US Economic Outlook: Rate hikes coming

Transcription

1 US Economic Outlook: Rate hikes coming February 215 Torsten Slok, Ph.D. Chief International Economist Managing Director 6 Wall Street New York, New York 15 Tel: Torsten.Slok@db.com DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/4/214.

2 Index Lower oil prices helping restaurants, which is a labor intensive industry, so that bodes well for employment Restaurant Performance Index Restaurants doing better than in Index Note: The National Restaurant Association's Restaurant Performance Index is a monthly composite index that t tracks the health of and the outlook for the U.S. restaurant t industry. Source: NRA, Haver Analytics, DB Global Markets Research 96 1

3 Consumer spending benefiting from lower oil prices % Real Personal Consumption pto Expenditures, dtu es, 2-qtr %chg ann % Source: NFIB, BLS, Haver Analytics, DB Global Markets Research

4 We are getting close to full capacity in the US economy Capacity utilization Inflation and wages rising Full capacity No inflation pressure Time Source: DB Global Markets Research 3

5 % The US economy is close to full capacity. That s when you normally begin to see inflation Capacity utilization (ls) Unemployment rate (rs) Capacity utilization at levels Unemployment rate close to NAIRU Source: Fed, BLS, Haver Analytics, DB Global Markets Research %

6 % 4.5 Will 215 be different? The market has predicted rate hikes for the past five years Fed funds futures at different points in time % Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: FRB, Bloomberg Finance LP, DB Global Markets Research. 5

7 % Wall Street economists have been consistently wrong in their forecasts for the ten-year rate over the past decade Actual 1y rate and forecasts for the 1y rate from the Fed's quarterly Survey of Professional Forecasters Average 12-month forecast error over the past decade: 6bps too high % Source: FRB, FRBPHIL, Haver Analytics, DB Global Markets Research 6

8 % 5 Workers are expecting higher wages... Consumer expectations: median rate of income change in 1 year (ls) ECI: wages & salaries: civilian workers (rs) %y/y Source: BLS, UMICH, Haver Analytics, DB Global Markets Research 7 1

9 and companies are planning to raise wages % of firms %y/y 25 2 NFIB: Companies planning to raise worker compensation (9 month lead, ls) ECI: wages & salaries: private industry workers (rs) Correlation= Source: NFIB, BLS, Haver Analytics, DB Global Markets Research 8

10 The FOMC has been too optimistic about the recovery Actual GDP growth June 1 FOMC projection % Nov 11 FOMC projection Dec 12 FOMC projection Dec 13 FOMC projection Dec 14 FOMC projection % Note: FOMC forecasts are q4/q4 and actual GDP is annual data and the observation for 214 is the latest consensus estimate. Source: FRB, BEA, DB Global Markets Research

11 Thous. 25 Headwinds are fading and as a result employment growth is accelerating Monthly average change in nonfarm payrolls 246 Thous Source: BLS, Haver Analytics, DB Global Markets Research 5 1

12 The ongoing housing recovery is healing household h and banking sector balance sheets Household Banking Government Corporate sector balance sector balance sector balance sector balance sheet sheet sheet sheet Rising home prices Fiscal drag shrinking in 214 Moving away from bank loans toward credit market loans Source: DB Global Markets Research 11

13 Headwinds are fading in the housing market 12

14 Months It takes five months to build a home, one month faster than in Avg Length of Time from Start to Completion: Built for Sale 1 Unit Bldgs Months Source: Census, DB Global Markets Research

15 New single-family homes are bigger than in Avg sq ft 27 Average square feet of floor area in new single-family houses Avg sq ft Source: Census, DB Global Markets Research 2 14

16 Housing supply back to normal. Accelerating employment growth will continue to support housing demand % Rental vacancy rate(ls) Homeowner vacancy rate(rs) % Note: A housing unit is vacant if no one is living in it at the time of the interview, unless its occupants are only temporarily absent. In addition, a vacant unit may be one which is entirely e occupied by persons s who have a usual residence elsewhere. Source: Census, Haver Analytics, DB Global Markets Research

17 % Distressed home sales now 9% of all sales Share in existing home sales Distressed home sales Non distressed home sales Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Source: National Association of Realtors, DB Global Markets Research 16 %

18 % The % of loans going into foreclosure per quarter is at levels % of loans going into foreclosure per quarter Prime Prime: FRM Prime: ARM Sub prime Sub prime: FRM Sub prime: ARM % Note: ARM=Adjustable Adj Rate Mortgage, FRM=Fixed Fi Rate Mortgage Source: MBA, Datastream, DB Global Markets Research 17

19 The number of homes for sale is low Thous 36 Single family homes available for sale Thous Source: NAR, Haver Analytics, DB Global Markets Research 12 18

20 The number of people per household coming down Ratio Number of people 16 and older per household 2-3 average Ratio Source: Census, BLS, Haver Analytics, DB Global Markets Research 19

21 Home price appreciation moderating % y/y S&P case shiller home price index:composite 2 CoreLogic national house price index %y/y CoreLogic national HPI distressed excluded 2 FHFA HPI purchase Mortgage rates increased 1bps Source: S&P, CoreLogic, FHFA, Haver Analytics, DB Global Markets Research 2-2

22 5% of US adults are single % Share of singles in total adult (+16 years) population Source: BLS, Haver Analytics, DB Global Markets Research %

23 Millions 6 There are 4.6mn 23-year olds in the US, more than any other age group U.S population by age, 214 Expect another echo in coming years Echo-boomers Baby-boomers Millions Source: Census, Haver Analytics, DB Global Markets Research 22

24 y/y chg 25 Household formation has increased dramatically in recent months Total Number of Households, Break-adjusted, Thous Are Millennials moving out of their parents basement? y/y chg Source: Census, Haver Analytics, DB Global Markets Research 23

25 The composition of the median household today is very different from what it was in 198 % of total Household shares by number of earners % of total No earner households One earner households 5 Two or more earner households Source: Census, Haver Analytics, DB Global Markets Research 15 24

26 Headwinds d are fading in the banking sector 25

27 $ bln Banking sector quarterly net income currently at the same level as in 25 and 26 Net operating income All FDIC institutions Securities gains/losses Source: FDIC, Haver Analytics, DB Global Markets Research $ bln

28 Delinquency rates coming down Loan delinquency rate: all insured commmercial banks % % Consumer loans Real estate loans C&I loans Source: FRB, Haver Analytics, DB Global Markets Research

29 % Balance sheet repair almost complete in small banks Total non-performing loans as % of total loans BHCs>$5bn All institutions BHCs $5bn-5bn Banks and BHCs<$5bn % Note: Non-performing loans include loans that are (1) 9 days or more past due and still accruing or (2) non-accrual. Source: FRBNY, DB Global Markets Research 28

30 Smaller banks have higher net interest margins % Net interest margin of FDIC-insured institutions, based on asset size (214Q3) < $5bn $5bn - $5bn > $5bn Source: FDIC, DB Global Markets Research %

31 %y/y 2 Credit growth continues to accelerate, driven by both small and large banks Loans & Leases in Bank Credit All commercial banks Large commercial banks Smallcommercialbanks %y/y Source: FRB, Haver Analytics, DB Global Markets Research -1 3

32 Lower energy prices 31

33 The effects of lower oil prices starting to show up: Consumer sentiment at the highest level since the crisis across income groups 66Q1=1 12 Bottom third household income tercile Middle third household income tercile Top third household income tercile 66Q1= Source: UMichigan, Haver Analytics, DB Global Markets Research

34 Consumers benefiting from lower oil prices and accelerating job growth Q1-66= Index of Consumer Sentiment (ls) Real Personal Consumption Expenditures (rs) 5m%Chg SAAR Note: We look at the 5-month change to analyze the period since oil prices started falling in June 214. Source: BEA, UMichigan, Haver Analytics, DB Global Markets Research

35 %yoy Oil prices down almost 5%: Markets underestimating the upside risk to growth in US, Japan, and Europe G7 GDP growth (ls) Oil price (reverse axis, 18m lead, rs) G7 growth could accelerate to +3% %yoy Note: Right scale is inverted. US recession shading shown. Source: EIA, OECD, Haver Analytics, DB Global Markets Research 34

36 No outsized contribution to this recovery by energy: The 12 energy states account for 2%-25% of the US economy and the energy states created around 25% of all jobs during this recovery mn jobs 7 6 Jobs created in energy states Jobs created in the rest of the country mn jobs 7 6 7mn jobs created in non-energy states mn jobs created in energy states Jul- 9 Jan- 1 Jul- 1 Jan- 11 Jul- 11 Jan- 12 Jul- 12 Jan- 13 Jul- 13 Jan- 14 Jul- 14 Jan Note: The 12 energy states are: TX, ND, OK, LA, PA, WY, NM, CO, AR, UT, KS, and WV. Source: Bloomberg Finance, Deutsche Bank Research 35

37 Only a small share of capex goes to the energy sector % 15 Share of energy investments in total non residential fixed investments % Source: BEA, Haver Analytics,DB Global Markets Research 36

38 The Baltic Dry Index at very low levels Index 12 Baltic dry index Index Source: BalticExchange, Bloomberg Finance LP, DB Global Markets Research 37

39 A lot of oil supply at the moment Mln bls 12 US stock of crude oil & petroleum products (ls) US crude oil field production (rs) Mln b/d Note: Stock excludes the strategic petroleum reserve. Source: EIA, Haver Analytics, DB Global Markets Research 38

40 Labor markets tightening i 39

41 Wage inflation decelerating and income growth accelerating: Hours worked was the problem in the December employment report Average Weekly Earnings: Total Private Industries % yoy % yoy Average Hourly Earnings: Total Private Industries Weekly earnings growing at the fastest rate in three years Source: BLS, Haver Analytics, DB Global l Markets Research

42 The 2, 3, and 4 quarter change in ECI shows solid momentum in wages in recent quarters ECI: Wages and salaries, civilian workers % change 2 qtr ann change % change 6 3 qtr ann change 4 qtr ann change Source: BLS, Haver Analytics, DB Global Markets Research 1 41

43 People are voluntarily quitting jobs at a pre-crisis rate: It is time for the Fed to think about hiking rates % JOLTS: Quits Rate (ls) Fed funds target rate (rs) % Pre-crisis quits rate Source: BLS, FRB, DB Global Markets Research 42

44 % Wage and income expectations at the highest levels in five years Expectations of personal finances in 1 year: Relative score (ls) Percentage of consumers expecting household income to rise over next year (rs) 14 7 % Source: University of Michigan, Haver Analytics, DB Global Markets Research 43 3

45 % Recent Fed work suggests that those who left the labor force are not coming back Labor force participation rate 68 Latest Fed projection (September 214) % Source: Aaronson et al. Labor Force Participation: Recent Developments and Future Prospects ( BLS,Haver Analytics, DB Global Markets Research 44 6

46 People per job opening Less slack in the labor market: Number of available people per job opening is back to its pre-crisis average (People not in the labor force who want a job now + total number of unemployed) divided by (total number of job openings) Pre-crisis average People per job opening Source: BLS, JOLTS, Haver Analytics, DB Global Markets Research 45

47 Labor shortage in construction worse than in 25 % % of builders reporting shortages for 9 types of labor % Serious or some shortage in labor availabilitya ab In 24 and 25 when builders were surveyed more than once a year, results from july survey are shown. For 214, GDP growth is reported for Q1 and unemployment rate are averaged for first 5 months, real non-residential construction for first 4 months (includes all construction except residential building, inflation adjusted using CPI). This information has been sourced from: Source: NAHB, DB Global Markets Research 46

48 Businesses will soon worry more about tight labor markets than about sales and we are still far, far away from the neutral fed funds rate NFIB: Single Most Important Problem % Reporting % Reporting 4 Poor Sales Quality of labor Pre-crisis level Source: NFIB, Haver Analytics, DB Global Markets Research

49 Thous Fiscal headwinds are gone: Instead of subtracting 1k jobs per month the government is now adding 1k jobs per month All employees: government Thous Source: BLS, DB Global Markets Research

50 % y/y Significant decline in disability insurance enrollment in recent years Number of individuals receiving disability insurance % y/y Source: Social Security Administration, Haver Analytics, DB Global Markets Research 49

51 Most of the jobs created during this recovery are high-wage jobs Thous 1 8 Cumulative increase in employment since Jan 21 High wage occupations Low wage occupations Medium wage occupations Total Thous High wage occupational categories are management, professional and related occupations. Medium wage categories are sales and office occupations; construction and extraction occupations; installation, maintenance and repair occupations; and production/transportation and material moving occupations. Low wage occupations are service occupations and farming, fishing, and forestry. Source: BLS, Haver Analytics, DB Global Markets Research 5

52 Is the Fed behind the curve? 51

53 Fed s optimal control framework suggests fed funds rate in 215Q1 should be.7% % December SEP/median dot Optimal control % According to FRB/US fed funds rate in 2 215Q1=.7% Sources: FRB/US, FOMC, Deutsche Bank Research 52

54 Yield, % Vol will move up as we get closer to the first Fed hike Yield curve with dovish Fed forward guidance Yield curve with hawkish Fed forward guidance Once the Fed turns hawkish the standard deviation of outcomes will increase, ie vol will go up Dovish Fed forward guidance pushes the yield curve closer to zero, which lowers the standard deviation of potential outcomes 1y 5y 1y Source: DB Global Markets Research 53

55 The FOMC has been too optimistic about the lift-off date. Will they get it right this time? % Actual fed funds rate Jan 12 FOMC projection % Sep 13 FOMC projection Sep 14 FOMC projection 4. Dec 14 FOMC projection Market expectations ti Too optimistic Too optimistic? Note: Fed forecasts are the median value in the dot charts. The Fed only began publishing dot charts in 212. Source: FRB, FOMC, DB Global Markets Research 54.

56 % The FOMC doesn t want to repeat the policy mistakes made by these five central banks Central bank policy rates Euro Area Sweden Norway Australia New Zealand % Source: ECB, SRB, NB, RBA, RBNZ, Haver Analytics, DB Global Markets Research 55

57 Tighter rental market will push up inflation % Rental vacancy rate % Source: Census, Haver Analytics, DB Global Markets Research 6 56

58 Fed holds 5% of 1y-2y Treasuries outstanding % 5 SOMA Treasury Holdings August 214 % Billsls Years to Maturity/Security Type TIPS FRNs Source: FRBNY, DB Global Markets Research 57

59 MBS: Fed holds 5% of outstanding 3% coupons % 5 SOMA Agency MBS Holdings August 214 % Coupon (percent) Source: FRBNY, DB Global Markets Research 58

60 The Fed can easily begin to hike rates: The taper tantrum had no impact on the speed of the recovery % 1. Unemployment rate (ls) Total nonfarm employment (rs) thous Euro crisis Debt ceiling Fiscal cliff Taper tantrum High yield blowout/ October turbulence Jan- 1 Jul- 1 Jan- 11 Jul- 11 Jan- 12 Jul- 12 Jan- 13 Jul- 13 Jan- 14 Jul Source: BLS, BEA Haver Analytics, DB Global Markets Research 59

61 Europe, Japan, and China 6

62 % change IMF January 215 WEO: US growth outlook revised up by.5%. The rest of G7 and BRIC revised down U.S U.K Revision of 215 GDP growth forecast since October 214 WEO Projections France Canada India Germany Japan China Source: IMF WEO, DB Global Markets Research Italy Brazil % change Russia

63 Europe: Are we already seeing the positive impact of lower oil, euro depreciation and lower long rates? Index Germany % y/y 12 IFO business climate index (ls) GDP (rs) Source: IFO, Bundesbank, DB Global Markets Research -8 62

64 First-year GDP impact in US and EU of lower oil prices, lower EURUSD, and lower 1y rates % Impact of lower EURUSD Impact of lower oil prices Impact of lower 1y rates % US EU -.5 Source: IMF, OECD, DB Global Markets Research 63

65 A falling euro is good for European inflation. And it holds back inflation in the US Effects of a ten percent euro depreciation Deviations from baseline, in percent Year United States GDP Level Inflation (Consumer prices) Japan GDP Level Inflation (Consumer prices) European Union GDP Level Inflation (Consumer prices) Source: OECD, DB Global Markets Research 64

66 Markets underestimating the progress made in Europe Difference in ranking between Germany and the periphery p in the World Bank s survey of how easy or difficult it is to do business in different countries Greece Portugal Spain Italy Ireland For example: In 21 Greece was 84 places behind Germany in the ranking, in 215 the difference was 47 Source: World Bank Doing Business Survey, DB Global Markets Research -1 65

67 First time home buyers struggling in London Multiple 4. London Mortgage as income multiple of first-time home buyers Multiple Source: ONS, Haver Analytics, DB Global Markets Research 2. 66

68 Australian housing market in trouble % 5 Australia Proportion of interest-only loans in total new residential term loans to households % Source: APRA, DB Global Markets Research 25 67

69 How over/undervalued are home prices today relative to historical averages of home price/rent and home price/income? Country 1) Home price/income (% above historical average) 2) Home price/rent (% above historical average) Current average over/undervaluation of home prices (=average of column 1) and 2) (%) Canada New Zealand Belgium Australia Norway United Kingdom Sweden France Finland Denmark Spain Ireland Netherlands Italy 3-4 Switzerland US Germany Greece Korea Japan Source: OECD, DB Global Markets Research 68

70 Japanese labor market is tightening, this will lead to wage inflation Japan jobs to applicants ratio More jobs than applicants Source: Bloomberg Finance LP, DB Global Markets Research

71 % Abenomics is working Japan: Female employment rate: age December 212 Abenomics begins % Source: OECD, Haver Analytics, DB Global Markets Research 7

72 Recent data from China is worrying %y/y China 24 Industrial production (ls) Real GDP(rs) %y/y Source: CNBS, Haver Analytics, DB Global Markets Research 71

73 Home prices are falling in China Number of cities with rising home prices Unchanged Number of cities with falling home prices Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Note: Month over month changes. Source: CNBS, Haver Analytics, DB Global Markets Research 72

74 US more competitive: Chinese wages are 2% of US wages, up from 4% ten years ago % % Manufacturing: Chinese wages (USD per hour) divided by US wages (USD per hour) Sources: US: BLS: Average Hourly Earnings in manufacturing. China: BLS: International comparisons of hourly compensation costs. To get data for we applied the growth rate of Average wage of employed persons in manufacturing, Chinese Ministry of Labor and Social Security multiplied by the CNY exchange rate. Data for 214 assumes the same growth rate in wages as in 213. DB Global Markets Research 73

75 How will a slowdown in China impact the rest of the world? Percent of total exports consumed by China % Australia Japan South Korea US Germany Brazil % Source: IMF, Haver Analytics, DB Global Markets Research 74

76 Next year growth will be higher in India than in China % IMF WEO January 215 GDP growth forecasts % 8. India China Source: IMF WEO, DB Global Markets Research 4. 75

77 ECB and Fed have a lot of room for more QE if needed % of GDP EA Japan Switzerland U.S. % of GDP Source: IMF, Country Sources, Haver Analytics, DB Global Markets Research 76

78 Recent Treasury flows 77

79 USD trillion 2 Central banks have printed more than $1trn dollars since the crisis began Total assets of Fed, ECB, BoJ, BoE, and PBC USD trillion Source: BoE, FRB, BoJ, ECB, PBC, SAFE, Haver Analytics, Deutsche Bank Research 78

80 7% of Treasuries are held by foreigners and the Fed % Holdings of treasuries as % of treasury debt outstanding US domestic real money,banks, and households Foreigners Federal Reserve During QE domestic accounts sold their Treasuries to the Fed Source: FRB, Haver Analytics, DB Global Markets Research %

81 Fed and foreign central banks hold 5% of Treasuries outstanding % Holdings of treasuries as % of treasury debt outstanding % US domestic real money,banks, and households 8 Foreign private 8 7 Federal Reserve and Foreign official Source: FRB, US Treasury, Haver Analytics, DB Global Markets Research

82 The Fed holds +4% of long Treasuries % Fed holdings of treasury securities outstanding (% of total securities outstanding by maturity) % 5 Fed share of total: -5 years 5 45 Fed share of total: -1 years 45 4 Fed share of total: 1+ years 4 35 Fed share of total: 5+ years Source: FRB, Haver Analytics, DB Global Markets Research

83 Who owns European government debt? Holders of government debt at end-213 (% of total) Foreign official Domestic nonbanks Domestic banks Domestic central bank Foreign banks Foreign nonbanks 1% 1% 8% 6% 4% 2% 8% 6% 4% 2% % Gree ece Portu ugal Irela and nds Netherla Fran nce Germa any Swed den Finla and Aus stria Source: Arslanalp and Tsuda (214), DB Global Markets Research 82 Denm mark Norw way Sp pain United Kingd dom ium Belgi Switzerla and It taly %

84 Investment Implications 83

85 Extreme positioning in HY and IG: Have HY spreads widened because of fear of coming Fed hikes? 6 Option Adjusted Spread (weighted by market value) of the US Dollar HY and IG: All Cash Bonds sector 2 HY Spread (ls) IG Spread (rs) Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Source: Blomberg Finance LP, DB Global Markets Research 84

86 Primary dealer inventory of IG and high yield bonds currently 2% of what it was in 27 and the outstanding stock of corporate bonds has almost doubled since 27 USD trn 4.5 Total stock of US corporate bonds outstanding (ls) Primary dealer inventory of corporate bonds (rs) USD bln The credit liquidity gap Source: FRB, Haver Analytics, DB Global Markets Research 85

87 Fed funds at zero sent households on a hunt for yield. Households now own 29% of IG and HY outstanding, up from 15% in 26. Will they sell when the Fed turns hawkish later this year? % 1 year treasury note yield (ls, inverted) % Household holdings of corporate bonds as share of all outstanding corporate 1.5 bonds (rs) Note: Flow of funds data; household holdings is the sum of household direct holdings + ETF + Mutual funds 12 Source: FRB, Haver Analytics, DB Global Markets Research 86

88 The seven stories to the left will continue to be an important part of the narrative in rates markets Forces pushing rates down Forces pushing rates up 1. Foreign central bank buying of Treasuries to 1. Economic data is getting better and better support EM competitiveness 2. Geopolitical risk in Ukraine/Russia creates safe-haven demand for US rates 3. Slow growth in Europe makes US rates look attractive 4. Secular stagnation has lowered the neutral fed funds rate 5. Pension funds and insurance companies are selling equities and buying fixed income 6. Banks buying US Treasuries to satisfy liquidity ratios. 2. Fed about to turn hawkish 7. Exhaustion. Rates investors are tired of the bullish US economic outlook story. Many have unsuccessfully been betting on higher rates for the past 5 years. Source: DB Global Markets Research 87

89 US long term interest rates disconnected from Fed expectations Months to first Fed hike based on fed funds futures (ls) Months 1 year Treasury yield (inverted, rs) % May- 9 Nov- 9 May- 1 Nov- 1 May- 11 Nov- 11 May- 12 Nov- 12 May- 13 Nov- 13 May- 14 Nov- 14 Source: Bloomberg Finance LP, Deutsche Bank Research 88

90 Will we see an inverted yield curve in 215? The yield curve is one of the best predictors of recessions % pts 1.6 Spread between 1y and 5y treasury yield % pts Could the yield curve invert in ? An inverted yield curve is a strong signal about a recession coming Source: FRB, Haver Analytics, DB Global Markets Research

91 VIX is normally low during the Fed hiking cycle Days, 6m sum Number of days where VIX index > 15 (ls) Fed funds rate (rs) % Source: WSJ, FRB, Deutsche Bank Research 9

92 Higher rates in the US normally also pushes rates up in the rest of the world Impact on 1y rates in selected countries of a 1bp increase 1. in US 1y rates Canada Germany UK France Australia Japan Italy Source: DB Global Markets Research 91.

93 Higher rates in the US normally also pushes rates up in the rest of the world Impact on 5y rates in selected countries of a 1bp increase in US 5y rates UK Canada Germany France Australia Italy Japan Source: DB Global Markets Research. 92

94 Investment implications summarized Fed outlook Fed will hike later this year Fed will likely remove the word patient in April. Bond markets - Rates modestly higher in 215 Stock markets - Better private sector balance sheets Fundamentals suggest 1y rates are below fair value. As growth accelerates rates will move higher. But tourists leaving HY+IG will come back to rates and keep a lid on the uptrend. Corporate, household, and banking sector balance sheets continue to heal. This bodes well for equities. FX - USD up Stronger US recovery will mean Fed hiking sooner, which will mean higher USD Commodities - Downside risks Slowing Chinese construction growth likely to continue to put downward pressure on commodity yprices. If commodity yp prices fall, Australia, Latam, and Canada likely to be hit. Emerging markets - Will benefit from US recovery Structural problems starting to appear in a number of emerging markets, including China. Source: DB Global Markets Research 93

95 Rules of thumb for the US economy Experiment Cumulative impact on GDP growth and unemployment rate after 1, 2, and 3 years Year 1 Year 2 Year 3 1% decline in the dollar GDP Unemployment rate $1 increase in oil prices GDP Unemployment rate % increase in stock market GDP Unemployment rate Note: Percent change from baseline. All experiments assuming constant real funds rate Source: Federal Reserve FRB/US Model, DB Global Markets Research 94

96 List of safe assets pre- and post-crisis USD billion US Federal government debt held by the public Held by the Federal Reserve Held by yprivate investors GSE obligations Agency-and GSE-backed mortgage pools ,569 ABS Issuers Agency-and GSE backed securities held by Fed 1547 Corporate bonds outstanding German and French government debt ,452 Italian and Spanish government debt ,683 Total Source: FRB, BdF, Bbk, ISTAT, BDE, Haver Analytics, DB Global Markets Research 95

97 Percentage of resilient students Percentage of resilient students Shanghai-China Hong Kong-China Viet Nam Singapore Korea Japan Switzerland Netherlands Poland Canada Finland Belgium Germany OECD average Italy Spain Australia United Kingdom France Norway United States Croatia Denmark Serbia Percentage of resilient students among all students Note: A student is classified as resilient if he or she in the bottom quarter of the PISA index of economic, social and cultural status (ESCS) in the country of assessment and performs in the top quarter of students among all countries, after accounting for socio-economic status. Countries and economies are ranked in descending order of the percentage of resilient students. Source: OECD, PISA 212 Database, Table II.2.7a., DB Global Markets Research 96

98 Torsten Slok, Ph.D. Chief International Economist, Managing Director Deutsche Bank Securities, Inc. Torsten Slok joined Deutsche Bank Securities in the fall of 25. Mr. Slok s Economics team has been top-ranked by Institutional Investor in fixed income and equities for the past five years. Slok currently serves as a member of the Economic Club of New York Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and Finance Division and the Structural Policy Analysis Division. Before joining the OECD he worked for four years at the IMF in the Division responsible for writing the World Economic Outlook and the Division responsible for China, Hong Kong, and Mongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has published numerous journal articles and reviews on economics and policy analysis, including in Journal of International Economics, Journal of International Money and Finance, and The Econometric Journal. 97

99 Deutsche Bank Appendix 1 Important Disclosures Additional Information Available upon Request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at / /di /Di l t Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Torsten Slok 98

100 Regulatory Disclosures Deutsche Bank 1. Important Additional Conflict Disclosures Aside from within this report, important t conflict disclosures can also be found at / under the Disclosures Lookup and Legal tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank s existing longer term ratings. These trade ideas can be found at the SOLAR link at 3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 32) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no ) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 3189, Faisaliah Tower - 17th Floor, Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 45) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial i Centre, The Gate Village, Building 5, PO Box 5492, Dubai, U.A.E. This information i has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.. 99

101 Risks ssto Fixed Income Positions ostos Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. 1

102 Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. In August 29, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at to determine the target price of any stock. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options," at If you are unable to access the website please contact Deutsche Bank AG at +1 (212) , for a copy of this important document. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany, this report is approved and/or communicated by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorised under German Banking Law (competent authority: European Central Bank) and is subject to supervision by the European Central Bank and by BaFin, Germany s Federal Financial Supervisory Authority. In the United Kingdom, this report is approved and/or communicated by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-SouthTowerSingapore48583, ),and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/3298/1). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright 215 Deutsche Bank AG This model is provided for the sole use of the recipient for internal purposes, redistribution of any nature is not permitted. While Deutsche Bank has taken all reasonable steps to ensure that the accompanying file is free of viruses and any other conditions which could damage the data, hardware or software with which it might be used, it is supplied on the basis that the recipient accepts full responsibility for, any consequences of use. The accompany files do not constitute investment advice and Deutsche Bank is not responsible for installing, maintaining or updating them. While Deutsche Bank has taken all reasonable care when creating these models, it accepts no responsibility for any omissions or errors. 11