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Chart 1: The gap between hard and soft data is a concern to investors Chart 2: Mediocre US Q1 data partly down to seasonal adjustments Residual seasonality in GDP growth from 1985 to 2015 08 06 04 02 0 02 4 08 eGDP 01/00 01/02 01/04 01/06 O1/08 01/10 O1/12 01/14 01/16 © Privete Investment 08 —— Surveys & Business Cycle Indicators Hard Data = Government consumption & investment 4 Qi Q2 Q3 Qs Source: BofA Memil Lynch Global Research, Bloomberg Source: Cleveland Federal Reserve We continue to believe in the reflation theme because: 1. Strength in the global economy is genuine - European PMIs are at 6 year highs, Chinese and Japanese PMIs continue to improve too. In fact ~90% of PMIs globally are above 50 and 60% have increased in the last 3 months. 2. Earnings revisions and Global Wave point to continued upturn - earnings revisions now above 1.0 for the first time since 2011. Be We expect Trump to deliver on tax, even if it is smaller than hoped for - should such a package be put together it would likely support the Trump trade once again after the failure to reform Obamacare 4. Bond markets are being too sanguine about the likely pace of Fed tightening - the Fed funds curve is once again well below the dot plot. We continue to see upside in yields if and when the market becomes more convinced that the soft data is right. Chart 7: Bond yields have pulled back from FOMC highs Chart 8: As the market refuses to price the dot plot 27 25 250 —— Current market pricing wre Median dot, Mar-17 SEP —— BofAML forecast —UST 10y yield # of meetings into tightening cycle oe at et oe ee. Sa Oe ee ee Se, ie Source: BofA Meili Lynch Global Research, Bloomberg In Banks, the reoccurring feedback from investors has been that clients have rotated out of US banks and into European banks. This conflicts with our latest Fund Manager Survey which suggested allocation to European Banks fell the most of any sector MoM in the first two weeks of March, however, its true European Banks have quickly reversed the performance gap to US peers. The spread between the SX7E and S5BANKX Index is back to pre-US election levels. What the EU banks bulls are saying: EUR rates are going higher it’s just a matter of timing, positive EPS revisions continue, EU is starting to see pockets of volume growth and asset yield recovery, credit spreads have been tightening YTD and HOUSE_OVERSIGHT_014861