Economic Outlook: Waning Argument for a 2015 Rate Increase

Transcription

1 Economic Outlook: Waning Argument for a 215 Rate Increase October 215 Lindsey M. Piegza Chief Economist Refer to the last page of this report for Stifel Fixed Income Capital Markets disclosures and analyst certifications. Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC.

2 Table of Contents Three Key Questions 1.What will monetary policy look like in 215 and beyond? 2.What is driving the Fed? And how has the argument changed? a) Labor market b) Inflation c) International developments 3.What is the outlook for the US economy? 1

3 What will monetary policy look like in 215 and beyond? 2

4 September Outcome The Fed Leaves Interest Rates Unchanged! 3

5 Fed Funds Target Rate: ZIRP 81 months Fed Funds Target Rate Source: Federal Reserve Board /Haver Analytics

6 Fed s Assessment of the Economy Household spending Business Investment and Net Exports Inflation Economic Activity July FOMC Statement "growth in household spending has been moderate..." Business investments and net exports "stayed soft" "Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports" "...economic activity has been expanding moderately..." September FOMC Statement Assessment of household spending maintained "...business fixed investment [has] been increasing moderately..net exports have been soft" Assessment of inflation maintained, but reference to "earlier" price declines removed Assessment of the economy maintained Labor Market Housing "The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year." "...housing sector has shown additional improvement." Assessment of the labor market maintained Assessment of the housing sector maintained Source: Federal Reserve 5

7 Fed s Assessment of the Economy January Solid March Moderated Somewhat June Expanding moderately July Expanding moderately September Expanding at a moderate pace April Slowed Modest but positive. The Fed continues to recognize underperformance of the US economy. 6

8 Majority Still Sees 215 Liftoff 7

9 Fed Forecasted GDP vs. Reality 5.% 4.% 3.% Fed forecasts 1-3bps above reality 2.% 1.% 2.5% 1.6% 2.2% 1.5% 2.4% 1.8%* 2.2%*.% -1.% -2.% -3.% -2.8% Annual GDP % Fed Forecasted GDP %** -4.% Source: Federal Reserve/Bloomberg *Stifel Forecast **Forecasted one-year prior 8

10 Policy Based on Data Not Individual Expectations I would like to underscore that the forecasts of the appropriate path of the federal funds rate, as usual, are conditional on participants individual projections of the most likely outcomes for economic growth, employment, inflation, and other factors. But our actual policy actions over time will depend on how economic conditions evolve, which is quite uncertain. -Janet Yellen, September 17 th, 215 Press Conference Following September Statement Release 9

11 Data Shows Economy Underperforming Since September Meeting ISM Index slowed from 51.1 to 5.2 in September. Service Index slowed from 59. to 56.9 in September. September NFP rose just 142k in September with the three month average slowing from 221k to 167k. Inflation fell outright, down.2% in September, keeping the annual CPI rate at.%. Producer prices fell.5% in September and are down 1.1% annually. The trade gap in August widened the most in 5 months with a 2% decline in exports. September retail sales rose.1%, less than expected. Excluding autos, sales fell outright, down.3%. 1

12 Data Shows Economy Underperforming 5.% US GDP SAAR% 4.% Slow start out of the gate 3.% +3% growth needed after.6% in Q1 to reach 215 Fed forecast 2.% 1.% Q3 Q4.9% Q3 GDPNow forecast.%.9% -1.% -2.% 213 Source: Bloomberg, Stifel

13 October Still on the Table So, as I ve said before, every meeting is a live meeting where the Committee can make a decision to move to change our target for the federal funds rate. That certainly includes October. -Janet Yellen, September 17 th, 215 Press Conference Following September Statement Release September was too close to call, additional weakness makes Dovish argument more clear 12

14 Committee members back away from 215 The Fed needs to take a stance of waiting to see if the risks to the outlook diminish. -Lael Brainard, October 12 th, 215 National Association of Business Economics Annual Meeting I wouldn t expect it to be appropriate to raise rates this year. -Daniel Tarullo, October 13 th, 215, CNBC Interview Raising rates this year is an expectation, not a commitment. -Stanley Fischer, October 12 th, 215, Reuters Interview 13

15 Slow and Steady After Liftoff 6. Fed Funds Target Rate % Potential pathway: 5bp increase per year 5. Liftoff will be gradual, according to Yellen we continue to expect that economic conditions will evolve in a manner that will warrant only gradual increases in the target federal funds rate. -Chairman Yellen, Sept. 17, 215 Press Conference Source: Bloomberg 14

16 What is the Fed watching? Dual Mandate: Full Employment and Stable Prices 15

17 Nonfarm Payrolls Remain Positive 45 4 Change in NFP, k Payrolls averaging 221k since consecutive months of positive payroll growth Avg. 198k since start of Source: Haver Analytics 16

18 Pre-Recession Levels Recaptured Total employment (M) M jobs created since the end of the Recession 3.1M in Source: Bureau of Labor Statistics /Haver Analytics

19 Unemployment Rate Down to 5.1% 9 Fed Full Employment % Unemployment Rate % 1 9 The unemployment rate has been in Fed s full employment range since October Source: Bureau of Labor Statistics /Haver Analytics

20 Phew! The disappointing jobs report, he said, seems to validate the Fed s decision to hold off on lifting interest rates off near zero levels at their meeting last month. Furthermore, the weakness displayed in the latest employment report, reaffirms the Committee s need to closely monitor the data in determining the appropriate timeline for the first rate hike. -Boston Fed President Eric Rosengren, October 3 rd, 215 WSJ interview 19

21 Nonfarm Momentum Slows Change in NFP, k k rise in July NFP 136k rise in Aug. NFP 142k rise in Sept. NFP Weakest quarterly growth since Q Source: Bureau of Labor Statistics /Haver Analytics 215 2

22 Nonfarm Momentum Slows 35 S NFP Quarterly Average, k 3 167k three-month average weakest quarterly growth since Q2 212 Q4 214: 324k Q1 215: 195k Q2 215: 231k Q3 215: 167k Q1 Q2 Q3 Q4 Q1 Q2 Q Source: Haver Analytics 21

23 Avg. Hourly Earnings Stubbornly Low 5 g 2.% Avg since Recession Avg Hourly Earnings YoY% Wage growth was flat in September Up 2.2% Y/Y as of September 2.% average since Recession Source: Bureau of Labor Statistics /Haver Analytics

24 Participation Rate Still Declining 8 68 Participation rate continues to decline with 35k drop outs in September alone. Participation rate at a multi-decade low year olds account for all of the decline in the labor force, 7.9M Americans (only 59% of working age population) Source: Bureau of Labor Statistics /Haver Analytics Current Rate 62.4 % Participation Rate %

25 Participation Rate Ages Employment Level 55+ (M) year old employment has nearly doubled since Source: Haver Analytics

26 Part-time Employment Recovery 1 Part-time % total employment 21 2 Typically 18% of the labor force, part-time jobs are 2.5M higher than pre-recession levels 6.M Americans want full-time but can only find part-time work Source: Haver Analytics

27 Temporary Hires 2 temp % of total nonfarm % of the labor force but almost 11% of all jobs since the end of the recession 2.9M temporary American workers Source: Haver Analytics

28 Real Unemployment 7 Unemployment Rate % Augmented Unemployment % % civilian unemployment rate vs. 1.% augmented unemployment rate Unemployed 7.9M vs. 15.8M real unemployed Source: Bureau of Labor Statistics /Haver Analytics

29 Inflation: Benign Price Pressures vs. 2% Forecast 28

30 Inflation Concerns Fed has acknowledged inflation is running below target levels since December 212 Inflation has continued to run below the Committee's longer-run objective... -September 17 FOMC Statement 29

31 Inflation Concerns on the Rise Fed sees downside risk to inflation outlook Many policymakers remain concerned about the downside risks to a further decline in inflation as a result of a strong U.S. dollar and low energy prices. -September 17 th, 215 FOMC Meeting Minutes 3

32 Crude Oil Prices Declining August monthly average $47.62 January 215 lowest level since 28, $47.76 a barrel. Average price $55.29 since then Down 64.1% from a July 28 high (star) Brent Crude Oil ($/Barrel) Source: EIA/WSJ /Haver

33 Risk to Fed s Outlook on Inflation 3.% Annual PCE% Fed Forecasted PCE % 2.5% 2.% Fed forecasts 1-3bps above reality 1.5% 1.%.5%.%.7%*.2%* Source: Federal Reserve/Bloomberg *Stifel Forecast 32

34 Inflation Concerns Keep Fed on Hold Fed sees downside risk to inflation outlook Furthermore, Committee members expressed concerns that a premature tightening might erode the credibility of the Committee s longerterm objective if inflation remained below 2% for a prolonged period...monetary policy is better suited to effectively respond to unexpected upside inflation surprise as opposed to persistent below-objective inflation levels.. -September 17 th, 215 FOMC Meeting Minutes 33

35 Inflation, What Inflation? Consumer prices fell outright in September, down.2% CPI flat Y/Y PPI fell.5% in September, down 1.1%Y/Y in September Nine months of % or below for the PPI % Target PPI yr/yr% CPI yr/yr% Source: Bureau of Labor Statistics /Haver Analytics

36 Inflation, What Inflation? 6 4 PCE yr/yr% Core PCE yr/yr% Fed's 2.% Target 6 4 Y/Y the PCE up.3% in August, down from 1.5% last August The core PCE up 1.3% Y/Y in August vs. 1.6% 12 months ago Source: Bureau of Economic Analysis /Haver Analytics -2 35

37 International Events: Developments vs. Contagion 36

38 International Developments Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. -September 17 th, 215 FOMC Statement 37

39 China s Economy Slowing Chinese factory activity dropped to the lowest level in more than six years. The Chinese PMI dropped from 47.3 to 47.2 in September. Exports are down 3.7% Y/Y in September Home prices are down 3.2% Y/Y in August The Asian Development Bank downgraded Chinese growth for 215 from 7.2% to 6.8% Chinese Manufacturing PMI Source: Bloomberg Chinese Exports YoY % Source: Bloomberg

40 International Developments 18,5 5,5 Since August 17 th, 215, US equities are down 7% with an intraday drop of more than 1, points on August 24 th Chinese equities are down 23% since August 17 th, 215. On August 24 th the Shanghai composite suffered its biggest one-day drop since 27, falling 8.5% 18, 17,5 17, 16,5 16, 15,5 Dow Jones Industrial Average (Left) Shanghai Composite (Right) 15, Jun Jul Aug Sep Oct Source: Bloomberg 5, 4,5 4, 3,5 3, 2,5 2, 39

41 Commodities 45 Aluminum is down 17.5% YTD Copper is down 18.9% YTD Steel is down 27.8% YTD Commodities index is down 9.% YTD Aluminum ($/metric ton) (left) Copper Scrap (cents/lb) (right) Source: Foundation for Intl Business & Economic Research /Haver Analytics 75 4

42 Import Prices Declining Down 1.7% Y/Y in September All import price indx YoY% Source: Bureau of Labor Statistics /Haver Analytics

43 US Dollar Strengthening Nominal Broad Trade-Weighted Exchange Value of the US$ (Jan-97=1) Up 15.% Y/Y Up 3.4% in the last six months Up 27.1% since a July 211 low Source: Federal Reserve Board /Haver Analytics

44 What is the outlook for the US economy? 43

45 Question for the Fed: Is the employment weakness symptomatic of broader weakness? If, yes, then policymakers should wait. 44

46 Consumers 45

47 Retail Sales Positive but Weak September sales.1% Y/Y up 2.4% vs. 4.4% in September Retail Sales MoM % (Left) Retail Sales YoY % (Right) month avg:.2% Q3 avg:.3% Ex-autos September sales -.3% Y/Y up.8% vs. 3.6% in September month avg:.1% Q3 avg:.1% Source: Haver Analytics. 46

48 Gas Prices Give Muted Boost 4. Current $2.37 lowest price since 21 $2.63 six-month average vs. $3.55 long-term average Down $1.32 and 36% from a peak monthly average of $3.69 in June 214 (star) Retail gas price ($/gallon) 211 Source: Haver Analytics

49 Why Aren t Consumers Spending? Rising Household Costs Health insurance premiums have increased between 39-56% since early 213 for an average family, that means paying $663 a month, an increase of $23 a month or nearly $3, annually. -National Online Private Health Insurance Exchange 48

50 Why Aren t Consumers Spending? Lower-Wage Jobs 4,k January 28-September 215 3,k 2,k Jobs lost: $64.4k Jobs gained: $5.7k 21% less in salaries (weighted-average) 1,k k -1,k -2,k Source: BLS Educational Services Professional Services Temp, Admin, Support Services Retail Trade Manufacturing Government Financial Services Health care and assistance Leisure and Hospitality Trasportation Mining Construction Information Services Wholesale Trade 49

51 Investment 5

52 Waning Investment Momentum Nonresidential fixed investment averaging 2.9% in 1H 215 vs. 5.6% in Nonres. Investment % SAAR Source: Bureau of Economic Analysis /Haver Analytics 51

53 Business Investment Declining 4 Orders ex-air, ex-def yoy% 4 Orders ex-air, ex-def down.2% in August % vs. 1.4% 2 Down 5.2% Y/Y in August Durable goods are down 2.3% Y/Y in August and down 3.9% ex transportation Activity at a six-year low Source: Census Bureau /Haver Analytics

54 Manufacturing Falters, Service Activity Slows ISM Non-Manufacturing Index ISM Manufacturing Index 7 6 ISM Manufacturing fell from 51.1 to 5.2 in September ISM Non- Manufacturing fell from 59. to 56.9 in September Source: Institute for Supply Management /Haver Analytics 53

55 Housing 54

56 Home Sales Show Signs of Improvement Existing Home Sales Current: 5.31M Low: 3.5M Spread: 1.81M Up 52% New Home Sales (k) (left) Existing Home Sales (M) (right) Sales fell.27m in August, matching 213 taper tantrum peak New Home Sales Current: 552k Low: 27k Spread: 282k New: Up 282k from trough Up 14% Existing: Up 1.81M from trough Sources: Census Bureau, National Association of Realtors /Haver Analytics

57 Housing Starts Still Recovering housing starts (k) 2,8 2,4 Housing starts still less than half of prerecession peak Starts fell 3.% or 35k in August 1,126k vs. 2,273k 2, 1,6 1, Source: Census Bureau /Haver Analytics

58 Housing Showing Signs of Weakness? 2 1 S&P/CS 2 City yr/yr% Source: Standard & Poor's /Haver Analytics Single-Family Starts % Total 5.% in June vs. 13.7% Nov 213 peak Homeownership Rate % Lowest rate in 27 years Source: Haver Analytics Lowest rate since Source: Census Bureau /Haver Analytics Two-decade low

59 Top Line Growth 58

60 Growth Momentum Slows Average growth since Recession: 2.2% 214: 2.4% Q2 215: 3.9% Source: Bureau of Economic Analysis /Haver Analytics -7.5 GDP SAAR% 4Q average

61 Forecasted GDP Growth 5.% US GDP SAAR% 4.% 3.% Average GDP in 1H 215 is 2.25% (on trend) 2.% 1.% BB:2.2% BB:2.3% 1.2% 1.5%.% -1.% Quarterly Forecasts -2.% Source: Bloomberg, Stifel 6

62 Summary 61

63 Summary Signs of improvement Extraordinary accommodation has led to 2% GDP for the past six+ years Headline job creation not sufficient to spark wage pressures and momentum waning Despite lower gas prices, consumer losing momentum without income growth Shift between goods and services (healthcare) Manufacturing and investment remain directionless Rising dollar, heightened inventory Regulation, healthcare, and tax uncertainty Global economy tepid, international demand uneven Housing contribution is limited 62

64 Summary 5 GDP SAAR% Modest Growth + What Inflation =====??==== Source: Bureau of Economic Analysis /Haver Analytics

65 Summary 6 4 2% Target PPI yr/yr% CPI yr/yr% 6 4 Modest Growth + What Inflation =====?? ==+== Source: Bureau of Labor Statistics /Haver Analytics

66 Summary 5 Change in NFP, k 3 month average NFP, k Modest Growth + What Inflation + Further Weakness in the Labor Market =====?? ==+== Source: Bureau of Labor Statistics /Haver Analytics

67 Summary Modest Growth + What Inflation + Further Weakness in the Labor Market = Fed on hold= Fed Funds Target Rate Source: Federal Reserve Board /Haver Analytics

68 Summary Modest but positive growth We continue to look for modest but positive GDP growth in the second half of the year, with an annual growth rate falling short of trend activity throughout 215, keeping downward pressure on rates and keeping the Fed on hold beyond

69 Interest Rate Forecast Grid Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q Growth indicators GDP, QoQ % 4.3% 2.1%.6% 3.9% 1.2% 1.5%.9% 3.2% 2.5% 2.1% 2.4% 1.8% 2.2% 2.5% Fixed Investment, % 7.9% 2.5% 3.3% 5.1% 2.8% 3.% 1.5% 3.5% 2.5% 1.9% 5.3% 3.6% 2.4% 2.5% Housing Starts, k 117 1, ,174 1,5 1,35 1, , Car Sales, M Unemployment Rate, % 5.9% 5.6% 5.5% 5.3% 5.1% 5.1% 5.2% 5.2% 5.3% 5.3% 6.1% 5.3% 5.3% 5.5% Participation Rate, % 62.7% 62.7% 62.7% 62.6% 62.4% 62.4% 62.5% 62.5% 62.6% 62.6% 62.8% 62.5% 62.6% 63.% Savings Rate, % 5.6% 4.9% 5.3% 5.8% 5.9% 5.8% 5.6% 5.2% 5.1% 4.8% 5.3% 5.7% 5.2% 4.3% Inflation indicators, YoY% CPI 1.7%.8% -.1%.1%.%.%.1%.5%.5%.7% 1.5%.%.5%.6% PCE 1.4%.8%.3%.3%.1%.2%.6%.7%.7%.9% 1.3%.2%.7%.9% Core PCE 1.5% 1.3% 1.3% 1.3%.8%.9%.9% 1.1% 1.2% 1.2% 1.4% 1.1% 1.1% 1.7% Interest rate, % FF month UST bills yr UST notes yr UST notes yr UST notes yr UST bonds s to 1s Spread bps Lindsey Piegza - Chief Economist Red identifies actual figures Source: Bloomberg, Stifel 68

70 Disclosures Disclosures and Disclaimers The Fixed Income Capital Markets trading area of Stifel, Nicolaus & Company, Incorporated may own debt securities of the borrower or borrowers mentioned in this report and may make a market in the aforementioned securities as of the date of issuance of this research report. Please visit the Research Page at for the current research disclosures applicable to the companies mentioned in this publication that are within Stifel s coverage universe. The information contained herein has been prepared from sources believed reliable but is not guaranteed by Stifel and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of investors. Employees of Stifel or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. No investments or services mentioned are available to private customers in the European Economic Area or to anyone in Canada other than a Designated Institution. The employees involved in the preparation or the issuance of this communication may have positions in the securities or options of the issuer/s discussed or recommended herein. Stifel is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon. Stifel Fixed Income Capital Markets research and strategy analysts ( FICM Analysts ) are not compensated directly or indirectly based on specific investment banking services transactions with the borrower or borrowers mentioned in this report or on FICM Analyst specific recommendations or views (whether or not contained in this or any other Stifel report), nor are FICM Analysts supervised by Stifel investment banking personnel; FICM Analysts receive compensation, however, based on the profitability of both Stifel (which includes investment banking) and Stifel FICM. The views, if any, expressed by FICM Analysts herein accurately reflect their personal professional views about subject securities and borrowers. For additional information on investment risks (including, but not limited to, market risks, credit ratings and specific securities provisions), contact your Stifel financial advisor or salesperson. Our investment rating system is three tiered, defined as follows: Outperform For credit specific recommendations we expect the identified credit to outperform its sector specific peers over the next six months. Market perform For credit specific recommendations we expect the identified credit to perform approximately in line with its sector specific peers over the next six months. Underperform For credit specific recommendations we expect the identified credit to underperform its sector specific peers over the next six months. Additional Information Is Available Upon Request I, Lindsey Piegza, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. 215 Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD All rights reserved.. 69

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