Economic Update: Fed Delay Bought Calm. But is it Calm Enough to Hike Rates? 2016 AAM Investment Conference Chris Low FTN Financial Chief Economist

Transcription

1 Economic Update: Fed Delay Bought Calm. But is it Calm Enough to Hike Rates? May AAM Investment Conference Chris Low FTN Financial Chief Economist

2 Executive Summary 1 FOMC recognizes global inflation influence FOMC signaled slower pace of tightening Same growth, same inflation Which way is next surprise? Inflation debate is key, though was eclipsed by new internationalism. Disclaimer is on the last page of this presentation.

3 The Backdrop: Global Turmoil

4 The Trade-Weighted Dollar Trade-Weighted US Dollar Major Currencies Index Index 1973= Source: Federal Reserve

5 Global Winners and Losers Dollar strong Fed hikes. Dollar Rises. Yuan and EM currencies rise, too. Euro and yen sink. Japan and EU exports and manufacturing rise. Their economies outperform. US, China and EM exports and manufacturing stumble. Their stock markets sink. Fed on hold. Source: FTN Financial

6 Global Winners and Losers Dollar strong Fed hikes. Dollar Rises. Yuan and EM currencies rise, too. Euro and yen sink. Japan and EU exports and manufacturing rise. Their economies outperform. US, China and EM exports and manufacturing stumble. Their stock markets sink. Fed on hold. Dollar weak Fed on hold. Euro and Yen rise. Dollar drops. Yuan and EMs weaken, too. EU and Japan GDP US, China and EM GDP Source: FTN Financial

7 Stocks Fell $16tn From June to Feb 6 $75.0tn World Equity Market Capitalization $70.0tn $65.0tn $60.0tn $55.0tn Bloomberg World Exchange Market Capitalization USD $50.0tn Source: Bloomberg

8 Market Tightened for the Fed 7 950bp 850bp Option Adjusted Spread (weighted by market value) of the US Dollar High Yield All Cash Bonds sector 750bp 650bp 550bp 450bp 350bp 250bp Source: Bloomberg

9 China Debt Surged Post Crisis 8 210% 190% 170% 150% 130% 110% 90% 70% China Private non-financial sector debt as % of GDP Private non-financial sector debt as % of GDP 50% Source: Bank for International Settlements

10 World Trade Less than 08 Peak 9 $1,900bn $1,700bn $1,500bn $1,300bn $1,100bn $900bn $700bn $500bn $300bn IMF World Exports FOB Billions USD $100bn Source: International Monetary Fund

11 2,000 1,800 1,600 1,400 1,200 1, Source: Baker Hughes, Bloomberg The Economy: Stumble in Q4 Rig Count US, oil & gas

12 Growth in 2016: Modest Slowdown % 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% GDP Forecast With Sector Contributions -2.0% -3.0% Consumption Res Investment Bus. Fixed Invest Inventories Net exports Government GDP Final Sales Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Source: Bureau of Economic Analysis and FTN Financial

13 Consumption: Slowed to 2% % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Personal Consumption 3m/3m % annualized Nominal consumption Real consumption -1.0% Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15 Jan '16 Source: Bureau of Economic Analysis

14 13 Weak Profits Mean Weak Markets

15 14 Threaten Investment & Employment

16 Car Sales Peaked in October % 20.0% 10.0% 0.0% -10.0% Total Light Vehicle Sales, SAAR (right) Car Sales, YoY% (left) Truck Sales, YoY% (left) 19.0m 18.0m 17.0m 16.0m 15.0m 14.0m 13.0m 12.0m 11.0m -20.0% Source: Autodata Corporation 10.0m

17 16 Employment too Strong? Not lately.

18 If it weren t for global factors, we d hike sooner. -John Williams, Mar 21 Fed: Normalization Underway

19 Divided Mandate 18 Jobs: Full employment half the dual mandate. Fed s full employment estimate hit in August. Inflation: The other half of the mandate. Outlook uncertain.

20 The Internationalist FOMC 19 District President Start Date Background Richmond Jeffrey Lacker 8/1/04 Professor Atlanta Dennis Lockhart 3/1/07 Professor, private equity manager, banker Cleveland Loretta Mester 6/1/07 Career Fed economist, professor Boston Eric Rosengren 7/23/07 Career Fed supervisor and regulator Chicago Charles Evans 9/1/07 Career Fed economist St. Louis James Bullard 4/1/08 Career Fed economist New York Bill Dudley 1/27/09 Head of NY Fed markets group, former Chief Economist Goldman Sachs San Francisco John Williams 3/1/11 Career Fed economist, took leave from Fed to serve as CEA Senior Economist during the Clinton Administration Kansas City Esther George 10/1/11 Career in Fed supervision and risk management Philadelphia Patrick Harker 7/1/15 University of Delaware president and professor. Goldman trustee. Dallas Robert Kaplan 9/8/15 Author, asset manager, Harvard Business School professor and Sr. Associate Dean. Former Vice Chair, Goldman Sachs. Minneapolis Neel Kashkari 1/1/16 Ran for governor of CA, former MD at PIMCO. Ran TARP program for Obama's Treasury Department. Started career at Goldman Sachs.

21 Secular Stagnation? 20 $10,000Bn Households and Nonprofit Debt (SA, Bil.$) The end of a 5-decade credit boom Log scale $1,000Bn Slower credit growth = lower inflation $100Bn Source: Federal Reserve Board

22 Credit Stagnation Is Global % 20.0% Outstanding Total Private Non-financial Sector Credit Growth Developed and Major Emerging Economies, Yr/Yr% 15.0% 10.0% 5.0% 0.0% -5.0% Yr/Yr% -10.0% Source: Bank for International Settlements

23 Credit Accelerating in US Only % 40.0% 32.0% 24.0% 16.0% 8.0% 0.0% -8.0% -16.0% -24.0% Outstanding Total Private Non-financial Sector Credit Growth Yr/Yr% Source: Bank for International Settlements China US Euro Area Japan

24 Inflation Rising? % 3.0% 2.5% Core CPI, Yr/Yr% Core PCE Deflator, Yr/Yr% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Bureau of Economic Analysis & Bureau of Labor Statistics

25 24 Yr/Yr Price Changes: 165 CPI Components

26 Inflation Will Settle at % % 4.00% 3.00% PCE, Yr.Yr% Core PCE, Yr/Yr% Fed Core PCE Forecast, Yr/Yr% 2.00% 1.00% 0.00% -1.00% -2.00% Source: Federal Reserve, FTN Financial, Bureau of Economic Analysis

27 26 Market Inflation Expectations Extraordinarily Low 2.75% 2.50% 5-yr Forward 5-yr Breakeven 2.25% 2.00% 1.75% 1.50% 1.25% Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15 Jan '16 Apr '16 Source: Bloomberg

28 27 Consumer Inflation Expectations Well Anchored, But Slipping 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% U Mich Long-Term Inflation Expectations 2.00% Source: University of Michigan

29 Market Doubts Fed Policy Conviction % 3.50% 3.00% 2.50% Tightening implied by FOMC forecasts - Mar 2016 Fed funds futures 5/6/16 FOMC dotplot year-end medians. 2.00% 1.50% 1.00% 0.50% 0.00% May '16 Nov '16 May '17 Nov '17 May '18 Nov '18 Source: Federal Reserve, Bloomberg & FTN Financial

30 Conclusions 29 Inflation is higher, but unlikely to rise much more. World is deleveraging. Best evidence of secular slowdown. Global core inflation still low, suggesting US core is overstated. Strong $ hurts EMs, weak $ hurts EU & Japan. Yellen concerned recent core inflation increases won t stick. Core PCE and neutral rate likely to guide policy pace.

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