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JUL 23 UniCredit Friday Notes

JUL 23 UniCredit Friday Notes

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Published by: Miir Viir on Jul 23, 2010
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23 July 2010Economics & FI/FX Research
Friday Notes
UniCredit Research
page 1
See last pages for disclaimer.
Slowdown ahead
While global GDP growth accelerated up until recently, there isnow mounting evidence pointing to a tangible slowdown. The OECDleading economic indicators, one of the most reliable and most forward-looking yardsticks for the global economy, are already heading clearlysouth (cf. chart below). Their still high level does, however, argue againsta double-dip recession.
The slowdown is already evident in the hard numbers. Recenteconomic indicators were generally weaker than expected. In the secondquarter, real GDP probably grew at an annual rate of only 2¼% (IV/09:+5.6%). For the first half of 2011, we expect only 2% (pages 3-5).
The central bank is also becoming increasingly concerned aboutthe economy, since the retarding effects of the inventory cycle and theexpiring fiscal programs will soon be joined by the headwind from higher taxes. There is, therefore, a growing risk that the Fed will initiate itstightening cycle later than projected so far. It may possibly wait untilsummer next year.
In Europe, the spring quarter should have still been pretty good.That, however, is attributable solely to a technical reaction to the poor start to the year because of the cold winter weather and not to therecovery of final domestic demand. But GDP growth is set to slow down,although maybe not as pronounced or as early as projected given therecent upbeat readings of PMIs as well as the German Ifo climate index.
The retarding effects of the inventory cycle and fiscal policymeasures are being joined by external strains. This is increasing the riskthat the ECB will also have to postpone the first rate hike, especially if today's bank stress test results disappoint investors (pages 6-7 & 8-9).
Further topics:
Weekly Comment:
Ready, stress, go! (page 2)
Data outlook:
Higher eurozone inflation due to a base effect;US consumers becoming more skeptical (page 10). –
Market outlook:
Euro to come under renewed pressure? (page 18)
-30-25-20-15-10-505101501/9701/9901/0101/0301/0501/0701/090.890.910.930.950.970.991. Industrial production (6M rate of change, in%)OECD leading indicators (detrended, RS)longer-term average
Source: Datastream, UniCredit Research
Weekly Comment____________________________2Research Notes_____________________________3Data Monitor_______________________________10FI Outlook_________________________________17FX Outlook________________________________18CIB View_________________________________20CIB Forecasts_____________________________21Calendar__________________________________24
in % yoy 2009 20102011
GDP EMU -4.1 1.01.3CPI EMU 0.3 1.51.8GDP Germany -4.9 1.81.5CPI Germany 0.3 1.11.6GDP Italy -5.1 0.91.0CPI Italy 0.8 1.61.9GDP US -2.4 3.02.4CPI US -0.3 1.82.2
2010/11 30-Sept 31-Dec 31-Mar30-Jun
EMU 3M (%) 0.95 1.20 1.281.35EMU 10Y (%) 3.00 3.25 3.453.50US 3M (%) 0.60 0.75 1.051.55US 10Y (%) 3.40 3.80 4.204.30EUR-USD 1.24 1.22 1.201.18USD-JPY 91 95 100106Oil Price 78 85 8080
Global Head of Research & Chief Strategist
Thorsten Weinelt, CFA (UniCredit Bank)+49 89 378-15110thorsten.weinelt@unicreditgroup.de
Head of Economics & FI/FX Research
Marco Annunziata, Ph.D. (UniCredit Bank)Chief Economist+44 20 7826-1770marco.annunziata@unicreditgroup.co.uk
Nikolaus Keis (UniCredit Bank)+49 89 378-12560nikolaus.keis@unicreditgroup.de
Editorial deadline
Friday, 23. Jul., 12:00H
www. research.unicreditgroup.eu
23 July 2010 Economics & FI/FX Research
Friday Notes
UniCredit Research
page 2
See last pages for disclaimer.
Ready, stress, go!
Perhaps never before has such a major transparency effort beenprepared and launched with such secrecy. With only a fewhours to go before the publication of the stress test results,we know very little about the assumptions and methodology.Even worse, in the last few days there have been concernsthat the results might not be easily comparable acrosscountries, partly because of heterogeneous assumptions ongovernment bonds – the very concern that forced the publicationof the stress test results in the first place. In addition, politicalleaders from some eurozone countries have been on the wiressuggesting that their banking systems are in a fine shape, andall the banks involved would pass the tests. An IMF reportreleased Wednesday, while based on dated information, was aclear reminder of the reluctant and recalcitrant attitude of manyEuropean policymakers to the idea of publishing the results.As the whole purpose of the exercise is to increase transparencyand bolster confidence, we have definitely started on thewrong foot. The only thing that has been strengthened so far is the impression that the eurozone is plagued by a lack of coordination that risks undermining even the best intentions,and that national interests continue to trump the commongood. The silver lining however is that this should haveserved as pragmatic expectation management: very fewinvestors now expect the European stress tests to provide asilver bullet or to even approximate the positive impact thatthe US stress tests had a year ago. The scope for disappointment should therefore have been reduced.The risk of “accidents” is still significant, however: The biggestrisk is that the stress tests might be perceived as a weak“pro-forma” exercise, or even worse an attempt to whitewashand pretend that all is well. To avoid this risk, governmentswill have to come clean, point to the weakest pockets of their banking systems and initiate remedial action for the mostfragile banks. A secondary risk is that differences of treatmentacross regulatory jurisdictions might increase confusion onthe relative standing of different banking systems, causinghigher volatility in the risk measures of different banks – itwould indeed be a shame if relatively stronger banks foundthemselves even temporarily under heavier pressure simplyfor having been tested with more stringent criteria.The greatest upside, in my view, still comes from the leeway thatindividual national regulators can exploit in outlining the results of their stress tests. Spain remains the lynchpin: Spanishpolicymakers seem to realize that they have perhaps the most togain from greater transparency, they were the first to pushfor publication of the results and they have extended thetests to cover a substantial share of their banking system;today, they should continue on this track by providing asmuch detail as possible on the tests, and outlining the strategy tofollow up on the weaker banks. The Spanish banking system,with a high ratio of loans to total assets, has been particularlyvulnerable to the impact of the recession and in particular tothe contraction in the real estate sector; but on the other hand, itbenefits from a high reliance on retail deposits as a fundingsource (cf. Economic Special by Loredana Federico
). If thestress tests show that the banking system can absorb theongoing private sector deleveraging – with recapitalizationand government help if and as needed – then the relativelylow level of public debt will look much more reassuring. Andif it looks like the Spanish system is sufficiently resilient, thenrisks of EMU-wide contagion will be substantially reduced.Realistically, it will take some time for investors to absorband process the information, given that we will have onerelease by the Committee of European Banking Supervisors(CEBS) followed by individual national releases. Depending onthe extent (if any) to which assumptions and methodologiesdiffer across countries, and on the extent to which the levelof details released differs across countries, it might requirequite a bit of work to figure out the implications for thedifferent banking systems and the eurozone financial sector as a whole. The immediate impact is therefore likely to bestronger for individual institutions, and especially for thoseplaced at the extremes of the distribution, that is bankspassing the tests with flying colors and banks showinginstead a significant shortfall in capital.
Marco Annunziata, Ph.D. (UniCredit Bank)
44 20 7826-1770marco.annunziata@unicreditgroup.eu
Eurozone: Waiting for the EU-wide stress test
23 July 2010 Economics & FI/FX Research
Friday Notes
UniCredit Research
page 3
See last pages for disclaimer.
US economy lost furthermomentum around mid-year
The US economy probably expanded 2¼% in the secondquarter. That is considerably less than the 3% we hadexpected thus far. The downward revision became necessarydue to weaker data from three sectors: private consumption,net exports and inventories.
Moreover, regional business surveys flag that themanufacturing sector will continue to lose momentum inthe second half of the year. This is a clear indication thatthe support from the inventory cycle is waning.
At the beginning of 2011, growth is bound to slow evenfurther, as the expiration of the Bush tax cuts is likely tohurt private consumption expenditures.
Weaker growth in the spring
This coming Friday, the Bureau of Economic Analysis willrelease its advance GDP estimate for the second quarter.We expect an increase of 2.3% annual rate, less than the 3% wehad seen so far.
The downward revision became necessaryprimarily because of weaker data for private consumption,net exports and inventories.Initially, it looked as if private consumption expenditures startedthe second quarter on a very strong note: After increasing2.1% in March – the strongest gain since January 2006 –retail sales rose another solid 0.6% in April. Accordingly, wehad until recently still expected that household spendingmight increase by 3+% in the second quarter. In the interim,however, not only was the growth rate for April revised downto 0.3%, but retail sales even reported two consecutivedeclines in May (-1.1%) and June (-0.5%). That was due in partto lower energy prices, which reduces nominal sales at gasstations, and to the expiration of the “cash for appliances“program, which had boosted demand for householdappliances in March and April. But sales in the less volatilecore group, which excludes cars, gasoline and buildingmaterial, have weakened noticeably, too. They even fell anannualized 1½% in the last three months (cf. chart nextcolumn). Apart from the slump during the Great Recession,that is the strongest decline since the statistics began in theearly 90s. Accordingly, we are revising our expectation for 2Q consumption growth down to 2.3% from 2.7%.
See: US: Moderate growth and downside risks,
Friday Notes 
dated9 July 2010.
Retail sales ex autos, gasoline and building material:annualized 3M change in %
Source: Census Bureau, Thomson Datastream, UniCredit Research
Net exports probably shaved more than half a percentagepoint off growth in the past quarter. While real exports in Apriland May were an annualized 8% above the 1Q average, realimports even increased by 15%. As a result, the real tradedeficit rose in May to its highest level since early 2009 (cf. chart).Even as we expect the real trade deficit to narrow slightly again inJune, net exports probably subtracted 0.3-0.4 percentagepoints more from growth than expected so far.
Real trade balance (only goods), in USD bn
Source: Census Bureau, Thomson Datastream, UniCredit Research
Last but not least, the inventory build-up has also slowed inrecent months. As a reminder: In 4Q09 and 1Q10, privateinventories added 3.8 and 1.9pp, respectively, to growth.They were, therefore, responsible for two-thirds of the entireGDP growth in these two quarters. In order to continuestimulating growth, the stockpiling would have to acceleratefurther, as the growth contribution is derived from the changeof the inventory change. Recently, however, the stockpilinghas not only failed to accelerate further – it has even slowed

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