Global Economic Perspective

Transcription

1 Investment Team Update December 2015 Global Economic Perspective PERSPECTIVE FROM THE FRANKLIN TEMPLETON FIXED INCOME GROUP Christopher Molumphy Michael Materasso Roger Bayston Eric Takaha John Beck David Zahn IN THIS ISSUE: Strong US Fundamentals Spur the Fed to Act No Let Up in Downward Pressure on Global Commodities European Central Bank Eases Monetary Policy Further to Strengthen Recovery Strong US Fundamentals Spur the Fed to Act In our view, the fundamentals that drive the US economy remain intact, underpinned by the robust growth of the private sector, particularly in areas like consumer demand, construction and real estate, and they look strong enough to endure gradual policy normalization by the Federal Reserve (Fed). While there are some headwinds such as the strength of the US dollar these seem to be broadly offset by positive factors such as cheaper energy costs. That the Fed has repeatedly stated its awareness of the dangers of moving either too quickly or too slowly increases our confidence that any future policy moves will be mindful of the need to maintain both growth and inflation at reasonable levels. At its December meeting, the Fed finally decided that conditions in the US economy were sufficiently strong to warrant a tightening of monetary policy, raising the federal funds target rate by 25 basis points. The move marked the first time that US policy rates had increased since before the global financial crisis of , and it had been widely expected following another month of robust economic data and a series of comments from Fed Chair Janet Yellen in the weeks beforehand, which were clearly aimed at preparing financial markets for such a move. She described the increase as a sign of the US economy s recovery from the recession brought on by the financial crisis, and forecasted continued growth and higher inflation. The most obvious pointer to the strength of the US economy remained the labour market, and this was underlined by a solid job gain figure of 211,000 in the November nonfarm payroll report, alongside an upward revision to October s already stellar number, with the elevated monthly figure of 298,000 the highest for 2015 so far. In November, there were particularly strong gains in construction, as well as growth in several serviceoriented sectors, with weakness confined to areas of the economy impeded by weak oil prices. The unemployment rate remained unchanged at 5.. Though there was a slight dip in the rate of wage growth compared with the six-year high seen in the previous month, further evidence of a pickup in pay came from the Beige Book, the Fed s roundup of conditions around the country, which hinted at broad upward pressure in earnings, particularly for skilled workers.

2 Third-quarter gross domestic product (GDP) figures were revised upward from 1.5% to 2., with much of the additional momentum provided by higher inventories, though these gains seemed likely to be temporary and a potential headwind for the fourth quarter. The element of growth provided by consumer spending was revised down a little to a still robust 3., but other data indicators pointed to continued underlying strength in this area. Retail sales for October slowed on an annualised basis as they ticked up 0. from the previous month, while the core number (less vehicles and gas stations) was a respectable 0.3%. Chart 1: S&P/Case-Shiller 20-City Composite Home Price Index January 2007 September 2015 US$ Thousands /07 9/07 5/08 1/09 9/09 5/10 1/11 9/11 5/12 1/13 9/13 5/14 1/15 9/15 Source: S&P Dow Jones Indices LLC, as of 24/11/15. Indexes are unmanaged, and on cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Past performance does not guarantee future results. There were improved numbers from the manufacturing sector, with durable goods reversing contractions in August and September to record a 3. month-on-month expansion in October, and 0.5% excluding transportation. Despite an overall 0. contraction in industrial production over the same period, weakness was concentrated in utilities (as a result of unseasonably warm weather) and mining; manufacturing expanded by 0. and construction by an extremely strong 1.7%. The strength of the housing market was further underlined by a 0.6% monthly rise in the Case-Shiller 20-city home price index for September, making a 5.5% rise year-onyear. While jobs data remained strong, the signals for inflation the other major consideration guiding Fed policy were more equivocal. October data showed the Fed s preferred measure, core personal consumer expenditure, which excludes volatile food and energy prices, rising at an annual rate of 1.3%, still some way off the Fed s goal of. Continued downward pressure on global commodity prices as well as the dampening effects of a strong US dollar seem likely to keep pricing pressures from picking up pace too rapidly despite the strength of the economy. With inflation in the United States somewhat more driven by labour costs than in other countries, we would expect to see the gradual stirring of wage growth become more evident in time, though such a trend could be relatively slow to develop, due to the lag effect before such costs feed through to consumer prices. The most obvious pointer to the strength of the US economy remained the labour market. No Let Up in Downward Pressure on Global Commodities Prices for global commodities generally remained under pressure, hampering the economies of those countries most reliant on their revenues. The most visible example was oil, with December s semi-annual meeting of the Organization of the Petroleum Exporting Countries (OPEC) failing to reach agreement on any new production targets, which raised the possibility of further price weakness as its members seek to maintain market share. Expectations of higher exports and production from Iran in 2016, when sanctions against the country are expected to be lifted, were thought to have hampered negotiations at the meeting over raising OPEC s existing output target. Against a backdrop of weaker demand from China, the price of iron ore fell to its lowest level since 2009, when pricing changed from being calculated annually to a more conventional spot market. A similar pattern of slumping prices amid falling Chinese demand and excess supply as capacity from investment made during the previous era of booming commodity prices added to production levels remained evident across a number of metals, with the prices for copper, gold and zinc all falling to multi-year lows.

3 Chart 2: Crude Oil Comparison of West Texas Intermediate (WTI) vs. Brent 1 July December 2015 $/Barrel /7/14 14/9/14 28/11/14 11/2/15 27/4/15 11/7/15 24/9/15 8/12/15 Crude Oil, WTI Crude Oil, Brent Source: FactSet. Indexes are unmanaged, and on cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Past performance does not guarantee future results. One of the countries most affected by lower commodity prices has been Brazil, where data revealed that the country s GDP contracted by a 1.7% in the third quarter from the previous quarter, and by a record 4.5% compared with a year earlier. Brazil s economy has been hit not just by falling commodity revenues but also by a long-running corruption scandal, which has prevented policymakers from implementing fiscal policies that could bolster the country s shaky finances. Nevertheless, we would be inclined to view the sizable falls in commodity prices as a potential medium-term boost for global growth, rather than signaling, for example, an impending lurch into global deflation or the trigger for a crisis that could spread across multiple emerging markets. In China, a survey of purchasing managers in manufacturing hit its lowest level since 2012, though indicators for the country s service sector suggested a much stronger picture. A more positive development for China was the announcement by the International Monetary Fund (IMF) that it would include the renminbi as the fifth currency in the basket used by the IMF to value its own quasi-currency Special Drawing Rights (SDR). The move was interpreted by some analysts as a vote of confidence in China s ability to push through deeper economic reforms, as well as its willingness to implement financial measures that would further internationalise its currency. In order to make space for the renminbi, the IMF reduced the weighting of several major currencies already present in the SDR basket, including the euro, Japanese yen and British pound, which led to some short-term selling pressure on these currencies as markets adjusted expectations of future capital flows. European Central Bank Eases Monetary Policy Further to Strengthen Recovery As widely expected, at the start of December the European Central Bank (ECB) eased monetary policy in order to bolster the region s weak recovery. Though its package of measures fell short of the bazooka predicted by some perhaps due to opposition from more hawkish policymakers at the central bank the ECB confirmed that it would lower the deposit rate even further into negative territory, with a cut of 10 basis points to -0.3%, a move designed to maintain pressure on the region s banks to lend more. Other announcements included a six-month extension of the timeframe for monthly bond purchases until at least March 2017, which added the not insignificant amount of 360 billion of quantitative easing (QE) to the existing ECB programme. An additional ECB decision to broaden its asset purchase programme to encompass more municipalities had been well telegraphed. Many commentators had previously noted that a major restriction on increasing the size of QE in the eurozone was the limited availability of German Bunds for purchase, and the inclusion of regional municipalities in the ECB programme appeared to be designed to address that constraint. Ahead of the ECB announcement, yields on eurozone government bonds had moved steadily lower as market expectations ramped up significantly, with widespread predictions of a substantial package of measures, including a larger reduction in the deposit rate than ultimately proved to be the case. Following the ECB s unveiling of a more limited set of measures, markets underwent a moderate selloff as expectations were realigned.

4 Chart 3: European Central Bank Deposit Rate June 2014 December % % % % 6/14 7/14 8/14 9/14 10/14 11/14 12/14 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 10/15 11/15 12/15 Source: European Central Bank. At the same time as announcing the new measures, the ECB reduced its forecasts for eurozone growth and inflation, after data releases that had continued to indicate a lacklustre recovery, largely due to the effects of a China-led slowdown in emerging markets. Third-quarter GDP figures for the region as a whole showed a slight slowdown in quarterly growth from 0. to 0.3%, with a similar figure for Germany, and Italy slowing from 0.3% to 0.. However, the picture was more encouraging in France, where third-quarter growth came in at 0.3% compared with stagnation in the previous quarter, thanks to improvements in industrial production and domestic demand. In Italy as well, there were signs that domestic consumption was starting to recover and provide some counterweight to the weaker outlook for exports. We believe measures ECB President Draghi unveiled were in line with what the Eurozone economy needed. But a fall in core inflation underlined the fragility of the eurozone s recovery and the need for continued central-bank action. For the 12 months to November, the core measure declined to 0.9% from a reading of 1. in the previous month, with the headline inflation level unchanged at 0.. The ECB s revised forecasts projected inflation of in 2016 and 1.6% in 2017 heading in the right direction but still some way short of its target of around. Although markets initially were underwhelmed by the latest ECB policy announcement, we believe the measures unveiled by ECB President Mario Draghi were actually very much in line with what the eurozone economy needed. The progress made since the current QE programme was announced in January 2015 is probably one of the reasons why Draghi and his ECB governing council colleagues were reluctant to do more. At the end of 2014, the eurozone economy looked rather bleak: Growth was languishing and inflation had slipped below zero. In the intervening 11 months, the region s economy has grown more consistently, and once the effect of the oil price decline is stripped out, inflation could be nudging back up above next year. Against that background, it is possible that Draghi and his fellow governing council members wanted to avoid rocking the boat too much, preferring instead to keep things moving while showing that they are prepared to act. There were other bright spots, notably a further drop in the number of unemployed workers in the region in October, which fell more than expected to the lowest level since early Though still at elevated levels, Italian unemployment showed particular improvement, while German joblessness reached a record low. Business surveys were largely upbeat; the eurozone composite purchasing managers index compiled by Markit climbed to 54.2 in November, its fastest pace in fourand-a-half years, headed by Ireland and Spain, and the equivalent index for eurozone manufacturing posted its highest level since April 2014, showing broad-based growth.

5 EUROLAND MACROECONOMIC DATA FINAL OUTPUT Gross Domestic Product (GDP) 1 4Q14 1Q15 2Q15 3Q15 GDP, Y/Y (%) Private Consumption, Y/Y (%) Gross Fixed Capital Formation, Y/Y (%) ECONOMIC INPUTS 1 Jul 15 Aug 15 Sep 15 Oct 15 Retail Sales, Y/Y (%) Unemployment Rate (%) Industrial Production, Y/Y (%) INFLATION & WAGE PRESSURE Inflation Indicators 1 Aug 15 Sep 15 Oct 15 Nov 15 Consumer Price Index (CPI), Y/Y (%) Core CPI, Y/Y (%) FINANCIAL MARKETS Aug 15 Sep 15 Oct 15 Nov 15 Dow Jones EURO STOXX Price Index EUR, Trailing P/E Ratio 2 ECB Refinance Rate (%) Year Yield German Bunds (%) BALANCE OF PAYMENTS 1, 3 Trade Balance Jun 15 Jul 15 Aug 15 Sep 15 Billion Euro Current Account Balance 4Q14 1Q15 2Q15 3Q15 % GDP JAPAN MACROECONOMIC DATA FINAL OUTPUT Gross Domestic Product (GDP) 4 4Q14 1Q15 2Q15 3Q15 GDP, Q/Q ar (%) Private Consumption, Q/Q ar (%) Fixed Capital Formation, Q/Q ar (%) ECONOMIC INPUTS Jul 15 Aug 15 Sep 15 Oct 15 Unemployment Rate (%) Industrial Production, Y/Y (%) Tertiary Index, Y/Y (%) 6 Corporate Activities 4Q14 1Q15 2Q15 3Q15 Corporate Profit Growth (%) Tankan Quarterly Survey (index level) INFLATION Inflation Indicators 5 Jul 15 Aug 15 Sep 15 Oct 15 Consumer Price Index (CPI), Y/Y (%) CPI ex-fresh Food, Y/Y (%) FINANCIAL MARKETS 2 Aug 15 Sep 15 Oct 15 Nov 15 Nikkei 225, Trailing P/E Ratio Month Yield JGBs (%) Year Yield JGBs (%) BALANCE OF PAYMENTS Monthly Trade Balance 7 Jul 15 Aug 15 Sep 15 Oct 15 Billion Yen Current Account Balance 9 4Q14 1Q15 2Q15 3Q15 % GDP Abbreviations: Q/Q ar: Quarter-over-quarter annualised rate. Y/Y: Year-over-year 1. Source: European Union Source: Bloomberg. P/E ratios of Dow Jones EURO STOXX 50 Price Index and Nikkei-225 Stock Average as calculated by Bloomberg. 3. Source: European Central Bank. 4. Source: Economic and Social Research Institute, Cabinet Office, Government of Japan. 5. Source: Ministry of Internal Affairs & Communication, Japan. 6. Source: Ministry of Economy, Trade and Industry, Japan. 7. Source: Ministry of Finance, Japan. 8. Source: Bank of Japan. 9. Source: Bloomberg Indexes. Past performance does not guarantee future results. Eurozone Real GDP, Y/Y - - Source: European Union , as at September Consumer Price Index, Y/Y 3% - 11/10 11/11 11/12 11/13 11/14 11/15 CPI Core CPI Source: European Union , as at November External Trade Balance, GDP 3% - 3Q12 3Q13 3Q14 3Q15 Source: European Union , as at September Japan Real GDP, Q/Q ar 1 8% - -8% Source: ESRI, Cabinet Office, Government of Japan, as at September Consumer Price Index, Y/Y - 10/10 10/11 10/12 10/13 10/14 10/15 CPI CPI ex Fresh Food Source: Ministry of Internal Affairs and Communications, Japan, as at October Visible Trade Balance, GDP % - 3Q12 3Q13 3Q14 3Q15 Source: Ministry of Finance, Japan and Economic and Social Research Institute, Cabinet Office, Government of Japan, as at 30/9/15. 5

6 US MACROECONOMIC DATA FINAL OUTPUT Gross Domestic Product (GDP) 2 2Q15 3Q15 4Q15E 1 1Q16E 1 Q/Q ar (%) ECONOMIC INPUTS CONSUMPTION/FINAL DEMAND Income/Savings 2 Jul 15 Aug 15 Sep 15 Oct 15 Consumer Spending, Y/Y (%) Personal Income, Y/Y (%) Savings Rate (%) Employment Aug 15 Sep 15 Oct 15 Nov 15 Unemployment Rate (%) Participation Rate (%) Nonfarm Payrolls (in thousands) Jobless Claims, 4-wk average (in thousands) 4 Housing 5 Jul 15 Aug 15 Sep 15 Oct 15 Existing Home Sales (in millions) Y/Y Change (%) INVESTMENT Corporate Earnings 6, 11 3Q15 4Q15E 1Q16E 2Q16E Earnings, Y/Y (%) Production & Utilisation 7 Jul 15 Aug 15 Sep 15 Oct 15 Industrial Production, Y/Y (%) Capacity Utilisation (%) Nonresidential Fixed Investment 2 4Q14 1Q15 2Q15 3Q15 Y/Y (%) INFLATION & PRODUCTIVITY Inflation Indicators Jul 15 Aug 15 Sep 15 Oct 15 Personal Consumption Expenditure (PCE), Y/Y (%) 2 Core PCE, Y/Y (%) Consumer Price Index (CPI), Y/Y (%) Core CPI, Y/Y (%) Producer Price Index (PPI), Y/Y (%) Core Producer Prices, Y/Y (%) Productivity 3 4Q14 1Q15 2Q15 3Q15 Productivity, Q/Q ar (%) Unit Labour Costs, Q/Q ar (%) FINANCIAL MARKETS Valuation Oct 15 Nov 15 Dec 15E Jan 15E P/E S&P Fed Funds Rate 7, BALANCE OF PAYMENTS US Monthly Trade Deficit 2, 9 Jul 15 Aug 15 Sep 15 Oct 15 Billion USD US Current Account Deficit 3Q14 4Q14 1Q15 2Q15 Quarterly (in USD billion) Annualised (% GDP) Abbreviations: Q/Q ar: Quarter-over-quarter annualised rate. Y/Y: Year-over-year. E: Estimate. 1. Source: Bloomberg Economic Forecasts as at 30/11/ Source: Bureau of Economic Analysis. 3. Source: Bureau of Labor Statistics. 4. Source: Department of Labor. 5. Source: Copyright National Association of REALTORS. Reprinted with permission. 6. Source: Standard and Poor's. 7. Source: Federal Reserve. At the 16 December 2008 meeting the Federal Reserve cut the main U.S. interest rate to "a target rate" between 0.0 and 0.25.% 8. Source: Chicago Board of Trade (30-Day Federal Funds Futures Rate for December 2015 and January 2016), as at 30/11/ Source: U.S. Census Bureau. 10. Source: Bloomberg Indexes. 11. Source: Bloomberg calculations are share-weighted year-over-year. Estimates as at 30/11/15. Gross Domestic Product (GDP), Q/Q ar 6% - - Source: Bureau of Economic Analysis, as at September Personal Income & Expenditures, Y/Y 1 8% - 10/10 10/11 10/12 10/13 10/14 10/15 Consumer Spending Personal Income Source: Bureau of Economic Analysis, as at October Nonfarm Payrolls & Unemployment Rate Thousands Percent % 0 6% /10 11/11 11/12 11/13 11/14 11/15 Nonfarm Payrolls Net Change Source: Bureau of Labor Statistics, as at November All figures seasonally adjusted. Consumer Price Index, Y/Y Source: Bureau of Labor Statistics, as at October Productivity & Unit Labour Costs, Q/Q ar Source: Bureau of Labor Statistics, as at September US Annualized Trade Deficit, GDP Unemployment Rate (Right-Hand Scale) 3% - 10/10 10/11 10/12 10/13 10/14 10/15 15% 1 5% -5% % % Source: Census Bureau and Bureau of Economic Analysis, as at September CPI Core CPI Unit Labour Costs Productivity -4. Past performance does not guarantee future results. 6

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