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Macro & Strategy Equity Credit Commodities 13 13 #1 Global Strategy #1 Multi Asset Research #3 Global Economics #2 Equity Quant #2 Index Analysis #3 SRI Research 12 sector teams in the Top 1 #1 Overall Credit Strategy #1 Overall Trade Ideas #1 in Sovereigns #1 in 3 sector teams #1 Best Overall Commodity Research #1 Research in Oil #1 Research in Natural Gas Europe #1 Research in Base Metals #1 Research in Coal UPDATE ON CURRENT MACRO ENVIRONMENT Alexander Gancz, CFA Head of Tactical Research Société Générale Corporate & Investment Banking
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PMI INDICES IMPROVING 7 65 6 55 5 45 4 35 3 Sep-6 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Eurozone Manufacturing PMI Index US ISM Manufacturing Index UK Manufacturing PMI Index China PMI Manufacturing index 6
UNEMPLOYMENT DECREASING 14 12 1 8 6 4 2 Aug-98 Aug-1 Aug-4 Aug-7 Aug-1 Aug-13 Euro zone US 7
BETTER GDP GROWTH 2. Euro area 1. China 1.5 1..5. 8. 6. 4. -.5 2. -1. 211 212 213f 214f. 211 212 213f 214f 3.5 3. 2.5 2. 1.5 1..5. Sources: SG Cross Asset Research United States 211 212 213f 214f 2.5 2. 1.5 1..5. United Kingdom 211 212 213f 214f 8
16 15 14 EUROPE: BECOMING MORE COMPETITIVE Nominal unit labour costs (1 = 2) Portugal 15 Spain Italy Ireland 14 France Euro area Germany 13 Hourly labour costs, business economy (in euros/hour) 213 Euro area 28 Belgium 41 France 35 Germany 31 Italy 27 Spain 21 Greece 16 13 12 12 11 11 1 1 1 2 3 4 5 6 7 8 9 1 11 12 13 9 1 2 3 4 5 6 7 8 9 1 11 12 13 Hourly Labor Costs: Industry and services, wages and salaries, direct remuneration (excluding apprentices). Source: Eurostat, OECD, SG Cross Asset Research 9
EUROPE: STRUCTURAL REFORMS PROGRESS Responsiveness to OECD Going for Growth recommendations, 211-12 Lower responsiveness Higher responsiveness The responsiveness rate reflects a scoring system in which a value of 1 is given if significant action is taken on a reform recommendation set out in the previous years (here 211-12). A score of 1 would reflect that all recommendations had seen significant action. Source: SG Cross Asset Research/Economics, OECD 1
EUROPE: GIIPS CURRENT ACCOUNT BALANCES IMPROVING 11
US: DELEVERAGING OF HOUSEHOLDS & BUSINESSES 12
US: TRADE BALANCE IMPROVING THANKS TO SHALE GAS 13
Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13(f) Q4-13(f) Q1-14(f) Q2-14(f) Year 213 (f) Year 214 (f) Year 215(f) Year 216(f) US: ECONOMIC RECOVERY STRONG & ON TRACK 22 2 18 16 14 12 1 Vehicle sales and employment creation millions Vehicle sales Job creation millions 139 137 135 133 131 129 % 5 4 3 2 1-1 -2 Quarterly GDP past data & forecasts (% qoq annualised).1 1.1 3.6 3. 3.1 3.1 2.5 Annual GDP forecasts (%) 1.8 3.1 3.4 3.8 8 127 Sep-99 Mar-3 Sep-6 Mar-1 Sep-13 US retail sales of new light vehicles (million unit, lhs) US total population employed (in million, rhs) US real GDP (% qoq annualised) SG Forecasts Consensus median forecasts Source: SG Cross Asset Research, Datastream, BEA 14
RISK FACTOR 1: GOVERNMENT DEBT Japan gross debt vs. LT rates since 1985 Public gross debt end-213 (est.) % % GDP 9 1Y Yield, Left HS 25 8 Gross Debt, Right HS 7 2 6 5 15 4 1 3 USD tn 2 18 16 14 11.5 $tn 12 1 8 6 96% 12 $tn 245% 17.5 $tn 18% 2 5 4 1 2 1985 1989 1993 1997 21 25 29 Source: SG Cross Asset Research, Datastream 213 Euro Area Japan US in USD tn in % of GDP 15
RISK FACTOR 1 : GOVERNMENT DEBT EUROPE VS US Euro area & US Budget Balance (% of GDP) Euro area countries Budget Balances (% of GDP) 5 5-5 -5-1 -1-15 -15-2 26 27 28 29 21 211 212 213 United States Euro area (SG f.) Sources: IMF, SG Cross Asset Research -2 26 27 28 29 21 211 212 213 (SG f.) France Greece Italy Portugal Spain Ireland 16
RISK FACTOR 1 : GOVERNMENT DEBT US ON A DANGEROUS PATH US Components of total spending, % of GDP US Federal Debt held by the Public, % of GDP 17
RISK FACTOR 2: MONETARY POLICY FINDING THE RIGHT EQUILIBRIUM 25 US monetary supply (%YoY) 25 Euro zone monetary supply (%YoY) 2 2 15 15 1 1 5 5-5 -5-1 -1 M1 M2 M3 M1 M2 M3 Sources: Datastream, SG Cross Asset Research 18
RISK FACTOR 2: MONETARY POLICY FINDING THE RIGHT EQUILIBRIUM 19
RISK FACTOR 2: MONETARY POLICY US GOING TOO FAR? 15 1 SG 214 forecasts 15 1 5-5 -5 Dec-71 Aug-76 Apr-81 Dec-85 Aug-9 Apr-95 Dec-99 Aug-4 Apr-9 Dec-13 7 5 3 1-1 -3 Paul Volker became Chairman of the FED US 1Y Treasuries US 1Y Treasuries US GDP growth QoQ, US GDP %YoY, growth current QoQ, price%yoy, current US CPI, price QoQ, %YoY 7% -5 Feb-95 Mar-98 Apr-1 May-4 Jun-7 Jul-1 Aug-13 German 1Y Bund Sources: Eurostat, US Bureau of Economic Analysis, Datastream, SG Cross Asset Research SG 214 forecasts Euro Area GDP growth, QoQ, %YoY, current price 4.6% 5 3.65% 1.6% 5% 3% 1% -1% -3% -5% 2
4 3 5 3 2 5 2 1 5 1 4 3 5 3 2 5 2 1 5 1 5 RISK FACTOR 2: MONETARY POLICY THE FED 5 Maturity: 5-1 Years Aug. 27 Aug. 28 Aug. 29 Aug. 21 Aug. 211 Aug. 212 Aug. 213 Maturity: 4.3 Years Aug. 27 Aug. 28 Aug. 29 Aug. 21 Aug. 211 Aug. 212 Aug. 213 Sources: ECB, US Federal Reserve, SG Cross Asset Research Average maturity: 6.4 Years Problem 1: Size of the balance sheet Problem 2: Structure of the assets FED Balance Sheet ($, Bn) Fed Agency Debt Mortgage-Backed Securities Purch Liquidity to Key Credit Markets Lending to Financial Institutions Long Term Treasury Purchases ECB Balance Sheet (, Bn) Other claims on euro area credit institutions Lending to euro area credit institutions Securities held for monetary policy purposes General government debt Other (Debt, Liabilities, Deposits facility, counterpart, capital and reserves) Gold 21
RISK FACTOR 2: MONETARY POLICY EU LACK OF TRANSMISSION 22
RISK FACTOR 2: MONETARY POLICY EU FRAGMENTATION 23
RISK FACTOR 2: MONETARY POLICY FURTHER LTRO (+AQR)? EUR bn 1 Excess liquidity just above 2bn Excess liquidity 45 4 Monetary base shrinking 8 6 35 3 Monetary base 4 2 25 2 15 1 M3-2 Apr-8 Aug-9 Dec-1 Apr-12 Aug-13 5 99 1 3 5 7 9 11 13 Source: SG Cross Asset Research/Rates, Bloomberg, Datastream 24
RISK FACTOR 3: EMERGING MARKETS CURRENT ACCOUNT DEFICITS (% of GDP) 8 6 4 2-2 -4-6 -8 Current accounts in % of GDP (3-year average for 211-213) (% of GDP) 8 6 4 2-2 -4-6 -8 Source: IMF, SG Cross Asset Research/ Global Asset Allocation 25
RISK FACTOR 3: EMERGING MARKETS FALLING GROWTH Growth consensus expectations continue to fall for 214 8.6 China 8.6 8 India 8 8.4 8.4 7.4 214e 7.4 8.2 213e 8.2 6.8 6.2 213e 6.8 6.2 8 214e 7.8 Jan-12 Jun-12 Nov-12 Apr-13 8 7.8 5.6 5 Jan-12 Jun-12 Nov-12 Apr-13 5.6 5 4.6 Brazil 4.6 4 Russia 4 4.2 3.8 214e 4.2 3.8 3.6 214e 3.6 3.4 213e 3.4 3.2 213e 3.2 3 3 2.6 Jan-12 Jun-12 Nov-12 Apr-13 2.6 2.8 Jan-12 Jun-12 Nov-12 Apr-13 2.8 Source: Consensus Forecast, SG Cross Asset Research/ Global Asset Allocation 26
RISK FACTOR 3: EMERGING MARKETS CHINA WITH HIGH LEVERAGE (% of GDP) 15% of GDP China s corporate debt level has become alarming (%) Record low capacity utilisation rates of the manufacturing sector 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 Source: NBS, CEIC, SG Cross Asset Research / Economics 27
RISK FACTOR 4: COMMODITIES 7 6 5 Thomson Reuters CRB Index Gold Crude Oil LMEX Index (Metals) Major commodity indices (Jan 2 = 1) 4 3 2 1 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 Source: SG Cross Asset Research, Datastream, as of 27/9/13 28
QUESTIONS? Macro & Strategy Fixed Income #1 Global Strategy #1 Multi Asset Research #3 Global Economics 213 #1 Overall Credit Strategy #1 Overall Trade Ideas #1 in Sovereigns #1 in 3 sector teams 213 Commodities Equity 213 #1 Best Overall Commodity Research #1 Research in Oil #1 Research in Natural Gas Europe #1 Research in Base Metals #1 Research in Coal #2 Equity Quant #2 Index Analysis #3 SRI Research 12 sector teams in the Top 1 29