Deutsche Bank Australia Special Report Date New Zealand · Deutsche Bank Markets Research Global 16 September 2014 Special Report Economics Date The Inflation Sensation _____ Deutsche

Deutsche Bank Markets Research

Global

Special Report

Economics

Date 16 September 2014

The Inflation Sensation

________________________________________________________________________________________________________________

Deutsche Bank AG/London

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

George Saravelos

Strategist

(+44) 20 754-79118

[email protected]

Arup Pal

Strategist

(+91) 22 7181-1643

[email protected]

Markus Heider

Strategist

(+44) 20 754-52167

[email protected]

The “Inflation Sensation” is a global inflation monitor, providing a holistic view of international price pressures. We have collected more than 100 time series covering consumer prices, producer prices, inflation expectations and wages across the G10.

Our heatmaps point to subdued global inflation, but with stark country divergences.

The Euro-area stands out for its disinflationary pressure. While headline inflation is driving most of the disinflationary trends, wage dynamics are often overlooked and seem equally worrying.

Japan sits at the opposite end of the spectrum. Our heatmap is flashing red, with price pressures extending beyond headline CPI to wages, expectations and producer prices.

The US inflation trend is in the middle of the pack. Price trends are normalizing but pointing to no imminent price pressures.

Both Australia and New Zealand stand out for subdued price pressures. Wage pressure remains exceptionally low - likely helped by migration trends.

The Swedish price outlook doesn't seem as worrying as CPI suggests. Pipeline producer prices are picking up due to a weaker currency, while wage inflation and inflation expectations well-behaved.

Figure 1: Global Inflation Heatmap1

04 05 06 07 08 09 10 11 12 13 14

US

Euro Area

UK

Japan

Canada

Switzerland

Australia

New Zealand

Sweden

Norway

Source: Deutsche Bank, Bloomberg, Haver Analytics Note: In the above heatmap, blue stands for low and red stands for high value of inflation with respect to historical averages

1 Average of Consumer, Producer, Wage and Future Expectations. The methodology and data sets used

for the analysis are listed in Appendix 1

16 September 2014

Special Report: The Inflation Sensation

Page 2 Deutsche Bank AG/London

United States

Figure 3: Consumer Price Inflation in the US Figure 4: Producer Price Inflation in the US

-4

-3

-2

-1

0

1

2

3

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

consumer inflation

-4

-3

-2

-1

0

1

2

3

4

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

producer inflation

Source: Deutsche Bank, Bloomberg Finance LP, Haver Analytics Note: The black line is the 1st principal component of the various indicators for consumer inflation shown in grey

Source: Deutsche Bank, Bloomberg Finance LP, Haver Analytics Note: The black line is the 1st principal component of the various indicators for producer inflation shown in grey

Figure 5: Wage Inflation in the US Figure 6: Inflation Expectations in the US

-4

-3

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0

1

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3

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

wage inflation

-4

-3

-2

-1

0

1

2

3

4

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

inflation expectations

Source: Deutsche Bank, Bloomberg Finance LP, Haver Analytics Note: The black line is the 1st principal component of the various indicators for wage inflation shown in grey

Source: Deutsche Bank, Bloomberg Finance LP, Haver Analytics Note: The black line is the 1st principal component of the various indicators for inflation expectations shown in grey

Figure 2: US Inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined

Source: Deutsche Bank, Bloomberg Finance LP, Haver Analytics Note: In the above heatmap, blue stands for low and red stands for high value of inflation with respect to historical averages

16 September 2014


Deutsche Bank AG/London Page 3

Euro Area

Figure 8: Consumer Price Inflation in the Euro Area Figure 9: Producer Price Inflation in the Euro Area

-4

-3

-2

-1

0

1

2

3

03 04 05 06 07 08 09 10 11 12 13

consumer inflation

-4

-3

-2

-1

0

1

2

3

03 04 05 06 07 08 09 10 11 12 13

producer inflation



Figure 10: Wage Inflation in the Euro Area Figure 11: Inflation Expectations in the Euro Area

-3

-2

-1

0

1

2

3

4

04 05 06 07 08 09 10 11 12 13 14

wage inflation

-4

-3

-2

-1

0

1

2

3

03 04 05 06 07 08 09 10 11 12 13




Figure 7: Euro Area inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



UK

Figure 13: Consumer Price Inflation in the UK Figure 14: Producer Price Inflation in the UK

-4

-3

-2

-1

0

1

2

3

4

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

consumer inflation

-2

-1

0

1

2

3

4

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

producer inflation



Figure 15: Wage Inflation in the UK Figure 16: Inflation Expectations in the UK

-6

-5

-4

-3

-2

-1

0

1

2

3

4

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

wage inflation

-4

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-1

0

1

2

3

4

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




Figure 12: UK inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



Japan

Figure 18: Consumer Price Inflation in Japan Figure 19: Producer Price Inflation in Japan

-3

-2

-1

0

1

2

3

4

5

6

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

consumer inflation

-5

-4

-3

-2

-1

0

1

2

3

4

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

producer inflation



Figure 20: Wage Inflation in Japan Figure 21: Inflation Expectations in Japan

-5

-4

-3

-2

-1

0

1

2

3

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

wage inflation

-3

-2

-1

0

1

2

3

4

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




Figure 17: Japan inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



Canada

Figure 23: Consumer Price Inflation in Canada Figure 24: Producer Price Inflation in Canada

-4

-3

-2

-1

0

1

2

3

4

5

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

consumer inflation

-4

-3

-2

-1

0

1

2

3

4

5

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

producer inflation



Figure 25: Wage Inflation in Canada Figure 26: Inflation Expectations in Canada

-4

-3

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-1

0

1

2

3

4

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

wage inflation

-4

-3

-2

-1

0

1

2

3

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




Figure 22: Canada inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



Switzerland

Figure 28: Consumer Price Inflation in Switzerland Figure 29: Producer Price Inflation in Switzerland

-3

-2

-1

0

1

2

3

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

consumer inflation

-4

-3

-2

-1

0

1

2

3

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

producer inflation



Figure 30: Wage Inflation in Switzerland Figure 31: Inflation Expectations in Switzerland

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

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

wage inflation

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

03 04 05 06 07 08 09 10




Figure 27: Switzerland inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



Australia

Figure 33: Consumer Price Inflation in Australia Figure 34: Producer Price Inflation in Australia

-3

-2

-1

0

1

2

3

4

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

consumer inflation

-4

-3

-2

-1

0

1

2

3

4

04 05 06 07 08 09 10 11 12 13 14

producer inflation



Figure 35: Wage Inflation in Australia Figure 36: Inflation Expectations in Australia

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

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

wage inflation

-4

-3

-2

-1

0

1

2

3

4

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




Figure 32: Australia inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



New Zealand

Figure 38: Consumer Price Inflation in New Zealand Figure 39: Producer Price Inflation in New Zealand

-3

-2

-1

0

1

2

3

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

consumer inflation

-3

-2

-1

0

1

2

3

4

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

producer inflation



Figure 40: Wage Inflation in New Zealand Figure 41: Inflation Expectations in New Zealand

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

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

wage inflation

-3

-2

-1

0

1

2

3

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




Figure 37: Australia inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



Sweden

Figure 43: Consumer Price Inflation in Sweden Figure 44: Producer Price Inflation in Sweden

-3

-2

-1

0

1

2

3

4

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

consumer inflation

-3

-2

-1

0

1

2

3

4

5

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

producer inflation



Figure 45: Wage Inflation in Sweden Figure 46: Inflation Expectations in Sweden

-4

-3

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0

1

2

3

4

5

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

wage inflation

-4

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-1

0

1

2

3

06 07 08 09 10 11 12 13 14




Figure 42: Sweden inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined

Source: Deutsche Bank, Bloomberg, Haver Analytics Note: In the above heatmap, blue stands for low and red stands for high value of inflation with respect to historical averages

16 September 2014



Norway

Figure 48: Consumer Price Inflation in Norway Figure 49: Producer Price Inflation in Norway

-4

-3

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-1

0

1

2

3

4

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

consumer inflation

-3

-2

-1

0

1

2

3

4

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

producer inflation



Figure 50: Wage Inflation in Norway Figure 51: Inflation Expectations in Norway

-3

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0

1

2

3

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

wage inflation

-3

-2

-1

0

1

2

3

4

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




Figure 47: Norway inflation Heatmap

04 05 06 07 08 09 10 11 12 13 14

Consumer

Producer

Wages

Inflation Exp.

Combined


16 September 2014



Appendix A Methodology

We classify inflation data for a particular country into 4 buckets according to the channel of transmission: consumer price inflation, producer price inflation, wage inflation and inflation expectations. We collect multiple time series for each bucket, the details of which are highlighted in the tables below (Figures 52 - 61). For each country bucket we follow these steps to construct the heat map:

Ensure each time time series gives the inflation rate, rather than price level. For data which are present in the form of an index we take YoY changes. Some inflation expectation time series are diffusion indices and we keep them as levels

We convert each time series to their z-scores using the entire sample available. This is done to ensure that each component in a bucket can be compared

We find the first principal component of the bucket of z-scores. The first component is again converted into a z-score format to visually display how the component is capturing the underlying variation of the data. Each chart above shows the individual components (in z-score format) along with the first principal component (also in z-score format)

We take the first principal component (in z-score format) for each bucket of a country and produce heat maps. Red indicates a high score, and blue a low one. An extra series is created to portray the average of the 4 inflation measures and is also plotted in the heat maps above

Country Data tables

Figure 52: US inflation data for each channel

Consumer Producer Wage Expectations

Consumer Price Index (SA, 1982-84=100)

PPI: Finished Goods (SA, 1982=100) Employment Cost Index: Compensation: Civilian Workers (SA,

Dec-05=100)

ISM: Mfg: Prices Index (NSA, 50+ = Econ Expand)

CPI-U: All Items Less Food and Energy (SA, 1982-84=100)

PPI: Finished Goods Less Food and Energy (SA, 1982=100)

ECI: Compensation: Private Industry Workers (SA, Dec-05=100)

ISM: Nonmfg: Prices Index (SA, 50+ = Econ Expand)

PCE: Chain Price Index (SA, 2009=100)

PPI: Intermediate Materials, Supplies and Components (SA, 1982=100)

Unit Labor Cost: Total Economy (SA, 2009=100)

12 Month Expectations: Change in Prices: Median Increase (%)

PCE less Food & Energy: Chain Price Index (SA, 2009=100)

PPI: Crude Materials for Further Processing (SA, 1982=100)

5-10 Yr Expectations: Annual Chg in Prices: Median Increase (%)

FRB Cleveland 16% Trimmed-Mean CPI (SA, 12 Month %chg)

Import Price Index: All Imports (SA, 2000=100)

FRB Cleveland Median CPI (SA, 12 Month %chg)

Import Price Index: All Imports Excluding Fuels (NSA, Dec-01=100)

Source: Deutsche Bank

16 September 2014



Figure 53: Euro Area inflation data for each channel


Monetary Union: Index of Consumer Prices(SA/H, 2005=100)

PPI: Industry excluding Construction (SA, 2010=100)

Compensation per Employee (SWDA, 2005=100)

Euro-zone PMI: Composite Input Prices (SA, 50+=Expansion)

MUICP: Total ex Energy/Food/Alcohol/Tobac(SA, 2005=100)

PPI: Manufacturing (SA, 2010=100) Hourly Compensation(SWDA,2005=100)

Euro-zone PMI: Composite Output Prices (SA, 50+=Expansion)

PPI: Consumer Goods (SA, 2010=100)


Next 12 Months Price Trends: Risen a Lot: Total Sample(NSA, %)

PPI: Capital Goods (SA, 2010=100) Next 12 Months Price Trends: Risen Fairly: Total Sample(NSA, %)

PPI: Intermediate Goods (SA, 2010=100)

Import Prices: Total (SA, 2010=100)


Figure 54: UK inflation data for each channel


Consumer Price Index: All Items (NSA, 2005=100)

PPI: Net Sector Output: Manufactured Products (NSA, 2010=100)

AWE, Total Pay: Whole Economy(SA, GBP)

U.K. PMI: Composite Input Prices (SA, 50+=Expansion)

CPI: All Items ex Energy, Food, Alcoholic Beverages & Tobacco(NSA, 2005=100)

PPI: Net Sector Output: Manuf Prods ex Fd/Bev/Tobacco/Petrol (NSA,

2010=100)

AWE, Total Pay: Private Sector(SA, GBP)

U.K. PMI: Composite Output Prices (SA, 50+=Expansion)

Retail Prices Index: All Items (NSA, Jan-87=100)

Import Price Index: Goods (NSA, 2010=100)

AWE, Total Pay: Public Sector(SA, GBP)

GfK Consumer Survey: Consumer Prices: Next 12 Months (NSA, % Bal)

RPI: All Items excl Mortgage Interest Payments [RPIX] (NSA, Jan-87=100)

Import Price Index: Goods excl Oil and Erratics (NSA, 2010=100)


Figure 55: Japan inflation data for each channel


Consumer Price Index: General (NSA, 2010=100)

Domestic Corp Goods Price Index: All Commodities (2010=100)

Total Cash Earnings/Employee [5 or more empl]: All Surveyed Ind (Yen)

Small/Medium Bus Survey: Input Price Change: Manufacturing (%)

CPI: General, excluding Food & Energy (NSA, 2010=100)

CGPI: Raw Materials (2010=100) Total Earnings Index [5/More Empl]: All Surveyed Industries (2010=100)

Small/Medium Bus Survey: Input Price Change: Non-Manufacturing (%)

Corp Goods Prices: Intermediate Materials (2010=100)

Corp Goods Prices: Final Goods (2010=100)

Import Prices, Yen Basis: All Commodities (2010=100)


16 September 2014



Figure 56: Canada inflation data for each channel


CPI: All Items [V41690914] (SA, 2002=100)

Industrial Product Price Index: Total (NSA, 2010=100)

Inflation Indicators: Avg Hourly Earnings of Permanent Workers (Y/Y %)

Business Outlook: Input Price Inflation: Balance of Opinion (%)

CPI: All Items ex Food and Energy [V41690924] (SA, 2002=100)

Raw Materials Price Index: Total (NSA, 2010=100)

Sal Employ: Avg Wkly Earn Incl O/T: Indus Agg Ex Unclass Business(SA,C$)

Business Outlook: Output Price Inflation: Balance of Opinion (%)

Canada Import [Customs] Laspeyres Price Index: All

Merchandise (SA, 2007=100)

Wage/Salary/Employer Social Contrib: Employee Compensation(SA,Thous. C$)


Figure 57: Switzerland


Consumer Price Index (NSA, Dec-10=100)

Producer Price Index: All Items (NSA, Dec-10=100)


Purchasing Managers' Index: Purchase Prices (SA, 50+=Expansion)

Core Inflation 1 (Dec-10=100) Core PPI (NSA, Dec-10=100)

PPI: Intermediate Goods (NSA, Dec-10=100)

Import Price Index (NSA, Dec-10=100)

Core Import Price Index (NSA, Dec-10=100)


Figure 58: Australia inflation data for each channel


Consumer Price Index: All Groups (SA, Yr/Yr % Chg)

PPI: Final Stage of Process (NSA, Q3.11-Q2.12=100)

Wage Price Index (SA, Q3:08-Q2:09=100) Natl Australia Bank Business Inflatn Expectations: 3 Months Ahead (%)

CPI excluding Volatile Items (NSA, Yr/Yr % Chg)

PPI: Intermediate Stage of Process (NSA, Q3.11-Q2.12=100)

Wage Price Index: Private Sector (SA, Q3:08-Q2:09=100)

Market Economists' Inflation Expectations: 2 Years Ahead (%)

Consumer Price Index: Tradables (NSA, Yr/Yr % Chg)

PPI: Prelim Stage of Process (NSA, Q3.11-Q2.12=100)

Wage Price Index: Public Sector (SA, Q3:08-Q2:09=100)

Break Even 10 Year Inflation Rate (%)

Consumer Price Index: Nontradables (NSA, Yr/Yr % Chg)

PPI: Final Stage of Process: Capital (NSA, Q3.11-Q2.12=100)


CPI Weighted Median (SA, Year-End % Change)

Producer Price Index: Manufacturing (NSA, Q3.11-Q2.12=100)

Import Price Index (NSA, Q3.11-Q2.12=100)


16 September 2014



Figure 59: New Zealand inflation data for each channel


CPI: All Groups [Partial Seasonal Adjustment] (Q2-06=1000)

PPI {Output Prices}: All Industries (10Q4=1000)

Salary and Wage Rates: All Sectors (Q2-09=1000)

Expected Annual CPI: 2 Years from Now (NSA, %)

CPI Less Food, Household Energy & Vehicle Fuels (NSA, Q2-06=1000)

PPI {Input Prices}: All Industries (10Q4=1000)

Salary and Wage Rates: Public Sector (Q2-09=1000)

Expected Increase in QES Hourly wage: 2 Years from Now (NSA, %)

CPI: Tradables (NSA, Q2-06=1000)

Imports Price Index: Merchandise (Q2-02=1000)

Salary and Wage Rates: Private Sector (Q2-09=1000)

CPI: Nontradables (NSA, Q2-06=1000)

Imports Price Index: Services (Q2-97=1000)

GDP Implicit Price Deflator (SA, Q3.95-Q2.96=1000)

Capital Goods Price Index (NSA, Q3-99=1000)


Figure 60: Sweden inflation data for each channel


Consumer Prices (NSA, 1980=100)

Producer Price Index (NSA, 2005=100) Private Hourly Earnings incl Overtime: All Industries (NSA, Kronor)

PMI: Prices (SA, %)

HICP: Total excluding Energy & Unprocessed Food (NSA, 2005=100)

PPI: Intermediate Goods (NSA, 2005=100) Labor Cost Index: Salaried Empl: Total Private Sector(NSA, Jan-08=100)

Services PMI: Prices (SA, %)

Harmonized Consumer Price Index (NSA, 2005=100)

PPI: Capital Goods (NSA, 2005=100) Labor Cost Index: Wage Earners: Total Private Sector(NSA, Jan-08=100)

PPI: Consumer Goods (NSA, 2005=100)

IMPI: Total Agriculture and Industry Less Construction (NSA, 2005=100)


Figure 61: Norway inflation data for each channel


Consumer Price Index (SA, 1998=100)

Total Producer Prices: Intermediate Goods (NSA, 2000=100)

Average Monthly Earnings: Manufacturing (NSA, 2005=100)

Economic Situation Surveys, Bank of Norway (Norges Bank), Expectations

Survey, Economists, Expected Inflation in 12 Months, Total

CPI excluding Energy Products (NSA, 1998=100)

Total Producer Prices: Investment Goods (NSA, 2000=100)


Economic Situation Surveys, Bank of Norway (Norges Bank), Expectations

Survey, Households, Expected Inflation in 2-3 Years as a Percentage, Total

Harmonized Consumer Price Index (NSA, 2005=100)

Total Producer Prices: Consumer Goods (NSA, 2000=100)

Economic Situation Surveys, Bank of Norway (Norges Bank), Expectations Survey, Labour Market Participants,

Expected Inflation in 12 Months, Total Source: Deutsche Bank

16 September 2014



Appendix 1

Important Disclosures

Additional information available upon request

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

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. George Saravelos

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

16 September 2014



(a) Regulatory Disclosures

(b) 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.

(c) 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.

(d) 3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

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16 September 2014



(e) Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

David Folkerts-Landau Group Chief Economist

Member of the Group Executive Committee

Guy Ashton Global Chief Operating Officer

Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Richard Smith and Steve Pollard Co-Global Heads Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

Steve Pollard Regional Head

Americas Research

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