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Economic Research
Week in Focus
Fed rate hikes: How vulnerable are Emerging Markets?
With the Fed set to raise interest rates, there are concerns that this could cause difficulties
for emerging markets. But we see only a remote risk of a rerun of the 1997 crisis, as EM no
longer hold such high levels of foreign currency debt. But private domestic currency debt has
risen sharply and financing conditions could deteriorate once the Fed raises rates. The
growth advantage enjoyed by EM over the developed economies is likely to narrow further
and most currencies will probably depreciate against the US dollar.
Page 2
20 March 2015
The Week in Focus in 100 seconds
Please follow this link for a video summary.
BRICS: Private sector more vulnerable than government
BRICS countries (Brazil, Russia, India, China, South Africa), debt in per cent of GDP
200
180
160
140
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Public Debt
Private Debt
Source: BIS, Global Insight, Commerzbank Research
ECB: Fragmentation remains in place. Contrary to ECB President Draghi’s view that
differences in lending rates across the euro countries have decreased “significantly”, ECB
data shows fragmentation in lending rates is currently higher than three years ago
Page 5
Product Idea: MinMaxPlus Note in US$. This product allows investors to benefit from our
view that the Fed will raise rates faster than the markets currently expect. Performance will
be enhanced by the further weakness of the euro.
Page 6
Outlook for the week of 23 to 27 March
Economic data: We look for the German Ifo business climate to have moved higher in
March. More importantly the manufacturing PMI is likely to break out of its recent sideways
trend.
Page 9
Bond market: The spectacular rally on euro area bond markets is losing steam. In the
medium-term, peripheral yields will drop further although a period of stronger price volatility
appears to be on the cards.
Page 12
FX market: For the first time, the Fed has hinted that the recent appreciation of the USD is
too rapid for comfort. However, the FX market ignored this warning, suggesting that it will
take more than words to rattle the market, and EUR-USD is likely to retreat further. Page 13
Equity market: The outperformance of the DAX versus the S&P500 should lose momentum
in the coming months as the P/E valuation gap has narrowed sharply.
Page 14
Commodity market: Rising US crude oil stocks should continue to weigh on oil prices whilst
gold could regain a bit of its shine as the downside pressure from a strong US dollar is
easing and demand from China and India appears to be picking up.
Page 15
Chief economist:
Dr Jörg Krämer
+49 69 136 23650
joerg.kraemer@commerzbank.com
For important disclosure information please see pages 18 and 19.
research.commerzbank.com / Bloomberg: CBKR / Research APP available
Editor:
Peter Dixon
+44 20 7475 4806
peter.dixon@commerzbank.com
Economic Research | Week in Focus
Dr Jörg Krämer
Tel. +49 69 136 23650
Fed rate hikes: How vulnerable
are Emerging Markets?
With the Fed set to raise interest rates sooner rather than later there are concerns that
this could cause difficulties for emerging markets (EM). But we see only a very remote
risk of a crisis like in 1997/98, as emerging markets no longer hold such high levels of
foreign currency debt. But corporate debt in domestic currency has risen sharply and
financing conditions could deteriorate considerably once the Fed raises interest rates.
The growth advantage enjoyed by EM over the developed economies is likely to narrow
further and most currencies will probably depreciate against the US dollar.
The Fed and EM: 1997 and 2013
EM have experienced difficulties several times in the past when the US central bank tightened
monetary policy. A dramatic example is the Asia crisis of the 1990s. When the Fed raised its key
interest rate from 3.0% to 6.0% in 1994 and 1995, higher US rates eventually put pressure on
EM currencies in 1997. In Asia especially, many central banks had to abandon their peg to the
US dollar. It became difficult to refinance high levels of foreign currency denominated debt.
Drastic savings programmes and a sharp decline in economic activity were the result.
When the Fed indicated in May 2013 that its asset purchases were coming to an end, EM did not
slide into a 1997/98-style crisis, but their currencies did depreciate sharply. The first Fed rate
hike, which is likely in June or September, will put these countries to the test again. But they can
rely on two advantages for now:
Advantage 1: Balanced current accounts, flexible exchange rates
Ahead of the Asian crisis, the crisis-hit countries were posting current account deficits around
4% of GDP (chart 1). In contrast, since the shock of 1997, emerging markets as a group have
reported current account surpluses, allowing them to build up currency reserves in the event of
future crises. Excluding China, with its high current account surplus, the current account
balances of other countries show only a slight deficit. This improvement has essentially been
possible because most EM no longer have fixed exchange rates and therefore have no incentive
to borrow abroad at favourable rates, protected by supposedly fixed exchange rates, which
enabled them to live beyond their means.
Advantage 2: Sustainable external debt
A second advantage for EM countries is that their external debt is now at sustainable levels.
According to the World Bank, developing countries held debt of around USD 5.5 billion in foreign
currency at the end of 2013. This is only just under a quarter of aggregate income. Debt
servicing came to only 10% of export revenues, a marked improvement on the 21% recorded in
2000. Mirroring the sustainable external debt position, domestic banks dominate the supply of
capital to the private sector in most EM. In the case of BRICS, the share of domestic banks in
CHART 1: Current accounts are roughly balanced
Current account balances in % of GDP. 1997 crisis countries:
Indonesia, Malaysia, South Korea, Philippines, Thailand.
EM: Emerging Markets
10
55
8
6
50
4
2
45
0
40
-2
-4
35
1990
1993
1996
1999
2002
1997er crisis countries
Source: IMF, Commerzbank Research
2
Gross public debt of all Emerging Markets, in % of GDP
60
12
-6
CHART 2: … and public debt levels are stable
2005
2008
2011
EM
2014
30
2000
2002
2004
2006
2008
2010
2012
2014
Source: IMF, Commerzbank Research
20 March 2015
Economic Research | Week in Focus
private credit supply fluctuates between 75% (Russia and China) and over 90% (Brazil, South
Africa, India, see chart 3). The advantage of this funding structure is that financing does not
immediately become more expensive if the domestic currency depreciates sharply (e.g. due to
higher Fed rates).
But domestic private sector debt has risen significantly
Balanced current accounts, flexible exchange rates and sustainable external debt levels suggest
that higher US interest rates are unlikely to push emerging markets into a crisis like in 1997/98.
This is even more true as public debt has merely grown in line with GDP in the past few years
(chart 2, p.2), something that many euro zone countries can only dream of. But the disadvantage
for many emerging economies is that private sector debt (companies/consumers) has risen in
recent years at a much sharper rate than GDP (see chart on front page). China is a prominent
example (chart 4). The debt ratio of Chinese companies and private households soared by
50 percentage points to 180% of GDP in the five years to Q2 2014 (newer figures are not
available). In particular, so-called shadow banks have contributed to this process since they
have provided a significant amount of finance to Chinese companies, which have thus bypassed
the banks.
The sharp rise in private debt is not an argument for a balance of payments crisis like in
1997/98, because it has been incurred predominantly in domestic currency. However, higher
debt leaves many businesses more vulnerable in the event that local central banks will have to
follow the Fed’s lead and raise interest rates (or least prevent them from being cut as far as
lower inflation rates would warrant). Interest rates in the emerging markets could also rise if
international investors shift funds from EM to the US, which would require action to offset capital
outflows as investors seek higher returns elsewhere. All in all, financing conditions in the EM
space are likely to deteriorate, which will weigh on economic growth.
Monetary policy is barely expansionary
EM monetary policy is in any case no longer as expansionary as it has been in previous years.
1
This can be demonstrated by a Taylor rate (chart 5, page 4). This appropriate key interest rate
with respect to capacity utilisation and inflation has fallen in the past few quarters, largely
because inflation rates in many emerging economies have dropped sharply on the back of
declining oil prices. The Taylor rate is thus now almost at the level of actual key interest rates,
which have only fallen a little recently.
CHART 3: Domestic banks are dominant
Share of domestic banks of private sector credit, in %. Data for Q2
2014. Horizontal line: unweighted average for 14 developing countries
CHART 4: China – Strong rise in private debt
Private-sector debt in % of nominal GDP and rise of private debt ratio
between 2009 and 2014 in percentage points
60
95
50
2009-14 debt growth
100
90
85
80
75
70
65
60
CH
40
TR
30
20
RU
10
0
MX
-10
Brazil
South Africa
India
2014
Russia
Average
Source: BIS, Commerzbank Research
China
-20
KR
0
HU
40
80
120
160
200
Private Debt/GDP
Source: BIS, Commerzbank Research
1
We have estimated capacity utilisation using a Hodrick-Prescott filter. As many central banks do not have
an explicit inflation target, we have similarly calculated an underlying inflation trend using the HodrickPrescott filter and interpreted this as the inflation target. We have calculated two versions of the rule. In one,
we use the Consumer Price Index as the inflation yardstick, in the other, the GDP deflator. Chart 5 (p.4)
compares the average result of the two versions with the actual trend in EM key interest rates, in which
aggregate values represent GDP-weighted averages of the individual countries. In our calculations, we have
drawn on a BIS study (see http://www.bis.org/publ/arpdf/ar2014_5_de.pdf, page 109).
20 March 2015
3
Economic Research | Week in Focus
Based on the Taylor rate, monetary policy is barely expansionary any more. Consequently, a
decade of cheap money across EM has now come to an end (if we disregard central and eastern
European countries that are focused on ECB monetary policy, and which has supplemented its
zero-interest-policy with broad-based asset purchases).
Growth edge of EM diminishes …
The less expansionary stance of monetary policy across the emerging markets has recently
played a role in the slowdown of economic growth. While EM GDP was still expanding at a rate
of 7.5% in 2010, which is 6.5 percentage points above the rate in the industrial countries (chart
6), the growth advantage was only 2.6 percentage points in 2014.
If financing conditions worsen due to higher US key interest rates, the EM growth edge should
narrow further. This applies particularly to China, where economic growth should slow further
this year to 6.5%. China is not only suffering under its high debt level but also from the fact that
house prices, after rising sharply in recent years, are now falling. Furthermore, the commodities
sector in particular is struggling with overcapacity. Mexico on the other hand is one of the few
emerging markets, which could expand its growth edge since it has tight links to the US
economy.
… which will weigh on company earnings and EM currencies
A narrowing of the EM growth advantage argues against strongly rising company earnings in the
euro zone. DAX-listed companies generate almost a fifth of their earnings in Asian EM alone. If
growth slows there, the DAX will continue to be less driven by company earnings and more by a
rise in the price/earnings ratio, which is likely to rise given the ECB’s zero-interest rate policy.
With a few exceptions (such as the Mexican peso) EM currencies are likely to depreciate versus
the US dollar. Unlike before, the Chinese renminbi should not appreciate against the US dollar
until at least the end of next year. Central European currencies should – largely in line with the
euro – either depreciate against the dollar (Zloty) or even underperform somewhat (Forint).
CHART 5: EM is almost at “Taylor level”
Key interest rate and Taylor rate of EM, in percent, for details see
footnote on page 3.
Gap in economic growth between EM and industrial countries, in
percentage points. IMF forecast for 2015.
12
25
10
20
8
15
6
10
4
2
5
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
key interest rate
Source: BIS, Commerzbank Research
4
CHART 6: Growth advantage is diminishing
Taylor rate
0
-2
1980
1985
1990
1995
Emerging economies
2000
2005
2010
2015
Emerging Asia
Source: IMF, Commerzbank Research
20 March 2015
Economic Research | Week in Focus
Dr Michael Schubert
Tel. +49 69 136 23700
ECB: Fragmentation remains in place
At the last press conference, ECB President Draghi emphasised that the differences
between lending rates across the euro countries had decreased “significantly”. But ECB
data shows that the so-called fragmentation of lending rates is currently higher than three
years ago.
The backdrop of Mario Draghi’s statement is the frequently voiced criticism that the ECB’s QE
programme helps the financial markets but does little to support the real economy. Whilst
government bond yields of the euro countries have converged considerably in recent years, such
a trend has not been seen for a long time in lending rates, which are much more important to the
real economy.
And this situation has not fundamentally changed. The central bank measures the dispersion of
2
lending rates by means of the coefficient of variation of 75 different rates for new lending to
businesses and private households, broken down by loan volume, rate fixation and whether
loans are uncollateralised or collateralised. In 2013, Draghi had already proposed to compare
the current levels of the coefficients with those in H1 2012. In the summer of 2012, government
bond yields of the peripheral countries started to fall sharply in the wake of Draghi’s “whatever-ittakes” announcement, and it thus makes sense to check to what extent the differences between
lending rates have diminished since then.
Contrary to Draghi’s statement, around three quarters of the coefficients of variation are currently
higher than in H1 2012, and in a quarter of cases they are even at all-time highs (chart 7). Whilst
lending rates in the euro periphery have indeed come down since last spring, rates in the core
countries have also fallen to a similar extent, and so the dispersion of lending rates across the
euro countries has barely changed.
This leads us to assume that while lower lending rates may help the real economy, the effect will
probably be smaller than the significant convergence in euro government bond yields suggests.
The still-hesitant decline in peripheral lending rates shows that the balance sheet adjustments
are only progressing slowly. Whilst, for example, the positive development of the ECB’s Bank
Lending Survey or the decline in non-performing loans in Spain demonstrate that progress is
being made, the balance sheet adjustments are far from over – and this is something the ECB
continues to emphasise at each press conference.
CHART 7: Euro zone: Fragmentation mostly greater than in H1 2012
Number of cases in which the variation coefficients calculated by the ECB for lending rates (new loans) in
the individual euro countries were higher/lower/unchanged compared to H1 2012
25
22
20
18
14
15
10
7
7
5
5
1
0
corporates
higher
1
corporates, collateralized
lower
0
households
unchanged
Source: ECB, Commerzbank Research
2
Standard deviation of lending rates in the individual euro countries at a given point in time, divided by the
average rate in the euro zone.
20 March 2015
5
Economic Research | Week in Focus
Markus Koch
+49 69 136 87685
Product idea: MinMaxPlus Note in US$:
3-month US$ Libor: race to the top!
With the Fed’s patient stance abandoned this week, the kick-off in the next rate hike cycle
looms ahead for this summer. Judging US$ Libor forwards by our own metrics, markets
persistently underestimate the pace of US money market rate hikes. What is more, the US
dollar still possesses decent scope to firm against the euro to sub-parity levels. To
express the view of a steep 3-month US$ Libor trajectory compounded by US dollar
gains, we recommend investing in a MinMaxPlus note, denominated in US$. A modest
rise in the note’s index suffices to print maximum coupons fairly soon on account of the
double lever. While coupon risks are limited to 1% during the 5-year term, the
performance may be further enhanced if the euro slides to the levels we expect.
The FOMC has finally abandoned its “patient” stance ahead of the next policy normalisation
cycle. Despite some marginal downward adjustments in growth and employment projections, the
door for the next hiking campaign – to be kicked off this summer – remains open. More
importantly, though, we expect US Fed funds to be raised quickly with an ongoing strengthening
3
of the US dollar not altering our assessment. Based on various measures of past Fed rate
4
cycles and also relative to the dot plot , the current Fed funds and US$-Libor forward strips are
way too flat, in our view. At the same time, we look for the US dollar to firm against the euro to
below parity, long term, as a result of divergent monetary policies. Investors willing to enhance
long-term FX exposure may benefit from more favourable entry levels amid the current EURUSD stabilisation.
To capture the value inherent in our view of swift Fed rate hikes coupled with EUR-USD sliding
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featured with a twofold leverage, depending on the annual in advance fixings.
If the index is fixed above a level of 0.5% at any annual coupon period, the floor will be
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index is fixed above 1.6% – a level we envisage for the start of year 2 i.e. Q1 2016. This may
mean a coupon increase to the maximum level of 3.20% (cap, see box below) already from year
2, ensued by similar coupons through maturity, based on our long-term Libor forecasts.
Comparing forecast- versus forward-based coupons currently yields c. 2.75% versus c. 2.5% on
average, respectively. This is simply a result of our expectation of the index outpacing the
forward strip. In a worst case scenario, the index would be fixed below the 0.5% threshold to
which, however, we attribute only a low probability.
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pick-up may reach c. 10% in total (and vice versa if the euro were to gain versus the US dollar).
Plus
MinMax
Note in US$ (indicative)
Issuer
A- (average)
Type:
Note
Maturity:
5 years
Currency:
US$ (non quanto)
Minimum lot:
US$1m
Redemption:
100%
Reference index:
3m US$ Libor
Coupon:
2 * 3m US$ Libor, floored at 1%
Coupon cap:
3.2%
Fixings:
Annually, in advance
Payment:
Annually, in arrears
Basis:
Act/360, mod. following, adjusted
3
4
6
Taylor & Co.: Where are we heading? in Ahead of the Curve, 12 March 2015.
Policymakers’ weighted-average projections on the appropriate pace of policy firming (18 March)
20 March 2015
Economic Research | Week in Focus
Major publications from 13 – 19 March 2015
Economic Insight: Euro area – the different types of euro sceptics
In a number of euro countries, parties with anti-euro agendas are successfully chasing more
votes. However, many of them are not so much lamenting the single currency itself, but rather
their view that its overvaluation places major restrictions on national economic policy. Criticism
could ease given the expected continuing weakness of the euro and the increasingly "flexible"
interpretation of the stability pact. In almost all countries, a clear majority of the population also
takes a positive view of the euro and the EU, with a marked improvement in sentiment evident
here in the last two years. more
Economic Briefing: UK – The fudge it Budget
Today’s budget presentation was an unashamedly political event. Voter giveaways such as an
end to the double-taxation of saving and higher personal tax thresholds are to be paid for by
higher corporate taxes, notably on banks. We continue to question whether the UK can deliver a
budget surplus on a three to four year horizon. However, public finances are (slowly) improving
and the UK’s gross funding needs are lower relative to GDP than for all major economies bar
Germany. more
Economic Insight: France & Italy – A reform overview
In France and Italy, it has become difficult to see through the thicket of reforms. We give an
overview and show that these reforms are unlikely to bring a breakthrough – although a number
of them are going in the right direction. more
EM Outlook: Q2 15 – Central Bankers of the world, unite!
A major challenge for EM central banks is how to reconcile domestic rate cuts with the pressure
posed by Fed rate hikes. While the EM sovereign credit space is better placed to deal with
tighter US monetary policy (given the lack of supply facing sustainable demand), EM FX/rates
will face continued volatility and curve steepening. more
Credit Note: EU Banks – (When) will the zero-risk weight for
sovereign exposure end?
The regulator’s aim seems clear – sovereign exposure on banks’ balance sheets should no
longer be considered risk free and thus exempt from capital charges. The ESRB proposes
various policy options. However we expect it will take several years to find political agreement on
this matter before the rules are implemented with a generous transitional period. Therefore no
reaction from market participants should be expected in the near term. The longer-term impact
could be, first, stronger diversification of banks’ sovereign exposures and, second, penalisation
for holding lower rated or stressed sovereign debt, affecting mainly peripheral banks but also
some German banks. more
FX Hotspot: The Hare and the Hedgehog
The FOMC reacted more strongly to the 9-month USD-appreciation trend. This was a strong
signal to the FX market not to push too hard for USD strength. more
FX Hotspot: Forward Misguidance
With confusing and hawkish talk, Riksbank Governor Stefan Ingves had talked down EUR-SEK
during recent weeks. Today his colleagues in the Executive Board had to take measures to
counter the effect of his words. With such a communication policy, an efficient forward guidance
is impossible. Uncertainty about the Riksbank’s strategy prevails. This has two consequences:
(1) Implied SEK volatilities should trade at elevated levels. And (2) Riksbank has to take stronger
measures to reach the desired results. This increases the risk that the strategy will finally fail.
more
20 March 2015
7
Economic Research | Week in Focus
Preview – The week of 23 to 27 March 2015
Time
Region Indicator
Period
Forecast
Survey
Last
Monday, 23 March 2015
14:00
15:00
USA
EUR
Existing home sales
Consumer confidence, preliminary
Feb
Mar
SAAR, mn
sa
4.88
-6.5
4.94
-5.8
4.82
-6.7
PMI, manufacturing
PMI, services
PMI, manufacturing
PMI, services
PMI, manufacturing
PMI, services
CPI
Mar
Mar
Mar
Mar
Mar
Mar
Feb
CPI
CPI ex food, energy
New home sales
Business confidence
Feb
Feb
Feb
Mar
sa
sa
sa
sa
sa
sa
mom
yoy
mom, sa
mom, sa
SAAR, k
sa
49.0
52.0
51.5
54.5
51.5
53.0
0.3
0.1
0.2
0.2
460
-8.0
–
–
51.5
55.0
51.5
53.9
0.4
0.1
0.2
0.1
475
–
47.6
53.4
51.1
54.7
51.0
53.7
-0.9
0.3
-0.7
0.2
481
-8.2
Mar
Mar
Feb
Feb
sa
sa
mom, sa
mom, sa
99.0
107.0
-1.5
-0.5
–
107.2
0.6
0.5
99.0
106.8
2.8
0.0
GfK consumer confidence
M3 money supply
Loans to the private sector
Retail sales
Apr
Feb
Feb
Feb
Initial claims
CPI
Unemployment rate
21 Mar
Feb
Feb
sa
yoy
yoy
mom, sa
yoy
k, sa
yoy
sa
10.0
4.0
0.0
0.2
3.9
290
2.3
3.5
9.9
4.4
–
0.3
4.0
–
2.3
3.5
9.7
4.1
-0.1
-0.7
4.8
291
2.4
3.6
Mar
Q4
SAAR
92
2.3
–
2.4
92
2.2(p)
Tuesday, 24 March 2015
8:00
FRA
8:30
GER
9:00
EUR
9:30
GBR
• 12:30
USA
•
14:00
BEL
Wednesday, 25 March 2015
7:45
9:00
• 12:30
FRA
GER
USA
Business climate (Insee)
Ifo business climate
Durable goods orders
Durable goods orders ex transport
Thursday, 26 March 2015
7:00
9:00
GER
EUR
9:30
GBR
12:30
23:30
USA
JPN
Friday, 27 March 2015
7:45
12:30
FRA
USA
Consumer confidence
GDP, real (3rd estimate)
Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 4 hours for EDST. add 1 hour for CET). # = Possible release; mom/qoq/yoy: change
to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; • = data of highest importance for markets
8
20 March 2015
Economic Research | Week in Focus
Dr Ralph Solveen
Tel. +49 69 136 22322
Economic data preview:
Germany: Just a matter of sentiment?
In March, the ongoing decline in the euro is likely to have sent the Ifo business climate
higher again. But will the German manufacturing PMI now finally rise as well? If, contrary
to our expectations, it were to remain stuck in the sideways trend started last autumn,
some economic optimists will likely rethink their 2%+ growth forecasts for this year. US
order intake is likely to have slipped.
An ever-growing number of analysts are now looking for the German economy to grow by more
than 2%. This also seems to be justified by the Ifo business climate which has been on the rise
since last autumn. However, this ignores the fact that businesses have so far been less positive
when asked about their trends in orders, production or employment. The purchasing managers’
index (PMI), which is calculated based on such data, has been moving sideways since last
autumn (chart 8). In the Ifo survey, too, responses to the relevant questions not included in the
Ifo index came in less favourable than the business climate. For instance, the Ifo PMI we have
calculated on this basis, fell markedly in February.
We, too, envisage quite decent economic growth in coming quarters. However, businesses’
caution with regard to order intake, production etc. indicates that growth will not be unlimited
even with the current euro weakness. One reason could be the weaker global economy which
offsets at least some of the positive currency effect and also sent our Early Bird slightly lower in
recent months. Against this backdrop, we are looking for an increase in the Ifo (107.0 from
106.8) and the PMI (51.5 from 51.1) but take a rather cautious stance – in line with our overall
growth forecast of 1.8%. If the PMI failed to rise once again, this would indicate that the global
economy is currently proving more of a drag for German businesses than assumed by many
analysts at present.
USA: Temporary slack in manufacturing
Momentum in US manufacturing has been falling for some months. Non-defence capital goods
orders excluding aircraft recently came in only roughly on par with deliveries (chart 9). In addition
to the stronger dollar, this may have been helped by the strikes of US West Coast dock workers
and the unusually cold weather. Against the backdrop of the booming US labour market, this is
unlikely to mean the end of the uptrend but may ultimately only be seen as a dip in orders as in
mid-2012. As regards February, however, lower capacity utilisation in manufacturing and the
virtually unchanged ISM orders index are pointing to another stagnation in core business. With
less airplanes ordered at the same time and demand for defence goods probably also lower, we
envisage a 1.5% decline in durable goods orders vs. January (consensus +0.6%).
CHART 8: Germany – bullish sentiment, soft hard data?
PMI: purchasing managers’ index for manufacturing in Germany; IfoPMI: average of subcomponents of Ifo survey for production, order
intake and employment, weighted like PMI
20
60
15
10
55
5
0
50
-5
-10
45
-15
-20
CHART 9: USA – dip in orders
Non-defence capital goods excl. airplanes, orders and deliveries,
three-month averages in USD bn
75
70
65
60
55
50
2012
2013
Ifo (LS)
2014
Ifo-PMI (LS)
Source: Bloomberg, Commerzbank Research
20 March 2015
40
2015
PMI (RS)
45
2008
2009
2010
2011
2012
orders
2013
2014
2015
shipments
Source: Global Insight, Commerzbank Research
9
Economic Research | Week in Focus
Central Bank Watch (1)
Fed
At its meeting on Wednesday, the Federal Reserve dropped
the assurance that it would be “patient” before starting to
normalise interest rates. This means that a rate hike at the
meeting after next in June is possible but by no means
certain. The Fed wants to raise rates when the labour market
has improved further and it is reasonably confident that
inflation will move back to the 2% target on a medium-term
perspective. At the end of the day, the incoming data will thus
determine the way forward. We think it is more likely that
these conditions will only be fulfilled in September, because in
June the Fed will probably still be influenced by a weaker Q1
and a negative inflation rate.
At the same time, Fed officials now expect rate hikes to
progress much more slowly. Partly due to the strong dollar,
they now forecast slower growth for 2015 and 2016, although
they still see above-average growth rates. Moreover, they
expect lower inflation pressure than in their December
projections. The need for higher rates is further reduced by
the lower forecast for the long-term unemployment rate. In the
Fed’s opinion, unemployment can now fall for a longer time
before inflation kick-starts. However, we still think that the rate
hikes priced in by the market are too low.
Dr Christoph Balz
+49 69 136 24889
CHART 10: Expected interest rate for 3-month funds (USD)
2,5
2,0
1,5
1,0
0,5
0,0
current
Jun 15
Sep 15
Dez 15
Mrz 16
Jun 16
Futures
12.03.15
19.03.15
Commerzbank
TABLE 1: Consensus forecasts Fed funds rate
Q2 15
Q4 15
Q2 16
Consensus
0.25
0.75
1.50
High
0.75
1.50
2.50
Low
0.25
0.25
0.25
Commerzbank
0.25
1.00
2.00
Source: Bloomberg, Commerzbank Research
ECB
In recent days, ECB officials highlighted that without
accompanying government action, latest central bank
measures would be less effective in the longer run. ECB
president Draghi cautioned that the currency area's
vulnerabilities will not disappear simply because the economic
cycle is turning. “They stem from the fact that our union
remains incomplete along two dimensions. Neither our
economies nor our institutions have converged enough," he
said. “The current upturn in economic conditions, which the
ECB has helped to generate, must be used,” Draghi urged.
He called on Europe’s leaders to make a “quantum leap”
toward greater sharing of national sovereignty to strengthen
the rules governing the 19-member currency bloc.
ECB Executive Board member Praet said that monetary
stimulus was an “opportunity that the governments have to
use”. He stressed that the current recovery is cyclical, not
structural. “We have to discuss what the structural problems
are”.
ECB’s Visco (Italy) said that while QE was justified in the light
of the deflation risk in the region, its effects on the exchange
rate and on the bond market have overshot expectations in
the first week of the plan. Credit costs are likely to fall on QE
but “not in an extraordinary way”, he added.
Dr Michael Schubert
+49 69 136 23700
10
CHART 11: Expected interest rate for 3-month funds (EUR)
0,8
0,6
0,4
0,2
0,0
-0,2
current Jun 15
Futures
Sep 15
19.03.15
Dez 15
12.03.15
Mrz 16
Jun 16
Commerzbank
TABLE 2: Consensus forecasts ECB minimum bid rate
Q2 15
Q4 15
Q2 16
Consensus
0.05
0.05
0.05
High
0.05
0.05
0.05
Low
0.05
0.05
0.05
Commerzbank
0.05
0.05
0.05
Source: Reuters, Bloomberg, Commerzbank Research
20 March 2015
Economic Research | Week in Focus
Central Bank Watch (2)
BoE (Bank of England)
The extent to which the collapse in oil prices is exerting
downward pressure on inflation is evident in the import price
data, which showed a 3.5% decline between November and
January. This is being exacerbated by the upward pressure
on sterling, which has risen by more than 2.5% on a tradeweighted basis since the start of the year. These effects
appear to be dominating the BoE’s thinking on inflation trends,
and recent concerns about the pickup in wage pressure were
notably absent from the March MPC minutes released earlier
this week. Indeed, the Committee noted for the first time that
the prospect of lower inflation expectations, on the back of the
slowdown in measured inflation, might be one of the factors
which helps keep wage growth in check – a feature which is
evident in the latest wage data, which once again undershot
relative to expectations. The government’s 2015 budget
outlook, presented this week, does not appear to have major
implications for monetary policy at first glance. But digging
deeper into the fiscal data reveals that a very tight squeeze on
government outlays is planned for the coming years. This will
act as a drag on growth and may prompt the BoE to be
correspondingly less aggressive when the monetary
tightening process finally begins.
CHART 12: Expected interest rate for 3-month funds (GBP)
2,0
1,5
1,0
0,5
0,0
current
Jun 15
Sep 15
Dez 15
Mrz 16
Jun 16
Futures
19.03.15
12.03.15
Commerzbank
Source: Bloomberg, Commerzbank Research
Peter Dixon
+44 20 7475 4806
BoJ (Japan)
As expected, the BoJ took no new measures at its monetary
policy meeting on Tuesday. The bank did not change its
forecast for growth, but with regard to inflation it announced
downward revisions to both the current situation and the
outlook. The Japanese economy has continued its “moderate
recovery trend” and is expected to keep following this path,
the BoJ said. The core inflation rate excluding fresh food and
adjusted for the effects of the VAT hike was moving “in the
range of 0 to 0.5%” (previously: “around 0.5%”). It “is likely to
be about 0% for the time being”. According to the BoJ, this is
due to the decline in energy prices. For this reason this
assessment does not mean that the bank is giving up its
inflation target of 2%.
We remain sceptical that the central bank will reach its
inflation target and still see a high probability that the BoJ will
ease policy again this year, for example by increasing its
purchases of equities. This should push asset prices further
upwards and depress the yen, especially versus the US
dollar.
CHART 13: Expected interest rate for 3-month funds (JPY)
1,0
0,8
0,6
0,4
0,2
0,0
current Jun 15 Sep 15 Dez 15 Mrz 16 Jun 16
Futures
19.03.15
12.03.15
Commerzbank
Source: Bloomberg, Commerzbank Research
Dr Christoph Balz
+49 69 136 24889
20 March 2015
11
Economic Research | Week in Focus
Rainer Guntermann
Tel. +49 69 136 87506
Bond market preview:
Breather but no readjustment
The spectacular rally on euro area bond markets is losing steam after ten-year Bund
yields fell to new record lows yesterday. The relief following a still cautious Fed pushed
yields lower while the ECB’s bond buying is increasingly becoming routine and several
market players are standing ready to take profits. Medium-term, peripheral yields will
drop further although a period of stronger price volatility appears to be on the cards
initially.
TABLE 3: Weekly outlook for yields and curves
Bunds
US Treasuries
Yield (10 years)
Sideways
Moderately higher
Curve (2 - 10 years)
Neutral
Flatter
Source: Commerzbank Research
The US central bank has lent fresh impetus to the bond market rally. While the Fed has adopted
an option to hike rates as early as June and the data dependency arguing for higher term
premia, the downward revision to the FOMC members’ interest rate expectations came as a
huge relief. This has sent the US Treasury curve around 15 basis points lower, and even after
the initial shift, yields hardly rose despite further solid labour market indications (chart 14). In
light of the US guidance, ten-year Bund yields dropped to a new record low of 0.17%.
Outlook for the Bund
future, 23-27 March
Economy
↓
Inflation
→
Monetary policy
↑
Trend
→
Supply
→
Risk aversion
→
Although the ECB’s daily bond purchases of just under €3bn during March are becoming routine,
price fluctuations have increased markedly of late. After the significant yield slide in all euro
countries, the ECB seems to be left as one of few buyers given that – in anticipation of steady
ECB buying – many market players are holding large amounts already. Lately, this has hit
peripheral bonds, pushing spreads versus Bunds to pre-QE announcement levels (chart 15).
This supply overhang has been helped by recent weeks’ lively issuance activity which will have
to be digested in coming days. Moreover, investors on cash markets are holding back in view of
the latest considerable intra-day volatility.
Next week’s economic data is unlikely to move markets sustainably. While the likely further
improvement in business surveys should additionally support the recent rise in inflation
expectations, the resulting slight upside pressure on yields would be limited by the increasingly
tight budgetary situation in Greece. Ahead of the long Easter weekend and Orthodox Easter on
12 April, the debate about capital controls could intensify further.
CHART 14: Relief after the Fed
CHART 15: Peripheral rally is losing steam
Yield of US Treasuries, in percent
2,4
0,8
185
2,3
0,7
170
2,2
0,6
2,1
0,5
155
2,0
0,4
1,9
0,3
1,8
0,2
110
1,7
0,1
95
0,0
80
Oct-14
1,6
Nov 14
Dez 14
Jan 15
10y (lhs)
Source: Bloomberg, Commerzbank Research
12
10y yield spread versus Bunds, in basis points
Feb 15
Mrz 15
2y (rhs)
140
125
Nov-14
Dec-14
Jan-15
ITA
Feb-15
Mar-15
SPA
Source: Bloomberg, Commerzbank Research
20 March 2015
Economic Research | Week in Focus
Lutz Karpowitz
Tel. +49 69 136 42152
FX market preview:
Who’s still listening to the central banks?
For the first time, the Fed has hinted that the recent appreciation of the USD is too fast in
its opinion. Yet the FX market ignored this warning rather quickly too. The FX market is
clearly not easy to unsettle at present with mere words. Even so, this still points to a
rather tenacious retreat of EUR-USD.
TABLE 4: Expected trading ranges for next week
Range
Bias
Range
Bias
EUR-USD
1.0400-1.0900

EUR-GBP
0.7100-0.7400

EUR-JPY
126.00-132.00

GBP-USD
1.4450-1.5050

USD-JPY
119.00-123.00

EUR-CHF
1.0350-1.0800

Source: Commerzbank Research
How much USD strength is the Fed prepared to take? This question has recently been asked
increasingly frequently. Those who had previously assumed that USD strength was not an issue
for the Fed have needed to rethink since Wednesday evening. For the first time, the Fed
explicitly spoke of the effects of the strong USD on import prices and hence domestic inflation.
For the FX market, the message was clear: EUR-USD jumped by about 4 cents to over 1.10. It
didn’t last though; already on Thursday morning, EUR-USD was below 1.07 again.
The Fed can ultimately learn from this that it is not easy these days to steer one’s own currency
by verbal means. In the global depreciation race, many central banks have already had to
experience this. And in this race, it is no longer enough for the Fed to fire a few verbal warning
shots.
That said, the Fed’s statement shows that it also has a pain threshold and the Fed should refer
to it again and again in the coming weeks. Consequently, the EUR-USD trend should continue to
point downwards on account of the very different directions of monetary policy on the two sides
of the Atlantic, although the USD appreciation will be much slower than in the past few months.
Norges Bank faces a few difficulties with its communication at present. It would actually like to
support the economy, which could suffer from the lower oil price, by lowering interest rates, but
the central bank then failed to act on Thursday. At the same time, interest rates should fall if
everything goes as expected. EUR-NOK subsequently took a tumble initially; As the Fed has
already shown, it is clearly not easy nowadays to weaken one’s own currency by verbal means.
CHART 16: Sizable USD appreciation since July
USD, nominal effective exchange rate
105
CHART 17: EUR-NOK: Krone depreciation reversed
EUR-NOK, spot price
9,00
8,90
100
8,80
95
8,70
90
85
Jan 14
8,60
Apr 14
Source: Bloomberg
20 March 2015
Jul 14
Okt 14
Jan 15
8,50
15.3
16.3
17.3
18.3
Source: CFTC
13
Economic Research | Week in Focus
Andreas Hürkamp
Tel. +49 69 136 45925
Equity market preview:
DAX outperformance should lose momentum
Thanks to the vibrant DAX outperformance, the gap of the DAX P/E to the S&P 500 P/E
has improved to minus 1.6 from minus 4.1 since October 2014. In our view the DAX
outperformance should lose momentum in the coming months as this P/E valuation gap
is already significantly above the 12-year average of minus 2.7.
TABLE 5: DAX has outperformed S&P 500 by 20% since the start of the year
Earnings 2015e
Performance (%) since
Index points
Growth (%)
P/E 2015e
Index
28/02
31/12
30/06
current
31/12
current
31/12
current
31/12
DAX 30
11,923
4.6
21.6
21.3
772.8
779.7
9.6
10.2
15.4
12.6
MDAX
20,682
2.9
22.1
23.0
1053
1053
8.6
13.9
19.6
16.1
Euro Stoxx 50
3,669
1.9
16.6
13.6
231.5
242.2
9.0
9.9
15.8
13.0
S&P 500
2,100
-0.2
2.0
7.1
118.1
124.7
1.5
7.6
17.8
16.5
Source: Commerzbank Corporates & Markets, I/B/E/S
On Monday the DAX closed at 6,240 – only 26 points below the all-time high of 6,266 on 7
March 2000. Only five months ago – in mid-October 2014 – investors discussed a German
recession scenario, and the DAX suffered a correction of more than 15%. The DAX P/E was 4.1
points below the S&P 500 P/E in October – a 10-year low (chart 18).
In mid-March, by contrast, Germany has become one of the most sought-after equity markets
against the backdrop of the ECB QE programme, the rising Ifo index and the euro depreciation.
The gap of the DAX P/E to the S&P 500 P/E has risen from minus 4.1 in October 2014 to minus
1.6 in March 2015 – the 12-year average of this gap is minus 2.7. Relatively robust 2015
earnings expectations for the DAX have worked as a key bull trend for the shrinking P/E gap.
The current ranking regarding EPS 2015 revisions now appears as follows:
•
DAX: analysts have upgraded their expected EPS 2015 for 16 companies over the last
quarter, whereas 14 companies suffered negative revisions – ratio 0.88.
•
MDAX: 24 downgrades to 26 upgrades – ratio 0.92.
•
Euro Stoxx 50: 31 downgrades to 19 upgrades – ratio 1.63.
•
DJ Global Titan 50: 42 downgrades to 8 upgrades – ratio 5.25.
•
US Dow Jones 30: 26 downgrades to 4 upgrades – ratio 6.50.
As a consequence, expected FY2015 earnings for the DAX have been relatively robust over the
last few months, whereas the Euro Stoxx 50 and the S&P 500 suffered a hefty cut in earnings
expectations (chart 19). Thanks to the strong depreciation of the euro over the last year the
earnings trend for the DAX should continue to remain more robust than for other equity markets.
However, we interpret the relatively low DAX P/E gap of minus 1.6 versus the S&P 500 as a
signal that the DAX outperformance should lose momentum in the coming months.
CHART 18: DAX P/E to S&P 500 P/E gap has risen strongly
DAX forward P/E minus S&P 500 forward P/E, in points
CHART 19: DAX EPS 2015 trend relatively robust
EPS 2015 for equity markets, indexed, Feb 2013 = 100
110
0
-1
100
-2
90
-3
80
-4
70
12-year average: -2.7
-5
-6
2003
60
Jan-13
2005
2007
2009
Source: Factset, Commerzbank Research
14
2011
2013
2015
DAX
Jul-13
Jan-14
FTSE 100
Jul-14
Euro Stoxx 50
Jan-15
S&P 500
Source: I/B/E/S, Commerzbank Research
20 March 2015
Economic Research | Week in Focus
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
Descent on gold market is over (for now)
Ever-rising US crude oil stocks should continue to weigh on oil prices for now, whereby
the price discount of WTI to Brent could actually widen further. Base metal prices should
tread water, as sentiment in China’s industrial sector probably barely improved. The gold
market should regain a bit of its shine as the downside pressure from a strong US dollar
is easing and demand from China and India appears to be picking up somewhat.
TABLE 6: Trends in important commodities
Per cent change
19 Mar
Trend Commodity specific events
1 week
1 week 1 year short-term
Brent (USD a barrel)
55.3
-3.2
-8.2
-47.8

Copper (USD per tonne)
5797
-0.8
0.8
-11.5

Gold (USD per troy ounce) 1165
1.0
-3.5
-12.4

Hong Kong gold exports to China (Feb)
Source: Bloomberg, Commerzbank Research
Oil prices are still under pressure on both sides of the Atlantic. Indeed, US crude oil stocks are
marking new record highs week after week, allowing the price WTI to drop to a 6-year low of 42
USD per barrel. In the short term, this inventory build should continue. While the US Energy
Information Administration expects lower drilling activity in some shale oil formations to show first
signs of slowing in April, the fall in production is still being offset by efficiency gains in other
regions. Consequently, supply should remain above moderate refinery demand for seasonal
reasons and US crude oil stocks should climb further, which is why the price gap between Brent
and WTI could even widen a bit more (chart 20). That said, stocks should sink again in the
summer, as crude oil processing in US refineries will pick up considerably as the summer driving
season starts and shale oil production begins to slow. This should then drive the sustained
recovery of oil prices that we expect. This would presumably only be at risk if sanctions against
Iran were to be lifted at mid-year after an agreement at the current nuclear talks.
The near two-month descent in gold prices appears to be coming to an end. This is mainly due
to the abrupt end of the dollar rally, removing a negative factor for the gold market for now. In
addition, we are seeing stronger physical demand for gold again. Hong Kong’s customs
authorities are likely next week to report robust gold exports to China in February. Moreover,
Switzerland’s gold exports to India, the world’s largest gold market, were a positive surprise
recently. Even so, it is still too early for a sustained price recovery on the gold market in our
opinion, as investors are still withdrawing from gold ETFs (chart 21).
CHART 20: High price discount for WTI
Front-month WTI contract minus front-month Brent contract, USD a
barrel
4
0
-4
-8
-12
-16
-20
-24
2011
2012
2013
2014
Source: ICE, Nymex, Bloomberg, Commerzbank Research
20 March 2015
Million ounces, USD a troy ounce
90
1900
80
1700
70
1500
60
1300
50
1100
40
900
30
700
20
500
10
0
300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
8
-28
2010
CHART 21: Continued outflows from gold ETFs
2015
ETF holdings, left
Gold price (US$/oz), right
Source: Bloomberg, Commerzbank Research
15
Economic Research | Week in Focus
Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)
Inflation rate (%)
2014
2015
2016
2014
2015
2016
USA
Canada
2.4
3.2
2.8
1.6
0.2
2.0
2.5
2.3
2.5
1.9
1.0
2.0
Japan
0.0
0.8
1.3
2.7
0.7
0.7
Euro area
0.9
1.2
1.3
0.4
-0.1
1.2
- Germany
1.6
1.8
1.8
0.9
0.5
2.4
- France
0.4
0.9
0.9
0.5
-0.1
0.7
- Italy
-0.4
0.1
0.5
0.2
-0.4
0.7
- Spain
1.4
2.3
2.3
-0.1
-0.7
0.5
- Portugal
1.0
1.5
2.0
-0.4
-0.9
0.5
- Ireland
5.2
3.5
3.5
0.4
0.3
1.4
- Greece
1.0
0.2
2.5
-1.2
-1.5
0.0
United Kingdom
2.6
2.5
2.4
1.5
0.3
1.6
Switzerland
1.9
0.5
0.5
0.0
-1.5
0.0
China
7.4
6.5
6.5
2.0
2.0
2.0
India
7.5
7.9
8.4
5.5
5.0
4.0
Brazil
-0.1
-0.3
1.1
6.3
7.3
6.4
Russia
0.6
-3.5
1.6
7.8
14.0
6.7
World
3.1
3.2
3.5
Q4 15
Q1 16
Q2 16
• The US economy has reduced its imbalances
and seems set to continue growing at solid
rates.
• Growth in China is decelerating partly on
decreasing house prices.
• The recovery in the euro zone will only
continue at a slow pace. GDP growth will
remain markedly lower than that of the USA.
• EMU has survived the sovereign debt crisis,
but is gradually evolving into an “Italian-style
monetary union”.
• The German economy is set to continue
outperforming the rest of the euro area – partly
because ECB key rates are much too low for
Germany.
• High unemployment in most countries is
keeping inflation low for the time being. In the
long term, however, inflation is likely to rise, as
central banks have given up some of their
independence.
TABLE 8: Interest rates (end-of-quarter)
19.03.2015
Q2 15
Q3 15
USA
Federal funds rate
0.25
0.25
0.50
1.00
1.50
2.00
3-months Libor
0.27
0.30
0.75
1.25
1.65
2.30
2 years*
0.58
0.75
1.20
1.75
2.30
2.75
5 years*
1.42
1.70
1.95
2.30
2.65
2.95
10 years*
1.93
2.30
2.40
2.50
2.50
2.60
Spread 10-2 years
135
155
120
75
20
-15
9
10
15
15
15
15
Minimum bid rate
0.05
0.05
0.05
0.05
0.05
0.05
3-months Euribor
0.02
0.00
0.00
0.00
0.00
0.00
2 years*
-0.23
-0.15
-0.10
-0.10
-0.05
-0.05
5 years*
-0.10
0.00
0.00
0.05
0.05
0.15
10 years*
0.19
0.40
0.50
0.60
0.60
0.70
Spread 10-2 years
42
55
60
70
65
75
Swap-Spread 10 years
36
45
45
45
45
40
Bank Rate
0.50
0.50
0.50
0.50
0.75
0.75
3-months Libor
0.56
0.55
0.60
0.75
0.85
1.00
2 years*
0.41
0.60
0.90
1.10
1.30
1.45
10 years*
1.55
1.90
2.00
2.10
2.15
2.20
Swap-Spread 10 years
Euro area
• Fed interest rate hikes are on the cards from
2015Q3, due to a continuously decreasing US
unemployment rate and the expectation that
wage growth will gradually rise.
• The focus on the Fed’s lift-off will put moderate
upward pressure on US$ long-end rates. A
return to 2½% for 10y UST yields is only on
the cards for year-end 2015, though. The
curve is in for a textbook-style flattening in the
coming quarters, led by rising short-end rates.
• We see a 40% chance that the ECB will
increase the monthly volume of purchases of
government bonds (QE) significantly in the
second half of 2015.
• 10y Bund yields are likely remain at their lows
in Q1 owing to the ECB’s QE. Thereafter,
yields should edge up slowly. The structurally
low interest rate environment remains intact for
longer.
• Risk premiums of peripheral government
bonds are set to decline further amid ECB
bond purchases.
United Kingdom
TABLE 9: Exchange rates (end-of-quarter)
19.03.2015
Q2 15
Q3 15
Q4 15
Q1 16
Q2 16
EUR/USD
1.07
1.10
1.06
1.04
1.02
1.01
USD/JPY
121
120
122
125
127
129
EUR/CHF
1.06
1.00
0.99
0.98
0.97
0.96
EUR/GBP
0.72
0.74
0.72
0.71
0.70
0.70
EUR/SEK
9.29
9.75
9.80
9.85
9.90
9.95
EUR/NOK
8.62
9.10
9.00
8.90
8.80
8.70
EUR/PLN
4.13
4.15
4.15
4.15
4.15
4.15
EUR/HUF
303
305
310
315
315
315
EUR/CZK
27.43
29.00
29.00
29.00
29.00
29.00
AUD/USD
0.77
0.76
0.74
0.73
0.73
0.74
NZD/USD
0.74
0.73
0.71
0.70
0.69
0.68
USD/CAD
USD/CNY
1.27
1.26
1.28
1.30
1.32
1.30
6.20
6.33
6.35
6.35
6.35
6.35
• USD should further profit from the
expectations of Fed interest rate normalization.
Current USD rates have not priced in the
speed of rate hikes that we expect.
• The euro is under pressure as a result of the
persistent deflation fears in the euro zone and
an ECB policy that could even expand
government bond purchases.
• CEE currencies tend to devalue.
• We see the PBoC “allowing” the CNY to
remain on the weaker side in H1, following its
rate cuts to support the economy and USD
strength.
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs
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Economic Research | Week in Focus
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Economic Research | Week in Focus
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