Tim Quinlan, Economist November 13, 2014

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1 Global Economic Outlook Tim Quinlan, Economist November 13, 2014

2 Bitcoin Price $1200 Bitcoin: Bitcoin Price USD $1200 $1000 $1000 $800 $800 Following last year s massive price surge, bitcoin has cratered $600 $400 $600 $400 $200 $200 $ $0 Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 2

3 Bitcoin Supply $25 Bitcoin Supply Millions of USD $25 $20 $20 $15 $15 There is a finite amount of bitcoins that can be created $10 $10 $5 $5 Projected Actual $0 $ Source: and Wells Fargo Securities, LLC Economics 3

4 Volatility 4% Volatility Comparison Average Daily Absolote Move vs. USD, Since Jan % 3% 3% The amount of volatility bitcoin experiences relative to other assets may undermine its acceptance by broader global markets 2% 1% 2% 1% EUR JPY S&P 500 Gold Bitcoin Source: Bloomberg LP, and Wells Fargo Securities, LLC Economics 4

5 Broad Trade Weighted Dollar 140 US Trade Weighted Dollar Index January 1997= The greenback has experienced strength in recent months, but remains well off highs of past cycles Broad Currency Index: Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 5

6 FX Outlook The move toward Fed tightening should help the U.S. dollar over the medium term, although with positioning extended and restrained U.S. Treasury yields, a near-term pullback is possible. Slow growth and a dovish European Central Bank suggest further euro declines, while additional Bank of Japan easing should weigh on the yen. We see potential for a recovery in the pound with Bank of England rate hikes rates expected next year. The Canadian, Australian and New Zealand dollars all have scope for a near-term recovery, but should soften further as the Fed starts raising rates. Subdued Chinese growth and moderate inflation means we expect only moderate renminbi gains in the quarters ahead. European currencies could be restrained by deflation and central bank easing, while the Brazilian real appears more vulnerable and the Mexican peso more resilient when Fed tightening begins. Economics 6

7 Global Forecast Wells Fargo Bank Currency Strategy Group Forecast (End of Quarter Rates) Q4 Q1 Q2 Q3 Q4 Q1 Major Currencies Euro ($/ ) U.K. ($/ ) U.K. ( / ) Japan ( /$) Canada (US$/C$) Australia (US$/A$) Switzerland (CHF/$) Fed rate hikes should help to boost the value of the U.S. dollar Other Currencies China (CNY/$) South Korea ($/KRW) Singapore ($/SGD) Taiwan ($/TWD) India ($/INR) Mexico ($/MXN) Brazil ($/BRL) Colombia ($/COP) Forecast as of: October 10, 2014 Source: Wells Fargo Securities, LLC Economics 7

8 Ukrainian Crisis U.S. and E.U. Trade with Russia Percent of Total, % 12% United States European Union 12.1% 14% 12% 1 1 The European Union has extensive trade ties, especially in energy products, with Russia 8% 6% 4% 7. 8% 6% 4% 2% 0.7% 1.2% 2% Exports Imports Source: International Monetary Fund and Wells Fargo Securities, LLC Economics 8

9 Ukrainian Crisis Exposure to Russian Energy Natural Gas % 36% Gas Imports from Russia as a Percent of Total Imports Gas Imports from Russia as a Percent of Total Demand 4 35% 31% 3 28% 3 25% 25% 25% Many EU countries are highly dependent on energy imports from Russia 2 15% 16% 16% 2 15% 1 1 5% 5% Germany Italy France UK U.S. Source: IEA, OECD, IMF and Wells Fargo Securities, LLC Economics 9

10 Eurozone Real GDP 8% 4% Eurozone Real GDP Bars = Compound Annual Rate Line = Yr/Yr % Change Compound Annual Growth: 0.1% Year-over-Year Percent Change: 0.7% Forecast 8% 4% The Eurozone has exited recession, the problems have not gone away -4% -4% -8% -8% -12% % Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 10

11 Eurozone PMI 65 Eurozone Purchasing Managers' Indices Index The purchasing managers indices skating on thin ice E.Z. Manufacturing: 50.6 E.Z. Services: Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 11

12 Eurozone CPI 5% 4% Eurozone Consumer Price Inflation Year-over-Year Percent Change Core CPI: 0.7% CPI: 0.4% 5% 4% 3% 3% Dangerously close to deflation 2% 2% 1% 1% -1% % Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 12

13 Government Bond Yields in the Euro Area Year Government Bond Yields Percent Financial market tensions in Europe have eased, but Europe is not fixed yet Italy: Oct 2.5% 1. Spain: Oct 2.2% Germany: Oct 0.8% Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 13

14 China Real GDP 13% Chinese Real GDP Forecast Year-over-Year Percent Change 13% 12% 12% 11% 11% 1 1 Growth in China has stabilized, we do not expect it to return to the double-digit growth rates seen in the past 9% 8% 7% Forecast 9% 8% 7% 6% 6% 5% Year-over-Year Percent Change: 7.3% 5% 4% % Source: Bloomberg LP and Wells Fargo Securities, LLC Economics 14

15 Chinese Loan Growth 35% Chinese Loan Growth Year-over-Year Percent Change 35% % 25% Loan growth in China is also stabilizing 2 15% 2 15% 1 1 5% 5% Chinese Loan Growth: 13.2% Source: CEIC and Wells Fargo Securities, LLC Economics 15

16 Loans Outstanding U.S. vs. China Debt Outstanding by Sector Percent of GDP Central Government Non-Financial Corporate Household If there is a leverage issue in the Chinese economy it resides in the non-financial corporate sector United States China Source: CEIC, BIS, U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 16

17 Japanese Monetary Base 350 Japan's Monetary Base Trillions of Yen Bank of Japan Revised Policy Path The expansion of the monetary base will expand the size of the BoJ s balance sheet considerably Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities, LLC Economics 17

18 Monetary Base Comparison Central Bank Monetary Base January 2008 =100 Fed: ECB: BoJ: BoE: BoJ Projection The planned expansion of the monetary base in Japan is really just playing catch-up ball with the Fed and ECB Source: Bank of Japan, Bloomberg LP and Wells Fargo Securities, LLC Economics 18

19 Japanese Inflation 4% Japanese Consumer Price Index Year-over-Year Percent Change 4% 3% 3% 2% 2% 1% 1% Early signs of success -1% -1% -2% "Core" CPI: 2.2% CPI: 3.3% -3% % -3% Source: Bank of Japan, Bloomberg LP and Wells Fargo Securities, LLC Economics 19

20 Canadian Real GDP Forecast 8% 6% 4% 2% Canadian Real GDP Bars = Compound Annual Rate Line = Yr/Yr % Change Forecast 8% 6% 4% 2% The long-awaited rotation is finally arriving -2% -4% -6% -8% -1 Compound Annual Growth: 3.1% Year-over-Year Percent Change: 2.5% -12% % -4% -6% -8% -1-12% Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 20

21 Exports Then & Now Canadian Exports 2000 When the United States Sneezes United States, 87.4% European Union, 4.6% Japan, 2.2% Developing Countries, 3.9% Other, 1.9% Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 21

22 Exports Then & Now Canadian Exports 2012 European Union, 8.5% Japan, 2.3% Still true, but the picture is changing United States, 74.5% Developing Countries, 11.6% Other, 3. Source: IHS Global Insight and Wells Fargo Securities, LLC Economics 22

23 U.S. Housing and Canadian Exports U.S. Housing Starts vs. Canadian Lumber Exports Thousands of Starts, Millions of CAD Lumber Exports: $ (Right Axis) Housing Starts: 1017K (Left Axis) C$2500 C$2250 C$2000 C$1750 C$1500 Undeniable link to the U.S. economy C$1250 C$1000 C$750 C$500 C$250 C$0 Source: U.S. Department of Commerce, IHS Global Insight and Wells Fargo Securities, LLC Economics 23

24 Global Forecast (Year-over-Year Percent Change) Wells Fargo International Economic Forecast GDP CPI Global (PPP weights) 3.3% 3.7% 3.8% 3.9% 3.9% 3.8% Global (Market Exchange Rates) 2.7% 3.2% 3.3% n/a n/a n/a Growth in the global economy likely will remain slow in 2013 before picking up somewhat in 2014 Advanced Economies 1 1.9% 2.5% 2.6% 1.6% 1.8% 2. United States 2.2% 2.9% 3.1% 1.8% % Eurozone 0.8% 1.3% 1.8% 0.5% 0.9% 1.3% United Kingdom % 2.3% 1.7% 1.9% 2.2% Japan 1.2% 1.4% 0.9% 2.9% 1.8% 1.3% Korea 3.5% 3.7% 3.6% 1.4% 2.2% 2.4% Canada 2.4% 2.8% 2.7% % Developing Economies 1 4.6% 4.9% % 5.7% China 7.3% 6.8% 6.5% 2.1% 2.4% 2.6% India 2 5.4% 5.8% 6.2% 7.8% 6.8% 6. Mexico % 3.5% 3.9% 3.8% 3.8% Brazil 0.2% 1.8% 2.3% 6.1% 4.9% 5.1% Russia 0.6% 1.5% 2.3% 7.4% 6.9% 5.7% Forecast as of: October 8, Aggregated Using PPP Weights 2 Forecasts Refer to Fiscal Year Source: International Monetary Fund and Wells Fargo Securities, LLC Economics 24

25 Real GDP Forecast 1 8% 6% 4% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 3.5% GDP - Yr/Yr Percent Change: 2.3% Forecast 1 8% 6% 4% Big downward revision sets up a tough base for full year growth, big rebound in Q2, continued strength in Q3 2% -2% -4% -6% -8% % -2% -4% -6% -8% -1 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 25

26 FOMC The FOMC has reaffirmed its concern with inflation remaining below its longer-run objective, while more participants feel 2015 is the appropriate time for policy firming. Timing of Firming Target Fed Funds Rate Appropriate Timing of Policy Firming Number of Participants September Release June Release % Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End June Projection September Projection % % % % 2.5% % % % 0.5% Longer Run 0. Source: Federal Reserve Board and Wells Fargo Securities, LLC Economics 26

27 U.S. Housing Market 2.4 Housing Starts Seasonally Adjusted Annual Rate, In Millions Despite the tough start to the year, housing is a key bright spot for the outlook Housing Starts: 1017K Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 27

28 Housing Starts Housing Starts Millions of Units Multifamily Starts Multifamily Forecast Single-family Starts Single-family Forecast Forecast Housing starts remain well below historical levels, but are expected to increase in the coming years Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 28

29 Housing: Emergence of Renters as Occupants 2,500 2,000 U.S. Homeowners vs. Renters Annual Change in Occupied Units, In Thousands Renters: Thousand Homeowners: Thousand 2,500 2,000 1,500 1,500 1,000 1,000 The number of renters has been accelerating steadily since 2007, while homeowners have been declining Series Break ,000-1,000-1, ,500 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 29

30 Debt Service Ratio 13.5% 13. Household Debt Service Ratio Debt Payments as a Percent of Disposable Personal Income DSR: 9.9% 13.5% % 12.5% Low interest rates are supportive to consumer spending and housing 11.5% % % 10.5% % % Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 30

31 Real PCE Forecast 8% Real Personal Consumption Expenditures Bars = CAGR Line = Yr/Yr Percent Change 8% 6% 6% 4% Forecast 4% Continued deleveraging likely will constrain growth in consumer spending over the next year or so 2% -2% -4% 2% -2% -4% -6% PCE - CAGR: 1.8% PCE - Yr/Yr Percent Change: 2.3% -8% % -8% Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 31

32 Core Capital Goods Orders Nondefense Capital Goods Orders, Ex-Aircraft Series Are 3-Month Moving Averages 3-Month Annual Rate: 10.4% Year-over-Year Percent Change: 7.8% Orders and production are gaining momentum Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economics 32

33 Business Surveys 65 ISM Manufacturing & Non-Manufacturing Composite Index Business activity is still growing, and at an accelerating pace in both the manufacturing and service sectors ISM Non-Manufacturing Index SA: 57.1 ISM Manufacturing Index SA: Source: Institute for Supply Management and Wells Fargo Securities, LLC Economics 33

34 Business Spending 4 3 Real Equipment Investment Bars = CAGR Line = Yr/Yr Percent Change Forecast 2 1 We anticipate modest growth in capital expenditures Equipment Investment - CAGR: 7.2% Equipment Investment - Yr/Yr Percent Change: 7.7% Source: U.S. Dept. of Commerce and Wells Fargo Securities, LLC Economics 34

35 U.S. Forecast Wells Fargo U.S. Economic Forecast Actual Forecast Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Actual Forecast Real Gross Domestic Product Personal Consumption Inflation Indicators 2 PCE Deflator Consumer Price Index Industrial Production Corporate Profits Before Taxes Trade Weighted Dollar Index Unemployment Rate Housing Starts Quarter-End Interest Rates 5 Federal Funds Target Rate Conventional Mortgage Rate Year Note Forecast as of: November 12, Compound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage Change 3 Federal Reserve Major Currency Index, 1973=100 - Quarter End 4 Millions of Units 5 Annual Numbers Represent Averages Economics 35

36 Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Diane Global Head of Research & Economics Chief Economist John E. Silvia... Mark Vitner, Senior Jay H. Bryson, Global Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Eugenio J. Alemán, Senior Anika R. Khan, Senior Economist Senior Economists. Economists Azhar Iqbal, Econometrician Tim Quinlan, Eric J. Viloria, Currency Strategist Sarah Watt House, Economist Michael A. Brown, Economist Michael T. Wolf, Economic Analysts Zachary Griffiths, Economic Analyst Mackenzie Miller, Economic Analyst Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Administrative Assistants Donna LaFleur, Executive Assistant. Cyndi Burris, Senior Administrative Assistant Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 2014 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. Economics 36

Evolution of San Francisco Over Time San Francisco. John E. Silvia, Chief Economist July 01, 2015

Evolution of San Francisco Over Time San Francisco John E. Silvia, Chief Economist July 01, 2015 Sustained Growth in 2015 10% 8% U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: Q1 @ -0.2%