Economics Research The UniCredit Weekly Focus

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26 September 2013 Economics & FI/FX ResearchWeekly FocusThis cautious optimism is due to the fact that most of the current net tightening of credit standardsis explained by factors directly influenced by economic developments – namely, banks’expectations regarding general economic activity and industry-specific outlook. Both factorscan be expected to improve in an environment of gradual economic recovery, thereby inducing amore favorable risk assessment by banks, which would in turn lead to less tight creditstandards (and potentially also an outright easing). The strong correlation between thechange in credit standards induced by economic developments and a timely gauge of economicactivity like the Composite PMI supports this assumption (see chart 13).In any case, one should not forget that it is the second derivative of credit standards – i.e. thechange in the net easing/net tightening – which matters most for sequential capex growth.Given that the pace of net tightening started to slow in 2H12 on the back of the positive OMTramifications (see chart 14), lending constraints on investment have already been slowlydiminishing for some time. We think a further, more visible improvement will materialize in thenext few quarters, possibly also helped by another long-term liquidity injection by the ECB.CHART 13: BANKS’ RISK AVERSION SET TO EASECHART 14: TIGHTENING OF CREDIT STANDARDS IS SLOWING80Factors affecting credit standards -economic and sector specific outlook (%) - LSComposite PMI - RS (inv.)3570Credit standards for loans to NFCs - net balance (%)70604060505040302010455055403020100-10600-10-204Q02 2Q04 4Q05 2Q07 4Q08 2Q10 4Q11 2Q1365-204Q02 2Q04 4Q05 2Q07 4Q08 2Q10 4Q11 2Q13Source: ECB, Markit, Thomson Datastream, UniCredit ResearchHaving said that, we emphasize that banks’ risk aversion is not the only factor which currentlyrestrains the supply of loans: a capital shortfall also plays an important role. The upcomingECB’s asset quality review (AQR) and the subsequent stress tests will be key to improvetransparency and quantify this capital shortfall. Restoring an appropriate level of bankcapitalization will be of outmost importance to make the investment recovery fully sustainable.Assuming that the AQR and the stress tests will not be finalized before mid-2014, it will probablytake another year or so before the area-wide banking sector is fully recapitalized. If this processruns relatively smoothly with no major impact on banks’ funding costs, most of the residualsupply-side constraints to lending activity are likely to dissipate early in 2015. This will furtherreduce the core-periphery gap both in terms of loan availability and cost, in turn generating ameaningful improvement in the transmission mechanism of monetary policy.The remaining uncertainty on banks' ability to lend, and the cost of such lending, rests onbanks’ adjustment to the new regulatory environment, particularly if additional measures wereto be required (for example, capital add-ons). Visibility on this risk factor remains low.Marco Valli, Chief Eurozone Economist(UniCredit Bank Milan)+39 02 8862-8688marco.valli@unicredit.euUniCredit Research page 10 See last pages for disclaimer.
26 September 2013 Economics & FI/FX ResearchWeekly FocusThe Week AheadThe upcoming economic week will be dominated by next Wednesday's ECB meeting (reaffirmingthe bank’s prudent and dovish stance), the final round of global sentiment figures trendinghigher (but breathing in the US) as well as an US labor market improving further, but unlikelyto trigger any Fed action.ECB to remain dovishWe expect next Wednesday's ECB meeting (Thursday is a public holiday in Germany) to berather uneventful. It is extremely likely that rates will remain unchanged, and we do not foreseeany new unconventional measure at this stage. The intra-meeting period has been characterizedby two main features: a confirmation of the recent improving trend in growth indicators and adovish re-pricing of money market future rates.On the growth front, the news has been encouraging. In September, the Composite PMI rosefor the sixth consecutive month to a level consistent with 0.2-0.3% qoq GDP growth (see ourreview section). In addition, the German Ifo increased moderately further, confirming thebroad-based nature of the German recovery, while some "paybacks" in business sentiment(manufacturing PMIs, INSEE headline) are just a breather after the previous spurt. Overall,however, the encouraging data are unlikely to convince the ECB to reconsider the downsiderisks to its own GDP outlook. Accordingly, Draghi will continue to sound dovish, and the forwardguidance will be confirmed in its current version.On the interest rates front, the re-pricing in money markets has been significant. The impliedrate of the December 2014 Euribor contract has declined by 20bp since the September 5 ECBmeeting, with most of the move caused by US-specific factors, namely a lackluster non-farmpayroll figure and the Fed’s decision to keep QE3 purchases unchanged. The remaining partof the rally in short rates is mostly explained by a number of dovish statements by ECB officials,including Draghi, who have left the door wide open to further easing measures. We expectthe ECB to remain alert and “ready to act” on liquidity. On balance, the latest rhetoricstrengthens our view that the ECB will launch another LTRO in the coming months, but thetiming of the new operation has become more uncertain. A delay in the scaling back of Fedasset purchases (with the EUR appreciation remaining so far modest in trade-weighted terms)raises the probability that the ECB may decide to wait until early 2014 before acting.EMU: A WELCOME RALLY IN SHORT RATES0.750.70Euribor Dec-14 (implied rate, %)0.650.60ECB forward guidance0.550.500.450.401-Jul 13-Jul 25-Jul 6-Aug 18-Aug 30-Aug 11-Sep 23-SepSource: Bloomberg, UniCredit ResearchUniCredit Research page 11 See last pages for disclaimer.
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