Global Chartbook: March 2016March 10, 2016 · Global Chartbook: June 2016 WELLS FARGO SECURITIES June 9, 2016 1%ECONOMICS GROUP1% 4 United States The United States posted another

This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

June 9, 2016

Economics Group

Executive Summary The global economy continued to disappoint during the first quarter of the year as the U.S. economy repeated what has become commonplace in recent years during the first quarter: a weak rate of economic growth, this time recording real GDP growth of only 0.8 percent on an annualized basis. However, more recent activity data have suggested that U.S. growth is poised to bounce back in Q2, and indeed we have slightly upgraded our full-year 2016 real GDP growth forecast to 2.0 percent. Looking ahead, we expect U.S. economic growth will pick up slightly to 2.2 percent next year.

Meanwhile, the Chinese economy has continued to slow down from the double-digit rates characteristic of prior decades to more moderate single-digit rates of growth. We expect Chinese economic growth will fall below 6 percent next year, although the downward adjustment should remain relatively gradual. Notably, after fears of a “hard landing” in China spurred broad declines in global commodity prices and equity markets last year and earlier this year, more recent data have been less discouraging. This has led to stabilization and ongoing rebound in commodity and equity prices, which has boded well for commodity-producing developed countries like Canada and Australia, as well as many emerging markets.

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Source: International Monetary Fund, IHS Global Insight and Wells Fargo Securities

At present, the U.S. Federal Reserve is the only central bank in a major developed economy that is poised to continue adjusting policy in a less accommodative direction. However, the Bank of Japan (BoJ) and European Central Bank (ECB) appear to be on hold for the time being as they weigh the impact of prior easing measures. Interestingly enough, the Eurozone actually bested consensus growth estimates during the first quarter of the year with an annualized growth rate in real GDP of 2.2 percent. However, economic growth in the Eurozone this year will probably be

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Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights

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Crude OilNYMEX Front-Month Contract, Dollars per Barrel

Crude Oil (WTI): Jun-3 @ $48.62

Special Commentary

Eugenio J. Alemán, Senior Economist [email protected] ● (704) 410-3273

Sarah House, Economist [email protected] ● (704) 410-3282

Erik Nelson, Economic Analyst [email protected] ● (212) 214-5652

Global Chartbook: June 2016

Contents………Page World ............................ 3 United States ................. 4 Eurozone ....................... 5 Japan ............................. 6 United Kingdom ........... 7 Australia ........................ 8 Canada .......................... 9 Singapore .................... 10 South Korea ................. 11 Sweden ........................ 12 Switzerland ................. 13 Taiwan ......................... 14 Argentina .....................15 Brazil ........................... 16 Chile ............................. 17 China ........................... 18 India ............................ 19 Mexico ......................... 20 Russia .......................... 21 Turkey ......................... 22 Dollar Exchange Rates 23 Energy ......................... 24 Other Commodities .... 25 Forecast ....................... 26

mailto:[email protected]



Global Chartbook: June 2016 WELLS FARGO SECURITIES June 9, 2016 ECONOMICS GROUP

2

constrained by a still relatively weak performance from the largest economies of the region. Furthermore, the broader European Union is facing its own threats with the proximity of the British referendum on its continued membership in the European Union. The referendum is scheduled for June 23 and represents a source of considerable uncertainty for the U.K. economy, which has been one of the few bright spots in the European Union during the past several years.

In emerging markets, we have seen some recent improvement as many emerging market countries’ exchange rates have recovered somewhat during the first quarter of the year, partially reversing a trend that started almost two years ago. This is likely reflective of a confluence of factors, including the rise in global commodity prices and equity markets as well was curbed near-term expectations of U.S. Federal Reserve rate increases, although some emerging market currencies have benefited further from more nuanced local developments. Of course, there is no guarantee that this trend could not be reversed in the near future. However, so far, this development is arguably one of the most important developments for emerging economies since the U.S. Federal Reserve started talking about starting its “tapering” process.

Perhaps one of the biggest concerns for the global economy, other than a potential U.K. exit from the European Union, is the still very delicate situation affecting Brazil. With the impeachment process against Dilma Rousseff underway, uncertainty in the country will continue to dampen the possibilities of a prompt economic recovery. We expect the Brazilian economy to contract this year and also next year, which will put the Brazilian economy in uncharted territory—that is, having a negative rate of economic growth for three consecutive years—if our forecast comes to fruition.

However, not all the news is negative for the global economy. The price of petroleum has recovered somewhat and is hovering $50 per barrel, a price that should lend some support to the energy sector in the United States, a sector that was very dynamic in terms of its contribution to growth in investment before the price of petroleum started to collapse almost two years ago. It is true that the rise in oil prices is not necessarily welcome news for the Eurozone economy, whose consumers have benefited from the low price of petroleum. However, while it is indeed higher than in the recent past, we doubt $50 per barrel is a level that will severely affect the continuous improvement in Eurozone economic growth.

Perhaps the biggest issue today for the global economy, an issue that we have discussed in the past, is the lack of proactive fiscal policies across the globe that could help complement the very expansive monetary policies of the past several years. The International Monetary Fund (IMF) has been discussing for a long time the potential for the global economy to fall into what they call a “low-growth trap.” Meanwhile, the Organisation for Economic Cooperation and Development (OECD) has argued that this fear has actually been confirmed and that the global economy has actually fallen into this “low-growth trap.”

In order to improve the prospects for the global economy and give a boost to aggregate demand, the IMF and now the OECD are urging countries, but especially developed countries, to implement fiscal and structural policies to help the demand side of the global economy so that it can emerge from this “low-growth trap.” For the OECD, monetary policy has already been stretched to the limit and now is time for structural reforms and fiscal policies to help complement monetary policy in improving the conditions of the global economy. For now, however, we see little evidence that there is any movement in this direction, with a global political environment that does not seem to agree with what these international economic institutions believe to be adequate. Thus, expect global growth to remain muted for the short to medium term.


3

World

Global industrial production (IP) growth remained subdued in the first quarter, consistent with below-average rates of growth in world export volumes and broader global GDP that have prevailed in recent years. Meanwhile, inflation has generally remained low and stable in most advanced economies even as it has been elevated in some emerging economies.

Many of the world’s major central banks have remained on hold in recent months. In particular, central banks in the Eurozone and Japan have held policy steady after announcing monetary easing measures earlier in the year. Meanwhile, the U.S. Federal Reserve has refrained from further rate increases since raising rates by 25 bps in December 2015, although we expect it may resume its tightening cycle later this year.

Sentiment toward developing economies has generally fared better in recent months as commodity prices have risen from multi-year lows and as the Fed has paused its rate increases. China’s ongoing deceleration remains gradual and, while it remains in recession, Russia’s economy is showing signs of stabilizing. That said, a challenging political environment is hampering Brazil’s recovery from recession.

We are forecasting that 2016 will be another year of subdued growth in global GDP, as we expect full-year growth of just 2.9 percent. Growth should pick up slightly next year, but our forecast of 3.1 percent growth would be below the longer-run average of 3.5 percent.

Source: IHS Global Insight, Bloomberg LP and Wells Fargo Securities

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World Export & IP VolumeYear-over-Year Percent Change

World Export Volume: Mar @ 0.8%

World Industrial Production: Mar @ 0.8%

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World Consumer Price InflationYear-over-Year Percent Change

World Consumer Prices: Apr @ 2.5%

OECD: Mar @ 0.8%

Emerging and Developing: Apr @ 4.8%

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Central Bank Policy Rates

U.S. Target Rate: Jun-3 @ 0.50%

Bank of England: Jun-3 @ 0.50%

ECB: Jun-3 @ 0.00%

Reserve Bank of Australia: Jun-3 @ 1.75%

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10-Year Government Bond YieldsPercent

Japan: Jun-2 @ -0.13%

United States: Jun-2 @ 1.82%

Germany: Jun-2 @ 0.12%

United Kingdom: Jun-2 @ 1.35%


4

United States

The United States posted another weak first quarter of economic growth, as real GDP rose just 0.8 percent on an annualized basis in Q1. The soft reading was due in part to drags from inventories and net exports, but domestic demand growth was also relatively weak.

Meanwhile, the U.S. labor market is showing signs of softening. The U.S. economy added an average of 150,000 jobs per month in the first five months of the year, well below the roughly average 230,000 jobs per month added during 2015. The unemployment rate fell to a new cycle low of 4.7 percent in May, but this was largely due to a drop in the participation rate. Perhaps more encouragingly, wage growth has held relatively steady around cycle highs.

Even as the U.S. labor market has slowed, we believe the average pace of job growth will be strong enough to bring down the unemployment rate and exert further upward pressure on inflation. To be sure, the PCE deflator, the Fed’s preferred measure of inflation, rose only 1.1 percent on a year-ago basis in April, while the core PCE deflator has decelerated slightly in recent months. That said, CPI inflation has been relatively stronger and the breadth of price gains has increased, suggesting the underlying trend in inflation continues to point to an economy where slack is gradually diminishing.

Our base case is for the Fed to resume its path of rate increases in the third quarter, although that will hinge on the tone of economic data releases in the coming months.

Source: U.S. Depts. of Labor and Commerce, Federal Reserve Board and Wells Fargo Securities

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Real GDP: Q1 @ 0.8%

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U.S. Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: May @ 38K

12-Month Average Change: May @ 200K

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PCE Deflator vs. Core PCE DeflatorYear-over-Year Percent Change

PCE Deflator: Apr @ 1.1%

"Core" PCE Deflator: Apr @ 1.6%

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Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End

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2016 Longer Run2017 2018


5

Eurozone

Economic growth in the Eurozone picked up in the first quarter, as real GDP rose 0.6 percent on a sequential basis (2.2 percent annualized). The solid print was reflective of fairly broad-based growth, as all components of domestic demand contributed positively to growth. That said, the year-over-year growth rate remained at 1.7 percent, affirming our view that the Eurozone economy is not set to “break out” any time soon.

Against the backdrop of still-soft economic growth, it comes as little surprise that inflationary pressures remain largely absent from the euro area economy. CPI inflation remains in negative territory, falling 0.1 percent on a year-over-year basis in May, and the core rate of inflation also remains relatively subdued.

The ECB, which announced broad-based easing measures at its March meeting, made no change to its monetary policy regime at its April and June meetings. In March, the ECB cut all three of its policy rates, ramped up its monthly asset purchases to €80B/month and broadened the array of assets available for purchase. While ECB policymakers may introduce additional easing measures in the coming months, we suspect it may focus on implementing its existing program for the time being. Moreover, as indicated by its recent statements, the ECB has called upon other policy areas, including fiscal and structural policy, to contribute more decisively to the ongoing economic recovery. We forecast real GDP growth of 1.6 percent this year and 1.9 percent in 2017.


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Eurozone Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change

Compound Annual Growth: Q1 @ 2.2%

Year-over-Year Percent Change: Q1 @ 1.7%

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Eurozone Consumer Price Inflation Year-over-Year Percent Change

Core CPI: May @ 0.8%

CPI: May @ -0.1%

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Eurozone Bank Lending GrowthYear-over-Year Percent Change

Total Lending: Apr @ 0.5%

Loans to Households: Apr @ 2.1%

Loans to Nonfinancial Corporations: Apr @ 0.0%

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Eurozone Exchange RateUSD per EUR

USD per EUR: Jun @ 1.137


6

Japan

Real GDP in Japan expanded 0.5 percent (1.9 percent annualized) on a sequential basis in the first quarter. The details were somewhat less encouraging, as the solid read was partially driven by a boost from net exports, while fixed investment spending contracted in Q1, marking the third sequential drop in four quarters. As a further reflection of the ongoing underlying weakness in the Japanese economy, real GDP grew just 0.1 percent on a year-over-year basis in the first quarter. We forecast Japanese real GDP growth of just 0.3 percent this year and 1.2 percent in 2017.

At its latest policy meeting, the Bank of Japan (BoJ) surprised financial markets by not adjusting any of its various rates or adjusting the pace of its quantitative and qualitative easing program. The surprise inaction may in part reflect a desire among BoJ policymakers to wait until the effects of the negative interest rate policy can be more fully evaluated. The risks of any near-term stimulus may have diminished as Japan postponed a 2 percentage point hike in the national sales tax until 2019. However, underlying inflation in Japan clearly remains weak. Headline CPI inflation is currently negative, and core inflation and other measures of underlying price pressures have softened. Moreover, BoJ officials lowered their inflation forecasts for 2017 in their April assessment. Looking ahead, we suspect that the BoJ will eventually look to ease monetary policy further until the inflation dynamics begin to firm in a meaningful way.

Source: IHS Global Insight, Bloomberg LP, Bank of Japan and Wells Fargo Securities

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Japanese Consumer Price IndexYear-over-Year Percent Change

CPI ex-Food and Energy: Apr @ 0.7%

CPI: Apr @ -0.3%

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Japan's Monetary BaseTrillions of Yen

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Japanese Exchange RateJPY per USD (Inverted Axis)

JPY per USD: Jun @ 109.0


7

United Kingdom

Real GDP in the United Kingdom rose at just a 1.4 percent annualized pace in Q1, the weakest sequential growth rate since 2012. The slowdown was mostly driven by a decline in fixed investment spending, while real private consumption growth remained relatively solid.

The Bank of England (BoE) has noted that there are some signs that capital spending has been weighed on by uncertainty regarding the outcome of the referendum on British membership in the EU that is slated for June 23. As we have written, the only certain outcome of a potential Brexit is uncertainty. However, if the United Kingdom votes to leave the EU, the unfettered movement of goods, services, capital and persons between the United Kingdom and the rest of the EU would likely be at risk. Moreover, London’s status as the unofficial financial capital of Europe may also be in jeopardy.

Moreover, if the United Kingdom opts to leave the EU, the BoE’s next move may be to cut interest rates. That said, even if voters opt to remain, BoE rate hikes do not appear imminent. Growth has clearly softened and inflation remains well below target. Indeed, CPI inflation stood at just 0.3 percent in April, and the core rate remains subdued as well. We currently expect the BoE will refrain from raising interest rates until next year. Our forecast calls for real GDP in the United Kingdom to grow 1.6 percent this year and 1.9 percent in 2017.


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U.K. Real Gross Fixed Capital FormationYear-over-Year Percent Change

Gross Fixed Capital Formation: Q1 @ 1.1%

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U.K. CPI and "Core" CPIYear-over-Year Percent Change

CPI: Apr @ 0.3%

"Core" CPI Inflation: Apr @ 1.2%

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U.K. Exchange RateUSD per GBP

USD per GBP: Jun @ 1.45


8

Australia

The Australian economy grew 3.1 percent on a year-over-year basis in Q1, the fastest growth pace in more than three years. The robust growth figure was primarily driven by a strong boost from net exports, but consumer spending growth remained fairly solid. Meanwhile, fixed investment spending contracted for the eighth consecutive quarter.

While domestic demand has softened only modestly despite a challenging external environment, inflation has slowed considerably over the past several quarters. The overall CPI posted its first sequential decline in 8 years in Q1, while core measures of inflation have also shown broad signs of softening. In light of easing price pressures, the Reserve Bank of Australia (RBA) cut its benchmark policy rate 25 bps to 1.75 percent at its May meeting. In its statement, RBA policymakers noted that domestic cost pressures, particularly unit labor costs, were likely to remain subdued in the coming quarters. Policymakers also appear concerned with the ongoing weakness in Australia’s terms of trade, which, coupled with soft wage growth, has tended to weigh on overall real personal income growth. Looking ahead, our baseline expectation is that the RBA can remain on hold for now and weigh the impact of the May rate cut. Having said that, the bias will likely be toward further cuts later this year, particularly if price dynamics continue to weaken, the most obvious example being if wage growth should begin to deteriorate.


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Australian Consumer Price IndexYear-over-Year Percent Change

Overall CPI: Q1 @ 1.3%

Core CPI: Q1 @ 1.7%

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RBA Cash Rate TargetPercent

Cash Rate: Jun @ 1.75%

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Australian Income IndicatorsIndex Q1 2000=100

Terms of Trade: Q1 @ 131.1

Real Disposable Personal Income: Q4 @ 141.0


9

Canada

Real GDP in Canada grew at an annualized rate of 2.4 percent on a sequential basis in Q1, a solid rebound from the soft 0.5 percent print in the prior quarter. Growth was led by consumer spending, as we have seen for the past few quarters, and net exports, while fixed investment spending subtracted from overall growth for the fifth consecutive quarter.

The resilience of consumer spending remains a bright spot in the Canadian economy. Consumer confidence has remained buoyant even as activity in the manufacturing and mining sectors has waned. As we have pointed out previously, however, the growing debt of Canada’s consumers remains one of the top risks to the country’s longer-term economic prospects.

Meanwhile, the outlook for fixed investment spending remains subdued. On top of the obvious devastating humanitarian impact, the wildfires in Alberta, Canada’s oil-producing province, have also likely had a marked effect on GDP growth. Indeed, the Bank of Canada (BoC) suggested the fires would likely subtract 1.25 percentage points from Q2 growth. That said, eventual reconstruction and a resumption of activities in Alberta are expected to support growth in the second half of the year. Meanwhile, inflation is broadly in line with the BoC’s target. Looking ahead, we expect the next move from the BoC will be a rate hike, although we expect this move will not occur until sometime after the next U.S. Fed rate hike.


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Bank of Canada Overnight Lending RatePercent

BOC Overnight Rate: Jun @ 0.50%

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Canadian Exchange Rate and Crude OilCAD per USD (Inverted), USD per Barrel - WTI

CAD per USD: Jun @ 1.306 (Left Axis)

Crude Oil - WTI: Jun @ $48.6 (Right Axis)

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Canadian Consumer Price IndexYear-over-Year Percent Change

CPI: Apr @ 1.7%

CPI ex-8 Volatile: Apr @ 2.0%


10

Singapore

Economic growth in Singapore remained fairly subdued in Q1, as real GDP rose just 1.8 percent on a year-over-year basis. The decline in manufacturing appears to be lessening, but services activity continues to decelerate.

Global trade growth and, more broadly, foreign demand are the primary engines of growth for the Singaporean economy (roughly 60 percent of domestic value added in the economy is attributable to foreign final demand). In that regard, the slowdown in real GDP growth in the Lion City in recent years can be traced to the deceleration in trade volumes and GDP growth in most regions of the world. With global growth and trade activity unlikely to rebound significantly in the years ahead, it seems unlikely that Singapore will be able to achieve double-digit growth rates again any time soon.

As Singapore has a very open economy, its central bank targets its country’s nominal effective exchange rate (NEER). In light of slowing growth and a dearth of inflationary pressures—CPI inflation has been negative since 2014 and the core rate remains depressed—Singapore’s central bank announced it would ease policy by reducing its target rate of appreciation for the NEER to zero. Since our currency strategists expect modest appreciation in the dollar vis-à-vis the currencies of most of Singapore’s trading partners, they expect the greenback to also rise against the Singaporean dollar on balance over the next 18 months or so.


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Singapore Real Output by SectorYear-over-Year Percent Change

Real GDP: Q1 @ 1.8%

Services Output: Q1 @ 1.4%

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Singapore Non-Petroleum Trade3-Month Moving Average, Year-over-Year Percent Change

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Imports: Apr @ 2.7%

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6%

7%

8%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Singapore Consumer Price IndexYear-over-Year Percent Change

CPI: Apr @ -0.5%

Core CPI: Apr @ 0.8%

95

100

105

110

115

120

125

130

95

100

105

110

115

120

125

130

2004 2006 2008 2010 2012 2014 2016

Singapore Nominal Effective Exchange RateIndex, 1990=100

Nominal Effective Exchange Rate: Apr @ 124.9


11

South Korea

Economic growth in South Korea slowed in the first quarter, as real GDP rose just 0.5 percent (2.1 percent annualized) on a sequential basis. On a year-over-year basis, growth dipped to 2.8 percent from 3.1 percent in the prior quarter but remained above the 2.6 percent pace registered in full-year 2015.

Unfavorable external conditions, including slowing growth in the country’s key trading partners, remain as challenges facing the Korean economy at present. Indeed, real exports have fallen in three out of the past four quarters. However, domestic demand has generally held up better than the external sector, although it has softened somewhat as well. Fixed investment spending and consumer spending both decelerated on a year-over-year basis in Q1, although some of the softening in consumer spending was due to the expiry of consumption tax cuts at the end of last year.

Meanwhile, inflationary pressures in South Korea remain subdued. Headline CPI inflation is below 1 percent and core inflation has slowed in recent months. In light of softer growth and inflation and looming external risks, the Bank of Korea (BoK) unexpectedly cut its main policy rate 25 bps to 1.25 percent at its June meeting. Policymakers signaled an end to the easing cycle may be near, but noted that further cuts may be in the offing if downside risks from the external sector intensify or domestic demand shows further signs of softening.


-20%

-15%

-10%

-5%

0%

5%

10%

15%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2001 2003 2005 2007 2009 2011 2013 2015

South Korean Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change



0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

2000 2002 2004 2006 2008 2010 2012 2014 2016

South Korean Consumer PricesYear-over-Year Percent Change

CPI: May @ 0.8%


1%

2%

3%

4%

5%

6%

1%

2%

3%

4%

5%

6%

2000 2002 2004 2006 2008 2010 2012 2014 2016

South Korean Official Bank RatePercent

Official Bank Rate: Jun @ 1.50%

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,000

1,050

1,100

1,150

1,200

1,250

1,300

2010 2011 2012 2013 2014 2015 2016

South Korean Exchange RateKRW per USD (Inverted Axis)

KRW per USD: Jun @ 1,166.9


12

Sweden

Economic growth in Sweden slowed a bit in the first quarter, as real GDP grew 4.2 percent on a year-over-year basis, down from 4.9 percent in the prior quarter. That said, the softer headline figure belies the underlying strength in Swedish domestic demand, all of the components of which added firmly to growth in Q1.

Despite the apparent underlying strength in Swedish domestic demand, data suggest that a fair amount of spare capacity remains in the economy. Indeed, while it has picked up somewhat since last year, CPI inflation remains well below the central bank’s 2 percent target, having risen only 0.8 percent on a year-over-year basis in April. Moreover, while the jobless rate has steadily trended downward over the past two years, it remains well above the lows observed during the prior cycle. Sweden’s central bank made no change to its policy rate at its April meeting, but increased the pace of annual asset purchases for 2016 under its quantitative easing program by 45 billion krona to 245 billion krona. Meanwhile, its main policy rate, the repo rate, remains firmly negative at -0.50 percent. Looking ahead, policymakers appear to be focused on the value of Swedish krona and its implications for domestic inflation in making its monetary policy decisions, at least for now. We do not believe the Riksbank will hike its main policy rate for quite some time, and it may even opt to ease policy further if conditions warrant.

Source: IHS Global Insight and Wells Fargo Securities

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Swedish Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change



-2%

-1%

0%

1%

2%

3%

4%

5%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Swedish Consumer Price Inflation Year-over-Year Percent Change

Overall CPI: Apr @ 0.8%

Underlying CPI: Apr @ 1.4%

4%

5%

6%

7%

8%

9%

10%

11%

4%

5%

6%

7%

8%

9%

10%

11%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Swedish Unemployment RateSeasonally Adjusted

12-Month Moving Average: Apr @ 7.2%

Unemployment Rate: Apr @ 6.7%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Swedish Central Bank Policy Rate

Central Bank Policy Rate: Jun @ -0.50%


13

Switzerland

Real GDP in Switzerland rose just 0.1 percent (0.4 percent at an annualized rate) on a sequential basis in the first quarter. The anemic headline figure was held back primarily by a drop in government spending and a sizeable inventory correction, while personal consumption and fixed investment spending growth was relatively more solid.

That said, the underlying pace of economic growth in Switzerland is quite weak at present. On a year-over-year basis, real GDP was up 0.7 percent in Q1, not as weak as the 0.3 percent rate that was registered in Q4 2015, but hardly robust either. Moreover, while the unemployment rate remains low at 3.5 percent, it has trended higher over the past few years. In addition, there are no inflationary pressures in the Swiss economy at present. To be sure, the swoon in the overall consumer price index since late 2014 reflects, at least in part, the collapse in energy prices. In addition, the appreciation of the Swiss franc, which is up nearly 10 percent on a trade-weighted basis since the end of 2014, has also added downward pressure on the overall rate of inflation. That said, inflation in Switzerland likely would be higher if the rate of economic growth in that country were stronger.

Due to the mild case of deflation that has taken hold in Switzerland, the Swiss National Bank (SNB) has cut its policy rates into negative territory. Although growth should firm a bit this year and inflation edge back into positive territory, the SNB seems to be a long way from tightening policy.


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Swiss Real GDPBars = Compound Annual Rate, SA Line = Yr/Yr % Change, NSA



90

100

110

120

130

90

100

110

120

130

2011 2012 2013 2014 2015 2016

Swiss Franc Exchange RatesIndex, Jan 1, 2011 = 100

EUR/CHF: Jun-03 @ 112.6

USD/CHF: Jun-03 @ 99.1

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Swiss Consumer Price IndexYear-over-Year Percent Change

CPI: May @ -0.4%

Core CPI: May @ -0.1%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

05 06 07 08 09 10 11 12 13 14 15 16

SNB Target LIBOR CorridorRates

3-M Swiss Franc LIBOR: Jun @ -0.74%

SNB Lower Bound: Jun @ -1.25%

SNB Upper Bound: Jun @ -0.25%


14

Taiwan

Economic growth in Taiwan remained subdued in the first quarter of the year. On a year-over-year basis, real GDP declined 0.7 percent, suggesting the Taiwanese economy has essentially stagnated over the past year.

The slowdown in Taiwanese GDP growth that has occurred in recent quarters has been driven, at least in part, by weak export growth. Indeed, exports are equivalent to about 60 percent of GDP in Taiwan. Softer export activity has weighed on the overall investment climate in Taiwan. Indeed, gross fixed investment spending declined on a year-over-year basis in the first quarter. With growth in world trade running well below rates seen in prior decades and with activity continuing to decelerate in China, Taiwan’s main trading partner, it seems unlikely that the country will be able to achieve a return to the robust growth rates it achieved in the prior decade.

In light of softer growth and weak underlying inflation—the headline and core CPI are both up around 1 percent from a year ago—Taiwan’s central bank has cut its main policy rate by 37.5 bps since last summer, and many forecasters look for further easing later this year. Given our expectation for a resumption of Fed rate hikes later this year, our currency strategists expect modest depreciation in the value of the Taiwanese dollar vis-à-vis the U.S. dollar in the coming quarters.


-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Taiwanese Real GDPYear-over-Year Percent Change

Year-over-Year Percent Change: Q1 @ -0.7%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

04 05 06 07 08 09 10 11 12 13 14 15 16

Central Bank of Taiwan Policy Rate

Taiwan Central Bank Rate: Jun @ 1.500%

-4%

-2%

0%

2%

4%

6%

-4%

-2%

0%

2%

4%

6%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Taiwanese Consumer Price IndexYear-over-Year Percent Change


CPI: May @ 1.2%

28

29

30

31

32

33

34

35

36

28

29

30

31

32

33

34

35

36

2000 2002 2004 2006 2008 2010 2012 2014 2016

Taiwanese Exchange RateTWD per USD (Inverted Axis)

TWD per USD: Jun @ 32.47


15

Argentina

The Argentine economy grew 2.1 percent in 2015 (latest available data), well above the 0.4 percent pace registered in 2014. Growth was led by the agricultural sector, where output rose 6.4 percent on a record soy harvest. Construction activity was also robust, while manufacturing contracted and services growth was modest. Most forecasters, including the IMF, expect the economy to contract this year.

Economic releases are still limited as the country continues to overhaul its national statistics agency. However, of particular note was Argentina’s $16.5 billion international bond issuance earlier this year, which marks the first time the country has tapped international capital markets in roughly 15 years. The bond issuance allowed the country to settle its longstanding dispute with holdout creditors and should provide the government with financing support for its fiscal deficit, which is estimated to be about 6 percent of GDP this year.

Meanwhile, policymakers have indicated that reducing inflation, which by some estimates is running above 30 percent, is one of their top goals. However, a number of factors will likely complicate their efforts. In particular, the government significantly curbed its consumer energy subsidy program, while wage negotiations among the country’s powerful labor unions may add further upward pressure to inflation. In short, the country is making strides toward recovery, but it still has a long way to go.

Source: IHS Global Insight and Wells Fargo Securities

-4%

0%

4%

8%

12%

16%

-4%

0%

4%

8%

12%

16%

05 06 07 08 09 10 11 12 13 14 15 16

Argentine Real GDP GrowthNot Seasonally Adjusted


$0

$10

$20

$30

$40

$50

$60

$0

$10

$20

$30

$40

$50

$60

01 03 05 07 09 11 13 15

Argentina Foreign Exchange ReservesBillions of Dollars

Total Reserves: Jun @ $31.0B

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

04 05 06 07 08 09 10 11 12 13 14 15 16

Argentina Consumer ConfidenceDiffusion Index

Consumer Confidence: May @ 42.7

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2010 2011 2012 2013 2014 2015 2016

Exchange Value of Argentine Peso vs. U.S. DollarARS per USD, Inverted Scale

ARS per USD: Jun @ 13.89


16

Brazil

Brazil’s ongoing recession deepened in the first quarter, as real GDP declined 0.3 percent (1.1 percent annualized) on a sequential basis. The weakness in domestic demand remains broadly based, and the Q1 growth print was helped by a strong boost from net exports, in part reflective of past depreciation in the Brazilian currency. That said, the pace of decline appears to be slowing, as the year-over-year rate of contraction lessened to 5.4 percent.

Further contributing to the severity of Brazil’s recession has been the challenging political climate in the country. President Rousseff has stepped down from her post while the Senate reviews evidence in her impeachment case and decides whether to remove her from office permanently. Vice President Michel Temer is currently serving as interim president during the trial and, if the Senate votes to remove Rousseff, he will assume her post until new elections are held in 2018.

Market participants appear optimistic that the new administration will be able to curb public spending and rein in the budget deficit, which currently stands at nearly 10 percent of GDP, and pave the way for rate cuts from the central bank. However, the measures required to trim public spending may be politically unpopular, and political uncertainty is unlikely to be fully resolved even if Rousseff is removed from office permanently. We expect real GDP in Brazil will decline 4.2 percent this year and fall a further 1.0 percent next year.


-20%

-15%

-10%

-5%

0%

5%

10%

15%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Brazilian Real GDPBars = Compound Annual Rate, SA Line = Yr/Yr % Change, NSA

Real GDP: Q1 @ -1.1%

Real GDP: Q1 @ -5.4%

0%

3%

6%

9%

12%

15%

18%

0%

3%

6%

9%

12%

15%

18%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Brazilian Consumer Price IndexYear-over-Year Percent Change

CPI: May @ 9.3%

6%

9%

12%

15%

18%

21%

6%

9%

12%

15%

18%

21%

05 06 07 08 09 10 11 12 13 14 15 16

Brazilian Central Bank Policy RatePercent

Selic Rate: Jun @ 14.25%

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

10 11 12 13 14 15 16

Brazilian Exchange RateBRL per USD (Inverted Axis)

BRL per USD: Jun @ 3.53


17

Chile

The Chilean economy remained weak in the first quarter, as real GDP grew just 2.0 percent on a year-over-year basis. The soft reading underscores the country’s ongoing adjustment to lower commodity prices and slower growth in some of its major trading partners. That said, the underlying details of the release suggest that growth, while weak, is fairly broad based at present. In particular, all components of domestic demand contributed to growth during the quarter.

Meanwhile, even as growth has been subdued, inflation has generally remained above the central bank’s target range of 2 to 4 percent. Indeed, CPI inflation has been above 4 percent in 23 out of the past 24 months. This is in part the result of lagged effects of depreciation in the peso, which fell about 20 percent on a trade-weighted basis from 2013-2015. Persistent above-target inflation led the central bank to raise its policy rate by 50 bps late last year, but it has subsequently held that rate steady.

Looking ahead, growth is likely to remain subdued, albeit positive, in the coming quarters. Still-low commodity prices, but especially prices for copper, should continue to prove a key headwind for fixed investment spending in Chile. Meanwhile, weak consumer confidence and elevated inflation without a commensurate pickup in wages will likely keep a lid on real consumption growth.


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12 13 14 15 16

Chilean Real GDPNot Seasonally Adjusted

Year-over-Year Growth: Q1 @ 2.0%

-4%

-2%

0%

2%

4%

6%

8%

10%

-4%

-2%

0%

2%

4%

6%

8%

10%

04 05 06 07 08 09 10 11 12 13 14 15 16

Chilean Consumer Price IndexYear-over-Year Percent Change

CPI: May @ 4.2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

95 97 99 01 03 05 07 09 11 13 15

Chile Central Bank Policy Rate

Monetary Policy Rate: Jun @ 3.5%

400

500

600

700

800

400

500

600

700

800

2010 2011 2012 2013 2014 2015 2016

Chilean Exchange RateCLP per USD (Inverted Axis)

CLP per USD: Jun @ 683.24


18

China

Real GDP in China rose 6.7 percent on a year-over-year basis in Q1, only marginally below the 6.8 percent rate registered in Q4 2015. The slight downshift affirms our view that China’s economy will experience a “soft landing.”

Higher frequency data support the hypothesis that the Chinese economy is showing signs of stabilizing. In particular, industrial production grew 6.8 percent in Q1, stronger than the 5.9 percent pace seen in Q4 2015. Consistent with this pickup, the official manufacturing PMI returned to expansion territory in March for the first time in nine months. Meanwhile, despite recent slowing, the pace of loan growth remains above rates seen in 2014, perhaps reflective of past easing measures from the People’s Bank of China (PBoC). With its benchmark lending rate at 4.35 percent, the PBoC arguably has scope to ease policy further, should it be necessary.

Our current forecast calls for real GDP growth in China to continue to moderate, as we expect the economy will expand 6.5 percent this year and 5.7 percent in 2017. Looking ahead, however, we are concerned that the Chinese economy may face some longer-term structural issues. In particular, the Chinese government could make a policy decision to keep some economically inefficient state-owned enterprises afloat to avoid mass layoffs. This has the potential to weigh on productivity and, in turn, broader GDP growth in China. That said, China may be able to shore up productivity growth by continuing to adopt technologies that have been developed in more advanced economies.


0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Chinese Real GDP ForecastYear-over-Year Percent Change


WF

Fcst.

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chinese Fixed Investment SpendingYear-over-Year Percent Change

Fixed Investment Spending: Apr @ 10.5%

0%

5%

10%

15%

20%

25%

30%

35%

0%

5%

10%

15%

20%

25%

30%

35%

00 02 04 06 08 10 12 14 16

Chinese Loan GrowthYear-over-Year Percent Change

Chinese Loan Growth: Apr @ 14.4%

0%

2%

4%

6%

8%

10%

0%

5%

10%

15%

20%

25%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chinese Monetary IndicatorsPercent of Deposits, Major Banks; 1-Year Benchmark Lending Rate

Reserve Requirement: Jun @ 17.00% (Left Axis)

Lending Rate: Jun @ 4.35% (Right Axis)


19

India

Economic growth firmed in India in the first quarter, as real GDP grew 7.9 percent on a year-over-year basis, the strongest pace in more than a year. Growth continues to be driven primarily by personal consumption, while fixed investment spending has generally remained weak, in part reflecting the ongoing softness in export growth. Going forward, we expect the strength in Indian economic growth will generally continue, as we expect real GDP to grow 7.6 percent in the current fiscal year and 7.4 percent in FY 2017-18.

While growth has been robust in recent quarters, the Reserve Bank of India (RBI) has generally had success in achieving relatively stable inflation over the past two years or so. Indeed, the reduction in inflationary pressures has given the RBI scope to cut its main policy rate by 150 bps since last year, including a 25 bps cut at its April meeting. Looking ahead, some analysts expect another rate cut in the coming quarters. However, a significant easing of policy does not seem likely unless the economy should completely stall, which we do not expect. At 5.4 percent in April, CPI inflation was slightly above the 5 percent target that the RBI has set for the fiscal year that ends next March. However, with rates in India biased to the downside and given expectations of further Fed rate hikes later this year, our currency strategists expect the Indian rupee to depreciate modestly versus the dollar in the coming quarters.


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2013 2014 2015 2016

Indian GDP GrowthYear-over-Year Percent Change

Real GDP Growth: Q1 @ 7.9%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Indian Consumer Price IndexYear-over-Year Percent Change

CPI: Apr @ 5.4%

2%

4%

6%

8%

10%

2%

4%

6%

8%

10%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Reserve Bank of India Repo RatePercent

Repo Rate: Jun @ 6.50%

37.0

41.0

45.0

49.0

53.0

57.0

61.0

65.0

69.0

73.0

37.0

41.0

45.0

49.0

53.0

57.0

61.0

65.0

69.0

73.0

2010 2011 2012 2013 2014 2015 2016

Indian Exchange RateINR per USD (Inverted Axis)

INR per USD: Jun @ 67.35


20

Mexico

Economic growth in Mexico topped analysts’ expectations in Q1, as real GDP rose 2.8 percent on a year-over-year basis, up from the 2.5 percent pace registered in the prior quarter. The pickup in growth was driven primarily by strength in consumer spending, a trend we have seen in the past several quarters. Meanwhile, fixed investment spending remained weak during the quarter, partly reflecting ongoing softness in the energy sector and slowing auto demand from the United States.

Following its surprise 50 bps hike earlier this year, Mexico’s central bank has subsequently refrained from further tightening. While inflation has risen from the lows seen at the end of last year, it remains below the central bank’s 3 percent target. Policymakers have indicated they see inflation below 3 percent in the coming months, and at the current juncture do not seem to be expressing significant concern about price developments. That said, a renewed weakening trend in the peso or unexpected spikes in inflation may spur the central bank into action. Moreover, the central bank will be watching closely the developments at the U.S. Federal Reserve, and may be inclined to follow any additional Fed rate hikes with tightening measures of its own.

Looking ahead, we expect growth will remain modest in the Mexican economy. Our forecast calls for real GDP to rise 2.6 percent this year and 2.8 percent in 2017.


-21%

-18%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

-21%

-18%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Mexican Real GDPBars = Compound Annual Rate Line = Yr/Yr % Change



2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Mexico Central Bank Policy RatePercent

Banxico Policy Rate: Jun @ 3.75%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

04 05 06 07 08 09 10 11 12 13 14 15 16

Mexican Consumer Price IndexYear-over-Year Percent Change

CPI: May @ 2.6%


11.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

20.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

20.00

2010 2011 2012 2013 2014 2015 2016

Mexican Exchange RateMXN per USD (Inverted Axis)

MXN per USD: Jun @ 18.60


21

Russia

Real GDP in Russia fell 1.2 percent on a year-over-year basis in Q1, which was not as weak as most analysts had expected. A breakdown of real GDP into its underlying components is not yet available, but higher frequency data suggest the economy may be stabilizing. In particular, declines in real retail sales and industrial production are lessening, suggesting domestic demand may be poised for a gradual recovery.

Nascent signs of a gradual recovery in domestic demand may reflect the slowdown in inflation that has occurred since last year. Indeed, while it remains high, the rate of CPI inflation has fallen to 7.3 percent on a year-over-year basis from nearly 17 percent in March 2015. Lower inflation has helped support consumers’ purchasing power and contributed to the stabilization in retail sales. While the slowdown in inflation likely reflects, at least in part, the shortfall in demand in the recession-laden Russian economy, it has also been helped by the relative steadiness in the value of the ruble. Although our currency strategists expect renewed weakness in the Russian currency, they do not expect it to test the all-time lows seen last year. Looking ahead, we expect real GDP growth to turn positive again in the second half of 2016 and continue to expand through next year. That said, geopolitical tensions, including Western sanctions, and still-low commodity prices remain key risks for the outlook for the Russian economy going forward.


-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Russian Real GDPYear-over-Year Percent Change

GDP: Q1 @ -1.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Russia Industrial Output vs Real Retail SalesYear-over-Year Percent Change

Industrial Production: Apr @ 0.5%

Real Retail Sales: Apr @ -4.8%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2002 2004 2006 2008 2010 2012 2014 2016

Russian Consumer Price IndexYear-over-Year Percent Change

CPI: May @ 7.4%


20.0

30.0

40.0

50.0

60.0

70.0

80.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2010 2011 2012 2013 2014 2015 2016

Russian Exchange RateRUB per USD (Inverted Axis)

RUB per USD: Jun @ 65.63


22

Turkey

Real GDP data for Turkey for Q1 are not yet available, but higher frequency indicators suggest growth remained fairly solid in the first few months of the year. In particular, real retail sales rose 4.2 percent from a year earlier in Q1, above the pace registered in the prior quarter. Meanwhile, industrial production rose 4.7 percent from a year ago during the quarter.

While economic activity has continued to grow at a fairly healthy clip, inflation has moderated since last year in part due to recent stability in the value of the lira. That said, at 6.6 percent year over year, inflation remains above the midpoint of Turkey’s central bank’s target range. The central bank has cut its benchmark lending rate, the upper bound of its interest rate corridor, 125 bps since the beginning of the year. However, it made no change to its other policy rates during this time period, effectively narrowing its policy rate corridor.

Looking ahead, the trajectory of the lira is likely to be a key factor affecting the outlook for growth and central bank policy. If the currency remains stable, then the inflationary impulses from rising import prices should recede further. If CPI inflation continues to trend down, the central bank could begin to guide its interest rate corridor lower, which may provide additional support for growth. However, political tensions in Turkey and recent terrorist attacks may contribute to volatility in the lira in the coming quarters.


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Turkish Industrial Production IndexYear-over-Year Percent Change

IPI: Mar @ 4.7%

3-Month Mov. Avg.: Mar @ 5.6%

0%

3%

6%

9%

12%

15%

0%

3%

6%

9%

12%

15%

2005 2007 2009 2011 2013 2015

Turkish Consumer Price IndexYear-over-Year Percent Change

CPI: May @ 6.6%

CPI Ex-Energy/Food&Bev/Gold: May @ 8.8%

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013 2014 2015 2016

Turkish Central Bank Policy Rate Corridor

Overnight Lending Rate: Jun @ 9.50%

Overnight Borrowing Rate: Jun @ 7.25%

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

2010 2011 2012 2013 2014 2015 2016

Turkish Exchange RateTRY per USD (Inverted Axis)

TRY per USD: Jun @ 2.950


23

Dollar Exchange Rates

After exhibiting broad weakness throughout the first few months of the year, the U.S. dollar has recovered modestly from lows seen around the beginning of May, although the greenback has pared some of those recent gains in part due to the subdued May U.S. jobs report.

Major currencies are somewhat mixed, but generally firmer on balance, over the past few months. The euro is little changed since March as the ECB left policy unchanged in April and June, while the Canadian dollar has risen modestly in value, in part due to the rise in oil prices. The yen has been fairly resilient on a slight reduction of near-term easing expectations, while the British pound has been volatile ahead of the U.K. referendum on EU membership.

Emerging currencies are generally firmer year-to-date, although on balance many have relinquished some of those gains in recent weeks. This likely reflects an increase in expectations of an eventual resumption of Fed rate hikes, even if those expectations have been tempered somewhat over the past few days. Meanwhile, commodity prices and global equity markets have been on firmer footing, lending support to some of those currencies.

Our currency strategists expect the U.S. dollar to rise in value versus most currencies over the medium term. This view reflects expectations for an eventual resumption of Fed rate hikes, particularly as many of the world’s major central banks are set to ease or maintain their existing policies in the coming quarters.

Source: Federal Reserve Board, Bloomberg LP, IHS Global Insight and Wells Fargo Securities

90

95

100

105

110

115

120

125

130

90

95

100

105

110

115

120

125

130

2010 2011 2012 2013 2014 2015 2016

U.S. Trade Weighted Dollar IndexJanuary 1997=100

Broad Currency Index: Jun-3 @ 121.1

60

70

80

90

100

110

110

120

130

140

150

160

2010 2011 2012 2013 2014 2015 2016

U.S. Trade Weighted Currency IndexesMarch 1973=100

"Other ITP" Index: Jun-3 @ 155.2 (Left Axis)

Major Currency Index: Jun-3 @ 89.4 (Right Axis)

60

80

100

120

140

1601.00

1.20

1.40

1.60

1.80

2.00

10 11 12 13 14 15 16

Euro, Pound & Yen Exchange RatesUSD per Euro, USD per Pound, Yen per USD

Dollars per Euro: Jun @ 1.14 (Left Axis)

Dollars per Pound: Jun @ 1.45 (Left Axis)

Yen per Dollar: Jun @ 106.53 (Right Axis, Inverted)

50

60

70

80

90

100

110

50

60

70

80

90

100

110

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Value of Emerging Market Currencies vs. DollarIndex, January 1, 2014 = 100

Turkish Lira: Jun-7 @ 74.0

Brazilian Real: Jun-7 @ 69.0

Colombian Peso: Jun-7 @ 65.5

Malaysian Ringgit: Jun-7 @ 80.8


24

Energy

Oil prices in recent months have continued to climb off the lows reached early this year. Prices for both Brent and WTI have been flirting with $50, increasing conviction that prices have bottomed for the current cycle.

The rebound in prices has been primarily driven by changes on the supply side. U.S. production has fallen by about 0.5 million barrels per day since the start of the year, leading to a slower pace of inventory growth. That said, inventories in the U.S. remain elevated (about 30 percent above their 5-year average), indicating further production cuts will be needed to bring the market back into balance.

Supply disruptions elsewhere in the world are providing some temporary support to prices. Wildfires in Canada have taken roughly 1 million barrels of production offline, while outages have reduced supply in Nigeria, Libya and Venezuela.

The 80 percent rise in Brent prices since January’s low has taken pressure off of OPEC members to dial back production. At its June meeting, members decided to keep output unchanged.

A further recovery in prices is likely to be more modest in the months ahead as supply disruptions run their course. Demand in the first quarter was stronger than expected, but overall remains modest given the weak global growth outlook.

Source: IHS Global Insight, Moody’s Analytics and Wells Fargo Securities

$10

$30

$50

$70

$90

$110

$130

$10

$30

$50

$70

$90

$110

$130

2009 2010 2011 2012 2013 2014 2015 2016

World Oil PricesWeekly Average Cash Spot Prices, Dollars per Barrel

WTI: Jun-3 @ $48.69Brent: Jun-3 @ $49.51

2

3

4

5

6

7

8

9

10

2

3

4

5

6

7

8

9

10

05 06 07 08 09 10 11 12 13 14 15 16

Thousands

Thousands

U.S. Crude Oil ProductionMillions of Barrels per Day

U.S. Oil Production: Jun-3 @ 8.75 M

280

310

340

370

400

430

460

490

520

550

580

280

310

340

370

400

430

460

490

520

550

580

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

U.S. Crude Oil Inventory4-Week Moving Average, Millions of Barrels

Oil Inventory: Jun-3 @ 536.6 Million Barrels

23

24

25

26

27

28

29

30

31

32

33

34

23

24

25

26

27

28

29

30

31

32

33

34

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

OPEC Crude Oil ProductionMillions of Barrels per Day

OPEC Production: May @ 32.7 M


25

Other Commodities

Oil has not been the only commodity to recover some ground in recent months. The Bloomberg commodity index ex-petroleum has risen to nearly an eight-month high through the first week of June.

Agriculture commodities have seen the biggest price gains in recent months as effects from the El Niño weather system emerge. Soybean prices have jumped since April as Argentina faced heavy rains. Dry weather in Brazil and Southeast Asia has hit sugar production, leading prices to rise roughly 20 percent since the start of the year. Corn prices have also pushed higher over the past two months as adverse weather looks to have reduced South American production. With wheat and coffee prices little changed, the overall Bloomberg agriculture index is up about 20 percent since early April.

Slower growth in China’s industrial sector continues to weigh on metals prices. That said, slightly better data and signs of supply starting to be reined in has provided some support. The Bloomberg industrial metals index is up about 4 percent year to date.

Zinc has seen the strongest rebound in prices (up 24 percent year to date) as mines have begun to scale back production. Copper prices have also risen since early in the year, but are beginning to head lower again amid concerns that demand was front-loaded earlier this year. Additionally, inventories remain elevated.

Source: Bloomberg LP, Commodity Research Bureau and Wells Fargo Securities

0

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225

2010 2011 2012 2013 2014 2015 2016

Commodity Indices Ex-Petroleum

Bloomberg Commodities Ex-Petroleum Index: Jun-5 @ 84.8

Bloomberg Industrial Metals Index: Jun-3 @ 92.1

Bloomberg Agriculture Index: Jun-3 @ 60.4

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Crop PricesDollars per Bushel

Corn: Jun-3 @ $418.25Wheat: Jun-3 @ $497.25Soybeans: Jun-3 @ $1,132.00

$5

$10

$15

$20

$25

$30

$35

$40

$5

$10

$15

$20

$25

$30

$35

$40

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sugar PriceDollars per Pound

Sugar: Jun-3 @ $18.75

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

$2,750

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

$2,750

2010 2011 2012 2013 2014 2015 2016

Zinc PriceDollars per Metric Ton

Zinc: Jun-3 @ $1,992

Economics Group International Economic Forecast Wells Fargo Securities

26

Wells Fargo International Economic Forecast

(Year-over-Year Percent Change)

GDP CPI

2015 2016 2017 2015 2016 2017

Global (PPP Weights) 3.0% 2.9% 3.1% 2.6% 3.2% 3.4%

Global (Market Exchange Rates) 2.8% 2.7% 2.9% n/a n/a n/a

Advanced Economies1 1.9% 1.8% 2.2% 0.3% 0.9% 1.5%

United States 2.4% 2.0% 2.2% 0.1% 1.4% 2.4%

Eurozone 1.5% 1.6% 1.9% 0.0% 0.2% 1.2%

United Kingdom 2.3% 1.6% 1.9% 0.0% 0.6% 1.4%

Japan 0.6% 0.3% 1.2% 0.8% 0.0% 1.0%

Korea 2.6% 2.6% 2.8% 0.7% 0.9% 1.9%

Canada 1.1% 1.9% 2.7% 1.1% 1.3% 1.9%

Developing Economies1 4.0% 3.9% 4.0% 4.7% 5.5% 5.3%

China 6.9% 6.5% 5.7% 1.4% 2.1% 2.0%

India2 6.6% 7.2% 7.6% 6.0% 4.9% 5.2%

Mexico 2.5% 2.6% 2.8% 2.7% 2.9% 2.8%

Brazil -3.9% -4.2% -1.0% 9.0% 9.0% 7.2%

Russia -3.7% 0.3% 1.7% 15.6% 7.3% 5.9%

Forecast as of: June 8, 20161Aggregated Using PPP Weights 2Forecasts Refer to Fiscal Year

(End of Quarter Rates)

Q2 Q3 Q4 Q1 Q2 Q3 Q2 Q3 Q4 Q1 Q2 Q3

U.S. 0.70% 0.95% 1.20% 1.20% 1.45% 1.70% 1.81% 1.96% 2.03% 2.12% 2.23% 2.39%

Japan -0.03% -0.05% -0.10% -0.12% -0.15% -0.15% -0.10% -0.10% -0.08% -0.05% -0.05% -0.02%

Euroland1 -0.28% -0.30% -0.30% -0.30% -0.25% -0.20% 0.10% 0.15% 0.20% 0.25% 0.30% 0.40%

U.K. 0.58% 0.58% 0.65% 0.90% 0.95% 1.15% 1.30% 1.35% 1.40% 1.55% 1.60% 1.75%

Canada2 0.90% 0.90% 0.90% 0.90% 1.10% 1.15% 1.25% 1.30% 1.40% 1.50% 1.60% 1.75%

Forecast as of: June 8, 20161 10-year German Government Bond Yield 2 3-Month Canada Bankers' Acceptances

2017

10-Year Bond

Wells Fargo International Interest Rate Forecast

3-Month LIBOR

20162016 2017

Source: IMF and Wells Fargo Securities

Wells Fargo Securities Economics Group

Diane Schumaker-Krieg Global Head of Research, Economics & Strategy

(704) 410-1801 (212) 214-5070

[email protected]

John E. Silvia, Ph.D. Chief Economist (704) 410-3275 [email protected]

Mark Vitner Senior Economist (704) 410-3277 [email protected]

Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 [email protected]

Sam Bullard Senior Economist (704) 410-3280 [email protected]

Nick Bennenbroek Currency Strategist (212) 214-5636 [email protected]

Anika R. Khan Senior Economist (704) 410-3271 [email protected]

Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 [email protected]

Azhar Iqbal Econometrician (704) 410-3270 [email protected]

Tim Quinlan Senior Economist (704) 410-3283 [email protected]

Eric Viloria, CFA Currency Strategist (212) 214-5637 [email protected]

Sarah House Economist (704) 410-3282 [email protected]

Michael A. Brown Economist (704) 410-3278 [email protected]

Jamie Feik Economist (704) 410-3291 [email protected]

Erik Nelson Economic Analyst (212) 214-5652 [email protected]

Alex Moehring Economic Analyst (704) 410-3247 [email protected]

Misa Batcheller Economic Analyst (704) 410-3060 [email protected]

Michael Pugliese Economic Analyst (704) 410-3156 [email protected]

Julianne Causey Economic Analyst (704) 410-3281 [email protected]

Donna LaFleur Executive Assistant (704) 410-3279 [email protected]

Dawne Howes Administrative Assistant (704) 410-3272 [email protected]

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC. and Wells Fargo Bank, N.A. are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2016 Wells Fargo Securities, LLC.

Important Information for Non-U.S. Recipients

For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.

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