Global Picture of Market

Global economy
■ Having accelerated up until this spring after the end of the Great Recession, real global GDP growth is now weakening again. But we do not expect a double-dip recession. Nevertheless, global economic growth should not re-accelerate before late next year.
■ For 2010, we expect real GDP to rise 4½% on a PPP basis (2011: +4%). Economic activity in industrialized countries should post only a modest 2½% increase (2011: +1.7%). China and Emerging Asia, which were the first to achieve a trend reversal last year, will clearly remain at the top of the global growth league.

US
■ Real GDP growth accelerated to a strong 5% in 4Q09 and a satisfactory 3.7% in 1Q10. But this pace of expansion was not sustainable since growth was primarily fuelled by the re-stocking process as well as the advance effects due to federal fiscal programs. Economic growth has been, therefore, decelerating since spring. But we do not expect a relapse into recession. For 2010 as a whole, we forecast real GDP to grow by 2.6%, falling back further to 1.9% next year.
■ A hike of the Fed funds target rate any time soon is out of the question. Furthermore, the palpable economic slowdown already under way in conjunction with growing economic risks and an inflation considered “too low” was sufficient to prompt the central bank to announce additional purchases of Treasury securities (Quantitative Easing II). We expect the Fed to stick to its Zero Interest Rate Policy (target rate currently at 0%-0.25%) up until early 2012.

Eurozone
■ The eurozone exited the Great Recession also in autumn last year. But it was primarily the turnaround in the inventory cycle, the growth effects of economic stimuli programs and improving net exports that lent a helping hand. After a weather-supported rebound last quarter, the economic slowdown is now underway. But we do not expect the EMU-wide economy to fall back into recession again. Eurozone GDP should grow by 1.6% this year. For 2011, we expect EMU-wide GDP growth to slow to 1¼%.
■ Taking into account the ongoing sovereign debt/spread crisis, doubts concerning the solidity of European banks together with the economic slowdown, the ECB should leave its key interest rate unchanged at currently 1% well into next year. We expect the first hike in 4Q11 (25bp). But the central bank will continue to remove excess liquidity before the rate hike at a measured pace.

Government bond markets
■ Accentuated QE and ongoing ZIRP by the Fed coupled with the current economic slowdown will keep US government bond yields exceptionally low over the next 6-9 months. But by summer next year, when investors start to price in the first Fed rate hike, yields should start to rise again. By the end of 2011, we expect 10Y Treasuries to yield 3%.
■ Bund yields should follow their US counterparts, rising to 2¾% twelve months from now. Exchange rates
■ The "announcement" of additional bond purchases by the Fed (Quantitative Easing II) resulted in a tumbling USD. The euro appreciated the most, despite the ongoing debt/spread/banking crisis. EUR-USD is expected to strengthen further, reaching 1.43 at the end of 2010. Signs of a stabilizing US economy coupled with weaker EMU data will drive EUR-USD back below 1.40 in spring next year, before it heads higher again thereafter. An ECB hike before the Fed should lead to a surge to 1.46 at the end of next year.
■ JPY should weaken over the next year or so, bringing USD-JPY back to 93 by year-end 2011.
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