March 2013

Every month SYZ Asset Management publishes 1 month in 10 snapshots a review of global economic activity. Since an image can be more telling than words, every month we select 10 charts illustrating the key data that has marked economic and financial activity over the month, decoding their meaning with a brief explanation.
A publication of the Global Macro & Fixed Income Strategies team SYZ Asset Management - Tel. +41 (0)58 799 10 00 info@syzgroup.com Author: Adrien Pichoud This document is based on graphics the data of which were collected during February 2013.

Index
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. United States The start of a new adventure for the Fed United States An improvement in sight on the employment front Euro zone Germany ready to rebound. But not France Euro zone The three new budgetary dunces Japan Hope is reborn Australia Beware of the AUD! China The soft landing facilitated by an easing of credit Bonds The Italian elections revive the interest-rate tensions Exchange rates The CHF again becomes a barometer of euro-zone stress Exchange rates The pound sterling faces many headwinds

1. United States The start of a new adventure for the Fed

Even though the Federal Reserve announced a quantitative easing programme in 3rd December, the gradual but now significant improvement in the U.S. economy has already pushed the members of the central bank (and the markets) on to the next stage: withdrawal of the support measures implemented over the last five years. The publication of the minutes of the meeting in late January has shown that several members are now envisaging the possibility of reducing (or even halting) the ongoing assets purchasing programme if the situation continues to improve. The debate on how to exit the ultra-accommodative policy has thus been broached. The start of this debate is encouraging because it presupposes that the improvement in the economy is lasting, this time. It probably also means that long-term rates hit their low last summer. As for gold, after having benefited from the zero-interest-rate environment, it may well come under increasing pressure if the rate of liquidity injections slows down and an interest rate hike begins to becomes envisageable. Gold has lost 12% since the beginning of last October.
GOLD PRICE (USD/OZ) AND RATE ON 10-YEAR US TREASURY (INVERTED SCALE)
2000 1.00

1800

1.50

2.00 1600 2.50 1400 3.00 1200 3.50 1000 4.00 800 4.50

600

5.00

400 2006 2007 2008 2009 2010 2011 G O LD - (USD/O Z ) US T REAS.BENCHMARK BO ND 10 YR (DS) - RED. YIELD(R.H.SCALE) 2012

5.50

Source: T homson Reuters Datastream

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.

March 2013

2. United States An improvement in sight on the employment front

Since the 8.8 million jobs that were destroyed during the last recession, the trend on the labour market has been crucial from the perspective of a return to self-sustaining and durable growth. Over the last two years, the U.S. economy has created 180,000 jobs on average per month, pushing the unemployment rate down from 9.1% to 7.9% over the period. Several indicators suggest, however, that this improvement moderate thus far might soon strengthen: initial weekly jobless claims declined further in early 2013 and stand at their lowest level since early 2008. As for the employment indices in the ISM surveys, they recently rose significantly. Thus, for the first time in many years, a really good surprise in terms of monthly job creations cannot be ruled out in the coming months.
ISM EMPLOYMENT COMPOSITE INDEX (INDUSTRY + SERVICES) AND MONTHLY PAYROLL CHANGE
60 400

55

200

50

45

-200

40

-400

35

-600

30 00 01 02 03 04 05 06 07 I SM EMPLO YMENT CO MPO SI T E NO N F ARM PAYRO LLS MoM CHG (3M MAV)(R. H.SCALE) 08 09 10 11 12

-800

Source: T homson Reut ers Dat ast ream

3. Euro zone Germany ready to rebound. But not France

The euro zone as a whole experienced a terrible 4th quarter 2012 in terms of economic activity. The 0.6% drop in GDP (the 3rd consecutive quarterly decline) makes it the worst since the 1st quarter of 2009. No economy was spared. GDP fell by 0.6% in Germany, 0.3% in France, 0.9% in Italy and 0.7% in Spain... However, the rebound in the activity and confidence indices in recent months suggests that the low was reached in Q412 and that the trend is now improving. However, the differences in trend between the euro-zone economies are re-emerging after the synchronized decrease in 2012: Germany looks set to record a sharp rebound in early 2013 while the rate of improvement is likely to be (much) more gradual in Italy and Spain. As for France, the indicators do not for the moment suggest a real rebound
PMI COMPOSITE INDICES (MANUFACTURING + SERVICES)
65

Expansion
60

55

50

45

Contraction
40

35 2006 EMU

2007

2008 G ER

2009 FRA

2010

2011

2012

2013

So urce: B lo o mb erg , SY Z A M

4. Euro zone The three new budgetary dunces

The peripheral countries of the euro zone have been ranked as the bad pupils of the zone for the last three years. But while the catching-up effort is far from complete, the efforts made have helped (at the price of a severe recession) to put public deficits on track for a gradual decrease. The degree of confidence to be placed in the reduction targets is debatable but they at least have the merit of being encouraging, especially for Italy (thanks to a primary budget surplus of nearly 3% of GDP) Ireland (with an expected 50% decrease in the 2012 deficit over the next two years) or Portugal (with a return to the 3% target in 2014). Because at this stage, it is probably above all the trend that matters more than the absolute level. And from this point of view, the bad pupils in the euro zone are now Spain, France and the Netherlands. These countries are running deficits above the 3% target but with no prospect of improvement
BUDGET DEFICIT FORECASTS (% OF GDP) OF THE EUROPEAN COMMISSION
2%

0%

-2%

-4%

-6%

-8%

-10%

2012 2013 2014

G ER FIN ITA A US BEL NET FRA G RE POR S PA IRE

-12%
So ure: Euro pean C o m m is sio n

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.

March 2013

5. Japan Hope is reborn

The election of Mr. Abe as Prime Minister, on the basis of a programme of drastic economic policy changes, has had a spectacular impact not only on the exchange rate of the yen but also the sentiment of the Japanese economic agents. It is hard to say whether this burst of optimism is based on genuine confidence in the measures announced (a stimulus plan via public spending, a reform of the Bank of Japans mandate) or only on the fact that this proactive programme puts an end to six years of indecisiveness at the head of the country after the Koizumi era The fact is that consumer confidence jumped in January, reaching its highest level since the end of 2007. And the economic outlook index has returned to its peak of early 2006. All that remains is to see these hopes materialize!
ECONOMIC OUTLOOK AND CONSUMER CONFIDENCE
65 60 55 50 45 40 35 30 25 20 15 2000 25 2002 2004 2006 2008 2010 2012 35 40 50 55

45

30

Eco Watche rs outlook C onsum e r confide nce

So urc e: SYZ A M , B lo o m berg

6. Australia Beware of the AUD !

The Australian dollar has benefited over the last decade from a combination of favourable factors. However, the trend currently looks set to be reversed, despite the support of an attractive mix between interest rates/the governments AAA rating. The end of the commodities super-cycle is already weighing on investment in the mining sector. The real-estate market (in a bubble situation) is still a considerable risk. And the banks - like the economy are heavily dependent on foreign capital (the current account deficit stands at 4% of GDP). In addition, through the close trade links forged with Asia, Australia and the AUD are in the front line in the event of a disappointment about global growth, particularly in China. So beware of this overvalued currency, which has a very limited upside potential and a considerable downside risk!
PMI MANUFACTURING AND AUD/USD (%, YEAR-ON-YEAR)
65 40

60

30

55

20

50

10

45

40

-10

35

-20

30 2003 2004 2005 2006 2007 AUS - PMI MANUF ACT URI NG (3M MAV) AUD/ USD YoY change (3M MAV)(R. H.SCALE) 2008 2009 2010 2011 2012

-30

Source: T homson Reut ers Dat ast ream

7. China The soft landing facilitated by an easing of credit

After a long slowdown, Chinas growth finally seems to have stabilized over the past six months. Although this soft landing has been accompanied by targeted public spending programmes on infrastructure, it also seems to have been facilitated by an easing of credit conditions. The monetary authorities had initiated a tightening of monetary conditions in 2010, faced with a sharp acceleration of inflation and runaway property prices. This tightening, illustrated by the slowdown in the growth rate of money-supply aggregates, continued until inflation fell to 2% in early summer 2012. Then the trend on liquidity growth was reversed, soon to be followed by a stabilization and a moderate recovery of growth. In the absence of a return of inflationary pressures, the return to normal of credit conditions should keep GDP growth at around 8% in 2013.
INFLATION, MONEY SUPPLY AND LOANS IN YUAN (YEAR-ONYEAR)
10 50 45 8 40 35 30 4 25 20 2 15 10 5 -2 2000 C HI C HI C HI 0 2002 2004 2006 2008 2010 - C PI YoY % - M1 YoY % (6 m onths ahead) RHS - Total loans YoY % (6 m onths ahead) RHS 2012

So urc e: B lo o m berg

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.

March 2013

8. Bonds The Italian elections revive the interest-rate tensions

The easing movement on the interest rates of the peripheral European countries that began during the summer was halted as of January by the prospect of the Italian elections. In January, the peninsulas rates had reached their lowest level since autumn 2010, when Spanish rates were returning to their low of early 2012. The erosion in the polls of the lead enjoyed by Mr. Bersanis Democratic Party, then the lack of a majority in the Senate resulting from the high scores of Mr. Berlusconi and Mr. Grillo caused Italian interest rates to rise sharply. A notable exception is Irish government rates, which continued to ease and now stand at their lowest level since 2007. The announcement of a restructuring of the government debt that resulted from the banking sector bail-out, then the dropping by S&P of the negative outlook attached to its BBB+ rating, caused this drop compared with the Italian and Spanish rates. As soon as the sovereign debt crisis erupted in the euro zone, the Swiss franc became the barometer of tensions in the Euro zone, fluctuating in line with the widening interest rate spreads between the periphery and Germany. Until the exacerbation of the crisis led to an appreciation of the franc that threatened the Swiss economy and pushed the SNB to put in place the floor rate of 1.20 EUR/CHF. A measure aimed at neutralizing the impact of this European stress on the exchange rate beyond a certain degree of tension. Without this measure, the euro might perhaps have fallen to 0.8 against the franc! Since the summer of 2012, the tensions in the euro zone have fallen significantly, to the point of returning below the level implicitly tolerated by the SNB. In January, the euro/ Swiss franc rate thus began again to move in line with European interest-rate fluctuations. Until the tensions caused by the Italian elections brought it back to very near the floor rate Since the start of the year, sterling has been bending under the weight of an accumulation of headwinds. In 2 months it has fallen by 6.5% against the U.S. dollar (to its lowest level since mid-2010) and by -5.7% against the euro (the main destination for the UKs exports). The prospect of an additional easing of the Bank of Englands monetary policy, with the priority now given by the BoE to economic growth (at the expense of the inflation target) and the imminent arrival of Mark Carney as Governor, have weighed on the currency. The monetary policy factors were compounded by a greater-than-expected contraction of 4th quarter GDP and Moodys downgrading of the governments sovereign rating, from Aaa to Aa1. The decline in fears about the future of the Euro zone may also have played a part by diminishing sterlings attractiveness as a safe haven.
10-YEAR GOVERNMENT BOND RATES
27/ 2/13 6. 00

5. 50

5. 00

4. 50

4. 00

3. 50 O CT I T ALY SPAI N I RELAND Source: T homson Reut ers Dat ast ream NO V DEC JAN F EB

9. Exchange rates The CHF again becomes a barometer of euro-zone stress

EUR/CHF AND RATE SPREAD PERIPHERAL EUROPE/GERMANY

1.60 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Weighted spread of 2y/5y/10y Italian, Spanish, Irish and Portuguese rates vs Germ an rates 2010 2011 2012 2013
So urce: SYZ A M , B lo o m berg

100

200

300

400

500

600

0.65 2009
EUR /C H F

700

Spread co m po site IT A /SP A /IR E/P OR vs GER (Inverted R ight H and Scale)

10. Exchange rates The pound sterling faces many headwinds

POUND STERLING AGAINST US DOLLAR US AND EURO

1. 64 1. 26

1. 62 1. 24

1. 60 1. 22

1. 58 1. 20 1. 56

1. 18 1. 54

1. 52

1. 16

1. 50 O CT G BP/ USD G BP/ EUR(R. H. SCALE) NO V DEC JAN F EB

1. 14

Source: T homson Reut ers Dat ast ream

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.