National Bank of Greece S A : Global Economy & Markets, Weekly Roundup 29/09/20

Global Markets Roundup

National Bank of Greece | Economic Research Division | September 29, 2020

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Democrats have unveiled a $2.2tn pandemic relief bill, as additional fiscal thrust is crucial in supporting the fragile US economic recovery

• The probability for a 5th pandemic-related relief US fiscal package is still below 50%, with political tensions increasing as we move closer -- get ready for the start of the debate season tonight-- to November's Presidential elections. The gap between the two parties on how to support the economy remains sizeable, albeit narrowing. Democrats' current standpoint is $2.2 trillion (10% of
  US GDP) from $3.4 trillion initially, whereas comments from President Trump and the White House Chief of Staff Meadows suggest that the Republicans may support a package totaling $1.3 to $1.5 trillion (6% to 7% of GDP) from $1 trillion. In that context, the prospect of significantly more stimulus to come after the November elections appears more likely, albeit negotiations in the US legislature continue at the time of writing.
• Recall that the four coronavirus relief fiscal packages (total: $3 trillion) enacted so far have been pivotal in stemming the adverse economic effects from the pandemic and supporting the expected GDP recovery in H2:2020. According to the Congressional Budget Office (CBO), the insofar enacted pandemic-related legislation had a positive effect on the level of real GDP in Q2 of 5 pps. As a result, real GDP would have contracted by circa 45% qoq saar (-14% yoy), instead of an actual outcome of -32% qoq saar (-9% yoy). For Q3, the positive effect is estimated at about 8 pps, with real GDP expectations at +32% qoq saar (-3.2% yoy), according to the Federal Reserve Bank of Atlanta's GDPNow forecasting model. Overall, CBO estimates that the already enacted fiscal measures will increase the level of real GDP by 4.7% in 2020, mitigating an extraordinary recession. Note that consensus analysts expect 2020 real GDP growth of -4.4% (NBG estimates: -4.1%).
• Looking forward, elevated household savings could continue to gradually feed through to higher private consumption (70% of US GDP) lessening the absence of new fiscal measures. Indeed, households' savings ratio (i.e. income minus outlays and taxes, as % of disposable personal income) remains particularly high (at 17.8% in July versus a 30-year average of 6.9%). Note that August data are due on October 1st with consensus expecting a still elevated ratio of 12%-14% on the back of consumer spending being deferred during the lockdown period (from late March to early May), alongside the massive government support (in form of, inter alia, direct checks to households and additional unemployment benefits). However, there is elevated uncertainty regarding the pace of re- directing these savings towards consumption, especially in the current, exceptional circumstances. All told, further fiscal stimulus appears an important prerequisite for the US economy to sustain its recent strong momentum in the short term with consensus expecting real GDP growth of +3.8% in 2021 (NBG estimates: +3.7%).
• Nevertheless, the insofar stimulus is projected by the CBO to add $2.3 tn to the federal budget deficit in fiscal year 2020 (11% of GDP) and $0.6 tn in 2021 (3% of GDP). As a result, CBO estimates that the federal government deficit will increase to 16% of GDP in fiscal year 2020 (i.e. from October 2019 to September 2020), the largest since 1945, followed by also extraordinary deficits of 8.6% and 6.1% in fiscal years 2021 and 2022, respectively (see graph below). As a result, according to the CBO, the federal debt will reach a record 106% of GDP by fiscal year 2022. At the general government level (including the debt of state and local governments), (cont'd on page 2)

Ilias TsirigotakisAC

Head of Global

Markets Research

210-3341517 [e-mail]

Panagiotis Bakalis

210-3341545 [e-mail]

Vasiliki Karagianni

[e-mail]

Leonidas Patsios

210-3341553 [e-mail]

Table of Contents

Overview_p1

Economics & Markets_p2,3

Forecasts & Outlook_p4

Event Calendar_p5

Markets Monitor_p6

ChartRoom_p7,8

Market Valuation_p9,10

Charts of the week

US Federal Debt Held by the Public (as % of GDP)

%						Federal Debt Held by the Public			%
120													CBO			120
110													Projections	110
100																100
90																90
80																80
70																70
60																60
50																50
40																40
30																30
20																20
10																10
0																0
1940	1945	1950	1955	1960	1965	1970	1975	1980	1985	1990	1995	2000	2005	2010	2015	2020

Source: NBG Research, CBO

US Revenues, Spending and Surpluses/ Deficits (as % of GDP)

%		Surpluses/ Deficits	Revenues	Spending	%
40					CBO		40
35					Projections		35
30							30
25							25
20							20
15							15
10							10
5							5
0							0
-5							-5
-10							-10
-15							-15
-20	1995		2005	2010		2020	-20
1990	2000	2015

Source: NBG Research, CBO

See page 11 for disclosures and analyst certification

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NBG Global Markets Roundup | Economics & Markets Section

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• debt will reach 143% of GDP in 2022 according to the International Monetary Fund (2020 Article IV Consultation, August 2020). Debt dynamics over the long-run are also bleak. CBO estimates that under current legislation, the federal debt will sky- rocket to 195% of GDP by 2050 with a a sharp rise in interest expenses (from 1.6% of GDP in fiscal year 2020 to 8.1% in fiscal year 2050).

Euro area PMIs suggest that the improvement for overall business activity stalled in September

• Euro area PMIs decreased considerably for a 2nd consecutive month in September (at the composite level), coming out meaningfully below consensus estimates. Indeed, the composite index declined to 50.1, from 51.9 in August and 54.9 in July, below expectations for an unchanged outcome. The ongoing deterioration of Covid-19epidemiological data and the subsequent renewed social distancing measures weigh on the services sector, with the respective PMI returning to levels below the expansion/contraction threshold of 50.0, to 47.6 (consensus: 50.6) from 50.5 in August and versus a peak of 54.7 in July. The aforementioned decrease, more than offset a rise in the manufacturing PMI, by 2.0 pts to 53.7 (not a broad-basedone though country-wise,as it was heavily concentrated in Germany | see below), versus consensus estimates for 51.9. Notably, panelists reported that prices charged for goods and services (on average) fell for a 7th consecutive month in September and at the steepest rate since June 2020, as they increasingly resorted to discounts in order to support sales. On the other hand, survey participants reported higher input costs for a 4th consecutive month in September, mainly due to higher virus protection costs. These developments suggest a significant narrowing of firms' profit margins (the most profound since December 2018 according to Markit). Note also that the employment component continues to lag (below the expansion/contraction threshold for a 7th consecutive month), as firms appear reluctant to increase staffing levels in view of elevated uncertainty regarding the path of the pandemic and the economic recovery. Meanwhile, consumer confidence was modestly changed (+0.8 pts) to -13.9in September, remaining below an average of -11.6since 2001 (consensus for a stable outcome).
• Regarding PMI performance by country, Germany overperformed France and the rest of the euro area (below the expansion/contraction threshold of 50.0 on a country weighted basis, for a 2nd consecutive month at the composite level). Specifically, in France the composite PMI was 48.5 in September from 51.6 in August (and a 2½-yearhigh of 57.3 in July), versus expectations for 51.9. The services PMI lost significant ground, down by 4.0 pts to 47.5, while its manufacturing counterpart rose by 1.1 pt to 50.9. It should also be noted though that INSEE's (France's official statistics office) composite business climate indicator improved in September, up by 2.0 pts to 92.4 (albeit remaining below an average of 100 since 1990).
• German PMIs recorded mixed changes. Specifically, the services PMI fell by 3.4 pts to 49.1, whereas its manufacturing counterpart increased substantially, by 4.4 pts to 56.6, the highest since July 2018. Overall, the composite PMI posted a much less profound fall compared with the rest of euro area countries, by 0.7 pts to 53.7 in September, close to consensus estimates for 54.0 and remaining

well above the expansion/contraction threshold of 50.0. Meanwhile, the IFO business climate index continued to recover, rising by 0.8 pts to 93.4, albeit remaining below its average of 97.1 since 2005. In a development that bodes well for a further improvement in coming months, the expectations component (expectations for business conditions in the next six months) continued to over-perform (97.7), while the assessment of current conditions came out at 89.2. Improvement occurred in the manufacturing, trade and construction sectors, whereas a modest deterioration took place in services. It should be noted that when interpreting/comparing the findings of the aforementioned surveys, caution is warranted in the different rationale of the survey questionnaires. In the event, PMI surveys indicate whether certain aspects are increasing or decreasing (e.g. the services business activity index is based on the survey question "Is the level of business activity at your company higher, the same or lower than one month ago?"). In the IFO survey a different approach is undertaken, with participants giving their assessments of the current business situation, describing it as "good," "satisfactory," or "poor" and their expectations for the next six months, describing them as "more favorable," "unchanged," or "less favorable".

Euro area bank lending growth to corporations remained strong in August

• Robust bank lending growth remains an important supporting factor for economic activity in the euro area, with the annual pace of growth of overall private sector borrowing largely stable at +4.6% yoy in August. The two major private sector components performed as follows in August: i) loan growth to households (adjusted for sales and securitizations) was largely unchanged at +3.0% yoy; and ii) loan growth to non-financialcorporations was also broadly stable at an elevated +7.1% yoy, remaining close to an 11½-yearhigh of 7.3% yoy in May 2020. On a country-by-countrybasis, the robust outcomes were broad based. Attention now turns to the ECB's quarterly Bank Lending
  Survey (due on October 27th), as it will provide insight regarding how euro area banks' willingness to extend credit to the private sector evolves, as well as an indication for loan demand (based on banks' expectations).
  UK PMIs suggest continued recovery for business activity in September, albeit with some loss of momentum
• UK PMIs declined considerably in September, remaining though well above the expansion/contraction threshold of 50.0. Specifically, the PMI in the dominant services sector (80% of UK GDP) fell by 3.7 pts to 55.1. Stronger housing market conditions, rising demand for digital services and greater domestic tourism were cited by respondents as having a positive effect. On the other hand, pandemic related restrictions continued to weigh heavily on transport services, international travel, hospitality and consumer-facingbusinesses. Meanwhile, the manufacturing PMI decreased modestly, by 0.9 pts to 54.3. Overall, the composite PMI came out at 55.7 in September from 59.1 in August. The fact that the Covid-19lockdown in the UK was imposed relatively later and lasted longer (thus the exit from strict restrictions occurred relatively more recently) appears to have resulted in remaining pockets of pent-updemand, a development which continued to boost activity in September, as also suggested by respondents' comments.

National Bank of Greece | Economic Research Division | Global Markets Analysis

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NBG Global Markets Roundup | Economics & Markets Section

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Equities

• Global equities declined in the past week, due to concerns that the rising number of coronavirus cases and the implementation of tighter restrictive measures will have a significant impact on the global economic recovery. Overall, the MSCI ACWI ended the week down up 2.1% (-1.8%ytd), with Developed Markets (-1.7%wow | -1.3%ytd) over-performingtheir Emerging Markets peers (-4.5%wow | -5%ytd). The S&P500 ended the week down by 0.6% (+2.1% ytd), recording its 4th consecutive week with losses, for the first time since August 2019 (See Graph 1). However, on Friday, the Index rose by 1.6%, on the back of renewed optimism for COVID-19vaccine, as Johnson & Johnson's vaccine candidate entered Phase-3trials (Healthcare: +1.7% on Friday). The IT sector led the increase (2.4% on Friday), with the S5INFT index hovering circa 10% lower compared with its 2020 high. Sector wise, Energy (-8.6%wow) led the decline on account of lower oil prices (see below), followed by Banks (-6.2%wow), due to, inter alia, money laundering reports earlier in the week. Looking forward, the forthcoming US election (November 3rd), the increased probability of a pandemic second wave and the possibility that the Congress will not reach an agreement for a new stimulus package are key factors to watch. On the other side of the Atlantic, the Eurostoxx fell by 4.2% wow (-14%ytd), posting its largest weekly decline since June 12th, as the number of new coronavirus cases recorded the largest weekly increase in France, Spain and the UK. On a sectoral level, Banks (-9.6%wow | -45%ytd) led the decline.

Fixed Income

• Government bond yields declined in major advanced economies, due to investors' increased risk aversion. Specifically, the US Treasury 10-yearyield ended the week down by 3 bps at 0.65%. On the other side of the Atlantic, in the UK, the 10-yearyield was stable at 0.21%, having increased by 5 bps on Tuesday, after the Bank of England's Governor Andrew Bailey stated that negative rates are part of the Bank's toolbox and that last week's monetary policy statement did not imply anything about the possibility of using them. In Germany, the 10- year Bund yield declined by 4 bps to -0.52%.Periphery bond yield spreads over the Bund in the 10-yeartenor were broadly stable (Spain: 76 bps, Portugal: 77 bps, Greece: 154 bps) with the exception of Italy (-3bps to 139 bps), following the decrease in political uncertainty post-regionalelections. Corporate bond spreads widened in the past week. Specifically, US high yield spreads rose by 48 bps to 564 bps, while their euro area counterparts were up by 46 bps to 484 bps. In the Investment Grade spectrum, US spreads increased by 11 bps to 146 bps and Euro area spreads rose by 7 bps to119 bps.

FX and Commodities

• In foreign exchange markets, the US Dollar rose in the past week as "safe haven" demand increased, due to intensified concerns about the effects of a second wave of Covid-19 on the economic recovery. Specifically, the US Dollar increased by 2% wow against the euro to $1.162, its highest level since July 23rd and by 1.3% against the Japanese Yen to ¥105.64. On the contrary, the British Pound declined in the past week, due to i) the risks related to a no-dealBrexit; ii) the speculation about the implementation of a negative bank rate by the BoE and iii) the restrictive measures announced by the country's government that hurt the investors' sentiment. Overall, the Sterling fell by 2% against the US
  Dollar to $1.27, recording a 2-month low, while it remained stable against the euro at €/0.915. Finally, in commodities, oil prices declined in the past week due to smaller-than-expectedfall in US oil inventories and the rise in coronavirus cases that stoked concern about the pace of economic recovery and oil demand. Specifically, US oil inventories decreased by 1.6 million barrels to 494 million barrels for the week ending September 18th. Moreover, the restoration of the pre-hurricane oil production in the Gulf of Mexico and the restart of Libyan oil exports almost nine months after the blockade imposed during the civil war also contributed to the downside. Overall, Brent declined by 2.9% to $41.9/barrel (-37% ytd), and WTI by 2.1% to $40.3/barrel (-34% ytd).

Assets Class Performance since September 2nd
Topix						2.4%
Germany Gov Bond						0.5%
Japan Gov Bond						0.2%
EUR IG				-0.1%
US Gov Bond				-0.1%
JPY vs USD				-0.6%
GSCI				-0.9%
EUR HY				-1.0%
US IG				-1.1%
EUR vs USD				-1.6%
US HY				-1.7%
GSCI Energy				-1.9%
Stoxx 600				-2.1%
Copper				-2.2%
EM FX				-2.5%
US Cycl/Def				-2.6%
DXY				-2.8%
EMBI				-3.0%
GSCI Gold				-3.2%
US 60/40			-	3.9%
World Value			-4.1%
MXAPJ			-4.3%
MSCI EM			-4.4%
MSCI World			-5.0%
Russell 2000			-5.1%
World Momentum			-5.6%
World Growth			-6.0%
S&P500			-6.4%
Nasdaq		-7.8%
	-10%	-5%	0%	5%
Source: NBG Research, Bloomberg

Graph 1.

VIX During Last 5 US Elections (5-day moving average)

%					Average			Average ex 2008	Current	%
32							Election Day			32
30											30
28											28
26											26
24											24
22											22
20											20
18											18
16											16
14	-58			-46	-42-38-34-30		-22-18-14	2 0 2	6 10 14 18	22 26 30 34 38 42 46 50 54 58 62	14
-62	-54	-50	-26
10- 6- -

Source: NBG Research, Factset, Last 5 US Elections: 2000, 2004, 2008, 2012, 2016

Graph 2.

Quote of the week: "It doesn't imply anything about the possibility of us using negative instruments … We have looked hard at the question of what scope is to cut interest rates further and particularly negative interest rates.", Bank of England Governor, Andrew Bailey, September 22nd 2020.

National Bank of Greece | Economic Research Division | Global Markets Analysis

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NBG Global Markets Roundup | Economic & Markets Forecasts

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Interest Rates & Foreign Exchange Forecasts

10-Yr Gov. Bond Yield (%)	September 25th	3-month	6-month	12-month	Official Rate (%)	September 25th	3-month6-month12-month
Germany	-0,53	-0,50	-0,40	-0,30	Euro area	0,00	0,00	0,00	0,00
US	0,66	0,90	1,00	1,20	US	0,25	0,25	0,25	0,25
UK	0,19	0,30	0,35	0,43	UK	0,10	0,08	0,06	0,04
Japan	0,01	0,01	0,04	0,06	Japan	-0,10	-0,10	-0,10	-0,10
Currency	September 25th	3-month	6-month	12-month		September 25th	3-month	6-month12-month
EUR/USD	1,16	1,17	1,18	1,20	USD/JPY	106	106	105	103
EUR/GBP	0,91	0,91	0,91	0,90	GBP/USD	1,27	1,29	1,30	1,33
EUR/JPY	123	124	124	124
Forecasts at end of period

Economic Forecasts

United States	2018a	Q1:19a	Q2:19a	Q3:19a	Q4:19a	2019a	Q1:20a	Q2:20a	Q3:20f	Q4:20f	2020f
Real GDP Growth (YoY) (1)	3,0	2,3	2,0	2,1	2,3	2,2	0,3	-9,1	-3,7	-3,7	-4,1
Real GDP Growth (QoQ saar) (2)	-	2,9	1,5	2,6	2,4	-	-5,0	-31,7	29,3	2,4	-
Private Consumption	2,7	1,8	3,7	2,7	1,6	2,4	-6,9	-34,1	32,8	5,0	-4,7
Government Consumption	1,8	2,5	5,0	2,1	2,4	2,3	1,3	2,8	14,1	-9,2	2,9
Investment	5,2	2,9	-0,4	2,4	1,0	1,9	-1,4	-28,9	12,8	3,4	-4,4
Residential	-0,6	-1,7	-2,1	4,6	5,8	-1,7	19,0	-37,9	36,2	1,3	0,9
Non-residential	6,9	4,2	0,0	1,9	-0,3	2,9	-6,7	-26,0	7,6	4,0	-5,8
Inventories Contribution	0,2	0,2	-1,1	-0,1	-0,9	0,0	-1,7	-4,7	2,9	1,2	-1,1
Net Exports Contribution	-0,3	0,6	-0,9	0,0	1,9	-0,2	1,6	0,6	-1,2	-1,0	0,6
Exports	3,0	1,8	-4,5	0,8	3,4	-0,1	-9,5	-63,2	28,0	19,6	-14,9
Imports	4,1	-2,1	1,7	0,5	-7,5	1,1	-15,0	-54,0	29,3	21,3	-14,1
Inflation (3)	2,5	1,7	1,8	1,7	2,1	1,8	2,1	0,3	1,1	1,0	1,1
Euro Area	2018a	Q1:19a	Q2:19a	Q3:19a	Q4:19a	2019a	Q1:20a	Q2:20a	Q3:20f	Q4:20f	2020f
Real GDP Growth (YoY)	1,9	1,4	1,3	1,4	1,0	1,3	-3,2	-14,7	-7,9	-5,3	-7,8
Real GDP Growth (QoQ saar)	-	2,0	0,8	1,1	0,1	-	-14,1	-39,4	37,8	12,2	-
Private Consumption	1,4	2,2	0,8	1,7	0,5	1,3	-16,8	-41,0	43,5	14,8	-8,3
Government Consumption	1,2	2,2	2,0	2,5	1,0	1,8	-2,8	-10,0	12,4	4,6	-0,3
Investment	3,5	1,7	2,9	-1,1	14,0	5,0	-19,2	-52,6	54,4	17,6	-9,2
Inventories Contribution	0,1	-3,4	5,6	-5,5	1,0	-0,3	2,0	0,2	0,0	-0,4	0,2
Net Exports Contribution	0,2	3,5	-6,0	5,6	-4,1	-0,5	-1,9	-3,8	0,9	0,0	-1,6
Exports	3,6	4,2	0,0	2,9	0,5	2,5	-14,7	-56,5	47,3	17,3	-12,3
Imports	3,6	-3,0	14,1	-8,4	10,0	4,0	-12,1	-54,7	46,7	18,2	-10,1
Inflation	1,8	1,4	1,4	1,0	1,0	1,2	1,1	0,2	0,1	0,0	0,4

a: Actual, f: Forecasts, 1. Seasonally adjusted YoY growth rate, 2. Seasonally adjusted annualized QoQ growth rate, 3. Year-to-year average % change

12-Month View & Key Factors for Global Markets

	US	Euro Area	Japan	UK
	+ Massive Fiscal loosening will support the economy	+Still high equity risk premium relative to other regions	+Still aggressive QE and "yield-curve" targeting by the	+65% of FTSE100 revenues from abroad
	but wont avoid a recession	+ Modest fiscal loosening in 2020 excluding Germany	BoJ	+Undemanding valuations in relative terms
	- 2020 EPS growth expectations have further room to	(5% of GDP)	- Signs of policy fatigue regarding structural reforms
	fall from +2%. Earnings will contract in 2020	- 2020-2021 EPS estimates may turn pessimistic as	and fiscal discipline	- Elevated Policy uncertainty to remain due to the
Markets	- Forget aggresive share buybacks for now due to	economic growth fails to pick up	- Strong appetite for foreign assets	outcome of the Brexit negotiating process
political pressures	- Political uncertainty (Italy, Brexit) could intensify	- JPY appreciation in a risk-off scenario could hurt
	- Peaking profit margins		exporters
Equity	- Protectionism and trade wars
despite P/E contraction of more than 20% since
	- P/Es (Valuations) are in line with long-term averages
	February highs (19x)
	Neutral/Positive	Neutral	Neutral	Neutral/Negative
	+Valuations appear rich with term-premium below 0%	+Valuations appear excessive compared with long-term	+Sizeable fiscal deficits	+Elevated Policy uncertainty to remain due to the
	+Sizeable fiscal deficit	fundamentals	+Restructuring efforts to be financed by fiscal policy	outcome of the Brexit negotiating process
Bonds	+Underlying inflation pressures if Fed seek makeup	- Political Risks	measures	+Inflation expectations could drift higher ahead of
strategies	- Fragile growth outlook	- Safe haven demand	EU/UK negotiations
Government	- Global search for yield by non-US investors continues	- Medium-term inflation expectations remain low	- Extremely dovish central bank	-The BoE is expected to remain on hold with risks
- Safe haven demand	- ECB QE net purchases	- Yield-targeting of 10-Year JGB at around 0%	towards rate cuts
	- Fed to remain at ZLB in the course of 2020-2021	- ECB QE "stock" effect		- Slowing economic growth post-Brexit
	- Fed: Unlimited QE purchases
	Slightly higher yields expected	Higher yields expected	Stable yields expected	Higher yields expected but with Brexit risk premia
	working on both directions
	+Safe-haven demand	+Reduced short-term tail risks	+Safe haven demand	+Transitions phase negotiations
	- Fed's interest rate differential disappeared following	+Higher core bond yields	+More balanced economic growth recovery (long-	+Valuations appear undemanding with REER 6% below
Exchange	cuts to 0%-0.25%	+Current account surplus	term)	its 15-year average
	- Sluggish growth	+Inflation is bottoming out	- Sizeable Current account deficit
		- Deflation concerns	- Additional Quantitative Easing by the Bank of Japan if	- Elevated Policy uncertainty to remain due to the
Foreign		- The ECB's monetary policy to remain extra loose	inflation does not approach 2%	outcome of the Referendum and the negotiating
	(Targeted-LTROs, ABSs, Quantitative Easing)		process
	Broadly Flat EUR against the USD with high	Broadly Flat EUR against the USD with high	Slightly higher JPY	Higher GBP expected but with Brexit risk premia
	volatility around $1.20	volatility around $1.20	working on both directions

National Bank of Greece | Economic Research Division | Global Markets Analysis

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