Still, H2 readings are showing improvement from a weak H1.

Source: INE, Macrobond, BNP Paribas

Brazil: Real GDP (Q3’2017) BNP Paribas forecast: On track to recovery

% Q3 (f) Q2 Q1 Q4

Real GDP (% q/q, sa) 0.5 0.2 1.0 -0.9 Real GDP (% y/y) 1.5 0.3 -0.4 -2.5 Real GDP (%Y/Y) -0.3 -1.4 -2.3 -3.6

RELEASE DATE: Friday 1 December Real GDP growth is once again likely to be positive on a quarterlybasis (+0.5% q/q s.a), confirming that Brazil is finally recovering from the record recession. In annual terms, if our forecast is confirmed, GDP could speed up to 1.5% y/y. On a 4-quarters moving average, the GDP is approaching zero and should finish 2017 at 1.0%. Lookinhg ahead, we expect further acceleration. For 2018, we expectGDP to expand 3.0%.

Source: IBGE, Macrobond, BNP Paribas

23



Central bank watch EUROPE

Interest rate Current

rate (%)

Date of last change

Next change in coming

six months Comments

EUROZONE

Refinancing rate 0.00 −5bp (10/3/16)

No change At its October meeting, the ECB extended its asset purchases until September 2018 in an open-ended fashion at a reduced monthly pace of EUR 30bn. Our base case is that purchases will be gradually tapered thereafter to end in December 2018. We expect the depo rate to be raised to –20bp in June 2019 and to reach zero by December 2019.

Deposit rate −0.40 −10bp (10/3/16)

No change

UK

Bank rate 0.50 +25bp

(2/11/17) No change Having hiked in November, the Bank appears in no hurry to deliver further tightening in light of subdued growth and the uncertainty surrounding the Brexit process, which might intensify in the near term.

NORTH AMERICA

Interest rate Current rate (%)

Date of last

change

Next change in coming six months

Comments

US

Fed funds target range

1.0 to 1.25

+25bp (14/6/17)

+25bp (13/12/17)

The Fed upgraded its assessment of economic activity to “solid” from “moderate” in its November meeting statement. To us, it appears as if growth momentum is more important to the Fed at the moment than inflation momentum (or the lack of). Accordingly, we now expect a December rate hike, and retain three hikes next year, as activity appears stronger than we had expected, justifying an extra hike compared with our earlier forecast.

CANADA

Overnight rate 1.00 +25bp

(6/9/17) +25bp

(6/12/17)

The BoC paused at its October meeting after raising its policy rate by 25bp to 1.00% in September. The Bank was also considerably more dovish in its statement, saying it “will be cautious in making future adjustments to the policy rate.” Still, with the policy rate well below neutral, we think it could initiate another hike by year-end, though if lending conditions don’t ease a bit, it may remain on hold for the rest of the year.

JAPAN


rate (%)

Date of last change


Comments

Deposit rate −0.10 −20bp

(29/1/16) No change The inflation rate is unlikely to top even 1% this year or next, in our view. As such, we expect the BoJ to keep its policy on hold for some time. There is a risk, however, that it could fine-tune its policy to alleviate the side effects of aggressive easing after the change in leadership next April. 10-year rate c.0% (21/9/16) No change

CHINA


rate (%)

Date of last change


Comments

1y bank deposit rate 1.50 −25bp

(24/10/15) No change We expect no change in the official benchmark rate in the foreseeable future, though short-term market rates are under upward pressure due to liquidity management and tighter monetary policy.

CENTRAL AND EASTERN EUROPE, MIDDLE EAST AND AFRICA


rate (%)

Date of last change


Comments

CZECH REPUBLIC

Repo rate 0.50 +25bp (2/11/17)

+25bp (21/12/17)

In light of robust GDP growth and core inflation remaining above its 2% target, we believe the central bank is likely to proceed with monetary tightening over the coming months. We look for another 25bp hike in December.

24



CENTRAL AND EASTERN EUROPE, MIDDLE EAST AND AFRICA (cont)


rate (%)

Date of last change


six months

Comments

HUNGARY

Base rate 0.90 −15bp (24/5/16) No change

The latest policy meeting confirmed that rates will probably stay on hold for a prolonged period. Although we see core inflation accelerating swiftly down the line, we do not expect policymakers to change their bias and tighten monetary policy in the coming quarters.

POLAND

Repo rate 1.50 −50bp (4/3/15) No change

Although we think that the upcoming central bank’s projection will see a much higher inflation path and GDP profile for 2018–19, this should not have an immediate impact on the current dovish stance of the MPC majority. We look for Polish rates to be kept on hold until mid-2018. That said, rate-hike motions may be filled by MPC dissidents as early as Q1 2018, we believe.

SOUTH AFRICA

Repo rate 6.75 –25bp (20/7/17)

−25bp (18/1/18)

We have pushed out the timing for further monetary accommodation by the SARB to January 2018 on the basis of heightened political uncertainty and a likely credit-rating downgrade on 24 November. We think the SARB will only revisit scope for rate reductions after the ANC conference in December and when it has assessed the potential impact of further credit-rating downgrades.

TURKEY

One-week repo rate 8.00 +50bp (24/11/16) No change

Inflation is likely to follow a volatile path for the rest of the year on the back of base effects. Apart from this, there is no fundamental disinflation story. We expect the CBRT to maintain its current policy unchanged and keep the marginal lending rate at its late liquidity rate of 12.25% for some time to come.

Overnight lending rate

9.25 +75bp (24/1/17)

No change

Late liquidity o/n lending rate

12.25 +50bp (26/4/17)

No change

LATIN AMERICA


rate (%)

Date of last change


six months

Comments

ARGENTINA

7-day repo rate 28.75 +100bp (7/11/17) No change

The BCRA surprised markets again in November with a 100bp hike after October’s 150bp increase. We expect it to stay on hold for some time, with the first cut in late Q2 2018. Rates should remain high as BCRA strives to guide inflation expectations down to its official targets. Easing should be very gradual, therefore, and only keep real rates unchanged.

BRAZIL

Selic overnight rate 7.50 −75bp

(25/10/17) −50bp

(6/12/17)

After October’s 75bp rate cut, we continue to expect a 50bp cut in early December. We also expect two further rate cuts (of 25bp each) in early 2018, in February and March. Rates would then have fallen to 6.5% and will, we think, stay there throughout 2018.

CHILE

Overnight rate 2.50 −25bp (18/5/17)

No change

Chile’s central bank delivered its last 25bp rate cut in May and adopted a neutral bias. September’s deflation had flashed a yellow light, but the October print is likely to have eased those concerns. We forecast the BCCh to remain on hold until end-2017 and expect a rate-hiking cycle to start in Q2 2018.

COLOMBIA

Overnight rate 5.00 −25bp (27/10/17)

–25bp (Jan 2018)

BanRep has clearly signalled it intends to ease monetary policy further, reinforcing our below-consensus view for the policy rate to reach 4.0% by the of end 2018. We expect cuts to concentrate in Q1, but we think another cut is still possible this year. Persistent core inflation and high deficits in the current and public sector accounts, however, would suggest caution in the short term.

MEXICO

Overnight rate 7.00 +25bp (18/5/17)

–25bp (Q1 2018)

It appears that Banxico is done hiking for the time being. The board considers the current policy rate consistent with inflation converging back to its 3% target, while core components have started to edge down. Our forecasts point to a solid disinflationary path in 2018, with the CPI plunging by January, allowing rates to reach around 5.0% by year-end.

Source: BNP Paribas, TEB, national central banks, BGZ BNP Paribas

25


Global inflation watch Table 1: BNP Paribas inflation forecasts

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y2016 100.2 - 0.2 100.2 - 0.2 100.2 - 0.2 100.2 - 0.22017(1) 101.8 - 1.5 101.7 - 1.5 101.2 - 1.0 101.2 - 1.02018(1) 103.4 - 1.6 103.3 - 1.6 102.7 - 1.4 102.5 - 1.3

Q1 2017 101.0 - 1.8 100.9 - 1.7 100.7 - 1.2 100.7 - 1.2Q2 2017 102.0 - 1.5 101.9 - 1.5 101.3 - 0.9 101.3 - 0.9Q3 2017 101.8 - 1.4 101.7 - 1.4 101.3 - 0.9 101.2 - 0.8Q4 2017(1) 102.4 - 1.4 102.3 - 1.4 101.6 - 1.1 101.6 - 1.1Q1 2018(1) 102.2 - 1.2 102.1 - 1.2 101.8 - 1.1 101.7 - 1.0Q2 2018(1) 103.6 - 1.6 103.5 - 1.6 102.7 - 1.3 102.4 - 1.1Q3 2018(1) 103.7 - 1.9 103.5 - 1.8 103.0 - 1.7 102.8 - 1.5Q4 2018(1) 104.2 - 1.7 104.1 - 1.7 103.3 - 1.6 103.0 - 1.4

Jan-17 100.5 -0.8 1.8 100.4 -0.9 1.7 100.4 -0.2 1.3 100.4 -0.2 1.4Feb-17 100.8 0.4 2.0 100.8 0.4 2.0 100.5 0.1 1.2 100.5 0.1 1.2Mar-17 101.7 0.8 1.5 101.6 0.8 1.5 101.2 0.6 1.1 101.1 0.6 1.1Apr-17 102.0 0.4 1.9 102.0 0.4 1.8 101.3 0.1 1.2 101.2 0.1 1.1May-17 101.9 -0.1 1.4 101.8 -0.1 1.4 101.3 0.0 0.8 101.3 0.0 0.8Jun-17 102.0 0.0 1.3 101.9 0.0 1.2 101.3 0.0 0.7 101.3 0.0 0.7Jul-17 101.4 -0.5 1.3 101.3 -0.5 1.3 101.0 -0.3 0.7 100.9 -0.4 0.7Aug-17 101.7 0.3 1.5 101.6 0.3 1.5 101.5 0.5 0.9 101.5 0.5 0.9Sep-17 102.1 0.4 1.5 102.0 0.4 1.5 101.3 -0.2 1.0 101.3 -0.2 0.9Oct-17 102.2 0.1 1.4 102.1 0.1 1.3 101.4 0.1 1.1 101.4 0.1 1.0Nov 17(1) 102.4 0.2 1.6 102.3 0.2 1.6 101.5 0.1 1.2 101.5 0.1 1.1Dec 17(1) 102.7 0.3 1.3 102.6 0.3 1.3 101.8 0.3 1.2 101.8 0.3 1.2Jan 18(1) 101.6 -1.0 1.1 101.5 -1.1 1.1 101.3 -0.5 0.9 101.3 -0.5 0.9Feb 18(1) 102.0 0.4 1.1 101.9 0.4 1.1 101.6 0.3 1.0 101.6 0.3 1.0Mar 18(1) 103.1 1.0 1.4 102.9 1.1 1.3 102.4 0.8 1.2 102.2 0.6 1.0Apr 18(1) 103.4 0.3 1.3 103.3 0.3 1.3 102.5 0.1 1.3 102.3 0.1 1.1May 18(1) 103.6 0.2 1.7 103.5 0.2 1.6 102.7 0.1 1.3 102.4 0.1 1.1Jun 18(1) 103.8 0.2 1.8 103.7 0.2 1.8 102.8 0.1 1.4 102.5 0.1 1.2Updated

Next Release

Nov flash HICP (Nov 30) Nov flash CPI (Nov 30)

Nov 23 Nov 23

Headline HICP Ex-tobacco HICPEurozone

Headline CPI Ex-tobacco CPIFrance

Source: BNP Paribas, national statistics offices; (1)

forecasts

Chart 1: Eurozone HICP inflation

Source: Macrobond, Eurostat, BNP Paribas

Eurozone HICP inflation ticked 0.1pp lower to 1.4% y/y in October. Core inflation fell by 0.2pp to 0.9% y/y, driven by three factors. First, this year’s euro appreciation might now be weighing on those goods prices that have a high import content. This trend could persist for a few quarters. Second, hotel and recreational prices look to have corrected sharply lower after a strong summer season. As the winter holiday season kicks in, we expect some renewed strength. Third, a one-off reduction in tuition fees alone knocked 0.3pp off Italian core inflation. Over the medium term, however, diminishing spare capacity and the temporary nature of some of October’s inflation weakness bolster our confidence in rising price pressures.

26


Table 2: BNP Paribas inflation forecasts

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y2016 107.4 - 0.5 100.4 - 0.4 99.9 - -0.1 99.9 - -0.1 100.0 -0.2 99.7 - -0.32017(1) 109.3 - 1.7 102.1 - 1.7 101.1 - 1.2 101.3 - 1.4 102.0 2.0 101.7 - 2.12018(1) 111.1 - 1.7 103.8 - 1.7 102.1 - 1.1 102.7 - 1.4 103.8 1.8 103.5 - 1.8

Q1 2017 108.6 - 1.9 101.5 - 1.9 100.9 - 1.3 100.2 - 1.3 101.2 - 2.7 100.7 - 2.7Q2 2017 108.9 - 1.7 101.7 - 1.6 101.1 - 1.4 102.2 - 1.6 102.0 - 2.0 102.2 - 2.1Q3 2017 109.5 - 1.7 102.3 - 1.7 101.2 - 1.1 100.8 - 1.3 101.5 - 1.7 101.3 - 1.8Q4 2017(1) 110.0 - 1.6 102.7 - 1.6 101.0 - 0.9 102.1 - 1.2 103.2 - 1.6 102.7 - 1.7Q1 2018(1) 110.2 - 1.5 103.0 - 1.4 101.6 - 0.7 101.2 - 1.1 102.7 - 1.4 102.1 - 1.4Q2 2018(1) 110.8 - 1.7 103.5 - 1.7 102.0 - 0.9 103.5 - 1.3 103.9 - 1.8 104.0 - 1.8Q3 2018(1) 111.6 - 1.9 104.3 - 1.9 102.4 - 1.2 102.5 - 1.7 103.8 - 2.2 103.5 - 2.2Q4 2018(1) 111.9 - 1.7 104.5 - 1.8 102.5 - 1.4 103.8 - 1.7 105.1 - 1.8 104.6 - 1.8

Jan-17 108.1 -0.6 1.9 101.0 -0.8 1.9 100.6 0.3 0.9 99.4 -1.7 1.0 101.5 -0.5 3.0 100.5 -1.0 2.9Feb-17 108.8 0.6 2.2 101.7 0.7 2.2 101.0 0.4 1.5 99.6 0.2 1.6 101.1 -0.4 3.0 100.2 -0.3 3.0Mar-17 109.0 0.2 1.6 101.8 0.1 1.5 101.0 0.0 1.4 101.5 1.9 1.4 101.1 0.0 2.3 101.3 1.1 2.1Apr-17 109.0 0.0 2.0 101.8 0.0 2.0 101.3 0.3 1.7 102.3 0.8 2.0 102.1 1.0 2.6 102.2 0.9 2.6May-17 108.8 -0.2 1.5 101.6 -0.2 1.4 101.1 -0.2 1.4 102.2 -0.1 1.6 102.0 -0.1 1.9 102.2 0.0 2.0Jun-17 109.0 0.2 1.6 101.8 0.2 1.5 101.0 -0.1 1.1 102.0 -0.2 1.2 102.1 0.0 1.5 102.2 0.1 1.6Jul-17 109.4 0.4 1.7 102.2 0.4 1.5 101.0 0.0 1.0 100.1 -1.9 1.2 101.4 -0.7 1.5 101.0 -1.2 1.7Aug-17 109.5 0.1 1.8 102.4 0.2 1.8 101.4 0.4 1.2 100.2 0.1 1.4 101.6 0.2 1.6 101.2 0.2 2.0Sep-17 109.6 0.1 1.8 102.4 0.0 1.8 101.1 -0.3 1.1 102.0 1.8 1.3 101.7 0.2 1.8 101.8 0.6 1.8Oct-17 109.6 0.0 1.6 102.3 -0.1 1.5 100.9 -0.2 0.9 102.0 0.0 1.1 102.7 0.9 1.6 102.4 0.6 1.7Nov 17(1) 109.9 0.3 1.8 102.7 0.4 1.9 100.9 0.0 0.9 102.0 0.0 1.3 103.4 0.7 1.9 102.9 0.5 1.9Dec 17(1) 110.5 0.5 1.6 103.3 0.6 1.4 101.3 0.4 1.0 102.3 0.4 1.2 103.5 0.2 1.5 103.0 0.1 1.5Jan 18(1) 109.7 -0.7 1.5 102.4 -0.8 1.4 101.4 0.1 0.8 100.6 -1.7 1.2 102.5 -1.0 1.0 101.5 -1.4 1.0Feb 18(1) 110.3 0.5 1.4 103.0 0.6 1.3 101.6 0.2 0.6 100.5 -0.1 0.9 102.6 0.0 1.4 101.6 0.1 1.4Mar 18(1) 110.7 0.4 1.6 103.4 0.4 1.6 101.8 0.2 0.8 102.5 2.0 1.0 102.9 0.3 1.8 103.1 1.5 1.8Apr 18(1) 110.6 -0.1 1.5 103.3 -0.1 1.5 102.0 0.2 0.7 103.4 0.8 1.0 103.6 0.7 1.5 103.8 0.6 1.5May 18(1) 110.8 0.2 1.8 103.5 0.2 1.9 101.9 -0.1 0.8 103.5 0.1 1.3 103.9 0.2 1.8 104.0 0.3 1.8Jun 18(1) 110.9 0.2 1.8 103.7 0.2 1.8 102.1 0.2 1.1 103.7 0.2 1.6 104.0 0.1 1.9 104.2 0.2 1.9Updated

Next Release

Nov flash HICP (Nov 29)Nov flash HICP (Nov 30)Nov flash HICP (Nov 29)

GermanyCPI FOI ex-tobacco Headline CPI

Nov 23 Nov 23 Nov 23

Headline HICPItaly Spain

Headline HICPHeadline CPI Headline HICP


Forecasts

Chart 2: German HICP inflation Chart 3: Italian HICP inflation

Source: Macrobond, German Federal Statistics Office, BNP Paribas

October’s German HICP fell by 0.1% m/m, slowing year-on-year inflation to 1.5% from September’s 1.8%. The breakdown points to continued rising food inflation in October. Core CPI inflation looks to have eased markedly, to 1.1% y/y from 1.5% in September, mainly owing to prices for leisure, hotels and restaurants, transport, and clothing and footwear. As the weakness looks to have come from relatively volatile components, it might correct in the coming months. Price surveys and well-above-trend growth suggest that core price pressures will re-emerge heading into next year.

Source: Macrobond, Istat, BNP Paribas

Italian HICP inflation ticked down by 0.2pp to 1.1% y/y in October, driven by a sharp fall in core inflation, which offset higher annual food and energy price inflation on the month. A one-off reduction in university fees accounted for about half of the 0.6pp decline in core inflation to 0.5% y/y. A sharp correction in prices of hotels and other recreational items was also evident. This continues the trend observed lately following summertime price spikes. We think that as the winter holidays kick in, some of these components will see renewed price rises. This could be evident as early as November, but at the latest in the December print.

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Table 3: BNP Paribas inflation forecasts

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y2016 99.7 - -0.3 99.7 - -0.3 100.7 - 0.6 263.1 - 1.72017(1) 100.2 - 0.5 100.2 - 0.5 103.4 - 2.7 272.5 - 3.62018(1) 100.9 - 0.8 100.9 - 0.8 106.2 - 2.7 282.5 - 3.7

Q1 2017 100.0 - 0.2 99.7 - 0.2 102.0 - 2.2 267.7 - 3.0Q2 2017 100.0 - 0.4 100.2 - 0.4 103.2 - 2.8 271.5 - 3.6Q3 2017 100.2 - 0.6 100.2 - 0.6 103.7 - 2.8 274.2 - 3.8Q4 2017(1) 100.5 - 0.8 100.6 - 0.8 104.6 - 3.0 276.6 - 4.1Q1 2018(1) 100.8 - 0.8 100.5 - 0.8 105.0 - 2.9 278.6 - 4.0Q2 2018(1) 100.8 - 0.8 101.0 - 0.8 106.0 - 2.8 281.9 - 3.8Q3 2018(1) 100.9 - 0.8 101.0 - 0.8 106.6 - 2.7 284.1 - 3.6Q4 2018(1) 101.2 - 0.6 101.2 - 0.6 107.2 - 2.5 285.6 - 3.2

Jan-17 100.0 0.2 0.1 99.6 -0.2 0.1 101.4 -0.5 1.9 265.5 -0.6 2.6Feb-17 100.0 0.0 0.2 99.6 0.0 0.2 102.1 0.7 2.3 268.4 1.1 3.2Mar-17 100.0 0.0 0.3 99.8 0.2 0.3 102.5 0.4 2.3 269.3 0.3 3.1Apr-17 100.0 0.0 0.3 100.1 0.3 0.3 102.9 0.4 2.7 270.6 0.5 3.5May-17 100.1 0.1 0.5 100.3 0.2 0.4 103.3 0.4 2.9 271.7 0.4 3.7Jun-17 100.0 -0.1 0.3 100.2 -0.1 0.4 103.3 0.0 2.7 272.3 0.2 3.5Jul-17 100.1 0.1 0.5 100.1 -0.1 0.5 103.2 -0.1 2.6 272.9 0.2 3.6Aug-17 100.2 0.1 0.7 100.3 0.2 0.7 103.8 0.6 2.9 274.7 0.7 3.9Sep-17 100.2 0.0 0.7 100.3 0.0 0.7 104.1 0.3 3.0 275.1 0.1 3.9Oct 17(1) 100.4 0.2 0.8 100.6 0.3 0.8 104.2 0.1 3.0 275.3 0.1 4.0Nov 17(1) 100.5 0.1 0.8 100.6 0.0 0.8 104.5 0.3 3.1 276.3 0.4 4.1Dec 17(1) 100.6 0.1 0.8 100.6 0.0 0.8 105.0 0.5 3.1 278.3 0.7 4.2Jan 18(1) 100.7 0.1 0.7 100.3 -0.3 0.7 104.4 -0.6 3.0 276.5 -0.6 4.1Feb 18(1) 100.9 0.2 0.9 100.5 0.2 0.9 105.1 0.6 2.9 279.2 1.0 4.0Mar 18(1) 100.9 0.0 0.9 100.7 0.2 0.9 105.5 0.4 2.9 279.9 0.3 4.0Apr 18(1) 100.8 -0.1 0.8 101.0 0.3 0.9 105.8 0.3 2.8 281.3 0.5 4.0May 18(1) 100.9 0.0 0.8 101.0 0.1 0.7 106.1 0.3 2.7 281.8 0.2 3.7Jun 18(1) 100.7 -0.1 0.7 101.0 -0.1 0.8 106.2 0.1 2.8 282.6 0.3 3.8Updated

NextRelease

Nov CPI (Dec 12)Oct CPI (Nov 24)

JapanHeadline CPI

Oct 27 Nov 16

RPIUK

Core CPI SA Core CPI NSA


Forecasts

Chart 4: Japanese CPI inflation Chart 5: UK CPI inflation

Source: Macrobond, Statistics Japan, BNP Paribas

Japan’s national core CPI (which excludes fresh food) was unchanged in September from August’s 0.7% y/y inflation rate. The new core CPI inflation (which also excludes energy and which the BoJ focuses on) was also unchanged at 0.2%: upward pressures from modest gains by food, a base-effect-driven rebound for overseas package tours and a slower rate of price decline for durables were offset by downward pressures from weakness in clothing prices and hotel accommodation rates. Based on the Tokyo CPI for October (which precedes the nationwide figures by a month), we project that the national index should improve by 0.1pp to 0.8% y/y in October.

Source: Macrobond, ONS, BoE, BNP Paribas

UK inflation surprised to the downside in October, remaining flat at 3.0% y/y. Core inflation was also unchanged at 2.7%. Core goods price inflation edged up to 2.6% y/y from 2.5%, but remained below August’s recent high of 2.7%. Services price inflation was flat at 2.7% for the third month running. It is too early to say that inflation has peaked, as there is still the potential for a slight increase in price pressures stemming from the weak GBP. However, beyond Q1 next year, headline inflation is likely to moderate, as the impact of the weak GBP on prices begins to fade, more than offsetting a gradual pick-up in domestic price pressures. We continue to expect that the high for inflation in this cycle would be around 3% late this year or early in 2018.

28



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BNP Paribas Niederlassung Deutschland is authorized and lead supervised by the European Central Bank (ECB) and by Autorité de Contrôle Prudentiel et de Résolution (ACPR) and is subject to limited supervision and regulation by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in respect of supervisions for which the competence remains at national level, in terms of Council Regulation n° 2013/1024 of 15 October 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions as well as Council Directive n° 2013/36/EU of 26 June, 2013 and Section 53b German Banking Act (Kreditwesengesetz - KWG) providing for the principles of shared supervision between the national competent authorities in case of branches and applicable national rules and regulations. BNP Paribas Niederlassung Deutschland is registered with locations at Europa Allee 12, 60327 Frankfurt (commercial register HRB Frankfurt am Main 40950) and Bahnhofstrasse 55, 90429 Nuremberg (commercial register Nuremberg HRB Nürnberg 31129). Belgium: BNP Paribas Fortis SA/NV is authorized and supervised by European Central Bank (ECB) and by the National Bank of Belgium, boulevard de Berlaimont 14, 1000 Brussels, and is also under the supervision on investor and consumer protection of the Financial Services and Markets Authority (FSMA), rue du congrès 12-14, 1000 Brussels and is authorized as insurance agent under FSMA number 25789 A Ireland: This report is being distributed in Ireland by BNP Paribas S.A., Dublin Branch. BNP Paribas is incorporated in France as a Société Anonyme and regulated in France by the European Central Bank and by the Autorité de Contrôle Prudentiel et de Résolution. Italy: This report is being distributed by BNP Paribas Italian Branch (Succursale Italia) which is authorised and lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution and regulated by the Autorité des Marchés Financiers, and this authorisation has been notified to the Bank of Italy. BNP Paribas Succursale Italia is the Italian branch of a company incorporated under the laws of France having its registered office at 16, Boulevard des Italiens, 75009, Paris, whose offices are located in Piazza Lina Bo Bardi 3, Milan, tax code and registration number at the Companies Registry of Milan No. 04449690157, is enrolled in the register of the banks held by Bank of Italy under No. 5482, duly authorised to provide in Italy banking and investment services according the principle of the mutual recognition. The branch is subject to limited regulation by the Bank of Italy and the CONSOB respectively. Netherlands: This report is being distributed in the Netherlands by BNP Paribas Fortis SA/NV, Netherlands Branch, a branch of BNP Paribas SA/NV whose head office is in Brussels, Belgium. BNP Paribas Fortis SA/NV, Netherlands Branch, Herengracht 595, 1017 CE Amsterdam, is authorised and supervised by the European Central Bank (ECB) and the National Bank of Belgium and is also supervised by the Belgian Financial Services and Markets Authority (FSMA) and it is subject to limited regulation by the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (De Nederlandsche Bank). Portugal: BNP Paribas – Sucursal em Portugal Avenida 5 de Outubro, 206, 1050-065 Lisboa, Portugal. www.bnpparibas.com. Incorporated in France with Limited Liability. Registered Office: 16 boulevard des Italiens, 75009 Paris, France. 662 042 449 RCS Paris. BNP Paribas – Sucursal em Portugal is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas - Sucursal em Portugal is authorized by the ECB, the ACPR and Resolution and it is authorized and subject to limited regulation by Banco de Portugal and Comissão do Mercado de Valores Mobiliários. BNP Paribas - Sucursal em Portugal is registered in C.R.C. of Lisbon under no. NIPC 980000416. VAT Number PT 980 000 416.” Spain: This report is being distributed in Spain by BNP Paribas S.A., S.E., a branch of BNP Paribas S.A. whose head office is in Paris, France (Registered Office: 16 boulevard des Italiens, 75009 Paris, France). BNP Paribas S.A., S.E., C/Ribera de Loira 28, Madrid 28042 is authorised and supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and subject to limited regulation by the Bank of Spain. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities traders, fund management companies and asset managers of collective investment schemes, regulated insurance institutions as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Financial Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CHE-102.922.193. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2, place de Hollande, 1204 Geneva, Switzerland. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. United States: This report may be distributed (i) by BNP Paribas Securities Corp. to U.S. persons who qualify as an institutional investor under FINRA Rule 2210(a) (4), or (ii) by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer only to U.S. persons who are considered “major U.S. institutional investors” (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended). U.S. persons who wish to effect transactions in securities discussed herein must contact a BNP Paribas Securities Corp. representative unless otherwise authorized by law to contact a non-US affiliate of BNP Paribas. BNP Paribas Securities Corp. is a broker dealer registered with the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Brazil: This report was prepared by Banco BNP Paribas Brasil S.A. or by its subsidiaries, affiliates and controlled companies, together referred to as "BNP Paribas", for information purposes only and do not represent an offer or request for investment or divestment of assets. Banco BNP Paribas Brasil S.A. is a financial institution duly incorporated in Brazil and duly authorized by the Central Bank of Brazil and by the Brazilian Securities Commission to manage investment funds. Notwithstanding the caution to obtain and manage the information herein presented, BNP Paribas shall not be responsible for the accidental publication of incorrect information, nor for investment decisions taken based on the information contained herein, which can be modified without prior notice. Banco BNP Paribas Brasil S.A. shall not be responsible to update or 32



revise any information contained herein. Banco BNP Paribas Brasil S.A. shall not be responsible for any loss caused by the use of any information contained herein. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr).. Notice Published in accordance with ‘‘Communiqué Regarding the Principles on Investment Consultancy Activities and the Investment Consultancy Institutions’’ Series: V, No: 55 issued by the Capital Markets Board. The investment related information, commentary and recommendations contained herein do not constitute investment consultancy services. Investment consultancy services are provided in accordance with investment consultancy agreements executed between investors and brokerage companies or portfolio management companies or non-deposit accepting banks. The commentary and recommendations contained herein are based on the personal views of the persons who have made such commentary and recommendations. These views may not conform to your financial standing or to your risk and return preferences. Therefore, investment decisions based solely on the information provided herein may fail to produce results in accordance with your expectations. Israel: BNP Paribas does not hold a licence under the Investment Advice and Marketing Law of Israel, to offer investment advice of any type, including, but not limited to, investment advice relating to any financial products. Bahrain: This document is being distributed in Bahrain by BNP Paribas Wholesale Bank Bahrain, a branch of BNP Paribas S.A. whose head office is in Paris, France (Registered Office: 16 boulevard des Italiens, 75009 Paris, France). BNP Paribas Wholesale Bank Bahrain is licensed and regulated as a Registered Institution by the Central Bank of Bahrain – CBB. This document does not, nor is it intended to, constitute an offer to issue, sell or acquire, or solicit an offer to sell or acquire any securities or to enter into any transaction. South Africa: BNP Paribas Securities South Africa (Pty) Ltd (Registration number 1996/009716/07) is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Provider (FSP 29451) in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002. Any view or opinion expressed in this report does not constitute advice and the recipient should obtain their own advice prior to making any decision or taking any action whatsoever based hereon. China: This document is being distributed in the People’s Republic of China (“PRC”), excluding the Hong Kong or Macau Special Administrative Regions or Taiwan) by BNP Paribas (China) Limited (“BNPP China”), a subsidiary of BNP Paribas. BNPP China is a commercial bank licensed by the China Banking Regulatory Commission to carry on banking business in the PRC. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5th floor, BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 (Tel. no. +91 22 3370 4000 / 6196 4000 / Fax no. +91 22 3370 4363). BNPPSIPL is registered with the Securities and Exchange Board of India (“SEBI”) as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. and Bombay Stock Exchange Ltd. (SEBI Regn. Nos.: INB/INF231474835, INB/INF011474831; CIN: U74920MH2008FTC182807; Website: www.bnpparibas.co.in). Indonesia: This report is being distributed by PT BNP Paribas Securities Indonesia and is delivered by licensed employee(s) to its clients. PT BNP Paribas Securities Indonesia, having its registered office at Menara BCA, 35th Floor, Grand Indonesia, Jl. M.H.Thamrin No.1, Jakarta, 10310, Indonesia, is a fully subsidiaries company of BNP Paribas SA and is licensed under Capital Market Law No. 8 of 1995 and the holder of broker-dealer and underwriter licenses issued by the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK). PT BNP Paribas Securities Indonesia is also a member of Indonesia Stock Exchange. Neither this research publication nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This research publication is not an offer of securities in Indonesia. Some of the securities referred to in this research publication have not been registered with the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstance which constitute an offer within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No. 1034 (PD 1034), and regulated by the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its entirety to the products and services allowed under PD 1034. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is registered as a Licensed Bank under the Banking Ordinance and regulated by the Hong Kong Monetary Authority. BNP Paribas Hong Kong Branch is also a Registered Institution regulated by the Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4 and 6 under the Securities and Futures Ordinance. Singapore: BNP Paribas Singapore Branch is regulated in Singapore by the Monetary Authority of Singapore under the Banking Act, the Securities and Futures Act and the Financial Advisers Act. This report may not be circulated or distributed, whether directly or indirectly, to any person in Singapore other than (i) to an institutional investor pursuant to Section 274 of the Securities and Futures Act, Chapter 289 of Singapore ("SFA"), (ii) to an accredited investor or other relevant person, or any person under Section 275(1A) of the SFA, pursuant to and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provisions of the SFA. 33

South Korea: Branch: BNP Paribas Seoul Branch is regulated by the Financial Services Commission and Financial Supervisory Service for the conduct of its financial investment business in the Republic of Korea. This report does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Securities: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This report does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Taiwan: BNP Paribas Taipei Branch is registered as a licensed bank under the Banking Act and regulated by the Financial Supervisory Commission, R.O.C. This report is directed only at Taiwanese counterparties who are licensed or who have the capacities to purchase or transact in such products. This report does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in Taiwan. Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Australia: This material, and any information in related marketing presentations (the Material), is being distributed in Australia by BNP Paribas ABN 23 000 000 117, a branch of BNP Paribas 662 042 449 R.C.S., a licensed bank whose head office is in Paris, France. BNP Paribas is licensed in Australia as a Foreign Approved Deposit-taking Institution by the Australian Prudential Regulation Authority (APRA) and delivers financial services to Wholesale clients under its Australian Financial Services Licence (AFSL) No. 238043 which is regulated by the Australian Securities & Investments Commission (ASIC).The Material is directed to Wholesale clients only and is not intended for Retail clients (as both terms are defined by the Corporations Act 2001, sections 761G and 761GA). The Material is subject to change without notice and BNP Paribas is under no obligation to update the information or correct any inaccuracy that may appear at a later date. Some or all of the information contained in this document may already have been published on https://globalmarkets.bnpparibas.com © BNP Paribas (2017). All rights reserved. IMPORTANT DISCLOSURES by producers and disseminators of investment recommendations for the purposes of the Market Abuse Regulation: Although the disclosures provided herein have been prepared on the basis of information we believe to be accurate, we do not guarantee the accuracy, completeness or reasonableness of any such disclosures. The disclosures provided herein have been prepared in good faith and are based on internal calculations, which may include, without limitation, rounding and approximations. The date and time of the first dissemination of this investment recommendation by BNP Paribas or an affiliate is addressed above. BNP Paribas and/or its affiliates may be a market maker or liquidity provider in financial instruments of the issuer mentioned in the recommendation. BNP Paribas and/or its affiliates may provide such services as described in Sections A and B of Annex I of MiFID II (Directive 2014/65/EU), to the Issuer to which this investment recommendation relates. However, BNP Paribas is unable to disclose specific relationships/agreements due to client confidentiality obligations. Section A and B services include A. Investment services and activities: (1) Reception and transmission of orders in relation to one or more financial instruments; (2) Execution of orders on behalf of clients; (3) Dealing on own account; (4) Portfolio management; (5) Investment advice; (6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; (7) Placing of financial instruments without a firm commitment basis; (8) Operation of an MTF; and (9) Operation of an OTF. B. Ancillary services: (1) Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management and excluding maintaining securities accounts at the top tier level; (2) Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction; (3) Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings; (4) Foreign exchange services where these are connected to the provision of investment services; (5) Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments; (6) Services related to underwriting; and (7) Investment services and activities as well as ancillary services of the type included under Section A or B of Annex 1 related to the underlying of the derivatives included under points (5), (6), (7) and (10) of Section C (detailing the MiFID II Financial Instruments) where these are connected to the provision of investment or ancillary services. BNP Paribas and/or its affiliates do not, as a matter of policy, permit pre-arrangements with issuers to produce recommendations. BNP Paribas and/or its affiliates as a matter of policy do not permit issuers to review or see unpublished recommendations. BNP Paribas and/or its affiliates acknowledge the importance of conflicts of interest prevention and have established robust policies and procedures and maintain effective organisational structure to prevent and avoid conflicts of interest that could impair the objectivity of this recommendation including, but not limited to, information barriers, personal account dealing restrictions and management of inside information. BNP Paribas and/or its affiliates understand the importance of protecting confidential information and maintain a “need to know” approach when dealing with any confidential information. Information barriers are a key arrangement we have in place in this regard. Such arrangements, along with embedded policies and procedures, provide that information held in the course of carrying on one part of its business to be withheld from and not to be used in the course of carrying on another part of its business. It is a way of managing conflicts of interest whereby the business of the bank is separated by physical and non-physical information barriers. The Control Room manages this information flow between different areas of the bank where confidential information including inside information and proprietary information is safeguarded. There is also a conflict clearance process before getting involved in a deal or transaction. In addition, there is a mitigation measure to manage conflicts of interest for each transaction with controls put in place to restrict the information flow, involvement of personnel and handling of client relations between each transaction in such a way that the different interests are appropriately protected. Gifts and Entertainment policy is to monitor physical gifts, benefits and invitation to events that is in line with the firm policy and Anti-Bribery regulations. BNP Paribas maintains several policies with respect to conflicts of interest including our Personal Account 34

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Dealing and Outside Business Interests policies which sit alongside our general Conflicts of Interest Policy, along with several policies that the firm has in place to prevent and avoid conflicts of interest. The remuneration of the individual producer of the investment recommendation may be linked to trading or any other fees in relation to their global business line received by BNP Paribas and/or affiliates. IMPORTANT DISCLOSURES by disseminators of investment recommendations for the purposes of the Market Abuse Regulation: The BNP Paribas disseminator of the investment recommendation is identified above including information regarding the relevant competent authorities which regulate the disseminator. The name of the individual producer within BNP Paribas or an affiliate and the legal entity the individual producer is associated with are identified above in this document. Where this investment recommendation is communicated by Bloomberg chat or by email by an individual within BNP Paribas or an affiliate, the date and time of the dissemination by the relevant individual is contained in the communication by that individual disseminator. The disseminator and producer of the investment recommendations are part of the same group, i.e. the BNP Paribas group. The relevant Market Abuse Regulation disclosures required to be made by producers and disseminators of investment recommendations are provided by the producer for and on behalf of the BNP Paribas Group legal entities disseminating those recommendations and the same disclosures also apply to the disseminator. If an investment recommendation is disseminated by an individual within BNP Paribas or an affiliate via Bloomberg chat or email, the disseminator’s job title is available in their Bloomberg profile or bio. If an investment recommendation is disseminated by an individual within BNP Paribas or an affiliate via email, the individual disseminator’s job title is available in their email signature. For further details on the basis of recommendation specific disclosures available at this link (e.g. valuations or methodologies, and the underlying assumptions, used to evaluate financial instruments or issuers, interests or conflicts that could impair objectivity recommendations or to 12 month history of recommendations history) are available at https://globalmarkets.bnpparibas.com/gmportal/private/globalTradeIdea. If you are unable to access the website please contact your BNP Paribas representative for a copy of this document.

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