Economic and Financial Markets Monthly Review & Outlook Detailed Report October 2017

Transcription

1 Economic and Financial Markets Monthly Review & Outlook Detailed Report October 17 NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 Overview of the Economy Business and economic confidence indicators remain elevated. Economic data is starting to become very noisy as a result of Hurricanes Harvey and Irma. Financial markets continue to grind higher, reflecting expectations of continued earnings growth and fairly stable inflation rates. The speed of policy changes in Washington, D.C. remains closely watched. Forecasts for gross domestic product (GDP) growth, including our own estimates, have remained relatively stable. The Federal Reserve (Fed) raised short-term interest rates in June to a range of 1.% to 1.%, the fourth increase since the end of the financial crisis. The Fed will begin a modest pace of quantitative tightening this month and futures markets are pricing in a roughly 7% chance of the next rate hike occurring in December. Second quarter GDP growth was revised up again to 3.1% from 3.%. We now anticipate full-year 17 growth of 1.9% to.%. Real Gross Real Domestic Gross Domestic Product Product Q/Q Percent Change Seasonally Q/Q Percent Adjusted Change Annual (SAAR) Rate (SAAR) 1.. Q (.) (.) (.) (.) (1.) % -% -3% -1% 1% 3% % 7% 9% After-Tax Profit Share of GDP and Unit Labor Costs After-Tax Profit Share of of GDP Right (right Scale axis) Q 17 Unit Labor Costs Y/Y (Inverted) Left Scale Unit Labor Costs Y/Y (Inverted) (left axis) % 11% 1% 9% % 7% % % % 3% Nonfarm Productivity Q Source: Department of Labor 1% 11% 1% 9% % 7% % % % 3% After Tax Corporate Profits % of Nominal GDP Q 17 % Source: Departments of Commerce, Labor

3 Consumer Expenditures Second quarter growth in real personal consumption expenditures was revised up to 3.3% from.%. Real income growth continues to trend around 1.% to 1.% after new revisions. Consumer confidence continued to run high in September, remaining at levels only exceeded during the tech boom of the late 199s. Household net worth as a percent of disposable income remained at an all-time high during the second quarter, supported by rising equity markets and strong housing price growth. Savings rates, after new revisions, have declined below % since last fall, reflecting generally elevated levels of confidence and asset values. Previous cyclical peaks in consumer confidence during the past two decades have been followed by disappointing returns in equity markets. We are watching for policy changes from the Trump administration that may boost confidence Consumer Confidence Index Level Source: Conference Board - - Real Personal Consumption Expenditures Q/Q Percent Change (SAAR) Q Real Consumer Spending and Disposable Income Real Disposable Income - Real Consumer Spending Household Net Worth and Personal Savings Rate 1 9 Net Net Worth Worth Multiple Q 17 of of Disposable Income (right axis) scale) 7 3 Personal Savings Percent of of 1 Disposable Income (left axis) scale) Sources: Department of Commerce, Federal Reserve 3

4 Housing Housing data remained generally in line with prior months trends. Vacancy rates remain low, housing activity (new and existing) remains stable and housing prices continue to increase at a % to % annual rate. Mortgage rates were relatively stable during the first nine months of the year, trending at around % after jumping higher after the election. While rates are higher than 1 averages, they remain historically low and should continue as a tailwind for homebuyers. Strong home price growth in excess of income growth over the last few years, however, has contributed to a decline in the trend of homebuyer affordability, which is at its lowest level since. This could eventually slow home sales. Housing Starts and Building Permits (Thousand Units) Seasonally Adjusted Annual Rate Housing Starts Building Permits Homeowner Vacancy Rate Q New Home Sales and Existing Home Sales (SAAR) Existing Home Sales Existing (right scale, Home millions) Sales (right axis, millions) New Home New Sales Home Sales (left axis, (left thousands) scale, thousands) Sources: Department of Commerce, Nat l Assoc. of Realtors Case-Shiller Composite City Home Price Index 1 Jul Source: Standard and Poors

5 Production and Investment Production and investment data are consistent with moderate economic growth. Survey-based data were mixed (manufacturing PMI and small business optimism), while hard data such as industrial production and capacity utilization were affected by hurricane related disruptions. The business inventory-to-sales ratio has stabilized in recent months, remaining higher than average for non-recessionary periods over the last years. This should be a headwind to investment in the near term. Private investment growth was weak in 1 and only contributed slightly to total year economic growth. We anticipate investment growth will be moderate in 17, as excess capacity and sluggish demand growth will likely limit new investment spending Source: National Federation of Independent Business 3 National Federation of Independent Business Small Business Optimism Index ISM Manufacturing Index Business Inventory to Sales Ratio Industrial Production Jul Source: Institute for Supply Management Source: Federal Reserve Board

6 International Trade The trade deficit was little changed in August, as were both exports and imports. Real net exports contributed around.% to second quarter GDP. The dollar has weakened through the first nine months of 17. This decline, along with stronger growth readings in several foreign economies, should provide a more favorable trade backdrop in early 1. Overall, we anticipate modest further narrowing in the trade deficit in the coming months before the deficit resumes its gradually widening trend. Trade policy and the potential for greater protectionism remains a wildcard in the outlook U.S. US Trade Balance $ Billions U.S. Dollar Index vs. Major Currencies U.S. Imports and Exports Exports Imports U.S. US Real GoodsTrade Balance $ Billions Source: Bloomberg Sources: U.S. Department of Commerce

7 Labor Market Conditions Nonfarm payrolls decreased by 33, in September. Following the September employment report, the average payroll gain was 91, over the trailing three months and 139, over the past six months. Payroll growth should continue at a moderate pace in the coming months relative to last year s pace, with the economy at full employment. The report did not have a significant effect on expectations for the path of Fed rate hikes, with the market implying 7% odds of an additional increase in December and only modest adjustments thereafter. Average hourly earnings jumped by.% during the month. Unemployment fell to a new cyclical low of.% in September. The unemployment rate is unlikely to fall much further. Additional demand for labor going forward is more likely to raise wages and / or increase the participation rate than reduce the unemployment rate meaningfully from current levels Civilian Unemployment Rate Source: Bureau of Labor Statistics Private Nonfarm Payrolls Average Hourly Earnings Employees on Nonfarm Payrolls Monthly Net Change and 3 Month Average Nonfarm Payroll Change (Thousands) () 3 month average Source: Bureau of Labor Statistics Employment Cost Index Q Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics 7

8 Inflation and Monetary Policy CPI inflation increased moderately in August to a 1.9% annual rate. Core CPI inflation (excluding food and energy costs) remained for the fourth month in a row at a 1.7% annual rate. The difference between headline and core inflation remains low. The PCE deflator, which typically runs below the CPI, has fallen back below the Fed s % policy objective and currently sits at 1.%. The Fed will begin a modest pace of quantitative tightening this month and markets now anticipate an additional policy rate increase in December. The latest economic projections indicate it will raise the fed funds rate steadily higher in 1 and 19, ending 19 at.7%. This stands in stark contrast to futures market pricing, which suggests less than basis points in additional rate moves over the next couple of years. Consumer Price Index 7 CPI Ex. Food/Energy CPI Source: Bureau of Labor Statistics U.S. Import Prices Source: Federal Reserve Board - - Nonfarm Unit Labor Costs CRB Commodity Index Q Source: Bureau of Labor Statistics Source: Reuters

9 Equity Market U.S. equity markets experienced positive performance in September. The Russell Index of small cap stocks returned.%, the S&P Index of large cap stocks.1% and the Nasdaq Composite Index returned 1.1%. Implied and realized volatility remained depressed during the month, declining shortly after Labor Day to record lows in early October. In September, energy stocks led the market with returns of 9.9%, while utilities stocks had the worst sector performance at -.7%. Technology and health care have been the standout performers year-to-date through September, returning 7.3% and.3%, respectively, while energy lost.%. Domestic markets in aggregate have lagged international equities so far in 17, a reversal of the past several years S&P S&P (right (right axis) scale) S&P and NASDAQ NASDAQ NASDAQ (left (left scale) axis) Source: Bloomberg Total Return Percent by Sector Source: Bloomberg. Based on the S&P Index YTD Source: Bloomberg - - Total Return Percent by Style S&P Year/Year Percent Change Source: Bloomberg 17 YTD 9

10 International Markets International equities performed similarly to U.S. stocks in September. EAFE (Europe, Australasia, Far East) equities returned.9% and emerging market equities returned -.%. Emerging markets have been the clear winners year-to-date, returning 7.7% vs. 1.% for the S&P. If non-u.s. equities maintain their performance advantage over U.S. equities through the remainder of the year, it would be the first time since 1 that international stocks outperformed the U.S. for a calendar year. Dollar weakness is unlikely to remain a continued source of foreign stock outperformance over the balance of the year, but better growth measures and ongoing policy support, as well as valuation differentials, suggests continued foreign stock outperformance MSCI Emerging Markets vs. MSCI Eafe Ratio Source: MSCI Barra Source: MSCI Barra Total Return Percent by Market Segment 1 17 YTD S&P Index Relative to MSCI AC World ex ex U.S. US Index Source: MSCI Barra MSCI AC AC World ex ex U.S. US Total Return Index Source: MSCI Barra 1

11 Fixed-Income Market The U.S. Treasury yield curve steepened slightly in September, with the -year yield increasing around.1% and 1-year yield increasing around.3%. Short-term rates have risen in 17, reflecting continued Fed tightening. The 1- year Treasury yield rose from.% on December 31 to a high of.3% on March 13, declined to.17% on April 1 and ended September at.33%. Investment grade credit spreads continued to decrease slightly in September. The bestperforming fixed income sector in September was the high yield sector, returning.9%. The key drivers of long-term interest rates over the past five years have been equivalent foreign bond yields and longer-term expectations for the fed funds rate. Both of these factors will likely be a near-term source of upward pressure on yields. 1 3 mo yield U.S. US Treasury Yields Percent 1 yr yield Source: Bloomberg (1.)... Total Return by Style Source: Barclays Capital. Based on the Barclays U.S. Aggregate Bond Index. 9.. (.) months ending 9/3/17 3 months ending 9/3/17 % % 3% % 1% % Source: Bloomberg U.S. Treasury Yield Curve 1/31/1 9/3/17 3Mo Yr Yr 1Yr 3Yr Credit Spreads by Quality (percent) Aaa Aa A Baa Source: Barclays Capital. Based on the Barclays U.S. Aggregate Bond Index. 11

12 Economic, Rates and Earnings Forecast 17 Bloomberg 1 Bloomberg 1 (A) 17 (F) 1 (F) Consensus* Consensus* Real GDP (Q/Q) 1.% 1.9% -.% 1.% -.%.%.3% Personal Consumption Expenditures.% 1.% -.% 1.% -.% Investment.9% 1.% - 3.% 1.% -.% Net Exports ($) -$B -$11B -$B Government Spending.%.%- 1.% 1.%-.% Unemployment Rate***.7%.%.1%.%.% CPI***.1% 1.% -.% 1.% -.%.%.% CPI Excluding Food and Energy***.% 1.% -.% 1.% -.% Fed Funds***.% -.7% 1.% - 1.% 1.% -.% 1.%.% 1 Year Treasury***.% 1.7% -.7%.% - 3.%.%.9% Corporate Earnings (S&P Operating) $1. $1. $17. $17.** $1.71** Trade Weighted Dollar*** *Bloomberg - October 1,17 **Standard and Poors - October 1, 17 ***End of Period Level (A) Actual (F) Forecast 1

13 Index Definitions The Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The MSCI Emerging Markets Index captures large and mid cap representation across 1 Emerging Markets (EM) countries The MSCI ACWI (All Country World Index) Index is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI (All Country World Index) Index ex U.S. is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI EM (Emerging Markets) Asia Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Asia. The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI Europe & Middle East Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe and the Middle East. The MSCI EM (Emerging Markets) Latin America Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The MSCI North America Index is designed to measure the performance of the large and mid cap segments of the U.S. and Canada markets. The MSCI Pacific Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in the Pacific region. The Russell 1 Growth Index is a market-capitalization-weighted index that measures the performance of those Russell 1 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1 Value Index is a large-cap value index measuring the performance of the largest 1, U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values. The Russell Index is composed of the, smallest stocks in the Russell 3 Index and is widely regarded in the industry as the premier measure of small-cap stock performance. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap is a subset of the Russell 1 Index. The S&P Index is a capitalization-weighted index of stocks designed to measure the performance of the broad domestic economy. 13

14 Disclosure This information represents the opinion of U.S. Bancorp Asset Management, Inc. and is not intended to be a forecast of future events, a guarantee of future results or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or a recommendation to invest. The factual information has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Past performance does not guarantee future results. U.S. Bancorp Asset Management, Inc. is a registered investment advisor and subsidiary of U.S. Bank National Association. U.S. Bank National Association is a separate entity and wholly owned subsidiary of U.S. Bancorp. U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Asset Management, Inc. 1/