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Markus Demary Cologne, October 21, 2019 · PDF file IW Financial Expert Survey 4 Figure 2-1: Upward and downward revisions Revisions are calculated as the differences between the forecasts

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  • Wirtschaftliche Untersuchungen,

    Berichte und Sachverhalte

    Markus Demary

    Cologne, October 21, 2019

  • IW Financial Expert Survey

    1

    Contents

    Abstract 2

    1 The IW Financial Expert Survey 3

    2 Financial market forecasts 3

    2.1 Upward and downward revisions 3

    2.2 Interest rates 5

    2.3 Stock Market Performance 9

    2.4 Foreign Exchange 13

    2.5 Oil Prices 15

    3 Macroeconomic forecasts 17

    4 Ranking of the best performing forecasters 19

    4.1 Trend Forecasts 19

    4.2 Point Forecasts 21

    5 Conclusion 22

    6 Appendix: Individual Forecasts 24

    Tables 36

    Figures 37

    JEL Classification: G12 – Asset pricing G17 – Financial forecasting

  • IW Financial Expert Survey

    2

    Abstract

    Pessimism determines the experts’ predictions for the last quarter of 2019 and first quarter of 2020, which can be inferred from the downward revisions of the experts’ forecasts. More down- ward revisions than upward revisions indicate that the experts have interpreted the incoming information between end of June 2018 and end of September 2019 mostly as bad news. Part or the forecast revisions for the interest rates is due to the experts' subdued inflation and growth outlooks. All experts have revised their growth outlooks for Germany and the Euro Area down- wards. So were inflation forecasts for Germany revised downwards by 8 experts, while inflation outlooks for the Euro Area were revised upwards by 7 experts. The other part of the interest rate forecast revisions were due to revisions about the future path of monetary policy interest rates, which also reflect a subdued inflation and growth outlook. While no experts expect the ECB to change its monetary policy, 12 experts have revised their forecasts for the federal funds rate downwards. The experts still expect the yield curve to become flatter. The lower forecasts for the short-term interest rate are consistent with the experts’ lower inflation and growth expectations. For 2020, the experts expect 1.3 percent inflation in the Eurozone and a growth rate of real gross domestic product of 1.0 percent, which indicates a slowdown of economic growth and a failure of the European Central Bank (ECB) to meet its inflation target. Given that, the experts lowered their outlook for the long-term interest rate to -0.49 percent at the end of the first quarter of 2020. For the short rate, the experts predict a downward change to -0.57 percent during the first quarter of 2020. In line with that, the experts expect the yield of US Treasury bonds to increase slightly from 1.66 percent to 1.69 percent by the end of the first quarter of 2020, although they expect the Federal Funds Rate to decline from 1.75 – 2.00 percent to 1.40 to 1.66 percent aver- aged over their individual forecasts. Despite the accommodative monetary policy stance of the ECB in 2019, the experts predict an appreciation of the Euro from 1.090 US-Dollar to 1.131 US- Dollar during the first quarter of 2020. Although some of the experts revised their stock market forecasts downwards, they expect the

    DAX to decrease slightly by -0.1 percent and the Stoxx index and the S&P 500 to increase by 1.3

    percent and 2.3 percent by the end of the first quarter of 2020.

    In the long-term ranking, which covers the last 18 quarters, National-Bank defended rank one,

    while Nord/LB moved from rank three to rank two and Commerzbank moved from rank two to

    rank three.

  • IW Financial Expert Survey

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    1 The IW Financial Expert Survey

    Since the second quarter of 2017, the IW is conducting the IW Financial Expert Survey. Before that, the Center for European Economic Research (ZEW) conducted this survey under the name ZEW Prognosetest. The participating forecasters in this survey are economists of financial companies who submit their forecast to the IW on a quarterly basis. The IW calculates mean predictions and forecasting intervals and evaluates the participants’ performance in making trend forecasts and point fore- casts. The indicators used for the IW Financial Expert Survey are the 3-month Euribor (called “short rate”), the yield of German government bonds with 10-year maturity (called “long rate”), the Stoxx 50 Europe Index, the DAX 30 Index, the EUR-USD exchange rate, and the oil price (brent). In the first quarter of 2019 we introduced new variables to the survey. Due to the global nature of financial markets we asked the participants about their expectations on the US Treas- ury Yield with 10 years maturity (“US long rate”) and on the S&P 500 index. Since monetary policy is an important factor, we asked the expects on their view on how the European Central Bank (ECB) and the Federal Reserve Bank will set their policy rates within the forecast horizons 3 months ahead and 6 months ahead. In addition to that we asked the experts about their in- flation and growth outlook for Germany and the Eurozone.

    2 Financial market forecasts

    This section contains an analysis of the current financial market forecasts for the end of the fourth quarter of 2019 and the end of the first quarter of 2020. The individual point forecasts, which the experts have submitted, were aggregated to a mean forecast. Moreover, trend fore- casts were calculated from the individual point forecasts and the most recent data points of the indicators.

    2.1 Upward and downward revisions

    Figure 2-1 gives an overview of the changes in market sentiment derived from the submitted

    forecasts. This indicator measures how the experts revise their forecasts when new information

    arrives. To this end, the differences between the forecasts for the end of December 2019 from

    October 2019 and the forecasts for the end of December 2019 from June 2019 were compared.

    In the case that the forecasters interpret the incoming economic indicators that have arrived

    between June 2019 and October 2019 as good news, the forecasters would have revised their

    forecasts for December 2019 upwards, leading to a positive difference between the forecast

    based on information available on June 2019 and the forecast based on information available in

    October 2019. If the forecasters would have interpreted the incoming data as negative for the

    performance of the indicator, the forecaster would have revised their predictions downwards.

  • IW Financial Expert Survey

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    Figure 2-1: Upward and downward revisions Revisions are calculated as the differences between the forecasts for December 2019 from September 2019 and the forecasts for June 2019 from September 2019, number of forecasters with a positive difference (upward revision) or a negative difference (downward revision)

    Source: Bloomberg, IW Financial Expert Survey

    From figure 2-1 can be inferred that most of the experts revised their interest rate forecasts for the end of the year 2019 downwards based on the incoming information between July, August and September 2019. While all experts expect no change for the ECB' main refinancing rate until the end of the year, 12 experts revised their expectation about the Federal Funds Rate down- wards. In line with this, 13 experts expect a lower long-term interest rate in the US compared to their forecast based on the information available in June 2019. For the Euro area the expects share a more pessimistic view now. Compared to their forecasts for the end of the year 2019 based on the information available in June 2019, they expect lower interest rates now. For the short-rate 11 experts revised their forecasts downwards, while 13 experts revised their fore- casts for the German sovereign bond with 10 years maturity downwards. Concerning the growth of the stock markets, the experts have interpreted the incoming infor- mation in July, August and September differently. While 3 experts revised their outlook for the Stoxx downwards and 5 experts revised their outlook upwards, most of the experts have inter- preted the incoming information in a neutral way. The experts made a similar assessment for the DAX. While 4 experts have revised their outlook downwards and 4 experts have revised their outlooks upwards, most of the experts did not revise their forecasts for the DAX. The experts were a bit more optimistic in their outlook for the S&P 500. While only 3 experts have revised their outlook downwards, 6 experts have revised their outlook upwards. In line with the more pessimistic interest rate outlook, the experts expect the EUR-USD ex- change rate to decline. In line with this, 10 experts revised their outlook for the end of the year downwards based on the incoming information in July, August and September.

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    GDP growth DE

    GDP growth EA

    Inflation DE

    Inflation EA

    Oil price

    EUR-USD

    S&P500

    DAX

    Stoxx

    Long-rate US

    Long- rate DE

    Short-rate (Euribor)

    Federal Funds Rate

    ECB Main Refinancing Rate

    Downward revision Upward revision

  • IW Financial Expert Survey

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    Eight experts have revised their oil price forecasts for the end of t

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