EFTA01476261.pdf

Research Deutsche Bank TheHouseView Special Deutsche Bank Research Fed: Taking the plunge 9 December 2015 DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 124/04/2015 EFTA01476261 TheHouseView Special — Fed: Taking the plunge Markets entered the year with expectations for the Fed to raise rates. Several shocks that stayed the Fed's hand in June and then September have now largely dissipated. There is now broad-based consensus that the Fed will take the plunge at its 16 December meeting and raise rates for the first time since 2006. Despite this consensus, there are lingering concerns that this shift in policy is a mistake. We disagree: the economy is strong enough to withstand higher rates. With the quasi-certainty of a hike this month, focus shifts to the Fed outlook beyond lift-off. How quickly will rates rise? How high will rates go? We expect the Fed to raise rates gradually in 2016 as it assesses the economy's reaction to this policy tightening, with the pace of hikes accelerating thereafter as the forces for going slow fade. The market is pricing a much more gradual ascent in rates; this disconnect should be resolved after a few hikes, with the market converging toward the Fed's projections. Further out, rates should peak lower than in the past but very likely higher than current market expectations. Within 2016 the Fed may hike more in the first half than the second half. From a macro point of view, inflation is likely to start slowing around mid-year. From a markets perspective, the repricing of the Fed's rate path could lead to a tightening of financial conditions — this is especially true if the Fed decides to taper its reinvestment policy. These factors combined could lead the Fed to pause briefly in the second half of the year. Given the widespread agreement that the Fed will hike, a strong initial market reaction is unlikely. Beyond the first hike, the outlook for risk assets will be determined by how the disagreement between the market and the Fed about the pace and extent of hikes gets resolved. Risk assets should be resilient in 2016 if this repricing is gradual and orderly. Editors: Marcos Arana, Matthew Luzzetti, Rajni Thakur Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 2 EFTA01476262 The reasons that kept the Fed put in September and October have now largely dissipated Lower US growth Tighter financial conditions Lower global growth Ahead of September / October FOMCs I Hike not priced by market — risk of financial tightening (stronger dollar, higher rates) II High financial markets volatility II Fears of sharp slowdown in China IIConcerns over US and eurozone growth, despite solid macro data Dollar strength I Concern given 20% rise since mid-2014 I Rate hike would have led to further strength Lower commodity prices Remaining slack in labour market Lower US inflation Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 I Sharp sell-off in commodities since May2015, including nearly 30% drop in oil Worry that it reflects global growth weakness Some slowdown in labour market I Little evidence of wage inflation Current conditions Market almost fully pricing a hike Volatility has abated I Buy into stabilisation and gradual, not sharp, slowdown in China IILess concern about downside risks in US and eurozone EFTA01476263 I Further strength but largely driven by hike expectations I Less a concern following ECBdriven euro rally* I Weakness continues — though less tied to global growth concerns I Strong rebound in labour market and pick-up in wage inflation — confirming diminishing slack 1 Largely dissipated — Partly dissipated i Still a concern ] 1 Note: (*) ECB delivered less than market expectations on 3-December, leading to a 296+ surge in the euro vs. the dollar 3 1 1 EFTA01476264 As a result, the Fed is widely expected to raise rates for the first time since 2006 at its 16 December meeting Everyone expects a Fed hike in December 1 Fed officials "When the Committee begins to normalize the stance of policy...it is a day that I expect we all are looking forward to." Janet Yellen, Fed Chair, 3 December "Assuming that we continue to get good data on the economy_ there's a strong case to be made in December to raise rates." John Williams, San Francisco Fed President, 21 November "It is quite possible that the conditions (_) to begin to normalize monetary policy could soon be satisfied." Bill Dudley, New York Fed President, 12 November "I'm comfortable with moving off zero soon." Dennis Lockhart, Atlanta Fed President, 19 November 3 Economists 0% 20% 40% 60% 80% 100% % of economists Financial Review, Nov 10th 2015 2 Market Probability of a hike by December* 100 % 20 40 60 80 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Note (*): It is likely that a 25bp hike by the Fed raises the Fed funds rate by less than 25bp, given excess liquidity in the system. The lower (upper) bound of range assumes Fed funds rate rises by 25bps (20bps) when the Fed hikes rates. Source: Bloomberg Finance LP, Deutsche Bank Research Sep FOMC Oct payrolls 97% 78% August selloff in risk priced* Oct FOMC 4 Other officials and prominent investors WSJ, Oct 11th 2015 Sep. FOMC Source: Bloomberg Finance LP, Deutsche Bank Research EFTA01476265 Research Deutsche Bank Dec. FOMC No hike [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 Bloomberg, Nov 6th 2015 Hike 4 EFTA01476266 We disagree with the view that hiking is a policy mistake: the economy is strong enough to withstand higher rates Fed does not want to hike too early and risk having to reverse course as other major central banks have done %, policy rate ECB -2 0 2 4 6 8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ECB, SRB, NB, RBA, Haver Analytics, Deutsche Bank Research Rising real wages incentivise firms to invest, leading to higher productivity growth; we should see this in the coming years %yoy 0 1 2 3 4 5 1985 Productivity growth (3y moving avg, ls) Real wage growth (2y lead, rs) Riksbank Norges Bank RBA We disagree with many arguments against hiking rates — and gradual hikes in any case reduce the chance of a policy error Argument strength Argument for policy mistake Fed lacks the tools to ease policy Financial conditions have already tightened No inflation pressures %yoy -0.5 0.0 0.5 1.0 1.5 2.0 2.5 EFTA01476267 3.0 1990 1995 2000 2005 2010 2015 Notes: productivity growth is real output per hour in the non-farm business sector; real wage growth is employment cost index compensation minus core PCE inflation Source: BLS, BEA, Haver Analytics, Deutsche Bank Research Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 Global growth is too weak Economy is too weak for hikes Productivity growth is low Weak Strong 5 Note: (*) The sum of personal consumption, residential investment and non- residential fixed investment. Our view Valid point for raising rates gradually Last months' tightening equal 1-2 hikes Tightening is precisely Fed's intention Temporary factors keeping inflation low Should rise toward target as they abate Global growth is slow — but expect moderate pick up in next two years I Exports only 1/8th of GDP IIPrivate domestic demand* growing at same pace as pre-crisis IIRobust employment growth continues IILow productivity growth means a faster tightening of the labour market EFTA01476268 H Should rise modestly as wages pick up EFTA01476269 With the quasi-certainty of a hike this month, focus shifts to how quickly and how high rates will go Focus following the first hike Market pricing of Fed hikes is materially lower than the Fed's projections of a gradual pace of hikes Fed funds, % Near term ediumterm j What pace of hikes? I What are the key drivers? I Is the market pricing this? Terminal rate* I How high will rates go this cycle? IIIs the market pricing this? Fed signals 220bp of hikes in 2016-17, 80bp less than in previous cycles — yet double market pricing 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Dec-14 Hikes (bp) Market Fed Previous cycles Note: (*) Peak Fed funds rate in a hiking cycle Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 Previous cycles Fed Sep-FOMC Market Lift-off Dec-15 EFTA01476270 2016 60 100 200 Dec-16 2017 50 120 100 Source: Fed, Bloomberg Finance LP, Deutsche Bank Research Low long rates could induce faster Fed rate hikes-12 November 2015 World Outlook: Managing with less liquidity-8 December 2015 6 Dec-17 2018 n/a 80 n/a Dec-18 EFTA01476271 As a result, most focus on 16 December beyond the hike decision will be on clues for what to expect next from the Fed How to read the Fed FOMC meeting on 16 December 1 The statement HAssessment of US economy HGuidance on future policy -Pace of hikes —Reinvestment policy* I Discussion of risks, e.g., global rowth, oil prices, dollar fI Last sentence of statement, i.e., signal that policy will remain accommodative !Any dissents to statement 3 Dots plot (individual members' projections of Fed funds rate) lOnly marginal downward revisions expected ILong-run median may come down — leading to lower dots trajectory 4 Chair Yellen press conference lOverall tone HConditions that Fed needs to see to continue hiking OWhat would lead the Fed to pause or stop hiking IGuidance on reinvestment policy* and interplay between rates and reinvestments Note: (*) Currently, the Fed reinvests its maturing holdings of MBS and Treasuries purchased during QE. Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 7 2 Economic projections ILittle change expected ISome scope for lowering: EFTA01476272 -Inflation forecast: dovish, signals gradual pace —Unemployment forecast: hawkish EFTA01476273 We expect the Fed to raise rates gradually in 2016, before moving to faster hikes as the forces for going slow fade... Main drivers for the Fed Impact on US Sign Global growth Labour market strength Dollar strength Low oil prices Higher rates I Moderate pace I Marginal pick-up in 2016 and 2017 I At full employment, to tighten more IWage inflation low but rising +25% since mid2014 Further strength, at slower pace I -50% in 2014, -25% in 2015 I Limited further downside in 2016 I Potential for sharp rise if market prices Fed path in 2016 n.a. + Impact H High Research EFTA01476274 Deutsche Bank M Medium [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 L Low H M H H in H1 Other M L Pace of hikes I Fed committed to radual hikes i Slow tightening to avoid recession** H After a few hikes, arguments for continuing slow less compelling Slow and gradual More rapid, to ward-off inflation 8 Notes: (*) Theoretical policy rate that keeps economy at full employment and inflation on target. A higher neutral rate requires more hikes in the same period of time. (**) At zero rates, easing options are more limited, so the Fed needs to be more cautious as it raises rates. Size Inflation Growth 2016 After L H Neutral rate* L Financial conditions II Tightening given EFTA01476275 dollar strength, higher rates I Tightening continues but at lower rate Inflation 2016 IIFirming in H1 but downside risks in H2 I Kept low by growth headwinds, low potential growth After I More clearly rising toward Fed target I Higher as headwinds fade, productivity growth rises Fed's assessment of pace of hikes EFTA01476276 ... though slowing inflation and a tightening of financial conditions as the market re-prices the Fed may pause hikes in H2-2016 2016 Q1 xpectations i Inflation to firm-up I Limited adverse impact from first hike on growth I Labour market continues to tighten Q2 I Inflation to stabilise, potentially recede d Growth and labour market to remain on track Q3 Q4 I Growth should remain broadly stable I Continued gains in labour market, with unemployment falling further than Fed expects I Inflation likely to drop modestly in H2 I Tightening of financial conditions likely as market starts to re-price Fed path IIGradual pace to assess impact of hikes on markets, economy Implications for the Fed I Remain data dependent I Rate hikes likely in March, June I Consider tapering the reinvestment of its securities holdings* I Expect one hike in the second half, with scope for skipping a quarter before resuming hikes Note: (*) Currently, the Fed reinvests its maturing holdings of MBS and EFTA01476277 Treasuries purchased during QE. Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 9 EFTA01476278 This is especially true if the Fed decides to taper its reinvestment policy and this leads to a tightening of financial conditions I The Fed is currently reinvesting proceeds from its maturing securities keeping its balance sheet stable I Altering this reinvestment policy would equate to a monetary policy tightening — Fed can stop, or more likely taper reinvestments — Opposite effect to QE, i.e., higher long-term rates I As such, the decision and the tightening of financial conditions it would bring about may affect the Fed's assessment of the pace of rate hikes — At $300-500bn per year through 2019, the amount of maturing securities is considerable I The Fed has so far given little guidance on when or how this will happen — Fed would like to be confident that economy is weathering rate hikes well I We expect Fed to begin reducing its reinvestment some time in the second half of 2016 The size of the Fed's balance sheet is currently kept constant via the reinvestment of maturing assets $tn 0 1 2 3 4 5 Source: Haver Analytics, Deutsche Bank Research MBS Other Treasuries A wave of maturities from the Fed's portfolio could put upward pressure on long-term rates when the Fed stops reinvesting $bn Fixed income market will have 200 400 600 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Note: projections based on a speech by the Fed's Stanley Fischer in February 2015 Source: Fischer (2015), FRBNY, Deutsche Bank Research Research EFTA01476279 Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 10 to absorb a lot more when Fed stops reinvestment Annual maturities (ls) Cumulative maturities (rs) $bn 1,000 2,000 3,000 4,000 0 EFTA01476280 By 2017 macroeconomic conditions should lead the Fed to hike faster — potentially even faster than current Fed projections I The latest Fed projections signal a more gradual pace of hikes than history — Fed sees 4-5 hikes in each of the next two years# — compared to 6 hikes in previous cycles I While a slow pace of hikes is justified initially, the risk of having to hike faster afterwards is high I By 2017 many of the inflation headwinds will have dissipated and inflation should be closer to target — Fading impact from dollar strength due to base effects — Wage pressure building I Unemployment, meanwhile, will have significantly undershot the Fed's estimate of full employment H In this context it is difficult to justify going slow, as the risk of inflation overshooting becomes more real H We therefore see the risk of an upward adjustment to Fed projections for 2017 hikes I It is hard to call the exact timing of this adjustment but it is likely only toward end-2016 Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 Inflation is expected to rebound from current low levels and approach the Fed's target* -0.5 0.0 0.5 1.0 1.5 2.0 2.5 %yoy Fed's target* Headline CPI inflation Core CPI inflation 2013 2014 2015 2016 2017 Note (*): The Fed officially targets 2% for headline PCE inflation. This is roughly equivalent to 2.3% for EFTA01476281 headline CPI inflation, given that CPI inflation tends to run a few tenths about PCE. Source: BLS, Haver Analytics, Deutsche Bank Research Unemployment rate is already at full employment and will continue dropping further 10 % 3 4 5 6 7 8 9 2005 2007 2009 Fed's full employment estimate (4.9-5.2%) 2011 Source: BLS, Haver Analytics, Deutsche Bank Research 11 Note (#): FOMC committee's leadership (Yellen, Fischer and Dudley) likely expect only 3-4 hikes 2013 2015 2017 EFTA01476282 The terminal rate will be lower than in the past but very likely higher than current market expectations The neutral rate has fallen since the crisis — but the rate implied by market pricing is consistent with a very pessimistic scenario Neutral rate estimates 3-3.25% 3.25-3.50% 2.00% Market pricing Potential growth DB Neutral rate estimates are consistent with: 0.6% Productivi -ty growth 0% 1.25% 1.75-2% Fed 2-2.25% 1.5% Source: CBO, Laubach and Williams (2003), FOMC, Deutsche Bank Research Pre-crisis* 3% 2% Note: (*) Avg. 1995-2005 Several of the reasons for a lower terminal rate have faded Reducing Rationale terminal rate? Fiscal policy Private deleveraging Mortgage credit conditions Subdued global growth Low potential growth Research Deutsche Bank 1.0 1 1 I Fiscal policy has shifted from a significant drag to neutral H Deleveraging slowed significantly; credit EFTA01476283  rowth picking up ll Still tight but showing some signs of loosening I Global growth, giving less external impulse to US growth I Still low but should rise modestly as productivity picks up [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 12 Note (#): FOMC committee's leadership (Yellen, Fischer and Dudley) likely expect only 3-4 hikes 4.50% I How high the Fed's policy rate eventually rises (i.e., the terminal rate) is closely tied to the neutral rate — A higher neutral rate means the Fed has to raise rates more to tighten financial conditions I Estimates suggest the neutral rate is currently very low due to growth headwinds (e.g., fiscal drag, tight credit, slow global growth), lower potential growth I Neutral rate should rise as these headwinds fade and potential growth improves... I ...But estimates suggest that the long-run neutral rate will remain lower than in the past — Prior to the crisis the neutral rate was near 4.5% — Fed's estimate is currently 3.25-3.50%; we think it is somewhat lower (i.e., 3-3.25%) I The market pricing of a terminal rate around 2% is consistent with a very pessimistic economic scenario, assuming no rebound in potential growth I As the market reprices the pace of hikes, it will also have to raise its view on the terminal rate EFTA01476284 We see risk assets resilient to Fed hikes in 2016, unless (until?) the market abruptly re-prices the Fed path Asset class View Equities IResilient to Fed hikes Rates I Long rates to drift higher I Partial convergence between US, Europe FX Credit EM Commodities Research Deutsche Bank IDownside but limited IDifficult outlook I Long USD I Short EUR IUS under pressure Rationale I As long as Fed hikes are gradual, long-term yields remain contained and dollar gains are slow, all of which we expect, equities should be resilient to Fed hikes I Short-term downside only if rates rise sharply I US long-end rates to rise gradually (10-year yield at 2.5% end-2016); upside risk as Fed signals reinvestment tapering, market pricing converges to Fed I Europe rates should follow the US higher, especially if an improving economy leads the ECB to signal tapering of QE next year I We are passing the peak point of central bank policy divergence (i.e., tightening Fed, loosening ECB) — rates should partially converge ahead H USD upswing to continue, though at a more moderate pace EFTA01476285 I ECB to discourage further appreciation; outflows should continue I US credit resilient to moderate Fed hikes, faster tightening would hurt I Expect higher default rates in HY ex-energy leading to wider spreads; prefer IG I Europe to outperform Fundamentals stronger in Europe (e.g., less energy I exposure, less aggressive debt accumulation) — European credit should outperform I Adjustment will not be smooth, but better external resilience, a gradual pace of hikes and cheaper valuations limit the downside H Under pressure from stronger dollar, higher real yields H Supply adjustment is underway for oil, though market is oversupplied until 2017 [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 13 EFTA01476286 The FOMC will take a more hawkish direction in 2016 — but we do not anticipate any significant policy implications from this shift The change of voting members will result in a more hawkish FOMC # of voting members 0 1 2 3 4 5 6 7 Dovish Composition of FOMC: shifting more hawkish Kocherlakota Evans Brainard Tarullo Rosengren 2015 2016 Dovish Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 Hawkish Notes: Faded pictures denote non-voting members. Kocherlakota to be replaced by Neel Kashkari (non-voting), not included. Members grouped by level of dovish / hawkishness but within each sub-group ordering may not reflect differences in dovish / hawkishness 14 2015 2016 FOMC becomes more hawkish on average I The Fed's voting members rotate annually except for several permanent spots (e.g., Chair, Board of Governors and NY Fed president) I Voting seats are set to shift in a more hawkish direction in 2016 — One less dove (Evans) and a net gain of two more hawkish voters (gain Mester, George and Bullard and lose Lacker) Hawkish Note: dotted lines represent average hawkish / dovish score each year. Source: Deutsche Bank Research H While this could affect policy at the margin, we do not anticipate any significant policy implications EFTA01476287 form this shift Yellen Dudley Lockhart Williams Fischer Powell Kaplan Mester Harker Lacker Bullard George EFTA01476288 Appendix EFTA01476289 Despite substantial progress towards its targets since the crisis, Fed policy remains extremely accommodative Policy is its furthest from normal on record even as the Fed nears its targets on unemployment and inflation 12 16 20 0 4 8 1960 1970 1980 1990 2000 The key considerations for the first hike have been met Unemployment Employment Job creation Core inflation (PCE) Inflation Wage inflation Inflation expectations Other Research Deutsche Bank Financial conditions I Remains robust I Stable at just 1.3% yoy but expected to rise IITrending higher, but still low IISurvey: mixed recently I Market: low but have risen IIMarket hike odds have risen IIFinancial conditions have eased a bit [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 EFTA01476290 I At NAIRU, broader slack measures also diminished 2010 Note: (*) Our distance measures follow a speech by St. Louis Fed President Jim Bullard on 17 July 2014 Source: Haver Analytics, Deutsche Bank Research Distance from targets* Distance from "normal policy"* I Fed has made considerable progress on its dual mandate — Headline inflation is low due to transitory factors and core inflation is firmer — Labour market is at full employment I Yet, Fed policy has remained stuck at "crisis" levels — Fed funds rate still near zero — Fed's balance sheet expanded to —$4.5tn, more than five times its pre-crisis level I As a result, current monetary policy is the furthest from normalised policy on record IIThe Fed has explained this divergence from normal policy in a number of ways — Other measures of labour market slack are elevated (e.g., high part-time employment) — Headwinds have significantly reduced the neutral fed funds rate since the financial crisis — Greater risk is hiking too early at 0% rates I While these considerations continue to support gradual rate hikes, they no longer justify near-zero rates 16 Hike considerations EFTA01476291 Significant progress toward the Fed's full employment objective and robust momentum justify a Fed funds rate well above zero US economy is near full employment, confidence is high and leading indicators are supportive, even if some measures of slack remain high Leading Indicators 7-8 8. Firms unable to fill job openings near 15-year high — labour market is tight for small businesses 1. Payroll employment growth has averaged 240k per month over past 18 months, near the fastest pace since 2000 7. Initial claims near 40+ year lows; signal further progress on unemployment is likely forthcoming 2. Job openings near record high levels, suggesting employers are looking to expand employment Employer Behaviour 1-2 6. Work part time for economic reasons remains elevated as many would like a full-time job but have settled for part-time work — slack remains 3. Hiring plans over the next 3 months for small businesses are near pre-crisis levels — employment growth should remain robust Dec-07 (pre-crisis; seen as a solid reference) Dec-09 (worst of the crisis) Current Reference Points Utilisation 5-6 5. Unemployment: at 5.0%, has fallen to post-crisis low, and within the range the Fed believes will begin to lead to higher inflation Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 4. Quits: leading indicator for wage growth — more people EFTA01476292 quitting means they can find higher paying jobs elsewhere Confidence 3-4 Outward movement in the spider chart denotes improvement. Source: Haver Analytics, BLS, National Federation of Independent Businesses, Department of Labour, Deutsche Bank Research 17 EFTA01476293 Although inflation is well below the Fed's objective, it is expected to rise ahead I Inflation still well below 2% target: headline inflation near 0%; core inflation 40-70bp below target I Weakness due primarily to forces Fed describes as temporary (e.g., USD surge, oil price drop) I Inflation outlook is more important than current data — Monetary policy acts with a lag: Fed thinks it takes 12-18 months for policy to have full effect — Fed must be reasonably confident inflation will return to target to hike — but doesn't need to wait for inflation to rise I Key inputs into this assessment include — Outlook for growth / labour market (positive) — Inflation expectations (positive) — Import price inflation / dollar (negative) H Core inflation unlikely to rise significantly next year — Strong dollar should continue to weigh on inflation next year — Falling commodity prices may be more persistent than Fed believes I But we and the Fed see inflation nearing 2% target over next 2 years, as temporary factors dissipate and labour market continues to tighten Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 Inflation is expected to rebound from current low levels and approach the Fed's target* -0.5 0.0 0.5 1.0 1.5 2.0 2.5 %yoy Fed's target* Headline CPI inflation Core CPI inflation 2013 2014 2015 2016 2017 EFTA01476294 Note (*): The Fed officially targets 2% for headline PCE inflation. This is roughly equivalent to 2.3% for headline CPI inflation, given that CPI inflation tends to run a few tenths about PCE. Source: BLS, Haver Analytics, Deutsche Bank Research Well-anchored survey measures of inflation expectations more important to Fed than sharp drop in market measures 2012-12-31 = 100 100 60 70 80 90 2012 Well-anchored survey based expectations... Survey of Professional Forecasters U Michigan, (consumer) ...contrasts with drop in market-implied inflation expectations 2013 2014 Source: U Mich, FRB Phil SPF, Haver Analytics, Deutsche Bank Research 18 Market 5y5y breakeven EFTA01476295 Appendix 1 Important Disclosures Additional Information Available upon Request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific recommendation or view in this compendium report. Marcos Arana / Matthew Luzzetti Attribution The Authors wish to acknowledge the contributions made by Shakun Guleria in the preparation of this report. Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 19 EFTA01476296 Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. Research Deutsche Bank [email protected] http://houseview.research.db.com TheHouseView Special — 9 December 2015 20 EFTA01476297 Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research report. 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