esw 1-05-13 (1)

7/30/2019 ESW 1-05-13 (1)

http://slidepdf.com/reader/full/esw-1-05-13-1 1/14

1 MAY 2013

INSIDE

Strategy Update: 2

Weekly Feature 7

What We’re Watching 9

Weekly Analytics 11

- Positioning 11- Sentiment 12

CONTRIBUTORS

Kerry Duce

Senior Strategist+61 2 9227 [email protected]

Warren HoganChief Economist+61 2 9227 1562

[email protected]

Tom Kenny

Senior Economist,+61 2 9227 1741

[email protected]

Andrew McManus

Economist,+61 2 9227 1742

[email protected]

MACRO STRATEGY

GLOBAL ECONOMICS & STRATEGY

ANZ RESEARCH

STRATEGY FEATURE: INVESTING IN AN EXTENDED LOW NOMNINAL GDP

GROWTH ENVIRONMENT

• Our core investment view is that the global economy remains in an extended

stable nominal GDP growth environment anchored by G3 central banks. This

environment will continue to support global yield convergence with risks absorbed

by central banks. The ANZ baseline is that cheap financing will support a

synchronised recovery in global capital goods spending towards end 2013.

• To date inflation expectations have remained anchored and this has supported

the effectiveness of central bank policy. A sustained behavioural shift to income

over growth could become self-reinforcing if capital spending is shelved. Growth

could then skid below the nominal GDP zone that supports riskier yield exposures.

WEEKLY FEATURE: EURO ZONE CREDIT CONDITIONS EASE BUT DEMANDSLUMPS FURTHER

• The latest ECB lending survey (released 24 April) highlights a modest

improvement in lending standards, albeit they remain restrictive. The survey also

shows that the negative impact from the sovereign crisis on bank funding

conditions has largely faded. This is where the good news ends.

• Poor growth prospects remain a major deterrent to credit demand (from

households and enterprises) in the euro zone (EZ). The lack of credit demand

points to further contraction in the region. This poor prognosis along with the

disappointing read on Germany’s PMI in April should see the ECB ease policy

when it meets on 2 May — we expect a 25bp cut in the key policy rate to 0.50%.

WHAT WE’RE WATCHING

• The US labour market continues to be of great importance for Fed policy

expectations and financial markets. We expect non-farm payrolls grew by 130k

(private: +150k) and the unemployment rate remained at 7.6% in April.

POSITIONING/SENTIMENT

• The consolidation in economic momentum through March and April has resulted in

a modest easing in risk appetite. In particular, there have been corrections to

commodity prices, while high yield spreads and non-commodity based equities

remain relatively well supported.

CHART OF THE WEEK

FIGURE 1. AUSTRALIAN EQUITY RETURNS SHIFT FROM COMMODITY INFLATION TOASSET INFLATION AS QE RAMPED UP

Sources: MSCI, Bloomberg, Thomson Reuters Datastream, ANZ

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ANZ Macro Strategy / 1 May 2013 / 2 of 14

STRATEGY UPDATE

AN EXTENDED NOMINAL GDP ZONE: INCOMETRUMPS GROWTH

•

Our core investment view is that global nominalGDP will remain stable through an extended

moderate growth cycle anchored by sustained G3

policy support.

• Currently fiscal tightening and easing global growth

momentum has lifted disinflation/deflation risks

above inflation.

• The ANZ producer price monitor has corrected much

more sharply than our lead indicator. In level terms

ANZ producer prices are approaching the July 2012

cycle low when the ANZ lead indicator was

substantially lower than at present.

• In this environment yield convergence will be

sustained and income will continue to trump growth.

This environment could become reinforcing if a

synchronized lift in global growth does not unfold by

2015.

• Therefore disinflation/deflation remains the

embedded risk and will provide the catalyst for

additional policy support.

INVESTING IN AN EXTENDED NOMINAL GDP

ZONE: INCOME WILLTRUMP GROWTH

Our core investment view is that global nominalGDP will remain stable through an extended

moderate growth cycle anchored by G3 policy

support. Currently we consider disinflation/deflation

risks are moderately larger than inflation, although

we see neither risk overwhelming steady and stable

nominal growth over the foreseeable future.

In this environment yield convergence will be

sustained and companies (including growth

companies) have an incentive to shift to dividends.

The current loss of momentum in our ANZ global lead

indicator is reinforcing the preference for income over

growth.

Clearly the risk is that this environment becomes

reinforcing as capital spending plans are wound back

to fund dividends. In essence central banks have

postponed the adjustment by supporting an extended

period of steady nominal GDP growth. The risk is

that nominal growth skids below the lower bound of

nominal GDP where inflation expectations are revised

down.

WILL FINANCIAL RISK APPETITE REMAIN

RESILIENT AGAIN IN 2013?

Despite the sharp loss of global growth momentum

through 2012 ANZ global risk appetite inflation

expectations remained very resilient through

the slow down. However, while financial asset

prices continued to surge through 2012 measures of

producer and commodity prices eased sharply with

the cycle (Figure 2). In short, financial risk has in

part disconnected from the cycle on central bank

policy support. The risk is that support becomes

embedded without generating a synchronised

recovery.

Currently our ANZ global lead indicators are easing

and (as was the case through 2012) our estimate of

financial risk appetite remains buoyant. However,

while producer and commodity prices declined

through 2012 currently they are declining much more

sharply than the cycle suggesting that disinflationary

forces could be gaining traction.

Finally, the key challenge is to identify when the

current super cycle in financial asset prices peaks.

We see two environments that would drive a peak:

o A sustained lift in inflation as growth finally

lifts to a sustained synchronised recovery; or

o A sustained period of disinflation that edges

towards deflation as nominal GDP falls to the

lower bound of the zone.

To date inflation expectations have remained

anchored despite large output gaps and rising

unemployment. It has been the stability of inflation expectations and relatively steady

nominal growth that remains the defining

feature of the current economic environment.

FIGURE 2. FINANCIAL ASSETS REMAIN RESILIENT

DESPITE LOSS OF ECONOMIC MOMENTUM

Sources: Markit, Bloomberg, Thomson Reuters Datastream, ANZ

AUSTRALIA: A MICROCOSM OF GLOBAL CAPITAL

MARKETS

The resilience of financial risk appetite andinflation expectations through an extended

period of steady nominal growth (as was the

case in 2012) remains the key driver of markets. In

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STRATEGY UPDATE

our strategy feature this week we analyse this

thematic through the prism of Australian capital

markets (the safe high yielding Australian equity and

corporate bond markets).

The Australian equity market is essentially a barbell

between global materials (mining) companies

(leveraged to commodities via Chinese growth) and

AA rated global banks (high quality financial assets

that offer elevated safe yield). The Australian dollar

clearly straddles both asset classes, although since

the Q3 2012 and the Fed open ended asset purchase

program it appears to be tilting more towards safe

financial yield rather than commodity inflation.

Overall in our strategy feature this week we identify

the core theme driving markets as the continued

transition from the commodity super cycle to

the yield super cycle anchored by a stable

moderate nominal GDP growth cycle.

We date the peak in the commodity super cycle in

late 2011 (likely earlier if we abstract from the large

Chinese fiscal stimulus). Since late 2011 we have

observed two commodity min-cycles. However, the

peak in each mini cycle has been slightly lower than

the previous high while mini cycle troughs tend to be

lower.

In contrast to the steady unwind of the commoditysuper cycle since late 2011, the financial asset

super cycle (the global race to the bottom in

yields) has printed each peak above the

previous high while mini cycle lows have been

shallower.

AUSTRALIAN EQUITIES: THE GREAT DIVIDE

BETWEEN INCOME AND GROWTH WIDENS

We identify two structural shifts in the Australian

equity market (and global capital markets) post the

global financial crisis.

1. In late 2011 we observed a large

structural capitulation in mining equity

stocks that marked the peak of the

commodity super cycle. Subsequent to the

capitulation we have observed two mining

mini cycles in late 2011 and again in late

2012. Both were a sell opportunity.

2. Since Q3 2012 (Fed announces open

ended asset purchases) we have

observed a relentless shift to global yield

compression reflected in the Australian bond

and equity markets. Each dip has marked a

buy on the dip in yield.

Subsequent to the collapse in the mining index in late

2011 returns to the materials sector lagged the

returns to financial assets through to September

2012. However, since September 2012 when the Fed

announced its open ended asset purchases the

returns to mining have fallen sharply while the

returns to the financial sector have surged.

Clearly the market does not expect that open ended

Fed purchases will fuel commodity inflation (yet).

Figure 3 clearly shows that since April 2012 the total

return Australian financial stocks have surged by

some 40%. Over the same period returns to mining

and materials have slumped by 15%.

The gap between financials and mining has widened

sharply since Q3 2012 when the Fed announce its

open ended asset purchase program.

In short, the race to the bottom in global yields

spurred by the Fed and now the Bank of Japan

has trumped the commodity super cycle since

late 2011.

FIGURE 3. LARGE DIVERGENCE BETWEEN FINANCIAL

AND MINING SECTORS BUILDS

Sources: MSCI, Thomson Reuters Datastream, ANZ

In figure 4 we plot the relative performance of the

Australian materials sector to financials against basemetals (in USD) and the Australian US dollar cross

since April 2011. This chart clearly shows the collapse

in materials and base metals in August 2011 was

largely ignored by the Australian dollar that has

disconnected from commodities and is trading more in

line with high safe yield.

Subsequently, we have observed two commodity

mini-cycles with lower peaks in December 2011 and

December 2012. Both cycles were truncated.

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STRATEGY UPDATE

FIGURE 4. THE MAJOR CORRECTION IN COMMODITIES

OCCURRED IN AUGUST 2011

-3

-2

-1

0

1

2

3

Apr

2010

Aug

2010

Dec

2010

Apr

2011

Aug

2011

Dec

2011

Apr

2012

Aug

2012

Dec

2012

Apr

2013

d e v i a t i o n f r o m

1 2 m o n t h t r e n d

Base metals USD ASX 300 mining to financials AUD


Overall, the peak in commodities occurred in Q3 2011

and since that time the pendulum has swung to

financial assets and global yield convergence.

This pattern broadly tracks the shifts in the level of

both the ANZ global lead indicator and the ANZ

producer price index since 2010 (Figure 5). The twin

peaks in producer prices occurred in July 2008

and again in March 2011. To generate a peak

above these levels we need to see the level of the

ANZ global lead indicator above 150 for a sustained

period (Figure 5).

The announcement of the Federal Reserve open

ended asset purchase program in Q3 2012 in

conjunction with a large decline in the ANZ producer

price index has driven the race to the bottom in

global yields including Australian financial equities

that offer high yield.

FIGURE 5. DECLINE IN PRODUCER PRICES SUPPORTS

RACE TO THE BOTTOM IN YIELDS AS GROWTH

MODERATES

20

30

40

50

60

70

80

90

70

80

90

100

110

120

130

140

150

160

170

ANZ global lead indicator (LHS) ANZ global producer prices (RHS)


STRONG RETURNS TO AUSTRALIAN EQUITIES

PRIMARILY DRIVEN BY YIELD COMPRESSION

NOT EARNINGS

As described in the previous section robust returns to

Australian equities have primarily been driven by

financial yield exposures and yield convergence (PE

re-rating) rather than strong earnings growth.

The decline in the implied earnings yield for the ASX

200 has largely coincided with the late 2011

correction in materials and mining and the

subsequent race to the bottom in global yields

spurred by the Fed open ended purchase program.

Indeed, the implied earnings yield for the ASX 200 in

December 2011 was around 9% as compared with

6.7% in April 2013. Over the same period the yield

of an A rated corporate bond has fallen from 6% to

3.9%.

FIGURE 6. THE GAP BETWEEN THE IMPLIED ASX 200

EARNINGS YIELD AND A CORPORATE BOND HAS

WIDENED SHARPLY

Sources: Merrill Lynch Bank of America, MSCI , Thomson Reuters

Datastream, ANZ

The decline in the implied earnings yield for the ASX

200 has been driven by sustained PE re-rating since

late 2012. For the ASX200 in total the PE has riseneven as earnings per share continue to fall. The

wedge between the PE decline and decline in earnings

per share is clearly shown in Figure 7.

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STRATEGY UPDATE

FIGURE 7: PE RE-RATE (YIELD COMPRESSION)

DRIVES THE ASX 200 SINCE LATE 2012 DESPITE FALL

IN EARNINGS

-30

-20

-10

0

10

20

30

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

% c

h a n g e y e a r o n y e a r

ASX 200 eps ASX 200 PE re-rate

Sources: MSCI, IBES, Thomson Reuters Datastream, ANZ

The inflection point between earnings growth as adriver of equity returns and PE re-rate (yield

compression) occurred around Q3 2012 in line with

the Fed announcing its open ended asset purchase

program. Indeed, over the year from April 2012 to

April 2013 the ASX 200 PE is up around 25%,

while earnings per share for the ASX 200 are

down around 6%. The decline in earnings is

heavily tilted to the mining sector.

Despite the large decline in Australian yields since

late 2012 Australian A rated corporate bonds still

offer a yield around 4.3% as compared to 1.8% for

an A rated US corporate bond.

FIGURE 8: AUSTRALIAN CORPORATE YIELDS STILL

WELL ABOVE US CORPORATE YIELDS

1

2

3

4

5

6

7

8

Apr 2011 Oct 2011 Apr 2012 Oct 2012 Apr 2013

Y i e l d

US corporate bond A Australian corporate bond A

Sources: Merrill Lynch Bank of America, Thomson Reuters

Datastream, ANZ

AUSTRALIAN FINANCIAL YIELDS HAVE FURTHER

SCOPE FOR COMPRESSION

A sizeable wedge remains in place between the

implied ASX 200 bank earnings yield around 7% and

the corporate financial bond at 4% and the Australian

government yield at 3.1%.

FIGURE 9. BANK EARNINGS YIELD STILL WELL ABOVE

CORPORATE YIELDS

Sources: Merrill Lynch Bank of America, Bloomberg, Thomson

Reuters Datastream, ANZ

The peak in the implied bank earnings yield was

around 11% in late 2011. Clearly the gap between

the implied earnings yield and sovereign yields was

excessive in late 2011 through to Q3 2012. The Fed

open ended asset purchase program provided the

catalyst for the massive yield compression rally.

Figure 10 clearly shows the powerful yield

compression that is supporting bank equity returns.

FIGURE 10. PE LIFT NOT EARNINGS KEY DRIVER OFAUSTRALIAN FINANCIALS

-40

-30

-20

-10

0

10

20

30

40

50

60

Apr 2011 Oct 2011 Apr 2012 Oct 2012 Apr 2013

% c

h a n g e y e a r o n y e a r

ASX 200 banks eps growth ASX 200 banks PE re-rate

Sources: Bloomberg, Thomson Reuters Datastream, ANZ

DEFLATION IS THE ULTIMATE RISK TO THE

YIELD CONVERGENCE SUPER CYCLE

With global economic momentum easing we consider

disinflation/deflation risk outweigh inflation for

the foreseeable future. To date markets remain in

a sweet spot for financial assets with G3 central

banks providing strong support and inflation

expectations and nominal growth modest but not

collapsing to sustained deflation. We consider it has

been the resilience of inflation expectations that has

enhanced the effectiveness of G3 central bank policy.

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STRATEGY UPDATE

A period of sustained deflation and weakening

nominal GDP would lift debt to GDP and for non-safe

haven sovereign yields that rely on foreign financing

would increase the cost of borrowing. Moreover,

increased sovereign borrowing would crowd out

private sources of capital.

Overall, we see limited risk that deflation risk will

emerge as a new thematic. Recent moves by the EZ

to ease fiscal tightening; clear signs that the drivers

of US growth have broadened and sustained G3 policy

support are all acting to support inflation

expectations. However, a synchronised lift in global

growth momentum supported by capital spending on

current cheap financing will need to evolve by 2015 to

prevent nominal GDP skidding to the bottom of thecurrent search for yield comfort zone.

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WEEKLY FEATURE

EZ CREDIT CONDITIONS EASE BUT DEMAND

SLUMPS FURTHER

• The latest ECB lending survey (released 24 April)

highlights a modest improvement in lending

standards, albeit they remain restrictive. The survey

also shows that the negative impact from the

sovereign crisis on bank funding has largely faded.

• Poor growth prospects remain a major deterrent to

credit demand (from households and enterprises) in

the EZ. The lack of demand for credit points to

further contraction in the region.

• In conjunction with the disappointing read on

Germany’s PMI in April, this news adds to the case

for the ECB to consider ease policy when it meets

on 2 May. We are expecting the central bank to cut

its key policy rate by 25bp to 0.50%.

THE VICIOUS CYCYLE - POOR CREDIT DEMAND

BEGETS WEAKER GROWTH

Bank funding conditions and the Sovereign

crisis. The negative impact of the sovereign crisis on

bank funding conditions appears to have largely faded

according to the latest bank lending survey. There

has been a sharp moderation in the impact of

sovereign debt tensions on bank’s funding conditions

(Figure 11). This is largely owing to the actions of the

ECB (e.g. LTRO, OMT) and to a lesser extent reform

measures from the sovereigns.

FIGURE 11. IMPACT OF SOVEREIGN CRISIS ON

BANKS’ FUNDING CONDITIONS

-5

0

5

10

15

20

25

30

n e t r e s p o n d e n t s %

Direct exposureValue of sovereign Other effects

q2 2012

q3 2012

q4 2012

q1 2013

Sources: Bloomberg, ANZ

Supply of credit to enterprises and households. The

latest survey highlights that lending conditions to

enterprises became less restrictive in Q1 2013 and

are below their long-run average (Figure 12). Lending

standards to households were also less restrictive, but

remain above long-run averages (Figure 14).

The moderation in credit standards to enterprises

reflects further improvement in financing conditions

for euro area banks — both access to market funding

and the banks’ liquidity position actually contributed

to an easing in standards. This improvement largely

reflects ECB’s non-conventional policy actions over

the past year.

There was a marked decline in banks’ perception that

poor economic growth prospects being a hurdle to

lending (from 26% in 4Q 2012 to 16% in Q1 2013 -

Figure 13). That said, this remains a major area of

concern for banks setting credit policy. Moreover, the

recent weakness in our inventory pulse for the EZ

suggests that momentum is again starting to ease in

the region after a pick up earlier in the year. This

suggests that poor growth prospects will continue to

be a major deterrent to lending standards.

Banks expect a similar degree of tightness in

credit standards to enterprises this quarter.

FIGURE 12. CHANGE IN CREDIT CONDITIONS – LOANS

TO ENTERPRISES

-20

0

20

40

60

80

03 04 05 06 07 08 09 10 11 12 13 14

N e t r e s p o n s e

Total Actual Total expected

Tightening

Easing


FIGURE 13. CHANGE IN CREDIT CONDITIONS –

LOANS TO ENTERPRISES

-10

-5

0

5

10

15

20

25

30

35

40

45

A x i s T i t l e

Q 1

2 0 1 1

Q 1

2 0 1 3

Costs related tobank's capital

position

Access to marketfinancing

Bank's liquidityposition

Expectation of general economic

activity

Peak of sovereign crisis


Lending conditions for households (both mortgages

and lending conditions) eased slightly but remain

restrictive. Poor economic and housing prospectscontinue to weigh on banks’ decision to lend. As with

lending for enterprises, pressures from banks’ cost of

funding contributed to an easing in standards.

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WEEKLY FEATURE

FIGURE 14. CHANGE IN CREDIT CONDITIONS –

LOANS TO HOUSEHOLDS

-20

-10

0

10

20

30

40

50

03 04 05 06 07 08 09 10 11 12 13


Mortgages Other personal

Tightening

Easing


Respondents indicated that lending standards to

households will ease slightly in the coming quarter.

We continue to expect that ongoing soggy demand

amid an elevated unemployment rate will act as a

constraint on European banks easing their lending

standards (Figure 15) as this keeps repayment risk

elevated.

FIGURE 15. UNEMPLOYMENT RATE AND HOUSING

LENDING STANDARDS

6

7

8

9

10

11

12

13

-20

-10

0

10

20

30

40

50

03 04 05 06 07 08 09 10 11 12 13 14

N e t r e s p o n d e n t s

Lending standards Unemployment rate, rhs


Demand for credit by households fell sharply in thequarter. The main factors contributing to the decline

were poor housing prospects and subdued consumer

confidence. Banks reported a decline in demand for

loans to enterprises at a similar rate to the previous

quarter. The lack of appetite for funding continues to

be driven by an absence of fixed asset investment

plans.

Respondents expect credit demand from both

households and enterprises to improve next quarter,

albeit to still decline in absolute terms. We think this

view is too optimistic, particularly for households.

FIGURE 16. EZ GDP GROWTH AND DEMAND

FOR LOANS

-6

-4

-2

0

2

4

6

-60

-50

-40

-30

-20

-10

0

10

20

30

40

03 04 05 06 07 08 09 10 11 12 13

% y / y


Household + Enterpr ise GDP, rhs

Increased

Decreased


The weakness in credit demand does not bode well for

future activity. A simple weighted index (household

+ enterprise) of credit demand tends to lead GDP

growth (Figure 16). This relationship points to a

further contraction in EZ activity, and disappointingly,

a renewed loss in momentum

IMPLICATIONS FOR THE ECB

The latest ECB lending survey highlights another

decline in credit demand, particularly by households.

This news does not bode well for EZ growth,

particularly in conjunction with the poor flash PMI’s

for April (the headline slipped to 46.5 from 46.8 in

March and the details point to a further loss in

momentum). In addition, on a regional basis there is

a worrying loss in momentum in Germany. At the

April ECB meeting, President Draghi flagged his

concern over the spreading of economic weakness to

the core.

Any easing from the ECB is unlikely to herald a

seismic shift in policy. In the near-term, we expect

the central bank will limit future policy action to

conventional tools and a couple of non-standardmeasures (e.g. the collateral framework and fixed-

rate full allotment). Draghi will also emphasise that

support is needed from elsewhere.

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US LABOUR MARKET

The US labour market continues to be a key driver of

global financial markets due to its importance insetting US monetary policy. This week we preview the

non-farm payrolls and JOLTS job openings releases.

MACRO

• US non-farm payrolls ANZ Forecasts:

Total payrolls: +130k (market +150k);

Private payrolls: +150k (market +160k)

Unemployment rate: 7.6% (market 7.6%)

• Model based view: The ANZ Non-farm payroll

(NFP) forecast is based on our short-term

employment model that includes the employmentindices of the ISM surveys and initial jobless claims.

We expect the 4-week moving average of initial

jobless claims will return to below 350k this week

after recent volatility around the Easter period saw

them peak at 362K, while the ISM employment

indices will indicate a modest loss of momentum

since peaking in February.

• Risks around view: We consider the risks to our

forecast as broadly balanced.

o Upside. 1) Employers are stretching existing

labour resources — average weekly hours and

overtime hours worked have risen in recent

months and are at levels consistent with the

pre-recession period. Further economic

growth may result in improved hiring. 2)

Construction employment growth is lagging

the pick-up in housing starts and hiring in

retail has eased recently despite solid retail

sales. 3) The average rise in ADP and NFP

employment growth are equal since inception.

However, over the 3 months to March the

ADP measure has averaged 20k higher than

the NFP estimate. We expect these two serieswill realign in coming months.

o Downside. 1) The sequester cuts likely

weighed on hiring in April and will way in

coming months — the CBO estimates 750K

job losses from the government spending

cuts.

• Policy: We expect the Fed to maintain its current

pace of asset purchases (US 85bn) for the

foreseeable future. FOMC members have stated

sustained employment gains, a rise in hiring

indicators and solid consumer spending would be

required for a tapering in the existing program. The

FOMC is likely to be cautious about tapering its

asset purchases given the headwinds to activity

from the sizable fiscal drag. We believe spending

growth at above 2.5% annualised, payrolls growth

averaging 170k/month and a pick-up in JOLTS job

openings over a 6 month period would result in

some tapering of the program. Our base case is for

growth to pick up in Q4 2013 and into 2014 such

that these economic indicators will warrant a

tapering in the current program.

FIGURE 17. US NON-FARM PAYROLLS AND FORECAST

(PUBLIC AND PRIVATE)

-100

-50

0

50

100

150

200

250

300

350

400

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

' 0 0 0 m / m

Private Public

Long-term avg public Long-term avg private

Sources: BLS, ANZ

FIGURE 18. US PRIVATE NON-FARM PAYROLLS (MODEL

AND ACTUAL)

-1000

-800

-600

-400

-200

0

200

400

600

97 99 01 03 05 07 09 11 13

m o n t h l y c h a n g e ,

0 0 0 s

Actual Model

Sources: Bloomberg, Thomson Reuters, ANZ

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• JOLTS Job Openings. As highlighted by recent

FOMC members, job openings will be closelymonitored as they tend to lead employment. JOLTS

openings rose strongly in February. If solid

momentum can be sustained over coming months,

this would be a further sign that the recent loss of

momentum will only be temporary.

FIGURE 19. JOLTS JOB OPENINGS AND NON-FARM

PAYROLLS

129

131

133

135

137

139

2.0

2.5

3.0

3.5

4.0

4.5

5.0

02 03 04 05 06 07 08 09 10 11 12 13

mn

m n

Job openings (6 month fwd) Non-farm employment, rhs


• The breakdown between hirings and layoffs

indicates the sustainability of recent employment

gains. Throughout 2012 employment gains occurredpredominantly due to a reduction in layoffs rather

than an increase in hiring. Given the now low level

of layoffs, a lift in hiring will be required for future

sustainable employment gains. Like job openings,

hires in February picked up strongly.

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WEEKLY ANALYTICS

1. MARKET POSITIONING

FIGURE 20. UST 10-YEAR NON-COMMERCIALPOSITIONS

Sentiment towards UST has improved in recent

weeks.

Uncertainties around the US economic growth

outlook and impact of the fiscal drag have

supported sentiment towards US Treasuries.

1

2

3

4

-300

-200

-100

0

100

200

300

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13

%

' 0 0 0 c o n t r a c t s

Net speculative positions 10-year-yield, rhs

Net Long

Net Short

FIGURE 21. US MUTUAL FUND FLOWS

Net flows into US bonds and equities have

remained solid since early January.

As sentiment towards both asset groups has

remained solid, this reflects a switch from other

geographies or cash rather than a rotation from

bonds to equities.

-30-25-20-15-10-505

10152025303540

Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13

U S $ b n

Equity Bonds Money Market

FIGURE 22. NON-COMMERCIAL COPPER POSITIONS

Sentiment toward copper has waned in recent

weeks. This likely reflects 2 factors: a stronger

USD; and, a consolidation in momentum of global

lead indicators.

5000

6000

7000

8000

9000

10000

11000

-40

-30

-20

-10

0

10

20

30

40


U S D

' 0 0 0 c o n t r a c t s

Net speculative positions Copper price, rhs

Net Short

Net Long

FIGURE 23. NON-COMMERCIAL GOLD POSITIONS

Sentiment toward gold has continued to wane in

recent weeks.

1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

2000

0

50

100

150

200

250

300

350


U S D

' 0 0 0 c o n t r a c t s

Net speculative positions Gold price, rhs

Net Long

Sources: Bloomberg, Thomson Reuters Datastream, ICI, ANZ

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WEEKLY ANALYTICS

2. RISK SENTIMENT

FIGURE 24. US RELATIVE PERFORMANCE OF HIGH

YIELD CORPORATE CREDIT

US credit spreads remain near post crisis lows. In

particular, high yield credit has strongly

outperformed since late 2011.In recent weeks high

yield credit has continued to outperform despite

the rally in US Treasuries.

0.62

0.67

0.72

0.77

0.82

0.87

0.92


Relative performance US MLBOA Corp HY to Corp AA 3-5 years

FIGURE 25. HIGH YIELD FLOWS & YIELDS

Sentiment towards high yield credit has remained

positive despite the consolidation in other risk

assets such as commodities in recent weeks.

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.525

26

27

28

29

30

31

32

33

Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

U S D b n

Junk bond ETF f lows ML junk bond y ield, rhs

%

FIGURE 26. US CORPORATE BOND ISSUANCE

US corporate bond issuance remained relatively

strong through Q1, particularly high yield issuance.

0

10

20

30

40

50

60

0

30

60

90

120

150

180


% U S D b n

Investment grade, lhs High yield, lhs % high yield

FIGURE 27. ANZ RISK APPETITE AND LEAD INDEX

The divergence between our lead indicator and risk

appetite measure has closed in recent months.

Given the retracement in our lead indicators for

March and April, we would expect some

consolidation in sentiment near-term.

However, over the medium-term sentiment is

expected to remain supported by G3 central banks.

-3

-2

-1

0

1

2

04 05 06 07 08 09 10 11 12 13

ANZ inventory pulse ANZ Risk appetite

D e v i a t i o n f r o m

1 2 m o n t h t r e n d

Sources: Bloomberg, Thomson Reuters Datastream, ANZ

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