FEDERAL RESERVE BANK OF MINNEAPOLIS BANKING AND POLICY STUDIES

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1 FEDERAL RESERVE BANK OF MINNEAPOLIS BANKING AND POLICY STUDIES Minneapolis Options Report Feb 1 th Median inflation expectations decreased over the two week period for both inflation tenors. The probability of high inflation for the 5-year tenor, defined as the market probability of more than 3% inflation, suffered its largest decline in 12 months. The S&P 5 fell by -.16%; both the 2 banks and 11 insurance firms we follow underperformed the broader market index, on average, returning -2% and - 1.1% respectively. MPD standard deviation for the 12-month S&P 5 tenor posted a 12 month low; several insurance firms followed this trend by posting respective 12-month lows, suggesting that investor uncertainty around these firms has diminished. The dollar was stronger against the euro and pound. Gold and silver posted gains of 3.6% and 4.3%, respectively; and the MPD skew for gold has returned to levels set prior to its precipitous decline in late November. Inflation Market-based inflation expectations derived from caps and floors on the CPI for 1- and 5-year periods were lower for both tenors: The 1-year declined slightly to 2.31%, and the 5-year decreased by 8.8 bps to 2.14%. The decrease registered by the 5-year tenor is shown for reference (see figure, below). Additional detail: The probability of high inflation, defined as the market probability of more than 3% inflation, fell by -2.9 percentage points; its largest change in 12-months (see chart, below). 1 of 3

2 Interest Rate Treasury prices increased over the two week period: The 5-year was higher by.5%, and the 1-year rose by.9%. As a result, yields fell. Changes in MPD standard deviation were minor. The metric fell by an average -.2 percentage points. Both LIBOR tenors declined over the two week period, with the 3-year tenor falling by 6.8 bps, and the 5-year tenor falling by 77 bps. Changes in MPD standard deviation were mixed. The metric was lower for the 3-year tenor, decreasing by -.6 percentage points, whereas the 5- year tenor experienced a slight increase of.1 percentage points. Banks and Insurance Companies The S&P 5 fell by.2% over the past two weeks. While changes in MPD standard deviation were flat for the 12-month tenor, the 6-month tenor experienced a 1.3% increase. The 2 banking firms we follow posted a -2.1% return, underperforming the market. The 11 insurance companies we follow underperformed the broader market index returning -1.1% on average. Additional details: The S&P 5 12-month tenor posted its lowest MPD standard deviation level in 1 year. This implies that investor uncertainty surrounding the broader market index has declined over the time period. MPD standard deviation changes were mixed for the banking and insurance firms we follow: the metric for banks was higher by.6 percentage points, while for insurers, it fell by -.8 percentage points. Specifically AFL, ALL, HIG, and LNC all posted new 12-month lows for MPD standard deviation. Other Markets The ishares US Real Estate Index outperformed the market, returning -.12%. Its MPD standard deviation increased by.8 percentage points. The dollar was stronger against the euro and pound, but lost ground against the yen. While MPD skew levels move higher for each currency pair, they all point toward neutral investor bias. Gold and silver moved higher by 3.6% and 4.3%, respectively. MPD standard deviation fell by an average -.55 percentage points for both metals and MPD skews currently signal neutral bias. Of note, The MPD skew for gold has steadily increased from the low set on 11/3/16, approaching the levels set prior to its decline. 2 of 3

3 WTI crude fell by -.95% over the 2 week period. Changes in MPD statistics were mostly flat. Corn, soybeans and wheat increased by 1.3%,.4% and.5%, respectively. Positive MPD skews for corn and wheat signal investor bias towards future higher crop prices. Cattle fell by -6.1% while lean hogs declined slightly. Both MPD skews signal investor bias towards lower future livestock prices. 3 of 3

4 Inflation MPD Statistics as of February 8, 217 Median 2.31%.55% MPD Std Dev.88%.98% MPD Skew Market Prob of Less Than 1% Inflation Market Prob of More Than 3% Inflation 9.74%.2% 2.82%.17% Inflation (1 Year Expiry) Apr Apr Inflation (5 Year Expiry) Feb1 Feb1 Feb1 Feb1 Jan Median 2.14%.88% MPD Std Dev 1%.16% MPD Skew Market Prob of Less Than 1% Inflation Market Prob of More Than 3% Inflation 11.49% 1.6% 19.17% 2.9% Feb1 Feb1 Feb1 Feb Source: Bloomberg Page 1 of 16

5 Medium to Long Bond Price MPD Statistics as of February 8, Year Treasury (3 Month Expiry) Spot % MPD Std Dev 1.66%.19% MPD Skew Market Prob of 3% 4.17% 1.1% Volume % Feb18 Jul6 Dec21 Nov3 Dec14 Nov3 1 Year Treasury (3 Month Expiry) last 29 months last 29 months last 29 months last 29 months last 29 months Spot % MPD Std Dev 2.73%.21% MPD Skew.1.68 Market Prob of 5% 3.81%.69% Volume % Jul6 Jun15 Dec21 Nov3 Dec14 Nov last 4 months last 4 months last 4 months last 4 months last 4 months Source: Chicago Mercantile Exchange Page 2 of 16

6 Short Interest Rates MPD Statistics as of February 8, Month LIBOR (3 Year Expiry) Median 1.75%.68% MPD Std Dev 1.18%.63% MPD Skew Market Prob of Less Than.5% LIBOR Market Prob of More Than 1% + Spot 11.73%.47% 38.19%.63% Jul6 Jul6 Dec21 Nov9 3 Month LIBOR (5 Year Expiry) Jan18 Dec Median 1.42%.77% MPD Std Dev 1.85%.1% MPD Skew Market Prob of Less Than 1% LIBOR Market Prob of More Than 2% + Spot % 5.7% %.71% Jul6 Jul6 Jul6 Oct19 Oct12 Dec21 Jan last 46 months last 46 months last 46 months last 46 months last 46 months Source: Bloomberg Page 3 of 16

7 Equity Index MPD Statistics as of February 8, 217 S&P 5 (6 Month Expiry) Spot % MPD Std Dev 1.33% 1.3% MPD Skew Market Prob of 2% 5.4% 1.8% Volume % Spot % MPD Std Dev 15.35%.27% MPD Skew Market Prob of 2% 1.2%.16% Volume % Mar S&P 5 (12 Month Expiry) Mar Jul13 Dec14 Feb8 Dec14 ishares US Real Estate Index (3 Month Expiry) Spot % MPD Std Dev 7.98%.78% MPD Skew Market Prob of 1% 12.15% 3% Volume % Mar3 Aug1 Jul2 Jul2 Jan Source: FactSet Page 4 of 16

8 Exchange Rate MPD Statistics as of February 8, 217 Dollar Euro Futures (3 Month Expiry) Spot % MPD Std Dev 3.92%.12% MPD Skew Market Prob of 1%.94%.34% Volume % Spot % MPD Std Dev 4.95%.43% MPD Skew Market Prob of 1% 2.69%.18% Volume % May4 Dec21 Nov3 Aug1 Nov2 Jun15 Aug1 Nov3 Dollar Pound Futures (3 Month Expiry) May25 Jun15 Oct12 Aug1 Jun22 Jun15 Aug1 Dollar Yen Futures (3 Month Expiry) Spot % MPD Std Dev 5.83%.15% MPD Skew Market Prob of 1% 3.93%.55% Volume % May25 Aug17 Jun22 Aug1 Jan4 Nov3 Nov Sources: Chicago Mercantile Exchange, Bloomberg Page 5 of 16

9 Metal and Energy Commodity MPD Statistics as of February 8, 217 Gold (6 Month Expiry) Spot % MPD Std Dev 1.78%.37% MPD Skew Market Prob of 2% 3.68%.35% Volume % Spot % 15.9 MPD Std Dev 16.75%.68% MPD Skew.8.54 Market Prob of 2% 11.78% 1.5% Volume % Feb25 Feb25 Jul6 Silver (6 Month Expiry) Mar3 Jul13 Jul6 Jul13 Jul6 Dec21 Nov2 Sep28 Nov3 Feb1 Dec21 Feb8 West Texas Intermediate Crude (6 Month Expiry) Spot % MPD Std Dev 21.55%.54% MPD Skew Market Prob of 2% 17.75%.63% Volume % Feb18 Apr2 Dec28 Dec28 Dec7 Dec Sources: Chicago Mercantile Exchange, Bloomberg Page 6 of 16

10 Agricultural Crop Commodity MPD Statistics as of February 8, 217 Corn (6 Month Expiry) Spot % MPD Std Dev 14.88%.14% MPD Skew Market Prob of 2% 8.7%.34% Volume % Spot % Apr13 Feb25 Jun15 Jun15 Jun15 Soybeans (6 Month Expiry) MPD Std Dev 14.48%.59% 1.21 MPD Skew.5.99 Market Prob of 2% %.78% 2.96 Volume % Mar3 Jun8 Feb25 May11 Feb25 Jul13 Jul13 Wheat (6 Month Expiry) Nov3 Nov Spot % MPD Std Dev 16.63%.37% MPD Skew Market Prob of 2% 11.35%.28% Volume 883 3% Jun8 Apr2 Apr2 Sep21 Jun29 Sep21 Dec Sources: Chicago Mercantile Exchange, Bloomberg Page 7 of 16

11 Agricultural Livestock Commodity MPD Statistics as of February 8, 217 Cattle (6 Month Expiry) Spot % MPD Std Dev 11.54%.1% MPD Skew Market Prob of 5% % 1.5% Volume % 1891 Mar17 Mar17 Mar23 Mar17 Hogs (6 Month Expiry) Oct19 Sep28 Oct19 Oct last 43 months last 43 months last 43 months last 43 months last 43 months Spot % MPD Std Dev 15.1%.62% MPD Skew Market Prob of 2% 11.2% 1.1% Volume % Mar17 Mar3 Mar3 Sep28 Sep28 Sep28 Nov16 Sep last 28 months last 28 months last 28 months last 28 months last 28 months Sources: Chicago Mercantile Exchange, Bloomberg Page 8 of 16

12 Bank MPD Statistics as of February 8, 217 MPD Standard Deviation (3 Month Expiry) American Express 1.22%.94% Bank of America 13.61% 1.4% BB&T 9.94%.59% Barclays 16.78%.18% Bank of NY Mellon 1.49%.41% Citigroup 12.34% 1.8% 1.57 Capital One 12.14% 1.3% Credit Suisse 19.76%.16% Deutsche Bank 18.71% 1.7% Fifth Third 13.44%.85% Goldman Sachs 11.55%.19% JP Morgan 1.62% 1.5% Keycorp 13.65% 1.5% Morgan Stanley 13.82% 1.9% 1.87 PNC Financial 1.52%.73% Regions Financial 14.86%.63% SunTrust 11.77%.7% State Street 12.35%.8% UBS 13.36% US Bancorp 9.17% 1.1% Wells Fargo 1.74%.31% Mar3 Mar3 Feb18 Apr13 Apr2 Feb18 Feb18 Apr27 Mar6 Sep14 Sep7 Aug17 Jun29 Aug24 Dec28 Aug17 Sep7 Oct19 Sep7 Aug24 Sep24 Sep14 Sep last 42 months last 47 months last 23 months Source: FactSet Page 9 of 16

13 Bank MPD Statistics as of February 8, 217 MPD Skew (3 Month Expiry) American Express Bank of America.44.2 BB&T Barclays.8.12 Bank of NY Mellon Citigroup Capital One Credit Suisse Deutsche Bank.12.3 Fifth Third Goldman Sachs JP Morgan Keycorp Morgan Stanley PNC Financial Regions Financial SunTrust State Street UBS.4 US Bancorp Wells Fargo Feb18 Mar1 Feb25 Mar3 Feb25 May25 Apr27 Mar1 Mar3 Sep14 Sep21 Dec14 Sep14 Jan4 Dec28 Nov9 Dec28 Aug24 Dec28 Oct12 Jun29 May18 Sep14 Jul13 Sep28 Sep21 Aug3 Feb1 Oct19 Feb8 Sep14 Sep14 Dec31 Nov last 42 months last 47 months last 23 months Source: FactSet Page 1 of 16

14 Bank MPD Statistics as of February 8, 217 Market Probability of 2% (3 Month Expiry) American Express 4.1%.99% Bank of America 9.22% 3.2% BB&T 3.9%.64% Barclays 11.89% 1.8% Bank of NY Mellon 4.41%.6% Citigroup 6.95% 3.3% Capital One 6.96% 2.5% Credit Suisse 15.41% 1.4% Deutsche Bank 12.49% 2.9% Fifth Third 8.65% 1.2% Goldman Sachs 5.43%.63% JP Morgan 5.9% 2.5% Keycorp 9.33% 3.8% Morgan Stanley 9.37% 3.2% PNC Financial 4.19%.56% Regions Financial 1.43%.53% SunTrust 5.34%.58% State Street 6.97% 1.5% UBS 7.28% US Bancorp 3.21% 1.6% Wells Fargo 4.53%.32% Mar3 Mar6 Feb25 Sep7 Aug17 Jul27 Aug24 Aug1 Aug17 Sep7 Sep7 Sep21 Aug24 Sep14 Sep7 Jan11 Dec last 42 months last 47 months last 23 months Source: FactSet Page 11 of 16

15 Bank MPD Statistics as of February 8, 217 Volume (3 Month Expiry) American Express % Bank of America % BB&T % Barclays % Bank of NY Mellon % Citigroup % Capital One % Credit Suisse % Deutsche Bank % Fifth Third % Goldman Sachs % JP Morgan % Keycorp % Morgan Stanley % PNC Financial % Regions Financial % SunTrust % State Street % UBS 124 US Bancorp % Wells Fargo % last 42 months last 47 months last 23 months Source: FactSet Page 12 of 16

16 Insurance Company MPD Statistics as of February 8, 217 MPD Standard Deviation (3 Month Expiry) Aflac 7.65%.63% AIG 1.4%.6% Allstate 6.97%.64% Ameriprise 13.32%.95% Chubb 7.84%.17% Hartford Financial 1.25% 1.4% Lincoln National 13.16%.6% Met Life 12.88% 1.1% Principal Financial 13.29%.67% Progressive 13.45% 7.9% Prudential 13.46%.42% Feb18 Sep7 Aug1 Feb8 Feb8 Feb8 Feb8 Nov16 Sep last 47 months Source: FactSet Page 13 of 16

17 Insurance Company MPD Statistics as of February 8, 217 MPD Skew (3 Month Expiry) Aflac AIG Allstate Ameriprise Chubb Hartford Financial Lincoln National Met Life Principal Financial Progressive Prudential Apr6 May4 Nov16 Sep7 Dec14 Sep28 Feb1 Sep7 Nov3 Oct5 Nov3 Jul27 Jun1 Jun8 May18 Dec14 Oct19 Jan11 Feb8 Jan last 47 months Source: FactSet Page 14 of 16

18 Insurance Company MPD Statistics as of February 8, 217 Market Probability of 2% (3 Month Expiry) Aflac 2.23%.27% AIG 4.16%.84% Allstate 1.11%.53% Ameriprise 8.9% 2% Chubb 2.48%.34% Hartford Financial 4.68%.72% Lincoln National 7.53%.79% Met Life 7.95% 2.4% Principal Financial 7.21%.36% Progressive 4.64% 2% Prudential 9.3% 1.9% Jun1 Aug17 Nov16 Sep7 Jul27 Feb8 Dec28 Dec last 47 months Source: FactSet Page 15 of 16

19 Insurance Company MPD Statistics as of February 8, 217 Volume (3 Month Expiry) Aflac % AIG % Allstate 88 3% Ameriprise 527 2% Chubb % Hartford Financial % Lincoln National % Met Life % Principal Financial % Progressive 6 94% Prudential % last 47 months Source: FactSet Page 16 of 16