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Market Insights
October 2018
Global Economyo Ten years after the collapse of Lehman Brothers and the major financial crisis, the US stock markets continue to break
records. A combination of strong growth and accommodative monetary and fiscal conditions support the US stock
markets to reach record highs while the rest of the world remains behind and has to face rising dollar interest rates
and the strengthening of the dollar
o The era of cheap money and high liquidity is coming to an end, as more and more central banks, led by the US Fed
and the ECB in Europe, are returning to normal policy
o The trade war continues to challenge the resilience of the global economy. Trump’s administration has imposed a new
round of tariffs on Chinese goods. Further actions are expected as the real intentions of the war between the
superpowers is much more than a trade war, it is a war on hegemony of the 21st century
o Although a lull in the emerging markets has occurred lately, the increase in the dollar interest rate alongside the
continued contraction of the Fed’s balance sheet are expected to keep pressuring the emerging markets
o The price of Brent Crude Oil jumped last month to more than $80 a barrel, a four-year level high due to the collapse of
Venezuela and the sanctions on Iran. Trump's demand to lower prices has for the time being received only a
indifferent response from OPEC
•
•
United Stateso The US economy continues to grow strongly due to accommodative economic policy. In Q2, the economy grew
at an annual rate of 4.2% led by private consumption, which rose by 3.8%
o Consumer confidence reached a 14-year high, while the small business confidence has climbed to a 45-year
high. According to corporate surveys, both manufacturing and services sectors continue to expand rapidly
o Hourly wages rose by 2.9% YOY, further evidence of the labor market strength. The unemployment rate
remained stable at 3.9% and the economy generated 201K new jobs
o Inflation rose to 2.7% in the past year, a decrease of 0.2% from the previous month. However, the Core PCE
Deflator remained stable at a level of 2%, meeting the Fed's inflation target
o The yield spread between 2 and 10 year bonds rose to 0.3%, reflecting the investors' understanding that the
economy remains strong, and the interest rate is expected to keep rising into 2019
o The Fed raised the interest rate by 0.25% (to 2%-2.25%). For the first time, the base rate rose above the
inflation target, and is expected to increase again by the end of 2018 and at least three additional times in the
upcoming year
Core Economic IndicatorUSA
Economic Indicator Latest Figure Reference Period
Growth Rate (YoY) 4.2% Q2-2018
Unemployment Rate 3.9% Aug-2018
Inflation Rate (Core, YoY) 2.0% Aug-2018
Fed Funds Target Range 2.25%-2% Oct-2018
10 Year Treasury 3.04% Oct-2018
Ratio of Surplus in Current Account to GDP 2.17%- Q2-2018
Ratio of Public Debt to GDP 105.68% Q1-2018
Economic GrowthGDP (Annualized)
-2.3
2.1
-2.1
-8.4
-4.4
-0.6
1.5
4.5
1.5
3.7
3
2
-1
2.9
-0.1
4.7
3.2
1.7
0.5 0.5
3.6
0.5
3.2 3.2
-1
5.1 4.9
1.9
3.3 3.3
1
0.4
1.5
2.31.9 1.8 1.8
3 2.82.3 2.2
4.2
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Economic SentimentManufacturing and Non-Manufacturing PMI
30
35
40
45
50
55
60
65
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Manufacturing Non- Manufacturing
Labor MarketUnemployment Rate (Left) and Under Unemployment Rate, U6 (Right)
6
8
10
12
14
16
18
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
12-07 06-08 12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18
Unemployment U6- Unemployment
InflationCore PCE (YoY) and 5Y Inflation Forecast
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
12-07 06-08 12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18
US Breakeven 5 Year Inflation Core PCE Rate (YoY)
Fed Inflation Target
10YR Treasury Yield to Maturity
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
12-07 06-08 12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18
US Treasury Yield Curve
0
0.5
1
1.5
2
2.5
3
3.5
0Y 2Y 4Y 6Y 8Y 10Y
Current 3-Months Ago 6-Months Ago
Fed Funds Projection
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
2018 2019 2020
FED Projection Market Projection
US Dollar Index (DXY)
75.0
80.0
85.0
90.0
95.0
100.0
105.0
12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18
Citi Economic Surprise
-100
-80
-60
-40
-20
0
20
40
60
80
100
12-12 03-13 06-13 09-13 12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18
Eurozoneo Q2 GDP grew by 1.5% in annual terms. The data indicates a decline in consumption, while on the other hand, an increase
in public expenditure and capital investments
o Net foreign trade subtracted 0.2% in both Q1 and Q2 growth, in evidence of the crisis in emerging markets and the
slowdown of international trade. Industrial production continues to decrease, when in fact, in six of the last eight months
it fell and does not appear to be a positive contribution to Q3 growth
o Despite the slowdown in growth, the labor market continues to recover. The unemployment rate fell to 8.1% in August, a
record-low rate since November 2008. The continuing decline in unemployment led to 2.3% increase in wages
o Forward-looking indices, including the Purchasing Managers’ Index, indicate continued expansion, albeit at a slow pace
o Although headline inflation edged up from 0.1% to 2.1% in September, the core inflation decreased slightly to 0.9%,
remaining far below the inflation target of 2%
o The ECB is expected to end its bond purchases at the end of the year and raise interest rates in the fall of 2019
o The chances of an orderly exit agreement between Britain and the EU diminished. The position of the British Prime
Minister has been eroded and the chances that it will be overturned or that elections will be held are increasing
Core Economic IndicatorEurozone
Economic Indicator Latest Figure Reference Period
Growth Rate (YoY) 1.5% Q2-2018
Unemployment Rate 8.1% May-2018
Inflation Rate (Core, YoY) 0.9% May-2018
Central Bank deposit rate 0.00% June-2018
10 Year Government Bond Yield (Germany) 0.45% June-2018
Ratio of Surplus in Current Account to GDP 3.57% Q1-2018
Ratio of Public Debt to GDP 86.7% Q4-2017
Economic GrowthGDP (Annualized)
2.2
-1.5
-2.2
-6.6
-11.4
-1
1.3
2.21.7
3.7
1.82.4
3.4
0 0
-1.2-0.7
-1.3
-0.5
-1.7-1.4
21.4
1
1.9
0.8
1.72
2.9
1.6 1.41.9
2.7
1.1 1.3
3.12.7 2.8 2.7 2.6
1.61.5
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Economic SentimentManufacturing and Non-Manufacturing PMI
48.0
50.0
52.0
54.0
56.0
58.0
60.0
62.0
11-15 02-16 05-16 08-16 11-16 02-17 05-17 08-17 11-17 02-18 05-18 08-18
Manufacturing Non-Manufacturing
Labor MarketUnemployment Rate
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
12-07 06-08 12-08 06-09 12-09 06-10 12-10 06-11 12-11 06-12 12-12 06-13 12-13 06-14 12-14 06-15 12-15 06-16 12-16 06-17 12-17 06-18
InflationCPI and Core CPI (YoY)
-1
0
1
2
3
4
5
01/08 01/09 01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17 01/18
Core CPI CPI
Money Supply and CreditGrowth in Money Supply, Loans to Real Sector
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
04/12 10/12 04/13 10/13 04/14 10/14 04/15 10/15 04/16 10/16 04/17 10/17 04/18
Change in Lending to Non Financial Institutions Change in Lending to Households M3 Money Supply Growth
10YR Government Bond Yield
-0.5
0.5
1.5
2.5
3.5
4.5
12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18
Germany Italy France Spain
Current Account BalanceEUR Billion
-2.29 -1.47-0.20
-5.41
-2.64
1.05 0.86
5.30 5.33
19.46
13.85
17.84
24.74
22.34
17.38
19.48 18.84
11.72
27.2625.18
19.18
4.34
28.34
32.66
30.20
25.61
31.44
28.69
34.29
27.99
40.24
28.61
38.37
28.91
21.31
-10
0
10
20
30
40
50
03/2010 09/2010 03/2011 09/2011 03/2012 09/2012 03/2013 09/2013 03/2014 09/2014 03/2015 09/2015 03/2016 09/2016 03/2017 09/2017 03/2018 09/2018
Exchange RateEuro Index (Left) EURUSD (Right)
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
75
80
85
90
95
100
31/12/2012 30/06/2013 31/12/2013 30/06/2014 31/12/2014 30/06/2015 31/12/2015 30/06/2016 31/12/2016 30/06/2017 31/12/2017 30/06/2018
Euro Index EURUSD
Citi Economic Surprise
-150
-100
-50
0
50
100
12-12 03-13 06-13 09-13 12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18
Israelo Q2 GDP grew only by 1.8% in annual terms, after increasing by 5.1% in Q1
o The headline inflation rose only by 1.2% YOY, close to the lower end of the inflation target (1%-3%). The
inflation expectation for the upcoming year decreased recently to 1.3%. However, it is too early to declare that
the inflation is established within the target range
o Despite the last increase in the unemployment rate, the labor market conditions are still tight
o The deterioration in the balance of payments continues: the current account surplus of H1 2018 was only
$2.27 billion, compared to a surplus of $4.76 billion in H1 2017. The decrease is derived from a deterioration in
the trade account, the continuous strengthening of the shekel and the slowdown in international trade
o The probability of an interest rate increase in 2018 reduced lately, due to moderate inflation and shekel
appreciation
o On the back of the interest rate differential between Israel and the US (2.8% per year), institutional and retail
investors continue to increase their exposure to US assets
Core Economic IndicatorIsrael
Economic Indicator Latest Figure Reference Period
Growth Rate 1.8% Q2-2018
Unemployment Rate 4.2% July-2018
Inflation Rate (YoY) 1.2% Aug-2018
Central Bank Interest Rate 0.1% Sep-2018
10 Year Government Bond Yield 2.01% Sep-2018
Ratio of Surplus in Current Account to GDP 2.06% Q2-2018
Ratio of Public Debt to GDP 61% Q4-2017
Economic Growth GDP (Annualized)
3.6
0.8 0.7
-2.6
0.4
3.5
4.9
5.86.1 6
4
6
6.9
4.1
8
1.7
-0.4
0.1
4.44
4.3
7.1
4.2
2
3.9 4
2.6
6.3
1.4
0.91.1
4
4.5
5.2
4.6 4.6
0.8
3.6
4.44.7 5.1
1.8
5.1
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
03-08 09-08 03-09 09-09 03-10 09-10 03-11 09-11 03-12 09-12 03-13 09-13 03-14 09-14 03-15 09-15 03-16 09-16 03-17 09-17 03-18
Labor MarketUnemployment Rate
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
2012 2013 2014 2015 2016 2017 2018
InflationCPI (YoY)
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
10YR Government Bond Yield
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
03-11 06-11 09-11 12-11 03-12 06-12 09-12 12-12 03-13 06-13 09-13 12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18
Government Bond Yield Curve
0
0.5
1
1.5
2
2.5
0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Current 3-Months Ago 6-Months Ago
Hedging CostsUSDILS 1YR Forward Premium
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
Current Account BalanceUSD Million
951
101211
948
1,820
1,2691,051
2,611
2,9933,002
2,236
835
1,986
1,453
556
1,262
-1,406
1,0401,227
633
2,406
1,992
892
3,439
3,174
4,226
2,213
3,702
3,158
4,278
4,612
3,816
2,924
3,579
1,965
3,441
2,4052,3542,413
2,091
1,473
795
000000000000000000000000000000000000000000000000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
Exchange RateUSDILS (Left) BoI Nominal Effective Rate (Right)
75
80
85
90
95
100
105
01-13 07-13 01-14 07-14 01-15 07-15 01-16 07-16 01-17 07-17 01-18 07-18
3
3.2
3.4
3.6
3.8
4
4.2
USDILS BoI Nominal Effective Exchange Rate