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The UniCredit Chartbook – July 2013

Welcome to the latest UniCredit Chartbook. We hope you will find this publication useful. This is the last Chartbook before the summer break. We will resume publishing in mid-September.

• EMU: The latest hard data increase the likelihood of a positive growth surprise in 2Q13. Much-better-than-expected IP resilience, a technical rebound in construction output and decent consumer spending data are shifting to the upside the risks to our -0.1% qoq GDP forecast for the second quarter. Soft indicators have also been constructive, although their pace of improvement is slower than that of hard data, and not without mixed signals. At the July meeting, the ECB adopted a new communication strategy to shield the eurozone from the premature tightening of financial conditions induced by the Fed’s rhetoric. This new communication, which aims to “inject downward bias” in interest rates, is unlikely to be a silver bullet when it comes to fragmentation and the lack of transmission of monetary policy. We think the ECB will resort to a new LTRO (with maturity of up to 5Y) before year-end, in order to maximize the liquidity insurance for banks when loan demand will start to bottom out and bank funding costs could be affected by higher government bond yields. 
• US: Economic growth in the first half of the year was slower than initially reported due to downward revisions in consumer spending. Those revisions not only affected the first quarter, in which GDP growth was lowered to 1.8% from 2.4% (annualized), but also the second quarter. As a result, the upside risks to our 2Q13 GDP forecast we stressed a month ago have given way to downside risks. For now, we stick to our 2Q13 estimate of 1.8%. Looking forward, we continue to expect growth to pick up to 2¾% in the second half of the year. Due to the weaker growth in the first quarter, our 2013 forecast declined from 2.0% to 1.8%. In line with our view of an accelerating economy, the Federal Reserve is likely to moderate the pace of asset purchases later this year (most likely beginning in September) and end the program around the middle of 2014. Rate hikes, however, remain far off. The vast majority of Fed officials does not foresee the first rate hike arriving before 2015.
• CEE: Financing of emerging markets has deteriorated, predominantly because Fed tapering is nearing. The initial impact on emerging markets has been negative, but we expect more differentiation from here. Countries such as Russia and Czech Republic are much less at risk given a limited accumulation of foreign capital in both countries and comfortable foreign reserves. Poland's access to the IMF's FCL offers it more protection while the combination of low inflation and a gradual recovery in activity means monetary policy is set to remain accommodative over the coming quarters. Turkey is more at risk given its reliance on foreign capital. This is pushing the central bank towards a more hawkish stance.
• China: Recent hard and soft data showed that economic growth in China weakened further over the spring to 7½% yoy, with soft momentum carrying over into the summer. External headwinds will remain significant, brisk credit growth is likely to decelerate and the government is primed to tolerate slow(er) growth. Thus we expect GDP growth to settle down to between the government's target of 7½% and its pain threshold of around 7% over the next few quarters. We revise down our annual GDP forecasts from 7.8% to 7.4% for 2013 and from 7.7% to 7.2% for 2014.

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