DR.CHENJIAZI ZHONG

Macro Update

World GDP is likely to grow 2.5%-3.0% in 2017[1]. Developed markets is expected to continue with its 1.5% pace, while the growth and policy dynamics within the developed markets should diverge substantially. In emerging markets, GDP growth is likely to pick up slightly from 4.5% this year to between 4.75%-5.25% in 2017[2]; as commodity prices and the U.S. stabilize, external conditions for many emerging markets economies have improved.

On U.S.

The overall U.S. economy presents positive growth surprise, in part due to the inventory correction and a revival of business investment amid ongoing robust consumer spending. The U.S. is expected to return its 2%-2.5% growth in 2017. While daily moves between U.S. equities and bonds have become usually correlated recently, suggesting near-term diversification challenges.

On Eurozone

The growth momentum in the Eurozone is likely to remain broadly in a 1%-1.5% range in 2017. Inflation is not expected to make much progress, markets are expecting a further round of monetary easing this December. Germany’s Leading Economic Index (LEI) continues to move sideways, showing its resilience to the Brexit vote, while the LEIs for the Eurozone, France and Italy turned downward into negative growth territory. That said, the stronger-developed economies pre-Brexit will continue to do better in the near term than the weaker-developed economies.

On U.K.

“A number of indicators of near-term economic activities have been somewhat stronger than expected. Overall these data remains consistent with the MPC’s judgement in the August Inflation Report that business spending would slow more sharply than consumer spending in response to the uncertainty association with the U.K.’s vote to leave the European Union. At its meeting ended on September 14, 2016, the MPC members judged it appropriate to leave the stance of monetary policy unchanged.”[3]

The U.K. is expected to slow down its growth into a broad 0%-1% range in 2017 as the uncertainties associated with the Brexit have worsened investment spending. Consumers are becoming extraordinary cautious.

On Asia

Attributed by its significant fiscal stimulus, Japan is expected to generate a growth of 0.5%-1.0% in 2017. With fiscal policy turning expansionary, the chances for monetary policy to find more traction have improved as well, particularly as the Bank of Japan just recalibrated its easing program with a view to minimize the negative side effects on the financial sector. On the China side, ongoing rebalancing from investment to consumption leads to a further gradual slowdown in growth.

Bank of Japan’s “QQE with Yield Curve Control”

Despite not exactly what the Bank of Japan (BoJ) was aiming for, the yen strengthened in the wake of the announcement. The changes include:

• Guide 10-year JGB rate to 0%
• Purchase JGBs with yields designated by BoJ
• Loan funds up to 10 years
• Purchase 6 trillion yen of ETFs per year
• Purchase 90 billion yen of J-REIT’s per year
• Extend monetary base until CPI ex. Fresh food year over year exceeds 2% and stabilizes

[1] Source: PIMCO September 2016 Cyclical Outlook

[2] Source: PIMCO September 2016 Cyclical Outlook

[3] Source: Bank of England, September 15, 2016