BoJ to disclose new macroeconomic projections at next week’s meeting….…
For professional investors and advisers only
Monthly data for March surprised on the downside in the United States, indicating a weakening of the economic cycle in 2Q 2013: NFPs and ISM in March, Empire and Philly Fed in April, builders’ confidence from February onwards, were all disappointing. The question is whether the reversal is temporary or indicative of a more lasting slowdown. Our interpretation, based on the available data, is that negative surprises are transitory events, due in part to a physiological volatility of the releases (also due to especially poor weather conditions in March), in part to the enforcement of the automatic cuts to public spending, and in part to the difficult seasonal adjustment of the central months of the year from 2010 onwards. We see no indications of a permanent slowdown in underlying growth, although it is likely that following the sharp acceleration towards 3.2% q/q ann. in 1Q 2013, the second quarter of this year will bring a temporary return to a pace around 1.5% q/q ann.
This interpretation of economic data is supported by the Beige Book prepared for the FOMC meeting of 1st May. The report states that “economic activity expanded at a moderate pace” in the period between the end of February and the beginning of April. It is important to note that the report gives no indication of the slowdown towards stall growth rates which, on the other hand, had emerged from recent economic data. The information provided by the Beige Book on the different sectors of the economy are relatively positive, with signals of an expansion of activity in manufacturing (contrary to the picture drawn by sector surveys); consumer spending is rising at a modest pace, but retailers expect continuing growth; the non-manufacturing sector is expanding, in transport and shipping in particular. Oil and natural gas are experiencing “robust” growth. As regards employment, conditions are stable or slightly improving, with indications of hiring in many industries. Expectations for the growth and activity outlook remain “optimistic” in all districts, with forecasts for an expansion in line with the current pace, or slightly faster; the main risks mentioned by the report are tied to fiscal policy and the costs faced by businesses for the health care system reform. Ultimately, only economic data will tell if it is correct to consider the current weakening as a transitory phase, and the FOMC will continue to monitor the development of the scenario. We stick to our forecast of a reacceleration in growth towards 2.5-3% in the second half of 2013.
The BoJ meeting on 26 April should not bring any changes in terms of monetary policy strategy. However, the meeting will be important as it coincides with the release of the central bank’s half-yearly economic outlook. The new growth and inflation forecasts will draw a clearer picture of the inflation path expected by the BoJ following the announcement, early in April, of new monetary stimulus measures. In a recent speech, Kuroda reasserted that the central bank is working to reach a 2% inflation rate within two years. The BoJ may step up its inflation forecasts for 2014 to 1.5%, and achievement of the 2% rate in fiscal year 2015. In the October 2012 economic outlook, the central projection for the CPI in fiscal year 2013 was 0.5% y/y. For 2014, when data will be influenced by the expected consumption tax hike (to 8% from 5%, April 2014), the BoJ estimated inflation at 4.2%, including the tax, and at 1.3% y/y net of the tax. Forecasts for 2013 could be revised downwards, as opposed to an upward revision on 2014, even net of indirect taxes. The 2015 horizon will be topical, as it should show a 2% rate. From now on, the central bank’s inflation forecasts will take on new importance, given the commitment to reach the 2% objective. The BoJ has said it is ready to step up monetary stimulus if the measures introduced prove insufficient to reach the 2% target in two years. Forecasts will guide the adoption of new stimulus measures.
Appendix
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department
Newsletter
