BOK Financial: Economic and Market Outlook

Transcription

1 BOK Financial: Economic and Market Outlook April 15, 2015 presented by: J. Brian Henderson, CFA President Cavanal Hill Investment Management, Inc. 1

2 About Cavanal Hill Investment Management Cavanal Hill is a multi-billion dollar investment adviser to high-net-worth individuals and institutions. Our firm s seasoned investment team follows proven, disciplined investment processes to manage fixed income, equity, and cash assets. Our unique investment approach looks beyond conventional Wall Street wisdom to discover stock and bond opportunities and takes advantage of those that are within our clients risk tolerance levels. Cavanal Hill Investment Management, Inc. ("Cavanal Hill") is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company ("BOKF"). Cavanal Hill s equity team leverages its own primary stock research with insights from company management and secondary street research to form the basis of their buy/sell decisions. The firm s fixed income team uses proprietary credit and interest rate modeling tools to analyze investment opportunities within the high grade corporate, municipal, mortgage-backed and government bond markets. Our Investment Professionals Fixed Income Management Team J. Brian Henderson, CFA President Michael P. Maurer, CFA Senior Fixed Income Portfolio Manager Rich Williams Senior Tax Free Fixed Income Portfolio Manager Michael J. Kitchen, CFA, CTP Cash Management Portfolio Manager Russell Knox, CFA Fixed Income Portfolio Manager Tyler Bosworth Junior Portfolio Manager Douglas Benton Senior Municipal Credit Manager Our Investment Strategies Leslie Lukens-Martin Senior Municipal Credit Analyst Keaton Hoppe Municipal Fixed Income Analyst Equity Management Team Matt Stephani, CFA Senior Equity Portfolio Manager Thomas Mitchell, CFA Equity Portfolio Manager Mike Schloss Senior Equity Analyst Jeffrey Carter Equity Analyst Brandon Barnes Equity Analyst Quantitative Equity Team Wes Verdel, CFA Senior Quantitative Equity Portfolio Manager Rob Gaston Quantitative Systems Analyst Trading Team Patti Robertson Head of Trading Chris O Connell Equity Trader Ryan Friedl Fixed Income Trader Tax Exempt Cash/Fixed Income Strategies Equity Strategies Fundamental Multi-Asset Class Strategies Taxable Cash/Fixed Income Strategies Equity Strategies Quantitative Alternative Strategies 2 CAVANAL HILL INVESTMENT MANAGEMENT

3 Summary The ECB takes a page from the Fed s QE-handbook Eurozone financial markets react accordingly What does ECB QE mean for the U.S.? Japan s experience How are emerging markets responding? 3

4 S&P 500 Index December 31, M arch 31, /31/09 1/28/10 2/25/10 3/25/10 4/22/10 5/20/10 6/17/10 7/15/10 8/12/10 9/9/10 10/7/10 11/4/10 12/2/10 12/30/10 1/27/11 2/24/11 3/24/11 A Look Back: Fed s QE Index Value Bernanke Jackson Hole Speech QE2 Source: Bloomberg 4

5 Price of 1 Euro in USD /08/10 09/08/10 03/08/11 09/08/11 03/08/12 09/08/12 03/08/13 09/08/13 03/08/14 09/08/14 Euro weaker Euro stronger It s the ECB s Turn for QE U.S. Dollar vs Euro March 3, 2010 March 26, 2015 Draghi Jackson Hole Speech ECB QE Source: Federal Reserve 5

6 Financial Market Performance Since ECB QE In Euros Performance Since ECB QE Announcement January 21, 2015 March 26, 2015 In USD CAC 11.45% CAC 4.37% Dax 14.63% DAX 7.65% Euro Stoxx 11.78% Euro Stoxx 5.03% CRB 6.97% -2.20% CRB CRB -1.99% Gold Gold -7.55% Gold Gold WTI 10.69% Oil 2.99% Source: Bloomberg, L.P. 6

7 What Does This Mean for the U.S. Index level U.S. Dollar Higher Stronger relative economic growth Fed preps for first rate hike ECB QE Other Central Banks rate cuts Higher interest rate differentials The U.S. Dollar Index March 12, 2010 March 26, /12/10 09/12/10 03/12/11 09/12/11 03/12/12 09/12/12 03/12/13 09/12/13 03/12/14 09/12/14 U.S. Dollar Stronger 03/12/15 U.S. Dollar Weaker Source: Bloomberg, L.P. 7

8 A Look Back: Japan s Experience During Fed s QE1 & QE2 Price of 1 USD in Japanese Yen QE1 Japanese Yen vs U.S. Dollar December 31, 2008 March 30, 2012 QE2 Japan GDP Net Exports Imports 16% -1% Export 15% Government 21% Consumption 60% 85 Investment 20% 80 The Yen strengthened during the Fed s QE period until the BoJ could no longer take the pain in /31/08 03/31/09 06/30/09 09/30/09 12/31/09 03/31/10 06/30/10 09/30/10 12/31/10 03/31/11 06/30/11 09/30/11 12/31/11 BoJ starts QE Source: Federal Reserve, Cornerstone Macro 8

9 FOMC Economic Projections March 2015 FOMC Projections The Fed s growth & Inflation forecasts were lowered. Stronger dollar cited. Source: Federal Reserve 9

10 Fed Funds Rate Projections: Lower for Longer Fed Funds Rate Projections Futures vs. Forecast, March 18, 2015 Medium term forecast for fed funds dropped to 2% Source: Evercore ISI 10

11 A Flood of Global Central Bank Rate Cuts Rate Cuts Canada Denmark Hungary Iceland Norway Poland Romania Russia Sweden Switzerland Australia China India South Korea Thailand Indonesia Pakistan Egypt Israel Jordan Turkey Peru CENTRAL BANK WATCH 2015 RATE CHANGES As of March 26, 2015 Rate Hikes Brazil Ukraine Moldova Trinidad Source: Bloomberg, L.P. 11

12 Oil Markets: What caused the rapid decline and what do we expect going forward? April 15, 2015 presented by: Matt Stephani, CFA Senior Vice President Cavanal Hill Investment Management, Inc. 12

13 Demand for Fossil Fuels Crude Oil Consumption and Industrialization 13 Source: BP Statistical Review of World Energy 13

14 Current Energy Market Sell-Off Current Energy Market Sell-Off Current Market Sell-Off - Global oil markets (93 million barrels per day) are oversupplied by 1.0 to. 1.5 million barrels per day Supply of Oil Increased production from Iraq and Libya Increased production from the U.S. primarily as a result of shale oil drilling in the Bakken, Permian, and Eagle Ford shales Demand for Oil Revised downward during final demand growth of only approx. 700,000 barrels per day Lower than expected growth in China and no recovery in demand in Europe 14 14

15 Current Energy Market Sell-Off United States is primary driver of global supply growth over the past five years U.S. production has grown 4.5mm barrels per day over the past five years That equates to 60% of global supply growth in that time period Virtually all U.S. production growth is from shale oil 15 Source: Strategis 15

16 Current Energy Market Sell-Off Imbalance of Supply and Demand Led to a Dramatic Decline in Oil Prices Price of WTI Crude fell more than 50% since the end of June through March 31, 2015 Source: Bloomberg, L.P. 16

17 Current Energy Market Sell-Off Oil Producers are responding Oil companies are reducing capital expenditures in response to lower oil prices. Reductions for many companies range from 30 to 70% declines in spending. Oil companies are laying down rigs. The Baker Hughes rig count peaked in October at 1931 rigs drilling in North America. That number has declined by more than 900 rigs, and we believe that decline will continue. Shale oil wells have a higher decline rate than conventional oil wells with first year decline rates anywhere from 40 70%

18 Current Energy Market Sell-Off Our View of Oil Markets Supply growth will continue during 2015, with most of the growth coming from North American shale producers. However, this growth will decelerate and turn negative sequentially in early summer. If prices remain low (below $65/barrel), we believe by late 2015, U.S. oil production will decline on a year over year basis. Incremental demand in the U.S. may surprise to the upside as, for example, gasoline demand was up over 6% in December Oil prices likely to rebound in the second half of 2015 to the $60-$80 range. Attractive risk-reward in oil-related equities. 18

19 Endnotes 1. Standard and Poor s, 2. MSCI Barra Indices, 3. Bloomberg Professional Service, Bloomberg Finance L.P. 4. Federal Reserve Board, 5. BIS Quarterly Review, International banking and financial developments, Bank for International Settlements, March Barclay s Capital Research, Global Family of Indices, March Russell Investment, 8. The European Debt Crisis and Its Implications for the United States, Christopher J. Neely, Assistant Vice President, Federal Reserve Bank of St. Louis, September 13, ECB hikes rates, ready to move again if necessary, by Paul Carrel, Reuters, April 7, Cavanal Hill Macroeconomic Perspectives, First quarter 2011, April 1, FYI-Dovish, Evercore ISI by Dennis Debusschere, March 18, Federal Reserve Board, FOMC press release and Economic Projections, March 18, Dollar is crushing EM, Portfolio Strategy, March 9, 2015, Cornerstone Macro 14.Global Dollar Credit: links to US monetary policy and leverage, by Robert McCauley, Patrick McGuire, and Vladyslav, Monetary and Economic Department, Bank for International Settlements, January Why we are ending our 39-month bullish call on equities, Portfolio Strategy, Cornerstone Macro, January 5, The Debt Supercycle RIP, The Bank Credit Analyst, January BP Statistical Review of World Energy, CIA World Fact Book 19

20 Disclosures Cavanal Hill Investment Management, Inc. ("Cavanal Hill") is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a whollyowned subsidiary of BOK Financial Corporation, a financial holding company ("BOKF"). Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This report is not to be considered a recommendation of Cavanal Hill s investment management services, any particular security, strategy or investment product, nor is it intended to provide personal investment advice. It does not take into account any specific investment objectives, financial situations, or particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. The information provided in this presentation is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Investments are not insured by the FDIC and are not guaranteed by Cavanal Hill or any bank, including any banking affiliates of Cavanal Hill. Investments are subject to risks, including the possible loss of the principal amount invested. Past performance does not guarantee future results. This document contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections, the securities and credit markets and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events and are inherently forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forwardlooking statements is subject to a number of limitations and risks. Cavanal Hill does not undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise. This report may not be reproduced, redistributed, retransmitted or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of Cavanal Hill. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report. For questions about this report, please contact Brian Henderson at (918)

21 Bank of Oklahoma Economic and Market Outlook Conference Call Wednesday, April 15, 2015 Jim Huntzinger, Chief Investment Officer BOK Financial Corporation 2015 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 21

22 Job Growth Solid The U.S. employment situation continues to be solid. As we ve noted previously, downdrafts in the U.S. economy do not tend to happen with payroll growth accelerating. Instead, recession happen after payroll employment decelerates (i.e., not now). Unemployment continues to decline (it s below 6%, i.e., more usual based on history). All Employees: Total Nonfarm % Change Year to Year SA, Thous. Civilian Unemployment Rate: 16 yr + SA, % Unemployment rate down to 5.5% BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 22

23 Consumer Confidence Conference Board: Consumer Confidence SA, 1985=100 Consumer confidence continues to trend up, which makes sense with better employment & still low energy prices BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 23

24 Consumer Spending Retail Sales: Total % Change Year to Year SA, Mil. $ Consumer appear to be shifting their preferences, spending more on experiences and less of goods. Still, recent data on retail sales has been weaker, as we wait for the benefits of cheaper energy prices to kick in, with a lag. Retail Sales: Food Services & Drinking Places % Change Year to Year SA, Mil. $ 2015 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 24

25 Housing Housing Starts SAAR, Thous. Units Housing data has moved back into a two-steps-forward and one-step-back pattern. This may be due to severe winter weather in first quarter BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 25

26 Saving Rate Improving Personal Saving Rate SAAR, % Savings from drop in gasoline prices, going into personal savings today BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 26

27 Average Hourly Earnings Still Well Behaved Barring a policy error or an exogenous event, inflation is the mechanism through which business expansions end. Growth in average hourly earnings of 4% often precedes recession. Today, we stand at 1.6%. With the decline in energy prices and the strength of the dollar, the chances for a l o n g e r cycle have grown. Average Hourly Earnings: Production and Nonsupervisory Workers (Y/Y, SA, $/Hour) vs. 10/2 Spread (bps, 12 Mo. Lead) Source: Strategas Research Partners, LLC 2015 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 27

28 Business Confidence NFIB: Small Business Otimism Index SA, 1986=100 Business confidence has been mixed, and global uncertainty is likely in part to blame. It s worth noting that small business confidence has not fallen much. U.S. small businesses appear to be ignoring a good part of the global volatility BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 28

29 CAPEX Equipment Mfrs New Orders: Nondefense Capital Goods ex Aircraft SA, Mil. $ Capex has flattened out in recent months, and the drop in oil prices is likely to create a drag on the energy patch through this can and should be offset elsewhere in the economy BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 29

30 Price Inflation CPI-U: All Items Less Food and Energy % Change Year to Year SA, =100 There s neither substantial inflation nor deflation in the U.S. pipeline. There are risks abroad. But domestically, core inflation (ex food and energy) has been a good estimate of inflation s trend. Clearly the drop in energy prices will depress headline inflation y/y in PPI: Finished Goods Less Food and Energy % Change Year to Year SA, 1982= BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 30

31 Wage Inflation Wage growth data remain mixed. Regardless it s still tough to call wage growth fast given the low levels we are starting from. Bottoming, but not fast. Avg. Hourly Earnings: Prod. & Nonsupervisory: Total Private Industries % Change Year to Year SA, $/Hour Employment Cost Index: Compensation: Civilian Workers % Change Year to Year SA, Dec-05= BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 31

32 Economic Growth And Oil Closely Connected With a lag a drop in oil prices will help spur growth. G7 GDP & Brent Oil Price Growth (Y/Y Pct Change) Brent Oil, 18M Lead, RHS G7 GDP LHS Source: Strategas Research Partners, LLC 2015 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 32

33 Euro Area Economies Spain PMI: Composite Output (SA, 50+=Expansion) Germany PMI: Composite Output (SA, 50+=Expansion) France PMI: Composite Output (SA, 50+=Expansion) Italy PMI: Composite Output (SA, 50+=Expansion) There is a tailwind of growth in the Euro area BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 33

34 Economic And Market Outlook Themes Economy U.S. long, slow, sustainable recovery. First Quarter growth was weak. GDP growth is expected to range between 2%-3% economy does better than market. Federal Reserve rate hike coming; probably in September. Sharply lower energy + extremely low interest rates + accelerating consumer confidence = stronger economy in second half of Market Cash returns remain at zero. Bond yields on a long slow move higher. My longer term bullish case for stocks is based on: moderate economic growth, low inflation, and solid corporate profitability. U.S. equities still best risk return option available but Europe now getting in the game as the strong dollar is a headwind for some U.S. companies. Climbing the wall of worry BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 34

35 Legal Information Disclaimers The information provided in this was prepared by Jim Huntzinger, Chief Investment Officer of BOK Financial Corporation. The information provided herein is intended to be informative and not intended to be advice relative to any investment or portfolio offered through BOK Financial Corporation (NASDAQ:BOKF). The views expressed in this commentary reflect the opinion of the author based on data available as of the date this report was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided in this commentary is not a solicitation for the investment management services of any BOKF subsidiary. BOK Financial Corporation (BOKF) offers wealth management and trust services through various affiliate companies and nonbank subsidiaries including advisory services offered by BOKF, NA (and its banking divisions Bank of Oklahoma, Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Bank of Arizona, Colorado State Bank and Trust, and Bank of Kansas City) and its subsidiaries MBM Advisors and Cavanal Hill Investment Management, Inc. each an SEC registered investment adviser. BOKF offers additional investment services and products through its subsidiary BOSC, Inc., a broker/dealer, member FINRA/SIPC, and an SEC registered investment adviser and The Milestone Group, also an SEC registered investment adviser. Investments are not insured by the FDIC and are not guaranteed by BOKF, NA or any of its affiliates. Investments are subject to risks, including the possible loss of the principal amount invested. This report may not be reproduced, redistributed, retransmitted or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of BOKF. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 35