global cycle notes - fixed income. credit suisse. june 02, 2014

8/12/2019 Global Cycle Notes - Fixed Income. Credit Suisse. June 02, 2014

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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND

ANALYST CERTIFICATIONS.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION

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Global Cycle Notes

Spring Loaded

The mild global growth slowdown that began in Q4 is set to end imminently. We

expect above-trend global industrial production growth for the rest of the year.

So far in 2014, some US de-stocking has coincided with bad weather and weak

Chinese data to cause a minor stretch of weakness within the global recovery

from Europes recession.

That recession caused stagnant manufacturing, demand, and trade trends

worldwide from mid-2011 until early 2013 (Exhibit 1). But by late 2013, global

industrial production was growing much faster than its longer-term trend, amid a

few signs of inventory accumulation in the United States.

In our view, the 3m/3m annualized growth rate of global industrial production will

rise from a local trough near 2.5% in June to a multi-month plateau above 6% at

year-end. If we are right, global growth in late 2013 will be stronger than it was

late last year.

Markets have disregarded early signs of improvement. However, a rebound in

cyclical momentum has the potential to reverse the duration rally since the

beginning of the year, in our view.

In this note, which is the first of a new monthly publication, we detail the reasons

for our view.

Exhibit 1: The Global Goods Sector (Production, Demand, Trade)

Real Log Levels

5.24

5.25

5.265.27

5.28

5.29

5.30

5.31

5.32

5.33

5.34

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Euro Area recession (2011Q4-2013Q1)

Global IP ex-China, nominal IP weights

Global Goods Demand x-China, trend-adjusted

World Trade Volume

Goods Demand = Adjusted IP Components from (C + I + G+X-M)

June Momentum

Trough

Source: Credit Suisse

Research Analysts

James Sweeney

212 538 4648

[email protected]

Neville Hill

44 20 7888 1334

[email protected]

Matthias Klein

44 20 7883 8189

[email protected]

Wenzhe Zhao

212 325 1798

[email protected]

Yiagos Alexopoulos

44 20 7888 7536

[email protected]

Axel Lang

212 538 4530

[email protected]

Jeremy Schwartz

212 538 6419

[email protected]

02 June 2014Fixed Income Research

http://www.credit-suisse.com/researchandanalytics


2/24

02 June 2014

Global Cycle Notes 2

Key Points

Momentum rebound: Global IP Momentum to bottom near 2.5% in June and

reaccelerate above 6% by year-end.

Exhibit 2: Global IP Momentum

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

3m/3m ann.%

pre-crisis: average: 3%

Source: Credit Suisse, Thomson Reuters Datastream

Strong goods demand: Steady US consumer, slower but still-high Chinese growth and a

recovering Eurozone economy are sufficient to support solid Global demand growth.

Inventories: The second half 2013 inventory build has been brought under control. There

is plenty of scope for re-stocking.

A less synchronous cycle: Growth is unusually uncorrelated across major regions. PMI

New orders have turned higher in Japan and China from depressed levels. Euro area and

US growth remain above-trend but is slowing. The Euro area is in the final stages of its

slowdown while the US is decelerating in a technical reversal of its post-winter

bounceback (Exhibit 3).

Interest Rates:A rebound in cyclical momentum has the potential to reverse the duration

rally since the beginning of the year. Duration risk appetite is nearing Euphoria (Exhibit 5)

andwe think developed market inflation is turning higher.

Risk Appetite: Global risk appetite has been range-bound at middling levels. A rebound in

Global IP Momentum should boost risk appetite in the absence of a severe short-term

interest rate spike.

Four requirements: We don't think a momentum rebound alone will be sufficient to trigger

sharply more-hawkish Fed expectations. That will requireadditional progress towards US

full employment.
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02 June 2014


Exhibit 3: PMI New Orders - North Atlantic-Asia Divide

38

42

46

50

54

58

62

09 10 11 12 13 14

US (Markit PMI) Euro Area

China (HSBC) Japan

Source: Credit Suisse, Markit

Exhibit 4: Global IP Momentum and Forward Rates

-10%

-5%

0%

5%

10%

15%

(250)

(200)

(150)

(100)

(50)

-

50

100

150

93 95 97 99 01 03 05 07 09 11 13

USD Swap, 5y5y Fwd, bps (LHS, dev from trend)

Global IP Momentum, % (RHS)


Exhibit 5: US Duration Risk Appetite

-7

-5

-3

-1

1

3

5

7

00 02 04 06 08 10 12 14

US Duration Risk Appetite

Euphoria

Panic



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02 June 2014


Global Demand

Global goods demand is back on track after being derailed by Europes recession.The

slowdown in global demand from late-2011 to early-2013 was comparable to prior world

recessions, but now year-on-year demand growth is above average.

Global goods demand1 (x-China) has typically trended at 3-4% p.a. except during global

recessions (Exhibit 6). The chart illustrates the stylized fact that production is more volatilethan demand, and also shows how demand growth anchors trend production.

In March our goods demand measure reached 4.1% y/y, near the top end of the recent

range. This strength is partly attributable to a surge in Japanese spending before the April

consumption tax increase. A reversal in Japanese spending in April is likely to push global

demand growth down somewhat.

However, we expect a long period of 3-4% growth to follow, similar to the years before

2007, or between mid-2009 and mid-2011. In the second half of the year, industrial

production growth is likely to overshoot this demand trend, but over time, production

growth will converge to demand growth.

Exhibit 6: Global x-China Real Goods Demand Industrial Production y/y%

-15%

-10%

-5%

0%

5%

10%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Global Goods Demand, x-China

Global IP, x-China


PMI surveys, market indicators, inventory estimates and changes in industry structure all

matter for the industrial production outlook, but estimating the global goods demand trend

is the most important part of our forecast. An unexpected speedup or slowdown in demand

can cause an abrupt change in IP growth even if these other indicators signal a different

path. For example, an unexpected slowdown in demand may lead to an inventory

accumulation which slows production later.

Of course, understanding global goods demand starts with knowing its composition.

Exhibit 7 shows a breakdown of global goods demand adjusted according to industrial

inputs given by input-output tables of the various economies. (We make these adjustmentsto create a measure of demand more comparable to global industrial production). The

composition of demand has changed significantly in recent years, especially for China,

where the share of global demand has tripled from 7% in 2004.

1Our measure of global goods demand includes consumer goods purchases and business and government investment. We weighteach component by dollar sales and adjust weights according to the amount of industrial valued added involved in bringing eachtype of good to market. We exclude China from our preferred global aggregate for data quality reasons but China is very muchpart of our analysis. Methodological details are in a technical appendix of anearlier piece.
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02 June 2014


Exhibit 7: Composition of Global Goods Demand (2012 weights)

14%

10%

13%

6%5%5%

7%

13%

17%

10%US ConsumptionUS InvestmentEA ConsumptionEA Investment

Japan ConsumptionJapan InvestmentChina ConsumptionChina InvestmentROW ConsumptionROW Investment


Exhibit 8 through 11 show the contributions of major economies to growth in Global

demand. Chinese investment, US goods consumption, and rest of the worldinvestment and consumption have been the major drivers of global goods demand in

recent years. These are the things that have required global manufacturing to grow. In

contrast, US, Japanese and European investment, and Japanese and European goods

consumption, have not grown much overall since 2000, so they have not required

growing factory output.

Note that Europes goods consumption and investment growth since 2001 has been near

zero. In 2012, Europe went from being a large economy not contributing to global demand

growth to being a large economy shrinking rapidly, causing a major global shock, which

was further inflamed by Europes growing current account surplus.

However, in 2013, European demand began to grow again, helping global demand and

global industrial production to snap back. Those who emphasize the low levels of

European investment or durable goods spending or sluggish growth rates in recovery misssomething important. These things do not grow much in normal times, so any period of

improvement in them, even from low levels, can help to drive above trend global growth.

In comparison, the US consumer has been a juggernaut since the early nineties, with only

2008 as an exception. Real goods spending has generally grown steadily, and recent

labor market trends do not suggest any imminent disruption. One interesting theme we will

be monitoring is whether the composition of US goods demand starts to transition from

being led by durables to being led by non-durables. A major risk is that durable goods

spending continues to slow and non-durables does not pick up the slack, leading to sub-

trend US demand.

Investment in the US has been more volatile and has contributed much less to global

growth than consumer spending since 2001. Our input-output table adjustment means that

the investment we are focusing on is mostly equipment, which involves lots of industrial

activity, rather than construction, which involves less, or software, which involves none.

We expect above trend equipment spending in the US in the second half of the year, but

do not expect a boom. Stronger investment is a major upside risk to our view.


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02 June 2014


Exhibit 8: Real Global Goods Demand (China included, y/y%)

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

OtherChinaJapanEAUSContribution to Global Goods Demand, y/y


Exhibit 9: Real Global Goods Demand Components, annualized growth ratesUS EA Japan China Other

Cons. Inv. Cons. Inv. Cons. Inv. Cons. Inv. Cons. Inv.

1980-90 3.4% 3.4% 2.4% 2.4% 3.0% 5.2% 3.6% 4.5%

1990-01 3.8% 5.4% 1.8% 2.9% 1.3% -0.6% 9.4% 23.8% 3.1% 2.9%

2001-08 3.5% 2.5% 1.1% 2.5% 0.7% 0.8% 11.5% 18.9% 4.0% 6.2%

3/08-3/09 -5.5% -19.2% -3.7% -16.4% -5.3% -13.1% 16.5% 24.1% 0.8% -13.3%

3/09-9/11 3.1% 5.7% -0.2% 1.5% 4.0% -0.7% 12.6% 15.3% 4.1% 7.6%

9/11-3/13 3.8% 3.3% -2.4% -5.4% 2.0% 1.4% 11.5% 18.7% 3.3% 1.3%

3/13-2/14 2.5% 1.9% 1.5% 5.1% 5.1% 8.2% 9.4% 13.8% 4.6% 3.1%

3/01-2/14 2.7% 1.3% 0.1% 0.0% 1.3% -0.1% 12.0% 18.2% 3.7% 4.0%


Exhibit 10: G3 Goods Consumption, rebased in 2007 Exhibit 11: G3 Investment, rebased in 2007

90

95

100

105

110

115

07 08 09 10 11 12 13

G3

US

EA

Japan

75

80

85

90

95

100

105

07 08 09 10 11 12 13

G3

US

EA

Japan

Source: Credit Suisse, Source: Credit Suisse


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02 June 2014


Chinas final demand growth has slowed in recent years, reflected in most indicators other

than the suspiciously steady headline investment and retail sales data. However, since

Chinas weight has grown so much in recent years , it can continue to be a major

contributor to global growth even if growth rates slip.

In summary, a steady US consumer, slower but still high Chinese growth, and a

recovering Eurozone economy are sufficient to support 3-4% global demand growth in the

next few years. Key upside risks could come from US and Eurozone investment, or astrong rebound in China.

In the very short term, Japan presents a negative risk. Further out, we view a slowdown in

US durable goods consumption and a sharper slowdown in China as the biggest possible

negative developments.

Inventories

Exhibit 12 below is a long term picture of global industrial production and goods

demand with China excluded. One benefit of viewing these things together is that it

allows us to estimate changes in inventories during periods when demand growth and

production growth are different. For example, in early 2008 global goods demand

slowed relative to production, leading to an inventory build, which was rapidly reversed

in late 2008, as production collapsed relative to demand. This then led to an extremely

strong bounce in production.

Exhibit 13 is our imputed measure of global inventories based on deviations of global (x-

China) production and demand. We show it against the average change in GDP

inventories for the US, Europe and Japan, and note that our monthly time series is mostly

in line with the GDP measure, but is less volatile and may lead slightly. Our imputed

measure (in red) falls below zero when production falls relative to demand. In late 2013,

however, our measure captured a mild increase in inventories.

US data, on the other hand, suggested something larger was happening. US GDP data

showed a large increase in inventory investment in the second half of last year, which was

also visible in bottom-up data for the automobile sector, non-auto retailers, and aerospace

industries. However, much of this inventory build was reversed sharply in Q1.Measured any way, inventories are difficult to estimate, especially since a larger part of

the global supply chain involves intermediate or in-transit inventories in places far from

their final markets. Our analysis here, however, suggests there was an inventory build

late last year, but it was not very large, and, in our view, it has largely been brought

under control recently.

The demand outlook, not the current inventory balance, will be the key driver for

production going from here, in our view.


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02 June 2014


Exhibit 12: Global x-China Industrial Production vs. Goods Demand

Log Levels

4.5

4.6

4.7

4.8

4.9

5

5.1

5.2

5.3

5.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Global Industrial Production, x-China

Global Goods Demand x-China, trend-adjusted

Goods Demand = Adjusted IP Components from (C + I + G+X-M)

Exhibit 13: G3+ Inventory Change vs. Global Inventory Change Proxy

-350

-250

-150

-50

50

150

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

Global Inventory Change Proxy, x-China

G3+ GDP Inventory Change, rhs, 2005 bn USD


Lead Indicators

Cyclical indicators have begun to pick up, consistent with our view of a June momentum

trough. The May improvement in ISM New Orders, the best lead indicator for Global IP

Momentum, points to an imminent re-acceleration. At 56.9, ISM New Orders is consistent

with Global IP Momentum above 5% (Exhibit 14).

However, performance across the major regions is not synchronous at present

(Exhibit 15).

In particular, North Atlantic growth rates are elevated compared to historical trends, while

Asian growth rates are depressed. PMI new orders have turned higher in China and

Japan, albeit from very low levels. In the US and the euro area, PMI new orders are

trending lower, albeit at historically elevated levels (Exhibit 16).


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02 June 2014


Exhibit 14: ISM New Orders and Global IP Momentum

-15%

-10%

-5%

0%

5%

10%

15%

20

25

30

35

40

45

50

55

60

65

70

95 97 99 01 03 05 07 09 11 13

ISM New Orders (lhs)

Global IP Momentum (rhs, 1m lag)


Exhibit 15: G3 and China IP Momentum

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-15%

-10%

-5%

0%

5%

10%

12 13 14 15

(3m/3m % ann)

US Euro Area

Japan (rhs) China (rhs)

Forecast

Exhibit 16: PMI New Orders - North Atlantic-Asia Divide

38

42

46

50

54

58

62

09 10 11 12 13 14

US (Markit PMI) Euro Area

China (HSBC) Japan

Source: Credit Suisse, Markit


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02 June 2014


The consequence of the unusually de-synchronized regional cycles is a slow bottoming of

growth. Momentum often turns within two months in the major regions. This time, we

expect a sequence of troughs between April and August.

The sequence of troughs is also unusual with Japan and China turning first, then the

euro area, and the US last. Momentum in two of the main countries, the US and China,

is thus moving in opposite direction in the next few months. That caps the downside for

Global IP Momentum and is one of the reason for the elevated Global IP Momentumtrough at trend-growth.

The recovery of developed markets was the key driver of above-trend growth in 2013

and countered wide-spread weakness across EM. We expect a more equal contribution

of emerging and developed markets to the Global IP re-acceleration in the remainder of

2014 (Exhibit 17). However, EM growth should only recover back to its pre-crisis

average, whereas developed markets are likely to experience a longer period of above-

trend growth.

Signs of a rebound in EM are already becoming apparent in the Credit Suisse Basic

Materials Index (CSBMI)2. Emerging economies are especially sensitive to the raw

materials sectors measured by the CSBMI and this indicator has consistently tracked

emerging market IP momentum with a slight lead (Exhibit 19).

Our preliminary estimate for the May CSBMI (-0.07) rises to its long-term average of zero

from the low end of its recent years range. This suggests the worst part of economic

slowdown in developing economies is likely to be behind us, which is corroborated by

rising Asian export data.

Exhibit 17: EM and DM IP Momentum

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

(3m/3m % ann)

EM IP momentum

EM Pre-Crisis Mean

DM IP momentum

DM Pre-Crisis Mean


2The CSBMI is a monthly index constructed to summarize variation among 25 cyclically sensitive market indicators covering thebasic material sectors including chemicals, energy, materials, paper & packaging, and transportation & shipping. The CSBMIallows timely inference from high frequency market data without reliance on lagged economic data releases.
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02 June 2014


Exhibit 18: CSBMI (last six months and the prior year)

May 14* Apr14 Mar14 Feb14 Jan14 Dec13 May13

CSBMI -0.07 0.01 -0.13 -0.88 -1.05 0.20 0.13

CSBMI 3m ma -0.06 -0.33 -0.68 -0.57 -0.33 0.22 -0.42

Source: Credit Suisse *Preliminary estimate

Exhibit 19: CSBMI and Emerging Market IP Momentum

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-6

-5

-4

-3

-2

-1

0

1

2

3

01 02 03 04 05 06 07 08 09 10 11 12 13 14

CSBMI 3mma

EM IP Momentum, rhs


Regional Developments

US IP: At the beginning of the year, we expected US IP to decelerate gradually from Q4

before picking up again in the second half of the year. However, the bounce-back from an

unseasonably cold winter has set us up for a large, swift, and quite technical momentum

cycle. We now see momentum in the US peaking near 6% in April. And from here we

expect a July trough before reaccelerating back towards 6% in the beginning of Q4.

While production growth should slow sequentially from its Feb-March strength, we expectthe deceleration will be short-lived. Markit PMI new orders, regional PMIs and auto

manufacturer production schedules are all pointing in the right direction, and we expect the

greatest strength to be concentrated in Q3. This should be supported by robust goods

demand. We expect steady trends in consumption to hold up, and both residential and

business investment should accelerate later this year. The risk of extreme weather from an

El Nio event this summer adds additional upside potential from utilities production.

Earlier in the year, excessive inventories (especially in autos) appeared to be a large

headwind towards US production (Exhibit 23). However, data revisions as well as some

genuine destocking have improved the outlook for inventories, allowing strong demand to

feed through directly into production growth.

The biggest risk to our view from here is the potential for disappointing business

equipment investment. Survey data last year suggested 2014 would finally see significantcontributions from this category, but so far this hasnt been confirmed in the hard data. If

this investment fails to materialize, it would mute the acceleration in US momentum later in

the year.


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02 June 2014


Exhibit 20: US IP Momentum and PMI New Orders Exhibit 21: US Motor Vehicle Production Schedules

-22%

-17%

-12%

-7%

-2%

3%

8%

13%

25

30

35

40

45

50

55

60

65

05 06 07 08 09 10 11 12 13 14 15

Markit PMI New Orders (1m lead)

IP 3m/3m% ann.(rhs)

10.0

10.2

10.4

10.6

10.8

11.0

11.2

11.4

11.6

11.8 projection(In millions)

Source: Credit Suisse, Thomson Reuters Datastream, Federal Reserve, Wards

Exhibit 22: Capital Goods Orders and Investment Exhibit 23: Retail Inventory-Sales Ratio

350

450

550

650

750

850

950

30

35

40

45

50

55

60

65

70

92 94 96 98 00 02 04 06 08 10 12 14

Core Capital Goods Orders

Equipment Investment (RHS)

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

95 97 99 01 03 05 07 09 11 13

Autos

ex Autos

Exhibit 24: Labour Income remains on Trend Exhibit 25: Retail Sales Resilience

4800

5000

5200

5400

5600

5800

6000

6200

2006 2007 2008 2009 2010 2011 2012 2013 2014

Wage and SalaryPayrolls4.6% Trend

5.75

5.80

5.85

5.90

5.95

6.00

6.05

6.10

00 04 08 12

US Real Retail Sales

(log level)



13/24


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02 June 2014


Exhibit 26: PMI New Orders show stabilizationExhibit 27: confirmed by broad range of activityproxies

35

40

45

50

55

60

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

China IP Momentum, estimate from y/y data,seasonally adjusted, 3m/3m ann.

HSBC PMI New Orders (rhs)

Source: Credit Suisse,

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Jan-08 Jan-10 Jan-12 Jan-14

China IP Indicator, PCA

HSBC PMI New Orders

CSBMI, 2m lead

IP Momentum, derived from official Y/Y

Exhibit 28: Policy bias has turned Exhibit 29: Less tightening in mortgage lending

-20%

-10%

0%

10%

20%

30%

40%

50%60%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13

China IP Momentum (3m/3m% ann.)

Real Loan Growth Momentum, RHS

10.2

10.4

10.6

10.8

11

11.2

11.4

11.6

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Quarterly Growth Rate of Mortgage Loan Stock,SAResidential Building Floor Space Sold, SA log,rhs

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse

Exhibit 30: Investment growth remains stable Exhibit 31: Other Asian exports signal acceleration

-5%

5%

15%

25%

35%

45%

55%

08 09 10 11 12 13 14

Infrastrucuture Investment: Utilities +Transportation (13% )Real Estate Investment (20%)

Manufacturing Sector Investment(32%)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

07 09 11 13

3m/3m ann.%

Taiwan

Korea

China (trade partner data)



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02 June 2014


Euro area IP:Momentum has been decelerating since the beginning of the year, and we

expect it to reach a trough of -1% in June. The global slowdown put a drag on European

exports with domestic demand only partially offsetting this. However, lean inventories and

stronger goods demand should lead the acceleration of Euro area IP in the second half of

the year.

Higher disposable income, less tight credit conditions and lower uncertainty are finally

setting the stage for a pickup in durable goods consumption. Car sales are 12% up fromthe bottom, but are still close to 50% below their pre-crisis levels in the periphery

(Exhibit 35). The improving macro environment, depressed levels of car sales and

stretched car life expectancy create a much more positive mix for demand. Consumer and

retail confidence indicators are pointing to an acceleration in retail sales.

On the investment front, the outlook is more mixed in the short-run. Boosted by

frontloaded transport equipment investment in the end of last year (due to changes in

emission regulations), euro area fixed investment has started 2014 on a weaker footing.

However, the pull-back is likely to be temporary. Investment intentions are at multi-year

highs, while the demand for credit has shown a sharp rise in the most recent surveys.

These trends suggest to us that Euro area IP momentum will accelerate above 5%

towards the end of the year. The inventory cycle represents an upside risk to our forecast.

No significant restocking has taken place in this recovery, a combination of limited accessto financing and high economic uncertainty. The completion of the ECBs AQR and

potential measures from the ECB to increase lending to corporates could provide

companies with the much needed inventory financing, and provide an additional boost to

Euro area production.


16/24

02 June 2014


Exhibit 32: Euro area IP Momentum is in the finalstage of slowdown

Exhibit 33: Very lean inventories should supportoutput although financing remains a constraint

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25

30

35

40

45

50

55

60

65

70

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

PMI - new orders,1m lead

IP 3m/3m% ann.(rhs)

-5

0

5

10

15

20

25

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Stocks of finishedproducts

Long-term avg

Exhibit 34: Consumer sentiment points to strongerretail spending

Exhibit 35: Car sales still have ample scope torecover

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-36

-31

-26

-21

-16

-11

-6

-1

95 97 99 01 03 05 07 09 11 13

Euro Area ConsumerConfidence

Euro Area Retail Sales (yoy%,

3mma, rhs)

30

40

50

60

70

80

90

100

110

120

06 07 08 09 10 11 12 13 14

Euro area

Italy

Germany

Spain

France

Exhibit 36: Investment should continue to rebounddespite a likely near-term pull-back

Exhibit 37: Stronger domestic demand recently hascountered persistent export weakness

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

25

30

35

40

45

50

55

60

65

98 00 02 04 06 08 10 12 14

EA PMI NewOrdersGFCF qoq% ann(rhs)

6.8

6.85

6.9

6.957

7.05

7.1

7.15

7.2

7.25

7.3

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Exports

Imports



17/24

02 June 2014


Japan IP: Japan has bucked the global slowdown in Q1 due to strong domestic demand

in the run-up to the consumption tax hike, but is now confronting a double-shock. The

severe drag on demand from the consumption tax hike is being exacerbated by the final

leg of the global momentum slowdown.

We expect Japanese IP Momentum to slow about 20pp in merely three months, an

extreme drop even for the standards of very volatile Japanese output. The recent bounce

in PMI New Orders in May, however, suggests that momentum is approaching its troughand could start rebounding from extremely depressed levels in Q3.

Base effects will cause a sharp bounce-back in momentum. However, weak domestic

demand, especially consumption, leaves downside risks for IP growth during the

remainder of the year, making Japan dependent on external demand dynamics. The

recent pickup in exports suggests that stronger external demand will probably counter

some of the domestic demand weakness.

Exhibit 38: PMI New Orders suggest sharpslowdown is coming to an end

Exhibit 39: High-Frequency Indicators show severedemand drag after cons tax hike with little rebound

-65%

-45%

-25%

-5%

15%

35%

20

30

40

50

60

70

08 09 10 11 12 13 14

PMI - New Orders (lhs)

IP 3m/3m% ann. (rhs)

1m lag

-60%

-40%

-20%

0%

20%

40%

Sep 13 Nov 13 Jan 14 Mar 14 May 1

Department store sales

Supermarket store sales

Electronics retail store sales formajor 5 items

Exhibit 40: Investment has bounced ahead of theconsumption tax hike

Exhibit 41: Japanese exports rebounded in April, asimports collapsed

600

650

700

750

800

850

900

950

1000

1050

1100

06 07 08 09 10 11 12 13 14

Core machinery orders

3 per. Mov. Avg. (Coremachinery orders)

8.2

8.3

8.4

8.5

8.6

8.7

8.8

8.9

9

07 08 09 10 11 12 13 14

Goods exports

Goods imports

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream


18/24

02 June 2014


Market Implications

We have written recently that there are four requirements for the market to price for a

significantly more hawkish Fed path. Those requirements are:

1.Higher inflation(particularly core inflation in the US rising near 2%).

2. Rising global industrial production momentum

3. Ongoing strength in credit markets

4.Further progress towards US full employment(unemployment rate below 6%)

Very soon, the first three of these will be in place, in our view. However, even if jobs

growth is strong in the next few months, it will likely take months before the US

unemployment rate is below 6%. Rising momentum alone is not enough to spark fears that

the Fed is behind the curve.

Many investors have been puzzled by the declines in US yields in recent months.

However, the rally in duration since the beginning of the year has occurred alongside

falling global growth momentum, as is often the case. Low inflation, dovish policy

statements and the pricing in of ECB cuts all have helped to reinforce the move lower

in yields.

Now that our duration risk appetite measure is nearing euphoria, inflation is troughing,

momentum is turning and the ECB may be about to complete the last major North Atlantic

policy ease of a cycle that goes back to 2007/8, we think it is time for the first stage of a

reversal. Our rates strategist, Carl Lantz, agrees that US duration has become rich and is

likely to reverse soon.

Recently, risky assets have begun to hint at this rebound. Emerging market assets have

been outperforming, perhaps driven by the early momentum rebound in place already

there. We think European and US numbers will be improving as well soon, and the EM

rebound will turn out to be a precursor to a more general pro-growth environment.

Rising momentum will be good for risk appetite as long as the move in yields is contained.

The equity and credit markets can likely easily handle the US 10-year yield returning to

3%. The risk, we believe, is that the US labor data, including wages, pick up sooner thanwe think, sparking a rebellion from the Fed's guidance that sends short term rates much

higher. That would have the potential to usher in a far more difficult environment.

Exhibit 42: Global Risk Appetite and Global IP Momentum

-10

-8

-6

-4-2

0

2

4

6

8

-25%

-20%

-15%

-10%-5%

0%

5%

10%

15%

20%

Jan 00 Jan 04 Jan 08 Jan 12

Global IP Momentum (3m/3m ann.%)

Global Risk Appetite, rhs

https://plus.credit-suisse.com/r/dkFRVvhttps://plus.credit-suisse.com/r/dkFRVvhttps://plus.credit-suisse.com/r/dkFRVvhttps://plus.credit-suisse.com/r/dKgo8Dhttps://plus.credit-suisse.com/r/dKgo8Dhttps://plus.credit-suisse.com/r/dKgo8Dhttps://plus.credit-suisse.com/r/dKgo8Dhttps://plus.credit-suisse.com/r/dkFRVv


19/24

02 June 2014


Appendix: Global IP and GDP Forecast Update

Exhibit 43: Global Industrial Production - latest data and current estimates

Global Americas Asia Europe

m/m 3m/3m ann. y/y m/m y/y m/m y/y m/m y/y

Feb-14 0.3% 4.1% 4.3% 0.9% 2.9% -0.2% 6.6% 0.4% 2.3%

Mar-14 0.4% 4.3% 4.2% 0.6% 3.0% 0.7% 6.8% -0.3% 1.4%

Apr-14 -0.1% 3.4% 3.8% -0.4% 2.4% -0.2% 6.3% 0.3% 1.4%

May-14 0.3% 3.0% 4.0% 0.3% 2.9% 0.5% 6.0% -0.2% 1.8%

Jun-14 0.5% 2.3% 4.1% 0.1% 2.4% 1.0% 7.2% 0.1% 1.2%

Jul-14 0.7% 3.5% 4.3% 0.4% 3.1% 0.9% 6.7% 0.6% 1.8%

Aug-14 0.5% 4.9% 4.5% 0.5% 3.2% 0.6% 6.8% 0.2% 2.2%

Sep-14 0.6% 6.4% 4.5% 0.3% 2.8% 0.8% 6.9% 0.4% 2.5%



20/24

02June2014

GlobalCycleNotes

20

Credit Suisse Global Economics Forecasts2014E 2015E 4Q to 4Q Annual Average

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 12 13E 14E 15E 12 13 14E 15E

Global Real GDP (y/y) 3.2 3.2 3.2 3.3 3.8 3.9 3.9 3.9 2.8 3.3 3.3 3.9 3.1 2.9 3.2 3.8

IP (y/y) 3.8 3.9 4.0 4.2 4.2 4.6 4.5 4.4 2.3 3.7 4.2 4.4 2.8 2.8 4.0 4.4

Inflation (y/y) 2.9 3.4 3.4 3.6 3.6 3.4 3.4 3.4 2.9 3.0 3.6 3.4 3.3 3.0 3.4 3.4

US Real GDP (q/q ann) -1.0 4.0 2.9 2.9 3.0 3.0 3.0 3.0 2.0 2.6 2.2 3.0 2.8 1.9 2.2 3.0

Inflation (y/y) 1.4 1.9 1.8 2.0 2.1 2.0 2.0 2.1 1.9 1.2 2.0 2.1 2.1 1.5 1.8 2.0

Policy rate (eop) 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0.50 ... ... ... ... ...

10yr bond yield 2.72 3.00 3.30 3.65 3.75 3.75 ... ... ... ... ... ...

Japan Real GDP (q/q ann) 5.9 -4.3 2.0 1.6 2.3 -1.3 1.3 -1.2 -0.3 2.5 1.2 0.3 1.4 1.6 1.4 0.7

Inflation ex. fresh food (y/y) 1.3 3.1 2.6 2.3 2.1 0.5 0.5 1.7 -0.1 1.1 2.3 1.7 -0.1 0.4 2.3 1.2Policy rate (eop) 0-0.1 0-0.1 0-0.1 0-0.1 0-0.1 0-0.1 0-0.1 0-0.1 ... ... ... ... ...

10yr bond yield 0.60 0.75 0.80 0.85 ... ... ... ... ... ... ...

USDJPY (eop) 102.72 102.96 107.56 112.22 120.00 ... ... ... ... ... ...

Euro Area Real GDP (q/q ann) 0.8 1.4 2.1 2.1 2.3 2.3 2.3 2.3 -1.0 0.5 1.6 2.3 -0.6 -0.4 1.2 2.2

Inflation (y/y) 0.7 0.6 0.5 0.9 1.0 1.2 1.2 1.2 2.2 0.8 0.9 1.2 2.5 1.4 0.7 1.2

Policy rate (eop) 0.25 0.15 0.15 0.15 0.15 0.15 0.15 0.15 ... ... ... ... ... ...

10yr bund yield 1.59 1.85 1.95 2.10 ... ... ... ... ... ... ... ... ... ... ... ...

EURUSD (eop) 1.36 1.37 1.36 1.34 1.32 ... ... ... ... ... ... ... ... ... ... ...

UK Real GDP (q/q ann) 2.9 3.0 3.1 2.8 2.5 2.2 2.2 2.2 0.2 2.7 2.9 2.3 0.3 1.8 3.0 2.5

Inflation (y/y) 1.7 1.9 1.8 2.1 2.5 2.6 2.6 2.5 2.7 2.1 2.1 2.5 2.8 2.6 1.9 2.6

Policy rate (eop) 0.50 0.50 0.50 0.50 0.75 0.75 1.00 1.00 ... ... ... ... ... ... ... ...

10yr bond yield 2.72 2.95 3.05 3.15 ... ... ... ... ... ... ... ... ... ... ... ...

GBPUSD (eop) 1.65 1.70 1.73 1.74 1.76 ... ... ... ... ... ... ... ... ... ... ...

Switzerland Real GDP (q/q ann) 2.0 2.3 2.8 3.0 1.4 1.3 1.3 0.6 1.6 1.7 2.5 1.1 1.0 2.0 2.0 1.8

Inflation (y/y) 0.3 0.1 0.1 0.4 0.9 0.8 0.9 1.0 -0.3 0.3 0.4 1.0 -0.7 -0.2 0.2 1.0

Policy rate (eop) 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 ... ... ... ... ... ... ... ...

USDCHF (eop) 0.90 0.90 0.91 0.91 0.92 ... ... ... ... ... ... ... ... ... ... ...NJA Real GDP (y/y) 6.3 6.2 6.2 6.2 6.6 6.8 6.9 7.0 6.7 6.3 6.2 7.0 6.1 6.1 6.1 6.7

Inflation (y/y) 3.2 4.2 4.1 4.5 4.4 4.4 4.3 4.3 3.3 3.9 4.5 4.3 4.2 4.1 4.1 4.1

China Real GDP (y/y) 7.4 7.1 7.0 7.0 7.8 7.9 7.9 7.9 7.9 7.7 7.0 7.9 7.7 7.7 7.1 7.9

IP (y/y) 8.7 9.1 9.4 9.4 9.4 9.4 9.5 9.5 10.0 10.0 9.4 9.5 10.1 9.7 10.0 10.3

Inflation (y/y) 2.3 3.1 2.9 3.5 3.5 3.6 3.5 3.6 2.1 2.9 3.5 3.6 2.6 2.6 3.0 3.5

India*** Real GDP (y/y) 5.4 5.7 6.3 6.2 5.6 5.9 6.1 6.8 4.7 4.7 6.2 6.8 4.6 4.8 6.0 6.3

EMEA Real GDP (y/y) 2.1 1.6 1.8 1.6 2.6 3.1 3.3 3.6 1.3 2.2 1.6 3.6 2.9 2.2 1.6 2.9

Inflation (y/y) 5.0 5.6 5.3 5.5 5.3 4.9 5.0 5.1 5.2 4.9 5.5 5.1 4.8 4.7 5.1 4.6

Latin America Real GDP (y/y) 1.5 2.0 2.4 2.8 3.1 3.1 3.1 2.9 2.9 2.1 2.8 2.9 2.8 2.4 2.2 3.3

Inflation (y/y) 9.4 9.5 9.9 10.1 10.0 9.6 9.4 9.1 6.1 8.4 10.1 9.1 6.2 7.5 9.9 9.5

Note: IMF PPP wei ghts are used to compute regional and global aggregate figures; 10yr bond yield figures are averages for the last month of each quarter ; * End of period. ** CPI ex. Fr esh food; *** Annual figures for India are on fiscal year basis.Source: Credit Suisse


21/24

GLOBAL FIXED INCOME AND ECONOMICS RESEARCH

Ric DeverellGlobal Head of Fixed Income and Economics Research

+1 212 538 [email protected]

GLOBAL ECONOMICS AND STRATEGY

James Sweeney, Chief EconomistCo-Head of Global Economics and Strategy


Neville HillCo-Head of Global Economics and Strategy


GLOBAL STRATEGY AND ECONOMICS

Matthias Klein+44 207 883 [email protected]

Wenzhe Zhao+1 212 325 [email protected]

Yiagos Alexopoulos+44 20 7888 [email protected]

Axel Lang+1 212 538 [email protected]

Jeremy Schwartz+1 212 538 6419

[email protected]

US ECONOMICS

James SweeneyHead of US Economics


Jay Feldman


Dana Saporta


Xiao Cui


LATIN AMERICA (LATAM) ECONOMICS

Alonso CerveraHead of Latam Economics+52 55 5283 3845

[email protected], Chile

Casey Reckman+1 212 325 5570

[email protected], Venezuela

Daniel Chodos+1 212 325 7708

[email protected] Strategy

Juan Lorenzo Maldonado+1 212 325 4245

[email protected], Peru

Di Fu+1 212 538 4125

[email protected]

BRAZIL ECONOMICS

Nilson TeixeiraHead of Brazil Economics


Daniel Lavarda


Iana Ferrao


Leonardo Fonseca


Paulo Coutinho

+55 11 [email protected]

EURO AREA / UK ECONOMICSNeville HillHead of European Economics


Christel Aranda-Hassel


Giovanni Zanni


Violante di Canossa


Steven Bryce+44 20 7883 [email protected]

Mirco Bulega+44 20 7883 [email protected]

EASTERN EUROPE, MIDDLE EAST AND AFRICA (EEMEA)ECONOMICS

Berna Bayazitoglu

Head of EEMEA Economics+44 20 7883 [email protected]

Turkey

Sergei Voloboev+44 20 7888 [email protected]

Russia, Ukraine, Kazakhstan

Carlos Teixeira+27 11 012 [email protected]

South Africa

Gergely Hudecz+33 1 7039 [email protected]

Czech Republic, Hungary, Poland

Alexey Pogorelov+7 495 967 [email protected], Ukraine, Kazakhstan

Nimrod Mevorach+44 20 7888 [email protected] Strategy, Israel

JAPAN ECONOMICS NON-JAPAN ASIA (NJA) ECONOMICS

Hiromichi Shirakawa

Head of Japan Economics+81 3 4550 [email protected]

Takashi Shiono

+81 3 4550 7189

[email protected]

Dong Tao

Head of NJA Economics+852 2101 [email protected]

China

Robert Prior-Wandesforde+65 6212 [email protected]

Regional, India, Indonesia, Australia

Christiaan Tuntono+852 2101 [email protected]

Hong Kong, Korea, Taiwan

Dr. Santitarn Sathirathai+65 6212 5675

[email protected], Indonesia, Malaysia, Thailand

Michael Wan+65 6212 3418

[email protected], Philippines

Weishen Deng+852 2101 7162

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


22/24

Disclosure Appendix

Analyst CertificationJames Sweeney, Matthias Klein, Wenzhe Zhao, Yiagos Alexopoulos and Jeremy Schwartz each certify, with respect to the companies or securitiesthat the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companiesand securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or viewsexpressed in this report.

Important DisclosuresCredit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, pleaserefer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html .Credit Suisse's policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the marketthat may have a material impact on the research views or opinions stated herein.The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse'stotal revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions.Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report.

At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report.As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in thisreport.For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625.For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendationsprovided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en .Credit Suisse clients with access to the Locus website may refer to http://www.credit-suisse.com/locusFor the history of recommendations provided by Technical Analysis, please visit the website atwww.credit-suisse.com/techanalysis .Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannotbe used, by any taxpayer for the purposes of avoiding any penalties.

Emerging Markets Bond Recommendation DefinitionsBuy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate.Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.

Corporate Bond Fundamental Recommendation DefinitionsBuy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector.Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles andare undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return

basis. These bonds may possess price risk in a volatile environment.Market Perform: Indicates a bond that is expected to return average performance in its sector.Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, orthey may be stable credits that, we believe, are overvalued or rich relative to the sector.Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector.Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, includingan investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain othercircumstances.Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer aninvestment view on the subject issue.Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment viewon the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is areasonable, non-material deduction based on an analysis of publicly available information.
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23/24

Corporate Bond Risk Category DefinitionsIn addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yieldinvestor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative, and Conservative, respectively.

Credit Suisse Credit Rating DefinitionsCredit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company'screditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our

assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed witha scale of High, Mid, or Low with High being the strongest sub -category rating: High AAA, Mid AAA, Low AAA - obligor's capacity to meet itsfinancial commitments is extremely strong; High AA, Mid AA, Low AA obligor's capacity to meet its financial commitments is very strong; High A,Mid A, Low A obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB obligor's capacity to meet itsfinancial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meetits obligations; High BB, Mid BB, Low BB obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B,Low B obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financialcircumstances; High CCC, Mid CCC, Low CCC obligor's capacity to meet its financial commitments is extremely weak and is dependent onfavorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the ratingagencies.


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal canbe eroded due to changes in redemption amounts. Care is required when investing in such instruments.When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as aseller, you will be requested to pay the purchase price only.
https://www.credit-suisse.com/who_we_are/en/https://www.credit-suisse.com/who_we_are/en/https://www.credit-suisse.com/who_we_are/en/https://www.credit-suisse.com/who_we_are/en/

global cycle notes - fixed income. credit suisse. june 02, 2014

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