leverageppp47.com

CitiInvestmentResearch&AnalysisisadivisionofCitigroupGlobalMarketsInc.
(the"Firm"),whichdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.
Asaresult,investorsshouldbeawarethattheFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.
Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.
CitigroupGlobalMarketsFigure1.
CurrencyandInterestRateForecasts(EndofPeriod,UnlessSpecified),asof28Sep201128Sep114Q111Q122Q123Q124Q12ForecastForecastForecastForecastForecastUnitedStates:FederalFunds0.
250.
250.
250.
250.
250.
2510-Yr.
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)1.
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202.
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75EuroArea:US$/1.
351.
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261.
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26EuroRepoRate1.
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001.
001.
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931.
501.
251.
351.
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50Japan:Yen/US$767575767677CallMoney0.
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100.
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05Source:CitiInvestmentResearchandAnalysisGlobal28September201176pagesGlobalEconomicOutlookandStrategySeptember2011Globalgrowthprospectscontinuetodeterioratequickly,bothforadvancedeconomiesandemergingmarkets.
Thismonth,weareagaincuttingour2011-12GDPgrowthforecastsformanycountries,includingtheEuroArea,UK,Japan,USandCanada,withamodestdowngradeforChinaandsharpercutsforEasternEurope,Singapore,HongKongandSouthAfrica.
WeexpectearlysovereigndebtrestructuringintheEuroArea,andfortheEuroAreaoveralltoslipbackintorecessionincomingquarters.
Weforecastglobalgrowth(atcurrentexchangerates)willslowfrom4.
0%lastyearto3.
0%thisyear(reviseddownfrom3.
1%lastmonth)andto2.
9%in2012(reviseddownfrom3.
2%lastmonthand3.
7%twomonthsago).
PPP-weighted,weexpectglobalGDPgrowthtoslowfrom5.
0%in2010to3.
8%thisyearand3.
6%in2012(withour2012forecastcutfrom3.
9%lastmonthand4.
4%twomonthsago).
Interestratesarelikelytostaylow,andnegativeinrealterms,foralongperiodinthemainadvancedeconomies.
WeexpecttheECBtocutitskeypolicyratebackto1.
0%incomingmonths.
FortheUS,ifdownsiderisksintensify,policymakersmightturnfirsttowardstill-strongerlanguagetoguiderateexpectationsdown.
RenewedexpansionoftheFed'sbalancesheetisunlikelyunlessdeflationbecomesacleardanger.
TheUKMPCislikelytobemoreaggressive,andweexpectthemtorestartQEonabigscaleinthenextmonthortwo.
WeexpectmoresovereignratingsdowngradesamongEuroAreacountriesinthenext3-6months,includingItaly,Spain,Greece,PortugalandCyprus.
Weexpectsomemonetaryeasingacrossarangeofemergingmarkets.
Againstthisbackdrop,Citi'sMacroStrategyteamarecautiousonriskassetsandbullishcorefixedincome.
Citiequitystrategistsbelievethatmarketsareoversold,butthatstockpricesareunlikelytomoveconvincinglyhigheruntilthereareclearersignsofstabilityineconomicactivityandprofitsgrowth.
CitiratestrategistsexpectloweryieldsandflattercurvesincoreEMUmarketsandtheUK.
CitiFXstrategistsexpecttheUSDandJPYtogain.
EconomicsSeeAppendixA-1forAnalystCertification,ImportantDisclosuresandnon-USresearchanalystdisclosures.
ChiefEconomistWillemBuiter+44-20-7986-5944willem.
buiter@citi.
comEuropeMichaelSaunders+44-20-7986-3299michael.
saunders@citi.
comJapanKiichiMurashima+81-3-6270-4981kiichi.
murashima@citi.
comNorthAmericaRobertVDiClemente+1-212-816-7942robert.
diclemente@citi.
comEmergingMarketsDavidLubin+44-20-7986-3302david.
p.
lubin@citi.
comJohannaChua+852-2501-2357johanna.
chua@citi.
comJoaquinACottani+1-212-816-2735joaquin.
cottani@citi.
comNextissue26October,2011WiththankstoJanMaguireGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets2ForecastHighlightsandChangesfromLastMonth3Overview—OutlookWorsensFurther4EconomicForecastOverview10ShortRates,10-YearYieldForecastsand10-YearYieldSpreads14EmergingMarketCountries—ShortRatesandForecast15ForeignExchangeForecasts15CountryCommentaryUnitedStates16Japan17EuroArea18Germany,FranceandItaly19Spain,GreeceandPortugal20UK21Switzerland,Sweden,DenmarkandNorway22Canada23AustraliaandNewZealand24China25India26KoreaandIndonesia27HongKongandSingapore28Russia29Turkey29Hungary30Poland30CzechRepublic31Romania31Brazil32Mexico32Argentina33Venezuela33SaudiArabia34UnitedArabEmirates34Nigeria35SouthAfrica35RatesStrategy40SovereignRatingsOutlook42CreditOutlook44GlobalEquityStrategy46SecuritizedProductsStrategy48CitiCommoditiesForecasts50CitiForeignExchangeForecasts52AppendixA-172ContentsGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets3Figure2.
ForecastHighlightsandChangesfromLastMonthGlobalProspectsforglobalgrowthcontinuetodeterioratequickly,bothforadvancedeconomiesandemergingmarkets.
Basedonthis,weexpectglobalgrowthtoslowto3.
0%thisyearfrom4.
0%lastyear,andwearecuttingour2012forecastto2.
9%from3.
2%lastmonthand3.
7%twomonthsago.
UnitedStatesAlthoughthereversaloftemporarydragshasgiventhelatestquarterasolidboost,deterioratingfinancialconditionsandlingeringpolicyuncertaintiescontinuetoweighonbusinessconfidence.
Wehavetrimmedabitfurtheralreadysubpargrowthestimatesthroughnextyear,withunemploymentexpectedtoremainhighoverthemediumterm.
Enhancedmonetaryaccommodationislikelytopersistthrough2013butnewfiscalsupportsforgrowthareexpectedtobelimited.
EuroAreaWithlikelymultipledebtrestructuringintheperipherycountries,theEuroAreawillprobablyfallbackintorecession.
WhileanenlargedandprobablyleveragedEFSFislikelytolimittherepercussionsofthedefaults,additionalausteritymeasuresandtighterfinancingconditionsprobablywillhiteconomicactivity.
Inthisenvironment,theECBislikelytocutratesbackto1.
0%byyear-endandtheECBisalsolikelytoputinplaceadditionalnon-standardmeasures.
ChinaWehavecutour2012growthforecastfrom9.
0%to8.
7%,reflectingadeterioratingexternaloutlookasmultipledebtrestructuringsintheEuroAreamaypushtheregionintorecession.
Withgrowthdeceleratingandinflationfalling,weexpectnofurthermonetarytighteningandfiscalpolicytobemoreproactivetoforestalldownsiderisks.
JapanWehavereviseddownourGDPgrowthforecastfor2012to2.
1%underthejudgmentthattheEuropeansovereigndebtcrisiswillenteranewphaseandtheEuroareawillfallintoarecessionincomingquarters.
WhileJapan'sdirecttradeexposuretoEuropeismodest,dysfunctionalfinancialmarketsinEuropewilllikelyhaveamuchbroaderimpactontheJapaneseeconomyviaindirectchannels.
WeexpectadditionalBoJeasinginOctober.
UnitedKingdomTheUKeconomyislikelytobeclosetorecessioninthenextfewquarters.
WeexpecttheMPCwillrestartQEsoonandonalargescale.
CanadaErodingconfidence,dimmingglobaleconomicprospectsandfinancialmarketturmoilnecessitatefurtherdowngradingoftheCanadianoutlook.
TheBoChassofteneditspolicystanceinresponsetorecentdevelopmentsandprobablywillkeeptheovernightrateunchangeduntilearly2013.
Absentsignificantworseningintheexternalenvironment,newfiscalpolicystimulusisunlikely.
AustraliaWehaveslightlyloweredourforecastforeconomicgrowthnextyeartoastill-robust3.
7%.
TheRBAwillprobablyremainonholdinthenearterm,butthereisagrowingriskofashiftbacktoneutralfromthecurrentrestrictivepolicystance.
EmergingAsia(exChina)Asiaisshowingdeceleratinggrowth,withmostpronouncedweaknessintechexports.
Inflationexpectationsarestabilizing,butsharpFXweaknesscouldbecounterproductive.
Indonesiacut50bpsfromitsovernightdepositfacility,leadingtheregion.
WethinkMAScouldalsoeasetheSGDNEERslopeinOct.
Mostofficialswilllikelyremaincautiousineasinggivenriskstoinflationexpectations.
Nonetheless,thechangesarethatAsianCentralBankshavefinishedhikingrates.
CEEMEAWecutour2012GDPgrowthforecastforemergingEuropefurtherto2.
3%from3.
4%ondeepeningfearsofsovereigndebtandbankingrisksintheEuroarea.
Therubleshouldcontinuedepreciatingto37-38againstthebasket,thankstopolicyuncertaintyandtheeffectofafallintheBrentoilpricetoUS$86pbonaveragein2012.
TheBankofIsrael'sratecuton26Septemberhassetaprecedentforlikelyeasinginothercountries.
Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets4Overview—CuttingForecastsAgainProspectsforglobalgrowthcontinuetodeterioratequickly,bothforadvancedeconomiesandemergingmarkets.
Thismonth,wearecuttingour2011-12GDPgrowthforecastsforarangeofcountries,includingChina,EuroArea,Japan,UKandCanada,withsharpdowngradesalsoinEasternEurope,Singapore,HongKongandSouthAfrica.
WenowexpecttheEuroAreawillslipintorecessionagain,withdeeprecessionsintheperipheryeconomies,andwiththeUKalsoclosetorecession.
Inall,weprovideup-to-dateforecastsforcountrieswhichcomprise97%ofglobalGDPeachmonthinGEOS.
Basedonthis,weexpectglobalgrowth(atcurrentexchangerates)toslowfrom4.
0%lastyearto3.
0%thisyear(reviseddownfrom3.
1%lastmonth)andto2.
9%in2012(reviseddownfrom3.
2%lastmonthand3.
7%twomonthsago).
PPP-weighted,weexpectglobalGDPgrowthtoslowfrom5.
0%in2010to3.
8%thisyearand3.
6%in2012(withour2012forecastcutfrom3.
9%lastmonthand4.
4%twomonthsago).
Westilldonotexpectaglobalrecessionfor2011or2012asawhole(usuallydefinedasglobalGDPgrowthoflessthan2%YoY),butQoQindustrialcountrygrowthprobablywillbewellbelowaverageuntilatleastend-2012.
Figure3.
Global—ChangestoCitiGDPGrowthForecastsforCurrentandFollowingYear,2000-11Figure4.
AdvancedEconomiesandEmergingMarkets—3-MonthSumofGDPForecastRevisions(CurrentandNextYear),2000-11-1.
6-1.
4-1.
2-1.
0-0.
8-0.
6-0.
4-0.
20.
00.
20.
40.
60.
8200020012002200320042005200620072008200920102011One-MonthRevisionRevisionOver3Months0.
8%-2.
0-1.
5-1.
0-0.
50.
00.
51.
0200020012002200320042005200620072008200920102011AdvancedEconomiesEmergingMarkets1.
0%Source:CitiInvestmentResearchandAnalysisSource:CitiInvestmentResearchandAnalysisTherecentscaleandbreadthofourforecastdowngradesisunusuallylarge.
Overthelastthreemonths,wehavecutourglobalgrowthforecastsforthecurrentandfollowingyearby0.
65%(from3.
4%to3.
0%forthisyear,andfrom3.
8%to2.
9%for2012).
Withinthelasttenyears,thispaceofdowngradeshasbeenonlyexceededinQ4-08andQ1-09.
Thisisthefourthmonthinarowinwhichwehavecutourforecastsforadvancedeconomygrowth,andthesecondconsecutivemonthwithdowngradestoourforecastsforemergingmarketgrowth.
Overthelastthreemonths,wehavecutourgrowthforecastsineverysingleoneof16majoreconomies(advancedeconomiesandemergingmarkets),apatternonlyseenonceinthelast10years(Q4-08).
MichaelSaundersmichael.
saunders@citi.
com(4420)79863299WeexpectglobalGDPgrowthwillslowbelow3%in2012,markedlylowerthanexpectedafewmonthsagoTherecentpaceofGDPforecastdowngradesisamongthegreatestofthelasttenyears……andextendstherecentrunoflowerforecastsWehavecutforecastsinawiderangeofcountries…GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets5FortheEuroArea,thecutinourgrowthforecast(down0.
1%forthisyear,down0.
8%fornextyear)isthefifthbiggestmonthlydowngradeofthelasttenyears1.
Weexpectgrowthtoslowmarkedlyinboththeadvancedeconomiesandemergingmarkets.
WeforecastthatGDPgrowthinadvancedeconomieswillslowfrom2.
6%in2010to1.
4%in2011and1.
3%in2012,withemergingmarketgrowthslowingfrom7.
3%in2010to6.
0%in2011and5.
5%in2012.
But,ingeneralwearecuttingouradvancedeconomygrowthforecastsfasterthanouremergingmarketforecasts.
Overthelastthreemonths,wehavecutourforecastsfor2011-12GDPgrowthinadvancedeconomiesby0.
8%,roughlytwicethedowngradeforemergingmarkets(0.
45%).
Nevertheless,wearemakingsomeexceptionallysharpforecastdowngradesinEasternEurope,withourforecastforaggregate2012growthinEmergingEuropecutto2.
3%from3.
4%lastmonthand4.
0%twomonthsago.
Figure5.
SelectedCountries—RecentRevisionstoCitiGDPGrowthForecastsfor2011-12-1.
6-1.
2-0.
8-0.
400.
40.
8PolandUSUKSwissSwedenCanadaJapanRussiaAustraliaEuroAreaSouthAfricaKoreaIndiaNorwayBrazilChinaRevisionInQ2RevisionInQ3TotalRevisionInQ2&Q30.
8%Note:WeshowrevisionstoGDPgrowthaveragedacross2011and2012.
Source:CitiInvestmentResearchandAnalysisThetwobigquestionsfortheglobaleconomyoverthelast12-18monthshavebeen:(1)whetherweareina"Reinhart-Rogoff"worldofprivatesectorbalance-sheetretrenchmentandextendedweaknessinprivatespending2,orwhethertheexceptionalmonetarystimulusof2009-10willpromptasolidrecovery;and(2)whethertheseemingly-inevitablesovereigndebtrestructuringofperipheryeurocountriescanbelimitedordelayedsufficientlytoavoidasystemicfinancialcrisis.
Atthestartofthisyear,weleanedtowardsrelativelyoptimisticviews,buttheanswertobothquestionsnowseemstobeclear—andadverse.
1TheonlymonthswithbiggerdowngradestoCitiforecastsaveragedoverthecurrentandnextyearhavebeenMarch2008,November2008,January2009andMarch2009.
2See"TheAftermathofFinancialCrises",ReinhartandRogoff,NBERWorkingPaperno14656,January2009.
…withanotherexceptionallylargedowngradefortheEuroAreaIngeneralwearecuttingforecastsmoreforadvancedeconomiesthanforemergingmarkets,butthismonthwehaveaverylargedowngradeforEasternEuropeTheglobaleconomyfacesdragsfromhighprivatedebtsacrossadvancedeconomiesplustheEMUsovereigndebtcrisisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets6Figure6.
G4—Q0QAnnualisedGDPGrowth,1996-2012FFigure7.
G4—ConsumerSpendingQoQandYoY,1996-2012F-10-8-6-4-202461996199820002002200420062008201020121996-2007Average=2.
5%6%F-6-4-20246199619982000200220042006200820102012QoQAnnualisedYoY6%Average1996-2007=2.
6%QoQSAARFFForecast.
Note:TheG4istheGDP-weightedaverageoftheUS,EuroArea,JapanandUK.
Sources:DatastreamandCitiInvestmentResearchandAnalysisFForecast.
Note:TheG4istheGDP-weightedaverageoftheUS,EuroArea,JapanandUK.
Sources:DatastreamandCitiInvestmentResearchandAnalysisPrivatesavingstostayhighforadvancedeconomiesTheReinhart-Rogoffthesisisthatsystemicfinancialcrisesinadvancedeconomiesandemergingmarketsareusuallyfollowedbydeeprecessions,slowrecoveriesandanextendedriseinunemploymentasbalancesheetrepairdominates.
Theinitialreboundafterthe2008-09recessionappearedtosuggestthattheexceptionalmonetarystimulus(lowinterestratesplusunconventionalmeasures)mightcounterthesedrags,withafairlystrongrecoveryinGDPplusaclearpick-upinprivateconsumptionandinvestmentacrosstheadvancedeconomiesasawholeinH2-09andthroughmostof2010.
However,thisinitialrecoveryhaspeteredout.
AggregateGDPgrowthfortheG4(averageoftheUS,EuroArea,JapanandUK)fellbackbelowaverageinQ4-2010andhasstayedbelowaveragesincethen.
Tobesure,specifictemporaryfactorsmayhaveplayedaroleinindividualcountries.
But,thewidespreadevidenceofslowdowninrecentquarterspointstomoregeneralheadwindsfromhighprivatedebtsandpoorcreditavailability.
TheunwindofsomeofthesetemporaryadverseshocksprobablyhasliftedgrowthinQ3,especiallyinJapan.
But,weexpectthatG4growthwillslipbackclosetozeroinsubsequentquarters.
AggregaterealconsumerspendingfortheG4wasroughlyflatinQ2thisyear,withamarkeddropintheEuroArea.
Earlythisyear,thejoblessratewasfallingintheUS,EMU,JapanandUK,butthesegainshavealreadyended.
ThejoblessrateprobablywillriseovercomingquartersintheUS,EuroArea,JapanandUK.
Thedragfromhighprivatedebtsisunlikelytofadequickly,leadingtoanextendedperiodofrelativelyhighprivatesavingsandrelativelysluggishrecoveryinprivatedemand.
Tobesure,corporateliquiditygenerallyisquitestrongamonglargefirms,butoverallprivatesectordebtburdensremainhighintheUS,EuroAreaandUK,withpoorcreditavailabilityforsmallfirmsinparticular.
Amidstheighteneduncertainties(forexample,overmedium-termfiscaltrends)companiesmaywellremaincautiousandcontinuetorepaydebt.
Theabilityoftheadvancedeconomiestobreakoutfromsluggishdemandisfurtherhinderedbythetightsupply/demandbalanceinmanycommoditymarkets,withgainsincommoditypriceshelpingtoshort-circuitthenascentrecoveryindemandearlythisyear.
Theoutlookhasbeenbalancedbetweenhighprivatedebtsandexceptionalmonetarystimulus……butthedragfromhighprivatedebtsseemstobedominating……andislikelytopersistoverseveralyearsGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets7EMUcrisistoworsenfurtherTheintensifyingEMUsovereigndebtcrisisislikelytofurtherhiteconomicgrowth,reinforcingthemoodofcautionamongcompaniesandhouseholds,especiallyinEuropebutinotherregionsaswell.
WehavearguedforawhilethatsovereigndebtrestructuringwithlargehaircutseventuallyislikelyinGreece,IrelandandPortugal3.
But,ourbasecasewasthatrestructuringwouldbedelayeduntil2013oreven20144.
Thatdelay,wehoped,wouldallowtimeforbankstoaccumulateorraiseenoughcapitaltowithstandsovereignlosses,andfortheperipheralcountriestoachievesufficientprimarybudgetsurplusessothatasizeablerestructuringwouldreturnthemtoasustainablefiscalpath.
However,itnowseemslikelythatsovereigndebtrestructuringwillcomemuchearlier5.
WenowexpecttheGreeksovereigntoengageinsubstantialandprobablycoercivedebtrestructuringbytheendof2012atthelatestandlikelymuchsooner(bythespringof2012orevenDecember2011).
WeexpectIrelandandPortugaltofollowGreeceintosovereigndebtrestructuringsoonafterwards,mainlybecauseof'politicalcontagion'.
First,withweakergrowthprospects,thescenariounderwhichbankscouldbuildupenoughcapitaltowithstandwrite-downsonperipheryexposurehasbecomeratherfar-fetched.
Indeed,theadversefeedbacksfromfiscaltighteningandworriesoverbankingsectorhealthtolowereconomicgrowth,andfromlowereconomicgrowthtoworsefiscaldeficitsandmoreworriesoverthebanks,havealsobecomemoreevident.
Astrategyof'buyingtime'islikelytocausethefiscalproblemswithintheEuroAreatobecomedeeperandbroader.
Second,Greecehasbecomesoclearlynon-compliantwiththeconditionalityofitsprogrammethatitisbecomingincreasinglylikelythatthiswillbereflectedintheresultsofthequarterlyreviewsofGreece'sperformanceundertheTroikaprogramme.
ApositiveassessmentisneededfordisbursementofthenextinstallmentoftheGreekfinancialsupportpackageandfortheapprovalofthesecondGreekbailoutpackage.
Third,oppositionincreditorcountriestoextrabail-outsfortheEMUperipheryissoaring,andfurtherdelayriskssimplyshiftingmoreofthelossesfromsovereigndebtrestructuringtoofficialcreditors,includingtheECB.
ThescaleandtimingofGreeksovereigndebtrestructuringinevitablyareuncertain.
But,inourview,restructuringislikelytobebig,atlast50%inNPVterms.
Twoplausibletargetsforpost-restructuringdebt-to-GDPratiosareeither60%ofGDP(theStabilityandGrowthPactreferencevalue)or80%(whichisclosetothecurrentEuroAreaaverageexGreece).
AssuminguniformhaircutsonallcreditorsbartheIMF,theseassumptionswouldimplyhaircutsof67%and54%,respectively.
Ifweexemptbills,haircutswouldriseto70%and57%,respectively.
Exemptingbothbillsandforeign-issueddebt(whichweassumecurrentlyaccountforabout10%ofthetotal)wouldbringthehaircutto79%and64%,respectively,assumingthattheECBonlypurchaseddebtissuedunderGreeklaw.
Witha50%haircuttocouponpayments,Greecewouldcontinuetohaveabudgetdeficitofabout7%ofGDPandstillneedsizeablefundingfromtheTroikaforthesovereignandECBliquidityassistanceforthebanks.
AfailuretoagreesuchcontinuedfundingwouldprobablyforceGreecetoexitEMU,andweregarditasunlikely(butnotimpossible)forthatreason.
3See"TheDebtofNations",GlobalEconomicsView,7January2011,Citi4Seerecentissuesof"GlobalEconomicOutlookandStrategy",WillemBuiteretall,Citi.
5See"DebtRestructuringBetterEarlyThanLate",EuroWeekly,JuergenMichelsetal,23September2011.
Figure8.
SelectedCountries—IndustrialProductionDataandForecasts(Pct.
),2011-13F2011F2012F2013FWorld5.
7%3.
3%4.
1%UnitedStates3.
82.
83.
5Japan-2.
52.
73.
5EuroArea3.
9-0.
51.
4UnitedKingdom0.
10.
00.
5Canada0.
8-1.
00.
4China13.
812.
511.
5India6.
88.
08.
8Korea8.
18.
88.
6Brazil2.
13.
03.
8Source:CitiInvestmentResearchandAnalysisTheslowdownandGreece'sfiscalslippagehavebroughtthelikelytimingforEMUsovereigndebtrestructuringmuchcloserWebelievethatearlyandlargerestructuringislikely…GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets8ThemostlikelydateforrestructuringisaftertheratificationoftheEFSFenlargementiscomplete,whichprobablywillbeinlateOctoberorearlyNovember.
Atthatstage,theexistingofficialfacilitiescouldhandlethedirectimplicationsofanorderlydeepsovereigndebtrestructuringofGreece,IrelandandPortugal,arecapitalisationofthebanksofthesethreecountries,andofthebanksinthecoreEAexposedtotheouterperiphery.
WeexpectIrelandandPortugaltofollowGreeceintosovereigndebtrestructuringsoonafterwards,mainlybecauseof'politicalcontagion'.
AGreekdefaultwouldfurtherraisethemarketassessmentofthelikelihoodofdefaultbythesesovereigns,andunderminethepoliticalcommitmenttoausterityinIrelandandPortugal.
IfGreecegetsadealthatoffersdebtreliefandfurtherfundinginreturnforeffortsofquestionabledeterminationtotightentheirbelts,thenIrishandPortuguesevotersandpoliticiansarelikelytodemandthesamelenienttreatment,especiallygiventhattheyhavesofarstucktotheconditionsoftheirprogrammes.
Earlyrestructuringislikelytobefarmoredisruptivetoeconomiesandfinancialmarkets,andweexpecttheEuroAreatofallintoafreshrecessionincomingquarters.
Nevertheless,thereisahugerangeofuncertainty,anditisunclearhowmuchcontagionwillspreadtootherEuroAreacountries,notablyItalyandSpain.
Thisislikelytodependonarangeoffactors.
Inparticular,weassumethat(1)GreecewillnotleaveEMU,andnorwillanyothercountry;(2)therewillbealargebackstopfacility,viatheEFSFand/orECB,forEuroAreacountriesotherthanGreece,IrelandandPortugal,notablyItalyandSpain;(3)therewillbemorewidespreadrecapitalizationofEuropeanbanks.
Butthesearenotcertain,andadverseoutcomescouldyetproduceamarkedintensificationoffinancialmarketstrainsandamuchbleakeroutlookfortheEMUeconomies.
SluggishgrowthandnegativerealinterestratesWedonotexpectthatstrainsinEuroAreasovereigndebtwillquicklyfadeevenafter2012.
Asaresult,weexpectthatnear-termrecessionintheEuroAreawillbefollowedbyamodestrecoveryinlateryears.
Inall,ourforecastsimplythatrealGDPintheEuroAreain2015willonlybe2-3%abovethe2007level.
FortheUK,weexpecttheeconomywillbeclosetorecessionneartermwithonlysluggishgrowththereafter,leavingGDPin2015only3-4%abovethe2007level.
ForboththeUKandEuroArea,theseforecastpathsforrealGDPgrowthover2007-15areworsethanJapan'sexperiencefor1992-00,thefirsteightyearsofJapan's'lost'period,whichactuallysawJapan'srealGDPriseby5.
9%6.
TheUKandEuroAreaoutlooksfrom2007to2015arebroadlycomparabletotheworst8-yearperiodinJapan'srecenthistory,2001-09,inwhichrealGDProsebyacumulative3.
0%.
ForboththeUKandEuroArea,weexpectthesetobetheweakestperiodsformanydecades.
FortheweakerEuroAreaeconomies(egIreland,Greece,Portugal,ItalyandSpain),wethinkthecumulativepathforrealGDPoverthisperiodwillbeconsiderablyworsethananyperiodinJapan'srecenthistory.
Bycontrast,westillexpectthattheUSrecoverywillovertimebeclearlybetterthanJapan's'lost'decadepath.
WiththisbackdropofsluggishgrowthfortheUS,JapanandUK,andoutrightrecessionintheEuroArea,weexpectalongperiodoflownominalinterestrates–andnegativerealinterestrates–forthemainadvancedeconomies.
Anyprospectofrisinginterestratesinthemainadvancedeconomiesappearsyearsaway.
TheECBislikelytocutitskeypolicyratebackto1.
0%inthenextfewmonthsand,withcontinuedprovisionofampleliquidity,overnightratesprobablywillfallwellbelow6From1997,justbeforerecession,realGDProse7.
9%intheeightyearsto2005.
…occurringbeforeend-2012andprobablymuchsoonerIrelandandPortugalprobablyalsowillseekdebtreliefinordertoreducetheneedforpainfulausteritymeasuresEarlydebtrestructuringislikelytoaffectrestoftheEuroArea,andItalyandSpaininparticularWeexpectthatrealGDPintheEuroAreaandUKin2015willonlybeafewpercentabovethe2007level……andthisperformanceisasbadasanythingseeninJapanoverrecentyearsWeexpectalongperiodoflowornegativerealinterestratesintheUSandEuropeGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets91.
0%.
ForFederalReservepolicy,ourbasecasedoesnotanticipatethateconomicandfinancialdevelopmentswillpressofficialstoenhanceaccommodationeffortsfurtherbeforethescheduledendofthecurrentmaturityextension(OperationTwist)campaignnextJune.
Ifdownsiderisksbecomemorethreatening,policymakersmightturnfirsttowardstillstrongeraccommodationlanguageguidingrateexpectations.
Beyondthat,theCommitteecouldbeforcedtoconsidermorecreativeoptionsoftargetingnominalGDPorinflation.
However,unlessdeflationscenariosbecomeacleardanger,renewedexpansionofthebalancesheetwilllikelyremainoffthetable.
TheUKMPCislikelytobemoreaggressive,andweexpectthemtoimplementextraQEonalargescaleincomingmonths,withperhapstoafurther300bnorso(about20%ofGDP)overthenextfewquartersunlessgrowthprospectsimprovemarkedly.
Figure9.
US,EuroArea,UKandJapan—CumulativeChangeinRealGDPInLow-GrowthPeriods,1991-2015FFigure10.
US,EMUandUK—RealShort-TermInterestRates(VersusCPIInflation),1980-2015F-10-50510152025048121620NumberofYearsfromStartofLowGrowthPeriodJapan(From1992)EMUDataandForecast(From2007)USDataandForecast(From2007)UKForecast(From2007)25%-4-2024681019801985199019952000200520102015USEMUUK10%Sources:DatastreamandCitiInvestmentResearchandAnalysisFCitiForecast.
Note:fortheUK,weusetheconsumerspendingdeflatorbefore1988.
Sources:DatastreamandCitiInvestmentResearchandAnalysisFigure11.
Global—SummaryofViewsofCiti'sMarketStrategistsEquitiesG10RatesCreditSecuritizedProductsFXCommoditiesGlobalMacroStrategyOverallViewMarketscheap,butneedacatalystSlowinggrowthandfallingconfidencemeansloweryieldsandflattercurvesPositioninghasimprovedbutmarketlikelytowidenfurtheronnegativeheadlinesMarketweightBullishUSDandJPYMorebearishshort-termfromweakergrowthandriskherding.
Dispersionacrossenergy/ags.
ContinuedinterestinpreciousmetalsCautiousriskassets,bullishcoreFIMost-FavouredRegion/SectorEM,Japan/IT,Materials,IndustrialsEUR5yrandGBPlongendLow-betacorenon-fins&seniorSIFIUSCMBSseniortranchesUSDGold,PreciousMetals,GrainsCoreFILeast-FavouredRegion/SectorUK/Telecoms,HealthCare,Cons.
StaplesEMUnonAAAFrenchcorporates&peripherysub-debtSpanish&IrishRMBSEUR,CEEMEACrudeOil,GasolineEurope,Financials,CommoditiesandotherCyclicalsKeyRisksMajorglobalrecessionEMUresolutionwouldtriggerdramaticreversalPolicydisappointment;recession;widersovereignspreadsRegulationEarlyQE3inUSPolicystimulus,economicrecovery,geopoliticalrisk/Downside:double-dip,eurozonecontagionEMUperiphery,globalgrowth,QE3inUSSource:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets10Figure12.
SelectedCountries—EconomicForecastOverview(Percent),2010-2015FGDPGrowthCPIInflationShort-TermInterestRates201020112012201320142015201020112012201320142015201020112012201320142015Global4.
13.
02.
93.
43.
83.
92.
74.
03.
23.
23.
13.
12.
072.
602.
782.
843.
293.
72BasedonPPPweights5.
03.
83.
64.
14.
54.
53.
44.
73.
83.
83.
63.
5IndustrialCountries2.
61.
41.
31.
72.
32.
41.
42.
61.
71.
71.
81.
80.
650.
760.
730.
801.
362.
14UnitedStates3.
01.
71.
92.
53.
33.
51.
63.
21.
92.
12.
22.
20.
250.
250.
250.
251.
102.
65Japan4.
0-0.
42.
10.
91.
51.
5-0.
70.
0-0.
3-0.
10.
10.
30.
100.
100.
100.
100.
130.
48EuroArea1.
71.
6-0.
20.
61.
21.
21.
62.
71.
91.
81.
91.
91.
001.
191.
001.
061.
571.
81Canada3.
22.
11.
82.
32.
52.
81.
82.
82.
02.
02.
02.
00.
691.
001.
001.
632.
192.
50Australia2.
71.
43.
74.
14.
33.
82.
83.
32.
53.
32.
92.
64.
444.
754.
885.
195.
195.
00NewZealand1.
71.
42.
62.
93.
23.
12.
34.
22.
12.
32.
62.
92.
812.
503.
254.
255.
505.
50Germany3.
63.
01.
01.
31.
71.
81.
12.
32.
02.
22.
12.
3France1.
41.
60.
21.
21.
71.
51.
72.
21.
82.
31.
51.
5Italy1.
20.
5-1.
00.
00.
80.
91.
63.
02.
71.
91.
91.
9Spain-0.
10.
6-0.
70.
00.
80.
92.
02.
90.
71.
51.
71.
7Greece-4.
4-5.
6-4.
9-2.
0-1.
0-0.
54.
73.
21.
21.
31.
41.
5Portugal1.
3-2.
0-5.
7-3.
8-0.
41.
21.
43.
40.
70.
51.
00.
8Netherlands1.
61.
30.
41.
01.
71.
81.
32.
31.
81.
91.
82.
0Denmark1.
81.
51.
61.
71.
81.
72.
32.
72.
01.
92.
12.
01.
051.
241.
051.
131.
681.
99Norway2.
12.
72.
93.
02.
72.
72.
41.
41.
82.
22.
32.
41.
912.
182.
302.
823.
534.
25Sweden5.
44.
32.
12.
62.
72.
61.
23.
02.
02.
22.
32.
10.
501.
762.
002.
303.
254.
00Switzerland2.
72.
11.
21.
21.
21.
20.
70.
3-0.
2-0.
6-0.
20.
10.
220.
440.
000.
000.
000.
00UnitedKingdom1.
41.
00.
71.
41.
82.
73.
34.
42.
92.
52.
42.
20.
500.
500.
500.
501.
062.
04EmergingMarkets7.
36.
15.
66.
06.
16.
15.
36.
55.
75.
55.
04.
95.
025.
926.
166.
046.
175.
96China10.
49.
08.
78.
58.
38.
13.
35.
34.
24.
04.
04.
02.
313.
223.
503.
754.
004.
00HongKong7.
05.
64.
54.
04.
04.
02.
45.
34.
03.
03.
53.
50.
250.
280.
440.
801.
302.
50India8.
57.
68.
28.
88.
88.
98.
69.
57.
57.
06.
06.
05.
968.
198.
507.
507.
507.
50Indonesia6.
16.
56.
36.
56.
77.
05.
15.
06.
26.
56.
56.
56.
506.
696.
506.
506.
757.
00Korea6.
23.
73.
94.
14.
54.
03.
04.
53.
53.
23.
13.
02.
683.
533.
583.
904.
505.
00Singapore14.
55.
33.
35.
05.
05.
02.
85.
13.
02.
52.
52.
50.
560.
420.
402.
302.
803.
20CzechRepublic2.
31.
90.
62.
43.
33.
81.
51.
82.
52.
22.
32.
00.
830.
750.
751.
232.
293.
25Hungary1.
21.
41.
12.
02.
52.
94.
73.
94.
83.
13.
03.
15.
486.
006.
006.
005.
695.
50Poland3.
83.
81.
93.
43.
53.
42.
74.
23.
02.
62.
52.
53.
504.
254.
154.
004.
655.
00Romania-1.
31.
62.
04.
34.
54.
66.
16.
23.
73.
03.
03.
06.
546.
255.
135.
005.
005.
00Russia4.
04.
02.
54.
24.
04.
06.
98.
87.
26.
55.
55.
57.
758.
257.
506.
006.
005.
50Turkey9.
07.
32.
54.
94.
44.
58.
66.
07.
56.
76.
25.
76.
505.
756.
758.
008.
007.
50Nigeria7.
27.
16.
76.
56.
97.
213.
710.
913.
010.
510.
39.
56.
088.
2310.
0010.
0010.
5010.
00SouthAfrica2.
83.
02.
83.
94.
44.
34.
15.
05.
85.
85.
65.
56.
415.
505.
837.
258.
508.
75Argentina9.
28.
55.
03.
53.
53.
518.
425.
022.
527.
522.
515.
010.
1912.
1819.
1213.
3911.
009.
00Brazil7.
53.
74.
04.
54.
54.
55.
06.
65.
74.
54.
04.
09.
8010.
8810.
7510.
7510.
259.
00Mexico5.
44.
13.
53.
43.
73.
44.
23.
43.
83.
83.
93.
84.
404.
504.
505.
387.
007.
00Venezuela-1.
43.
53.
92.
32.
52.
428.
227.
026.
328.
026.
029.
014.
5219.
4020.
4021.
0021.
0021.
00Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets11Figure13.
SelectedCountries—EconomicForecastOverview(Percent),2010-2015FCurrentBalance(PctofGDP)FiscalBalance(PctofGDP)GovernmentDebt(PctofGDP)201020112012201320142015201020112012201320142015201020112012201320142015Global0.
20.
0-0.
10.
00.
0-0.
1-5.
7-5.
0-3.
9-3.
2-2.
8-2.
5656666666564BasedonPPPweights0.
60.
21.
92.
12.
12.
1-5.
2-4.
7-3.
8-3.
3-2.
9-2.
6IndustrialCountries-0.
8-1.
0-0.
9-0.
8-0.
8-0.
8-7.
2-6.
5-4.
8-3.
9-3.
2-2.
7899496989797UnitedStates-3.
2-3.
1-2.
8-2.
7-2.
9-3.
2-9.
0-8.
5-6.
2-5.
0-4.
0-3.
5636872757677Japan3.
62.
12.
12.
52.
82.
8-9.
8-10.
3-9.
0-8.
5-8.
2-7.
7225238240245249253EuroArea-0.
5-0.
7-1.
1-1.
1-1.
1-1.
0-6.
0-4.
3-3.
5-2.
4-2.
0-1.
6858991919089Canada-3.
1-3.
3-3.
5-2.
5-2.
4-1.
9-2.
2-1.
9-1.
1-0.
50.
00.
2343434333230Australia-2.
7-2.
3-2.
0-4.
7-5.
4-5.
5-4.
2-3.
6-1.
80.
20.
20.
3466766NewZealand-4.
1-3.
9-5.
3-6.
3-7.
7-8.
4-4.
0-8.
0-6.
0-3.
0-0.
50.
0142127303232Germany5.
74.
93.
83.
84.
14.
2-3.
3-1.
7-1.
5-0.
9-0.
5-0.
3838485898785France-1.
7-2.
7-2.
3-1.
5-0.
70.
0-7.
1-5.
6-4.
7-4.
0-3.
0-2.
0828593969695Italy-3.
5-3.
8-3.
3-3.
0-2.
9-2.
8-4.
6-4.
0-2.
8-1.
5-1.
2-0.
7119121123123121120Spain-4.
6-3.
8-3.
0-2.
7-2.
4-2.
2-9.
2-6.
8-6.
2-5.
8-5.
6-5.
6606876838993Greece-10.
4-9.
2-4.
5-2.
9-2.
9-1.
9-10.
5-10.
4-6.
8-2.
30.
61.
514316591929088Portugal-10.
5-8.
7-6.
3-3.
4-2.
0-1.
9-9.
1-6.
0-4.
7-2.
5-2.
7-2.
393108879499102Netherlands7.
28.
07.
17.
06.
97.
0-5.
4-3.
0-2.
4-2.
0-1.
20.
0636568696966Denmark5.
35.
65.
04.
33.
53.
1-2.
8-3.
8-4.
6-3.
9-2.
6-2.
1444649515252Norway12.
414.
014.
314.
915.
215.
810.
612.
012.
513.
515.
019.
0NANANANANANASweden6.
66.
46.
56.
66.
76.
9-0.
20.
20.
41.
12.
03.
1393634312827Switzerland14.
514.
713.
013.
214.
315.
40.
20.
30.
60.
60.
90.
9555351504847UnitedKingdom-3.
2-2.
2-0.
60.
51.
21.
7-9.
7-8.
3-7.
4-6.
5-5.
5-4.
6768287909394EmergingMarkets2.
51.
81.
31.
21.
10.
9-2.
6-2.
3-2.
4-2.
3-2.
2-2.
1161616171716China5.
24.
03.
22.
82.
52.
0-1.
6-2.
0-2.
0-2.
0-2.
0-2.
0212021212121HongKong6.
28.
39.
310.
010.
010.
04.
22.
93.
02.
52.
02.
0112233India-2.
6-3.
0-2.
3-1.
5-0.
8-0.
4-8.
1-8.
3-7.
1-7.
0-6.
0-6.
0686664626058Indonesia0.
90.
1-0.
3-0.
5-0.
7-0.
7-0.
6-1.
5-1.
5-1.
5-1.
3-1.
0262625242323Korea2.
81.
41.
10.
80.
5-0.
51.
40.
50.
71.
21.
51.
4353534333130Singapore22.
216.
515.
013.
013.
012.
00.
50.
02.
02.
01.
01.
0107110115118120120CzechRepublic-3.
7-3.
8-3.
5-4.
1-4.
7-5.
7-4.
7-4.
5-4.
0-3.
4-2.
3-1.
5394144454544Hungary2.
13.
04.
3-0.
8-2.
0-2.
6-4.
21.
9-3.
0-3.
0-2.
9-2.
9807473716967Poland-3.
4-4.
4-3.
4-4.
0-5.
0-5.
4-7.
9-5.
3-4.
5-3.
2-2.
3-2.
2535353525050Romania-4.
2-4.
2-5.
0-5.
5-5.
5-5.
0-6.
7-4.
5-3.
0-2.
5-2.
0-1.
5353737363432Russia4.
84.
81.
91.
4-1.
3-1.
8-4.
0-1.
4-3.
1-2.
7-2.
3-1.
98911121313Turkey-6.
5-9.
6-8.
4-7.
4-6.
6-5.
8-3.
6-1.
9-2.
7-3.
0-3.
0-3.
0434038363636Nigeria6.
18.
86.
45.
94.
63.
7-4.
9-2.
3-2.
4-1.
8-2.
3-2.
8NANANANANANASouthAfrica-2.
7-3.
3-4.
7-6.
2-6.
6-6.
4-5.
2-5.
6-5.
6-5.
2-4.
7-4.
3343843403735Argentina1.
0-0.
10.
90.
3-0.
1-0.
10.
2-0.
61.
01.
52.
12.
3494949505253Brazil-2.
3-2.
2-2.
7-2.
5-2.
2-2.
0-2.
5-2.
5-2.
5-2.
2-2.
4-2.
4636363707071Mexico-0.
5-1.
1-2.
6-2.
6-2.
7-2.
7-2.
8-2.
5-2.
0-1.
9-1.
9-1.
9434242424242Venezuela3.
711.
611.
05.
04.
94.
7-6.
6-5.
0-5.
0-5.
5-5.
9-5.
8384033394140Note:USdebtanddeficitfiguresarefortheFederalgovernmentonly.
Allothercountriesaregeneralgovernmentdebtanddeficits.
WeassumesovereigndebtrestructuringinGreece,IrelandandPortugalin2014.
Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets12Figure14.
SelectedCountries—ChangesinEconomicForecastfromthePreviousMonth(PercentagePoints),2011-2013FGDPGrowthCPIInflationCurrentBalance(PctofGDP)FiscalBalance(PctofGDP)201120122013201120122013201120122013201120122013Global-0.
1-0.
3-0.
20.
1-0.
10.
1BasedonPPPweights-0.
4-0.
20.
10.
1-0.
10.
10.
1-0.
1IndustrialCountries-0.
4-0.
30.
10.
1-0.
1-0.
1-0.
20.
2UnitedStates0.
1-0.
2-0.
20.
20.
3-0.
1-0.
1-0.
10.
30.
6Japan-0.
2-0.
3-0.
6-0.
2-0.
2-0.
5-0.
5-0.
2EuroArea-0.
1-0.
8-0.
50.
1-0.
1-0.
1-0.
4-0.
4-0.
2-0.
4-0.
2Canada-0.
3-0.
40.
10.
30.
9-0.
1Australia-0.
3-0.
30.
2-0.
20.
2-0.
50.
81.
6-0.
3NewZealand-1.
0-0.
80.
4-0.
1-0.
8-0.
2-3.
20.
2-1.
30.
4-1.
3-1.
2Germany-0.
9-0.
70.
1-0.
3-1.
0-0.
70.
2-0.
5-0.
6France-0.
7-0.
10.
1-1.
1-0.
10.
4-0.
2-0.
7Italy-0.
1-0.
7-0.
20.
20.
20.
51.
11.
50.
1-0.
3-0.
2Spain-0.
4-0.
4-0.
1-0.
3-0.
4-1.
4-1.
50.
1Greece-1.
3-1.
9-0.
1-0.
6-1.
7-0.
5-0.
8-0.
60.
73.
5Portugal-0.
1-1.
9-1.
1-0.
1-0.
1-0.
2-0.
4-0.
6-0.
30.
31.
4Netherlands-0.
2-0.
7-0.
50.
10.
1-0.
1Denmark-0.
1-0.
3-0.
3-0.
1-0.
20.
50.
71.
0-0.
8-0.
1Norway-0.
2-0.
3-0.
20.
11.
0-0.
2-0.
1Sweden-0.
4-0.
7-0.
2-0.
3-0.
2-0.
1-0.
3-0.
8-1.
5Switzerland-0.
1-0.
2-0.
1-0.
2-0.
8-0.
91.
12.
93.
3UnitedKingdom-0.
1-0.
6-0.
2-0.
3-0.
2-0.
2-0.
3-0.
2-0.
1-0.
5-0.
7EmergingMarkets0.
1-0.
2-0.
10.
10.
10.
1-0.
2-0.
2China-0.
3-0.
3-0.
3-0.
2HongKong-0.
50.
10.
7India0.
51.
0-0.
2-0.
10.
3IndonesiaKorea0.
20.
30.
2-0.
2-0.
1-0.
1-0.
3-0.
2-0.
2Singapore-0.
4-0.
70.
30.
20.
2CzechRepublic-0.
2-0.
9-0.
80.
20.
10.
3-0.
7-0.
1Hungary-0.
4-0.
5-0.
90.
11.
51.
44.
0-0.
10.
80.
7Poland-1.
0-0.
10.
20.
41.
00.
20.
4-0.
4-0.
4Romania-1.
0-0.
2-0.
10.
1Russia-1.
00.
10.
31.
01.
0-0.
4Turkey1.
0-1.
4-0.
30.
20.
40.
30.
70.
8Nigeria0.
30.
91.
2-1.
7-0.
10.
1-0.
40.
1SouthAfrica-0.
4-0.
70.
20.
30.
50.
5-0.
2-0.
5-0.
8Argentina0.
71.
0Brazil0.
20.
1Mexico0.
2-0.
2Venezuela0.
2-0.
20.
60.
4Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets13Figure15.
SelectedCountries—EconomicForecastOverviewandExchangeRateForecasts(Percent),2010-2015F10-YearYieldsExchangeRatesVersusU.
S.
Dollar*ExchangeRateVersusEuro201020112012201320142015201020112012201320142015201020112012201320142015IndustrialCountriesUnitedStates3.
212.
752.
353.
454.
004.
00NANANANANANA1.
321.
381.
261.
291.
321.
34Japan1.
181.
171.
101.
501.
751.
7587797678818311410896101106111EuroArea2.
782.
501.
401.
802.
202.
701.
321.
381.
261.
291.
321.
34NANANANANANACanada3.
242.
852.
763.
854.
003.
901.
031.
011.
010.
960.
960.
971.
351.
381.
281.
241.
261.
30Australia5.
554.
804.
765.
506.
006.
300.
941.
011.
000.
960.
920.
891.
411.
361.
271.
351.
431.
50NewZealand5.
874.
964.
965.
706.
406.
800.
730.
780.
800.
670.
630.
621.
811.
761.
581.
942.
102.
15Germany2.
782.
501.
401.
802.
202.
70France3.
123.
202.
302.
502.
803.
20Italy4.
005.
306.
204.
804.
504.
20Spain4.
305.
406.
205.
004.
704.
40Greece9.
2019.
0018.
9016.
8012.
207.
70Portugal5.
4011.
2016.
9016.
8012.
207.
70Netherlands3.
002.
901.
902.
102.
503.
00Denmark2.
952.
601.
561.
992.
432.
95Norway3.
412.
831.
912.
402.
903.
356.
025.
716.
165.
965.
845.
757.
957.
867.
787.
717.
707.
69Sweden2.
892.
511.
542.
052.
503.
057.
096.
687.
186.
846.
686.
589.
369.
199.
078.
848.
808.
80Switzerland1.
571.
280.
670.
601.
001.
501.
010.
900.
961.
021.
031.
031.
331.
241.
211.
321.
361.
37UnitedKingdom3.
581.
781.
752.
052.
602.
901.
541.
571.
521.
621.
671.
700.
860.
880.
830.
800.
790.
79EmergingMarketsChina2.
963.
653.
804.
054.
304.
306.
776.
426.
155.
905.
805.
609.
158.
827.
777.
637.
647.
49HongKong1.
541.
201.
202.
152.
752.
757.
777.
787.
777.
757.
757.
7510.
5010.
709.
8110.
0210.
2110.
37India8.
008.
258.
258.
258.
258.
2545.
5847.
0047.
5046.
1345.
1344.
1361.
6264.
6460.
0059.
6259.
4759.
03Indonesia8.
497.
717.
697.
257.
257.
25909289228975867586508625122911227211337112131139911539Korea4.
083.
873.
825.
205.
455.
6011561134114810531010980156315591449136113311311Singapore2.
412.
052.
052.
803.
203.
601.
361.
271.
241.
191.
171.
161.
841.
751.
571.
541.
541.
55CzechRepublic3.
713.
653.
674.
174.
404.
4019.
118.
019.
718.
51.
717.
025.
824.
724.
823.
923.
322.
7Hungary7.
977.
327.
747.
617.
106.
09208211260236223215281290329305294287Poland5.
355.
635.
585.
455.
555.
343.
023.
103.
453.
072.
872.
734.
084.
274.
353.
963.
783.
65RomaniaNANANANANANA3.
183.
063.
213.
072.
942.
834.
304.
214.
063.
963.
873.
79Russia7.
277.
997.
577.
597.
607.
6030.
430.
333.
731.
830.
930.
541.
141.
742.
541.
140.
840.
9TurkeyNANANANANANA1.
501.
721.
871.
801.
741.
682.
032.
362.
362.
332.
292.
24NigeriaNANANANANANA151154153150148150204212193194195201SouthAfrica8.
388.
288.
339.
509.
259.
207.
327.
458.
408.
739.
119.
519.
9010.
2510.
6111.
2912.
0012.
72ArgentinaNANANANANANA3.
904.
165.
316.
087.
198.
145.
275.
726.
717.
869.
4710.
90Brazil12.
0511.
9711.
5910.
989.
748.
751.
761.
721.
801.
721.
731.
762.
382.
362.
272.
222.
282.
36Mexico6.
936.
897.
257.
508.
108.
0012.
612.
613.
012.
412.
412.
717.
117.
416.
416.
016.
417.
0Venezuela13.
7813.
0014.
0015.
0015.
0015.
002.
594.
304.
304.
804.
805.
303.
505.
915.
436.
206.
337.
09*PerUSDexceptEuroArea,Australia,NewZealand,UnitedKingdom.
Note:AllforeignexchangeforecastsareconsistentwiththerollingforecastspresentedinFigure84.
Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets14Figure16.
ShortRates(EndofPeriod),asof28Sep2011(Percent)Current4Q111Q122Q123Q124Q12UnitedStates0.
250.
250.
250.
250.
250.
25Japan0.
100.
100.
100.
100.
100.
10EuroArea1.
501.
001.
001.
001.
001.
00Canada1.
001.
001.
001.
001.
001.
00Australia4.
754.
754.
754.
755.
005.
00NewZealand2.
502.
502.
753.
003.
503.
75Denmark1.
551.
301.
051.
051.
051.
05Norway2.
252.
252.
252.
252.
252.
50Sweden2.
002.
002.
002.
002.
002.
00Switzerland0.
00.
000.
000.
000.
000.
00UnitedKingdom0.
500.
500.
500.
500.
500.
50China3.
503.
503.
503.
503.
503.
50Note:Theratesshownareovernightrates,exceptforDenmark,whereitisthecentralbank'sseven-dayreporate;Switzerland,whereitistheSNB'sthree-monthLIBORtarget;andChina,whereitistheone-yeardepositrate.
Source:CitiInvestmentResearchandAnalysisFigure17.
10-YearYieldForecasts(PeriodAverage),asof28Sep2011(Percent)Current4Q111Q122Q123Q124Q12UnitedStates1.
982.
002.
002.
202.
502.
75Japan1.
011.
201.
201.
101.
051.
05EuroArea(Germany)1.
931.
501.
251.
351.
501.
50Canada2.
192.
402.
402.
602.
903.
15Australia4.
314.
304.
454.
604.
905.
10NewZealand4.
354.
604.
754.
905.
005.
20Denmark2.
131.
701.
451.
501.
651.
65Norway2.
421.
851.
651.
802.
052.
15Sweden1.
841.
501.
351.
451.
651.
70Switzerland0.
900.
730.
530.
660.
680.
68UnitedKingdom2.
342.
001.
651.
651.
801.
80Note:Bondyieldsmeasuredonlocalmarketbasis(semi-annualfortheUnitedStates,UnitedKingdom,Canada,Australia,andNewZealand;annualfortherest).
The10-yearyieldfortheEuroAreaistheBundyield.
Source:CitiInvestmentResearchandAnalysisFigure18.
10-YearYieldSpreads(PeriodAverage),asof28Sep2011Spreadvs.
US$Spreadvs.
GermanyCurrent4Q111Q122Q123Q124Q12Current4Q111Q122Q123Q124Q12UnitedStatesNANANANANANA6517686102127Japan-98-81-81-111-147-172-92-30-5-25-45-45EuroArea-6-51-76-86-102-127NANANANANANACanada2140404041412791116127142167Australia237234249244244240243285325330346367NewZealand241264280275255250247315356361356377France69342414-12-4774851001009080Italy366399424394378323371450500480480450Spain309329404394378353314380480480480480Netherlands36-6-31-46-67-97414545403530Belgium1801491441249863185200220210200190Denmark14-31-56-71-87-112202020151515Norway43-16-36-41-47-62493540455565Sweden-15-51-66-76-87-107-9010101520Switzerland-114-128-148-155-184-209-108-77-72-69-82-82UnitedKingdom30-1-36-56-72-97365040303030NANotapplicable.
Note:Spreadscalculatedonannualbasis(exceptthoseoftheUnitedKingdom,Canada,AustraliaandNewZealandovertheUnitedStates).
Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets15Figure19.
EmergingMarketCountries—ShortRatesActualandForecastofAdditionalRateMoves(EndofPeriod),asof28Sep2011TotalCumulativeRateMovesExpectedCountryCurrentRate(%)byDec11Mar12Jun12Sep12Dec12SouthAfrica5.
500005050100Turkey5.
750752500100Colombia4.
50050002575China3.
50000000Czech0.
75000000Hungary6.
00000000Korea3.
25000000Mexico4.
50000000Philippines4.
50000000Thailand3.
50000000Indonesia6.
75-250000-25Israel3.
00-250000-25India8.
2500-25-250-50Poland4.
5000-5000-50Russia8.
250-2500-50-75Chile5.
250-75-2500-100Brazil12.
00-100-50000-150Source:CitiInvestmentResearchandAnalysisFigure20.
ForeignExchangeForecasts(EndofPeriod),asof28Sep2011vs.
USDvs.
EURCurrentDec11Mar12Jun12Sep12Dec12CurrentDec11Mar12Jun12Sep12Dec12UnitedStatesNANANANANANA1.
351.
291.
281.
261.
251.
26Japan7675757676771039796969597EuroArea1.
351.
291.
281.
261.
251.
26NANANANANANACanada1.
031.
061.
041.
021.
000.
991.
391.
361.
321.
291.
251.
25Australia0.
980.
950.
981.
001.
021.
001.
381.
351.
311.
261.
231.
26NewZealand0.
780.
760.
790.
810.
830.
781.
741.
691.
621.
561.
511.
63Norway5.
836.
136.
156.
186.
196.
127.
887.
907.
857.
807.
757.
74Sweden6.
887.
257.
237.
227.
197.
089.
309.
349.
229.
119.
008.
95Switzerland0.
900.
950.
950.
950.
950.
981.
221.
231.
221.
201.
191.
23UnitedKingdom1.
551.
521.
511.
511.
511.
540.
870.
850.
840.
840.
830.
82China6.
396.
306.
246.
186.
126.
058.
68.
18.
07.
87.
77.
6India49.
449.
548.
047.
547.
547.
066.
863.
861.
260.
059.
459.
4Korea116712001180116011401110157815471505146414261403Poland3.
263.
603.
553.
493.
433.
324.
414.
644.
524.
414.
294.
19Russia32.
032.
933.
433.
834.
133.
443.
342.
542.
542.
642.
742.
2SouthAfrica8.
278.
018.
188.
358.
508.
5711.
1810.
3310.
4310.
5310.
6410.
83Turkey1.
841.
861.
871.
871.
881.
862.
492.
402.
382.
372.
352.
34Brazil1.
861.
821.
811.
811.
801.
772.
512.
342.
312.
282.
252.
24Mexico13.
813.
213.
113.
113.
012.
818.
617.
016.
716.
516.
216.
2Note:AllforeignexchangeforecastsareconsistentwiththerollingforecastspresentedinFigure83.
Source:CitiInvestmentResearchandAnalysisFigure21.
ForeignExchangeForecasts(EndofPeriod),asof28Sep2011vs.
JPYCurrentDec11Mar12Jun12Sep12Dec12UnitedStates767575767677JapanNANANANANANAEuroArea1039796969597Canada747173747678Australia757173767777NewZealand59.
457.
259.
261.
262.
859.
4Norway13.
112.
212.
312.
312.
312.
5Sweden11.
110.
410.
410.
510.
610.
8Switzerland857979798078UnitedKingdom118114114114115118China121212121213India1.
541.
521.
571.
591.
601.
63Korea15.
3015.
9915.
6615.
3314.
9914.
50Poland23.
420.
821.
221.
722.
223.
1Russia2.
42.
32.
32.
22.
22.
3SouthAfrica9.
29.
49.
29.
18.
98.
9Turkey41.
540.
340.
440.
440.
541.
2Brazil41.
041.
241.
641.
942.
343.
2Mexico5.
55.
75.
75.
85.
96.
0Note:AllforeignexchangeforecastsareconsistentwiththerollingforecastspresentedinFigure83.
Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets16CountryCommentaryUnitedStatesAlthoughthereversalofsometemporarydragsgaveaboosttoeconomicgrowthatthestartofthethirdquarter,theoutlookhasdeterioratedabitfurtherthismonth.
Wecontinuetoexpectbelow-trendgrowthonaveragethroughnextyear,withthejoblessratelikelytoedgeupslightlyfromalreadyelevatedlevels.
Butthelatestforecastalsoincorporatesthepossibilitythatrecurringboutsofheightenedriskaversionthathavebeenafeatureofearlyrecoverymaypersiststilllonger,reflectingdomesticpolicyuncertaintiesaswellascontagioneffectsfromanunresolvedEuropeandebtcrisis.
TheFed'sback-to-backeasingeffortsintheformofstrongerguidanceandOperationTwistwerealreadypartoftheAugustforecastandtheoutlookassumesthesemeasureswillyieldmodestsupportforfinancialconditions.
Alongwithloweroilprices,thisbufferssomeofthedownsideriskstoexpansion.
ThepreviousassumptionthatthescheduledexpirationofpayrolltaxreliefwillbeextendednowaddssomefurtherenhancementinlinewiththeAdministration'sproposedstimuluspackage.
Retrenchmentamongstateandlocalgovernmentsislikelytoremainadragonincomeandemployment.
Inflationhasremainedelevatedwithhigh-frequencycoremeasuresof2%-2%runningabovedesiredranges.
Thishasnarrowedpolicyoptionsbutalsoundercutgrowth.
Easingbottlenecksinautosshouldhastensomemoderationwhilebusinesspricingintentionsandsomepipelinemeasureshavestartedtocrest.
Withlabormarketimprovementstalled,wagegrowthremainsanemicandconsumerresistancetohigherpricesiswidelyevident.
Easinginpricepressuresshouldhelpstabilizerecovery.
Figure22.
UnitedStates—EconomicForecasts,2010-12F2011201220102011F2012F1Q2Q3QF4QF1QF2QF3QF4QFGDPSAAR0.
4%1.
4%2.
0%1.
6%1.
8%2.
0%2.
2%2.
0%YoY3.
0%1.
7%1.
9%2.
21.
71.
51.
31.
71.
81.
92.
0ConsumptionSAAR2.
10.
41.
81.
71.
91.
52.
22.
1YoY2.
02.
11.
72.
82.
22.
01.
51.
41.
71.
81.
9BusinessInvestmentSAAR2.
111.
92.
04.
44.
24.
56.
94.
6YoY4.
47.
34.
810.
18.
46.
15.
05.
63.
85.
05.
0HousingInvestmentSAAR-2.
53.
84.
67.
07.
19.
912.
313.
0YoY-4.
3-1.
38.
1-2.
9-6.
92.
13.
25.
67.
19.
110.
6GovernmentSAAR-5.
9-0.
9-2.
1-1.
3-1.
5-1.
9-1.
6-1.
4YoY0.
7-2.
2-1.
6-1.
0-2.
2-2.
9-2.
6-1.
5-1.
7-1.
6-1.
6ExportsSAAR7.
93.
75.
25.
77.
17.
56.
96.
8YoY11.
37.
06.
48.
97.
36.
15.
65.
46.
46.
87.
1ImportsSAAR8.
30.
4-0.
14.
25.
04.
74.
44.
4YoY12.
54.
63.
79.
64.
51.
53.
12.
43.
44.
64.
6CPIYoY1.
63.
21.
92.
23.
33.
73.
52.
51.
91.
51.
6CoreCPIYoY1.
01.
71.
91.
11.
51.
92.
12.
12.
01.
71.
7UnemploymentRate%9.
69.
19.
58.
99.
19.
19.
29.
49.
49.
59.
5Gov'tBalance(FiscalYear)%ofGDP-9.
0-8.
5-6.
2AssumedWTISpotPriceUS$79.
491.
581.
194.
0102.
690.
279.
380.
180.
580.
982.
9CurrentAccountUS$bn-471-471-430-477-489-462-456-425-437-417-441%ofGDP-3.
2-3.
1-2.
8-3.
2-3.
3-3.
0-3.
0-2.
8-2.
8-2.
7-2.
8S&P500Profits(US$PerShare)YoY37.
813.
54.
119.
212.
412.
010.
95.
34.
63.
73.
0Notes:FCitiforecast.
YoYYear-to-yearpercentchange.
SAARSeasonallyadjustedannualrateSources:BureauofEconomicAnalysis,BureauofLaborStatistics,I/B/E/S,TreasuryDepartment,WallStreetJournalandCitiInvestmentResearchandAnalysisRobertV.
DiClemente(1-212)816-7942robert.
diclemente@citi.
comPeterD'Antonio(1-212)816-9889peter.
dantonio@citi.
comStevenWieting(1-212)816-7148steven.
wieting@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets17JapanWehavereviseddownourGDPgrowthforecastfor2012to2.
1%from2.
5%lastmonth,mostlyreflectingdevelopmentsinEurope.
UnderthejudgmentthattheEuropeansovereigndebtandbankingcrisiswillintensifyinawaythatleadstoaEuroarearecession,Japan'sexports—notonlytotheEUbutalsotootherregions—willlikelyslowreflectinghigherriskaversion.
Weexpectthatafterlikelystronggrowth(drivenbynormalizationinsupplychains)inthethirdquarter,theeconomywillslowtoamodestpacebecauseofthestrongyenandexportweakness.
Moreover,temporaryfactorsthatliftedconsumerspendinginrecentmonthsaretaperingoff.
Meanwhile,reconstructiondemandfromtheearthquake—onbothpublicandprivatesectors—willlikelysupporteconomicactivityinquarterstocome.
TheAdministrationiscurrentlyfinalizingthethirdsupplementarybudget,whichisreportedtoreach12tn.
Weestimatethatreconstructiondemandincludingpublicandhousinginvestmentwillbe5.
5tninfiscal2012following2.
1tninFY2011.
ThiswouldpushupGDPgrowthin2012byaround0.
7%points.
Ontheotherhand,temporaryindividualincometaxhikestofundreconstructionwilllikelybedelayeduntil2013.
WeexpectanadditionaleasingmeasurefromBankofJapaninOctober.
Inparticular,ifupwardpressuresontheyenintensifyamidglobalriskaversion,theBoJwillmostlikelytakeadditionalactions.
Possiblepolicyoptionsinclude:1)reducingtheinterestpaidonexcessreserves(0.
1%);2)strengtheningitscommitmenttokeeprateslowforanextendedperiod,astheFeddidinAugust;and3)extendingthemaximummaturityofJGBsthattheBoJbuysundertheassetpurchaseprogram,fromtwoyearscurrently.
However,ashasoftenbeenthecaseinthepast,theBoJ'sactionwilllikelybepassiveratherthanproactive.
Finally,weexpecttheBoJ'sratehikewillstartaslateasthefourthquarterof2014,mostlikelylaterthantheFed'sfirstratehike.
Figure23.
Japan—EconomicForecasts,2010-12F2011201220102011F2012F1Q2Q3QF4QF1Q2QF3QF4QFRealGDPYoY4.
0%-0.
4%2.
1%-0.
7%-1.
1%-0.
1%0.
8%2.
5%3.
1%1.
4%1.
4%SAAR-3.
7-2.
18.
11.
52.
70.
11.
31.
3DomesticDemandYoY2.
20.
32.
4-0.
50.
20.
31.
12.
93.
11.
91.
8SAAR-2.
90.
85.
81.
24.
01.
41.
30.
8PrivateConsumptionYoY1.
9-0.
61.
0-0.
9-0.
5-0.
80.
01.
01.
20.
81.
2SAAR-2.
5-0.
13.
0-0.
31.
31.
01.
50.
8BusinessInvestmentYoY2.
50.
63.
52.
2-1.
30.
11.
63.
84.
73.
02.
6SAAR-5.
5-3.
610.
46.
12.
6-0.
13.
64.
5HousingInvestmentYoY-6.
52.
75.
25.
13.
23.
4-0.
80.
13.
65.
012.
0PublicInvestmentYoY-3.
5-3.
114.
6-13.
5-4.
01.
25.
521.
020.
012.
06.
0ExportsYoY24.
10.
92.
06.
4-5.
10.
02.
51.
55.
30.
51.
0SAAR0.
0-18.
127.
06.
1-3.
8-5.
35.
68.
3ImportsYoY9.
85.
35.
28.
53.
33.
75.
75.
26.
04.
65.
0SAAR5.
8-0.
212.
45.
23.
63.
26.
56.
7CPIYoY-0.
70.
0-0.
30.
00.
10.
0-0.
3-0.
2-0.
3-0.
4-0.
4CoreCPIYoY-1.
0-0.
2-0.
3-0.
8-0.
30.
2-0.
1-0.
2-0.
3-0.
4-0.
4NominalGDPYoY1.
7-2.
40.
7-2.
9-3.
3-2.
3-1.
00.
81.
90.
30.
1CurrentAccounttn17.
210.
09.
913.
07.
49.
010.
59.
99.
29.
710.
6%ofGDP3.
62.
12.
12.
81.
61.
92.
22.
12.
02.
12.
3UnemploymentRate%5.
14.
74.
64.
94.
64.
74.
64.
74.
64.
64.
6IndustrialProductionYoY16.
6-2.
52.
7-2.
5-6.
8-0.
60.
32.
26.
01.
21.
7CorporateProfits(FiscalYear)YoY50.
02.
013.
5GeneralGovt.
Balance(FiscalYear)%ofGDP-9.
8-10.
3-9.
0FCitigroupforecast.
SAARSeasonallyadjustedannualrate.
YoYYear-to-yearpercentchange.
CorporateprofitsareTSE-Inonfinancialsconsolidatedrecurringprofits.
Source:CitiInvestmentResearchandAnalysisKiichiMurashima(81-3)62704980kiichi.
murashima@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets18EuroAreaWithlowerglobalgrowth,Greece'snon-compliancewiththeprogrammeconditionsandincreasingoppositionincreditorcountriestofurtherbail-outs,wenowexpectasubstantialandprobablycoercivedebtrestructuringoftheGreeksovereignbytheendof2012atthelatestandlikelymuchsooner(bythespringof2012orevenDecember2011).
WeexpectIrelandandPortugaltofollowGreeceintosovereigndebtrestructuringsoonafterwards,mainlybecauseof'politicalcontagion'.
Weexpecthaircutstoallnon-IMFdebt(soincludingtheEuropeanofficiallending)ofaround55%forGreeceand35%forPortugalandIreland,whichwilllikelybringtheirdebtratiosclosetotheEuroAreaaverage.
InordertopreventspilloversfromthesesovereigndefaultstootherstrainedEuroAreacountries,therearenowplanstoleveragetheamendedversionoftheEFSF.
However,beforegoingahead,theamendedframeworkoftheEFSF(withalendingcapacityof440bn)hastobeapprovedbyall17EUmembercountriesinthefirstplace,whichislikelytohappenbymid-October.
Furthermore,itdependsonthewillingnessoftheECBandthecreditorcountriestosupporttheleverageoftheEFSF.
TheyprobablywillrequestadditionalausteritymeasuresfromfiscallyunsoundcountriesandatighteningoftheStabilityandGrowthPactincludingautomaticpenalties.
EvenwithaleveragedEFSF,additionalfiscaltighteningandtighterfinancialconditionsarelikelytobesizeabledragsforEuroAreagrowth.
Takingthisintoaccount,werevisedownourEuroArea2012GDPgrowthforecastfrom+0.
6%to-0.
2%,nowexpectingamildrecessiontostartin4Q2011.
Inthisscenario,theECBislikelytoreduceratesbackto1.
0%byyear-end.
WithreasonableGDPgrowthin3QandinflationlikelytoincreaseinSeptember,weexpectthattheECBwillleavethepolicyrateunchangedinOctober,althoughtheprobabilityofaratecuthasrisenrecently.
TheECBislikelytoexpanditsnon-standardmeasuresbyprovidingaseriesof12MLTROsandprobablytoresumepurchasesofcoveredbonds.
Figure24.
EuroArea—EconomicForecasts,2010-12F2011201220102011F2012F1Q2Q3QF4QF1QF2QF3QF4QFRealGDPYoY1.
7%1.
6%-0.
2%2.
4%1.
6%1.
4%0.
9%0.
1%-0.
2%-0.
4%-0.
3%SAAR3.
10.
60.
8-0.
8-0.
4-0.
3-0.
3-0.
1FinalDomesticDemandYoY0.
40.
9-0.
31.
40.
70.
70.
6-0.
1-0.
1-0.
4-0.
5PrivateConsumptionYoY0.
80.
60.
00.
90.
50.
60.
30.
10.
2-0.
1-0.
3GovernmentConsumptionYoY0.
50.
2-0.
80.
80.
30.
0-0.
2-0.
8-0.
8-0.
8-0.
7FixedInvestmentYoY-1.
02.
4-0.
53.
71.
72.
02.
30.
1-0.
5-0.
8-0.
8—BusinessEquipmentYoY2.
14.
8-0.
96.
24.
74.
63.
70.
8-0.
9-1.
7-1.
9—ConstructionYoY-3.
8-0.
5-1.
41.
3-1.
6-1.
5-0.
4-2.
2-1.
5-1.
1-0.
7Stocks(Contrib.
toY/YGDPGrowth)0.
60.
1-0.
10.
30.
20.
0-0.
1-0.
2-0.
2-0.
10.
0ExportsYoY10.
66.
22.
09.
66.
35.
33.
72.
11.
81.
62.
4ImportsYoY8.
94.
81.
58.
24.
73.
82.
81.
31.
21.
41.
9CPIYoY1.
62.
71.
92.
52.
82.
62.
92.
22.
02.
01.
4CoreCPIYoY1.
01.
41.
11.
11.
61.
21.
61.
31.
31.
20.
6CPIExEnergyandFoodYoY1.
01.
71.
41.
31.
81.
62.
11.
71.
71.
40.
8UnemploymentRateYoY10.
110.
010.
310.
010.
010.
010.
110.
210.
310.
310.
3CurrentAccountBalanceEURbn-43.
2-63.
0-105.
7%ofGDP-0.
5-0.
7-1.
1GeneralGovernmentBalanceEURbn-550.
5-406.
0-331.
5%ofGDP-6.
0-4.
3-3.
5GeneralGovernmentDebtEURbn7837.
28378.
28659.
8%ofGDP85.
188.
790.
5GrossOperatingSurplusYoY3.
73.
5-0.
5Sources:EurostatandCitiInvestmentResearchandAnalysisJürgenMichels(44-20)7986-3294juergen.
michels@citi.
comGiadaGiani(44-20)7986-3281giada.
giani@citi.
comGuillaumeMenuet(44-20)7986-1314guillaume.
menuet@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets19GermanyWithlikelynegativerepercussionsofthemultipledefaultsintheEuroAreaandweakerglobaldemandwehavereviseddownourforecastfor2012GermanexportsandGDPsubstantiallyforasecondconsecutivemonth.
However,withindicationsofstronger-than-expected3QGDPanddespitethenewforecastofacontractioninGDPin4Q,wehaveleftour2011GDPforecastunchanged.
Weexpectthatdomesticdemandwillbemoreresilientthanduringthe2008recession.
Evenwiththerecentenvironmentofsharplyfallingsentiment,companiescontinuetoplananincreaseinemploymentsuggestingthathouseholds'disposableincomewillcontinuetosupportprivateconsumption.
AlthoughthegovernmentislikelytoachieveapprovaloftheextendedversionoftheEFSF,AngelaMerkel'scoalitionremainsfragile,particularlyinEurope-relatedquestions.
FranceSentimentsurveysareweakeningmarkedly,reflectinganeconomythatisgettingdangerouslyclosetostallingspeed.
PressureonFrenchfinancialinstitutions,ifitcontinues,willimpactcreditavailabilityandleavetheeconomymorevulnerabletoshocks.
Wearguethatthegovernment'sprojectionof1.
75%GDPgrowthin2012isnotachievable.
OurnewbaselinescenarioofanearlyGreekdefaultwouldimpactFrance'smacroeconomicperformanceandcouldleadtoatechnicalrecessionifnotmanagedwithanoverwhelmingpolicyresponse.
Weareloweringour2012GDPforecastfrom0.
9%to0.
2%,implyinga1.
2pptreductionsincetheJulyGEOS.
WedoubtthegovernmentwilltightenfiscalpolicyaggressivelyaheadoftheMay2012elections,preferringtorelyonautomaticstabiliserstocushiontheblow.
ItalyWehavecutbackonceagainourGDPforecasts,asthedeteriorationoftheeurodebtcrisiswilllikelycausefurthertighteninginfinancingconditions,especiallyinahigh-debtcountrylikeItaly.
Recentausteritypackagesimplysizablefiscaltighteningalreadyin2012,focusedmainlyontaxincreaseswhicharelikelytohitspending.
Thefiscaldeficitshouldkeepfalling,butwithanegativegrowthenvironmentpreventingitreachingthegovernment'stargetofclose-to-zeroby2013.
Thedebtratioshouldstabilisejustabove120%,but,barringmajorprivatizations,itisunlikelytostartfallinganytimesoon.
Politicaluncertaintyisboundtostayhigh,withearlyelectionsoramajorgovernmentreshuffleaslikelydevelopmentsinthenearterm.
Figure25.
Germany,FranceandItaly—EconomicForecasts,2010-12FGermanyFranceItaly20102011F2012F20102011F2012F20102011F2012FRealGDPYoY3.
6%3.
0%1.
0%1.
4%1.
6%0.
2%1.
2%0.
5%-1.
0%FinalDomesticDemandYoY1.
72.
31.
60.
81.
3-0.
10.
90.
4-1.
5PrivateConsumptionYoY0.
61.
11.
41.
30.
80.
01.
00.
7-0.
9FixedInvestmentYoY5.
47.
93.
4-1.
33.
6-0.
52.
40.
0-2.
5ExportsYoY13.
48.
33.
69.
44.
43.
28.
93.
50.
2ImportsYoY11.
57.
94.
48.
35.
82.
110.
31.
8-2.
4CPIYoY1.
12.
32.
01.
72.
21.
81.
63.
02.
7UnemploymentRate%7.
16.
16.
29.
39.
29.
38.
48.
18.
5CurrentAccountbn141.
1126.
3100.
8-33.
9-54.
2-47.
8-53.
5-60.
8-54.
7%ofGDP5.
74.
93.
8-1.
7-2.
7-2.
3-3.
5-3.
8-3.
3GeneralGovt.
Balancebn-82.
0-43.
5-38.
2-136.
5-112.
9-96.
5-71.
2-63.
7-44.
8%ofGDP-3.
3-1.
7-1.
5-7.
1-5.
6-4.
7-4.
6-4.
0-2.
8GeneralGovt.
Debt%ofGDP83.
284.
085.
181.
784.
892.
7119121123GrossTradingProfitsYoY10.
50.
6-2.
51.
13.
52.
0NANANAFCitiforecast.
YoYYear-to-yeargrowthrate.
Note:TheGermanannualfiguresarederivedfromquarterlyBundesbankdataandadjustedforworkingdays.
ForecastsforGDPanditscomponentsarecalendaradjusted.
Sources:DeutscheBundesbank,StatistischesBundesamt,INSEE,andCitiInvestmentResearchandAnalysisJürgenMichels(44-20)7986-3294juergen.
michels@citi.
comGuillaumeMenuet(44-20)7986-1314guillaume.
menuet@citi.
comGiadaGiani(44-20)7986-3281giada.
giani@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets20SpainWeexpect2011-H2and2012GDPgrowthtosufferfromtheworseningoftheeurodebtcrisisandfurthertighteninginfinancingconditions.
Thedownwardadjustmentintheconstructionsectorhasre-acceleratedrecently,andfurtherhousepricedeclinesarelikelytohitprivatesectorbalancesheets.
Fiscalrestraintistheothermajordragonprivatespending,althoughprobablynotlargeenoughtoensurethedeficitwillfallinlinewiththegovernment'stargets(6.
0%ofGDPin2011and4.
4%in2012).
Morefiscalausterityislikelytobeimplementedaftertheelections(on20Nov).
ThedebtratioremainsbelowtheEuroArea's,butlikelyslippagesinthefiscalconsolidationpathandadditionalcapitalneedsfromthebankskeeptheuncertaintyaroundthefuturedebt-to-GDPtrajectoryelevated.
GreeceWiththetargetsoftheEU/IMFGreekprogramlookingincreasinglyunattainableandrisingpoliticalfatigueindonorcountries,wenowexpectaGreekdebtrestructuringsoon(withhaircutsofatleast50-55%onnon-IMFdebt),possiblyevenbeforeyear-end.
Weexpectthelikelyverynegativeeffectsonconfidence,onGreekbanksandonoverallfinancingconditionstocauseanevendeeperrecessionin2012/2013.
Thefiscaldeficitshouldbemuchsmaller,butaprimarysurplusisunlikelybefore2013.
Apost-defaultsecondbail-outpackagewouldstillbenecessarytofilltheprimarybalancegapandbankrecapitalizations,keepingthepressureforfiscaldisciplinestillhigh.
PortugalWethinkearlydebtrestructuringinGreecewouldquicklyspreadcontagiontoPortugal,makingtheimplementationoftheEU/IMFadjustmentprogrameconomicallyandpoliticallymoredifficult.
Also,upwardrevisionstothepublicdeficit/debtnumbersarelikelyincomingmonths.
Weexpectadebtrestructuringtohappensometimebeforeend-2012inPortugaltoo,withhaircutsofaround35%-40%,tobringthedebtratiodowntoaroundtheEuroAreaaverageof80%.
Therecessionwilllikelygetdeeperin2012-13,butitmaybeshorterthaninascenarioofdelayedrestructuringto2014.
Figure26.
Spain,GreeceandPortugal—EconomicForecasts,2010-12FSpainGreecePortugal20102011F2012F20102011F2012F20102011F2012FRealGDPYoY-0.
1%0.
6%-0.
7%-4.
4%-5.
6%-4.
9%1.
3%-2.
0%-5.
7%FinalDomesticDemandYoY-1.
2-1.
0-2.
2-5.
9-7.
8-6.
4NANANAPrivateConsumptionYoY1.
30.
5-0.
9-4.
6-5.
6-5.
2NANANAFixedInvestmentYoY-7.
5-6.
1-5.
8-8.
2-14.
5-10.
7NANANAExportsYoY10.
37.
7-0.
23.
9-0.
10.
5NANANAImportsYoY5.
51.
7-4.
0-4.
8-9.
4-6.
2NANANACPIYoY2.
02.
90.
74.
73.
21.
21.
43.
40.
7UnemploymentRate%20.
121.
021.
612.
517.
220.
1NANANACurrentAccountbn-48.
4-41.
3-33.
0-24.
1-20.
2-9.
4-18.
1-14.
8-10.
8%ofGDP-4.
6-3.
8-3.
0-10.
4-9.
2-4.
5-10.
5-8.
7-6.
3GeneralGovt.
Balancebn-98.
2-74.
1-67.
5-24.
2-22.
8-14.
1-16-10-7.
9%ofGDP-9.
2-6.
8-6.
2-10.
5-10.
4-6.
8-9.
1-6.
0-4.
7GeneralGovt.
Debtbn638.
8742.
2820.
83293601901601851488%ofGDP60.
168.
375.
6142.
8164.
691.
193.
0108.
487.
2FCitiforecast.
YoYYear-to-yeargrowthrate.
Sources:ISTAT,INE,HaverAnalytics,Eurostat,andCitiInvestmentResearchandAnalysisGiadaGiani(44-20)7986-3281giada.
giani@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets21UKSignsofslowdownareaccumulating:unemploymenthasbeenrisingforseveralmonths,corporateliquidityisworseningandbusinesssurveyshavenose-dived.
WenowexpectthattheUKeconomyislikelytoslowclosetorecessioninthenextfewquarters,withconsumerspendingremainingsluggishandweaknessinbusinessinvestmentandexports—thepreviousenginesofrecovery.
Althoughinflationisfarabovethe2.
0%targetthisyear,itislikelytoslowsharplynextyearastheVAThikedropsoutandtheslowdowntakeshold.
Wedonotcurrentlyexpectthatinflationwillfallbacktothe2.
0%targetnextyear,buttheMPCbelieveitwillfallbacktotargeteveniftheeconomypicksupsignificantly.
Sinceprospectsforrecoveryarenowverymuchindoubt,theMPCprobablynowbelievethatinflationwillfallbelowtargetbyend-2012.
Asaresult,theMPCarelikelytorestartQEsoonandindeedarealreadysofteningupmarketopinionfortherelaunchofQE.
ThepoliticalobstaclestoQEevidentintheUSdonotexistintheUK.
TheBoEbelievethatQEiseffectiveinboostingnominalGDP,butthatittakesalotofQEtohavemucheffect:theybelievetheQEprogrammeof2009-10–200bn(14%ofGDP)–liftednominalGDPbyabout2%-3%,afarsmallereffectthantheyexpectedwhenQEwasimplemented.
ItfollowsthattheMPCnowarelikelytouseQEinbiggerscale,relativetoanygivenshortfallinexpectedeconomicgrowth,thanpreviously.
Weexpecttheywillbeginwith50bn-100bnofQEinOctoberoratthelatestinNovember,withatotalofabout300bnoverthenextfewquarters.
Atthatpoint,theBoEwillownroughlyhalfthegiltmarket.
Ifnecessary,wewouldexpectthemtobuythewholegiltmarket.
Figure27.
UnitedKingdom—EconomicForecasts,2010-2012F2011201220102011F2012F1Q2QF3QF4QF1QF2QF3QF4QFRealGDPYoY1.
4%1.
0%0.
7%1.
6%0.
8%0.
5%1.
0%0.
8%0.
8%0.
7%0.
8%SAAR2.
00.
81.
00.
21.
00.
90.
50.
6DomesticDemandYoY2.
70.
00.
30.
50.
3-0.
2-0.
40.
80.
2-0.
10.
2(Incl.
Inventories)SAAR-3.
62.
81.
0-1.
51.
20.
4-0.
3-0.
4ConsumptionYoY0.
9-0.
11.
5-0.
5-0.
4-0.
10.
51.
41.
31.
51.
6SAAR-2.
31.
80.
81.
51.
41.
61.
61.
7InvestmentYoY3.
7-1.
1-2.
4-0.
21.
8-1.
9-4.
1-0.
9-1.
5-3.
9-3.
5SAAR-7.
72.
60.
9-11.
45.
20.
2-8.
7-9.
9ExportsYoY5.
24.
85.
49.
33.
33.
33.
62.
26.
76.
86.
1SAAR9.
8-10.
05.
99.
94.
26.
86.
27.
2ImportsYoY8.
81.
33.
64.
21.
40.
9-1.
12.
44.
33.
73.
9SAAR-9.
1-2.
95.
42.
94.
64.
43.
13.
6UnemploymentRate%7.
98.
08.
67.
77.
98.
08.
18.
48.
68.
78.
8CPIInflationYoY3.
34.
42.
94.
14.
44.
64.
63.
42.
92.
72.
4Merch.
Tradebn-54.
8-90.
7-75.
2%ofGDP-3.
8-6.
0-4.
8CurrentAccountbn-46.
3-33.
0-9.
1%ofGDP-3.
2-2.
2-0.
6PSNBbnFY142.
1127.
3117.
5%ofGDP-9.
7-8.
3-7.
4GeneralGovt.
Balance%ofGDP-10.
2-8.
8-7.
9PublicDebt%ofGDP76.
081.
786.
5GrossNonoilTradingProfitsYoY4.
510.
58.
3Note:Fiscaldeficitshownexcludingfinancialinterventions.
FCitiforecast.
YoYYear-to-yeargrowthrate.
Sources:ONSandCitiInvestmentResearchandAnalysisMichaelSaunders(44-20)7986-3299michael.
saunders@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets22SwitzerlandTheSwisseconomyislikelytoslowsharplyincomingquarters,probablyalreadyinQ3,asthesuper-strongCHFhitsexportsandinvestment.
Signsofasharpslowdownalreadyareevidentinrecentbusinesssurveys,andthesearelikelytoweakenmarkedlyfurtherincomingmonths.
CPIinflationislikelytoturnnegativeasimportpricesfall,stayingwellbelowtheSNB's2%targetceilingthroughoutthenextfewyears.
WeexpecttheSNBtokeepthepolicyrateatzeroforseveralyears.
TheywillstronglyresistFXappreciation.
SwedenWeexpecttheslowdowninSwedishgrowthtobemorepronouncedthanwethoughtpreviously,andnowforecastGDPgrowthof4.
3%thisyearand2.
1%in2012(comparedto4.
7%and2.
8%respectively).
Moreover,wenowexpecttheRiksbanktokeeptheirkeypolicyrateunchangedat2.
0%fortherestofthisandnextyear,beforeslowlycontinuingtheirhikingcycleagainin2013.
Asaresultofapostponementintheprojectedratehikes,ourforecastforheadlineCPIisloweredto2.
0%nextyearand2.
2%in2013(from2.
3%and2.
4%respectively).
DenmarkFollowingsofter-than-expectedprivateconsumptionandinvestmentin2Q,wehavetrimmedour2011growthforecastto1.
5%(from1.
6%lastmonth).
Wehavealsocutourforecastsfor2012-13,andexpectGDPgrowthof1.
6%in2012and1.
7%in2013(versus1.
9%and2.
0%previously),mainlyreflectingweakerinvestment.
Thecentralbankwillprobablykeepastablespread(5bp)betweentheirlendingrateandtheECBpolicyrateinthecomingyears,andhencematchexpectedECBeasing.
Inaddition,theCentralBankislikelytotakeanychanceofcurrencystrengthtofurthercutthecurrentaccountrate(whichistheanchorformoneymarketrates)inthenearterm.
NorwayWehavereviseddownourgrowthforecastforNorwayslightlyforthisandnextyearmainlybasedondownwardrevisionsofmainlandexports.
GivenalargedownsidesurpriseininflationinAugust,wehavealsoreviseddownourforecastsforCPIthisyearto1.
4%YY(from1.
6%).
HeadlineinflationislikelytostaybelowNorgesBank's2.
5%targetinthecomingyears.
FollowingadovishtoneattheSeptembermeeting,wenowexpecttheNorgesBanktostayonholduntiltheendof2012.
Figure28.
Switzerland,Sweden,DenmarkandNorway—EconomicForecasts,2010-2012FSwitzerlandSwedenDenmarkNorway20102011F2012F20102011F2012F20102011F2012F20102011F2012FRealGDPYoY2.
7%2.
1%1.
2%5.
4%4.
3%2.
1%1.
8%1.
5%1.
6%2.
1%2.
7%2.
9%FinalDomesticDemandYoY2.
21.
52.
63.
83.
42.
20.
7-0.
41.
51.
93.
33.
4PublicConsumptionYoY1.
91.
62.
21.
81.
10.
10.
70.
40.
82.
21.
82.
3PrivateConsumptionYoY2.
01.
21.
43.
62.
51.
92.
3-0.
41.
63.
62.
73.
2Investment(ExStocks)YoY7.
24.
75.
15.
79.
56.
1-2.
7-1.
22.
5-3.
17.
65.
1ExportsYoY8.
85.
22.
610.
08.
04.
43.
97.
43.
02.
82.
94.
5ImportsYoY7.
44.
06.
412.
17.
64.
63.
95.
82.
88.
15.
14.
2CPI(Average)YoY0.
70.
3-0.
21.
23.
02.
02.
32.
72.
02.
41.
41.
8UnemploymentRate%3.
93.
13.
18.
47.
57.
47.
47.
27.
13.
63.
33.
2CurrentAccount%ofGDP14.
514.
713.
06.
66.
46.
55.
35.
65.
012.
414.
014.
3GeneralGovtBalance%ofGDP0.
20.
30.
6-0.
20.
20.
4-2.
8-3.
8-4.
610.
612.
012.
5GeneralGovtDebt%ofGDP55535139.
336.
334.
243.
645.
748.
7NANANAaForNorway,mainlandGDP.
FCitiforecast.
YoYYear-on-yeargrowthrate.
Sources:NationalsourcesandCitiInvestmentResearchandAnalysisMichaelSaunders(44-20)7986-3299michael.
saunders@citi.
comMichaelSaunders(44-20)7986-3299michael.
saunders@citi.
comWiththankstoFridaSellbergGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets23CanadaErodingconfidence,dimmingglobaleconomicprospectsandfinancialmarketturmoilnecessitatefurtherdowngradingoftheCanadianoutlook.
ThethreatofaEuropeanrecession,atepidUSexpansion,andaweakerprofileforcommoditypricesallsuggestsub-trenddomesticgrowththrough2013.
Near-termdepreciationoftheCanadiandollarwillcreatesomeoffset,butongoingcompetitivenesswoeswillcontinuetoweighonexports.
Narrowerjobgains,governmentlayoffsandincreasedjoblessnessarelikelygivenmoderategrowthprospectsanddownsiderisks.
Lacklusterwagegrowth,coolinghousingactivityandoutsizedfinancialmarketlossesprobablywillsqueezeincomesandsubsequentlyconsumerspending.
Thecapexrevivalcouldfalteronflaggingbusinesssentiment.
DownsiderisksincludecontagionandreducedriskappetiteamidtheEAsovereignandbankingcrises;persistentCADstrength;andconsumerretrenchment.
Thefirstriskhasbeenrealized,thesecondhasintensifiedandthethirdcouldoccurashouseholdincomegrowthmoderatesfurther.
Meanwhile,headwindsfromthecurrencyandsoftUSdemandhaveincreased,andUSpoliticalriskswillbecomeagreaterinfluenceoverthenextfewmonths.
Whileupsiderisksremain,theyhavelessenedindegreeasslowerglobaleconomicmomentumshoulddampendomesticresourceutilizationandinflationarypressures.
Riskslooktiltedtothedownside.
Inresponsetorecentdevelopments,theBoCsofteneditsstanceattheSeptembermonetarypolicymeetingandislikelytokeepratesunchangeduntilearly2013.
Absentsignificantworseningintheexternalenvironment,newfiscalstimulusisunlikely.
BankofCanadaratecutsalsohavelimitedscope,givenCanada'sstillrelativelystrongeconomicfundamentalsandstablefinancialsystem,aswellasongoingconcernaboutexacerbatingwantonconsumerdebtaccumulation,andlingeringupsideinflationrisks.
Alternatively,theBoCmayapplyadditionalstimulusbysignalingalengthyperiodoflowinterestrates,shouldconditionswarrantit.
Figure29.
Canada—EconomicForecasts,2010-2012F2011201220102011F2012F1Q2Q3QF4QF1QF2QF3QF4QFRealGDPYoY3.
2%2.
1%1.
8%2.
9%2.
2%1.
8%1.
5%1.
1%1.
7%2.
1%2.
2%SAAR3.
6-0.
41.
02.
01.
92.
02.
52.
3FinalDomesticDemandYoY4.
52.
91.
83.
73.
52.
61.
81.
81.
51.
92.
1SAAR1.
83.
00.
91.
51.
81.
92.
42.
4PrivateConsumptionYoY3.
31.
82.
02.
12.
21.
81.
21.
81.
92.
12.
2SAAR-0.
11.
61.
51.
82.
22.
12.
42.
2GovernmentSpendingYoY4.
70.
9-1.
62.
92.
00.
2-1.
4-1.
9-2.
5-1.
5-0.
6SAAR0.
21.
5-4.
2-3.
1-1.
7-0.
8-0.
20.
2PrivateFixedInvestmentYoY8.
48.
85.
310.
110.
07.
87.
56.
04.
75.
45.
1SAAR10.
89.
73.
16.
64.
84.
45.
65.
7ExportsYoY6.
43.
84.
06.
71.
54.
33.
02.
05.
44.
14.
4SAAR7.
7-8.
310.
13.
53.
84.
44.
84.
7ImportsYoY13.
16.
53.
39.
56.
84.
65.
23.
62.
23.
44.
0SAAR9.
510.
0-0.
32.
03.
04.
04.
54.
5CPIYoY1.
82.
82.
02.
63.
42.
82.
52.
31.
82.
02.
0CoreCPIYoY1.
71.
72.
01.
31.
61.
72.
02.
22.
02.
01.
9UnemploymentRate%8.
07.
57.
37.
87.
57.
37.
47.
67.
47.
17.
1CurrentAccountBalanceC$bn-50.
9-56.
8-61.
2-40.
3-61.
3-60.
5-65.
2-61.
3-65.
4-61.
4-56.
6%ofGDP-3.
1-3.
3-3.
5-2.
4-3.
6-3.
6-3.
8-3.
5-3.
7-3.
5-3.
2NetExports(Pct.
Contrib.
)-3.
1-1.
5-0.
1-0.
6-5.
73.
40.
30.
0-0.
3-0.
4-0.
4Inventories(Pct.
Contrib.
)0.
70.
30.
02.
22.
5-2.
00.
00.
00.
20.
20.
1BudgetBalance(FiscalYear)%ofGDP-2.
2-1.
9-1.
1FederalBudgetDebt%ofGDP33.
634.
234.
0FCitiforecast.
YoYYear-to-yearpercentchange.
SAARSeasonallyadjustedannualrate.
Sources:StatisticsCanada,andCitiInvestmentResearchandAnalysisDanaM.
Peterson(1-212)816-3549dana.
peterson@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets24AustraliaWehaveloweredslightlyourforecastsforAustralianeconomicgrowthin2012toastillrobust3.
7%from4.
0%lastmonth.
Thedowngradereflectsaslightlyweakeroutlookforexportsgiventhemoreuncertainglobalbackdropandsloweremploymentgrowthascompaniesrespondtoarangeoffinancialpressures.
Thatsaid,wecontinuetoexpectstrongergrowthnextyearaftertheimpactofthesummerfloodspassesandasminingandenergyprojectsdriveanaccelerationinbusinessinvestmentgrowth.
Weexpectfairlysteady,butbelowtrend,growthinhouseholddemand.
AkeyrisktothisoutlookisthatprospectsinEuropeandtheUScontinuetodeteriorate,eventuallyundercuttinggrowthinChinasignificantly.
Shouldthisoccur,theRBAwouldlikelyrespondbycuttinginterestratesbackintotheneutralzone,butfornowweseenonear-termchangetorates.
NewZealandTherecoveryfromtherecessionremainsslowandasaresultwehaveloweredourgrowthforecastsandpushedbackthetimingofthenormalizationofmonetarypolicy.
EconomicactivityinQ2grewbyjust0.
1%andyearlygrowthremainsbelowpotentialdespitethemaintenanceofalowpolicyrate.
Thestrongcurrencyisdampeningservicesexportsanddomesticactivityhasyettoreceiveameaningfulboostfromreconstruction-relatedexpenditureintheCanterburyregion.
Householdexpenditureisunabletoaccelerateonasustainedbasisandimprovementsinbusinessconfidencehaveyettoappearinactualinvestmentactivity.
However,pricesofsoftcommoditiesremainrobustandweexpecttheRBNZtoanchortheOCRat2.
50%foratleastanothersixmonthsbecauseofdownsiderisksfrominternationaldevelopments.
Figure30.
AustraliaandNewZealand—EconomicForecasts,2010-2012FAustraliaNewZealand20102011F2012F20102011F2012FRealGDPa2.
7%1.
4%3.
7%1.
7%1.
4%2.
6%RealGDP(4Qversus4Q)2.
71.
74.
11.
11.
93.
1RealFinalDomesticDemand3.
83.
84.
32.
62.
33.
1Consumption2.
83.
23.
22.
31.
62.
9Govt.
Current&CapitalSpending9.
11.
41.
72.
63.
21.
6HousingInvestment4.
22.
83.
22.
7-15.
713.
9BusinessInvestment0.
011.
512.
43.
56.
83.
6ExportsofGoods&Services5.
7-2.
010.
02.
83.
61.
5ImportsofGoods&Services13.
710.
57.
79.
94.
33.
7CPI2.
83.
32.
52.
34.
22.
1CPI(4Qversus4Q)2.
73.
22.
94.
02.
62.
2Unemployment5.
25.
25.
06.
56.
56.
2Merch.
Trade,BOP(LocalCurrency,bn)16.
220.
122.
73.
44.
13.
4CurrentAccount,(LocalCurrency,bn)-36.
0-32.
9-31.
0-8.
0-7.
9-11.
1PercentofGDP-2.
7-2.
3-2.
0-4.
1-3.
9-5.
3BudgetBalanceb(LocalCurrency,bn)-57.
1-41.
5-12.
3-8.
0-16.
0-12.
0PercentofGDP-4.
2-3.
6-1.
8-4.
0-8.
0-6.
0GeneralGovt.
Debt(%ofGDP)c3.
75.
76.
414.
120.
926.
8GrossTradingProfitsd12.
25.
87.
4NANANABOPBalanceofpaymentsbasis.
CPIConsumerPriceIndex.
FCitigroupforecast.
NANotavailable.
aAveraged-basedGDPinAustralia;ProductioninNewZealand.
bFiscalyearendingJune.
Australia'sunderlyingcashbalance.
cAustraliaandNewZealandBudgetdefinitionandforecasts—debtequalsanasset.
dCompanygrossoperatingsurplus.
Source:NationalsourcesandCitiInvestmentResearchandAnalysisPaulBrennan(61-2)8225-4899paul.
brennan@citi.
comJoshuaWilliamson(61-2)82254904josh.
williamson@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets25ChinaWecutourgrowthforecastfor2012toreflecttheworseningoutlookinEurope.
SovereigndebtrestructuringisexpectedtotakeplaceinGreecebyend-2012atthelatest,tobefollowedprobablybyIrelandandPortugal.
MultiplerestructuringsmayleadtonewrecessionintheEuroArea,significantlyreducingdemandfromChina'sbiggestexportmarket.
Wethereforereducedour2012growthprojectionto8.
7%from9.
0%lastmonth,duemainlytoanegativecontributionfromnetexports.
Quarterlygrowthinearly2012mayfalltoaround8%,likelyincreasingcallsformoreaccommodativepolicies.
Growthhasheldupwellsofar,butisexpectedtoslowmoretangibly.
Allrealeconomydata–includingonindustrialproduction,fixedassetinvestmentandretailsales–inAugustpointedtofurthermoderationofeconomicexpansion,buttherewaslittlesignofhardlanding.
ThePMIalsoconfirmedtheeconomicslowdown.
WeexpectweaknessinexportorderswillweighonChina'sexportsincomingmonths.
This,togetherwithaccumulatedimpactfrommonetaryandpropertytightening,willlikelybringdowngrowthmoresignificantlyinthenextcoupleofquarters.
Inflationmayhavepeaked,andwilllikelyfallmoremarkedlyin4Q.
YoYCPIinflationfellfrom6.
5%inJulyto6.
2%inAugust,reflectingmorefavorablebaseeffects.
Overallinflationmaystaycloseto6%YoYinSeptemberonseasonallyhighfoodinflation,butweexpectittoeasemoresubstantiallyin4Qduetotheeconomicslowdownandlowerbaseeffects.
Nofurthertighteningislikely,andfiscalpolicymaybecomemoreproactive.
Withtheeconomycoolingandinflationeasing,furtherpolicytighteningisunlikely.
Althoughexternalheadwindsmaystrengthencallsforpolicyloosening,wethinkspeculationofanoutrightpolicyreversalisprematureastheinflationtargetissettobeexceededbyabigmarginthisyear.
Weexpectpolicymakerstomakemoreuseoftheflexibilityunderthecurrentpolicymixtoforestalldownsiderisks.
Inparticular,givensubstantialrevenueoutperformancesofarintheyear,fiscalpolicyislikelytobemoreactiveintheremainderoftheyear,withmorespendingonsocialhousingandpossiblyonsocialsafetynet.
TheCentralEconomicWorkConferenceinlateNovemberorearlyDecemberwillprobablyshedlightonthepolicystancefor2012.
Figure31.
China—EconomicForecasts,2010-2012F2011201220102011F2012F1Q2Q3QF4QF1QF2QF3QF4QFRealGDPYoY10.
4%9.
0%8.
7%9.
7%9.
5%8.
9%8.
4%8.
0%8.
6%8.
9%8.
9%RealFinalDomesticDemandYoY9.
89.
99.
7ConsumptionYoY8.
09.
19.
6FixedCapitalFormationYoY11.
910.
79.
8IndustrialProductionYoY15.
713.
812.
514.
913.
913.
613.
013.
012.
512.
312.
0ExportsYoY31.
321.
011.
626.
422.
021.
016.
014.
012.
011.
010.
0ImportsYoY38.
724.
514.
432.
823.
125.
019.
016.
015.
014.
013.
0MerchandiseTradeBalance$bn183.
1172.
7143.
4-0.
746.
764.
961.
8-8.
839.
558.
354.
4FXReserves$bn2,8473,4013,6793,0453,1973,3073,4013,4273,5023,5923,679CurrentAccount%ofGDP5.
24.
03.
2FiscalBalance(trailing4-qtrsum)%ofGDP-1.
6-2.
0-2.
01.
81.
0-1.
8-3.
01.
81.
0-1.
8-3.
0GeneralGovt.
Debt%ofGDP20.
520.
420.
6UrbanUnemploymentRate%4.
14.
14.
04.
14.
14.
04.
04.
04.
04.
04.
0CPIYoY3.
35.
34.
25.
15.
76.
04.
64.
54.
24.
04.
0ExchangeRate(endperiod)CNY/$6.
626.
306.
056.
566.
476.
356.
306.
246.
186.
126.
051-YrDepositRate(endperiod)%2.
753.
503.
503.
003.
253.
503.
503.
503.
503.
503.
50Note:FCitiforecast.
ECitiestimate.
YoYYear-to-yearpercentchange.
SAARSeasonallyadjustedannualrate.
Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisMinggaoShen(852)2501-2485minggao.
shen@citi.
comShuangDing(852)2501-2769shuang.
ding@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets26IndiaRecentlyreleasedmacroandsectoraldataindicateaclearslowdownineconomicactivitywithGDPgrowthcominginatsub8%forthesecondconsecutivequarter.
Weexpectthistrendtocontinuedueto(1)laggedeffectof500bpsoftightening,(2)structuralpolicyissues,and(3)worseningprospectsontheglobalfront,andthusmaintainourFY11/12GDPestimateof7.
6%.
InflationarypressurescontinuedunabatedinAugust,withtheWPIrising9.
8%YoY.
Whilewehavebeenexpectinginflationtoremainelevatedduetohigherminimumsupportpricesofagricropsandcontinuedupwardrevisionstopastdata,twofurtherpricepressureshaveemergedoverrecentweeks:(1)commoditypriceshaveshowednosignofabatingdespiteslowingglobaldemand.
ThishasastrongbearingontheWPIgiventhat~60%oftheinflationbasketislinkedtocommoditiesand(2)overthelastmonth;theINRhasweakenedby8%,whichaddstoinflationarywoes.
Thus,keytowatchwouldbeifadeclineincommoditypricesoccurs;andtheextenttowhichthisisoffsetbyexchange-ratedepreciation.
Onthefiscalside,trendsingovernmentfinancesremainunchangedwiththeApril-JulyfiscaldeficitcominginatRs2,288bnor55%ofbudgetestimatesofRs4,128bn.
Despiteausteritymeasures,weexpectthegovernmenttomissitsdeficittargetduetobothlowerrevenuesandhigherexpenditures.
Dependingonthetimingofthepay-outtooilcompanies,theheadlinedeficitnumbercouldcomeinat5.
1%to5.
8%vs.
budgetestimatesof4.
6%ofGDP.
Thefurtherdeteriorationseenontheglobalfronthastakenitstollonriskassets–EMcurrencies,equitiesandbonds.
WhileIndia'slowexports/GDP,domesticallyfinancedfiscaldeficit,limitedexposuretoforeignliabilitiesandhealthybankingsystemarepositive,intimesofriskaversion,Indiaimmediatelycomesontheradarduetoitstwindeficitsandrelianceonexternalcapital.
Asmentionedearlier,thoughIndiaisrelativelybetterplaced,theworriesthistimeare(1)aslowingeconomyand(2)limitedammunitionvs.
2008thatIndianpolicymakershaveintheeventofacrisis.
Thisisonboththefiscalandmonetaryfront,wherehigherdeficitsandstickierinflationlimitspaceforconventionalpolicyresponses.
Figure32.
India—EconomicForecasts,FY2010/11-2012/13FFYFYFY10/11F11/12F12/13FRealGDPYoY8.
5%7.
6%8.
2%FinalDomesticDemandYoY8.
15.
78.
3PrivateConsumptionYoY8.
67.
08.
0FixedInvestmentYoY8.
43.
09.
0ExportsYoY12.
016.
513.
0ImportsYoY6.
311.
08.
3WholesalePriceIndex*YoY8.
69.
57.
5ConsumerPriceIndexYoY9.
58.
07.
0UnemploymentRate%NANANACurrentAccountUS$bn-44.
3-57.
5-50.
8%ofGDP-2.
6-3.
0-2.
3ConsolidatedFiscalBalance%ofGDP-8.
1-8.
3-7.
1CentreFiscalBalance%ofGDP-5.
1-5.
8-4.
6USDollarExchangeRateAverage45.
647.
647.
5Note:*InIndia,policymakerslookatthewholesalepriceindex.
Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisRohiniMalkani+912266319876rohini.
malkani@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets27KoreaAugheadlineCPIrosetoayear-highlevelof5.
3%YoYfrom4.
7%YoYinJulyaspricesoffreshfoodsandoilsroseby13.
8%YoYand15.
2%YoY,respectively.
Coreinflationalsoroseto4.
0%YoYandisexpectedtorisefurtherto4.
6%YoYin4Q11asthesecond-roundeffectsofpreviousrawmaterialandfoodspricehikesmaterialize.
Headlineinflation,however,willprobablygraduallydeclineduetoincreasedsupplyofagriculturalgoodsandhighbaseeffectsfromayearago.
Exportsgrew25.
9%YoYinAugust,reachingUS$45.
9bn,ledbypetroproducts(up82.
7%YoY),shipbuilding(79.
9%),auto(33.
7%)andsteel&iron(28.
0%).
LabormarketconditionsalsocontinuedtoimproveinAug.
Theseasonallyadjustedjoblessratefelltoathree-yearlowlevelof3.
1%from3.
3%inJulyasthenumberofemployedincreasedby490KYoY,onthebackofjobgrowthinservicesector(572KYoY).
Meanwhile,jobgrowthinthemanufacturingsectordecreasedby28KYoY,suggestingaslowdownofproductioninthesector.
Industrialproductionhasalreadyslowedto3.
8%YoYinJulyfrom6.
5%inJune.
Facingfinancialmarketturmoilandweakerprospectsfortheglobaleconomy,theBoKkeptthepolicyrateat3.
25%attheSepMPCmeeting.
Wereiterateourcallofnopolicyratehikeintheremainderof2011.
IndonesiaTheIDRdepreciatedbyaround7percentagainstthedollarinthefirstthreeweeksofSeptember,followingincreasedworriesovertheUSandEUdebtcrisis.
ThiscameasasurprisetomanywhohavebecomeaccustomedtoseeingBIkeeptheexchangerateinatightrange.
Marketliquidityhasdriedupamidforeignunwinding,despiteinterventionbytheBIinboththebondandFXmarkets(usingforthefirsttimeitsdollar-settledbondbuyingauctionfacility).
Domesticfundamentals,however,shouldnotbeaffectedsignificantlyyet.
TheIDRismerelyclosetowhereitwasinthebeginningoftheyear.
Asaresult,wedonotexpectthedepreciationtospawnabroad-basedriseintheinflationrate.
Howeverexchange-ratesensitiveitems(e.
g.
goldjewelryprices)couldtriggeramoderateone-offjumpintheinflationrate.
OuroutlookontheBIrateremainsunchanged,expectingacutof25bpsbyYE11.
WethinkBI'srecentlydovishstancereflectsarethinkontheirapproachtomonetarypolicyandnotjustshort-termgrowthandinflationconsiderations.
Adheringtotraditional'policyrules'isbeingviewedasacostlystrategy,giventhecurrentbackdropoflowglobalinterestratesandcapitalinflowswhichaddtoexcessliquidityinthedomesticbankingsystem.
Figure33.
KoreaandIndonesia—EconomicForecasts,2010-12FKoreaIndonesia20102011F2012F20102011F2012FRealGDPYoY6.
2%3.
7%3.
9%6.
1%6.
5%6.
3%FinalDomesticDemandYoY4.
81.
73.
95.
27.
27.
7PrivateConsumptionYoY4.
12.
73.
34.
65.
04.
9FixedInvestmentYoY7.
0-0.
85.
68.
59.
011.
1ExportsYoY14.
59.
96.
814.
911.
07.
6ImportsYoY16.
97.
87.
517.
313.
311.
3ConsumerPriceIndexYoY3.
04.
53.
55.
15.
06.
2UnemploymentRate%3.
73.
53.
37.
16.
86.
5CurrentAccountUS$bn28.
215.
513.
16.
30.
8-2.
7%ofGDP2.
81.
41.
10.
90.
1-0.
3FiscalBalance%ofGDP1.
40.
50.
7-0.
6-1.
5-1.
5USDollarExchangeRateAverage115611341148909289228975Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisJaechulChang+82237050727jaechul.
chang@citi.
comHelmiArman+65-21-5290-8960helmi.
arman@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets28HongKongInflationconcernslingerdespiteexpectedthegrowthmoderation.
Domesticstrengthsofarprovidessomebuffertofurtherexternaltradeweakness,especiallywhenthejoblessrateunexpectedlyfelltoa13-yearlowof3.
2%sainAug,indicatingatightlabormarketthatcouldtoleratesomeheadcountadjustments.
WeforecastGDPwillslowto4.
9%YoYin2H11fromthestrong1Hof6.
3%YoY.
Weareloweringour2012forecastto4.
5%from5.
0%lastmonth.
Thisexpectedslowdowncouldalleviateinflationpressures.
However,somesourcesofHK'sinflationarelikelytoremainpersistent,especiallyrisingrentals(forbothretailandresidential)andlaborcosts(asdemandsforwagerisesusuallylag).
ItiswidelyexpectedthatthegovernmentwilllaunchmoreinflationreliefmeasuresforlowerincomegroupsintheupcomingPolicyAddressinOctober.
AlthoughHIBORremainedlowalongsideitsUScounterparts,consecutivequartersofincreasesinloan-to-depositratioshavetightenedbanks'liquiditypositions.
Thetrendisforhigherfundingcoststobepassedontoborrowers(e.
g.
therehavebeenseveralhikestonewmortgageratesandlendingratesforotherloantypeshavealsorisen).
TheHKDgyratedaroundthemiddleoftheconvertibilitybandinthepastmonth,reflectinglargefinancialmarketvolatility.
Wethinkthiswillcontinuein4Q,withtheUSDpegtostay.
SingaporeUpsidesurprisesinAugNODXandIPhavereducedbutnoteliminatedoddsofa3Qtechnicalrecession.
Withex-biomedmanufacturingalreadyincontractionfor7months,ourforecastscurrentlyanticipateashort-livedrestocking-drivenstabilizationin4Q,YoYgrowthbottomingin1Q12,andareversiontothelowerendoftheofficial3-5%trendgrowthratefor2012.
ThedeterioratingsituationinEurope,however,posesdownsiderisksto2012growth,whichcouldfallbelowtrendunderalternativescenariosofaprotractedrecessionextendinginto1Q12.
Inflationreachedanewyearlyhighof5.
7%inAug,butwilllikelymoderatefromhereon.
However,policy-inducedsupplysideconstraints,atightlabourmarket,recordjobvacancies,andlowinterestrates,allsuggestthatinflationisunlikelytomoderateassharplyasinpastslowdowns.
Withaggressivelabourcostreductionpolicieslessfeasibleinthecurrentpoliticalclimate,amoreactivistapproachtoFXpolicysettingmaybeneededtoarresttheerosionofcostcompetitivenessfromREERappreciation.
Theexpectedreturntotrendgrowthin2012warrantsacalibratedeasingor'normalization'ofthemonetarypolicystancewiththeMASshiftingtoagentlerslopeof1-2%p.
a.
oftheSGDNEERpolicybandinmid-Oct.
But,thepossibilityofbelow-trendgrowthin2012suggeststhatanoutrighteasingto'neutral'remainsasignificantrisk.
Figure34.
HongKongandSingapore—EconomicForecasts,2010-12FHongKongSingapore20102011F2012F20102011F2012FRealGDPYoY7.
0%5.
6%4.
5%14.
5%5.
3%3.
3%FinalDomesticDemandYoY6.
25.
83.
95.
53.
63.
7PrivateConsumptionYoY6.
27.
23.
74.
24.
73.
4FixedInvestmentYoY7.
83.
04.
75.
12.
53.
6ExportsYoY16.
85.
66.
419.
24.
24.
8ImportsYoY17.
35.
16.
016.
64.
06.
0CPIYoY2.
45.
34.
02.
85.
13.
0UnemploymentRate%4.
43.
43.
52.
22.
12.
3CurrentAccountUS$bn13.
920.
024.
449.
543.
542.
9%ofGDP6.
28.
39.
322.
216.
515.
0FiscalBalance%ofGDP4.
22.
93.
00.
50.
02.
0USDollarExchangeRateAverage7.
777.
787.
771.
361.
271.
24Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisAdrienneLui+85225012753adrienne.
lui@citi.
comKitWeiZheng+65665750779wei.
zheng.
kit@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets29RussiaWeexpecttherubletocontinuedepreciatingto37-38againstthebasket,providedtheglobalfinancialturbulencecontinuesandtheBrentoilpricefallstoUS$86pbonaveragein2012asourcommodityteamexpects.
Fornow,depreciationpressureisstemminglargelyfromcontagion,butitcouldaccelerateshouldtheCBRstartprovidingliquidityaggressively,thusgivingdomesticbanksammunitiontopositionagainsttheruble.
ShouldmarketsstabilizeandoilpricesholdupatUS$100,webelievetherublecouldregainsomeofitslosses.
Wearealsocuttingoureconomicgrowthforecast:downthisyear(by0.
2ppto4.
0%)andnext(by1.
5ppto2.
5%)givenananticipatedslowdownintheglobaleconomy,volatilityinthefinancialmarketandourexpectationforloweroilprices.
Whilethe2QGDPnumber–3.
4%YoY–camewellbelowexpectations,internaldemandlooksrobust.
Privateconsumptionroseabout5%YoYandinvestmentandconstructionactivityhaveacceleratedsignificantlyrecently.
Weexpectafiscaldeficitofabout1.
5%ofGDPin2011,allowingforhighersocialspendingandtheindexationofpublicwagesin2H11.
Weexpectthefiscaldeficitwillwidento3-4%ofGDPinthenextthreeyearsandpublicdebttogrowbyaboutUS$50bnperannum.
TurkeyAt8.
8%YoY,Turkey's2QGDPcameinstronger-than-expected(6.
4%)onthebackofrobustdomesticdemand.
Standingat1.
3%QoQ(SWA),thepaceofeconomicactivityremainedstronginthesecondquarter,thoughthemomentumseemstobesofteningcomparedwiththelastquarterof2010(3.
6%QoQ,SWA)andthefirstquarterof2011(1.
7%QoQ,SWA).
Despiteourexpectationsofasofter2H,wedon'tthinktheCBTisfacingastrugglingeconomy.
This,coupledwiththedeteriorationinunderlyinginflationdynamics,reducesthelikelihoodofaratecutduringtheremainderoftheyear,inourview.
ConcerningourFXoutlook,despitetheenvisagedimprovementinthecurrentaccountbalancegoingforward,thecountry'sexternalfinancingneedswillremainlarge,whichpreventsusfrombecomingconstructiveaboutthesecularoutlookforthelira.
TheS&P'srecentdecisiontoupgradeTurkey'slocalcurrencycreditrating,whilekeepingFCratingunchanged,suggeststhatanupgradetoIGonFCdebtremainsachallengerequiringmajorpolicyefforts.
Inthisregard,thegovernment'snewMedium-TermPlan(tobeannouncedinearlyOctober)willhaveanimportantsignalingeffect,whichmayinturnhaveimplicationsforthetrajectoryofthelira.
Figure35.
RussiaandTurkey—EconomicForecasts,2010-12FRussiaTurkey20102011F2012F20102011F2012FRealGDPYoY4.
0%4.
0%2.
5%9.
0%7.
3%2.
5%FinalDomesticDemandYoY3.
38.
23.
310.
710.
01.
6PrivateConsumptionYoY3.
05.
33.
06.
76.
50.
8FixedInvestmentYoY6.
17.
55.
029.
922.
12.
9ExportsYoY7.
13.
32.
73.
43.
81.
8ImportsYoY25.
617.
03.
620.
713.
2-1.
4CPIYoY6.
98.
87.
28.
66.
07.
5UnemploymentRate%7.
57.
37.
511.
910.
210.
4CurrentAccountUS$bn71.
181.
331.
4-47.
7-70.
4-62.
0%ofGDP4.
84.
81.
9-6.
5-9.
6-8.
4FiscalBalance%ofGDP-4.
0-1.
4-3.
1-3.
6-1.
9-2.
7USDollarExchangeRateAverage30.
430.
333.
71.
501.
721.
87Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisElinaRibakova(44-20)7986-4356elina.
ribakova@citi.
comNataliaNovikova+74956431507natalia1.
novikova@citi.
comIlkerDomac+902123194623ilker.
domac@citi.
comGultekinIsiklar+902123194915gultekin.
isiklar@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets30HungaryAdeterioratingglobalgrowthenvironmentandfearsofcontagionhavecontributedtoasubstantialrevisionofourGDPforecastsforHungary.
Inresponsetoweakergrowthprospects,thegovernmentreiterateditscommitmenttokeepthefiscaldeficitbelow3%ofGDPin2012andpresentedasetoffiscalmeasuresthataretohelpachievethattarget.
Weseeariskthatthenewfiscalmeasuresmaynotbesufficienttokeepthegeneralgovernmentdeficitbelow3%ofGDP,especiallyintheeventofadeeper-than-expectedeconomicslowdown.
TheHungarianParliamentadoptedalsoanewlawthatallowshouseholdstorepayforeigncurrency-denominatedmortgagesinasinglestepatanoff-marketexchangerateofCHF/HUF180.
TheFXlossrelatedtosuchrepaymentswillbebornebyHungarianbanks,andassumingthat25%ofclientswillhaveaccesstorefinancingloansorsufficientsavingstotakeadvantageoftherepaymentoption,thecosttobankscouldreach1%ofGDP.
Theresultingdemandforforeigncurrenciescouldputdownwardpressureontheforint;however,thecentralbankisreadytoprovideFXfromitsofficialreservestolimitmarketpressures,partlyreducingtheriskofadisruptivedepreciation.
Weexpectinterestratestoremainonholdinthecomingmonthswithsomeriskofratehikesintheeventofsubstantialcurrencydepreciation.
Poland2QGDPgrowthdeceleratedto4.
3%YoYfrom4.
4%YoYin1Q,whichcomprised:decelerationinprivateconsumptionto3.
5%YoYfrom3.
9%YoYin1Q,accelerationofinvestmentsgrowthto7.
8%YoYfrom6%YoY,andhighstock-building.
Thedeteriorationofglobaleconomicgrowthprospects,especiallyintheeurozone,shouldnegativelyaffectthePolisheconomyinthenextquarters.
ConsumptionmaybenegativelyaffectedbyprobabledeteriorationinlabourmarketconditionsandweakerzlotyversustheSwissfranc.
Atthesametime,publicconsumptionmaybereducedduetofiscaltightening.
Increaseduncertaintyandlowerconfidencemaynegativelyaffectprivateinvestments.
AllinallwerevisedownourforecastsforPolandin2012.
Wealsoreviseupwardsthepathofinflationforthenext3-6monthsduemainlytoaweakerzloty,whichisunderpressureinthecurrentrisk-offenvironment.
Furtherzlotyweakeningtoabove4.
70wouldincreasetheriskofPoland'sdebt-to-GDPratioexceedingthe55%thresholdlevel,whichwouldrequiresubstantialfiscaltightening.
Therefore,theMinistryofFinancemaydecidetointensifyitsinterventionstotheendofthisyeartosecureastrongerzloty.
Wethinkattemptstostabilizethezlotywillstopthecentralbankfromimmediateratecuts.
However,giventheprospectofmonetaryeasingintheEuroArea,wenowbelievethePolishMPCwillvotetocutratesin2Q2012.
Figure36.
HungaryandPoland—EconomicForecasts,2010-12FHungaryPoland20102011F2012F20102011F2012FRealGDPYoY1.
2%1.
4%1.
1%3.
8%3.
8%1.
9%FinalDomesticDemandYoY-2.
8-0.
8-0.
42.
13.
31.
0PrivateConsumptionYoY-2.
10.
2-0.
23.
23.
22.
0FixedInvestmentYoY-5.
6-4.
4-0.
9-2.
05.
7-0.
8ExportsYoY14.
18.
55.
010.
15.
21.
4ImportsYoY12.
07.
03.
811.
54.
8-1.
8CPIYoY4.
73.
94.
82.
74.
23.
0UnemploymentRate%11.
211.
511.
812.
111.
110.
0CurrentAccountUS$bn2.
74.
04.
9-15.
9-21.
4-15.
7%ofGDP2.
13.
04.
3-3.
4-4.
4-3.
4FiscalBalance%ofGDP-4.
21.
9-3.
0-7.
9-5.
3-4.
5USDollarExchangeRateAverage2082112603.
03.
13.
4Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisPiotrKalisz+48(22)6929633piotr.
kalisz@citi.
comCezaryChrapek+48(22)6929421cezary.
chrapek@citi.
comPiotrKalisz+48(22)6929633piotr.
kalisz@citi.
comCezaryChrapek+48(22)6929421cezary.
chrapek@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets31CzechRepublicWehavecutourGDPgrowthforecastto0.
6%YoYin2012(from1.
5%)and1.
9%in2011(from2.
1%)asforeigndemandislikelytoslowbelowtheforecastsoftheCNB(2.
2%YoYin2012)andMoF(2.
5%).
IndustrialproductiongrowtheasedinJulyandweexpectittodropto2%YoYinSeptemberbecauseofaregulartemporarystoppageatarefineryindustry.
Weexpectlittleornogrowthinindustrialproductionin2012.
Themaindownsiderisktoourforecastsistheslowdowninexportactivity.
Domesticdemandremainsweak,withretailsalesstillfallinginJuly,although2QwagedataandtheAugustunemploymentrateimproved.
CPIgrowthundershotagaininAugustandweexpecttheCPItoundershoottheCNB'sforecastintheremainderoftheyear.
Theeconomicslowdownislikelytoleadtosomepressurefortighterfiscalpolicy,butwebelievethefiscaldeficitismanageableunlesstheeconomystartstocontract.
ThekorunahasbeenweakercomparedtotheCNBforecastandweexpectthistopersist.
Inspiteofthis,weexpecttheCNBtokeepthemainpolicyrateunchangedat0.
75%alsoin2012withthekorunatobeaninflationaryrisk,andtheexternalenvironmentakeydisinflationaryrisk.
ButaweakerkorunaislikelytobewelcomedlaterbytheCNBtoeasemonetaryconditionsandtooffsetthepressuretocutitspolicyrate,unlessweseeEURCZKabove25(whichisourforecast)accompaniedbystronger-than-expectedGDP.
RomaniaContagioneffectsfromtheongoingGreekcrisiscontinuetoplayoninvestors'mindsduetotherelativelyhighpresenceofGreek-ownedbanksinRomania(about16%oftotalbankassets).
Itistruethatthereareseveralmitigatingfactors:(i)despitetherisingconcernsaboutGreece,therearesofarnovisiblesignsofstressintheformofarunonsubsidiariesofeurozoneperipherybanksorcapitaloutflows;(ii)theGreek-ownedbanksinRomaniadon'tholdasignificantamountofGreeksovereigndebtandhavelowexposurestootherGreekentities;and(iii)theNBR,whichcandrawonexternalassistanceifneeded,appearstobeinastrongpositiontocontainthesituationintheeventofsuchashock.
Nonetheless,webelievethatinvestors'appetiteforRomanianassetswillremainsubdueduntilthereismoreclarityonGreeksovereigndebtwoes.
Onthemonetarypolicyfront,whiletheimprovementinthenear-terminflationoutlookanddifficultgrowthprospectshaveraisedtheprobabilityofaratecut,wethinkthattheNBRwillkeepratesonholdat6.
25%duringtheremainderoftheyear.
TheNBRofficialsremaincautious,sincearatecutthisyearmaynotbeaprudentmoveduetorisingconcernsabouttheGreekcrisisandtheelevatedlevelofriskaversion.
Figure37.
CzechRepublicandRomania—EconomicForecasts,2010-12FCzechRepublicRomania20102011F2012F20102011F2012FRealGDPYoY2.
3%1.
9%0.
6%-1.
3%1.
6%2.
0%FinalDomesticDemandYoY-0.
9-0.
2-0.
3-4.
3-0.
13.
4PrivateConsumptionYoY0.
0-0.
3-0.
1-1.
50.
43.
5FixedInvestmentYoY-3.
11.
6-2.
1-13.
1-0.
73.
0ExportsYoY18.
09.
21.
514.
316.
24.
2ImportsYoY18.
07.
20.
712.
410.
85.
2CPIYoY1.
51.
82.
56.
16.
23.
7UnemploymentRate%9.
08.
69.
26.
96.
66.
1CurrentAccountUS$bn-7.
2-8.
0-6.
9-6.
8-7.
8-9.
2%ofGDP-3.
7-3.
8-3.
5-4.
2-4.
2-5.
0FiscalBalance%ofGDP-4.
7-4.
5-4.
0-6.
7-4.
5-3.
0USDollarExchangeRateAverage19.
118.
019.
73.
23.
13.
2Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisJaromirSindel+420233061485jaromir.
sindel@citi.
comIlkerDomac+902123194623ilker.
domac@citi.
comGultekinIsiklar+902123194915gultekin.
isiklar@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets32BrazilCopom'ssurprisingdecisiontocuttheSelicrateinAugust(to12%from12.
50%)andtheconsequentdeclineinrealinterestratesshouldincreaseinflationrisksincomingmonths,raisingthelikelihooditwillsurpassthetargetbandthisyear.
Simultaneously,thedecisionalsoindicatedthatmonetarypolicyprobablywillbelooserin2012thanwepreviouslyexpected.
Thisstimulus,togetherwiththelikelymoreexpansionaryfiscalpolicy,suggeststhat2012GDPgrowthmaybestrongerthanthemarketcurrentlyforecasts.
OntheFXfront,therecentdeteriorationintheglobaloutlook,reflectedinlowercommodityprices,higherriskaversionandamoredovishstanceinmonetarypolicy,suggeststhatpartoftherecentBRLdepreciationshouldpersist.
Wemaintainourmoreconstructiveviewregardingtradebalance/currentaccountperformancesthisyear,whileintermsoffiscalpolicywekeepourviewthatthepublicsectorwillaccomplishitsprimaryfiscaltargetthisyear.
MexicoEconomicactivitybeganthesecondhalfwithreasonableresults.
IndustrialproductiongrowthinJulyat3.
2%YYwasbelowourexpectation,butinternaldemandindicators,suchasretailsales,employmentandbanklending,arestillgainingmomentum.
Wethereforekeepour2011GDPgrowthforecastat4.
1%.
For2012,ourprojectionalsoremainsunchangedat3.
5%butwereiteratethatforecastrisksappeartiltedtothedownside,albeitlimitedbythefactthatUSmanufacturingisstillperformingbetterthantherestoftheeconomy.
Inanycase,Banxicohasmadeclearthatashiftincurrentprospects–giveninflationclosingataroundthe3.
5%levelthisyearandnext–couldleadpolicymakerstoconsiderratecuts.
Forthemoment,however,westicktothecentralscenariothatBanxicowillkeepthepolicyrateat4.
5%throughout2011-12.
Thisisparticularlythecasesincepesoweaknessvs.
theUSDduringtherecentepisodeofglobalvolatilityalreadyimpliesloosermonetaryconditions.
WethinktheUSD/MXNhasovershotrelativetofundamentalsandthereforeweseespacefortheMXNtoexplorestrongerlevelstowardsyear-end(partiallyreversingfromcurrentlevels),intandemwithanexpectedpartialeasinginriskaversionabroad.
Figure38.
BrazilandMexico—EconomicForecasts,2010-12FBrazilMexico20102011F2012F20102011F2012FRealGDPYoY7.
5%3.
7%4.
0%5.
4%4.
1%3.
5%FinalDomesticDemandYoY8.
34.
84.
44.
24.
84.
2PrivateConsumptionYoY7.
04.
93.
55.
04.
43.
6FixedInvestmentYoY21.
95.
54.
72.
38.
67.
3ExportsYoY11.
53.
36.
424.
39.
48.
0ImportsYoY36.
210.
08.
822.
110.
410.
3CPIYoY5.
06.
65.
74.
23.
43.
8UnemploymentRate%6.
76.
36.
35.
45.
24.
7CurrentAccountUS$bn-47.
4-54.
1-70.
8-5.
6-13.
0-30.
7%ofGDP-2.
3-2.
2-2.
7-0.
5-1.
1-2.
6FiscalBalance%ofGDP-2.
5-2.
5-2.
5-2.
8-2.
5-2.
0USDollarExchangeRateAverage1.
761.
721.
8012.
612.
613.
0Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisMarceloKfoury+551140093470marcelo.
kfoury@citi.
comSergioLunaMartinez+525522266799sluna@banamex.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets33ArgentinaTherehavebeennomajorchangesinthepoliticaloutlook.
CristinaFernándezdeKirchner'svictoryinthefirstroundintheOctober23presidentialelectionsseemslikely,astheoppositionremainshighlyfragmented,evenafterthestrongblowitscandidatessufferedintheAugust14openprimaries.
Regardingtheeconomicoutlook,activityindicatorscontinuetoshowmomentum,especiallythoseproducedbytheNationalStatisticalInstitute(INDEC).
AccordingtotheINDEC,GDPgrew9.
1%YYinrealtermsduring2Q11and9.
5%YYin1H11.
Inourview,thosefiguresseemoverestimated,andwethinkthatrealeconomicexpansionduring1H11wasaround7%y/y.
Noteverythingisgoingwellontheeconomicfront,ascapitalflighthasrisenandinSeptemberitprobablyhasbeenaboveUS$3billion,thehighestlevelsinceOctober2008.
ThebigquestionisifcapitalflightislikelytocontinueaftertheOctoberpresidentialelectionsornot.
Ifcapitalflightdoesnotdwindleafterthepresidentialelections,thechancesoftheeconomymarchingtowardsstagnationarefarfromnegligible,webelieve.
VenezuelaTheVenezuelaneconomyexpanded3.
6%yearoveryearin1H11,drivenmostlybygrowthinthecommunicationsandretailsectors.
Constructionshowedoverallweakness,fallingforasecondconsecutivequarter.
Thisposesachallengefortheadministrationasitisusingthehousingconstructionprogramastheflagshipofitssocialagenda.
Pricescontinuetoriseatapaceroughlyconsistentwithannualinflationof26-28%,although,aswithmanyemergingeconomies,thebiggestriskisthattheadverseeffectsoftheglobalslowdowncouldoverwhelmtheburgeoningdomesticactivityrecovery.
Inthisregard,itisworthnotingthattheVenezuelaneconomysufferedthemostamongitsLatAmpeersbackin2009,astheslumpinoilpricessenttheeconomyintosevencontinuousquartersofnegativegrowth.
ThisisthereasonwhyweconsiderVenezuelatobetheeconomywiththehighestrisksintheregioniftheglobaloutlookdeterioratesfurther.
Figure39.
ArgentinaandVenezuela—EconomicForecasts,2010-12FArgentinaVenezuela20102011F2012F20102011F2012FRealGDPYoY9.
2%8.
5%5.
0%-1.
4%3.
5%3.
9%FinalDomesticDemandYoY11.
611.
96.
7-2.
15.
65.
1PrivateConsumptionYoY9.
010.
15.
1-2.
35.
57.
8FixedInvestmentYoY21.
29.
03.
6-4.
4-5.
9-2.
4ExportsYoY14.
6-0.
25.
2-12.
45.
5-0.
7ImportsYoY34.
021.
712.
9-4.
610.
96.
0CPIYoY18.
425.
022.
528.
227.
026.
3UnemploymentRate%9.
38.
17.
88.
58.
86.
7CurrentAccountUS$bn3.
6-0.
5-2.
014.
434.
443.
3%ofGDP1.
0-0.
1-0.
53.
711.
611.
0FiscalBalance%ofGDP0.
2-0.
61.
0-6.
6-5.
0-5.
0USDollarExchangeRateAverage3.
94.
25.
32.
64.
34.
3Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisJoaquinACottani(1-212)816-2735joaquin.
cottani@citi.
comMunirJalil+5716394195munir.
jalil@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets34SaudiArabiaWeexpectanaverageWTIoilpriceof$89perbarrelthisyear,downfrom$98YTD,butbelievegovernmentrevenuesarelikelytoremainbuoyedbyanincreaseinproduction.
SaudiArabiacouldcutbackto9millionbarrelsperday(from9.
9mbpdinAugust)fortheremainderoftheyearandoverallproductionwouldstillregistera10%increase.
Suchacutbackisunlikely,inourview,leavingriskstoproductionforecastsfirmlytotheupside.
Assumingstablenon-oilrevenuesandexpendituregrowthof40%thisyear(reflectingtheslewofsocialexpendituresannouncedearlierthisyear),wecontinuetoexpectasmallfiscalsurplus(1%ofGDP)in2011.
Goingforward,itislikelythatSaudiArabiawillbegintoaccumulatefiscaldeficitsgivenourprojectedoilpriceofaround$75perbarrelofWTI,andafiscalbreakeventhatwillhoverinthemidtohigh$80sperbarrelWTImark.
However,weremainconfidentthatSaudiArabiahasthefiscalspacetoabsorbthesedeficits,eitherthroughresortingtoitsconsiderablefiscalassets(governmentdepositsatSAMAstoodjustshyof$290bninJuly,or65%ofprojected2011GDP)orthroughborrowing.
Economicgrowthwillremainrobust,inourview.
Wedonotexpectthegovernmenttocurtailexpendituredespiteslowingrevenues,aspriorityisbeinggiventosocialstabilityanddiversificationoftheeconomyforthepurposeofcreatingemployment.
Non-oilgrowthisthuslikelytoremainstrongonthebackofhighgovernmentexpenditure,andwillbegivenafurtherboostbythepassingofthemortgagelaw(whichweexpectimminently)andtheincreaseinlocalemployment.
UnitedArabEmiratesThedeterioratingglobaloutlookspellsrisksfortheUAEonthreefronts,andwenowconsiderriskstooureconomicforecaststobetothedownside.
First,thefallinglobaloilpricesinrecentmonthswillsqueezerevenuesattheAbuDhabilevel,andwehavealreadyseenthatemiratebegintopullbackfromsomepreviouslyanticipatedinvestments,particularlyinthenon-oilsector.
Second,slowergrowthinglobaldemandmayimpactDubai'songoingrecovery,dependentasitisonglobaltrade,tourismandtransportation.
Finally,theretrenchmentinglobalriskappetitewillexposeentitiesintheUAEtoheightenedrefinancingrisksiffinancialconditionsremaintightinthemediumterm.
Thatsaid,webelievethatDubaiinparticularwillcontinuetobenefitfromitssafe-havenstatusatatimeofcontinuedMiddleEastunrest,providingsignificanttailwindstoitstourismandbankingindustries.
ThelatestfiguresshowasurgeindomesticdepositsintheUAE,easingpreviousliquidityconstraintsinthebankingsectorandcreatingconditionsforarenewalofgrowthinbanklending.
Figure40.
SaudiArabiaandUnitedArabEmirates—EconomicForecasts,2010-12FSaudiArabiaUnitedArabEmirates20102011F2012F20102011F2012FRealGDPYoY3.
8%7.
2%6.
2%2.
1%2.
2%2.
3%FinalDomesticDemandYoY-0.
89.
97.
81.
93.
13.
5PrivateConsumptionYoY2.
310.
05.
01.
01.
02.
0FixedInvestmentYoY-5.
615.
010.
05.
05.
05.
0ExportsYoY5.
010.
58.
010.
013.
013.
0ImportsYoY-8.
015.
012.
010.
015.
015.
0CPIYoY5.
47.
08.
01.
52.
02.
4CurrentAccountUS$bn66.
844.
645.
621.
79.
68.
5%ofGDP16.
510.
17.
57.
93.
32.
7FiscalBalance%ofGDP6.
70.
8-3.
70.
00.
00.
0USDollarExchangeRateAverage3.
83.
83.
83.
73.
73.
7Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisFaroukSoussa+971(4)5099750farouk.
soussa@citi.
comFaroukSoussa+971(4)5099750farouk.
soussa@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets35NigeriaGDPdatashowsthatgrowthslowedmarginallyin1H2011,becauseofthepoliticaluncertaintyaroundtheelectionsandlowergovernmentspending.
Butgrowthisstillquiterobust;weforecast7.
1%fortheyear.
InflationfellintosingledigitsinJulyandAugust,butwethinkthatfurthersignificantfallsareunlikelyandthatitwillremaininhighsingle/lowdoubledigitslevelsinto2012.
TheappointmentofNgoziOkonjo-Iwealaasfinanceminister,alongsideincumbentcentralbankgovernor,LamidoSanusi,createsarespectedeconomicteamcommittedtoimprovingfiscaldisciplineanddrivingareturntomoreorthodoxmonetarypolicies.
However,thefocuswillnowbethespeedwithwhichthenewgovernmentmakesprogresswithstructuralreformswhichhavebeeninthepipelineforsometime,ledbyreformsofthepowersectorandtheoilindustry.
But,thecombinationofimprovedfiscaldiscipline,higherinterestratesandrecoveringoilproductionshouldallowthecentralbanktomaintainnairastabilityunlessthereisasignificantfallintheoilprice.
SouthAfricaWeareagaindowngradingourrealGDPgrowthforecastsfor2011and2012,andnowexpectonly3.
0%averagegrowththisyearand2.
8%in2012.
Ongoingglobalfinancialtensionsandtheirnegativeimpactonlocalbusinesssentimentarethekeyreasonsbehindthisrevision.
Inaddition,widespreadstrikesinearlyQ3probablyforcedcompaniestoreduceinventories,resultinginapoorQ3GDPperformance.
WeseeareboundfromQ4onwards,butprivateconsumptiongrowth–sofarthemaindriverofexpansion–willprobablysufferfromerodingrealwagegrowth.
Jobprospectsremainflat,fixedinvestmentprojectsmaybedelayedbythecurrentdropinbusinessconfidenceandhousinghasnotyetbottomed,despiteverylowrealinterestrates.
Inflationislikelytobehigherby0.
3percentagepointonaveragein2012comparedwithourearlierforecast–becauseofaweakerrandanddespiteslowerGDPgrowth–butwestilldonotseeasustainedbreachofthe3-6%target.
Westillexpectthecurrentaccountdeficittowidenin2012amidless-supportivecommodityprices,butbylessthanwepreviouslyprojectedbecausetherandisweakerandtherecoveryindomesticfixedinvestmentisdelayed.
Mixedriskstotheinflationoutlookprobablywillprecludeadditionalmonetaryeasingbutrateslooksettostayonholdforalongwhile,withnohikesbefore2H12.
Discretionaryfiscalpolicyeasinglooksunlikely,butthedeficitprobablywillwidentemporarilyasgrowthslows.
Figure41.
NigeriaandSouthAfrica—EconomicForecasts,2010-12FNigeriaSouthAfrica20102011F2012F20102011F2012FRealGDPYoY7.
2%7.
1%6.
7%2.
8%3.
0%2.
8%FinalDomesticDemandYoYNANANA2.
84.
03.
4PrivateConsumptionYoYNANANA4.
44.
53.
4FixedInvestmentYoYNANANA-3.
72.
23.
0ExportsYoYNANANA4.
73.
02.
7ImportsYoYNANANA9.
67.
44.
7CPIYoY13.
710.
913.
04.
15.
05.
8UnemploymentRate%NANANA25.
526.
025.
7CurrentAccountUS$bn14.
223.
721.
4-10.
0-12.
7-17.
5%ofGDP6.
18.
86.
4-2.
7-3.
3-4.
7FiscalBalance%ofGDP-4.
9-2.
3-2.
4-5.
2-5.
6-5.
6USDollarExchangeRateAverage1511541537.
327.
458.
40Sources:HaverAnalyticsandCitiInvestmentResearchandAnalysisDavidCowan+44(20)79863285david.
cowan@citi.
comJean-FranoisMercier+27(11)9440813jean.
mercier@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets36Figure42.
SelectedEmergingMarketCountries—EconomicForecastOverview,2010-12FGDPGrowthCPIInflationCurrentBalance(%ofGDP)FiscalBalance(%ofGDP)20102011F2012F20102011F2012F20102011F2012F20102011F2012FAsia9.
2%7.
4%7.
3%4.
2%5.
8%4.
7%4.
0%2.
9%2.
4%-2.
4%-2.
7%-2.
4%China10.
49.
08.
73.
35.
34.
25.
24.
03.
2-1.
6-2.
0-2.
0HongKong7.
05.
64.
52.
45.
34.
06.
28.
39.
34.
22.
93.
0India*8.
57.
68.
28.
69.
57.
5-2.
6-3.
0-2.
3-8.
1-8.
3-7.
1Indonesia6.
16.
56.
35.
15.
06.
20.
90.
1-0.
3-0.
6-1.
5-1.
5Korea6.
23.
73.
93.
04.
53.
52.
81.
41.
11.
40.
50.
7Malaysia7.
24.
75.
01.
73.
22.
711.
810.
59.
0-5.
6-5.
4-5.
0Pakistan2.
43.
55.
013.
912.
012.
00.
2-1.
7-1.
6-6.
2-4.
0-3.
9Philippines7.
63.
73.
93.
84.
33.
54.
23.
53.
0-3.
5-1.
6-1.
2Singapore14.
55.
33.
32.
85.
13.
022.
216.
515.
00.
50.
02.
0SriLanka8.
07.
97.
56.
08.
06.
5-2.
9-4.
1-4.
0-8.
0-6.
8-5.
2Taiwan10.
84.
84.
61.
01.
31.
59.
48.
08.
0-3.
2-2.
5-2.
4Thailand7.
82.
73.
43.
33.
83.
54.
65.
13.
0-2.
0-2.
9-2.
0Vietnam6.
85.
76.
49.
218.
711.
8-4.
7-6.
8-6.
2-7.
9-5.
0-4.
8LatinAmerica6.
1%4.
5%4.
1%7.
5%8.
2%7.
5%-1.
0%-1.
0%-1.
4%-2.
6%-2.
3%-2.
0%Argentina9.
28.
55.
018.
425.
022.
51.
0-0.
10.
90.
2-0.
61.
0Brazil7.
53.
74.
05.
06.
65.
7-2.
3-2.
2-2.
7-2.
5-2.
5-2.
5Chile5.
26.
34.
51.
43.
22.
91.
9-0.
8-1.
8-0.
30.
91.
0Colombia4.
35.
04.
82.
33.
33.
5-3.
1-2.
2-2.
0-3.
6-3.
5-3.
2Ecuador2.
03.
53.
53.
42.
83.
0-4.
7-3.
20.
0-3.
5-3.
2-3.
3Mexico5.
44.
13.
54.
23.
43.
8-0.
5-1.
1-2.
6-2.
8-2.
5-2.
0Panama7.
510.
07.
53.
56.
37.
0-11.
0-13.
5-12.
1-1.
9-3.
0-2.
0Peru8.
86.
55.
51.
53.
23.
1-1.
5-3.
0-3.
6-0.
81.
41.
1Uruguay7.
85.
84.
76.
77.
46.
61.
00.
4-1.
9-1.
2-1.
1-1.
0Venezuela-1.
43.
53.
928.
227.
026.
33.
711.
611.
0-6.
6-5.
0-5.
0Europe4.
6%4.
4%2.
3%6.
1%6.
8%6.
2%-0.
1%-0.
5%-1.
6%-4.
8%-2.
4%-3.
2%CzechRepublic2.
31.
90.
61.
51.
82.
5-3.
7-3.
8-3.
5-4.
7-4.
5-4.
0Hungary1.
21.
41.
14.
73.
94.
82.
13.
04.
3-4.
21.
9-3.
0Kazakhstan7.
06.
44.
57.
18.
67.
33.
17.
65.
3-2.
6-1.
9-2.
1Poland3.
83.
81.
92.
74.
23.
0-3.
4-4.
4-3.
4-7.
9-5.
3-4.
5Romania-1.
31.
62.
06.
16.
23.
7-4.
2-4.
2-5.
0-6.
7-4.
5-3.
0Russia4.
04.
02.
56.
98.
87.
24.
84.
81.
9-4.
0-1.
4-3.
1Slovakia4.
02.
91.
01.
03.
82.
1-3.
4-4.
8-3.
9-7.
5-5.
4-4.
3Turkey9.
07.
32.
58.
66.
07.
5-6.
5-9.
6-8.
4-3.
6-1.
9-2.
7Ukraine4.
24.
74.
09.
49.
39.
2-2.
1-2.
5-5.
0-5.
9-3.
8-3.
1Africa/Mideast4.
7%5.
2%4.
9%5.
0%5.
9%6.
2%6.
3%5.
2%4.
4%0.
1%-0.
5%-1.
9%Bahrain4.
11.
06.
01.
92.
03.
06.
36.
26.
3-1.
5-4.
0-4.
1Egypt5.
11.
43.
611.
19.
89.
5-2.
1-3.
5-3.
0-8.
1-9.
0-8.
8Ghana6.
615.
57.
310.
79.
58.
0-7.
2-6.
9-5.
4-7.
5-6.
9-7.
1Iraq5.
910.
410.
40.
04.
05.
02.
70.
90.
7-11.
12.
2-11.
7Israel4.
74.
32.
52.
73.
42.
33.
1-0.
4-1.
2-3.
0-2.
0-2.
5Jordan5.
03.
54.
65.
05.
05.
0-5.
0-8.
3-8.
0-5.
6-3.
0-2.
7Kenya5.
35.
76.
14.
414.
411.
3-7.
9-8.
2-7.
5-6.
5-6.
9-6.
7Kuwait6.
24.
44.
74.
44.
25.
038.
138.
839.
121.
718.
414.
1Lebanon6.
02.
83.
54.
03.
44.
0-13.
0-16.
7-11.
7-7.
4-8.
4-8.
9Nigeria7.
27.
16.
713.
710.
913.
06.
18.
86.
4-4.
9-2.
3-2.
4Oman7.
04.
44.
13.
53.
53.
02.
63.
42.
9-1.
61.
00.
3Qatar9.
312.
89.
4-2.
43.
03.
019.
318.
915.
215.
215.
014.
6SaudiArabia3.
87.
26.
25.
47.
08.
016.
510.
17.
56.
70.
8-3.
7SouthAfrica2.
83.
02.
84.
15.
05.
8-2.
7-3.
3-4.
7-5.
2-5.
6-5.
6Tanzania6.
97.
27.
66.
211.
49.
3-9.
5-10.
1-9.
6-6.
4-5.
5-5.
0UAE2.
12.
22.
31.
52.
02.
47.
93.
32.
70.
00.
00.
0Uganda6.
97.
27.
64.
116.
410.
7-9.
9-10.
6-9.
2-4.
5-5.
0-5.
1Zambia7.
67.
26.
88.
59.
08.
33.
86.
63.
0-3.
1-3.
9-3.
5Total7.
3%6.
0%5.
5%5.
3%6.
5%5.
7%2.
5%1.
8%1.
3%-2.
6%-2.
3%-2.
4%*Note:InIndia,policymakerslookatthewholesalepriceindex.
Sources:NationalsourcesandCitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets37Figure43.
CitiGlobalEconomicsTeamForInformationalPurposesOnlyNameOfficeNumberEmailAddressResponsibilitiesNEWYORKNorthAmericaNathanSheets3(1-212)816-9297nathan.
sheets@citi.
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diclemente@citi.
comHead,NorthAmericaPeterD'Antonio3(1-212)816-9889peter.
dantonio@citi.
comU.
S.
ForecastStevenWieting3(1-212)816-7148steven.
wieting@citi.
comEquityThemesDanaPeterson3(1-212)816-3549dana.
peterson@citi.
comU.
S.
ForecastandCanadaEmergingMarketsJoaquinCottani3(1-212)816-2735joaquin.
cottani@citi.
comHead,LatinAmericaJorgePastrana2(1-212)816-5728jorge.
armando.
pastranavillegas@citi.
comCaribbeanandCentralAmericaCamiloGonzálezGarcía21-212)816-9901camilo.
gonzalezgarcia@citi.
comArgentina,Chile,Peru,Caribbean,CentralAmericaLONDONWillemBuiter1(44-20)7986-5944willem.
buiter@citi.
comChiefEconomistTinaFordham1(44-20)7986-9860tina.
fordham@citi.
comGlobalPoliticalAnalysisEbrahimRahbari1(44-20)7986-6522ebrahim.
rahbari@citi.
comGlobalEconomicsWesternEuropeMichaelSaunders1(44-20)7986-3299michael.
saunders@citi.
comHead,WesternEuropeandU.
K.
CoverageJürgenMichels1(44-20)7986-3294juergen.
michels@citi.
comEuroArea(Germany)andECBSpecialistGiadaGiani1(44-20)7986-3281giada.
giani@citi.
comEuroArea(Italy,Spain,Greece,Portugal)GuillaumeMenuet1(44-20)7986-1314guillaume.
menuet@citi.
comEuroArea(France)TinaMortensen1NordicsAnnO'Kelly1(44-20)7986-3297ann.
okelly@citi.
comEuropeEmergingMarketsDavidLubin1(44-20)7986-3302david.
p.
lubin@citi.
comHead,EmergingMarketsandCEEMEADavidCowan1(44-20)7986-3285david.
cowan@citi.
comAfrica(exSouthAfrica)ElinaRibakova1(44-20)7986-4356elina.
ribakova@citi.
comRussia,Kazakhstan,UkraineTOKYOKiichiMurashima2(813)6270-4980kiichi.
murashima@citi.
comHead,JapanJinKenzaki2(813)6270-4997jin.
kenzaki@citi.
comJapanSYDNEYPaulBrennan15(612)8225-4899paul.
brennan@citi.
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williamson@citi.
comAustralia,NewZealandBOGOTAMunirJalil12(57)(1)639-4195munir.
jalil@citi.
comColombia,VenezuelaDUBAIFaroukSoussa1(971)(4)509-9750farouk.
soussa@citi.
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chua@citi.
comHead,EmergingAsia,VietnamMinggaoShen4(852)2501-2485minggao.
shen@citi.
comChinaShuangDing4(852)2501-2769shuang.
ding@citi.
comChinaAdrienneLui4(852)2501-2753adrienne.
lui@citi.
comHongKongISTANBULIlkerDomac6(90)212319-4623ilker.
domac@citi.
comTurkey,Romania,BalkansGultekinIsiklar6(90)212319-4915gultekin.
isiklar@citi.
comTurkey,Romania,BalkansJAKARTAHelmiArman62-21-5290-8960helmi.
arman@citi.
comIndonesiaJOHANNESBURGJean-FranoisMercier5(27)11944-0813jean.
mercier@citi.
comSouthAfricaMANILAJunTrinidad17(63)(2)894-7270jun.
trinidad@citi.
comPhilippines,ThailandMEXICOCITYSergioLunaMartinez4(52)(55)2226-6799sluna@banamex.
comMexicoMOSCOWNataliaNovikova18(7)495643-1507natalia1.
novikova@citi.
comRussia,Kazakhstan,UkraineMUMBAIRohiniMalkani8(91)22-6631-9876rohini.
malkani@citi.
comIndia,Bangladesh,Pakistan,SriLankaAnushkaShah8(91)22-6631-9878anushka.
shah@citi.
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sindel@citi.
comCzechRepublic,SlovakiaSAOPAULOMarceloKfoury19(55)(11)4009-3470marcelo.
kfoury@citi.
comBrazil,LatinAmericaSEOULJaechulChang16(82)23705-0727jaechul.
chang@citi.
comKoreaSINGAPOREKitWeiZhang20(65)66575079kit.
wei.
zheng@citi.
comSingapore,MalaysiaTAIPEICheng-MountCheng11(886)(2)8726-9096chengmount.
cheng@citi.
comHongKong,TaiwanWARSAWPiotrKalisz7(48)(22)692-9633piotr.
kalisz@citi.
comPoland,HungaryCezaryChrapek7(48)(22)692-9421cezary.
chrapek@citi.
comPoland,Hungary1CitigroupGlobalMarketsLtd;2CitigroupGlobalMarketsJapanInc.
;3CitigroupGlobalMarketsInc;4CitigroupGlobalMarketsAsia;5CitigroupGlobalMarkets(Pty)Ltd;6CitibankAnonimSirketi;7BankHandlowywWarszawie;8CitigroupGlobalMarketsIndiaPrivateLimited;9CitigroupGlobalMarketsIndiaPrivateLimited;10Citibank(China)Co.
Ltd;11AccionesyValoresBanamex,S.
A.
deC.
V;12CitibankTaiwanLtd;13BancoCitibankS.
A.
;14CitibankEuropeplcCzechRepublic;15CitigroupPtyLimited;16CitigroupGlobalMarketsKoreaSecuritiesLtd;17CitibankN.
A.
Philippines;18ZAOCitibank;19BancoCitibankS.
A.
;20CitigroupGlobalMarketsSingaporePTELIMITEDNON-USRESEARCHANALYSTDISCLOSURES:Thenon-USresearchanalystslistedabove(i.
e.
,theresearchanalystslistedaboveotherthanthoseidentifiedasemployedbyCitigroupGlobalMarketsInc.
)arenotregistered/qualifiedasresearchanalystswithFINRA.
SuchresearchanalystsmaynotbeassociatedpersonsofthememberorganizationandthereforemaynotbesubjecttotheNYSERule472andNASDRule2711restrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.
UnlessindicatedinAppendixA-1ofthisdocumentoranyofthereferenceddocuments,theanalystslistedabovehavenotcontributedtothisdocumentoranyofthereferenceddocuments.
SALESANDTRADINGTEAMS:PeopledesignatedasworkinginthesalesortradingdepartmentsofCitiarenotindependentresearchanalystsandhavenotcontributedtothisdocumentoranyofthereferenceddocuments.
Source:CitiInvestmentResearchandAnalysis.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets38Figure44.
CitiGlobalStrategyandMacroTeamForInformationalPurposesOnlyNameOfficeNumberEmailAddressResponsibilitiesGlobalMacroStrategyMarketCommentaryLondonJeremyHale1(44-20)7986-9465jeremy.
hale@citi.
comHead,MacroStrategyJeffAmato1(44-20)7986-1326jeffery.
david.
amato@citi.
comMacroStrategyMaximilianMoldaschl1(44-20)7986-8753maximilian.
moldaschl@citi.
comMacroStrategyRatesStrategyResearchLondonMarkSchofield1(44-20)7986-9224mark.
schofield@citi.
comHeadG10RatesStevenMansell1(44-20)7986-9249steven.
mansell@citi.
comEuropeanRatesRobertCrossley1(44-20)7986-9255robert.
crossley@citi.
comEuropeanRatesJamieSearle1(44-20)7986-9493jamie.
searle@citi.
comEuropeanRatesNishayPatel1(44-20)7986-1007nishay.
patel@citi.
comEuropeanRatesPeterGoves1(44-20)7986-3215peter.
goves@citi.
comEuropeanRatesNewYorkBrettRose3(1-212)723-6439brett.
rose@citi.
comUSRatesandMBSStrategyNeelaGollapudi3(1-212)723-3075neela.
gollapudi@citi.
comUSRatesandMBSStrategyIngerDaniels3(1-212)723-3274inger.
daniels@citi.
comUSRatesandMBSStrategyAsiaPacEijiDohke3(813-6)270-7245eiji.
dohke@citi.
comAsiaPacRatesSandeepArora3(813-6)270-7228sandeep.
k.
arora@citi.
comAsiaPacRatesMakiShimizu3(813-6)270-7246maki.
shimizu@citi.
comAsiaPacRatesJacySun3(813-6)270-7247jacy.
sun@citi.
comAsiaPacRatesEquityStrategyResearchGlobalRobertBuckland1(44-20)7986-3947robert.
buckland@citi.
comChiefGlobalStrategistHasanSTevfik,CFA1(44-20)7986-4110hasan.
tevfik@citi.
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comMertGenc1(44-20)7986-4087mert.
genc@citi.
comGlobalThemesMichaelGeraghty3(1-212)816-7291michael.
j.
geraghty@citi.
comPan-EuropeJonathanStubbs1(44-20)7986-4218jonathan.
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comRegionalHeadAdrianCattley1(44-20)7986-4454adrian.
cattley@citi.
comAnnaEsposito1(4420)7986-4039anna.
z.
esposito@citi.
comChristineJensen1(4420)7986-4008christine.
jensen@citi.
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vig@citi.
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levkovich@citi.
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m.
schmitt@citi.
comAndrewTWard3(1-212)816-8515andrew.
t.
ward@citi.
comUSSmall&MidCapScottTChronert3(1-415)951-1771scott.
t.
chronert@citi.
comJapanKenjiAbe2(81-3)6270-4890kenji.
abe@citi.
comRegionalHeadAustralia&NewZealandTonyBrennan15(61-2)8225-4890tony.
brennan@citi.
comRegionalHeadGlobalEmergingMarketsGeoffreyDennis3(1-212)816-8391geoffrey.
dennis@citi.
comRegionalHeadHowardPark3(1-212)816-2473howard.
park@citi.
comAsiaexJapanMarkusRosgen4(852)2501-2752markus.
rosgen@citi.
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kwok@citi.
comYueHinPong4(852)2501-2449yue.
hin.
pong@citi.
comLatinAmericaJasonPress3(1-212)816-5130jason.
press@citi.
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zamora@citi.
comCEEMEAAndrewHowell,CFA1(44-20)7986-0891andrew.
howell@citi.
comRegionalHeadMariaGratsova1(44-20)7986-1238maria.
gratsova@citi.
comThisauthorisnotanindependentresearchanalystandmayhaveknowledgeoftheFirm'spositionsand/ortheFirm'sinterestinoneormoreofthesecuritiesreferencedherein.
1CitigroupGlobalMarketsLtd;2CitigroupGlobalMarketsJapanInc.
;3CitigroupGlobalMarketsInc;4CitigroupGlobalMarketsAsia;5CitigroupGlobalMarkets(Pty)Ltd;6CitibankAnonimSirketi;7BankHandlowywWarszawie;8CitigroupGlobalMarketsIndiaPrivateLimited;9CitigroupGlobalMarketsIndiaPrivateLimited;10Citibank(China)Co.
Ltd;11AccionesyValoresBanamex,S.
A.
deC.
V;12CitibankTaiwanLtd;13BancoCitibankS.
A.
;14CitibankEuropeplcCzechRepublic;15CitigroupPtyLimited;16CitigroupGlobalMarketsKoreaSecuritiesLtd;17CitibankN.
A.
Philippines;18ZAOCitibank;19BancoCitibankS.
A.
;20CitigroupGlobalMarketsSingaporePTELIMITEDNON-USRESEARCHANALYSTDISCLOSURES:Thenon-USresearchanalystslistedabove(i.
e.
,theresearchanalystslistedaboveotherthanthoseidentifiedasemployedbyCitigroupGlobalMarketsInc.
)arenotregistered/qualifiedasresearchanalystswithFINRA.
SuchresearchanalystsmaynotbeassociatedpersonsofthememberorganizationandthereforemaynotbesubjecttotheNYSERule472andNASDRule2711restrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.
UnlessindicatedinAppendixA-1ofthisdocumentoranyofthereferenceddocuments,theanalystslistedabovehavenotcontributedtothisdocumentoranyofthereferenceddocuments.
SALESANDTRADINGTEAMS:PeopledesignatedasworkinginthesalesortradingdepartmentsofCitiarenotindependentresearchanalystsandhavenotcontributedtothisdocumentoranyofthereferenceddocuments.
Source:CitiInvestmentResearchandAnalysis.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets39Figure44.
(Continued)CitiGlobalStrategyandMacroTeamForInformationalPurposesOnlyNameOfficeNumberEmailAddressResponsibilitiesCreditStrategyResearchLondonMattKing1(44-20)79863228matt.
king@citi.
comGlobalHeadHansLorenzen1(44-20)79863568hans.
lorenzen@citi.
comEuropeanFlowCreditMichaelHampden-Turner1(44-20)7986-3445michael.
hampdenturner@citi.
comStructuredCreditNewYorkRatulRoy3(1-212)723-6043ratul.
roy@citi.
comStructuredCreditMikhailFoux3(1-212)723-9353mikhail.
foux@citi.
comUSFlowCreditJasonShoup3(1-212)723-6147jason.
b.
shoup@citi.
comUSHYFlowCreditMichaelAnderson3(1-212)723-3819michael.
henry.
anderson@citi.
comUSHYFlowCreditSecuritizedProductsStrategyResearchNewYorkMaryKane3(1-212)816-8409mary.
e.
kane@citi.
comGlobalHeadStavGaon3(1-212)816-3233stav.
gaon@citi.
comCMBSJeffBerenbaum3(1-212)816-8399jeffrey.
s.
berenbaum@citi.
comCMBSLondonGordonKerr1(44-20)7986-1998gordon.
kerr@citi.
comEuropeanRMBS/ABS1CitigroupGlobalMarketsLtd;2CitigroupGlobalMarketsJapanInc.
;3CitigroupGlobalMarketsInc;4CitigroupGlobalMarketsAsia;5CitigroupGlobalMarkets(Pty)Ltd;6CitibankAnonimSirketi;7BankHandlowywWarszawie;8CitigroupGlobalMarketsIndiaPrivateLimited;9CitigroupGlobalMarketsIndiaPrivateLimited;10Citibank(China)Co.
Ltd;11AccionesyValoresBanamex,S.
A.
deC.
V;12CitibankTaiwanLtd;13BancoCitibankS.
A.
;14CitibankEuropeplcCzechRepublic;15CitigroupPtyLimited;16CitigroupGlobalMarketsKoreaSecuritiesLtd;17CitibankN.
A.
Philippines;18ZAOCitibank;19BancoCitibankS.
A.
;20CitigroupGlobalMarketsSingaporePTELIMITEDNON-USRESEARCHANALYSTDISCLOSURES:Thenon-USresearchanalystslistedabove(i.
e.
,theresearchanalystslistedaboveotherthanthoseidentifiedasemployedbyCitigroupGlobalMarketsInc.
)arenotregistered/qualifiedasresearchanalystswithFINRA.
SuchresearchanalystsmaynotbeassociatedpersonsofthememberorganizationandthereforemaynotbesubjecttotheNYSERule472andNASDRule2711restrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.
UnlessindicatedinAppendixA-1ofthisdocumentoranyofthereferenceddocuments,theanalystslistedabovehavenotcontributedtothisdocumentoranyofthereferenceddocuments.
SALESANDTRADINGTEAMS:PeopledesignatedasworkinginthesalesortradingdepartmentsofCitiarenotindependentresearchanalystsandhavenotcontributedtothisdocumentoranyofthereferenceddocuments.
Source:CitiInvestmentResearchandAnalysis.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets40RatesStrategyThehighlightofthelastfewweeksintermsofnewsheadlineswasprobablytheFOMCmeetingbutthebusinessendoftheproceedingsisundoubtedlystillthedeterioratingsituationinEMU.
Theaverageoftiertwospreadshaswidened70bpversustieronespreadsandourblendedtierthreemeasurehaswidened250bpagainsttiertwo.
TheEurocrisisnowthreatenstoderailconfidenceacrossthesystemandishavingadetrimentaleffectonglobalgrowthexpectations.
TheFed'sflatteningtradeTheFedannouncedaUSD400billiondurationextensiontradelastweek,sellingsub3yrpapertobuy6-30yrpaper.
ThelongerthanexpectedmaturityswitchhastriggeredadramaticflatteningoftheUSTreasuryyieldcurvebutithasfailedtoboostriskassets.
Wesuspectthattherewillneedtobeasignificantfurtherflatteningofthecurvebeforeequitymarketscanreallyrespond,thuswhilewethinktheimpactonthelevelofyieldsmaybemutedcomparedtoQE2,giventhedifferentstructureofthepackage,wethinktheyieldcurveflatteningmovepotentiallyhasalotfurthertorun.
Tier2EMUspreadslikelytoremainunderpressureDespiteItaly'slatest,lessoutdated,growthforecasts,andtheirsecondausteritypackageinasmanymonths,weremainpessimisticontheprospectsforsustainedspreadcompressionintiertwomarketsintheimmediatefuture.
ConsiderableuncertaintiessurroundItaly'spackage,whichrequireclarification,butitisthepoliticsandimplementationrisksthatposethemainthreatstothetargetsbeingmet,andtofuturegrowth.
WeexpectsovereignratingsinEMUtocomeunderfurtherpressureincomingmonthsandwiththemarketnowimplyingaveryhighprobabilityofaGreekdefaultitseemsthattiertwomaybewherethenextwaveofpressurecomesfrom.
Thatsaid,wenotethatCDSspreadsinthecoremarketsarealsoheadingsharplyhigher.
GermanyandtheNetherlandswere,atthetimeofwriting,flirtingwiththe100bplevel,whichiswhereJapantradedatthestartofthemonth.
Themarketisfastlosingpatiencewiththeapparentpoliticalimpasseandwebelievethatthiswillcontinuetodriveriskpremiahigher.
ForecastsrevisedlowerWithgrowthexpectationsdecliningfastandanincreasingsensethatthesovereigndebtcrisisandtheglobalslowdowningrowthareinextricablylinked,wehavereviseddownmanyofouryieldforecaststhismonth.
Forecastingbeyondafewweeksisverydifficultatthepresenttimebecausethepolicyresponsefromcentralbankswillinevitablychangedependingonhowtheeconomiesreacttonewandunusualmeasures.
Ourforecastsarethereforebasedonacentralscenariowiththecaveatthatextremescenarioprobabilitiesarerising.
Thecentralscenarioisoneofpositivebutweakgrowth,modestpricepressuresandlowandstablepolicyratesthroughout2012.
WeexpectcontinueddownwardpressureonyieldsfromcentralbankbondpurchasesintheUSandtheUKtoo.
Thisislikelytomeanlowandstablebondyields,flattercurvesandprobablydecreasingrealizedvolatility.
Wedo,however,urgeinvestorstoconsidertail-riskhedgesinsuchanuncertainenvironment.
MarkSchofield(4420)79869224mark.
schofield@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets41Figure45.
InterestRateandBondMarketForecasts(EndofPeriod),asof28Sep2011ForecastEndPeriodCurrent4Q111Q122Q123Q124Q12USPolicyRate(FedFunds)EndQuarter0.
250.
250.
250.
250.
250.
253-MonthLibor0.
370.
380.
400.
450.
500.
602YearTreasuryYield0.
240.
250.
250.
350.
400.
655YearTreasuryYield0.
950.
950.
951.
251.
351.
6010YearTreasuryYield1.
982.
002.
002.
302.
602.
9030YearTreasuryYield3.
093.
103.
103.
353.
603.
902-10YearTreasuryCurve1741751751952202252YearSwapSpread(SwapLessGovt.
),bp28343435353510YearSwapSpread(SwapLessGovt.
),bp18202020222530YearMortgageYield4.
054.
14.
14.
34.
44.
710YearBreakevenInflation188195205215225240EuroAreaPolicyRate1.
501.
001.
001.
001.
001.
00OvernightRate(EONIA)1.
050.
600.
400.
400.
400.
403-MonthLibor1.
501.
100.
700.
700.
800.
902YearTreasuryYield0.
400.
250.
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355YearTreasuryYield0.
900.
800.
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7510YearTreasuryYield1.
931.
501.
251.
351.
501.
5030YearTreasuryYield2.
492.
352.
152.
102.
252.
202-10YearTreasuryCurve15312510011012011510YearBTP-BundSpread39045047545042540010YearSwapSpread(SwapLessGovt.
),bp71858075706010YearBreakevenInflation135125115120125130JapanPolicyRate0.
100.
100.
100.
100.
100.
103-MonthLibor0.
190.
190.
170.
150.
150.
152YearTreasuryYield0.
130.
150.
150.
150.
100.
105YearTreasuryYield0.
340.
350.
450.
450.
400.
3510YearTreasuryYield1.
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201.
201.
101.
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0530YearTreasuryYield1.
922.
002.
102.
102.
052.
002-10YearTreasuryCurve881051059595952YearSwapSpread(SwapLessGovt.
),bp21202424222010YearSwapSpread(SwapLessGovt.
),bp-11553110YearBreakevenInflationNANA.
NANANANAUKPolicyRate0.
500.
500.
500.
500.
500.
503-MonthLibor0.
931.
000.
900.
850.
850.
852YearTreasuryYield0.
540.
450.
400.
300.
350.
455YearTreasuryYield1.
291.
251.
201.
101.
151.
3010YearTreasuryYield2.
342.
001.
651.
651.
801.
8030YearTreasuryYield3.
543.
303.
103.
003.
003.
002-10YearTreasuryCurve18015512513514513510YearSwapSpread(SwapLessGovt.
),bp32456060606010YearBreakevenInflation263245225235250265AustraliaPolicyRate4.
754.
754.
754.
755.
005.
003-MonthLibor4.
745.
005.
105.
205.
305.
402YearTreasuryYield3.
473.
603.
754.
004.
254.
505YearTreasuryYield3.
663.
803.
954.
204.
454.
7010YearTreasuryYield4.
314.
304.
454.
604.
905.
102-10YearTreasuryCurve84707060656010YearSwapSpread(SwapLessGovt.
),bp726560605550Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets42SovereignRatingsOutlookWeexpectaseriesofsovereignratingsdowngradesamongEuroAreacountriesinthenext3-6months,includingItaly,Spain,Greece,PortugalandCyprus.
WealsoexpectItaly,Spain,PortugalandIrelandtobedowngradedfurtheroverthelongerterm(next2-3years).
Overthenext2-3years,wealsoexpectthatFranceandAustriaarelikelytobeputonnegativeoutlook,withBelgiumatriskofasinglenotchdowngrade.
Overthelongerterm(next2-3years),wealsoexpectthatthesovereignratingsoftheUSandJapanwillbedowngradedinresponsetoadversemedium-termfiscaltrends.
WedonotcurrentlyexpecttheUKtobedowngradedorputonnegativeoutlookinthenextfewmonthsorthelongerterm.
ButtheUKisarelativelyweak'AAA',giventhesharpriseinthefiscaldeficitoverrecentyears,surgingpublicdebts,largebankingsystem,weakeconomicoutlookandprospectthatthedeficitwillovershootofficialforecasts.
TheUK'sratingcouldbeatriskifthecoalitionfallsapartoreasesuponthefiscalconsolidationprogramme.
WeregardthesmallerEuropeancountries(Switzerland,Sweden,DenmarkandNorway)asfairlysolidAAAsfornow,albeitwithsomeconcernsovertherisingfiscaldeficit,sluggishhousingmarketandpoorexportperformanceinDenmark.
Wedonotexpectanyratingsupgradesamongadvancedeconomies,eitheroverthenextfewmonthsorthenext2-3years.
77See"SovereignRatingsOutlook",MichaelSaundersandMarkSchofield,12September2011,CitiMichaelSaunders(44-20)7986-3299michael.
saunders@citi.
comMarkSchofield(44-20)7986-9224mark.
schofield@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets43Figure46.
AdvancedEconomies—SovereignLong-TermDebtRatingsandCitiRatingsForecastsS&PRatingsMoody'sRatingsCountryCurrentRatingCurrentOutlookCitiNearterm(3-6months)ForecastRatingCitiLongterm(2-3Years)ForecastRatingandOutlookCurrentRatingCurrentOutlookCitiNearterm(3-6months)ForecastRatingCitiLongterm(2-3Years)ForecastRatingandOutlookUSAA+NegAA+AA↓AaaNegAaaAa1↓CanadaAAAStableAAAAAAAaaStableAaaAaaJapanAA-NegAA-A+↓Aa3StableAa3A1↓GermanyAAAStableAAAAAAaaStableAaaAaaFranceAAAStableAAAAAA(Neg)AaaStableAaaAaaItalyANegAA-↓Aa2(NegW)NAAa3↓A3↓↓↓↓SpainAANegAA-↓A-↓↓↓↓Aa2(NegW)NAAa3↓A3↓↓↓↓AustriaAAAStableAAAAAA(Neg)AaaStableAaAaaBelgiumAA+NegAA+AA↓Aa1StableAa1Aa1(Neg)FinlandAAAStableAAAAAAAaaStableAaaAaaGreeceCCNegSD↓CC/C↓CaDevelopingC↓CaIrelandBBB+StableBBB+BBB↓Ba1NegBa1Ba2↓NetherlandsAAAStableAAAAAAAaStableAaaAaaPortugalBBB-NegBB↓↓CC/C↓↓↓↓↓Ba2NegBa3↓Ca↓↓↓↓↓DenmarkAAAStableAAAAAAAaaStableAaaAaaNorwayAAAStableAAAAAAAaaStableAaaAaaSwedenAAAStableAAAAAAAaaStableAaaAaaSwitzerlandAAAStableAAAAAAaaStableAaaAaaUKAAAStableAAAAAAAaaStableAaaAaaNote:Arrowsdenoteexpectedratingschanges.
(Neg)denotesnegativeoutlook.
(NegW)denotesnegativewatch.
SpainandItalycurrentlydonothavearatingsoutlookfromMoodys,bothareonnegativewatch.
SDmeansSelectiveDefault.
Thenumberofarrowsdenotestheexpectedchangeinratingsnotchesfromthecurrentlevel.
Weshowamaximumoffivearrowsevenforcountrieswhereweexpectmorethanfivenotchesofratingschange.
IntheoutlookwehavenotincludedanextensionoftheactualEFSFlendingbeyondthenowtargeted440bnmaximumcapacity.
IntheeventthatasubstantialextensionoftheEFSFtakesplaceandislikelytoincursizeablefiscalcosts,thesixAAA-ratedEuroAreacountriesmaybeatriskofdowngrade.
NANotavailable.
Sources:Moody's,S&PandCitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets44CreditOutlookTherenewedsell-offinmarketshasleftmanyinvestorsstrugglingtofindsuitablecomparisons.
A2001-stylerecessionisvirtuallypricedin,andatfirstsightseemsaworseprospectthanwarrantedeitherbythestateofcorporatebalancesheets,orbymosteconomists'mainscenarios.
Inmanyrespects,though,wethink2008isabettercomparison.
8Aswasthecasethen,theeconomicoutlookdependsasmuchuponmarketsasviceversa.
Andwhilebanks'liquiditypositionislessofaconcernthanthen,inotherrespectsthecurrentsituationfeelsworse:policymakersonbothsidesoftheAtlantichavelesscredibility,andthesolutionsarelessobvious.
Growthprospects–forecastcuttingtocontinueWhilstEuroAreawoesaretheobviousculpritforthecurrentsell-off,toourmindsthesharpfallineconomicindicatorsthatbeganinAugustisalmostasimportant.
Thatfallwasnotconfinedtotheeuroperiphery,butpresentintheUS,inGermanyandinemergingmarketsaswell.
AndregardlessofwhetherthecauseofthatfallwasthepolicytighteninginEM,theUSdebtceilingdebacleorEuroAreawoesspreading,feedbackloopssuggesttousthattheprocesshasfurthertorun.
Marketvalues–paradigmlostIfitwerejustacaseoftheneedtopriceinarenewedrecession,wewouldfeelmorerelaxed.
Afterall,onmostmeasures,wearealreadythere.
Spreadsonnon-financialsinboththeUSandcoreEuropearealreadyverycloseto2001levels.
Netdebt/EBITDArelationshipssuggestthatcreditmarketvaluationsalreadydiscountsomethinglikea30%declineinnon-financialearningsnextyear(seeFigure47).
Thetroubleis,investorafterinvestortellsusthattheydonotknowwhattherightparadigmis.
Theparalleltheyallfearis2007-08.
Thentoo,corporatebalancesheetswerenotparticularlystretched–yetacrisisinthebankingsectorsparkedacollapseingrowthandearningswhichledtoariseindefaultsandasurgeinspreadsinanycase.
Whenthethreatsonthemacrosidearesolarge,balancesheetandprofitmetricsarerenderedlittlemorethanahistoricalcuriosity.
Nowhereisthismoreobviousthaninthebankingsector.
EuropeanbankCDSandcashbondspreadsareat,ornear,2008levels.
Asweseeit,itisnotsimplyaquestionofraisingmorecapital.
NoamountofcapitalraisingislikelytoallowtheEuropeanbankingsectortowithstandtheimpactofanItaliandefault,inourview.
Ontheotherhand,ifitisjustGreece,IrelandandPortugalwearetalkingabout,andItalyandSpaincanbering-fenced,thelosseswouldbesmallenoughthatmostbankswouldbarelyneedanycapitalatall(seeFigure48).
Eveninnon-financials,itisnotdifficulttoconjureupascenariowherespreadswouldwidento2008levels.
Overthepasttwoyears,retailinvestorsintheUSalonehavetakenaround$1tnoutofmoneymarketfundsanddepositeditincreditandequityfunds,spurredonbyzerointerestratesandtheneedtopickupyield.
Iftheoutlookcontinuestodeteriorate,partofthisflowmaybereversed.
Afterall,iftheUSisre-enteringrecession,equitiesarefallingsharplyandEuropeisonthebrinkofmultiplesovereigndefaults,zeromightnotbesuchabadreturnafterall.
Yetgivencurrentlevelsofliquidityincredit,forcedsellingincashwouldsendspreadsgappingwider,regardlessoffundamentals.
EvenafterAugust'soutflows,holdings8Fundamentally,ofcourse,thesimilaritiesarestrongerwith,say,theLatinAmericandebtcrises,giventhattherootoftheimmediateproblemissovereigndebt.
Butintermsofmagnitude,familiarityandscopeforcontagion,2008stillseemstheobviouscomparison.
MattKingmatt.
king@citi.
com(4420)79863228HansLorenzenhans.
lorenzen@citi.
com(4420)79863568Figure47.
-30%EarningsAlreadyinthePriceNetdebt/EBITDAvsspreads,bp0100200300400500600120140160180200220LeverageSpreadSource:CIRA,Yieldbook,MarkitFigure48.
WhyItalyandSpainMustBeSavedSovereignexposuresvsbankcapital60%70%80%90%100%110%120%NLGEFRUKUS0%1%2%3%4%5%2014Fdeficit2014Fstandalonedebt/GDP1trEFSF440bnEFSFSource:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets45ofriskyassetsrelativetomoneymarketfundsarestillextremelyelevated(seeFigure49).
And,whileourclientsurveyshowsthatnetlongpositionshavefallenconsiderablyinrecentmonths,italsosuggeststhatmuchofthishasbeenthroughindexhedging,ratherthancashsales–hencetheperiodicsharpsqueezesinCDSandsteadywideningofthebasis.
WaitingforthecavalryWhatcouldbedonetoavertsuchanightmarescenarioQuitealot,actually–butlittleofitfeelsverylikelyuntilthingsbecomemuchworse.
Itisnotthatpolicymakersarerunningoutofammunition–itisthatthepoliticalwilltouseitislacking.
TheECB,forexample,hasthemeanstostopthewideninginItalianandSpanishgovernmentbondspreadsbyeithersteppingupitspurchasesviatheSMPorbydrawinganSNB-stylelineinthesand–buttherepeatedreferencestothesolepurposeoftheSMPbeingto"ensuretheorderlytransmissionofmonetarypolicy",andthesteadyreductioninthescaleofpurchases,demonstratethatitdoesnotconsiderititsjobtodoso.
TheFed,too,hasplentymoreammunitioninprinciple.
QE1andQE2wereremarkablyeffectiveinproppingupmarketswhiletheylasted.
Butelevatedlevelsofinflationandthegrowingpoliticaloppositiontofurtherbalancesheetexpansionhavelimitedtheirroomformanoeuvre.
Politicians,too,couldstopthesell-offinitstracks–butseemunlikelytodoso.
IfEuropewereactuallytoadoptaplantorestructureGreece,IrelandandPortugalbuttoeffectivelyring-fenceItalyandSpainthroughagiganticallyexpandedEFSF-styleliquiditycushion,asisbeginningtobediscussed,theoutlookwouldimproveinaninstant.
Butpoliticaloppositionmakessuchactionunlikely.
LikewiseintheUS,ifthesupercommitteeweretoexceeditsmandate,comingupwithalong-termproposalforareturntobudgetsurpluscoupledwithnear-termstimulus,bothmarketsandtheratingagencieswouldbeappeased.
But,aswithEurope,thereneedstobegreaterrecognitionofjusthowdesperatethesituationisbeforethenecessarywillcanbemusteredtoaddressit.
NextstepsDespitethevaguelyencouragingsignsfromtheIMFmeetingsovertheweekend,wesuspectthatdecisivemeasureswillonlybeimplementedifmarketscontinuetopushhardenough,andiftheglobaleconomicoutlookdeterioratesenough,thatpolicymakersrealizetheyhavelittlechoice.
Untilthatpointweexpectonlybriefshortsqueezespromptlyfollowedbybiggersell-offsasmarketsandpolicymakersalikecometoappreciatethemagnitudeofthehurdlesconfrontingthem.
Andsowegofrommarkets,totheoutlook,topolicymakers–andbacktomarketsagain.
Becauseuntilthesepolicyproblemsareaddressed,thesteadyerosionofconfidenceseemslikelytocausemarketstoselloff,andasell-offinmarketsisamajordriveroftheeconomicoutlook.
Itisnousefirmsandinvestorshavingcashifacrisisofconfidencemeanstheyarenotpreparedtouseit(Figure50).
Tosumup,itfeelslikeintermsoftime,thepointofwantingtobeoutrightlongisbeginningtobewithinsight:valueisthere,anditmightonlybeamatterofmonths,orevenweeks,beforethingsarebadenoughthatpolicymakersstarttotakemoredecisiveaction.
Intermsofspreadlevels,though,thoseweeksormonthscouldeasilyseeaverysignificantmovewider.
Withinvestorssoundingbearishbutnotyetobviouslyshort,andliquidityincashminimalatbest,itishardtodomorethantosaywefearthecollapseinconfidenceisnotyetover,andtorecommendstrappingyourselfinfortheride.
Figure49.
StillFullyInvested,forNowMutualfunds(%MMktholdings)0%50%100%150%200%250%300%960106110%2%4%6%8%10%12%14%16%18%20%EquitiesHYInvestmentGradeSource:CitiInvestmentResearchandAnalysisFigure50.
DownandRoundWeGoMarketsOutlookPolicymakersMarketsOutlookPolicymakersSource:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets46GlobalEquityStrategyTheongoingsovereigncrisisinEurozone,lackofstrongactionfrompolicymakersaroundtheworldandworriesaboutglobalgrowthhaveallbeendriversofweakerstockprices.
Globalequitiesaredown20%fromtheir2011peaks.
Atcurrentlevels,wethinkstockmarketsareimplyingglobalEPStocontractby10-15%for2012.
Thisisunlikelytohappen,inourview.
OurforecastsforglobalEPSgrowthare12%for2011and9%in2012.
Assuch,webelievemarketsareoversoldandglobalstockindiceswillmovehigherwithEPS.
Figure51illustratesourforecasts.
Figure51.
MSCIACWIandCitiForecastsFigure52.
GlobalERIandMSCIACWI175200225250275300325350375400425Jan09Jul09Jan10Jul10Jan11Jul11Jan12Jul12MSCIACWorldCitiTargetTheTwilightZoneTheGrindHigher-0.
8-0.
6-0.
4-0.
200.
20.
4000102030405060708091011150200250300350400450ERI(4weekavg)MSCIACWI(RHS)Sources:MSCI,CitiInvestmentResearchandAnalysisSources:CIRA,FactsetValuationsforglobalequitiesareapproachingthelowsthatwesawduringthe2008-09bearmarket.
Globalequitiestradeon1.
5xpricetobookwhereasthelong-termaveragehasbeen2.
1x.
Theglobalpricetotrend(10-yearaverage)earningsratiois15.
8xwhilethelong-termaverageis25x.
Outsideoftherecentbearmarket,boththesemeasuressuggestequitiesareascheapastheywereintheearly/mid1980sorclosetorecessionlevelsalready.
However,oureconomists'forecastsareconsistentwithsluggishglobalGDPgrowth,notarecession.
Althoughtheriskstocorporateprofitshaverisen,especiallyinEurope,wedonotbelievetheyareconsistentwithacontractioninglobalEPS.
Whileweremainconstructiveonequities,stockpricesareunlikelytomoveconvincinglyhigheruntilthereareclearersignsofstabilityineconomicactivityandprofitsgrowth.
So,whichindicatorshavebeenhelpfulinthepasttohelpconfirmamarketbottomOnehasbeentheCitigroupEconomicSurpriseIndex(CESI),whichisameasureofeconomicdatareleasesrelativetoexpectationsoverthelast3months.
IntheEuroZonetheCESIishoveringarounditsrecentlows—consistentwitheconomicdatamissingexpectationsbyaconsiderablemargin.
IntheUStheCESIhasbeenrisingsinceJune,butremainsnegative.
Wealsofindeconomists'forecastscanhelpconfirmmarketlows.
InthepasttheperiodofthebiggestGDPdowngradeshasusuallybeenaroundthetimemarketsmadebottoms.
GDPdowngradeshaveacceleratedoverlastfewmonths.
RobertBuckland44(20)79863947robert.
buckland@citi.
comHasanTevfik44-(20)79864110hasan.
tevfik@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets47Timelyindicatorsofcorporateprofitslikeourearningsrevisionindex(ERI)9havealsohelpedconfirmamarketbottom.
ERIisameasureofEPSforecastchangesmadebybottom-upanalysts.
AsshowninFigure52,ourglobalmeasureofERItendstobeacoincidentindicatorofstockprices.
Previousreboundsinstockpriceshavebeenconfirmedbyslowinginthepaceofdowngrades(i.
e.
analystsarestillputtingthroughmoredowngradesthanupgrades,butlesssothanpreviously).
Wehavejusthadtheweakest6weeksforglobalearningsrevisionssince2009.
Thereareatleast2downgradesforeveryupgrade.
Itisstilltooearlytosayearningsrevisionshavestabilized.
Whileourglobalmeasureofearningrevisionsisacoincidentindicatorofstockprices,earningrevisionsforthe'problemchild'haveattimesledabottominstockprices.
The'problemchild'isthepartoftheequitymarketthatisattheepicentreofthepull-backorbearmarket.
Thisregionorsectorusuallysuffersthebiggestdeclinesinearningsandprices.
Theproblemchildinthelate1990swasAsianFinancials,intheearly2000sitwasUSTechandin2009itwasUSFinancials.
In2010(andnow)wethinkitisContinentalEuropeanFinancials.
Onaveragethepaceofearningsdowngradesfortheproblemchildbeginstoslow40-50daysbeforethemarketfindsaneventualbottom.
Weareyettoseethishappening,butwethinkwearegettingcloserafteralreadybigdowngradesinEuropeanFinancialsoverthelastfewweeks.
OurkeyregionalandglobalsectorrecommendationsaresummarisedinFigure53.
EmergingMarketsremainourpreferredstructuralgrowthplay.
EMeconomicandEPSmomentumremainrobustcomparedtoDM.
Balancesheetsarestrongforcorporates,banksandgovernments.
WestayOverweight.
WearealsoOverweightJapan,whichisourrecoveryplay.
Thepost-earthquakeEPSdowngradeshavereversedandwebelieveJapancanbenefitfrompositiveearningstrendsfromthispoint.
WeareNeutralontheUS.
AlthoughtheUShasitsownfiscalproblems,corporatesintheUSarebuyingbacktheirsharesatarapidrateandEPSmomentumremainssolid.
EuropeexUKhasbeenoneoftheworstperformersrecentlyduetoongoingsovereignconcerns.
AlthoughweseemoreseriousrisktoearningsinContinentalEurope,cheapvaluationsandexpectationsofamarketreboundkeepusNeutral.
WeareUnderweightUKandDevelopedAsia.
Ourglobalsectorstrategykeepsacyclicaltilt.
Whilethesesectorshaveunderperformed,ourpositiveviewonglobalcorporateprofitsshouldbemostbeneficialforthesesectors.
Weprefertobuyoperationalleverageratherthanfinancialleverage.
OurOverweightsincludeIT,MaterialsandIndustrials.
Wethinkthesesectorsarelikelytobenefitfromamarketrebound.
Despitedismalearningsmomentum,wekeepFinancialsatNeutralaswethinkshort-termperformancemaybestrongifthereisanimprovementininvestors'riskappetites.
OurUnderweightshaveacleardefensivetiltandincludeTelecoms,HealthCareandConsumerStaples.
Otherthanbeingdefensive,thesesectorsshouldunderperformasearningsrevisionsstabilize.
Theirvaluationsdonotlookparticularlyattractiveeither.
Figure53.
RegionalAndGlobalSectorRecommendationsOverweightNeutralUnderweightGlobalEmergingMarketsUSUKJapanEuropeex-UKDevelopedAsiaOverweightNeutralUnderweightITConsumerDisc.
ConsumerStaplesMaterialsEnergyHealthCareIndustrialsFinancialsTelecomsUtilitiesSource:CIRA9ERIiscalculatedasupgradeslessdowngradesdividedbytotalnumberofestimateschangedforperiod.
ERIisavailableonBloombergCGQIOption3(ERI)GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets48SecuritizedProductsStrategyWeexpectsecuritizedproductsspreadstoremainfairlystable,asmostsectorshaveperformedwellduringtherecentvolatilemarketperiod.
Moreover,securitizationmarketsalsooutperformedcompetinghighqualityfixedincomesectors,andwethinkthistrendissustainableforthenearfuture.
Withaninvestors'stancethatisdecisivelyriskaverseatthisjuncture,defensivepositioningandspreadstabilityremainkeyingredientstodealwiththeongoingmarketturmoil.
Securitizedproductssectorshavemanagedtofinessethemarket'sstrongcreditde-riskingtrendandviciousvolatility.
Werecommendremainingmarketweighted.
Still,tocomplementafocusondefenseandstability,certainsectorsofferinterestingpositioningopportunitiesinsecuritizedmarkets.
UpinCredit.
Wewouldusespreadwideningtogoupincredit.
Tieringislikelytobecomemoreprevalentasyear-endapproaches,andmaintainingqualityisakeydefensivestrategy.
"OperationTwist"Trades.
LongdurationbondscouldmaximizeanybenefitderivingfromtheFed"twist"operation.
Longersecuritizedproductssectors,suchas7-10YRcreditcardsorlongtriple-ACMBSclasseswouldbenefitthemost.
"OperationTwist"involvedtheFedleggingoutofshorter-termcouponinvestmentstoextendmaturities.
Thisduration-extendingmechanismwoulddrivedownlonger-termyields.
Cross-sectorReallocation.
CMBSislikelytobenefitfromyear-endsectorre-allocationbymoneymanagersshiftingfromRMBStoCMBSformoreyieldpickup.
Thistrendisintheearlystage,inourview.
ThemostrecentPPIPquarterlyperformancereportalsoshowsthatPPIPportfoliomanagersincreasedtheirCMBSallocationattheexpenseofnon-AgencyRMBS.
10CMBSyieldsareveryattractive,perhapsbeingoversoldatthisstage,inourview.
Figure54.
SelectedSecuritizedProductsSectors—SpreadPerformance,Sep07-Sep11WALsUnder5YearsWALsOver5Years01002003004005006007008009001,000Sep-07May-08Jan-09Sep-09May-10Jan-11Sep-11EuroLLCMBSAAA5-YrAAAUKPrimeRMBS5-YrEURAutosAAAEuroFL2YrAAAAuto3-YrUSBIGAAACorp3-7yr02004006008001,0001,2001,4001,600Sep07May08Jan09Sep09May10Jan11Sep11CMBSAAA10-YrCLOAAACCAAA10-YrUSBIGAAACorpSource:CitiInvestmentResearchandAnalysis10See"PPIPStillPositiveTechnicalforAMsandAJs,"Citi,July29,2011.
MaryKane+1(212)816-8409mary.
e.
kane@citi.
comStavGaon+1(212)816-3233stav.
gaon@citi.
comJeffBerenbaum+1(212)816-8399jeffrey.
s.
berenbaum@citi.
comGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets49FocusonStabilityintheFaceofWeakerEconomicOutlook…Ourexpectationforcontinuedspreadstabilityissupportedbytherecentperformanceofsecuritizedmarkets.
EuropeanABS,forexample,outperformedothermarketsduringtherecentmarketrout.
Similarly,theconsumerABSindexduration-adjustedreturnsleadalternativehigh-qualityindexes'performancesforthemonthofAugust,andalsofortheyeartodate(Figure55).
Challengingbroadmarketheadwindsunderscoreourfocusonstability.
Combinedeffectsfrom1)asofterpaceoffirst-halfgrowthand2)lastmonth'sfinancialshock,suggestweakereconomicprospectsforthecomingyear.
Oureconomistscuttheirfull-year2011GDPestimatesto1.
6%,includingshavingaboutthree-fourthsofapointrelatingtotheearlyAugustfinancialshockalone.
11Butwhileevidenceshowsthatfundamentalshaveinfactweakened,dataalsoshowstheeconomyisnotfallingoffacliff.
Forexample,consumerspendingshowedmomentumimprovingpriortothefinancialshock.
Consumerspendingincreasedbyasolid0.
8%(0.
5%inrealterms)inJuly,mainlyonabouncebackinmotorvehiclepurchases.
Inthesamevein,someCMBSfundamentalperformancemetricsappeartohavestabilized.
Thefixed-rateCMBS30-plusdaydelinquencyrate,forexample,fell14bpinAugust.
…ButActivePrimaryMarketSignalsaConstructiveViewArobustnewissuancepipelinealsosuggestsmanymarketparticipantsmaintainaconstructiveview.
InCMBS,themarketisgearingupforarelativelyheavynewissuecalendar.
Thereisan$8billionnewissuepipelinethroughOctober,acrosssevendeals.
Arobustnewissuecalendaralsokickedoffabusypost-holidayweekinconsumerABS.
ThefirsttwoweeksofSeptemberexperienced$8-10billionofsupply,spreadacrossvarioussectors,includingcreditcards,auto,equipmentandstrandedassets.
SectorRelativeValueandAllocationRecommendationsOursecuritizedproductsstrategistshavemixedviewsonthemarket,rangingfrombullishtoneutral,andFigure56showsCitistrategists'recommendationsformajorstructuredproductssectorsonascaleof-3(maximallybearish)to+3(maximallybullish).
Thetablealsoincorporatesthestrategists'mostcurrentthinkingaboutvalueandpresentsoneortwotradeideas.
Figure56.
SectorRelativeValueandAssetAllocationRecommendations—SelectedSectors,September2011SectorStrategistRecommendationSpreadsRelativetoLong-TermAveragesCommentsCABS0FairRemainmarketweighted.
Seniorcardsandautoareourcorepicks.
Wealsolikecertainoff-the-runseniorsectors,includingdealerfloorplan,privatelabelcreditcards,equipmentandautoleaseABS.
CMBS+1CheapOurlong-termviewremainsforfurthertightening,butthecurrentenvironmentsuggestswaitingabitlongertostepinwithnewinvestments.
WestillfeelthatbuyingstrongerAMsopportunisticallyinamarketdislocationwillultimatelyrewardinvestorsinthelongrun.
CLO0CheaptoFairWeremainneutralonthemortgagebasisintheshortterm,aspolicyriskandspreadvolatilityareelevated.
Valuationscontinuetolookattractive.
AgencyMBS0FairEuropeanproductslookfairvaluerelativetocreditmarkets.
MovetoanunderweightinItalianRMBS.
Overweightcorecountrysectors.
Shortdurationcreditcardsandautosaredefensiveplaysandoutperform.
WealsolikeUKprimeRMBS,CMBSandUKBTL.
EuropeanSecuritizedProducts0FairRemainmarketweighted.
Seniorcardsandautoareourcorepicks.
Wealsolikecertainoff-the-runseniorsectors,includingdealerfloorplan,privatelabelcreditcards,equipmentandautoleaseABS.
Source:CitiInvestmentResearchandAnalysis11See"US:EconomicForecastHighlights:August2011"byRobertDiClementeet.
al.
CitiFixedIncomeResearch.
24Aug11and"CommentsonCredit",byRobertDiClementeetal.
,CitiFixedIncomeResearch,2Sep11.
Figure55.
Duration-AdjustedTotalRateofReturnforSelectedCitiBroadInvestmentGradeIndexes,August2011(%)0.
740-0.
095-0.
0050.
370-0.
424-1.
988-2.
50-2.
00-1.
50-1.
00-0.
500.
000.
501.
00ABSAgencyTreasuryMortgageBIGHighGradecorporateAug-11YTDSource:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets50CommodityOutlookandForecastCommoditiesremainpressuredinachoppy'risk-off'environmentthathaspermeatedcapitalmarketssincetheAugustsell-off.
MacrouncertaintyinEurope'sbankingsector,sovereignsolvencyandfundingissuesacrossbothcoreandperipheryEMUentitiesaswellasretrenchmentintheUSandChineseeconomies(bothofwhichalsohavebank-creditproblemscomingtothefore,asseeninfinancialsectorratingsdowngradesandrecentIMFreports)havenotsparedcommodityreturnsorflowsasinvestorslooktorepositionportfoliosfrombothafundamentalandliquiditypurview.
Assuch,itisbecomingmoreandmoreevidentthatthecommodity'bull-runcycle'thatbeganinlate2010willremainonholdintheabsenceofmeaningfulpolicystimulusfromtheECBandUSFederalReserveBank(beyondan'OperationTwist'),oraglobalgrowthturnaround,eventhoughsomekeycommoditymarkets(includingcopperandoil)remaintightlybalanced.
Figure57.
CommodityPriceForecasts*ForecastsSpot0-3M6-12M5YCyclical2011E2012E2013EEnergyNYMEXWTIUSD/bbl79.
982.
072.
581.
0**89.
771.
892.
5ICEBrentUSD/bbl104.
095.
091.
085.
0**106.
086.
3102.
0BaseMetalsLMEAluminumUSD/MT2,1832,3252,3002,5002,4622,3192,566LMECopperUSD/MT7,3557,0007,5007,5009,0998,3758,534LMELeadUSD/MT1,9562,2502,2002,2002,4772,2632,356LMENickelUSD/MT18,26421,00020,00018,50023,64920,93823,419LMETinUSD/MT20,19522,50021,00018,000N/AN/AN/ALMEZincUSD/MT1,8962,1252,0002,3002,2602,0752,256PreciousMetalsGoldUSD/T.
oz1,6382,0001,6501,0501,5901,6501,500SilverUSD/T.
oz30333212332622PlatinumUSD/T.
oz1,6331,8501,8501,5001,8271,9001,775PalladiumUSD/T.
oz641795823550801950850BulkCommoditiesHardCokingCoal(benchmarkAsia)302305280220289275248ThermalCoal(API2)USD/MT125123125105122139148IronOreSpot(TSI)USD/MT176165175100173160135AgricultureCornUSD/bu639675700700688671N/ASoybeansUSD/bu1,2581,2471,3431,3501,2891,369N/AWheatUSD/bu641700725675713710N/ARiceUSD/cwt1615.
615.
61415.
315.
5N/ACottonUSD/lb10010498125150100N/ASugarUSD/lb252726252825N/ACoffeeUSD/lb231245249250253250N/ACocoaUSD/MT2,6343,0003,0503,1003,0803,095N/A*AsofSeptember2011,**Real-AdjustedSource:CitiInvestmentResearchandAnalysisThebenchmarkDow-JonesUBSTotalReturnIndexisdown11.
8%year-to-dateandhaslost10%month-over-monthonaflat-pricebasis.
ThiscomparestoaCAGRofpositive0.
5%fromJanuary-Julyofthisyear.
Tobesure,volatilityacrosskeymarketshasreturnedtothelatesummerpeaksandcommoditymarketshavenotbeenimmune–themetalscomplex,agricultureandenergysectorsbeingmostadverselyaffected.
Indexandfundflowsonceagainareexitingthecommodityspace,followingtheAugustnadirandwilllikelystaychallengedforthetimebeing.
Sentimentsincemid-Augusthasthusfarlackedconviction.
FortheweekendingSeptember20th,commodityindexoutflowstotaled$4Bn,markingthethirdAakashDoshi(212)723-3872aakash.
doshi@citi.
com.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets51consecutiveweekofflowsleavingthesector.
Institutionalandretail(realmoney)investmentviaETFshasalsobeenmutedinSeptember,drivenlargelybyflowsintopreciousmetalfundsthathavebeeninpartoffsetbyoutflowsintheenergyspace.
Themixedtrendincommodityflowsissomethingweexpecttocontinueuntilthemarketisprofferedanewcatalysttofirmupsentimentforrisk.
Figure58.
Near-TermOutlookCurrentPriorMonthBeginningofYearEnergyBearishBearishBullishPreciousMetalsSlightlyBullish/NeutralBullishSlightlyBullishBaseMetalsSlightlyBearishNeutralBullishBulkCommoditiesSlightlyBearishNeutralBullishAgricultureSlightlyBullishSlightlyBullishNeutralSource:CitiInvestmentResearchandAnalysisInlightofthesemacroheadwinds,wehavemostrecentlyreviseddownourbasemetalandbulkcommodityoutlookinearlySeptember.
Basemetal2011priceswerereviseddown6-14%ex-zinc,and2012pricesdownanywherefrom11-23%acrosstheboard.
Thelargestrevisionscameinfornickel,whichweperceivetobemostsusceptibletoeconomicslowdownonthebackofsurgingChinesenickel-pig-ironproduction.
Bulkcommoditiescouldremainmorebufferedsinceemergingmarketsrepresent50-70%ofglobaldemandforcoal,ironoreandsteel,placingaflooronpricesasAsiancountrieslooktobuyonboutsofweakness.
Assuch,ourrevisedforecastsfor2012arestillup5%forironoreandunchangedforthermalcoal.
Ourforecastforgoldremainsunchangedasit'settles'aftertherecentcorrectiononlongmetals/shortDXYunwindswitha2011averagepriceforecastof$1,591/toz.
Weremainbearishtheenergysector,whichhasseendownwardshiftsintheforwardcurvetermstructuresforbothWTIandBrent.
TheWTI-BrentspreadshouldalsostayvolatileintheshorttermastraderssortphysicaltightnessinNorthSealoadingdelaysandtheresumptionofLibyansupply,whichweestimatetobe200-kb/dinOctober,upto500-kb/dinDec'11and900-kb/din2012.
WTIshouldremainweakdespitenewrailevacuationroutesintheUSmid-continent.
AgriculturecommoditieshavesoftenedsharplyinearlySeptemberbutinventoriesstillneedtoberebuiltanddemographicshiftsindevelopingmarketsshouldprovidesupportinto2012.
Wethusexpectheighteneddifferentiationamongcommoditysectorstoresumeinto4Q'11andoverallnotethatthe'bull-cycle'istemporarilyonpause.
Figure59.
MarketMovements:Equities,Credit,DollarandCommodities*Figure60.
Equity,CorporateCredit,PetroleumMarketandFXVolatility-20%-10%0%10%20%30%40%USEquitiesGlobalEquitiesUSInv.
GradeCreditGlobalInv.
GradeCreditEM$CreditUSD(DXY)DJ-UBSSpotIndexDJ-UBSEnergySpotDJ-UBSPrecMetalsSpotDJ-UBSIndMetalsSpotDJ-UBSAgsSpot%Chg.
YTD%Chg.
M-o-M1020304050607080Jan-11Feb-11Mar-11Apr-11May-11Jun-11Jul-11Aug-11Sep-111011121314151617VIXImpliedIGCDXATM3MVolCrudeOilVolatilityImpliedEURUSDATM3MVol(rhs)Source:Bloomberg,CitiInvestmentResearchandAnalysis*Note:Reflectsnominalspotpricechangefrom1January2011–21September2011Source:CBOE,CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets52CitiForeignExchangeForecastsMarketCommentaryThismarketcommentaryhasbeenpreparedbyamemberoftheInstitutionalClientsGroupofCiti.
Theinformationinthiscommunicationisnotintendedtoconstitute"research"asthattermisdefinedbyapplicableregulations.
**Forspecifictradeideasassociatedwiththissectorreview,pleasecontactthecontributorslistedattheendofthispieceRisingandelevatedriskaversion,resultingfromweakergrowthexpectationsandtheongoingfiscalcrisisintheEuroArea,seemslikelytoextendtherallyintheUSDwheredownsideinADXYandinEURhavecaughtupinrecentweekswithalreadydepreciatedLATAMandCEEMEAcurrenciesWeforecast3-5%USDgainsonaDXYbasisovertheshorttomediumtermwithEUR/USDlikelytodropintoa1.
25-1.
30range.
ThereshouldbefurtherneartermUSDgainsvs.
commoditybackedG10currenciesascommoditypricesease,includingAUDandCADOnlyJPYislikelytobestrongenoughtoresisttheUSDadvanceWithinEurope,weexpectthe1.
20EUR/CHFpegtoholdforsometimebutwarnthatthisimpliespotentiallyexplosivedomesticmoneygrowthwhichcouldunravelthecurrencyfixinthemediumtermiftheEuroAreacrisispersistsWithinEM,CEEMEAisexpectedtocomeunderthemostpressure,withLatamoutperforming.
AsiarunsamiddlecourseCitiForeignExchangeForecastsTheseforecastsareajointventurebetweenCiti'sforeignexchange,globalmacroandtechnicalstrategygroupsandourdevelopedandemergingmarketseconomists.
Undernormalcircumstances,weexpecttopresentForecastsonamonthlyschedulealthoughwemayofferintramonthupdatesifcircumstancesdictate.
WhiletheseforecastsshouldbeconsideredthebestguidetoCiti'sshorttomediumtermviewsontheoutlookfortheexchangeratescovered,individualanalystswithinvariousstrategyteamsmayofferseparatetradeideasinspot,forward,optionsorfutureswhenthisseemsappropriatefortechnical,tacticalorstrategicreasons.
Editor:JeremyHale**(44-20)7986-9465jeremy.
hale@citi.
comThisauthorisnotanindependentresearchanalystandmayhaveknowledgeoftheFirm'spositionsand/ortheFirm'sinterestinoneormoreofthesecuritiesreferencedherein.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets53Figure61.
CitiForeignExchangeForecastsspot3mFwd12mFwd0-3mos6-12moslong-term3mosrtn12mosrtnG10EuroEURUSD1.
351.
351.
351.
291.
251.
30-4.
5%-7.
6%JapaneseyenUSDJPY767676757678-1.
6%0.
3%BritishPoundGBPUSD1.
551.
541.
541.
521.
511.
65-1.
7%-2.
2%SwissFrancUSDCHF0.
900.
900.
890.
950.
951.
045.
6%6.
4%AustralianDollarAUDUSD0.
980.
970.
950.
951.
020.
95-2.
0%7.
8%NewZealandDollarNZDUSD0.
780.
770.
760.
760.
830.
63-1.
8%9.
2%CanadianDollarUSDCAD1.
031.
031.
031.
061.
000.
953.
0%-3.
0%DollarIndex*DXY78.
1078.
1978.
1080.
8482.
0879.
363.
4%5.
1%G10CrossesJapaneseyenEURJPY1031031039795101-6.
0%-7.
4%SwissFrancEURCHF1.
221.
221.
211.
231.
191.
350.
8%-1.
7%BritishPoundEURGBP0.
870.
880.
880.
850.
830.
79-2.
9%-5.
5%SwedishKronaEURSEK9.
309.
319.
399.
359.
008.
800.
4%-4.
1%NorwegianKroneEURNOK7.
887.
908.
007.
907.
757.
700.
0%-3.
1%NorwegianKroneNOKSEK1.
181.
181.
171.
181.
161.
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0%AustralianDollarAUDNZD1.
261.
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241.
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51-0.
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3%AustralianDollarAUDJPY757472717874-3.
5%8.
1%AsiaChineseRenminbiUSDCNY6.
396.
426.
436.
306.
125.
87-1.
9%-4.
8%HongKongDollarUSDHKD7.
807.
797.
777.
787.
767.
75-0.
1%-0.
1%IndonesianRupiahUSDIDR894194609749930089008650-1.
7%-8.
7%IndianRupeeUSDINR49.
450.
351.
449.
547.
546.
0-1.
6%-7.
6%KoreanWonUSDKRW1167118911891200114010501.
0%-4.
1%MalaysianRinggitUSDMYR3.
173.
183.
203.
203.
062.
890.
6%-4.
4%PhilippinePesoUSDPHP43.
644.
044.
143.
742.
841.
5-0.
6%-3.
2%SingaporeDollarUSDSGD1.
301.
301.
301.
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241.
170.
1%-4.
3%ThaiBahtUSDTHB30.
931.
131.
730.
730.
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829.
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5%EMEACzechKorunaEURCZK24.
724.
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725.
324.
823.
82.
2%0.
6%HungarianForintEURHUF29129229933533030014.
7%10.
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654.
303.
904.
9%-4.
4%IsraeliShekelUSDILS3.
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753.
803.
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0%-3.
9%RussianRubleUSDRUB32.
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232.
934.
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0%0.
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739.
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0%TurkishLiraUSDTRY1.
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941.
861.
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313.
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1%ColombianPesoUSDCOP190119201955185018501850-3.
6%-5.
4%*TheDXYforecastsareimpliedfromtheforecastsoftheconstituentcrosses.
**ReturnsarerelativetoforwardsMarketdataForecastsReturns**Source:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets54OverviewLastmonth,wepointedtohigherriskaversion,lowergrowthexpectationsandrallyingcorebondmarketsandnotedthat,inrecenttimes,suchabackgroundwouldhavegeneratedastrongUSDrally.
Thismonth,theUSDrallyhasfinallystarted(seeFigure62).
Initially,themovehasbeenledbyweaknessinLATAMandCEEMEAcurrencies.
ThedropinUSD/CNYinthefirsthalfofAugustthatcoincidedwiththevisitofUSVPBidentoChinastemmedinitialADXYdeclineswhileAsianCBbuyingofEURalsodelayedthemovehigherinDXY.
ButtheseindicesarenowcatchingupasfundamentalshaveoverwhelmedtheEURandADXYhasfinallyrespondedtoglobalevents.
InourSeptemberforecasts,weexpectfurtherupsideinDXYover0-3and6-12months.
RelativetoDXYweightedforwards,wethinklongUSDwilloutperformbyabout5%overthenextyear.
Keydriversaremuchweakergrowthexpectationsandcontinuedelevatedlevelsofriskaversion(seeFigure63).
Aswehaveseenbothrecentlyandin2008,aUSDrallyagainstG10currenciesimpliesarallyagainstEMFXtoo.
Figure62.
DXY(Blue),ADXY(Black),LACI(Red)CEEMEAFX(Green)Figure63.
RiskAversionHigher–CitiGRAMI0.
00.
51.
01.
52.
02.
5Jan-10Mar-10May-10Jul-10Sep-10Nov-10Jan-11Mar-11May-11Jul-11Sep-11101520253035404550CitiGRAMI(StdDev)VIX(RHS,%)Source:CitiandBloomberg*CEMEAXYisaequallyweightedindexofCZK,HUF,PLN,ILS,RUB,TRY,ZAR(allvs.
USD),rebasedtoJan2010=100.
HigherCEMEAXY=CEEMEAFXappreciationSource:CitiandBloombergG10ExchangeRatesEUR/USD–FurtherdownsideLastmonth,wepointedtothreekeycrosstrendsaffectingEUR/USD.
First,wefeltthattheEMUcrisiswasnotexpectedtosubsidesoon.
Second,despiteECBstubbornnessonofficialrates,shorttermratedifferentialswerealreadylesshelpfulfortheEURthanbefore.
Butthird,officialEURbuying,mainlybyAsianCBs,wasbuoyingtheEURrelativetolevelsthatseemedunsustainablebasedonthefirsttwoandotherfundamentalfactors.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets55Overall,wethoughtthattheEURwasratherneartothetopendoftheshorttermtradingrangewithapullbacktothelow1.
40slikelyshorttermandto1.
37longerterm.
This,wefelt,wouldcontinuethemediumtermpatternoflowerhighsandlowssincethe2008peakatover1.
60.
Ingeneralterms,thepathofEUR/USDsinceourlastforecastisasexpected.
SpotfellalittlefasterthanwepredictedpartlybecausethesuddenapparentwithdrawaloftheAsianCentralBankbidaftertheendofAugustcoincidedwithfurtherbadnewsontheperipherycrisis.
Inparticular,therewerethesignsthatGreeceisfailingtheconditionalityneededforTroikasupport.
ThishasresultedinafurthersharpunderperformanceofGermanCDSrelativetotheUSequivalent(seeFigure64)atrendthatmightwellgenerateamuchlowerEUR/USDrateifsustained.
ArelatedconcerntotheperipherysovereigncrisisisthestrainontheEuroAreabanks.
USDfundingcostshaveskyrocketedasUSinvestorsareincreasinglyreluctanttolendevenshortterm.
Asaresult,evenwithexpandedswaplinesandacoordinatedsupplyofUSDliquidityinvolvingtheFed,ECB,SNBandBoE,theEUR-USDbasisswapremainswideandisanotherfactorpotentiallydrivingEURlowerasEuropeanbankstrytoaccessUSDhowevertheycan(seeFigure65).
Figure64.
CDSSpreadsRemainElevated(Red–USLessGermany),ARiskfortheEUR(Blue)Figure65.
EUR-USDBasisSwap(Black)vs.
EUR/USDFXSpot(Blue)Source:CitiInvestmentResearchandAnalysisSource:CitiInvestmentResearchandAnalysisOntheotherhand,however,therecentfallinEURspothasrestoredamorenormalrelationshipwithshorttermratedifferentials.
OurbiasisstilltoseesomescopeforfrontendEURratestofallmorethanUSDequivalentsgivenmorerapidlyrecedingcoreinflation,growthexpectationsandsimplythatthelevelishigher.
SotheremaystillbejuiceintheratedifferentialtodriveEUR/USDabitlower.
Overall,ourmarketbasedmodelsseeEURfairvalueataround1.
29andthisisnowournew0-3monthsforecast.
Over6-12months,our1.
25forecastisdrivenbytwofurtherfactors.
First,inthistimehorizonweseearealisticchanceofrealiseddefaultbysovereignsintheEMUperiphery.
Second,weexpecttheUSDtorallyasisthenorminaUSrecessionaryenvironment.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets56Yen–USD/JPYloweronriskaversion,weakergrowthUSD/JPYhasdriftedina76-78rangesincetheinterventioninducedspiketoover80inearlyAugust.
However,thereislittleevidencethatthetrendlowerinthisexchangeratesincemid-2007isover.
Instead,withglobalgrowthexpectationsfallingandriskaversionrising,weexpectfurtherdownsidefortherate.
ThishaslittletodowithJapanesefundamentals.
Japan'seconomyisprobablygrowingstronglyinQ3givenabounceinexports,moreconsumerspendingandreconstructiondemand.
However,whilethereconstructionwillpersistinQ4,othersupportsmaydiminish.
Inanyevent,inthethreequarterspriortothecurrentone,theeconomycontractedinwhatwasessentiallytheseventhrecessionsincetheassetbubbleburstjustover20yearsago(seeFigure66).
Japaneseeconomicfactorsrarelyimpacttheexchangeratedirectly.
Forexample,thecorrelationbetweenthetradebalanceandthecurrencyisinverse(seeFigure67)becausecapitalflowsdriveJPYandthecurrencythendrivestheeconomyandthetradebalance.
Nonetheless,economicfactorswillhaveaninfluenceonofficialpolicytowardstheJPY.
AtCiti,wehaveneverreallybeenconvincedthatJPYwasovervaluedvs.
USD.
ButJapaneseofficialsremainobsessedwiththisandwillmostlikelytrytostemUSD/JPYdownsidebelow75iftheycan.
Possibleinitiativesinclude(i)reducingtherateonexcessreserves–now0.
1%;(ii)announcing/strengtheningthecommitmenttoextendedlowrates;(iii)buyingJGBsbeyond2ymaturitiesundertheassetpurchaseprogramme.
Andofcourse,furtherFXinterventionisalsopossible/likely.
Ifgrowthexpectationsindeveloped,andevenEM,economiesindeedcontinuetoweaken,wearescepticalthatanylinesinthesandwilllastlongasthewindsofriskaversionblowin.
SoourforecastbiasisstillUSD/JPYdownovertheyearaheadalthoughageneralisedUSDrally(andapossiblepauseinanydownsideUSD/CNYmoves)plusofficialactionsmayslowthemove.
Figure66.
NominalandRealGDPGrowthRatesinJapanFigure67.
USD/JPYvs.
TheBilateralJapaneseTradeBalanceWiththeUSPercentJPY(thousandbillions)USD/JPYSource:ReutersEcoWinandCitiSource:ReutersEcoWinandCitiGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets57DollarBloc–USDhigheracrosstheboardAUDiscurrentlyapproximately11%belowlateJulycyclicalhighsatjustover1.
10.
Whileadecentcorrection,wethinkitwillextendfurthersincethesetbackinMay/June2010wasmorelike15%whilethe2008AUDdropreachedalmost40%.
WehavefeltforawhilethatAUDwaslivingabitonborrowedtime.
Clearly,relativetotraditionalvaluationmetrics,suchasourWERMfairvalueestimateof0.
86,thecurrencyremainsveryrich.
Inresponsetothiskindofobservation,AUDbullstypicallyrefertooneofthreemainsupports:(i)rates/carry;(ii)ChinaandEMgrowth;and(iii)thetermsoftrade/commodityprices.
Let'sconsidertheseinturn.
Onrates/carry,theAUDshouldnowbetradingaround0.
90,closetotheWERMfairvaluelevelof0.
86–seeFigure68.
Sincethestartoftheyear,andespeciallysincelateJuly,therehasbeenahugerallyinfrontendratesinAustraliaasratehikeswerepricedoutandcutspricedin.
WhileoureconomistsinSydneyarecautiousrelativetothemorethan100bpofcutspriceinforthenext6-12months,thecurrencyseemsrecentlytohavedecoupledfromratedifferentialsandwedoubtthatthislasts.
WiththeRBAonholdfortheimmediatefuture,asharpbackupinratedifferentialsseemsunlikelysoAUDprobablyhastofallfurther.
OntheChinaEMstory,wearegettingmorecautioustheretoo.
WeexpectevenEMgrowthexpectationstomovelowerandnotethatmanyEMFXmarketsarenowunderpressurereflectingthisand,insomecases,thelowerratesthatgowithweakeractivity(seeEMsectionbelow).
AUDhasalsotendedtoignoreaweaktrendforsometimeinChineseequities,weakChinesemoneygrowthandsofternominalGDPgrowthinChina.
WearenotsurethattheChina/EMstorypreventsfurtherdownsideinAUD/USD.
Finally,oncommodities,aswepointedoutinthelastForecasts,commoditypricesaregenerallytrendinglowernowandweexpectfurtherdownsideespeciallyforenergypricesandbasemetals.
SomeAustralianexportstobefair,likeironoreandcoal,aresetinlongertermcontractsandpricesaresofarresilient.
Nonetheless,evenrelativetoAustralia'sactualtermsoftrade,wethinkAUDalsolooksabitrich.
Takingallthesefactorsintoaccount,wefeelthatAUDhasprobablypeaked,atleastforthemediumtermandmaytradearatherlowerrangeovertheshortterm.
Wepredict0.
95over0-3monthsandlookforaround1.
02over6-12months.
Figure68.
AUD/USDRegressedon2ySwapDifferentialsFigure69.
USD/CADvs.
OilPricesAUD/USDPercentOilPriceUSD/CAD(InverseScale)Source:ReutersEcoWinSource:ReutersEcoWinGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets58NZDcorrectedhardinearlyAugustfromover0.
88toalowbelow0.
80beforeretracingover60%ofthismovelowerovertherestofthemonth.
Sincethen,NZDisagaindepreciatinginlinewiththegeneralmovehigherintheUSD.
WeexpectmoredownsideinNZDaswithAUD.
Lowercommodityprices,moreriskaversionandsofterglobalgrowthwillallbekeyfactors.
Rightnow,NewZealandisreallyinaminorityofoneamongstG10countriesthatpriceinhigherpolicyratesoverthenext6-12months.
Werecognizethatthisispartlybecauseratesarerelativelylow(comparedwithAustralia)andpartlybecauserateswerecutinMarchasanemergencyresponsetotheearthquake.
Nonetheless,wehaveseenrecentlyintheEMworldthatrateshavereversedcourseastheglobaleconomyhasslowedanditispossiblethatanyreboundinRBNZrateswillalsobedelayed.
Asthisoccurs,theNZDmayweakensomewhatfurtheragainstarelativelystrongUSD.
Weforecast0.
76over0-3monthsandthen0.
83over6-12months.
ThisimpliesthattheNZDoutperformanceofAUDsinceMarchwillcontinue.
ItstillappearsthatUSD/CADhasformedadoublebottomataround0.
945inearlyMayandlateJulyandhassincebeenmovinghigher.
TherecentmoveaboveparityseemstobewarrantedgiventhegeneralUSDrally,apriormisalignmentwithratedifferentialsandwithoilprices(seeFigure69).
Weexpectafurthermovehighertoaround1.
06over0-3months.
Longerterm,somemodestupsideinUSD/CADwouldpleasepolicymakers,especiallytheBankofCanadawhoseecurrencystrengthasadownsiderisktogrowth.
Recenteconomicnewshasbeenweak(aselsewhere)andthelabourmarkethasbeenespeciallydisappointing.
Whileratesmaynotfallasimpliedinmarketforwards,theBankofCanadamayyetoffera(second)conditionalunchangedratecommitment.
ThismayalsolimitupsideforCAD.
Overall,weforecastareturntoparityat12months.
EuropeanCrossesGBP–CheapbutslowprogresshigherlikelySterlingcontinuestomovebroadlysideways,relativetotheaverageoftheUSDandEUR,andhasdonesosincemid2010(seeFigure70),mostrecentlymovingsharplyloweragainsttheUSDbutgainingvs.
EUR.
ThisbroadstabilityinGBPhascomeagainstasharpmovetowardsexpectationsofeasiermonetarypolicy(viaadditionalassetpurchases–QE2)andawayfromexpectationsofhigherpolicyrateswhichwastheprevalentviewearlyin2011.
Assuch,therelativeresilienceofGBPissurprisingbut,ofcourse,weneedtorememberthatexchangeratesarerelativepricesnotabsoluteones.
SincefrontendyieldsintheUShavefallenmoreorlessinparallelwiththeUK,whileyieldsonfrontendAAAEURhavefallenmuchmoresharplyandconvergedontheUK(seeFigure71),thereisanoffsettingsupporttoGBPfromratedifferentials.
GBPisalsohelpedbybeingfundamentallycheap,whereourWERMestimatesoflongterm"fairvalue"areEUR/GBP0.
79andGBP/USD1.
73.
WestillthinkthatthelongertermeffectsoftighterfiscalpolicyintheUKmaybearecoveryinthecurrencyasthecurrentaccountimprovesandtheUK'screditalsoimproves.
Thequestionthenbecomes:whereareweonthedynamicpathWethinkwemayalreadyhavepassedthepointofmaximumweaknessandnotethatsterlinglowshavebeenrisingsincelate2008.
Furthermore,marketconcernsaboutfiscalissuesinboththeEURandUSDmeanthatGBPcanwinbydefaultoverthelongerterm.
WethereforestillexpectbroadstabilityinGBPwithacontinueddriftlowerinEUR/GBPbutweaknessinGBP/USD.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets59Figure70.
GBPvs.
AverageofUSDandEUR(LowerInChart=StrongerGBP)Figure71.
2yYieldMovesHelpGBPGovernmentBondYieldsSource:Bloomberg,CitiSource:ReutersEcoWinScandis–NOK/SEKhigherneartermEUR/SEKbottomedoutinFebruary/Marchandhasbeentrendingerraticallyhighersincethen.
SEKhastendedtobea"riskon"currencyinthepast.
ThisisinpartdowntothehighbetanatureofSwedishequitiesandtheSwedisheconomytoeventsinEurope.
Asgrowthexpectationsgloballyhavefallen,sotoohaveforecastsforSwedenstartedtoedgelowerandexpectationsofhigherRiksbankpolicyrateshavebeenscaledbacktozero.
ThishighlightsaproblemforSEKbulls.
WhilestaticfundamentalssuchasSweden'sstrongexternalsurplusandrelativelygoodfiscalpositionareattractiveatatimeofbalancesheet/fiscalconcernselsewhere,Sweden'sexposuretothegrowthcycleisaproblemifyouarebearishontheeconomicoutlook.
Notably,higherriskaversionandspikesinEUR/SEKaresometimescorrelatedalthoughthislinkdoesseemtobediminishingsomewhatmorerecently(seeFigure72).
Weforecastupsideto9.
35over0-3monthsandthenamovelowerover12monthsto9.
00.
WERM"fairvalue"forEUR/SEKisbelow8.
80soanabatementinriskaversioncouldseeSEKperformstrongly.
InNorway,EUR/NOKremainsinamainlysidewaystradingrange.
AfterasharpspikelowerinearlySeptember,thecrossisagainbackina7.
70-7.
90band(Figure73)afterNorgesBankGovernorOlsensuggestedthatastrongerNOKwasunhelpful.
WefindithardtohaveastrongdirectionalviewontheNOK.
AsinSweden,thefiscal/externalbalancenumbersappeargreat.
ButwhilethebetaofNorwayinctoEuropeislowerthanforSweden,NOKisstillexposedtooilpriceswhichweforecastlower.
Thispushme-pullme,plustheNorgesBank'saversiontoNOKappreciation,seemslikelytokeepEUR/NOKsomewhatrangebound.
Our"fairvalue"WERMestimateis7.
68soourlongertermbiasissmallNOKappreciationintheforecasts.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets60Figure72.
EUR/SEKvs.
VIXFigure73.
EUR/NOKvs.
CrudeOilPricePercentEUR/SEKEUR/NOKUSD/BarrelSource:ReutersEcoWinSource:ReutersEcoWinCHF–PegholdsforawhileatleastEUR/CHFhadeffectivelybottomedevenbeforetheSNBshockedmarketswiththeannouncementofanasymmetricpegonEUR/CHFat1.
20(orhigher)on6September.
Sincethepegannouncement,spothasbeendriftingmodestlyhigherastheSNBtriestoavoidasenseofonewayrisk(i.
e.
thatthepegcouldbetestedwithnorisktospeculatorsofupsideinthecross).
Fornow,weexpectthepegtohold.
OneofthekeyissuesisthatthisiseffectivelyaneasingofmonetarypolicybytheSNBbutitisonethatisjustifiedandthereforecredible.
Forexample,easiermoneyiswarrantedbythecurrentzerocoreinflationinSwitzerland(6mannualisedratesarerunningat-1%)andbythesharpweakeninginSwisseconomicactivity(seeFigure74onourCitiESI).
AstheSNBalsocommentedon23September,thecurrencycapiswarrantedbydeflationaryriskswithgrowthlikelytohavestoppedaltogetherinthesecondhalfoftheyear.
Forsolongasthisweakgrowth/lowornegativeinflationbackgroundpersists,themarketisunlikelytoreallytesttheSNBresolve.
Settingacurrencypegeffectivelymakesthedomesticmoneysupplyendogenous.
In2009,basemoneygrowthinSwitzerlandrosetoover150%paastheSNBintervenedatvariouslevelstostemEUR/CHFlosses(seeFigure75).
ButwithanunlimitedcommitmenttosellCHFat1.
20,domesticmoneygrowthrateswillexplodetoevenhigherlevels.
Already,basemoneygrowthisreaccelerating.
Wehavecalculatedthatifallbondholdersintheperiphery3(Greece,Ireland,Portugal)soldouttotheSMPorEFSFandthengavetheirEURtotheSNB,Swissbasemoneygrowthwouldbecirca800%.
IfwethrowinSpainandItaly,thismightriseto2000-4000%.
Thismayseemanextremescenariobut,ontheotherhand,itdoesnotallowforotherliabilitiessuchasbankdepositsmakingtheirwayintoCHF.
Soakeymediumtermquestionbecomesthis.
WilltheSNBtoleratesuchmassivedomesticmoneygrowthForsure,thereisnoreasonnottonow.
ButwhatifweseesomesignsofeconomicrecoveryandasharpriseinlocalrealestatepricesandotherassetmarketsAlternatively,oradditionally,assumingthatover6-12monthstheEMUcrisiscomestoaheadwithsovereigndefaultsandaweakEURgenerally,thelongertermsustainabilityofthispegremainsindoubt.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets61Ourforecastisfor1.
20-1.
25toholdover0-3months.
Over12months,wearenotsosure.
Weshow1.
19asapointforecast.
Thisclearlyimpliesthepegisstressedatthishorizonthoughwerecognisethatifitdoesbreakitwillprobablybreakbymorethan0.
01.
Ourforecastreflectsouruncertaintyonthetimehorizonoverwhichthismayoccur.
Figure74.
SwissEconomicSurpriseIndex(ESI)Figure75.
SwissMoneyGrowthPercentSource:BloombergSource:ReutersEcoWinEMExchangeRates"Synchronisedsinking"isperhapsthebestdescriptionofmovesinEMexchangeratessinceourlastFXForecast.
MajorEMcrossesplummetedinSeptember.
SinceSeptember1,anequalweightedbasketofLatamFXisdown9%,CEEMEAby10%andAsia5%.
Adverseglobalconditions,notlocalfundamentals,arethechiefdrivingforcehere,andareexpectedtopersistandevenintensifyforsomecountries,inthenear-term.
Thepotentcombinationofsignificantdownsideriskstoglobalgrowthandsharplyreducedriskappetitearedollarpositive–andthereforetendtobeEMFXnegative.
HeftyreversalsinforeignportfolioflowshaveworsenedcorrectionsformanyEMs,promptingseveralcentralbanks,includingKorea,Brazil,TurkeyandIndonesiatointervenetocontainsell-offsanddampenvolatility.
InEMFX,theparallelswith2009arestriking,asindeedisthecontrastwiththelastroundofinterventions,whichweredesignedtopreventcurrencystrength.
Theparametersofthecurrencywarhavechangedradically.
Ofthethreeregions,CEEMEAFXisintheeyeofthestorm.
WithEUR/USDexpectedtogrinddownto1.
25,Eurozonebanks(andsomeeconomies)underseverepressure,andlargelocaldistortionsinsomeCEEMEAeconomies,therisksforregionalFXarerunninghigh.
TheHUFisforecasttobethehardest-hit,and15%lowerinsixmonthstimerelativetocurrentspot.
ThebeleagueredZARistheonlycurrencyintheregionthatcouldappreciateoverthenexttwelvemonths,althoughtightlinkswithvulnerablemetalsremainthemaindownsiderisk.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets62WhattranspiresinAsiaistoalargeextenthingedontheheavilymanagedyuan,wheretheoutcomeisasyetunclear.
Atthecurrentjuncture,withinflationrunninguncomfortablyhighandgrowingcostsofFXintervention,weexpectChinatocontinuewithits"normal"trendappreciation.
However,weacknowledgethatgivenourEUR/USDforecasts,thiswouldmarkanimportantdeparturefromthepast.
LikewiseinLatam,commoditypricesareakeyrisktoourforecasts,asthreeofthefourcrossesintheregionaretightlylinkedwithmetalsand/oroil.
EMAsia–CNYtrendvs.
globalgrowthfearsIntensifyingdownsideriskstoglobalgrowth,andsharplyreducedappetite,arethemajorforcesthatleadustocrunchourEMAsiaFXforecastsdownwardsthismonth.
AkeyquestionsurroundsChina'spolicyapproach.
WillChinacontinuewith"normal"trendappreciation,especiallyifourDXYforecastsareborneoutFurthermore,CNYstillplaysacentralroleintheregion,thoughperhapslessthanbefore,especiallyifglobalgrowthfearsaccelerateandhaveabiggerimpactonthesmalleropeneconomies.
USD/CNYhasflat-linedduringallfourmeaningfulDXYralliessinceJune2010,suggestingthesidewaysmovesincemid-Augustcouldpersist(seeFigure76).
ArguingforcontinuedCNYstrength,however,isthegrowingpressureonChinatobringdomesticinflationundercontrol.
Theneedforapolicytighteninganchor,andtocurbthe(increasinglyevident)costsofrapidFXreserveaccumulation,addsfurtherweighttoaCNY-constructivepolicy.
Fornow,westickwithourCNYforecastofmoderateappreciation,withUSD/CNYat6.
3in0-3months,and6.
12at6-12months.
ThiswouldmakeCNYthemostresilientcrossinitsregion.
Tobesure,takingAugustasawholetheRMBdidinfactgainversusUSD,incontrastwithotherEMcurrencies;italsofellbytheleastinthefirstthreeweeksofSeptember.
Withstickyinflation,stillhoveringabove6%onthelatestprint,andasizeabletradesurplus,afirmercurrencywillbeimportanttomanagedomesticconditions(seeFigure77).
Longerterm,itremainsakeyingredientforneededglobalrebalancing.
Figure76.
DXYandUSD/CNYSince2009Figure77.
ChinaNominalandRealEffectiveExchangeRatesIndexSource:BloombergSource:ReutersEcoWinGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets63KRWandINRsitattheoppositeendofthespectrum.
SharpspikesineachinSeptemberleavethemasamongsttheworstperformingAsianEMsinthelastone,threeandsixmonths.
Inourforecastglobalsetting,bothareforecasttokeeptheirdepreciatingtrend,ifimprovingsomewhat6-12monthsout.
ForINR,theweakeninginfluencesofastrongerdollarandgreaterriskaversionareheightenedbydomesticfactors–includinggrowingsignsofinflationgetting"bakedin"tothewidereconomyandsizeabletwindeficitsonthecurrentandfiscalaccounts,whichisunusualinAsia.
Anyfurthercentralbanktighteningisunlikelytoprovidemuchsupport:thiscomesattheworstpointinthecycle,withslowinggrowthandhighandstickyprices;andtheallureofcarryhaserodedinanycase.
Thatsaid,althoughwehaveraisedour3and6-12monthforecastssincelastmonth,to49.
5and47.
5respectively,ourcurrentforecastsrelativetospotshowsomeneartermweakeningfollowedbymediumtermbounce.
6-12monthsout,INRishelpedbytherelativelyattractivedomesticgrowthstory,favourablecompositionofexternaldebtanddomesticallyfinancedfiscaldeficit.
ForKRW,largewithdrawalsbyforeignersfromcapitalmarketshavebeenthemajorsourceofsharpsell-offs.
Korea'sbankingsystemisalsotheonlyoneitsregionthathasadirectriskofcontagionfromglobaldevelopments,beingheavilyreliantonwholesalefundingandwithlargeFXmismatches.
Withlikelyfadingsupportfromthecurrentaccountsurplus,andinnatesensitivitytoglobalfinancialmarkets,weexpectKRWtoweakento1200,beforestrengtheningtoaroundthe1140levelbyearlynextyear.
IDRhasbeendraggeddownbysimilarforcesplaguingKRW,i.
e.
,abruptunwindingofovercrowdedforeignpositionsinmoneyandbondmarkets.
Althoughoutflowssofarhavemostlybeenconcentratedattheshortend,thiscouldspreadquiteeasilyiftensionsinglobalmarketsescalateasweexpect.
Thecentralbank'sforeignreservecover(7monthsofimportsandshorttermexternaldebt)hasimprovedsignificantlyfrompre-Lehmanlevels(4.
7months),andhasbeendeployedinrecentcentralbankinterventions.
Butthismatterslessintheglobalenvironmentthatweareanticipating.
WearecuttingbackourIDRforecastto9300for3monthsahead,and8,900in6-12months.
OurMYRforecastfollowscloseattheheelsofKRW.
Commodity-backedMYRhassoldoffmoresharplythanmostinitsregioninthelastsixmonths,apatternthatshouldbesustainedover0-3monthsgivenheavyforeignpositioninginthebondmarket.
Anestimated70+%and34%ofBNMbillsandMGSsecuritiesrespectivelyareforeign-owned.
USD/MYRisexpectedtodropto3.
06,in6-12monthstime.
WealsoscalebackouroptimismontheBaht.
Heretoo,likelycontinuedunwindingofforeignportfolioinvestmentsremainsthechiefneartermrisk.
However,ahealthycurrentaccountsurplusandlowerpoliticalriskpremiashouldtogetherfacilitatemodestBahtappreciationfurtherout.
WhilethePHPcannotentirelyshrugoffglobalforces,itislessvulnerabletoheftyportfoliooutflowsthanThailand,withresilientOFWremittancesandsteadyBPOproceeds.
Thisisreflectedinourfairlysteadyforecastsboth3and6monthsahead.
Thepossibilityofacreditratingupgradewouldalsoboostonshoresentiment.
Inkeepingwiththeregionalsell-off,TWDdepreciatedquitesharplyagainsttheUSDinrecentweeks.
Thisisexpectedtocontinue,ifatamoremoderateclipthanothersintheregion,becauseofstrongdomesticfundamentals.
Finally,wereviseour3and6-12monthSGDforecaststo1.
30and1.
24respectively,whileacknowledginganumberofdownsiderisks.
ChiefamongsttheseisanhistoricallytightcorrelationbetweenSGDandEUR.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets64CEEMEAlooksmostexposedUntiltheLatam"capitulation"thatkicked-ininearnestaftertheFOMC'stwist,CEEMEAcurrencieshadbeenmuchweakerversustheUSDthaneitherLatamorAsiainbetaadjustedterms.
Theregionalfxpricereturnsofarthismonthisabout-10%,onaverage,whichstrikingly,isalsoworsethanMay2010.
Thereare,ofcourse,significantvariationswithintheCEEMEAgroup:inspotterms,TRYisoneofthebetterperformersinEM;bycontrast,theHUF,PLN,andZARfallattheverybottomoftheirEMcohort.
OurCEEMEAforecastscapturesomeoftheidiosyncraticforcesthathavedrivendivergentperformances,butwithoneoverridingthemegoingforward:whattranspiresinEurope.
WithEUR/USDexpectedtogrinddownto1.
25inthenext6-12months,Eurozonebanksunderintensifyingpressure,weakeninggrowthandaprospectiveGreekdefault,risksforCEEMEAFXasawholearerunninghigh.
OfthethreeCEEcurrencies,theCZKoutperformedbothPLNandHUFinthethirdquarterasawhole,althoughittooshedvalueagainsttheEUR,inlinewithourAugustforecast.
Increasingdownsiderisksforglobalgrowth,astrongerUSDdollaranddisinflationarydomesticfactorsarelikelytoweighagainstCZKinthenear-term.
Importantlyinourexpectedglobal(andparticularlyEuropean)setting,thecentralbankshouldalsobecomfortablewithaweakerCZK,whichmarksadeparturefromearly2009;theCzecheconomyisheavilyexport-reliant,soanyboosttocompetitivenesswouldbewelcome.
Longerterm,theforeigntradesurplus,goodfiscalposition,andnoexposuretothehighforexleveragerisksforHUFandPLNshouldkeepthecurrencyrelativelystable.
TheHUFmeanwhilesoldoffheavilyinrecentweeks,withsporadicofficialannouncementsonanFXmortgagedebtrepayment"program"andprospectivereversalofearlierfiscalplansworseningthecorrection.
Fundamentalsarenotsupportive.
Theeconomyisweakandweakeningfurther;thecentralbankisdebatingaratehike,whichwoulddamagegrowthprospectsevenmore,andHungaryshowsovertrelianceexportstotheeurozone.
Furthermore,basicvulnerabilitiesincludeahighlyfx-leveredprivatesectorandunstablepublicfinances(seeFigure78).
TheFXmortgagedebtprograminparticularisprojectedtoshave1%ofGDPfrombankingsectorprofits.
Capturingtheserisks,ourEUR/HUFforecastimpliesanear15%depreciationintheHUFoverthe6-12monthtimeframe,andisourmostbearishFXcallthismonth.
Therisk-offenvironmentalsocontinuestopummelthehigh-betaPLN,whichsharesHUF'svulnerabilitytoforexloans,withaworsefiscalpositionandinanelectionyear(althoughothereconomicfundamentalsaremuchstronger).
PLNisforecasttoweakenfurtherintheshorttermasEuroArearisksescalate,butbouncebackto4.
3in6to12month'stime.
Twoscenariosseempossibleinthenearterm.
IfEUR/PLNroseto4.
60-4.
80inthenext3months,inlinewithourforecast,ourcalculationssuggestthatthedebttoGDPthresholdlevelof55%couldbeexceeded,increasingPLN'svulnerability.
If,however,heavyFXinterventiontostrengthenPLNispursuedinplaceoffiscaltightening,thePLNcouldfindtemporarysupport.
CutbacksinriskappetiteonceagaindrovecapitaloutflowsfromtheRussianeconomy,hittingtheoil-backedRUBdespiterelativelyfirmoilpricesandtightdomesticliquidityconditions.
Risksaremainlytothedownside:aforecastfallinoilpricesandacceleratingsupplyofliquidityviabudgetspendingshouldtriggerfurtherweakeningoftherubleintheshortterm,abovetherecentCBRtargetbandof32.
15-37.
15forthebasket.
TheCBRwillcontinuetointervene,butthebandislikelytobemoveduporwidened.
Wethinkthebasketcoulddepreciateto38rublesin2012asoilpricesfallandthecurrentaccountsurplusnarrowstoUS$18bn.
Figure79showshowsensitiveUSD/RUBistoglobalriskappetite.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets65Figure78.
ShareofForexLoansinStockofTotalHousingLoansFigure79.
RubleBasketandCitiGMSGRAMI-5%5%15%25%35%45%55%65%75%Jan-00Nov-01Sep-03Jul-05May-07Mar-09Jan-11Hungaryforexhousingloans/totalPolandforexhousingloans/totalSource:CitiandReutersEcoWinSource:CitiandBloombergFortheZAR,itmightseemasthoughthebulkofbadnewsisalreadypricedin:sincetheJulyS&Ppeak,theZARhaslostnearlyafifthofitsvalueagainstthedollar,andhasbeentheworstEMperformeragainstboththeUSDandEURforseveralweeks.
Butinourforecastglobalsetting,theZARcontinuestolookweak,withafragiledomesticrecovery,poorcompetitiveness,andgrowingdownsiderisksforcommodities,particularlymetals.
Nearterm,ZARlooksoversold,butlongerterm,ouroutlookforthecurrencyisstillnegative.
OurTRYforecast,whichhasTRYbasicallyflatvs.
theEUR,balancestwoseparateforces.
ActingagainstFXrecoveryarelargeexternalfinancingneeds(thecurrentaccountdeficitisnearlyindouble-digits),madeworsebythecentralbank'sradicalpolicies.
InitsfavouraretheCBT'sapparentwillingnesstosupporttheliraviaFXsaleauctions,andthedeclineintheprobabilityofaratecutthisyear.
Thegovernment'snewMedium-TermPlan(tobeannouncedinlateSeptemberorearlyOctober)mayhaveimportantimplicationsforthetrajectoryofthelira.
Finally,theshekelhasweakenedbeyondourpreviousforecast,andtheprospectofastrongdollarandsustainedriskaversionsuggesttherisksstayskewedtothedownside.
InrecentsessionstheILShasprovedsurprisinglyresilient,however,mostlythankstotheverylowlevelofforeigninvolvementinthedomesticfixedincomemarket.
Onlysome3%ofShaharsareforeign-owned.
Nonetheless,withrisingriskpremiafromregionaltensions,andthescopefora"catchup",weexpectUSD/ILStoriseto3.
80near-term.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets66Latam–AnewkindofwarCapitulationinBRL,whichatitstroughhadplummetedbynearly20%againsttheUSD,hasbeenthemoststrikingdevelopmentinLatamFXmarketsinrecentweeks.
Ironicallyinthecontextofrecenthistory,large-scaleofficialinterventiontostrengthenthecurrencywasneededtocurbthesell-off.
Ourcurrentforecastsshowareversalinthemediumterm,assome"overshooting"iscorrected.
ThemainthreattosucharecoveryisthatthreeofthefourLatamcurrencies(BRL,CLP,MXN)arebackedbyincreasinglyvulnerablecommodities,andsomaybeconfrontedwitha"double-whammy":aweakerglobalgrowthenvironmentandriskappetite,plusslidingmetalsandoil.
Itisnotablethat,inthelatestwaveof"riskoff",somecurrenciesseemtohaveledcommoditypricemovements.
Our6-12monthforecastfortheBRLat1.
80stillleavesitweakerthanits1.
70averageforthepasttwoyears.
NotwithstandingaggressiveinterventiontoshoreuptheBRL,thereareseveralreasonstobelievethatrecentBRLdepreciationshouldbemorepersistentthanweenvisagedpreviously.
Metalsandoilcomprisehalfofallexports,and,asobservedin2008,thefeedbackfromcommoditypricestotheexchangeratecanpowerful.
ChinaisBrazil'schieftradingpartner,magnifyingtherisks.
Finally,withcarrysupportforecasttodropawayasthecentralbankcutsinterestrates,downwardpressureonBRLcouldremain.
Thelocalinterestratefuturescurveispricingin140bpsofeasingbynextApril.
ForMXN,itiswhattranspiresintheUS,andindeedoilprices,thatisofparamountimportance(seeFigure80).
Withthebulkofallexports,andalargechunkofrealgrowthdrivenbyexportstotheUSalone,MXNisextremelysensitivetodevelopmentsintheUS–andhasshedvaluequicklyasaresult.
Goingforward,thequestioniswhetherthepesocanreversethisunderperformance,evenifglobalgrowthconcernslingerandoilpricesfailtostageameaningfulrally.
Thechiefsupporttothisoutcomewouldbethatlocalfundamentals,andindeedoverallcompetitiveness,aremuchbetternowthantheyhavebeenduringpastcrisisperiods.
Figure80.
Ultra-TightLinksBetweenUSandMexico(IndustrialProduction)Figure81.
CLPandCopperPricesSource:BloombergSource:BloombergGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets67CLPmeanwhileiscopper-backed,sointhisaspectisperhapsmostexposedofthefourregionalcrosses.
Basedonhistoricalrelationships,ifcopperfallstothe6500-7000range,CLPshouldweakento550(Figure81).
Afront-loadingofratecuts–weareanticipatingthecentralbanktostandpatthisyear,butcutby100bpsnextyear–isanaddedrisk.
Overthelongerterm,however,weexpectfundamentalstoreassertthemselves,supportingCLPonceagain.
DepreciationobservedintheUSD/COPwasafractionofwhatwasobservedinotherLatamcurrencies.
Weexpectthisstrengthtobemaintained,withUSD/COPat1850inboth3and6monthstime.
TheColombianfinancialsystem'spoorUSDcashposition,however,couldbeanimportantriskfactor.
AsofSeptember9,theUSDcashpositionheldbythefinancialsectorstoodatUS$498.
1million,almostahalfofwhatisconsideredtobethe"normal"level.
Contributors**CitiForeignExchange:ForecastsisajointventurebetweenCiti'sforeignexchange,globalmacroandtechnicalstrategygroupsandourdevelopedandemergingmarketseconomists.
Theanalystslistedbelowhavecontributedtotheseforecastsinoneformoranother.
Figure82.
CitiForeignExchangeForecastsContributorsForinformationalpurposesonlyGlobalMacroStrategyMarketCommentaryJeremyHale(Head,MacroStrategy)44-20-7986-9465jeremy.
hale@citi.
comJeffAmato(MacroStrategy)44-20-7986-1326jeffery.
david.
amato@citi.
comMaximilianMoldaschl(MacroStrategy)44-20-7986-8753maximilian.
moldaschl@citi.
comGlobalMacroEconomicsResearchWillemBuiter1(ChiefEconomist)44-20-7986-5944willem.
buiter@citi.
comMichaelSaunders1(Head,G10Economics)44-20-7986-3299michael.
saunders@citi.
comKiichiMurashima(Head,JapanEconomics)81-3-6270-4981kiichi.
murashima@citi.
comJuergenMichels1(EuropeanEconomics)44-20-7986-3294juergen.
michels@citi.
comGiadaGiani1(EuropeanEconomics)44-20-7986-3281giada.
giani@citi.
comTinaMortensen1(EuropeanEconomics)44-20-7986-3284tina.
mortensen@citi.
comDanaPeterson2(CanadaEconomics)1-212-816-3549dana.
peterson@citi.
comDavidLubin1(Head,EMEconomics)44-20-7986-3302david.
p.
lubin@citi.
comJohannaChua3(Head,EMEconomics-Asia)852-2501-2357johanna.
chua@citi.
comJoaquinCottani2(Head,EMEconomics-Latam)1-212-816-2735joaquin.
cottani@citi.
comPaulBrennan4(AustralianEconomics)61-8225-4899paul.
brennan@citi.
comJoshWilliamson4(AustralianEconomics)61-8225-4904josh.
williamson@citi.
comFXandLMStrategy,FXTechnicals&QISStevenEnglander(Head,G10Strategy)1-212-723-3211steven.
englander@citi.
comOsamuTakashima(G10Strategy)81-3-6270-9127osamu.
takashima@citi.
comGregAnderson(G10Strategy)1-212-723-1240gregory1.
anderson@citi.
comValentinMarinov(G10Strategy)44-20-7986-1861valentin.
marinov@citi.
comDirkWiller(Head,EMStrategy-Latam)1-212-816-8758dirk.
willer@citi.
comWikeGroenenberg(Head,EMStrategy-CEEMEA)44-20-7986-3287wike.
groenenberg@citi.
comPatrickPerret-Green(Head,EMStrategy-Asia)65-6328-2931patrick.
perretgreen@citi.
comLeonMyburgh(EMStrategy,Sub-SaharanAfrica)27-11-944-1830leon.
myburgh@citi.
comTomFitzpatrick(Head,TechnicalAnalysis)1-212-723-1344thomas.
fitzpatrick@citi.
comKristjanKasikov(QuantitativeInvestorSolutions)44-20-7986-3032kristjan.
kasikov@citi.
com1CitigroupGlobalMarketsLtd.
;2CitigroupGlobalMarketsInc.
;3CitigroupGlobalMarketsAsia;4CitigroupPtyLimitedNON-USRESEARCHANALYSTDISCLOSURES:Thenon-USresearchanalystslistedabove(i.
e.
,theresearchanalystslistedaboveotherthanthoseidentifiedasemployedbyCitigroupGlobalMarketsInc.
)arenotregistered/qualifiedasresearchanalystswithFINRA.
SuchresearchanalystsmaynotbeassociatedpersonsofthememberorganizationandthereforemaynotbesubjecttotheNYSERule472andNASDRule2711restrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.
UnlessindicatedinAppendixA-1ofthisdocumentoranyofthereferenceddocuments,theanalystslistedabovehavenotcontributedtothisdocumentoranyofthereferenceddocuments.
SALESANDTRADINGTEAMS:PeopledesignatedasworkinginthesalesortradingdepartmentsofCitiarenotindependentresearchanalystsandhavenotcontributedtothisdocumentoranyofthereferenceddocuments.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets68Figure83.
CitiQuarterlyInterpolatedForecastsCurrencySpotSep-11Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13G10-USDollarEuroEURUSD1.
351.
351.
291.
281.
261.
251.
261.
281.
291.
30JapaneseyenUSDJPY76767575767677777878BritishPoundGBPUSD1.
551.
541.
521.
511.
511.
511.
541.
581.
611.
65SwissFrancUSDCHF0.
900.
910.
950.
950.
950.
950.
981.
001.
021.
04AustralianDollarAUDUSD0.
980.
980.
950.
981.
001.
021.
000.
980.
970.
95NewZealandDollarNZDUSD0.
780.
780.
760.
790.
810.
830.
780.
730.
680.
63CanadianDollarUSDCAD1.
031.
031.
061.
041.
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000.
990.
970.
960.
95DollarIndex*DXY78.
1178.
3680.
8881.
2981.
7082.
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3380.
6579.
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35G10CrossesJapaneseyenEURJPY103103979696959798100102SwissFrancEURCHF1.
221.
221.
231.
221.
201.
191.
231.
271.
311.
35BritishPoundEURGBP0.
870.
870.
850.
840.
840.
830.
820.
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800.
79SwedishKronaEURSEK9.
309.
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349.
229.
119.
008.
958.
908.
858.
80NorwegianKroneEURNOK7.
887.
887.
907.
857.
807.
757.
747.
727.
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70NorwegianKroneNOKSEK1.
181.
181.
181.
181.
171.
161.
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151.
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14AustralianDollarAUDNZD1.
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51AustralianDollarAUDJPY74.
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575.
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1EMAsiaChineseRenminbiUSDCNY6.
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87HongKongDollarUSDHKD7.
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75IndonesianRupiahUSDIDR8941910093009200900089008800875087008650IndianRupeeUSDINR49.
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0KoreanWonUSDKRW1167117012001180116011401110108010601050MalaysianRinggitUSDMYR3.
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89PhilippinePesoUSDPHP43.
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5SingaporeDollarUSDSGD1.
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17ThaiBahtUSDTHB30.
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2EMEuropeCzechKorunaEURCZK24.
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79HungarianForintEURHUF290294335333332329322314307300PolishZlotyEURPLN4.
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90IsraeliShekelUSDILS3.
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40RussianRubleUSDRUB32.
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3RussianRubleBasketRUB37.
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5TurkishLiraUSDTRY1.
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79SouthAfricanRandUSDZAR8.
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76EMLatamBrazilianRealUSDBRL1.
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70ChileanPesoUSDCLP517517520524527529519509499490MexicanPesoUSDMXN13.
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812.
612.
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2ColombianPesoUSDCOP1902189818501850185018501850185018501851*TheDXYforecastsareimpliedfromtheforecastsoftheconstituentcrosses.
QuarterlyInterpolatedForecastsSource:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets69Figure84.
CitiAnnualForecastsCurrencySpot2011*2012*2013*2014*2015*G10-USDollarEuroEURUSD1.
351.
381.
261.
291.
321.
34JapaneseyenUSDJPY767976788183BritishPoundGBPUSD1.
551.
571.
521.
621.
671.
70SwissFrancUSDCHF0.
900.
900.
961.
021.
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03AustralianDollarAUDUSD0.
981.
011.
000.
960.
920.
89NewZealandDollarNZDUSD0.
780.
780.
800.
670.
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62CanadianDollarUSDCAD1.
031.
011.
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97DollarIndex**DXY78.
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48G10CrossesJapaneseyenEURJPY10310896101106112SwissFrancEURCHF1.
221.
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321.
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37BritishPoundEURGBP0.
870.
880.
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800.
790.
79SwedishKronaEURSEK9.
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80NorwegianKroneEURNOK7.
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69NorwegianKroneNOKSEK1.
181.
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151.
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14AustralianDollarAUDNZD1.
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43AustralianDollarAUDJPY74.
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2EMAsiaChineseRenminbiUSDCNY6.
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60HongKongDollarUSDHKD7.
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787.
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75IndonesianRupiahUSDIDR894189228975867586508625IndianRupeeUSDINR49.
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1KoreanWonUSDKRW11671134114810531010980MalaysianRinggitUSDMYR3.
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932.
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85PhilippinePesoUSDPHP43.
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0SingaporeDollarUSDSGD1.
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16ThaiBahtUSDTHB30.
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9TaiwanDollarUSDTWD30.
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8EMEuropeCzechKorunaEURCZK24.
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73HungarianForintEURHUF290290329305294287PolishZlotyEURPLN4.
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65IsraeliShekelUSDILS3.
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40RussianRubleUSDRUB32.
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5RussianRubleBaskeRUB37.
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76ChileanPesoUSDCLP517496525499508528MexicanPesoUSDMXN13.
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7ColombianPesoUSDCOP190218471850185218801913*Averagesofend-quarterdatashowninquarterlyinterpolationtable.
**TheDXYforecastsareimpliedfromtheforecastsoftheconstituentcrosses.
AnnualForecastsSource:CitiInvestmentResearchandAnalysisGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets70DisclaimerforMarketCommentaryThiscommunicationhasbeenpreparedbyCitigroupGlobalMarketsLimitedandisdistributedbyorthroughitslocallyauthorisedaffiliates(collectively,the"Firm").
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GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets71Thiscommunicationisnotintendedtoforecastorpredictfutureevents.
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oritsaffiliatesandareusedandregisteredthroughouttheworld.
GlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets72AppendixA-1AnalystCertificationTheresearchanalyst(s)primarilyresponsibleforthepreparationandcontentofthisresearchreportarenamedinboldtextintheauthorblockatthefrontoftheproductexceptforthosesectionswhereananalyst'snameappearsinboldalongsidecontentwhichisattributabletothatanalyst.
Eachoftheseanalyst(s)certify,withrespecttothesection(s)ofthereportforwhichtheyareresponsible,thattheviewsexpressedthereinaccuratelyreflecttheirpersonalviewsabouteachissuerandsecurityreferencedandwerepreparedinanindependentmanner,includingwithrespecttoCitigroupGlobalMarketsIncanditsaffiliates.
Nopartoftheresearchanalyst'scompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificrecommendation(s)orview(s)expressedbythatresearchanalystinthisreport.
IMPORTANTDISCLOSURESAnalysts'compensationisdeterminedbaseduponactivitiesandservicesintendedtobenefittheinvestorclientsofCitigroupGlobalMarketsInc.
anditsaffiliates("theFirm").
LikeallFirmemployees,analystsreceivecompensationthatisimpactedbyoverallfirmprofitabilitywhichincludesinvestmentbankingrevenues.
Forimportantdisclosures(includingcopiesofhistoricaldisclosures)regardingthecompaniesthatarethesubjectofthisCitiInvestmentResearch&Analysisproduct("theProduct"),pleasecontactCitiInvestmentResearch&Analysis,388GreenwichStreet,28thFloor,NewYork,NY,10013,Attention:Legal/Compliance[E6WYB6412478].
Inaddition,thesameimportantdisclosures,withtheexceptionoftheValuationandRiskassessmentsandhistoricaldisclosures,arecontainedontheFirm'sdisclosurewebsiteatwww.
citigroupgeo.
com.
ValuationandRiskassessmentscanbefoundinthetextofthemostrecentresearchnote/reportregardingthesubjectcompany.
Historicaldisclosures(foruptothepastthreeyears)willbeprovideduponrequest.
CitiInvestmentResearch&AnalysisRatingsDistribution12MonthRatingRelativeRatingDatacurrentasof30Jun2011BuyHoldSellBuyHoldSellCitiInvestmentResearch&AnalysisGlobalFundamentalCoverage54%36%11%10%81%10%%ofcompaniesineachratingcategorythatareinvestmentbankingclients45%41%42%50%42%44%GuidetoCitiInvestmentResearch&Analysis(CIRA)FundamentalResearchInvestmentRatings:CIRA'sstockrecommendationsincludeariskratingandaninvestmentrating.
Riskratings,whichtakeintoaccountbothpricevolatilityandfundamentalcriteria,are:Low(L),Medium(M),High(H),andSpeculative(S).
InvestmentratingsareafunctionofCIRA'sexpectationoftotalreturn(forecastpriceappreciationanddividendyieldwithinthenext12months)andriskrating.
Analystsmayplacecoveredstocks"UnderReview"inresponsetoexceptionalcircumstances(e.
g.
lackofinformationcriticaltotheanalyst'sthesis)affectingthecompanyand/ortradinginthecompany'ssecurities(e.
g.
tradingsuspension).
Stocksplaced"UnderReview"willbemonitoreddailybymanagement.
Assoonaspracticallypossible,theanalystwillpublishanotere-establishingaratingandinvestmentthesis.
Tosatisfyregulatoryrequirements,wecorrespondUnderReviewtoHoldinourratingsdistributiontableforour12-monthfundamentalratingsystem.
However,wereiteratethatwedonotconsiderUnderReviewtobearecommendation.
Relativethree-monthratings:CIRAmayalsoassignathree-monthrelativecall(orrating)toastocktohighlightexpectedout-performance(mostpreferred)orunder-performance(leastpreferred)versusthegeographicandindustrysectorovera3monthperiod.
Therelativecallmayhighlightaspecificnear-termcatalystoreventimpactingthecompanyorthemarketthatisanticipatedtohaveashort-termpriceimpactontheequitysecuritiesofthecompany.
Absentanyspecificcatalysttheanalyst(s)willindicatethemostandleastpreferredstocksintheuniverseofstocksunderconsideration,explainingthebasisforthisshort-termview.
Thisthree-monthviewmaybedifferentfromanddoesnotaffectastock'sfundamentalequityrating,whichreflectsalonger-termtotalabsolutereturnexpectation.
ForpurposesofNASD/NYSEratings-distribution-disclosurerules,mostpreferredcallscorrespondtoabuyrecommendationandleastpreferredcallscorrespondtoasellrecommendation.
Anystocknotassignedtoamostpreferredorleastpreferredcallisconsiderednon-relative-rated(NRR).
ForpurposesofNASD/NYSEratings-distribution-disclosureruleswecorrespondNRRtoHoldinourratingsdistributiontableforour3-monthrelativeratingsystem.
However,wereiteratethatwedonotconsiderNRRtobearecommendation.
Forsecuritiesindevelopedmarkets(US,UK,Europe,Japan,andAustralia/NewZealand),investmentratingsare:Buy(1)(expectedtotalreturnof10%ormoreforLow-Riskstocks,15%ormoreforMedium-Riskstocks,20%ormoreforHigh-Riskstocks,and35%ormoreforSpeculativestocks);Hold(2)(0%-10%forLow-Riskstocks,0%-15%forMedium-Riskstocks,0%-20%forHigh-Riskstocks,and0%-35%forSpeculativestocks);andSell(3)(negativetotalreturn).
Forsecuritiesinemergingmarkets(AsiaPacific,EmergingEurope/MiddleEast/Africa,andLatinAmerica),investmentratingsare:Buy(1)(expectedtotalreturnof15%ormoreforLow-Riskstocks,20%ormoreforMedium-Riskstocks,30%ormoreforHigh-Riskstocks,and40%ormoreforSpeculativestocks);Hold(2)(5%-15%forLow-Riskstocks,10%-20%forMedium-Riskstocks,15%-30%forHigh-Riskstocks,and20%-40%forSpeculativestocks);andSell(3)(5%orlessforLow-Riskstocks,10%orlessforMedium-Riskstocks,15%orlessforHigh-Riskstocks,and20%orlessforSpeculativestocks).
Investmentratingsaredeterminedbytherangesdescribedaboveatthetimeofinitiationofcoverage,achangeininvestmentand/orriskrating,orachangeintargetprice(subjecttolimitedmanagementdiscretion).
Atothertimes,theexpectedtotalreturnsmayfalloutsideoftheserangesbecauseofmarketpricemovementsand/orothershort-termvolatilityortradingpatterns.
SuchinterimdeviationsfromspecifiedrangeswillbepermittedbutwillbecomesubjecttoreviewbyResearchManagement.
Yourdecisiontobuyorsellasecurityshouldbebaseduponyourpersonalinvestmentobjectivesandshouldbemadeonlyafterevaluatingthestock'sexpectedperformanceandrisk.
NON-USRESEARCHANALYSTDISCLOSURESNon-USresearchanalystswhohavepreparedthisreport(i.
e.
,allresearchanalystslistedbelowotherthanthoseidentifiedasemployedbyCitigroupGlobalMarketsInc.
)arenotregistered/qualifiedasresearchanalystswithFINRA.
SuchresearchanalystsmaynotbeassociatedpersonsofthememberGlobalEconomicOutlookandStrategy28September2011CitigroupGlobalMarkets73organizationandthereforemaynotbesubjecttotheNYSERule472andNASDRule2711restrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbyaresearchanalystaccount.
Thelegalentitiesemployingtheauthorsofthisreportarelistedbelow:CitigroupGlobalMarketsLtdWillemBuiter;MichaelSaunders;DavidLubin;GuillaumeMenuet;JürgenMichels;GiadaGiani;ElinaRibakova;MarkSchofield;MattKing;DavidCowan;FaroukSoussa;HansLorenzen;HasanSTevfik,CFA;RobertBucklandCitigroupGlobalMarketsJapanInc.
KiichiMurashimaCitigroupGlobalMarketsIncRobertVDiClemente;JoaquinACottani;DanaMPeterson;PeterD'Antonio;StevenCWieting;AakashDoshi;StavGaon;MaryEKane;JeffreyBerenbaumCitigroupGlobalMarketsAsiaJohannaChua;AdrienneLuiCiticorpPtyLtdJoshWilliamson;PaulBrennanCitigroupGlobalMarketsKoreaSecuritiesLtdJaechulChangCitigroupGlobalMarketsIndiaPrivateLimitedRohiniMalkaniCitibankAnonimSirketiGultekinIsiklar;IlkerDomacBankHandlowywWarszawiePiotrKalisz;CezaryChrapekCitigroupGlobalMarketsSingaporePTELIMITEDWeiZhengKitPTCitigroupSecuritiesIndonesiaHelmiArmanZAOCitibankNataliaNovikovaCitigroupGlobalMarkets(Pty)LtdJeanFrancoisMercierBancoCitibankS.
A.
MunirJalil;MarceloKfouryAccionesyValoresBanamex,S.
A.
deC.
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