NESGFOA Economic Assessment Impact on Rates

Transcription

1 NESGFOA Economic Assessment Impact on Rates September 18, 2017 Not FDIC Insured May Lose Value No Bank Guarantee Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. For institutional use only. l 2017 FMR LLC. All rights reserved.

2 Agenda 1. Market Overview 2. Q&A Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with any investment or transaction described herein. Fiduciaries are solely responsible for exercising independent judgment in evaluating any transaction(s) and are assumed to be capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. Fidelity has a financial interest in any transaction(s) that fiduciaries, and if applicable, their clients, may enter into involving Fidelity s products or services. 2 For institutional use only.

3 Real GDP YoY ( %) Unemployment Rate (%) PCE YoY (%) Federal Reserve s Economic Projections Actual Inflation Inflation Forecast Actual Unemployment Rate Unemployment Rate Forecast GDP Forecast Actual GDP Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Source: Bloomberg and Federal Reserve Actual Inflation as of 6/30/2017, Actual Unemployment Rate as of 7/31/2017, and Actual GDP as of 6/30/2017 FOMC Forecast based on the central tendency (excludes the three highest and three lowest projections for each variable in each year) as of 6/14/ For institutional use only.

4 % GDP Growth Not Likely over the Long Run Real GDP Components Labor Force Productivity Real GDP Year-over-Year Growth (20-Year Average) 4.5% Scenarios for 4% Growth 20-Year AART Projections Labor Force Growth 2.3% 1.0% 0.5% Labor Market Productivity 1.7% 3.0% 1.1% Real GDP Growth 4.0% 4.0% 1.6% 4.0% 3.5% 3.0% Productivity Peak ( ): 3.0% 2.5% 2.0% 1.5% 1.0% Labor Force Peak ( ): 2.3% 2.3% 1.4% 0.5% 0.0% 48% of labor force growth since 2000 comes from immigration 0.9% 4 Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART), as of 12/31/16. For institutional use only.

5 Tighter Labor Markets Support Wage Growth, Consumers With the unemployment rate falling to a cycle low of 4.3% in Q2, tightening labor markets continue to boost consumers and keep U.S. recession risk low. Extra labor market slack, measured by workers who leave the labor market or are forced into part-time work, still remains high relative to long-term history. However, this slack has declined and continued to gradually push up wage growth, which we expect to continue. U.S. Phillips Curve: Extra Labor Market Slack vs. Wage Inflation Pre-Recession Post-Recession Change (Year-over-Year) 6% 5% 4% 3% May % May % 0% 2% 3% 4% 5% 6% 7% 8% U-6 minus U-3 Unemployment Rate Gap 5 Wage inflation: Atlanta Fed Wage Tracker. Unemployment rate gap is the difference between U-6 and U-3 unemployment and captures the number of workers who are either working part-time due to economic reasons or are discouraged and have left the labor force. Source: Federal Reserve, Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART), as of 5/30/17. For institutional use only.

6 Wage Inflation Sufficient to Pressure Profit Margins Even today s modest pace of wage growth is enough to crimp corporate profits, given that top-line revenue growth has been even more subdued. This dynamic has historically been typical during late-cycle phases, when earnings growth tends to come under pressure. Gap Between Nonfinancial Corporate Revenue Growth and Wages & Salaries Growth Year-over-Year Change (4-Quarter Average) 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Revenues growing faster than wages Wages growing faster than revenues % 0 Shading represents U.S. economic recessions as defined by the National Bureau of Economic Research (NBER). Source: NBER, Bureau of Economic Analysis, Haver Analytics, Fidelity Investments (AART), as of 3/31/17. 6 For institutional use only.

7 U.S. Core Inflation Likely Range-Bound Tight labor markets and rising wages suggest core inflation should remain firm around 2%. However, shelter costs (roughly 40% of core CPI) are slowing in tandem with a surge in new multi-family housing units coming online, and temporary factors such as plunging wireless phone costs have weighed on core prices. Weakening auto prices might also provide a sustained check on core inflation. U.S. Multifamily House Prices & Shelter CPI Apartment Rents (REIS) Shelter Change (Year-over-Year) 7% Change (Year-over-Year) 4.0% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Share of Core CPI May 2017 Y/Y % Shelter 43% 3.3% New & Used Vehicles 8% -1.4% Communication 5% -6.3% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -4% -1.0% CPI: Consumer Price Index. Source: REIS Inc., Bureau of Labor Statistics, Bloomberg Finance L.P., Haver Analytics, Fidelity Investments (AART), as of 3/31/17. 7 For institutional use only.

8 Continued Uncertainty Around Fiscal Policy Changes Changes in economic policy can influence the cyclical outlook, but the multiplier tends to be higher for stimulus when there is a large amount of economic slack and monetary policy is accommodative (unlike today). U.S. political uncertainty remains elevated amid the lack of legislative progress on potential changes to tax and fiscal policies, and looming debt ceiling and budget deadlines could generate further unease this fall. Impact of $1 Fiscal Stimulus Boost over Next Two Years $1.5 U.S. Economic Policy Uncertainty U.S. Policy Uncertainty Index Index Level (3-Month Average) $ $ $0.0 Output below potential and Fed's response limited Output close to potential and Fed's response typical 50 LEFT: Sources: Congressional Budget Office, Fidelity Investments (AART), as of 2/28/15. RIGHT: Source: Baker, Bloom, & Davis, Bloomberg Finance L.P., as of 6/30/17. 8 For institutional use only.

9 5y Real Yield (%) Fed Funds Target Rate (%) Gradual Conventional Tightening After Years of Unconventional Tightening 6 Conventional Tightening 5.25% Conventional Easing Unconventional Easing Unconventional Tightening Conventional Tightening % 1.125% 0.125% QE1 Jan QE2 Nov 10 Considerable Time Mar 14 Fed Hikes 25 bps Dec 15 Fed Hikes 25 bps Dec 16 Fed Hikes 25 bps Jun Mid-2013 Aug 11 QE3 Sep 12 Taper Meeting by Dec 13 Meeting Mar 15 Taper Talk May 13 Fed Hikes 25 bps Mar 17 Source: Federal Reserve, Bloomberg as of 7/31/ For institutional use only.

10 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Market Expectations Assume Fed Will Be Less Hawkish After converging on the 2017 outlook over the past year, investor expectations for Fed tightening have once again diverged materially from the Fed s forecasts for the next 12 to 18 months. Markets are anticipating the Fed will hike rates only twice through December 2018 instead of the four times the Fed projects. The Fed also announced the outlines of a plan to begin shrinking its balance sheet that would imply additional tightening. FOMC vs. Market Expectations of Fed Tightening Cycle Fed Fund Futures Market FOMC Expected Fed Funds Rate 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% FOMC as of June 2016 Fed Treasury and MBS Holdings (Billions) Maturing Securities $709 $567 $ % Market as of June 2016 Fed s Roll-off Cap of Reinvestments $420 $600 $ % Fed: Federal Reserve. FOMC: Federal Open Market Committee. MBS: Mortgage-Backed Securities. Market fed funds rate hike expectations calculated using daily generic fed funds futures contracts out 18 months. FOMC rate hike expectations calculated using the weighted average of the participants of the Federal Reserve System s appropriate pace of policy firming survey results. TABLE: Calculations based on the FOMC s Addendum to the Policy Normalization Principles and Plans, released June 14, Assumes Fed starts to allow roll-off of securities in October Source: Federal Reserve, Bloomberg Finance L.P., Fidelity Investments (AART), as of 6/30/ For institutional use only.

11 Fed Rate Hike Probabilities 100.0% 1 Rate Hike 2 Rate Hikes 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 3.7% 30.0% 20.0% 38.0% 10.0% 0.0% 5.6% Sep-17 Date of FOMC Meeting Dec Source: Bloomberg as of 7/31/2017 For institutional use only.

12 Ratio Demographics are an Important Driver of Interest Rates US Borrowers/Savers 12-Month Rolling Average 10-Year US Treasury Yield Median Age (July 1, 2016) Rank* Maine New Hampshire Vermont Connecticut 40.7 T Rhode Island Massachusetts United States Yield (%) *Includes all 50 states, District of Columbia, and Puerto Rico. Note: Borrowers are represented by ages and savers are represented by ages Sources: US Treasury Data - Bloomberg as of 7/31/2017; US Borrowers/Savers Ratio - Organisation For Economic Co-Operation And Development (OECD) as of 8/29/2017; Median Age United States Census Bureau as of 7/1/ For institutional use only.

13 Real GDP Growth Rates 13 For institutional use only. Production code #

14 NE Growth Rankings Growth Rank State GDP Growth Growth Young Population 12 Rhode Island Massachusetts New Hampshire Maine Connecticut Vermont Net Migration Source: U.S. News and World Report: Data provided by McKinsey & Company GDP growth measures the year-year compounded annual growth rate of real GDP for the years For institutional use only. Production code #

15 Outlook: Market Assessment Fidelity s Business Cycle Board, composed of portfolio managers responsible for a variety of asset allocation strategies across Fidelity s asset management unit, believes that the global economy is experiencing a synchronized expansion. However, upside globally may be limited, with Chinese policymakers tightening and the U.S. in a mature expansion. At this point in the cycle, smaller asset allocation tilts may be warranted. U.S. economy is between mid and late cycle The global economy is experiencing synchronized expansion Recession risks remain low globally Asset Allocation Considerations Less reliable relative asset performance patterns generally merit smaller cyclical tilts. The possibility of higher volatility emphasizes the importance of diversification and a disciplined investment strategy. Potential Risks The disconnect between the market s and the Federal Reserve s expectations of tightening may incite volatility in the markets. China s policymakers evolving tightening bias indicates that economic momentum may have peaked, which could pose a risk to the global expansion. Fed: Federal Reserve. Sources: Market Assessment Statement of Global Asset Allocation s Business Cycle Board, Fidelity Investments, as of 6/30/ For institutional use only.

16 Important Information Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. Before investing, consider the funds and/or accounts investment objectives, risks, charges, and expenses. Contact Fidelity or visit institutional.fidelity.com for a prospectus or, if available, a summary prospectus containing this information, if applicable. Read it carefully. The third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company. Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI For institutional use only Not FDIC insured. May lose value. No bank guarantee.