Financial Market Weekly

Transcription

1 Financial Market Weekly CHRISTOPHER S. RUPKEY, CFA MANAGING DIRECTOR CHIEF FINANCIAL ECONOMIST ECONOMIC RESEARCH OFFICE (NEW YORK) (212) FEBRUARY 215 The Bank of Tokyo-Mitsubishi UFJ, Ltd. A member of MUFG, a global financial group GDP SPENDING ON STRUCTURES CONTINUES TO ADVANCE Business spending on structures continues to move up in the fourth quarter of 214 with actual nominal dollar spending up 4.4% at an annual rate, and is 7.7% above year ago levels. The level of activity is $518.8 billion which is almost 3% of the $17.7 trillion GDP economy. This spending is more broadly called commercial real estate even as it includes spending on power plants, mining and drilling, and 6 $ bln 55 5 Nonresidential spending on structures (GDP accounts) 1986 no Fed did cut rates -14.8% Q3 9 peak July 199- Mar % 3% Fed funds Q38 $559.3 bln peak Q1 11 $343.2 bln down 38.6% Q3 1 peak Final Fed rate hike to 5.25% 1-2.3% 3 Iraq War deflation 1% Fed funds manufacturing factories. In the early years following the s end in June 9, Yellen would point to this broad nonresidential spending category as a reason why the economic recovery had more to go; spending bottomed in Q1 211 and has expanded rapidly since this time, so there is no role for monetary policy to play here for this sector of the economy. Construction on these big commercial projects can take years and so this is always a lagging indicator of current economic and business conditions. At $518.8 billion in Q4 214 construction is 7.8% away from the peak in Q3 8 (nine months into the ); much of that building in the housing bubble economy years was done in support of the boom in residential housing starts with many projects Commercial Construction $bln -38.6% Q Q Q Peak Dec YTD Year 7 % Chg Total Commercial Automotive Food/beverage Multi-retail General merchandise Shopping center Shopping mall Other comercial Warehouse

2 of questionable necessity and reflecting the overbuilding at the time. So it is not clear what a full recovery level for commercial real estate construction is; but there is growing anecdotal evidence that we are back to the stage where the availability of cheap money is building speculative construction projects again. There is a lot of discussion whether $4 crude oil is helping or hurting the economy. One of the ways it hurts is through a potential decline in the construction spending in the mining and drilling space. Looking back historically without a detailed analysis, mining/drilling construction activity fell by half when crude oil collapsed from $14 down to $32 from July to December 8. It was a back in 8 of course and demand for energy or the outlook for energy was falling as well. Global demand, the outlook, is not as dismal currently, but mining/drilling could still decline sharply from current levels which would lead nonresidential spending on structures to have a significant drag on real GDP growth of three or four-tenths of a percentage point. Mining/drilling spending 3 % Commercial Property Values decline 8-9 after 14 straight years of gains Commercial Real Estate is picking up the pace 9/11 1 March 8 Iraq War NCREIF Property Index-- Office Value of Private Nonresidential Construction Put in Place Jan 8 $414.5b Jun 9 Last Fed hike to 5.25% % Q1 +3.2% Q2 +4.5% Q3 +3.% Q4 +2.5% % Q1 +2.3% Q2 +2.3% Q3 +2.3% Q4 +2.2% % Q1 +1.9% Q2 +2.8% Q3 +2.4% Q4 +2.3% % Q1 +2.2% Q2 +2.9% Q3 +2.8% Q4 +3.1% Jul January data are released Mar 2 at 1am EST Construction Dec $348.9bln Dec -.2% Nov +.8% Oct +.4% Jan billions was still rising through Q4 214 to $16.8 billion or 14.4% higher than year ago levels. But the crude oil rig count did not start its sharp decline until late December. The nominal GDP dollars economy grew 3.7% the last year to $17.7 trillion and mining and drilling was just.1 of that, but a decline in drilling activity on the scale of 8 would be a drag of nearly.5 percentage points on nominal GDP growth. Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 YOY% Structures ($billion) Commercial and health care Manufacturing Power and communication Mining exploration, shafts, and wells Other structures * * Religious, educational, vocational, lodging, railroads, farm, and amusement and recreational structures, other 3 %

3 JOBLESS CLAIMS BACK ABOVE K FULL EMPLOYMENT LINE Unemployment claims jumped 25K in the February 7 week to 34K. It is hard to connect the latest few months of weekly jobless claims with the monthly payroll numbers. Initial claims have not fallen further and look to be in a sideways trend recently and yet private nonfarm payroll have put up huge numbers: one million and one thousand created the last three months. We don t expect the monthly new pace to run any faster than it has the last three months. The numbers are certainly strong enough to bring down the unemployment rate in the next several months. The focus of some on part-timers wanting full-time, dropouts, and wages, seems to miss the point. Life is good. 425 Initial jobless claims below K means the labor market is at full employment Nov 1 Hurricane Sandy Good Friday holiday Govt shutdown Calif. computers 5.7% Jan 215 unemployment rate 425 Continuing unemployment claims move sideways like last Winter s Unemployment rates 414K 3 s First-time claims Feb 7 34K Jan K Jan K Jan 17 39K I II III IV I 212 Apr K II III IV I 213 II III IV I 214 II III IV Payroll left axis Private payrolls Jan +267K Dec +32K Nov +414K Jan 31, million A M J J A S O N D J F M A M J J A S O N D J F TREASURY YIELD CURVE STEEPENS: FED LIFTOFF, OIL, EUROPE, GREECE The yield curve between 2-yrs and 1-yrs was +141 bps on Friday versus +131 bps last week. Yields closed out at the highs for the week at 2.5% even if it was in thin preholiday weekend trading. Retail sales were the major new economic news Thursday with 1-yr Treasury yields at 2.3% and falling as 31-Dec Q1 Q2 Q3 Q4 Q Yr Bond Yr Note Yr Note Yr Note month Libor Federal Fund Rate s/1s spread low as 1.96% by noon as retail sales fell a second month: -.9% in December and -.8% in January. Bond yields rose this week on the quarterly refunding supply and the Fed liftoff penciled in for June. 21 bps 19 2yr/1yr Treasury curve flattens further on oil, ECB, Greece, Fed Oct 8 Fed minutes Global risks FOMC minutes Next Supply: Th2-19TBA 2s/5s/7s Feb Treasuries Held in Custody for Foreign Central Banks at the Fed $bln, changes Feb 11 Outstanding $2.932 tln Oct 7 IMF growth risk Oct 29 FOMC hawkish OCT Nov 25 new 2-yr Nov 28 OPEC oil Dec K Jan 6 Oil under $5 Dec 31 bps NOV DEC JAN 214 Jan 28 Fed goes international Feb 6 257K FEB S Sep +5. Oct -62. Nov +9.8 Dec -2. Jan Feb O N D 212 J Russia Ukraine? F M A M J J A S O N D J F M A M J J A S O N D J F

4 FEDERAL RESERVE POLICY The Fed meets March to consider its monetary policy. We guess this is the meeting where the Fed has to drop the word patient, if they are going to hike rates the first time in June. The first rate hike is also being called liftoff by Fed officials. This liftoff term makes it sound like it will be a big deal. Maybe it is, and maybe they should make sure they really, really need to go before they pull the trigger. But the word liftoff exaggerates the importance of the first rate hike we think. We have to keep in mind the Fed s policy thinking ten years ago during the Greenspan Era that Fed policy remains accommodative until the Fed funds rate is raised to neutral/normal levels. So let s not mistake what a rate hike from.25% to.5% at the June meeting will mean. They are not taking away the punchbowl or putting the brakes on economic growth. The unemployment rate will continue to fall from 5.7% and will be created whether the Fed funds rate is.25%, 1.%, 2.5% or the Fed s estimated 3.75% neutral Fed funds rate. The January meeting minutes will be released Wednesday, February 18 which may shed light on how concerned policy makers are about international developments. At the last meeting, they inserted the Selected Fed assets and liabilities Sep 1 Fed H.4.1 statistical release 8** billions, Wednesday data 11-Feb 4-Feb 28-Jan 21-Jan pre-leh Factors adding reserves U.S. Treasury securities Federal agency debt securities Mortgage-backed securities Primary credit (Discount Window) Term auction credit (TAF auctions)..... Asset-backed TALF.... Maiden Lane (Bear) Maiden Lane II (AIG)..... Maiden Lane III (AIG)..... Central bank liquidity swaps Federal Reserve Assets month Libor % Factors draining reserves Currency in circulation Term Deposit Facility Treasury supplemental bill auctions..... Reserve Balances (Net Liquidity) Treasuries within 15 days Treasuries 16 to 9 days Treasuries 91 days to 1 year Treasuries over 1-yr to 5 years Treasuries over 5-yrs to 1 years Treasuries over 1-years **September 1, 8 is pre-lehman bankruptcy of Data-dependent is not relevant when rate hikes 4 months away Fed funds rate 1.25 at end of 215 means liftoff in March, and 25 bps every other meeting, June, Sep, Dec Dec 214 FOMC forecasts to % end of % end of % end of Eurodollar futures Eurodollar futures % % % % % Long run words international developments in the press release for the first time where the first rate hike since June 6, the assessment, will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The market thought it saw something last October in the minutes about the Fed s concern with the world economic outlook. The main event however should be Fed Chair Yellen s semiannual Monetary Policy Report testimony before the Senate on Tuesday, February 24. After one million and one thousand private were created the last three months, if Fed members are starting to lose patience with their steady as she goes zero-rates policy with a time-stamp start-date of December 8, the decision to tell the markets surely cannot be dependent on a couple more months of data. It is probably best to tell Congress on February 24 if change is finally coming. %

5 CORPORATE BONDS: LOCKHEED MARTIN, NATIONAL RURAL, BP CAPITAL Corporate bond offerings were $3.3 billion in the February 13 week versus $37.8 billion in the February 6 week. On Wednesday, Rockwell Automation sold $6 million 5s/1s. It priced $ million 2.875% 1-yrs (m-w +15bp) at 9 bps (A3/A). The world s largest industrial automation and information company will use the proceeds to repay outstanding commercial paper. Corporate bonds (1-yr Industrials rated A2) were 88 bps above 1-yr Treasuries on Friday versus 88 bps last Friday. Weekly Corporate Issuance USFIIVST<Index> ($Bln) Spread: A2-Rated 1-Yr Industrials Sep bln versus 1-Yr Treasuries (BPS) 16 Mar bln BPS SPREAD: BAA-RATED CORPORATES TO 3-YR GOVTS Sep 8 LEH MER AIG credit freeze Aug8 265 bps ONDJ FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J ASONDJ F Shaded areas s Recession Dec 7 Jun bps in January (4.45% vs 2.46%) 1 5 TREASURY MARKET OUTLOOK EXPECTED 1-YR 2-3 WEEK TRADING RANGE 1.5% to 2.3% Week s Range 1-YR HIGH % Old bond Monday, February 9, start of the week lows LOW % New bond Friday, February 13, late selling in thin trading conditions after futures close RECENT TREND IN 1-YR GOVERNMENT NOTES (N.Y. CLOSING) Oct 29 Fed slack not significant Nov K Nov % GDP Good 5-yr auction Nov 28 OPEC no cut Dec 12, 212 Fed QE3 Govts 6.5% unemployment trigger for rate hike 1-yr closes 1.7% Dec 12 Oil Dow -315 Dec 18 Dow +421 points Dec 29 Greece Jan 6 Crude breaks $5 Jan 15 Swiss franc turmoil Jan 5 Greek exit talk FOMC meets Jan 22 ECB QE 1.86% Feb 6 257K OCT NOV DEC JAN FEB

6 Analyst Certification The views expressed in this report accurately reflect the personal views of Christopher S. Rupkey, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of such analyst's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein. The information herein is provided for information purposes only, and is not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Neither this nor any other communication prepared by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (collectively with its various offices and affiliates, "BTMU") or should be construed as investment advice, a recommendation to enter into a particular transaction or pursue a particular strategy, or any statement as to the likelihood that a particular transaction or strategy will be effective in light of your business objectives or operations. Before entering into any particular transaction, you are advised to obtain such independent financial, legal, accounting and other advice as may be appropriate under the circumstances. In any event, any decision to enter into a transaction will be yours alone, not based on information prepared or provided by BTMU. BTMU hereby disclaims any responsibility to you concerning the characterization or identification of terms, conditions, and legal or accounting or other issues or risks that may arise in connection with any particular transaction or business strategy. While BTMU believes that any relevant factual statements herein and any assumptions on which information herein are based, are in each case accurate, BTMU makes no representation or warranty regarding such accuracy and shall not be responsible for any inaccuracy in such statements or assumptions. Note that BTMU may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth herein. Such other reports, if any, reflect the different assumptions, views and/or analytical methods of the analysts who prepared them, and BTMU is under no obligation to ensure that such other reports are brought to your attention. Copyright 215 Bank of Tokyo-Mitsubishi UFJ All Rights Reserved The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of MUFG or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor MUFG guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor MUFG shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information. About MUFG Union Bank and MUFG Americas Holdings Corporation MUFG Union Bank, N.A., is a full-service bank with offices across the United States. We provide a wide spectrum of corporate, commercial, retail banking and wealth management solutions to meet the needs of customers. The bank also offers an extensive portfolio of value-added solutions for customers, including investment banking, personal trust, capital markets, global treasury management, transaction banking and other services. With assets of $16.7 billion (USD), as of March 31, 214, the bank has strong capital reserves, credit ratings and capital ratios relative to peer banks. MUFG Union Bank is a proud member of the Mitsubishi UFJ Financial Group (NYSE: MTU), one of the world s largest financial organizations with total assets of approximately 258 trillion (JPY) or $2.5 trillion (USD) as of March 31, 214. MUFG Americas Holdings Corporation, the financial holding company and MUFG Union Bank, N.A., have corporate headquarters in New York City. 6