Economic Research

Week in Focus

31 Oktober 2014

Doing Business: The German eagle is losing its strength

According to the World Bank's most recent Doing Business Report, the quality of Germany
as a business location has barely changed. But that is precisely the problem; while we are
seeing a standstill in Germany, other EU countries are making progress with reforms
including countries in the euro periphery. Against all other EU countries, Germany as a
business location has slipped to the middle of the rankings. Portugal has moved into the top
third although Italy and Greece remain unattractive as a business location.
Page 2

The Week in Focus in 100 seconds

Please follow this link for a video summary.

Doing Business: Germany only mid-ranked

Distance to a hypothetical top ranking business location inside the EU, in per cent, 2014
DK IE UK SE FI LT NE EE PT LV DE AT BE FR SI PL ES LU CY BG GR HU IT SK CZ RO
0
5
10
15
20
25
30
35
40
45
50
Source: World Bank Doing Business Indicator, Commerzbank Research

Council meeting: ECB set to sit tight. If survey-based inflation expectations fall further,
the pressure for additional ECB monetary easing will increase further. That said, ECB
Council members have signalled a waiting stance at least for next Thursday.
Page 5
Product Idea: Structured Products 30y Multitranche offering 4%. We advise long-term
investors with minimum return requirements to sell optionality by buying a 30y callable
multitranche with a 4.01% coupon.
Page 6

Outlook for the week of 3 November to 7 November 2014

Economic data: We expect that next weeks release of labour market and ISM index data
to strengthen hopes of a decent US GDP growth rate in the final quarter of 2014. In
Germany, order intakes and industrial production are set to surprise to the upside.
Page 9
Bond market: A combination of restraint at the ECB Council meeting and US data releases
due in the week ahead are likely to dampen the currently bullish market sentiment. Page 12
FX market: As the FX market is increasingly pricing in a normalisation of US monetary
policy, the dollar will gain further support. However, the main highlight of the FX markets
week will be the ECB meeting on Thursday.
Page 13
Equity market: The Q3 reporting season is a rather mixed bag, with MDAX results
somewhat more convincing than for DAX companies. These mixed results will not provide
any support for the German equity market.
Page 14
Commodity market: Saudi Arabia could help to settle oil prices if the country does not
further lower the official selling price for December crude oil which would help to calm fears
of a price war within OPEC.
Page 15

Chief economist
Dr. Jrg Krmer
+49 69 136 23650
joerg.kraemer@commerzbank.com

Editor:
Peter Dixon

For important disclosure information please see page 18.

research.commerzbank.com / Bloomberg: CBKR / Research APP available

+44 20 7475 4806

peter.dixon@commerzbank.com

Economic Research | Week in Focus

Doing Business: The German eagle is losing strength

Dr Marco Wagner
Tel. +49 69 136 84335

According to the World Bank's most recent Doing Business Report, the quality of
Germany as a business location has barely changed. But that is precisely the problem;
while we are seeing a standstill in Germany, other EU countries are making progress with
reforms including countries in the euro periphery. Against all other EU countries,
Germany as a business location has slipped to the middle of the rankings. Portugal has
moved into the top third and Italy and Greece remain unattractive as a business location,
despite reforms.

Germany slips and is now only in the middle of the rankings

The general perception is that Germany remains a role model to aspire to in the international
competition of business locations. Legal security, good infrastructure and a high level of product
market competition are some of the attributes Germany is associated with. However, the World
Bank's Doing Business Report 1, published on Wednesday, offers a sobering assessment. The
report measures the location quality from the perspective of small and medium-sized enterprises
and it shows that the picture in Germany is deteriorating.
Since the outbreak of the financial crisis, Germany has steadily fallen back compared to the best
business locations within the EU. To illustrate this, we have calculated for all World Bank
indicators how far Germany deviates from the results of the best EU country in each category.
We have then standardised and averaged these deviations. 2 Accordingly, Germanys average
lag to a hypothetical top location in the EU this year is 33.9%, compared to 32.3% last year and
25.8% in 2009. Germany therefore only occupies a mid-ranking position as a business location
(cover picture) behind Latvia and Portugal and is the country that has fallen back most since
the outbreak of the sovereign debt crisis (Chart 1). There are two reasons for this:

All other countries in the EU have implemented reform since 2009 and considerably
increased their quality as a business location (Chart 1). In particular the eastern European
countries such as Latvia, Poland and the Czech Republic have done their homework. Eurozone peripheral countries have also undertaken reform.

At the same time, we are witnessing a reform standstill in Germany, with some notable
areas of deterioration. The costs of starting a business rose last year alone from 4.8% of per
capita income to 8.8% mainly due to higher legal fees. Imports and exports are also more
expensive: it now costs 1,015 US dollars to export a container compared to 905 dollars last
year and 872 dollars in 2009. In addition, the waiting time for connection to the electricity

CHART 1: Germany in the unusual position of tail ender

Distance from hypothetical top location, change between 2014 and 2009 in percentage points
6
4
2
0
-2
-4
-6
-8
-10
LT PL CZ LV SI BG PT GR IT ES AT DK IE NE EE FI RO SE SK HU UK FR BE CY LU DE
Source: World Bank Doing Business Indicator, Commerzbank Research

See http://www.doingbusiness.org/
The Doing Business Index consists of ten categories, quantified by a total of 51 sub-indicators. We firstly calculate the
difference between the level (w) of each sub-indicator for each country and the best sub-indicator level across all countries
(min). We normalize the result (w min) by dividing it by the difference between the worst level (max) and min: (w
min)/(max min). We then average the standardised deviations across countries for all sub-indicators and then across all
categories. To guarantee the comparability for some years, we only use the 36 sub-indicators from 2009.
2

31 October 2014

Economic Research | Week in Focus

network is currently 28 days, compared to 17 days in 2009. Companies meanwhile pay

almost 49% of their earnings to the state as tax (compared to almost 45% five years ago)
and they need 20 hours longer to fill out their tax declarations.

Germany is cutting off the branch on which it sits

Germany is not only falling behind in locational factors, summarised in the Doing Business
Report, but also in price competitiveness. The comparatively strong economy and the robust
labour market have made it easier for the government to introduce a minimum wage and
significantly increase the universal application of collective wage agreements. In future, the
Ministry of Labour will be able to make collective agreements applicable to those businesses
outside Employers Associations if the wage agreements cover less than half of the employees
in a sector. This will force German unit labour costs to rise at a much faster rate and will impact
on corporate competitive advantage especially as temporary employment, work contracts and
working-time accounts will be restricted. If this trend continues, Germany in five years time could
even be at the point where France is today. 3

France is also sliding down the rankings

Although France improved its location quality within the euro zone last year, judging by the
Doing Business Report (Chart 2) for example, it now takes only 4 days to start a company
compared to 6 days a year ago the country is in a worse position than it was in 2009 (Chart
1). While access to electricity cost 38.4% of per capita income five years ago, it costs 42.9%
today. The tax rate has also risen 66.6% of profit goes to the tax authorities, compared to
65.8% in 2009 and the tax payment process has become somewhat more complicated. Exports
and imports are much more expensive. It now costs 1,335 US dollars to export a container,
which is a good 250 dollars more than in 2009.
All in all, reforms so far have been too weak to keep up with those in other countries. France has
therefore slipped further behind in comparison to other EU locations (cover picture). The
governments plans for further reform are not convincing and are unlikely to change the situation
much. This should also be reflected in lower growth rates in future. We expect that the French
economy will expand by only 0.5% in 2015 and by significantly less than 1% in 2016.

Portugal moves up to the top third

While France and Germany are hampered by reform lethargy, countries such as Portugal are
showing the way. Since the outbreak of the sovereign debt crisis, Portugal has worked its way
up from the middle to the top third (cover picture) and has strengthened its quality as a business
location by the most of all periphery countries compared to 2009 (Chart 1). It has made
particularly rapid progress in terms of starting a business and dealing with construction permits.
CHART 2: Greece outperforms, Germany underperforms
Distance from a hypothetical top location, change between 2014 and 2013, in percentage point

4
3
2
1
0
-1
-2
GR RO IE AT ES CZ FR IT SE EE SI DK UK PL PT LU SK NE LV BE BG LT HU CY FI DE
Source: World Bank Doing Business Indicator, Commerzbank Research

31 October 2014

See also Germany - the next France, Economic Insight, 3 April 2014.

Economic Research | Week in Focus

Fewer procedural steps, shorter approval procedures and lower costs are making it easier for
entrepreneurs to start a business and obtain construction permits. It is now possible to set up a
company in only three procedural steps and in an impressive 2 days a record time among
EU countries. The registration of property has become less bureaucratic and cheaper. It takes
less time to fill out tax returns and the tax rate is somewhat lower. Furthermore, goods can be
imported and exported one to two days faster. Although freight costs for container exports have
risen by almost 100 US dollars, at 780 dollars, this is still lower than in most other EU countries.
Such conditions should help to bolster investment and the Portuguese economic recovery
should continue, with growth rates of 1% in 2015 and almost 2% in 2016.

Ireland remains in the lead

Ireland has the reputation of attracting businesses with particularly favourable locational
conditions. Little bureaucracy, low costs, fast administrative processes, high investor protection
and low taxes have lured businesses particularly banks in the past and made Ireland a very
attractive business location. Although Ireland fell back in the rankings in the first few years after
the financial crisis, it has made huge efforts especially in the past year (Chart 2). With its
current reforms, Ireland has further improved its position among the top rankings compared to
2009 (cover picture). Last year, the government streamlined its administration. The processes of
starting a business and registering property are now much faster. Obtaining access to electricity
now takes 85 days compared to 205 days in 2013 and is much cheaper. We expect Ireland to
post growth rates of around 3% in each of the next two years.

Spain moves from lower third to the middle of the rankings

Spain has also made good progress with its reforms, especially last year (Chart 2). Spains
government has been working to ensure easier conditions for setting up a business. (Chart 2).
This now requires only 6 procedural steps compared to 10 last year; furthermore, it takes only 13
days to set up a company, down from 23 days. The registration of purchased land and property
is now faster than a year ago. In terms of location quality, Spain has overtaken other countries
and moved up from the lower third to the middle range (cover picture). Furthermore, Spain
should profit from labour market reforms, which point to growth rates of over 2% in each of the
next two years.

Italy and Greece remain unattractive despite reforms

In the past few years, Italy and Greece have also improved their quality as business locations
(Charts 1 and 2). Reforms in these countries have not been enough, though, to lift these
countries out of the lower third. Greece has moved up from fourth last to sixth last in the EU
rankings, while Italy has only moved up from second bottom to fourth last (cover picture).
Consequently, both countries are still comparatively unattractive as business locations.
There is still much to do to lift these countries out of their economic malaise, even if it currently
looks like Italy has discovered its appetite for reform. While some of the reform plans are
heading in the right direction, we do not believe this will result in the great breakthrough
reforms will probably be too weak for that. 4 And most of the reforms that have been started are
still at the parliamentary discussion stage, and could take some time to come to fruition. As a
result, the Italian economy is likely to expand by only 0.3% in the coming year and by less than
0.5% in 2016.

See also Reforms in Italy: Still much to do!, Economic Insight, 28 July 2014.

31 October 2014

Economic Research | Week in Focus

Dr Michael Schubert
+49 69 136 23700

Council meeting: ECB set to sit tight

Market-based inflation expectations have fallen again since the last ECB Governing
Council meeting. Should survey-based expectations also drop, the pressure for additional
measures by the central bank such as government bond buying would increase
further. That said, ECB Governing Council members have signalled a waiting stance at
least for next Thursday.

Rising downside risks for inflation also in SPF survey?

At the last press conference, ECB president Draghi made it very clear that in the coming months,
inflation expectations will ultimately determine whether the central bank takes further measures.
And market-based inflation expectations have indeed fallen again since the last Governing
Council meeting (chart 3).
The pressure on the ECB to take renewed action would increase further if the latest results of
the Survey of Professional Forecasters, which the ECB will have at its disposal at the
forthcoming meeting, were also to signal bigger downside risks to inflation. In actual fact, the
likelihood according to the SPF of the ECB falling short of its target in the long term has run
parallel to (the much more volatile) market-based inflation expectations since the outbreak of the
debt crisis in 2010 (chart 3). Consequently, analysts in the survey also believe that the likelihood
of falling short of the target has steadily grown. In the last survey in July, the likelihood of the
inflation rate being no higher than 1.4% in five years time was assessed at around one third.

Corporate bonds: a further possible interim step

The latest media reports confirm that the ECB is ready to act; unspecified representatives of the
central bank have hinted that the ECB is thinking about buying corporate bonds. A decision is
not to be expected at the meeting next week though. According to one source, the ECB could
decide in December to begin purchases in the first quarter of 2015. Other sources are more
cautious: this is merely a test balloon, a concrete proposal has not been discussed and there is
no time plan. Like ourselves, other central bank representatives argue that the buying volume of
corporate bonds would be too low and the ECB Governing Council is therefore likely to decide
ultimately for broad-based government bond purchases. According to the sources, a first
decision could be made at the meeting on 22 January as the ECB first wants to await the
outcome of the second TLTRO and needs a first appraisal of ABS purchases.
The latest statements by ECB Governing Council members also point to a waiting stance at the
coming meeting: ECB vice president Constancio had said that the purchase of corporate bonds
was not on the table; the ECB first wanted to assess the effect of measures so far. ECB
Governing Council members Coene and Nowotny stressed that there had been no discussion so
far on possible purchases. Nowotny spoke out in favour of a steady-hand policy. Markets should
thus not expect fresh measures at every other meeting.
CHART 3: Euro zone: Do surveys confirm growing downside risks?
Five-year inflation-linked forward swap rate in five years, likelihood according to SPF that the inflation rate
will be below 1.5% in five years (inverted scale!)
2.9

2.7

10
15

2.5

20
2.3
25
2.1

30

1.9
1.7
2005

35
40
2006

2007

2008

2009

market expectation (lhs)

2010

2011

2012

2013

2014

Likelihood (inflation < 1.5%) (rhs)

Source: Source: ECB, Bloomberg, Commerzbank Research

31 October 2014

Economic Research | Week in Focus

Markus Koch
Tel. +49 69 136 87685

Structured Products: 30y Multitranche offering 4%+

Our medication: A 4.01% fixed coupon amid historically low yields
Ultra-long Euro IRS are trapped at historically low levels. To enhance life insurers
provisions, the Bundesbank suggests a higher net return strategy. With German banks
passing the ECBs stress test, uncertainty with regard to solvency has been largely
removed. We advise long-term investors with minimum return requirements to sell
optionality through buying a 30y callable multitranche with a 4.01% coupon. The issuer
bank may tender five sub-tranches at its discretion.
Despite higher volatility recently in swap markets, the low-yield environment in the euro area
persists. Specifically, ultra-long swaps fail to show any signs of higher rates. In this context, note
that recent Bundesbank research reveals that a considerable share of German life insurers is
facing a serious risk of default by 2023. Apart from retaining profits and/or raising capital, the
recommended medication is to increase net return even though this will entail greater risks.
With enhanced provisions, insurers may better deliver on policyholders minimum return
guarantees.
Regarding issuers solvency, the latest ECB stress test/AQR outcomes have considerably
reduced uncertainty. Consequently the attractiveness of long-term fixed income structures
issued by German banks has improved.
To this end we recommend buying a 30y single callable multitranche offering a fixed-rate coupon
of 4.01% p.a. This product particularly serves investors targeting minimum return levels (due to a
need to match defined benefits) and with known long-term re-investment needs. The call option
on the bond leads to a 167 bp coupon pick-up relative to an equivalent non-callable, fixed-rate
note. The structures coupons may be enhanced further through selling additional optionality.
Specifically the issuer has the right for up to five taps (sub-tranches) after 6,7,8,9 and 10 years.
In contrast to the main tranche, the sub-tranches feature the same size and coupon, but are not
callable. All tranches will mature in 2044.
To get a better handle on the mechanics, note that additional tranches will only be issued when it
is beneficial to the issuer. This would be the case when market rates for a matched new issue
are higher than the multitranches coupon i.e. above 4.01%. If such a scenario unfolds, investors
would incur a disadvantage compared to investing at the then-prevailing market rates.
Nevertheless, in a scenario of ongoing low IRS and only moderate volatility in longer maturities,
investors profit from the large fixed-rate coupon. Recalling adverse scenarios, the sub-tranches
will most likely not be issued and the main tranche may be called in 2024. In a nutshell, investors
may still match at least part of their yield targets through selling optionality. Effectively this works
as a hedge against a sustained low-yield environment.
30-year callable Multitranche with a 4.01% coupon
Issuer:
A- (average)
Type:
Registered
Minimum Lot:
1m
Maturity:
2044 (for all tranches)
Coupon:
4.01%
Possible sequence of
tranches:
The issuer has the right to issue up to five additional sub-tranches,
one per year, after 6,7,8,9 and 10 years.
Call right:
The issuer has a single call right on the main tranche after 10 years
Mother tranche:
10m
Daughters:
10m (each)
Payment:
Annual , in arrears
Basis:
Annual, 30/360

31 October 2014

Major publications from 23 30 October 2014

Credit Note: EU Banks - Relief and questions after stress test results
With the publication of the stress test results it has become clear that fewer than eight banks are
actually left with the need to improve their capital, by a total that is unlikely to exceed 5bn. While
this result clearly ranges below market expectations, market participants can be expected to
become more critical of banks that only passed by an unexpectedly narrow margin. Overall,
however, the spread impact should be limited. more

Cross Asset Feature: Update - Small eurozone countries

Markit announced it will lower the size threshold for sovereign bonds for the iBoxx benchmark
indices from 2bn to 1bn effective from 31 October 2014. The upcoming change will have two
main implications: 1) Countries that are already members of the iBoxx family have bonds
outstanding that will now be included, too. 2) Bonds issued by Slovenia and Latvia will become
part of iBoxx, triggering a first appearance of these countries. We outline the impact of the
change on the various iBoxx indices and on the issuers concerned. more

Economic Insight: Maybe the world can export itself out of trouble
Currently, we hear the n-th replay of that tired old song: not every country can export itself out of
stagnation. Therefore, better stop trying, boost government spending and blame the Germans
for their oh-so-dangerous foreign trade surplus. We beg to differ and demonstrate some of the
many holes in this line of reasoning. more

EM Briefing: Brazil - Dilma Rousseff re-elected President

Dilma Rousseff has been re-elected president for a second four-year term. Given widespread
discontent with the status-quo, quickly providing a credible plan of action will be of paramount
importance in order to avoid further downgrades and the possible loss of the countrys
investment grade rating. more

Commodity Spotlight Energy: Paradigm shift on the oil market

Even with geopolitical unrest on several fronts, the oil price has fallen almost constantly in the
last four months and is currently trading close to a 4-year low. This could indicate a paradigm
shift on the oil market. OPEC countries obviously want to defend their market shares and appear
to be ready to do so even at the cost of a price war. We have therefore cut our Brent price
forecast for 2015 to an annual average of USD 85 per barrel. more

Commodity Spotlight Energy: Weak European gas demand

dampens price
Although gas spot prices have risen lately, they are still much lower than a year ago. We also
anticipate little upward price potential in the long term. For although demand for gas in Europe is
likely to have bottomed out this year, the growth potential is limited. more

FX Hotspot: SEK - Ways out of the ECBs QE trap

Riksbank cut its key rate to zero and has thus reached the end of the line as far as conventional
monetary policy is concerned. In the following note we describe what measures it could now take
to ease its monetary policy further should this become necessary. In the end it is likely to refrain
from unconventional measures though and will accept SEK appreciation against the EUR. more

31 October 2014

Economic Research | Week in Focus

Preview The week of 3 to 7 November 2014

Time

Region Indicator

Period

Forecast

Survey

Last

Saturday, 1 November 2014

1:00

CHN

PMI, manufacturing

sa

Oct

51.0

51.2

51.1

52.5
50.5
50.7
52.0
56.3
16.4

50.7
52.0
56.5
16.6

52.6
50.7
50.7 (p)
51.6
56.6
16.34

2.50
-40.0
-1.0

2.50
-40.0
-0.2

2.50
-41.1
-10.1

mom, k, sa
sa

52.4
58.0
230
58.3

52.4
58.5
211
58.0

52.4 (p)
58.7
213
58.6

mom, sa
mom, sa
%
%
k, sa

2.5
0.1
0.50
0.05
285

2.0
0.4
0.50
0.05

-5.7
0.0
0.50
0.05
287

5.0
2.4

1.8

-5.8
-4.0

0.0
230
5.9

225
5.9

0.0
248
5.9

Monday, 3 November 2014

8:15
8:45
9:00
9:30
15:00
#

SPA
ITA
EUR
GBR
USA

PMI, manufacturing
PMI, manufacturing
PMI, manufacturing, final
PMI, manufacturing
ISM index (manufacturing)
Auto sales

Oct
Oct
Oct
Oct
Oct
Oct

sa
sa
sa
sa
sa
SAAR, mn

Sep
Sep

%
$bn, sa
mom

Tuesday, 4 November 2014

3:30 AUD
RBA interest rate decision
13:30 USA
Trade balance
15:00
Industrial order intake
USA: Congressional elections
Wednesday, 5 November 2014
9:00
9:30
13:15
15:00

EUR
GBR
USA

PMI, services, final

PMI, services
ADP employment change
ISM index (non-manufacturing)

Oct
Oct
Oct
Oct

Thursday, 6 November 2014

7:00
9:30
12:00
12:45
13:30

GER
GBR
GBR
EUR
USA

Industrial order intake

Industrial production
BoE interest rate decision
ECB interest rate decision
Initial claims

Sep
Sep

Nov 1

Friday, 7 November 2014

7:00

GER

7:45
13:30

USA

Exports
Industrial production

Sep
Sep

Industrial production
Non-farm payrolls
Unemployment rate

Sep
Oct
Oct

mom, sa
mom
mom
yoy
mom, k, sa
%, sa

Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 5 hours for EST. 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

31 October 2014

Economic Research | Week in Focus

Dr Christoph Balz
Tel. +49 69 136 24889

Economic data preview:

USA: Alls well that ends well?

Should the US economy follow up strong growth in the second and third quarters (4.6%
and 3.5%) with another above-average quarter, the weak start to the year (-2.1%) will
probably be forgotten once and for all. We expect next weeks first indicators for October
to strengthen hopes of a decent final quarter.
With the employment report and ISM index, two of the most-watched US indicators are due out
next week. They will also give a first picture of how the US economy has started the fourth
quarter. In the case of the labour market, it is noticeable how stable the recovery has been so
far. The number of jobs in the private sector has been rising by about 2%, year-on-year, since
mid-2011 (Chart 4). This corresponds to the pace at the peak of the upswing between 2001 and
2007. Private employment only rose faster in the 1990s, but this was due to technology bubble.
The current increase in employment is not being fuelled by market distortions and is fairly
substantial, although the number of jobs in the overall economy is not rising at quite such a
sharp rate, as the public sector has only recently started to recruit additional staff again.
Yet it is enough to push down unemployment; jobs are being created at a faster pace than
people are entering the labour market. The total population is growing by less than 1% a year.
The employable percentage is growing at an even slower pace as the sizeable baby boom
generation is now retiring. Consequently, the unemployment rate is falling steadily and, at less
than 6%, is close to the level the Federal Reserve regards as the natural long term rate (Chart
5).
We expect that little has changed in this trend in October. Unemployment has probably risen by
230,000, which is roughly the average of the past three months (consensus 225,000). As the
unemployment rate dropped surprisingly sharply in September, we expect the labour market to
take a breather in October and predict an unchanged rate of 5.9% (consensus 5.9%).
US industry is still one of the main drivers of the economic recovery. We expect this to be
reflected in another above-average ISM index, although the level is likely to have dropped
marginally from 56.6 to 56.3 (consensus: 56.5) in line with on balance slightly weaker regional
indicators.

Germany: Orders pick up, but not enough

The late summer holidays in most German federal states pushed orders down in August. There
should be a counter-movement in September. We anticipate a gain versus the previous month of
2.5% (consensus: 2.0%). The effect of the holidays should also have had a positive impact on
industrial production, especially the automotive sector. Industrial production probably rose in
September by 2.4% (consensus: 1.8%) on the previous month. Yet even these upwardly
distorted figures would not be enough to end the downtrend in orders and industrial production.
CHART 4: USA Stable rise in employment

CHART 5: USA Full employment will soon be reached

private-sector employment, year-on-year change in per cent

Unemployment rate, long-term level according to estimates of FOMC

members

4
3
2
1
0
-1
-2
-3
-4
-5
-6
1991

10
9
8
7
6
5
1994

1997

2000

2003

2006

Source: Global Insight, Commerzbank Research

31 October 2014

2009

2012

4
2009

2010

2011

2012

2013

2014

Source: Global Insight, Commerzbank Research

Economic Research | Week in Focus

Central Bank Watch (1)

Fed
The Fed terminated QE3 at its meeting on 28/29 October as
expected. For the time being, the US central bank will
continue to invest the proceeds from maturing bonds in
securities. In this way the Fed will prevent a contraction in its
asset portfolio. And finally, the Fed confirmed the key rate
corridor at between 0.00% and 0.25%.
With its statement, the Fed gave a clear signal that the next
step on the way back to normal will be a rate hike. The Fed
put the decline in market-based inflation expectations into
perspective and reiterated its view that the risk of a too-low
inflation rate had slightly diminished. Moreover, the Fed now
views the labour market more positively.
The Fed again voiced its expectation that it will keep interest
rates at current levels near zero for a considerable time.
But it is also clear that not the calendar but economic data
will determine the timing of the first rate move. And this step
could occur sooner than anticipated if the data turns out
better than expected. Since the Fed did not even mention a
resumption of asset purchases as an option, a rate move will
probably occur around the middle of 2015. We see our
forecast to this effect confirmed.
Bernd Weidensteiner
+49 69 136 24527

CHART 6: Expected interest rate for 3-month funds (USD)

2,0
1,5
1,0
0,5
0,0
current Dez 14
Futures

Mrz 15

30.10.14

Jun 15

Sep 15

23.10.14

Dez 15

Commerzbank

TABLE 1: Consensus forecasts Fed funds rate

Q4 14

Q2 15

Q4 15

Consensus

0,25

0,25

1,00

High

0,25

1,00

2,00

Low

0,25

0,25

0,25

Commerzbank

0,25

0,50

1,50

Source: Bloomberg, Commerzbank Research

ECB
Regarding the issue of further monetary measures, ECB
Board Member Praet noted that it had eased monetary policy
in June and September. However, some observers doubt
that these will suffice to achieve the intended significant
expansion of central bank balance sheet. "The debate on
additional measures is still ahead of us," Praet said.
ECB Executive Board member Lautenschlger confirmed her
view that government bond purchases should be introduced
only as a last resort to combat deflation: "I am critical of
major bond purchases ... because the balance between
costs and benefits is currently negative."
According to council member Noyer, the ECB would "not
accept passively" an inflation target. However he noted that
purchases of government bonds would be difficult because of
the greater fragmentation of the bond markets in the euro
area than in the US.
ECB Governing Council member Hansson spoke out against
government bond purchases "in the coming months". The
recent ECB measures were "fairly extensive," argued
Hansson. The Governing Council now needs time - "maybe
until next spring" - in order to estimate their impact.
Dr Michael Schubert
+49 69 136 23700

10

CHART 7: Expected interest rate for 3-month funds (EUR)

1,0
0,8
0,6
0,4
0,2
0,0
current Dez 14
Futures

Mrz 15

30.10.14

Jun 15

23.10.14

Sep 15

Dez 15

Commerzbank

TABLE 2: Consensus forecasts ECB minimum bid rate

Q4 14

Q2 15

Q4 15

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

31 October 2014

Economic Research | Week in Focus

Central Bank Watch (2)

Bank of England (BoE)
The majority view of the MPC was encapsulated in a speech
this week by Deputy Governor Cunliffe who noted that the
absence of wage inflation at the same time as unemployment
was falling sharply was a puzzle, and that "Understanding
why that has happened and how long it will persist is now
key to deciding policy." He also pointed out that despite the
recent squeeze on real wages, there is little evidence that
workers are demanding higher wages now that the economy
is looking stronger. This in turn "implies that we can afford to
maintain the current degree of monetary stimulus for a longer
period than previously thought." Any chance that the MPC
will adjust policy at next week's meeting is thus pretty close
to zero. The Committee will be given a preview of the BoE's
staff forecast which will be publicly unveiled in two weeks'
time along with the Inflation Report. Whilst the BoE's
attention in recent months has largely focused on the real
economy, we suspect that it may well switch towards inflation
in the months ahead. With commodity prices unlikely to make
much of a contribution to price pressure in the near-term,
inflation is likely to continue running below the BoE's 2%
target for some time to come, which makes the case for a
rate hike even more difficult.

CHART 8: Expected interest rate for 3-month funds (GBP)

2,0
1,5
1,0
0,5
0,0
current

Dez 14

Mrz 15

Jun 15

Sep 15

Dez 15

Futures
30.10.14

23.10.14

Commerzbank

Source: Bloomberg, Commerzbank Research

Peter Dixon
+44 20 7475 4806

RBA (Australia)
Australian data in October was a mixed bag. Business
sentiment has blurred moderately, which suggests that
investment activity ought to remain lacklustre. Consumer
demand is modest, only residential construction is booming.
Moreover, the inflation rate has edged down markedly. In the
third quarter, it posted a rate of 2.3%, thus slipping back into
the lower half of the RBAs target corridor. Currently, labour
market data are showing statistical flaws. Following changes
in data collection, the Bureau of Statistics saw problems with
seasonal adjustment. In this respect, the RBA is poking
around in the dark.
On balance, the RBAs economic concerns, which were
already evidenced in the minutes of its October meeting,
should have intensified. The catalysts were the weaker
dynamics in key export markets, particularly China, declining
commodity prices and the AUD, which remains too strong
from the perspective of the RBA, thus failing to support the
economy as would normally be expected in a phase of falling
commodity prices. As long as global interest rates remain at
low levels, no improvement is to be expected on this front.
Against this backdrop, we expect the RBA to leave the target
for the cash rate unchanged at 2.5%. Its stance is likely to
remain neutral.

CHART 9: Expected interest rate for 3-month funds (AUD)

4,0
3,5
3,0
2,5
2,0
current

Dez 14

Mrz 15

Jun 15

Sep 15

Dez 15

Futures
30.10.14

23.10.14

Commerzbank

Source: Bloomberg, Commerzbank Research

Elisabeth Andreae
+49 69 136 24052

31 October 2014

11

Economic Research | Week in Focus

Markus Koch
Tel. +49 69 136 87685

Bond market preview:

How strong will the headwind for Bunds from the US bond market become?

Apart from some rhetoric that has already been priced in, the ECB will continue to practice
restraint at its Council meeting in November, whilst the US data releases due in the week
ahead should combine to sour the currently bullish market sentiment. For this reason we
would sell ten-year US Treasuries versus Bunds and furthermore recommend a tactical
duration short position in Bunds.
TABLE 3: Weekly outlook for yields and curves
Bunds

US Treasuries

Yield (10 years)

Higher

Higher

Curve (2 - 10 years)

Neutral

Flatter

Source: Commerzbank Research

Outlook for the Bund

future,
3 7 November
Economy

Inflation

Monetary policy

Trend

Supply

Risk aversion

Following the surprisingly hawkish Fed statement, the US$ government bond and swap curves
have flattened massively from the short end. The market is now looking to next weeks ECB
Council meeting (see page 5) and data releases from Germany and (especially) the US. The
successful start of the covered bond purchase programme, together with the current slight
upward correction in break-even inflation, should alleviate the pressure on the ECB to announce
further steps before the recent QE measures take effect. At the end of the day, this meeting is
unlikely to produce market relevant stimuli because, apart from some priced-in rhetoric, the ECB
Council members will probably continue to exercise restraint. On a medium-term perspective,
however, the pressure will increase noticeably, should survey-based inflation expectations also
continue to decline (Chart 10).
Another above-average ISM index and the US employment report for October will suggest that
the US economy continued to grow at a solid rate in the final quarter of 2014, which will be a
burden on the US Treasury market. We would use the current market rally from the recent yield
highs as an opportunity for selling ten-year US Treasuries versus Bunds with the same maturity.
Below 0.9%, we recommend a tactical duration short position in Bunds, because for the coming
week we forecast event risks that will weigh on the bond market on balance. We expect ten-year
Bund yields to re-test the 0.9% mark (Chart 11) and see ten-year Treasury yields returning to the
range of 2.35% to 2.45%.

CHART 10: Significant downside risks to survey-based

inflation expectations in the next SPF

CHART 11: Facts to take the helm at the start of the month
Yields of ten-year Bunds and US Treasuries in percent

5y5y inflation swap forward (5d MA) and SPF 5y ahead inflation
expectations in %

35

2.7

1.4

30

2.6

1.3

25

2.5

20

2.4

15

2.3

10

2.2

5
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Global Insight, Commerzbank Research

12

2.1
Jul 14

1.2
1.1
1.0
0.9
0.8
0.7
Aug 14

Sep 14

Treasuries (LS)

Oct 14
Bunds (RS)

Source: Bloomberg, Commerzbank Research

31 October 2014

Economic Research | Week in Focus

Esther Reichelt
Tel. +49 69 136 41505

FX market preview:
After the Fed is before the ECB

The era of unconventional monetary policy in the US has come to an end. The FX market
is increasingly pricing in a normalisation of US monetary policy. The BoE on the other
hand is trying to back-paddle cautiously which is affecting sterling. However, the main
highlight of the FX markets week will be the ECB meeting on Thursday. The euro remains
under pressure.
TABLE 4: Expected weekly trading range
Range

Bias

EUR-USD

1.2375-1.2750

EUR-JPY

137.00-142.00

USD-JPY

108.50-113.50

Range

Bias

EUR-GBP

0.7775-0.7950

GBP-USD

1.5800-1.6150

EUR-CHF

1.2000-1.2120

Source: Commerzbank Research

October has been an eventful month for EUR-USD (Chart 12). Speculation the Fed might
postpone the normalisation of its monetary policy because of fears about global economic
weakness and an excessively strong dollar, had supported the currency pair. For the time being
the Fed has dispelled such fears. The ECB is probably grateful that EUR-USD is likely to resume
its downtrend following the FOMC report. Now that US central bankers have made it clear that
they will stick to their normalisation schedule, FX investors attention is focussing on Europe.
On Thursday both the ECB and the Bank of England are due to take their monetary policy
decision. The FX market expects both central banks to leave their monetary policies unchanged.
However, as always the devil will be in the detail. In the United Kingdom, current data suggests
that the recovery is slowing down. The fall in inflation provides scope for the BoE to postpone a
first rate hike. If the BoE also refers to the moderate data developments , sterling will continue to
struggle. However, particularly against the euro, the pound is in a strong position. The market
expects further expansionary ECB measures in the coming months as long-term inflation
expectations are no longer firmly anchored (Chart 13). The only question is what exactly these
will look like. This means the FX market will listen very carefully to what ECB President Mario
Draghi has to say. Following rumours about the purchase of corporate bonds the market might
be disappointed should the ECB assume a wait and see approach. However, that is likely only to
temporarily slow the downtrend in EUR-USD.
CHART 12: EUR-USD is once again trading at the levels
seen in early October

CHART 13: In the absence of a notable improvement on the

inflation front the euro remains under pressure

EUR-USD spot, daily data

5x5 inflation expectations based on inflation swaps, euro zone

consumer price index (excluding tobacco)

1.290

2.3

1.285

2.2

1.280

2.1

1.275
1.270

2.0

1.265

1.9

1.260
1.255

1.8

1.250
1.245
01 Oct

08 Oct

15 Oct

Source: Bloomberg, Commerzbank Research

31 October 2014

22 Oct

29 Oct

1.7
Jan-14

Mar-14

May-14

Jul-14

Sep-14

Source: Commerzbank Research

13

Economic Research | Week in Focus

Markus Wallner
Tel. +49 69 136 21747

Equity market preview:

Q3 reporting season: DAX companies off to a weak start
The Q3 reporting season is gaining momentum. Some 31% of DAX companies and 26% of
MDAX companies have now presented their reports. The results are a rather mixed bag,
with the MDAX companies somewhat more convincing than the DAX companies. From
todays vantage point, currency losses exerted much less of a drag on company results
in Q3 than in the preceding quarters thanks to the weaker euro. These mixed results will
hardly support the German equity market.
TABLE 5: DAX index slowly recovering
Earnings 2014E
Performance (%) since

Index points

Growth (%)

P/E 2014E

Index

30/09

30/06

31/12

Current

31/12

Current

31/12

Current

DAX 30

9,083

-4.1

-7.6

-4.9

707.7

731.1

1.9

11.6

12.8

31/12
13.1

MDAX

15,765

-1.4

-6.3

-4.9

933.7

994.2

27.0

41.6

16.9

16.7

Euro Stoxx 50

3,022

-6.3

-6.4

-2.8

221.8

242.3

4.7

12.1

13.6

12.8

S&P 500

1,982

0.5

1.1

7.3

116.6

119.3

7.5

9.9

17.0

15.5

Source: Commerzbank Corporates & Markets, I/B/E/S

The reporting season for Q3 is picking up momentum. Some 31% of the companies in the DAX
and 26% of MDAX companies have now presented their reports, with the results turning out very
mixed (table 4):

DAX: Up to now, 44% of companies exceeded our expectations, 23% were in line and 33%
of the results fell short of our expectations. This results distribution for Q3 is currently well
below that of the previous year and also remains below the average of the last eight
quarters.

MDAX: To date, 38% of companies exceeded our expectations, 31% were in line and 31%
of the results fell short. This distribution is above that of last year, but remains below the
average of the last eight quarters.

We find the Q3 results of MDAX companies somewhat more convincing than the figures
presented by DAX companies. Thanks to the weaker euro, the results in Q3 presented up to now
were far less affected by negative currency losses than in the preceding quarters. The mixed
results are unlikely to offer broad-based support for the German equity market at present.
CHART 14: Q3 results of MDAX companies have been more convincing so far
Distribution of quarterly results for Q3 in %
DAX: R epo rting Distribution
Quarter
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Avg.

Above
E xpectations
44,4%
24,1%
34,5%
31,0%
44,8%
41,4%
44,8%
41,4%
44,8%
38,4%

Change y-o-y
in %pts
-0,4
-17,2
-10,3
-10,3
0,0

In Line
Expectations
22,2%
51,7%
41,4%
41,4%
41,4%
37,9%
31,0%
44,8%
24,1%
39,2%

C hange y-o-y
in % pts
-19,2
13,8
10,3
-3,4
17,2

Below
Expectations
33,3%
24,1%
24,1%
27,6%
13,8%
20,7%
24,1%
13,8%
31,0%
22,4%

Change y-o-y
in % pts
19,5
3,4
0,0
13,8
-17,2

In Line
Expectations
30,8%
52,0%
46,0%
52,0%
48,0%
38,0%
34,0%
54,0%
32,0%
44,5%

C hange y-o-y
in % pts
-17,2
14,0
12,0
-2,0
16,0

Below
Expectations
30,8%
22,0%
14,0%
16,0%
30,0%
24,0%
36,0%
14,0%
28,0%
23,0%

Change y-o-y
in % pts
0,8
-2,0
-22,0
2,0
2,0

MDAX: Rep orting Distribution

Quarter
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Avg.

Above
E xpectations
38,5%
26,0%
40,0%
32,0%
22,0%
38,0%
30,0%
32,0%
40,0%
32,5%

Change y-o-y
in %pts
16,5
-12,0
10,0
0,0
-18,0

Source: Company data, Commerzbank Research

14

31 October 2014

Economic Research | Week in Focus

Eugen Weinberg
Tel. +49 69 136 43417

Commodities market preview:

Certainly uncertain

US dollar strength still stands in the way of a sustained recovery in commodity prices.
That said, the data on the purchasing managers indices from China and the USA next
week could lead to a stabilisation of prices. On the oil market, Saudi Arabia could help to
settle prices if it does not further lower the official selling prices for its crude oil for
December which will thus calm fears of a price war within OPEC.
TABLE 6: Tendencies in important commodities
Per cent change

Tendency Commodity specific events

30 Oct. 1 week

1 month

1 year short-term

Brent (USD per barrel)

84.8

0.3

-12.5

-21.4

Official selling price (OSP) from Saudi Arabia

Copper (USD per ton)

6682

2.0

-0.6

-6.8

ISM USA, PMI China

Gold (USD per troy ounce)

1240

0.1

1.3

-7.0

Source: Bloomberg, Commerzbank Research

Oil prices have recovered somewhat recently after several weeks of huge selling pressure. The
market has clearly already priced in negative expectations relating to oversupply on the oil
market. Whether OPEC members will agree on a large enough production cut at their meeting at
the end of November to restore market balance is questionable though. An indication of this
could come from Saudi Arabias official selling prices, due to be published next week. Compared
to international reference prices, Saudi Arabia has recently offered its crude oil at prices last
seen in December 2008 (Chart 15). This has helped to fuel speculation about a price war within
OPEC. We are sceptical about a sustained price recovery in Brent above 90 USD per barrel and
expect prices to stabilise at around 85 USD per barrel in the coming months.
Base metal prices are rising and falling almost in line with the expectations of the purchasing
managers and fluctuations in market sentiment about China (Chart 16). While the consensus
already expects the economic recovery to continue, if the purchasing managers indices are
stronger, contrary to expectations, we could see a temporary covering of short sales and sharper
price rises given the very negative sentiment for base metals.
Not even robust gold import data from China could protect precious metal prices from the
stronger US dollar. Even if a renewed breakthrough of the psychologically important 1200 USD
per troy ounce mark and possibly also a renewed test of the four-year low at around 1200 USD
per ounce are likely, gold should gain support from strong Asian demand and speculation of a
possible victory by the supporters of the Swiss gold referendum. At the end of November, the
people of Switzerland vote on whether the Swiss National Bank has to hold a minimum 20% of
its currency reserves in gold in future, which would force the SNB to buy substantial quantities of
gold.
CHART 15: Saudi Arabia has markedly cut prices of late

CHART 16: China PMI paralleled by industrial metal prices

Spread of Saudi Aramco Arab Light vs Platts Oman/Dubai for Asia,

in USD per barrel

CSI 300 China equity index, LME industrial metal prices;

index 1/1/2011 = 100

5
4
3
2
1
0
-1
-2
2001

2003

2005

2007

2009

Source: Bloomberg, Commerzbank Research

31 October 2014

2011

2013

110
105
100
95
90
85
80
75
70
65
2011

2012
Equity index

2013

2014
LMEX

Source: Hong Kong Statistical Office, Commerzbank Research

15

Economic Research | Week in Focus

Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)

Inflation rate (%)

2013

2014

2015

2013

2014

2.2

2.2

2.9

1.5

1.7

1.8

2.0

2.3

2.5

0.9

2.1

2.0

Japan

1.5

1.0

1.3

0.4

2.8

1.5

Euro area

-0.4

0.7

0.8

1.4

0.6

1.0

- Germany

0.1

1.3

1.3

1.5

1.1

2.1

- France

0.4

0.3

0.5

0.9

0.6

0.7

- Italy

-1.7

-0.2

0.3

1.2

0.4

0.6

USA
Canada

2015

- Spain

-1.2

1.4

2.3

1.4

0.0

0.5

- Portugal

-1.4

1.0

1.5

0.3

-0.2

0.8

- Ireland

0.2

5.2

3.1

0.5

0.6

1.4

- Greece

-4.2

1.0

2.0

-0.9

-1.3

0.5

United Kingdom

1.7

3.0

2.6

2.6

1.6

1.9

Switzerland

2.0

1.7

1.8

-0.2

0.0

0.5

China

7.7

7.3

6.5

2.6

2.3

2.5

India

4.7

5.8

6.2

6.3

6.5

6.2

Brazil

2.5

0.3

0.9

6.2

6.3

6.5

Russia

1.3

0.3

0.9

6.8

7.3

6.5

World

2.9

3.1

3.4

The ultra-expansionary policy of the Fed is

boosting the US economy. At the same time,
fiscal policy is at least no longer a headwind.
We therefore expect US growth to markedly
accelerate.
Growth in China decelerates further, also due
to decreasing house prices.
The recovery in the euro zone will only
continue at a slow pace. GDP growth will
remain lower than that of the USA.
EMU has survived the sovereign debt crisis,
but is gradually evolving into an Italian-style
monetary union.
Despite its current weakness, the German
economy looks set to continue outperforming
the rest of the euro area partly because ECB
target 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)

30.10.2014

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

Federal funds rate

0.25

0.25

0.25

0.50

1.00

1.50

3-months Libor

0.23

0.25

0.30

0.80

1.35

1.90

2 years*

0.48

0.70

0.90

1.20

1.60

2.00

5 years*

1.59

2.10

2.40

2.70

2.95

3.20

10 years*

2.29

2.70

2.90

3.10

3.30

3.50

Spread 10-2 years

181

200

200

190

170

150

Swap-Spread 10 years

15

10

10

10

15

15

USA

Euro area
Minimum bid rate

0.05

0.05

0.05

0.05

0.05

0.05

3-months Euribor

0.09

0.05

0.05

0.05

0.05

0.05

2 years*

-0.05

-0.10

-0.10

-0.10

-0.05

0.00

5 years*

0.14

0.25

0.20

0.25

0.35

0.40

10 years*

0.84

1.10

0.80

1.00

1.20

1.35

Spread 10-2 years

89

120

90

110

125

135

Swap-Spread 10 years

23

15

25

30

35

35

United Kingdom
Bank Rate

0.50

0.50

0.75

0.75

1.00

1.25

3-months Libor

0.56

0.80

0.90

1.05

1.25

1.40

2 years*

0.61

1.00

1.25

1.30

1.35

1.55

10 years*

2.21

2.60

2.85

3.05

3.20

3.35

The Fed has ended its QE3 programme.

Interest rate hikes are on the cards from
2015Q2, due to a continuously decreasing US
unemployment rate and gradually rising
inflation.
Due to the deteriorating growth outlook and
increasing downside risks for inflation we
expect the ECB to announce QE within the
next 12 months.
10y Bund yields are likely to stabilise around
1% later this year when the Fed
communication changes but mark new record
lows when the ECB announces QE in 2015.
Thereafter, yields should rise gradually. The
structurally low interest rate environment
remains intact.
The focus on the Feds lift-off will put upward
pressure on US$ rates. A return to 3% for 10y
USTs is only on the cards for 2015, though.
The curve is in for a textbook-style flattening
via the short-end in the coming quarters.
Risk premiums of peripheral government
bonds are set to decline further.

TABLE 9: Exchange rates (end-of-quarter)

30.10.2014

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

EUR/USD

1.26

1.25

1.22

1.19

1.17

1.15

USD/JPY

109

110

113

116

118

120

EUR/CHF

1.21

1.21

1.21

1.21

1.21

1.21

EUR/GBP

0.79

0.77

0.76

0.75

0.74

0.73

EUR/SEK

9.27

9.10

9.00

8.95

8.90

8.90

EUR/NOK

8.46

8.05

7.80

7.70

7.70

7.65

EUR/PLN

4.22

4.15

4.10

4.08

4.06

4.05

EUR/HUF

309

312

310

309

308

306

EUR/CZK

27.73

27.50

27.30

27.00

27.00

26.90

AUD/USD

0.88

0.87

0.85

0.83

0.81

0.80

NZD/USD

0.78

0.77

0.75

0.73

0.71

0.70

USD/CAD
USD/CNY

1.12

1.13

1.15

1.16

1.17

1.18

6.12

6.10

6.05

6.00

5.95

5.95

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 high yielding G10 currencies should
particularly suffer from US rate hikes.
EUR will remain under pressure due to
increasing likelihood of an ECB QE program.
ECB wants a weaker EUR and is active in
achieving this goal.
CEE currencies are generally benefiting from
the dovish ECB backdrop, meaning central
banks have room to cut rates further. HUF,
PLN and RON should trade range-bound,
while EUR/CZK will float above the 27.0 floor
set by the CNB.

Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs

16

31 October 2014

Economic Research | Week in Focus

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17

Economic Research | Week in Focus

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