economic-research.bnpparibas.com

/// 27 March 2015 /// 15-12

With the euro’s effective exchange rate down 10%, the EMU can hope for market share gains and an extra boost in activity of about a half point of GDP in 2015. Yet, the effect is just the opposite for the eurozone’s trading partners whose currency has appreciated. The United States, for example, must now deal with a much stronger dollar. The US economy is much more internationalised than is suggested by the low weighting of exports as a share of GDP (14%), since intra-group trade plays a big role. Moreover, the dollar’s appreciation pulls up the other currencies that are pegged to it, which makes the entire US productive base more expensive, regardless of the region in which it is located. The Chinese yuan has increased considerably, gaining more than 25% against the euro over the past year. Most major corporations have already warned of pressure on sales and margins, which could curb investment. On the other hand, growth is supported by low oil prices, buoyant job creations and robust consumption. These factors will help soften the adverse effects of the strong dollar. Yet we would be wrong to consider those effects as negligible. The Federal Reserve, which is preparing the way for an interest rate hike, is bound to integrate the dollar’s appreciation in its timing.

Summary

United States One quarter does not make a trend First-quarter growth will be disappointing, because of temporary adverse factors. Prospects remain as strong as the labour market. The main risk in this scenario is how the strong dollar will affect activity. However, the correction that started with the most recent FOMC meeting is allaying those fears. Page 2

Eurozone Positive pieces of news in Q1 2015 Survey and hard data signal that the recovery gained momentum over the first quart of the year. The update of our now-casting model suggests that GDP growth accelerated to around 0.5-0.6% q/q in Q1 Thereafter a combination of three positive shocks will support the recovery. Page 3

Economic indicators ► Page 4

Market overview ► Page 5

Also in

Their currency, their problem ? In less than a year, the dollar appreciated by almost 10% in real

effective terms The Fed is concerned…

EXPENSIVE GREEN BACK

Real effective exchange rate of the dollar, 1973=100

Sources :Federal Reserve

THE WEEK ON THE MARKETS

Source : Thomson Datastream

80

85

90

95

2010 2011 2012 2013 2014 2015

Week 23-3 15 > 26-3-15

CAC 40 5 087 } 5 006 -1.6 %

S&P 500 2 108 } 2 056 -2.5 %

Volatility (VIX) 13.0 } 15.8 +2.8 %

Euribor 3M (%) 0.02 } 0.02 +0.0 bp

Libor $ 3M (%) 0.27 } 0.27 +0.2 bp

OAT 10y (%) 0.39 } 0.45 +6.8 bp

Bund 10y (%) 0.19 } 0.22 +2.9 bp

US Tr. 10y (%) 1.93 } 2.01 +7.8 bp

Euro vs dollar 1.08 } 1.09 +1.1 %

Gold (ounce, $) 1 185 } 1 206 +1.8 %

Oil (Brent, $) 54.6 } 58.0 +6.2 %

Alexandra Estiot 27 March 2015 – 15-12

2 economic-research.bnpparibas.com

US One quarter does not make a trend

■ First-quarter growth will be disappointing, especially given that falling oil prices were expected to provide a boost. Temporary adverse factors – such as weather conditions and labour disputes – are partly responsible.

■ The labour market is showing impressive momentum. Jobs alone suggest that growth will rebound.

■ The main risk in this scenario is how the strong dollar will affect activity. However, the correction that started with the most recent FOMC meeting is allaying those fears.

Growth levelled off in early 2015, although that is no cause for alarm. It could be the result of another harsh winter, while strike action at west coast ports has affected foreign trade. It appears that the positive impact from the slump in oil prices will be slow to arrive. In February, retail sales excluding volatile components (gasoline and cars, along with building materials which, in the US national accounts, are included under residential investment not consumer spending), rose only 0.1% after falling in December and January. Over the same period, manufacturing production fared even worse, falling for three straight months: 0.1% in December, 0.3% in January and 0.2% in February. In addition, leading indicators are weak. The ISM manufacturing index, although it remains comfortably above 50, is continuing to fall, while the initial regional surveys by the New York and Philadelphia Feds are not showing any upturn in confidence. Despite the mixed news, we remain optimistic about the US growth outlook. In our view, disappointing figures in early 2015 are due to temporary factors, and the fundamentals remain strong. Job creation is a major source of optimism. Since March 2014, it has been running at 275,000 per month and the improvement is broad-based, with payrolls growing in the public sector, manufacturing, construction and private services. That puts the poor sales and production data into context, suggesting that companies regard recent weakness as a blip. Otherwise, job creation would not have remained so strong. Strong impetus in the labour market is also pushing up households' disposable income. In January, household purchasing power was at its highest since 2006, excluding exceptional movements arising from changes in taxation. The fact that these very positive trends are not yet driving a rebound in activity comes from households currently increasing their savings, putting aside 5.5% of their disposable income in January as opposed to 4.5% in October. A temporary increase in the savings rate is not surprising. We often see this happening when tax cuts take place. The strength of the jobs market means that households will eventually increase their income expectations, at which point we will see a fall in the savings rate. Wage growth is a key factor in this respect: it remains very disappointing but should improve as

underemployment falls. Fed officials do not seem overly worried about the tepid wage growth. They have again cut their estimate of the NAIRU (non-accelerating inflation rate of unemployment), now estimated to range between 5% and 5.2%, still below the current unemployment rate (5.5% in February). That makes it less surprising that wage growth is failing to accelerate. FOMC members seem more concerned by the dollar's rapid rise. Between July 2014 and February 2015, the dollar's real effective exchange rate – i.e. its value against a basket of currencies taking into account relative movements in prices – rose 10%, and it was up 16% against the main international currencies. The dollar rally is similar to that seen in early 2008, which was driven by flight to safety. However, the dollar then corrected sharply. In fact, the decline in US foreign trade in 2008 was more the result of falling global demand. The strong dollar is having a more unquestionable impact on import prices. Between June 2014 and February 2015, the total import price index fell 9.8%, and excluding petroleum products the decline was 1.6%. The effect on exports is harder to quantify, since disruptions at several major west coast ports clearly played a major role in depressing US exports in January. Exports to Pacific Rim countries fell much more sharply (-10.8% year-on-year) than those to the other trading partners (-0.9%) of the US. Since the dollar's external value is not part of the Fed's brief, we cannot say that the decisions it took last week were designed to stop the dollar rally. However, that is what happened. As news emerged from the FOMC meeting – the policy statement followed by updated forecasts and the press conference – the dollar fell, and its exchange rate against the euro even broke briefly above USD 1.10. Since then, the dollar did not resume its appreciation, and stabilised this week around 1.09.

Temporary slowdown Year-on-year, 3-month moving averages, % ▬ Manufacturing output ; ▬ Retail sales (ex. gaz, cars & build. Mat.)

Chart 1 Source: Federal Reserve, US Department of Commerce

2

3

4

5

6

2012 2013 2014 2015

Clemente De Lucia 27 March 2015 – 15-12

3 economic-research.bnpparibas.com

Eurozone Positive pieces of news in Q1 2015

■ Survey and hard data signal that the recovery gained momentum over the first quart of the year.

■ The update of our now-casting model suggests that GDP growth accelerated to around 0.5-0.6% q/q in Q1

■ Thereafter a combination of three positive shocks will support the recovery.

Survey data on the rise After ending the year better-than-expected, the eurozone entered in 2015 with the right foot. Survey data signal that the recovery gained momentum over the first three months of 2015. This week Markit Economics published its closely watched Composite PMI for Activity which came in at 54.1, up by almost a full point with respect to the previous month and by almost two points with respect to the previous quarter. A more in depth look at survey details suggest that the recovery is moving toward a more advanced phase where domestic demand, rather than exports, leads activity. The most domestically oriented services sector seems growing at a faster pace than the manufacturing industry, which is, by contrast, more export sensitive. Details from the European Commission survey confirm this. According to preliminary estimates, the consumer confidence indicator (released also this week) gained 3 points in March, climbing to its highest level since summer 2007.

Positive hard data as well Available hard data confirm this positive view. The retail sales growth rate accelerated to 1% m/m in January, after +0.4% in December. Even assuming zero growth in the remaining two months of the quarter (a rather conservative assumption given the dynamic of survey data – see chart 1- and the expected path of real disposable income), sales would increase by 1.5% q/q in Q1, well above the growth rate recorded in Q4 2014. This sharp increase of retail sales, a good coincident indicator of private consumption, suggests that the latter probably performed quite well during the quarter. The message coming from industrial production, the other hard data available so far, is somewhat less positive. Yet, orders and survey data suggest

an increase of output in the range of 0.3-0.4% in Q1.

Financial conditions Financial and monetary conditions have definitely improved over the quarter. The announcement at the end of January and then the launch at the beginning of March of a full QE program by the ECB have contributed to push significantly down medium to longer-term interest rates, particularly relevant for households and firms purchase and investment decisions. QE has also created a rally in equity markets with stock indices reaching levels not seen for several years. Last but not least, the strong depreciation of the currency is another element favouring financial and monetary conditions. Although changes in financial and monetary conditions pass on the economy

with some lags, some incipient sign of improvement is already evident looking, for instance, at lending statistics. While credit to the private sector continued to contract on a yearly basis in February 2015 (released this week), although at a slower pace, the monthly flows were positive for the third month in a row, after contracting almost permanently over the previous three years. The better-than-expected demand at the first “conditional” TLTRO (the ECB injected almost EUR 100bn at the one conducted mid-March) suggests that commercial banks expect credit demand to increase. The liquidity injected through the TLTRO can be indeed used to satisfy the new tougher regulatory requirements (Liquidity Coverage Ratio). Taking together all these pieces of information, our now-casting model (see chart 2) suggests that GDP growth has probably accelerated in Q1 at around 0.6% Q/Q after +0.3% Q/Q in Q4 2014. Going forwards, the combination of three positive shocks, i.e. the fall in oil prices, the euro depreciation and an extremely loose monetary policy, will support the recovery.

A consumption led recovery? ▬Retail sales (3-m m.a., y/y); --- Consumer confidence indicator

Chart 1 Sources: Eurostat, European Commission

Gaining momentum ▬Q/Q GDP growth and model projections*

Chart 2 Source: BNPParibas

*For model details see: “Eurozone Gathering clouds” EcoWeek, 17/10/2014

-40

-35

-30

-25

-20

-15

-10

-5

0

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-5.0

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-3.0

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1999 2001 2003 2005 2007 2009 2011 2013 2015

0.0

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1.0

Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15

High

Low

Average

OECD Team 27 March 2015 – 15-12

4 economic-research.bnpparibas.com

To watch from 30 March to 3 April 2015

Monday 30 March 2015 JAPAN: Industrial production (February)

Production may have dropped by about 3% in February, after having been boosted in the previous month by strong Asian demand ahead of the Chinese New Year.

EUROZONE: Economic Sentiment Indicator (March)

Confidence is improving in the eurozone. The combination of three positive shocks (fall in oil prices, euro depreciation, QE) will further boost confidence in March. The Economic Sentiment Indicator, at 102.1 in February might have increased by around 1 point

Tuesday 31 March 2015 EUROZONE: Inflation (March)

The inflation rate has probably bottomed out. After losing 0.3% y/y in February and 0.6% in January, it probably remained in negative territory in March, but barely.

FRANCE: Retail sales (February)

Retail sales should post, in February, their third montlhy rise in a row, supported by the purchasing power gains arising from the fall in oil prices. The significant improvement in consumer confidence is consistent with this momentum.

Wednesday 01 April 2015 UNITED STATES: Manufacturing ISM (March)

We expect the national ISM manufacturing index to have ticked down to 52.5 in March, moving back in line with regional surveys. The focus will be on the employment index: if it holds up, it will be positive news, softening the overall slide.

JAPAN: Tankan survey (March)

The sentiment indicator may improve by three points for large manufacturers, but remain largely unchanged for non-manufacturers and small firms.

UNITED KINGDOM: PMI manufacturing (March)

In March, the manufacturing PMI index should further increase (after 54.1 in February) in line with a somewhat stronger outlook in the eurozone.

Friday 03 April 2015 UNITED STATES: Labour Market Report (March)

As the Fed recently dropped its forward-guidance and reaffirmed data-dependency of policy, while soft and hard data have been disappointing, the March labour market report will be of great importance. We expect job gains of 260k.

OECD Team - Statistics 27 March 2015– 15-12

5 economic-research.bnpparibas.com

Markets overview

The essentials Week 23-3 15 > 26-3-15

CAC 40 5 087 } 5 006 -1.6 %

S&P 500 2 108 } 2 056 -2.5 %

Volatility (VIX) 13.0 } 15.8 +2.8 %

Euribor 3M (%) 0.02 } 0.02 +0.0 bp

Libor $ 3M (%) 0.27 } 0.27 +0.2 bp

OAT 10y (%) 0.39 } 0.45 +6.8 bp

Bund 10y (%) 0.19 } 0.22 +2.9 bp

US Tr. 10y (%) 1.93 } 2.01 +7.8 bp

Euro vs dollar 1.08 } 1.09 +1.1 %

Gold (ounce, $) 1 185 } 1 206 +1.8 %

Oil (Brent, $) 54.6 } 58.0 +6.2 %

10 y bond yield, OAT vs Bund Euro-dollar CAC 40

0.22 0.00

0.50

1.00

1.50

2.00

2.50

2013 2014 201526 Mar

1.09

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

2013 2014 201526 Mar

3 400

3 600

3 800

4 000

4 200

4 400

4 600

4 800

5 000

5 200 5 006

2013 2014 201526 Mar

─ Bunds ▬ OAT

Money & Bond Markets Interest Rates

€ ECB 0.05 0.05 at 01/01 0.05 at 01/01

Eonia -0.06 0.14 at 01/01 -0.08 at 16/01

Euribor 3M 0.02 0.08 at 01/01 0.02 at 20/03

Euribor 12M 0.20 0.33 at 01/01 0.20 at 25/03

$ FED 0.25 0.25 at 01/01 0.25 at 01/01

Libor 3M 0.27 0.27 at 13/03 0.25 at 06/01

Libor 12M 0.70 0.72 at 18/03 0.61 at 16/01

£ BoE 0.50 0.50 at 01/01 0.50 at 01/01

Libor 3M 0.56 0.57 at 19/03 0.56 at 11/03

Libor 12M 0.96 0.99 at 09/03 0.95 at 16/01

At 26-3-15

highest' 15 lowest' 15

Yield (%)

€ AVG 5-7y 0.34 0.65 at 08/01 0.24 at 12/03

Bund 2y -0.24 -0.08 at 01/01 -0.24 at 26/03

Bund 10y 0.22 0.54 at 01/01 0.19 at 19/03

OAT 10y 0.45 0.84 at 01/01 0.39 at 20/03

Corp. BBB 1.42 1.79 at 01/01 1.29 at 10/03

$ Treas. 2y 0.60 0.72 at 06/03 0.44 at 15/01

Treas. 10y 2.01 2.24 at 06/03 1.67 at 02/02

Corp. BBB 3.59 3.70 at 06/03 3.41 at 30/01

£ Treas. 2y 0.43 0.62 at 09/03 0.39 at 23/03

Treas. 10y 1.60 1.98 at 06/03 1.36 at 30/01

At 26-3-15

highest' 15 lowest' 15

10y bond yield & spreads

11.18% Greece 1096 pb

1.63% Portugal 141 pb

1.37% Italy 115 pb

1.29% Spain 107 pb

0.70% Ireland 48 pb

0.49% Belgium 27 pb

0.45% France 23 pb

0.38% Austria 16 pb

0.36% Finland 14 pb

0.31% Netherlands8 pb

0.22% Germany

Commodities Spot price in dollars 2015(€)

Oil, Brent 58 46 at 13/01 +15.1%

Gold (ounce) 1 206 1 149 at 17/03 +12.7%

Metals, LMEX 2 796 2 652 at 18/03 +6.3%

Copper (ton) 6 196 5 433 at 29/01 +7.8%

CRB Foods 348 344 at 17/03 +4.4%

wheat (ton) 183 177 at 05/03 -6.9%

Corn (ton) 148 138 at 30/01 +11.9%

At 26-3-15 Variations

lowest' 15

Oil (Brent, $) Gold (Ounce, $) CRB Foods

40

50

60

70

80

90

100

110 120

58

2013 2014 201526 Mar

1 120

1 200

1 280

1 360

1 440

1 520

1 600

1 680

1 760

1 206

2013 2014 201526 Mar

340

360

380

400

420

440

460

348

2013 2014 201526 Mar

Exchange Rates Equity indices 1€ = 2015

USD 1.09 1.21 at 01/01 1.05 at 13/03 -9.8%

GBP 0.74 0.79 at 06/01 0.71 at 11/03 -5.2%

CHF 1.05 1.20 at 01/01 0.98 at 16/01 -12.7%

JPY 129.96 145.08 at 01/01 127.50 at 13/03 -10.4%

AUD 1.39 1.49 at 03/02 1.38 at 12/03 -5.7%

CNY 6.78 7.51 at 01/01 6.58 at 19/03 -9.6%

BRL 3.47 3.50 at 19/03 2.91 at 23/01 +8.0%

RUB 62.64 79.36 at 30/01 62.64 at 26/03 -13.7%

INR 68.51 76.38 at 01/01 66.26 at 13/03 -10.3%

At 26-3-15 Variations

highest' 15 lowest' 15

Index 2015 2015(€)

CAC 40 5 006 5 088 at 24/03 4 084 at 06/01 +17.2% +17.2%

S&P500 2 056 2 117 at 02/03 1 993 at 15/01 -0.1% +10.7%

DAX 11 844 12 168 at 16/03 9 470 at 06/01 +20.8% +20.8%

Nikkei 19 471 19 754 at 23/03 16 796 at 14/01 +11.6% +24.6%

China* 69 70 at 26/02 66 at 19/01 +4.6% +15.9%

India* 513 553 at 03/03 481 at 06/01 +2.6% +14.4%

Brazil* 1 535 1 886 at 22/01 1 446 at 13/03 +0.3% -7.2%

Russia* 473 512 at 18/02 402 at 30/01 +12.8% +29.5%

At 26-3-15 Variations

highest' 15 lowest' 15

* MSCI Indices

27 March 2015 – 15-12

6 economic-research.bnpparibas.com

Most recent articles

MARCH 20 March 15-11 United States : Normalising policy if not (yet) rates Eurozone : Labour update

13 March 15-10 United States : The wage mystery Eurozone : The first week of QE

6 March 15-09 United States : Good things come to those who wait Eurozone : Good start, before the QE starts

FEBRUARY 27 February 15-08 France : Doubts about recovery Greece : Reality check

20 February 15-07 Eurozone : Doing better Germany : Europe’s biggest destination for migrants

13 February 15-06 France : Slightly brighter economic prospects Greece : The high stakes of negotiation

6 February 15-05 United States: Making sense of recent data Germany: Self-esteem Japan: Exiting deflation

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23 January 15-03 Eurozone: QE: the ECB joins the club ! United Kingdom: Also in the United Kingdom, inflation slows down

16 January 15-02 United States : Green ans black Eurozone : Flexibility for the fiscal rules in exchange for more reforms and investment

9 January 15-01 United States: Light at the end of the tunnel Eurozone: Prices down, discussions heat up Greece: Towards compromise

DECEMBER 19 December 14-44 Global : Climate change : Sounding the alarm on climate change Eurozone : The juncker investment plan : hard to implement Greece : Waiting for the third round

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NOVEMBER 28 November 14-41 Eurozone: Downward revision Eurozone: Jean-Claude Juncker’s investment plan is up and running

21 November 14-40 Eurozone : It’s now or never ? On black boxes and ECB quantitative easing France : Recovery possible Japan : A

14 November 14-39 Eurozone : Economic weakness and monetary stimulus under debate Germany : Soft patch or another recession ?

7 November 14-38 Eurozone : Autumn forecasts France : Unemployment benefits soon to be tightened ? Spain : So far so good

OCTOBER 31 October 14-37 Eurozone: How risky is the fall of oil prices for inflation? European Union: European bank assessment reassuring Brazil: Habent Præsidens!

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EMERGING ECONOMIES AND COUNTRY RISK

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CONJONCTURE

Structural or in the news flow, two issues analysed in depth

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Data releases, major economic events. Our detailed views…

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