economic-research.bnpparibas.com EcoWeek 17 June 2016 – 16-23

Summary

Global TTIP, a challenging obstacle course In 2013, the United States and the European Union entered negotiations with the intent of ratifying the TTIP. However many issues remain to be solved just a few months before the U.S. presidential elections. ► Page 2

Eurozone TLTRO-II, a weapon of choice TLTRO-II, the new series of long-term refinancing operations announced in March, has not attracted much attention despite its key position in the ECB’s strategy. ► Page 4

Germany Low rates and savings behaviour of households Do low interest rates influence savings behaviour in Germany, and how? ► Page 6

Market overview ► Page8

Summary of forecasts ► Page 9

Also in :

A peaceful uneasy feeling

■FOMC sends a dovish message ■‘Uncertainty’ is the dominant word in

Janet Yellen’s press conference

As widely expected the FOMC left its policy rate unchanged this week. In addition the median projection of the FOMC participants for the federal funds rate for 2017 and 2018 is now 0,25 to 0,50 percentage points lower than in the March projection. This more benign interest rate outlook will be welcomed by financial market investors and developing economies which are particularly sensitive to the Fed policy stance. Their feeling may be peaceful but it certainly is uneasy. The FOMC statement and Janet Yellen’s press conference made it clear that the members expect the economy to continue to expand at a moderate pace so at some point the tone may become more hawkish again. On the other hand, there was a clear emphasis on the asymmetric pay-off: with rates still close to zero, better to be too late in hiking than too early. Finally, there was a big emphasis on how difficult it is to gauge the economic momentum and in particular the labour market. In the statement and the answers to journalists’ questions the words ‘uncertainty’ or ‘uncertainties’ were used 10 times. What better way is there to convey a message of caution? Interestingly, the increased uncertainty of the FOMC about the outlook has reduced the uncertainty of market participants about the policy orientation: the decline in bond yields in recent weeks not only reflects a downward adjustment of the market-implied policy path (risk-neutral yield on the chart) but also a decline in the term premium. The latter has become increasingly negative: investors no longer ask to be rewarded for duration risk when they think the Fed won’t move.

Bond yields and monetary policy

▬ ACM Fitted Yield ▬ ACM Term Premium

▬ ACM Risk-neutral Yield

Source: Federal Reserve of New York

THE WEEK ON THE MARKETS

Source: Thomson Reuters

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-0.5

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1.5

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2.5

Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16

Week 10-6 16 > 16-6-16

CAC 40 4 307 } 4 153 -3.6 %

S&P 500 2 096 } 2 078 -0.9 %

Volatility (VIX) 17.0 } 19.4 +2.3 %

Euribor 3M (%) -0.26 } -0.26 -0.1 bp

Libor $ 3M (%) 0.66 } 0.66 +0.1 bp

OAT 10y (%) 0.39 } 0.40 +1.4 bp

Bund 10y (%) 0.02 } -0.02 -4.2 bp

US Tr. 10y (%) 1.64 } 1.56 -7.5 bp

Euro vs dollar 1.13 } 1.11 -1.3 %

Gold (ounce, $) 1 274 } 1 310 +2.9 %

Oil (Brent, $) 51.1 } 47.7 -6.7 %

ECONOMIC RESEARCH DEPARTMENT

economic-research.bnpparibas.com Catherine Stephan 17 June 2016 – 16-23 2

Global

TTIP, a challenging obstacle course

■ In July 2013, the United States and the European Union entered negotiations with the intent of ratifying the Transatlantic Trade and Investment Partnership (TTIP).

■ Numerous points are still up in the air just a few months ahead of the US presidential elections.

■ The European Commission and the United States have accelerated the negotiating process, but this hasty approach worries many European leaders.

■ The wariness of political leaders must nonetheless be measured in the light of the growing mistrust of civil society.

■ The European Commission needs to affirm its legitimacy in order to pursue the talks serenely, and intends to ask the European heads of state and governments to bolster its negotiating mandate at the next European Summit on 28 and 29 June.

In July 2013, the United States and the European Union (EU) entered negotiations on the ratification of the Transatlantic Trade and Investment Partnership (TTIP), which is also known under the acronym TAFTA (Trans-Atlantic Free Trade Agreement). The US and the EU hope this partnership will lead to new market outlets, economies of scale and productivity gains. Given their preponderant clout in world trade, they also want to respond to the growing importance of the emerging countries, and China in particular (see chart).

Yet the US and the EU are struggling to reach an agreement. The broad scope of fields covered by TTIP undoubtedly slows down the pace of negotiations. The treaty aims not only to reduce customs tariffs, but also non-tariff barriers such as laws, regulations and standards. In particular, the EU and the US hope to reach mutual recognition of procedures. While maintaining safety standards, for example, this would involve accelerating the accessibility of medical systems (pacemakers, scanners, etc.), particularly when the applied rules are redundant or impose identical testing.

Negotiations are also being hampered by opposition from some parts of civil society, which fear that social and environmental standards will be watered down. This opposition has forced the European Commission, which is still struggling to affirm its legitimacy, to review some of its proposals, prolonging the talks even further1.

Talks led by the European Commission

Mandated by the member states in June 2013, the European Commission is conducting the TTIP negotiations on behalf of the EU. The Lisbon treaty gives the EU exclusive powers in the field of international trade, which now encompasses foreign direct

1 See “Transatlantic Treaty: big ambitions, little progress…”, Conjoncture, December 2015

investment and its protection. In the United States, the Office of the US Trade Representative is responsible for negotiating TTIP.

Numerous points are still up in the air

At the end of April, after 13 rounds of negotiations between the United States and the EU, the talks resulted in nearly twenty consolidated texts on the 25-30 chapters that should eventually make up the partnership agreement. Consolidation of the texts does not mean that the parties have reached an agreement, although it facilitates the continuation of negotiations. Moreover, the US and the EU have made some progress and have agreed to eventually eliminate customs tariffs on 97% of tariff lines.

The US and the EU still have a long way to go before reaching an agreement. Several major subjects are still being discussed, such as agricultural tariff lines and regulatory cooperation. Certain negotiations are particularly delicate, notably those about European companies accessing American public markets. Currently, there is a huge difference between the EU, where a high proportion of public markets is potentially open, and the United States, which continues to apply the Buy American Act (BAA), a 1933 law that can be waived under certain conditions, requiring the American government to prefer US-made products in its purchases.

The issues are also complex concerning the protection of a list of geographic indicators, a priority for the EU. The EU and the US must reconcile different approaches. A registered designation of origin ties a product to its place of origin (such as Beaufort cheese or Modena vinegar). They are protected as “geographic indications” (GI) in the EU, whereas in the US they are considered to be brands.

The US continues to examine the European Commission’s new proposals on the resolution of disputes between governments and companies. Taking into account the fears expressed by civil society,

The US and the EU: major players in international trade Share of national merchandise trade (% of world trade) in 2014 █ Exports █ Imports

Chart Source: Eurostat

economic-research.bnpparibas.com Catherine Stephan 17 June 2016 – 16-23 3

the European Commission now wants the Investment Court System (ICS) to be comprised of a Court of First Instance and an Appeals Court, unlike the current arbitration court. The text also states that a government can change legislation, even if this change affects investors’ future profit expectations.

Wary politicians

Numerous points are still up in the air, and the next US president might be much less inclined than President Obama to push through free-trade agreements. Hillary Clinton, the presumptive Democratic candidate for the White House, expressed her reserves concerning the Trans-Pacific Partnership (TPP) 2 , and Donald Trump, the presumptive Republican candidate, is against it.

Hoping to reach an agreement by the end of the year, the European Commission and the US have accelerated the pace of negotiations by increasing the number of meetings between rounds. Yet some European political leaders are worried by this hasty approaching, fearing that it will result in an incomplete document. The European Commission will either have to make more concessions or neglect certain conflictual subjects, such as assess to public markets or the dispute resolution court.

Civil society opposes TTIP

The wariness of the political class on either side of the Atlantic must be measured in the light of the growing mistrust of the population with the approach of major elections. US presidential elections will be held next fall, followed by French presidential elections in spring 2017 and federal elections in Germany in either the summer or fall of 2017.

Opposition to TTIP is particularly fierce in Germany and in the United States. According to a Bertelsmann Foundation survey published in April 2016, only 17% of Germans think TTIP could be beneficial, down from 55% in 2014. This mistrust might seem surprising from the world’s third largest commercial power, especially considering that the United States is already its main trading partner3. Deploring the negotiation’s lack of transparency, the Germans fear that TTIP will harm consumer protections and undermine environmental standards. Similarly, only 15% of Americans think that TTIP could be advantageous, down from 53% in 2014.

The European Commission needs to build legitimacy

Faced with this environment, the European Commission needs to build its legitimacy in the eyes of the people and their leaders in order to pursue the negotiations more serenely. Towards this end, it intends to ask the European heads of state and government to strengthen its negotiation mandate at the European Summit on 28 and 29 June.

Yet even with a clearer mandate, once the negotiations end, the European Commission will not be able to escape a debate on the nature of the agreement. The stakes are enormous, and the TTIP

2 The TransPacific Partnership (TPP) was signed by a dozen countries in February

2016 (United States, Brunei, Chile, New Zealand, Singapore, Australia, Peru, Vietnam, Malaysia, Mexico, Canada and Japan). It must still be approved by the US Congress. 3 The United States accounted for 9.5% and 6.3%, respectively, of German

merchandise exports and imports in 2015.

ratification process depends on it. If the European Commission esteems that TTIP is exclusively a trade agreement, then ratification would “only” require the approval of the European Council and the European Parliament, since the EU has exclusive powers in this area. If to the contrary, TTIP is considered to be a mixed agreement that includes measures that are not solely trade related, as several member states, including France, are demanding, then it would also fall under the jurisdiction of the member states. National parliaments would then have to approve the agreement. This is bound to drag out the ratification process and could even compromise the text given the climate of mistrust concerning free trade agreements among the local population.

It is for this reason that the Comprehensive Economic and Trade Agreement (CETA), signed by Canada and the EU in September 2014, has become the centre of attention. Soon, the Commission’s legal advisors must issue their recommendation on the nature of the agreement, which aims, like TTIP, to eliminate customs’ tariffs, open the services market, promote cooperation on regulations and to end restrictions limiting access to public markets.

The European Commission and the member states should see a few points clarified in the months ahead concerning the nature of these trade agreements. The EU Court of Justice should issue its opinion soon on the free trade agreement proposal signed between the EU and Singapore in October 2014.

The dispute over the nature of TTIP is just one more obstacle for the United States and the EU to resolve as they struggle to reach an agreement on a number of key themes.

economic-research.bnpparibas.com Thibault Mercier 17 June 2016 – 16-23 4

Eurozone

TLTRO-II, a weapon of choice

■ TLTRO-II, the new series of long-term refinancing operations announced in March, has not attracted much attention despite its key position in the ECB’s strategy.

■ TLTRO-II offers substantially more advantageous refinancing conditions than the TLTRO-I. It should create a strong incentive to increase lending. ■ Yet TLTRO’s success will also depend on the outlook for credit demand, which has shown signs of running out of steam recently. This is a clear reminder that monetary policy must be accompanied by structural reforms and fiscal policies that favour investment.

TLTRO-II, the new series of long-term refinancing operations announced last March, will start up on 22 June. So far these operations have attracted little interest. Overshadowed by the negative interest rate policy and quantitative easing, TLTRO-II did not raise any specific questions during the ECB’s latest press conference on 2 June. Even so, TLTRO-II lies at the heart of the ECB’s strategy. It is the most consensual monetary policy tool among the Governing Council, and, apparently, also the most underestimated.

Credit, the most pertinent transmission channel for the eurozone

When analysing the ECB’s monetary policy, it is always useful to refer back to Mario Draghi’s April 2014 speech in Amsterdam1. In the speech, the ECB President spells out the central bank’s “reaction function” i.e. the monetary policy response that can be expected to address changes in economic and financial conditions. Mr. Draghi sees three cases:

1) An unwanted tightening of the monetary stance (tensions in the interbank market, appreciation of the euro, etc.), which would call for a rate cut, notably the deposit facility rate.

2) A deterioration in monetary policy transmission, via the credit channel, which would pave the way for the launch of long-term refinancing operations and purchases of asset-backed securities (ABS).

3) A worsening of medium-term inflation expectations, which would necessitate a response in terms of quantitative easing.

At the time of the Amsterdam speech in April 2014, eurozone monetary policy had not yet taken the accommodative turn that we see today. Yet by explicitly spelling out the ECB’s reaction function, Mr. Draghi has provided a precious key for analysing the desired effects sought from the ensuing monetary policy decisions: the deposit facility rate was lowered to weaken the euro;

1 https://www.ecb.europa.eu/press/key/date/2014/html/sp140424.en.html

long-term refinancing operations were launched to ease credit supply, and quantitative easing was designed to bolster domestic demand and inflation expectations.

Naturally, the common goal of all these instruments is to stimulate growth and fuel inflation, and they operate conjointly. Public securities purchases, for example, increase excess liquidity which helps bring down money market rates towards the deposit facility rate, while lower rates tend to weaken the external value of the euro. Similarly, quantitative easing encourages portfolio reallocations in favour of credit, while long-term refinancing operations ease lending conditions. The March monetary policy meeting, at which the ECB announced the launch of TLTRO-II and said it did not foresee another rate cut (although it did not rule out the possibility), should be interpreted as a sign that the ECB is focusing its strategy towards boosting credit.

This focus is logical given the preponderant role credit plays in financing European companies. In the eurozone, bank loans account for 60% of the debt of non-financial companies, compared to only 15% in the United States. The strengthening of bank lending is thus vital for European investment, which benefits less directly from the decline in long-term rates achieved via quantitative easing. So far, credit easing measures have had a significant impact. Since mid-2014, borrowing rates on new NFC loans of up to EUR 1 million have declined by 125 basis point on average in the eurozone, and this trend was even more pronounced in southern Europe. The lower cost of credit has been coupled with a rebound in annual volume growth since July 2015, after three years of contraction. Yet this improvement seems to be losing steam: the credit impulse (year-on-year change in the growth of loans outstanding), which tends to track investment growth rather closely, has clearly slowed (see chart 1).

More impulse needed ▬ Credit impulse ; ▬ Investment (y/y) ; %

Chart 1 Sources : ECB, Eurostat

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economic-research.bnpparibas.com Thibault Mercier 17 June 2016 – 16-23 5

TLTRO II: how it works

Although baptised TLTRO-II, the new series of refinancing operations is significantly different from the previous one. Under TLTRO-I, during the first two operations eurozone banks could borrow up to 7% of the stock of net lending to the private sector excluding housing at the refi rate +10bp. During the next six operations, the amount that could be borrowed at the refi rate depended on net lending trends. All these operations had the same maturity date of June 2018. Altogether, EUR 425 billion was borrowed during seven operations2.

Under TLTRO-II, banks will be able to borrow up to 30% of the outstanding amount of net lending to the private sector (excluding housing) at the end of January 2016, minus the amounts borrowed under TLTRO-I 1&2. This time, it is the cost of borrowing that will depend on eligible net lending dynamics. The rate applied will be set for each operation at the refi rate prevailing at the time of allotment (currently 0%). But it could be subsequently reduced as low as the deposit facility rate prevailing at the time of allotment (currently -0.4%). TLTRO-II will have four operations, one per quarter, each with a maturity of four years. The first will occur on 22 June and the last on 21 March 2017.

To determine the cost of the operation, the ECB will take into account the evolution of eligible net lending between 1 February 2016 and 31 January 2018 relative to a benchmark. Two cases are foreseen.

Case 1: For banks whose eligible net lending increased between 31 January 2015 and 31 January 2016, the benchmark is set at zero. These banks would only need to keep increasing their level of net lending to obtain negative interest rates (see chart 2).

Case 2: For banks whose eligible net lending contracted between 31 January 2015 and 31 January 2016, the benchmark corresponds to the eligible net lending in that period. In other words, if a bank reduced its eligible net lending by 5, let say from 105 to 100, between January 2015 and January 2016, the benchmark will be 95 (100-5). Banks would only have to ease the contraction of lending to obtain negative interest rates (see Chart 3).

To obtain an interest rate as low as the deposit facility rate, eligible net lending at year-end 2018 would have to be at least 2.5% higher than the benchmark. However, the cost of the operation could also range between the refi rate and the deposit facility rate. The size of the discount is proportional to the amount the benchmark is surpassed. For the June operation, surpassing the benchmark by 2.5% would give the right to a rate of -0,4%, while 2% would give a rate of -0.32%, etc. Note that if a bank fails to meet the benchmark requirement, the cost of the operation would equal the refi rate.

TLTRO-II provides a strong incentive to increase net lending. By respecting the requirements described above, banks would obtain liquidity at a negative rate thereby reducing the costs associated with a negative deposit facility rate.

2 The last TLTRO-I operation was scheduled for June 2016 but will be de facto

replaced by the first TLTRO II. Indeed, the ECB has allowed banks to roll over amounts borrowed under LTRO-I into TLTRO-II. On 10 June, the ECB released the amount of TTRO-I liquidity that should be rolled into TLTRO-II : EUR 368bn

Yet TLTRO success will also depend on the outlook for credit demand. Despite tighter liquidity and capital adequacy requirements, bank lending surveys show a net easing of credit supply. Yet outlook for credit demand has been showing signs of running out of steam recently. This is a clear reminder – if one was really needed – that monetary policy must be accompanied by structural reforms and fiscal policies that favour investment.

Case 1 Outstanding net lending to the private sector, excluding housing. Jan 2016 = 100

Chart 2 Sources: ECB, BNP Paribas

Case 2 Outstanding net lending to the private sector, excluding housing. Jan 2016 = 100

Chart 3 Sources: ECB, BNP Paribas

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+2,5%

economic-research.bnpparibas.com William De Vijlder 17 June 2016 – 16-23 6

Germany

Low rates and savings behaviour of households

■ Interest rates are an important transmission channel of monetary policy.

■ Macro-data suggest declining rates weigh on possibility to save.

■ Micro-data show that declining rates didn’t cause big changes in savings behaviour.

The topic of very low nominal interest rates and its detrimental impact on savers has given rise to heated debates across the Eurozone and in particular in Germany. At some point leading politicians got involved triggering reactions from the ECB explaining that interest rates are low for a reason, i.e. because growth is too slow and that its mandate (inflation target) is very clear1. If need be, 14 June 2016 was a harsh reminder of the issue with the 10-year Bund yield dipping into negative territory. For shorter maturities, nominal yields have been negative for longer and at present more than 70% of German government bonds trade with negative yields.

Bond yields and the transmission of monetary policy

Bond yields are a key transmission channel for monetary policy. Declining government bond yields can weaken the currency and boost exports; they can trigger a portfolio rebalancing towards assets with a higher expected return, albeit with higher risk; thereby creating wealth effects and lowering the cost of funding for corporates, at least if the required credit or equity risk premium is not on the rise; they can boost household spending because the opportunity cost of spending more and saving less is going down. However, on this last point, the opposite argument can be made as well: households, unwilling to take on more investment risk, could feel compelled to save more for their retirement considering that the income from their financial investments is declining thereby triggering a slower accumulation of financial wealth. If that were to be the case, it would weaken the transmission of monetary policy.

Interest rates and savings behaviour: macro data

A priori one would argue that the net effect of lower rates should be to boost consumption if only because in the opposite case this would imply that central banks should not cut rates during a recession, at least not with the consumer in mind. The detailed questions in the European Commission consumer surveys provide some insight into this matter, at least at the macro level. Chart 1 plots the evolution of the yield on 10-year Bunds (as a proxy for overall interest rate

1 “We have a mandate to pursue price stability for the whole of the eurozone, not only

for Germany. This mandate is established by the Treaty, by European law. We obey the law, not the politicians, because we are independent, as stated by the law. And by the way, all this applies to all countries, to all politicians in the eurozone.” Introductory statement to the press conference (with Q&A), Mario Draghi and Vítor Constâncio, 21 April 2016 (source: ECB)

conditions for savers) and how German households assess the current savings environment. The answers for the 50-64 years age group are shown because they consist of people who typically will have paid back (most of) their mortgage and are saving for retirement2. A declining line means that an increasing number of households consider that now is a bad moment to save. The correlation with the long term interest rate suggests that this assessment is very much interest rate sensitive3.

Does the assessment of the savings environment influence savings behaviour? Chart 2 tries to shed light on this.

The question ‘savings over the next 12 months’ assesses how likely it is that a household will save any money. The answers fluctuate quite a bit and exhibit some correlation with real disposable income growth: unsurprisingly, when the cyclical environment improves, households expect to save more. The ‘statement of financial situation’ shows to what extent households consider that they save a lot or are running into debt4. With the exception of 2002-2003 this series has seen a rising trend and very much so after 2003: an increasing number of German households between 50 and 64 years of age are stating that they save more. This does not necessarily mean that declining interest rates are the cause. Other factors could be at play as well, like population ageing.

Recent ECB research provides insight on how interest rate developments affect households in the aggregate, so across age groups. In the euro area, Germany and France, the decline of household interest payments due to lower interest rates is more or less the same as the decline in interest earnings. In Italy however,

2 Savings behaviour for the different age groups are actually very correlated. 3 In completing the survey households have to choose between: a very good moment to save/a fairly good moment/not a good moment/a very bad moment/don’t know. 4 In completing the survey households have to choose between: we are saving a lot/we are saving a little/we are just managing to make ends meet on our income/we

are having to draw on our savings/we are running into debt/don’t know.

Germany - Consumer surveys by age: 50-64 years old ─ Savings at present ▬ Bund 10-year rate, % (RHS)

Chart 1 Sources: European Commission, Thomson Reuters

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economic-research.bnpparibas.com William De Vijlder 17 June 2016 – 16-23 7

interest earnings drop more than payments because of low household debt and a high ratio of interest-bearing assets in percent of household income. In Spain, payments decline more than earnings5.

Interest rates and savings behaviour: micro data

In reality, the situation is more complex because the ‘average household’ doesn’t exist: some have mortgage debt and benefit from lower rates, some have a defensive portfolio of fixed income instruments and as the bonds mature they have to invest in lower yielding instruments, some may have a lot of equities which at times will benefit from declining bond yields. In addition, the net exposure to interest rates will not be the same across the age groups. In 2015 the Deutsche Bundesbank reported on the Panel on Household Finances (PHF). This very detailed study showed that “only a small number of households stated in 2014 that they had adjusted their savings behaviour because of low interest rates”6. More than 75% reported ‘no change’, 15% had actually lowered their savings rate and 7% were investing differently than before. Moreover “the percentage of households that adjust their savings behaviour goes up with increasing wealth”. From an age perspective, older savers (55 or older) state more often than younger savers that they save less than before whereas younger savers tend to look at other types of investment more often. Perhaps this reflects a longer investment horizon leading to a greater willingness to take risk.

In summary, these different elements would indicate that lower interest rates are a source of concern for households but have had a limited impact on savings behaviour. In addition, to the extent that there has been an impact, it was in line with the objective of the ECB, i.e. a lower savings rate for some groups or a shift to other types of investments (one presumes of a riskier nature). In both cases this would contribute to the transmission of monetary policy. At the macro level, despite the environment of very low interest rates, we expect the net savings rate to increase further in 2016 to 10% of disposable income from 9.5% in 2015. This is partly related to the strong growth in (real) disposable income, which is not immediately fully spent. In addition, the 50-64 years age group, which have a relatively high propensity save, is still growing. Finally, households may underestimate their savings, as they are not always aware that some of their transactions, such as contributions to occupational pension schemes, are classified as savings.

5 Low interest rates and households’ net interest income, Box 3 in ECB Economic Bulletin, Issue 4 2016 6 German households’ saving and investment behaviour in light of the low interest rate environment, Deutsche Bundesbank Monthly Report, October 2015.

Germany - Consumer surveys by age: 50-64 years old - Savings over next 12 months & statement of financial situation ▬ Savings over next 12 months ▬ Financial situation statement ▬ Household real disposable income, y/y % (RHS)

Chart 2 Sources: European Commission, Thomson Reuters

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economic-research.bnpparibas.com OECD Team – Statistics 17 June 2016 – 16-23 8

Markets overview

The essentials Week 10-6 16 > 16-6-16

CAC 40 4 307 } 4 153 -3.6 %

S&P 500 2 096 } 2 078 -0.9 %

Volatility (VIX) 17.0 } 19.4 +2.3 %

Euribor 3M (%) -0.26 } -0.26 -0.1 bp

Libor $ 3M (%) 0.66 } 0.66 +0.1 bp

OAT 10y (%) 0.39 } 0.40 +1.4 bp

Bund 10y (%) 0.02 } -0.02 -4.2 bp

US Tr. 10y (%) 1.64 } 1.56 -7.5 bp

Euro vs dollar 1.13 } 1.11 -1.3 %

Gold (ounce, $) 1 274 } 1 310 +2.9 %

Oil (Brent, $) 51.1 } 47.7 -6.7 %

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

0.40

-0.02 -0,25

0,25

0,75

1,25

1,75

2,25

2,75

2014 2015 201616 Jun

1.11

1,05

1,10

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─ Bunds ▬ OAT

Money & Bond Markets Interest Rates

€ ECB 0.00 0.05 at 01/01 0.00 at 16/03

Eonia -0.34 -0.13 at 01/01 -0.36 at 26/05

Euribor 3M -0.26 -0.13 at 01/01 -0.26 at 08/06

Euribor 12M -0.03 0.06 at 01/01 -0.03 at 04/03

$ FED 0.50 0.50 at 01/01 0.50 at 01/01

Libor 3M 0.66 0.69 at 31/05 0.61 at 04/01

Libor 12M 1.27 1.34 at 31/05 1.12 at 12/02

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

Libor 3M 0.57 0.59 at 15/02 0.57 at 15/06

Libor 12M 0.96 1.07 at 01/01 0.95 at 14/06

At 16-6-16

highest' 16 lowest' 16

Yield (%)

€ AVG 5-7y 0.17 0.49 at 12/01 0.11 at 09/06

Bund 2y -0.60 -0.34 at 01/01 -0.60 at 16/06

Bund 10y -0.02 0.63 at 01/01 -0.02 at 16/06

OAT 10y 0.40 0.98 at 01/01 0.36 at 05/04

Corp. BBB 1.64 2.50 at 20/01 1.60 at 10/06

$ Treas. 2y 0.68 1.06 at 01/01 0.64 at 11/02

Treas. 10y 1.56 2.27 at 01/01 1.56 at 16/06

Corp. BBB 3.54 4.50 at 12/02 3.54 at 10/06

£ Treas. 2y 0.35 0.65 at 01/01 0.28 at 08/02

Treas. 10y 1.24 1.96 at 01/01 1.24 at 15/06

At 16-6-16

highest' 16 lowest' 16

10y bond yield & spreads

8.34% Greece 836 pb

3.43% Portugal 344 pb

1.60% Spain 162 pb

1.56% Italy 158 pb

0.93% Ireland 95 pb

0.46% Belgium 47 pb

0.40% France 42 pb

0.31% Finland 33 pb

0.24% Netherlands26 pb

0.23% Austria 25 pb

-0.02% Germany

Commodities Spot price in dollars 2016(€)

Oil, Brent 48 28 at 20/01 +30.1%

Gold (ounce) 1 310 1 062 at 01/01 +20.2%

Metals, LMEX 2 290 2 049 at 12/01 +1.3%

Copper (ton) 4 529 4 328 at 15/01 -6.2%

CRB Foods 376 329 at 11/01 +9.4%

w heat (ton) 171 146 at 04/01 +8.1%

Corn (ton) 161 134 at 31/03 +13.9%

At 16-6-16 Variations

lowest' 16

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

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2014 2015 201616 Jun

Exchange Rates Equity indices

1€ = 2016

USD 1.11 1.15 at 03/05 1.07 at 05/01 +2.6%

GBP 0.79 0.81 at 08/04 0.73 at 05/01 +7.5%

CHF 1.08 1.11 at 04/02 1.08 at 16/06 -0.8%

JPY 115.85 131.84 at 01/02 115.85 at 16/06 -11.3%

AUD 1.53 1.60 at 11/02 1.45 at 20/04 +2.2%

CNY 7.34 7.49 at 08/06 6.99 at 05/01 +4.0%

BRL 3.89 4.53 at 16/02 3.84 at 09/06 -9.4%

RUB 73.41 91.22 at 11/02 72.66 at 09/06 -7.5%

INR 74.99 77.50 at 11/02 71.42 at 05/01 +4.3%

At 16-6-16 Variations

highest' 16 lowest' 16

Index 2016 2016(€)

CAC 40 4 153 4 637 at 01/01 3 897 at 11/02 -10.4% -10.4%

S&P500 2 078 2 119 at 08/06 1 829 at 11/02 +1.7% -0.9%

DAX 9 550 10 743 at 01/01 8 753 at 11/02 -11.1% -11.1%

Nikkei 15 434 19 034 at 01/01 14 953 at 12/02 -18.9% -8.5%

China* 54 59 at 01/01 48 at 12/02 -9.7% -12.1%

India* 454 466 at 08/06 393 at 11/02 +0.4% -3.7%

Brazil* 1 314 1 454 at 29/04 860 at 21/01 +12.0% +23.6%

Russia* 464 509 at 28/04 331 at 20/01 +5.6% +11.8%

At 16-6-16 Variations

highest' 16 lowest' 16

* Indices MCSI

economic-research.bnpparibas.com Detailed forecasts 17 June 2016 – 16-23 9

Economic forecasts

Financial forecasts

En % 2015 2016 e 2017 e 2015 2016 e 2017 e 2015 2016 e 2017 e 2015 2016 e 2017 e

Advanced 1.9 1.5 1.5 0.3 0.7 1.6

United States 2.4 1.7 1.6 0.1 1.2 2.1 -2.7 -2.8 -2.9 -2.5 -3.1 -3.1

Japan 0.6 0.2 0.2 0.5 0.0 0.7 3.3 3.6 3.3 -4.6 -4.3 -4.2

United Kingdom 2.3 1.7 2.1 0.1 0.6 1.8 -5.2 -5.0 -4.0 -3.9 -3.2 -2.2

Euro Area 1.5 1.5 1.3 0.0 0.1 1.3 3.2 2.9 2.7 -2.1 -2.0 -1.8

Germany 1.4 1.5 1.3 0.1 0.3 1.6 8.6 8.4 7.8 0.7 0.2 0.2

France 1.2 1.4 1.3 0.1 0.3 1.2 -0.2 -0.1 -0.7 -3.5 -3.3 -3.0

Italy 0.6 1.0 0.7 0.1 -0.2 0.9 2.2 1.9 1.8 -2.6 -2.7 -2.5

Spain 3.2 2.8 2.0 -0.6 -0.7 1.3 1.4 1.2 1.1 -5.1 -4.0 -3.1

Netherlands 2.0 1.8 1.6 0.2 0.4 0.9 9.4 9.5 9.2 -1.8 -1.8 -1.6

Belgium 1.4 1.2 1.5 0.6 1.5 1.4 0.8 1.6 1.9 -2.6 -2.6 -2.4

Portugal 1.5 0.9 1.0 0.5 0.6 1.4 0.8 0.6 0.4 -4.4 -2.9 -2.7

Emerging 4.1 4.2 4.9 6.1 6.4 5.5

China 6.9 6.6 6.3 1.4 1.9 2.2 3.1 3.2 2.4 -2.4 -3.0 -3.2

India 7.3 7.8 8.4 4.9 5.6 5.0 -1.3 -0.9 -1.3 -4.1 -3.9 -3.5

Brazil -3.8 -4.0 2.0 9.0 8.6 5.0 -3.3 -1.1 -1.6 -10.3 -8.7 -7.0

Russia -3.7 -0.5 2.0 15.6 7.4 6.4 5.3 3.5 3.6 -3.7 -4.5 -3.8

World 3.1 3.0 3.4 3.6 4.0 3.8

Source : BNP Paribas Group Economic Research / GlobalMarkets (e: Estimates & forecasts)

GDP Growth Inflation Curr. account / GDP Fiscal balances / GDP

Interest rates ######## ######## ########

End period Q1 Q2 Q3 Q4 Q1 Q2e Q3e Q4e 2015 2016e 2017e

US Fed Funds 0.25 0.25 0.25 0.5 0.5 0.25-0.50 0.25-0.50 0.25-0.50 0.01 0.25-0.50 0.25-0.50

3-month Libor $ 0.27 0.28 0.33 0.61 0.63 0.66 0.65 0.70 0.61 0.70 1.05

10-y ear T-notes 1.93 2.35 2.03 2.27 1.79 1.84 1.55 1.60 2.27 1.60 1.75

EMU Refinancing rate 0.05 0.05 0.05 0.05 0.00 0.00 0.00 0.00 0.05 0.00 0.00

3-month Euribor 0.02 -0.01 -0.04 -0.13 -0.24 -0.26 -0.30 -0.30 -0.13 -0.30 -0.30

10-y ear Bund 0.18 0.77 0.59 0.63 0.16 0.17 0.00 -0.20 0.63 -0.20 -0.20

10-y ear OAT 0.42 1.20 0.90 0.98 0.41 0.51 0.30 0.10 0.98 0.10 0.10

10-y ear BTP 1.29 2.31 1.73 1.60 1.23 1.49 1.10 0.80 1.60 0.80 0.80

UK Base rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.00

3-month Libor £ 0.57 0.58 0.58 0.59 0.59 0.59 0.75 0.75 0.59 0.75 1.25

10-y ear Gilt 1.58 2.03 1.77 1.96 1.42 1.46 1.35 1.50 1.96 1.50 1.80

Japan Ov ernight call rate 0.02 0.01 0.01 0.04 -0.00 -0.30 -0.30 -0.30 0.04 -0.30 -0.50

3-month JPY Libor 0.17 0.17 0.17 0.17 0.10 0.06 -0.05 -0.10 0.17 -0.10 -0.25

10-y ear JGB 0.40 0.44 0.35 0.25 -0.04 -0.12 -0.20 -0.20 0.25 -0.20 -0.30

Exchange rates

End period Q1 Q2 Q3 Q4 Q1 Q2e Q3e Q4e 2015 2016e 2017e

USD EUR / USD 1.07 1.11 1.12 1.09 1.14 1.16 1.15 1.14 1.09 1.14 1.05

USD / JPY 120 122 120 120 112 108 108 110 120 110 124

EUR EUR / GBP 0.72 0.71 0.74 0.74 0.79 0.77 0.74 0.72 0.74 0.72 0.68

EUR / CHF 1.04 1.04 1.09 1.09 1.09 1.14 1.14 1.16 1.09 1.16 0.01

EUR/JPY 129 136 134 131 128 125 124 125 131 125 130

Source : BNP Paribas Group Economic Research / GlobalMarkets (e: Estimates & forecasts)

2015 2016

2015 2016

economic-research.bnpparibas.com 17 June 2016 – 16-23 10

Most recent articles

JUNE 10 June 16-22 Global: The rise in the price of oil: short term relief, longer term concern? France: Loss of momentum?

03 June 16-21 Eurozone: Patience and cautious optimism Germany: Savings surplus harms growth potential

MAY 27 May 16-20 Global: Updated economic forecasts: The challenge of 2017 Eurozone: A reverse snowball effect

20 May 16-19 Eurozone: A slightly less buoyant environment Greece: A compromise will provide some relief

13 May 16-18 United States: At a crossroads Eurozone: ECB: a race against time Spain: The persistent labour market duality

APRIL 29 April 16-17 Global: Helicopter money United States: Déjà vu? European Union: The Juncker Plan is still on track France: Stable business climate masks contrasting trends

22 April 16-16 China: Public finances under pressure United States: Stripped to the core

15 April 16-15 United States: Potential problem France: Fiscal targets maintained Brazil: Rebuilding confidence for a fresh start

08 April 16-14 United States: Already over? Japan: Gloomy Tankan

01 April 16-13 United States: You don’t change a winning team Japan: The year starts off slowly France: Significant reduction in the 2015 fiscal deficit

MARCH 25 March 16-12 France: A slow but unobstructed recovery Netherlands: Getting its house in order

18 March 16-11 China: Priority on stabilising growth United States: Safety first Spain: Deadlocked

11 March 16-10 United States: Risk management Eurozone: The ECB changes gear

04 March 16-09 Germany: Inflation back in negative territory France: Unemployment declines: the first in a series?

FEBRUARY 26 February 16-08 United States: Household blues? Germany: Businesses on red alert France: Confidence shaken

19 February 16-07 United States: Positive signs Eurozone: A lower growth profile Ireland: General election against a background of economic recovery

12 February 16-06 United-States: If labour was the only criterion… Portugal: Still needs to prove its worth

05 February 16-05 Eurozone: Oil and inflation: between rounds United Kingdom: With love from him to them Saudi Arabia: Time to accelerate reforms

JANUARY 29 January 16-04 Germany: A sluggish start France: Investment, the new growth engine? Brazil: No remission expected in the short term

22 January 16-03 China: Put to the test United States: What about inflation? Greece: When can we expect to see growth?

15 January 16-02 United States: If wishes were horses… Eurozone: Negative deposit facility rate and lending France: Growth blew hot and cold in late 2015

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