4Q The Synchronization of Growth Engines

Transcription

1 4Q The Synchronization of Growth Engines Craig Dismuke Chief Economist, Vining Sparks cdismuke@viningsparks.com Dudley Carter Economic Analyst, Vining Sparks dcarter@viningsparks.com

2 10-Year Treasury Yield Range Bound It has been a one-step-forward-two-steps back year for yields with lower highs and lower lows. The driving forces have been consistent: fiscal expectations, inflation uncertainty, monetary policy, and geopolitics. Stock Record Highs: Dow 48, S&P 44, Nasdaq 57 French Trump sworn in 1 2 Uncertainty keeps yields range-bound following optimistic 60 bps increase after the election J F M A M J J A S O 1.85% - Pre-Election Yield Sources: Bloomberg, Vining Sparks election fears Fed hikes, leaves dots unchanged French Election Fedspeak shifts markets to March GOP lacks support for healthcare bill, creates uncertainty about fiscal reform agenda 4 Weak April CPI, retail sales start month of weaker economic data ECB, BoE, BoC surprisingly hawkish 5 Comey memos Fed hikes, hawkish slant, dots unchanged, roll-off cap sizes Fed debate on inflation begins 6 Senate healthcare failures begin Presidential advisory councils disbanded North Korea tests hydrogen bomb Fed announces October start date for roll-off Irma less severe than feared 7 Tax framework released 2 Weak core inflation

3 U.S. Stocks Having a Record Year Investors in U.S. equities have enjoyed a record run so far in 2017, one built on hopes of deregulation and tax reform, improved corporate earnings, and stable economic growth. However, they ve lagged results elsewhere. 16% 14% 12% 10% 8% 6% 4% 2% 0% S&P 500 YTD (thru October 13): 14.0% Return 44 Record-High Closes J F M A M J J A S O 0% 10% 20% 30% S&P 500, 14.0% Developed Markets, 16.2% Emerging Markets, 30.6% China, 24.6% Japan, 15.9% Taiwan, 24.9% South Korea, 30.9% India, 31.2% Brazil, 30.8% France, 23.6% Germany, 27.0% U.K., 13.0% YTD Return, Current USD 3 Sources: Bloomberg, Vining Sparks

4 4Q 2017 Economic Outlook The Synchronization of Growth Domestically and Globally Areas of Concern The Fed and Other Central Banks Have Turned Less Accommodative Weak Inflation Persists 2017 and 2018 Interest Rate Outlook Risks to Outlook

5 s Labor Market Continues to Improve The unemployment rate has dropped to 4.2%, the lowest rate in sixteen years. Nonfarm payroll growth remains above expectations notwithstanding the hurricane-effect in September. 5 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Unemployment Rates Plus Part-Time for Eco Reasons Plus Marginally Attached Plus Discouraged Workers Headline Unemployment Rate 4.2% Nonfarm Payroll Growth Total Monthly Change in Nonfarm Payrolls 3M Average k Fed Sources: BLS, Vining Sparks

6 Manufacturing Construction IT Finance Utilities Other Services Retail Transportation Leisure Business Services Education, Health Total Wage Growth Improving? After slowing earlier in the year, earnings jumped in September. The recent hurricanes affected certain sectors but positive revisions to previous months indicated the trend may be firmer than previously thought. 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Sources: BLS, Vining Sparks Average Hourly Earnings, YoY Average Hourly Earnings, 3M/3M Annualized 3.6% 2.9% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Greater-than-3% YoY Wage Growth MoM 6M Avg. of MoM YoY 6 6% 5% 4% 3% 2% 1% 0%

7 Consumer Debt Remains Low Despite increases in auto loans and student loans, overall household debt outstanding remains low relative to net worth. This has been driven primarily by the decline in mortgage debt % 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Debt by Category as % of Net Worth Mortgage Debt Revolving Credit Non-Revolving Credit Auto Loans Student Loan Debt Sources: Federal Reserve, Vining Sparks 25% 20% 15% 1.5% 10.3% 10% 1.1% 1.0% 5% 0.2% 0% Debt by Category as % of Net Worth, Cumulative 25% Mortgage Debt Revolving Credit 20% Non-Revolving Credit Auto Loans 15% Student Loan Debt 10% 5% 0% %

8 University of Michigan Conference Board And Consumers Remain Very Confident Consumer confidence remains very high with an improving labor market, record-high stock prices, and continued low interest rates Consumer Confidence - Expectations Personal Consumption (QoQ, SAAR) Conference Board Consumer Confidence University of Michigan Consumer Confidence Sources: BEA, Conference Board, University of Michigan, Vining Sparks 8% 6% 4% 2% 0% -2% -4%

9 Businesses are Buying More Equipment Momentum in businesses spending on equipment picked up in 2016 and has strengthened through 2Q17. Leading indicators show this is likely continued in 3Q. 40% 30% 20% 10% 0% -10% % Business Investment in Equipment (GDP, QoQ Annualized) -30% Capital Goods Shipments Non-def. Ex-Air (QoQ, Ann. Tracking) -40% Sources: BEA, Census Bureau, Vining Sparks Businesses Remain Very Confident Also

10 Slowdown in Growth of Regulations New final regulations are on pace to slow 33% from the recent annual growth rate. New regulations in 2017 are having a minimal cost impact and are cutting paperwork hours. Number of New Finalized Regulations Economic Costs of New Regulations (Billions of Dollars Annually) $22.7 $12.0 $36.0 $104.8 $169.2 $218.0 $47.0 $65.5 $29.5 $79.3 $99.1 $164.2 $ Hours of New Paperwork (Millions of Hours Annually) Sources: American Action Forum Estimates, Vining Sparks

11 Trade Benefitting from Weaker Dollar As the Dollar has weakened, it has helped U.S. producers export more goods and services abroad. Trade to the country s biggest trade partners has all turned from negative to positive. 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Sources: Census Bureau, Federal Reserve, Vining Sparks U.S. Exports to China (YoY, 3M Avg) U.S. Exports to Canada (YoY, 3M Avg) U.S. Exports to Eurozone (YoY, 3M Avg) Trade-Weighted Dollar (YoY) -15% -10% -5% 0% 5% 10% 15% 20% 11

12 Hurricanes Make Landfall on Data Harvey and Irma have already had a significant impact on the economic data, slowing home sales, inflating the ISM indices, boosting auto sales, and dragging on the labor data. Industrial Production 0.4% Existing Home Sales (South) -0.2% Pending Home Sales (South) 0.1% New Home Sales (South) -0.8% ISM Man. Supplier Deliveries 64.4 ISM Non Man. Supplier Deliveries 58.0 Auto Sales 15.2% 12 Nonfarm Payrolls 153k % -5.7% Month after Hurricanes Previous 6-Month Average Change -3.5% -4.7% -1.3% -33k Sources: Federal Reserve, NAR, Census Bureau, ISM, Wards, BLS, Vining Sparks

13 Index, month of impact = 100 Storm Effects Historically Temporary While growth slowed in the months after Katrina and Irene, growth rebounded quickly thereafter. Growth actually accelerated in the months following Andrew and Sandy Monthly Change in Real GDP Month of Storm = Andrew Katrina Irene Sandy Months before/after storm Sources: Macroeconomic Advisors, Vining Sparks

14 4Q 2017 Economic Outlook The Synchronization of Growth Domestically and Globally Areas of Concern The Fed and Other Central Banks Have Turned Less Accommodative Weak Inflation Persists 2017 and 2018 Interest Rate Outlook Risks to Outlook

15 Housing Data Showing Slower Growth As inventory and mortgage rates have remained low, prices have risen steadily. This is beginning to weigh on affordability and actual sales. 40% 15 30% 20% 10% 0% Home Prices (YoY, 3M Avg) -10% Homebuilder Confidence (YoY, 3M Avg) -20% Building Permits (YoY, 3M Avg) Housing Starts (YoY, 3M Avg) -30% New Home Sales (YoY, 3M Avg) -40% Existing Home Sales (YoY, 3M Avg) % +5.9% +4.0% +1.5% +0.9% +0.4% Sources: S&P CoreLogic, NAR, Census Bureau, Vining Sparks

16 Housing Data Showing Slower Growth As inventory and mortgage rates have remained low, prices have risen steadily. This is beginning to weigh on affordability and actual sales. 20% 15% 10% 5% 0% Construction and Sales Slow Building Permits (YoY, 3M Avg) Housing Starts (YoY, 3M Avg) New Home Sales (YoY, 3M Avg) Existing Home Sales (YoY, 3M Avg) J F M A M J J A Sources: S&P CoreLogic, NAR, BEA, Census Bureau, Vining Sparks 20% 15% 10% 5% 0% -5% -10% -15% -20% As Affordability Declines Personal Income (YoY) Home Prices (YoY) 30YR Mortgage Rate % 9.0% 8.0% 7.0% 5.9% 6.0% 2.8% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

17 Pre-Storm Auto Sales Rolled Over After years of stronger sales activity leveled off in 2016, sales rolled over in 2017 before a hurricane-related jump in September. Slower sales paired with an influx of lease fleets into the market have weighed on prices Auto Sales Decline Pre-Hurricanes New Car Sales (Annualized, MMs) -11.2% Sources: Wards Automotive, BLS, Vining Sparks 20% 15% 10% 5% 0% -5% -10% -15% And New and Used Auto Prices Fall New Car Price Change, YoY Used Car Price Change, YoY -20% % -3.7%

18 4Q 2017 Economic Outlook The Synchronization of Growth Domestically and Globally Areas of Concern The Fed and Other Central Banks Have Turned Less Accommodative Weak Inflation Persists 2017 and 2018 Interest Rate Outlook Risks to Outlook

19 Fed Expects More Hikes than Markets The Fed has surprised markets this year. In the short run, the Fed expects to continue being more hawkish than the market expects. However, the Fed has lowered its longer run target rate to 2.75% Fed Funds Target Rate FOMC SEP Projections (Sept. 2017) Fed Funds Futures (Oct. 2017) Sources: FOMC SEP Projections, Bloomberg, Vining Sparks FOMC Median Longer-Run "Neutral Rate" Projection Jan Apr Jun '12 '12 '12 Sep '12 Dec '12 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun '13 '13 '13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 FOMC Summary of Economic Projection Date Sep '16 Dec ' Mar Jun Sep '17 '17 '

20 Trillions FOMC Surprised with Balance Sheet The Fed also surprised the markets by beginning its balance sheet adjustment plan in The eventual goal is to allow the portfolio pay down to be between $2.0 and $3.5 trillion. $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Fed Balance Sheet Projected Assuming Proposed Caps Potential Long-Term Size of Balance Sheet Sources: Federal Reserve, Projected Balance Sheet Approximations, Vining Sparks 20

21 Announcement Reaction Non-Existent While the flow impact is likely to push rates slightly higher, the initial announcement reaction has been negligible, pointing to a tempered market response overall Year Treasury Yield 15-Year MBS Yield (Bloomberg Current Coupon Rate) Likely Appropriate in 2017 FOMC Lays out Details of Balance Sheet Plan FOMC Meeting Begin Relatively Soon YR MBS Spread / 10YR Treasury Sources: Bloomberg, Vining Sparks

22 More Synchronization of Growth The synchronization of growth improvement is evident in the PMIs from the largest economic engines, fueling the global reflation concerns Growth Canada Manufacturing PMI (3M Avg) Eurozone Manufacturing PMI (3M Avg) U.S. Manufacturing PMI (3M Avg) China Manufacturing PMI (YoY) Japan Manufacturing PMI (YoY) Contraction Sources: ISM, Caixin, Markit, Vining Sparks

23 Finally, Synchronized Global Growth Growth is the most synchronized since the Great Recession; all 46 of the OECD countries are growing for the first time since 2007, adding to optimism about the health of the global economy. Growth Accelerating Growth Slowing Contracting Sources: OECD, Vining Sparks

24 Central Banks Are Optimistic About Activity While the Fed is well ahead of other central banks with respect to returning towards a more normal monetary policy stance, there are signs that others may be headed towards less accommodation. 24 Economy strengthening? The ECB The BoE The BoJ x Labor market tightening? Inflation approaching target? x x

25 Central Banks are Optimistic About Activity While the Fed is well ahead of other central banks with respect to returning towards a more normal monetary policy stance, there are signs that others may be headed towards less accommodation. 25 So what s the status: The ECB: Raised its growth forecast, cut its inflation forecast, and said subdued inflation pressures warrant a substantial degree of monetary accommodation Expected to extend QE past December expiration at a reduced rate, but keep rates low well past the end of QE The BoE: Pound depreciation (Brexit) pushed inflation to 3% (highest since 2012); household spending and business investment have weakened; unemployment is at a 42-year low Indicated a rate hike is likely to be warranted in coming months to address the inflation overshoot, but said any increases would be expected to be at a gradual pace and to a limited extent The BoJ: 2Q economic growth was the strongest in two years and unemployment is at a 23- year low; however, core inflation of 0.7% YoY is well short of the 2%-target Governor Kuroda said the BoJ will Consistently pursue aggressive monetary easing because achieving the 2% target is still a long way off.

26 4Q 2017 Economic Outlook The Synchronization of Growth Domestically and Globally Areas of Concern The Fed and Other Central Banks Have Turned Less Accommodative Weak Inflation Persists 2017 and 2018 Interest Rate Outlook Risks to Outlook

27 But Inflation Remains Stubbornly Low Surprisingly, core CPI inflation has fallen to 1.7% for three consecutive months and core PCE inflation has dropped in five of its last six reports, now down to 1.29% Core CPI (YoY) Core PCE (YoY) 1.7% 1.29% Sources: BLS, Vining Sparks

28 Big Drivers of Weaker Inflation Representing 31%, 8%, and 8% of core inflation respectively; the downturns in rent equivalents, medical care prices, and auto prices have been significant drivers of weaker core inflation. 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Sources: BLS, Vining Sparks Medical Care Prices (YoY) Owners Equivalent Rent (YoY) 0.6% New and Used Auto Prices (YoY) 4.9% 3.6% % 1.6% -1.7%

29 Weakness Has Been Broad-Based Weaker price gains have been broad-based, evident in the decline in core prices excluding shelter. At 0.6% growth year-over-year, this measure is now at its second-slowest pace on record. 12% 10% 8% 6% 4% 2% Core CPI Less Shelter (YoY) 29 0% % Sources: BLS, Vining Sparks

30 Inflation Inflation Rises Phillips 6.0 Curve Not Working Globally Phillips Curve U.K. U.S. Current EU 1.0 Current Current 0.0 Japan Current Unemployment Declines Unemployment Rate Sources: BLS, UK ONS, Eurostat, Japan MIAC, Vining Sparks

31 4Q 2017 Economic Outlook The Synchronization of Growth Domestically and Globally Areas of Concern The Fed and Other Central Banks Have Turned Less Accommodative Weak Inflation Persists 2017 and 2018 Interest Rate Outlook Risks to Outlook

32 Year-End Interest Rate Expectations Longer maturity interest rates are still expected to rise slightly into year-end, although forecasters continue lowering their year-end rate forecasts YE2017 Yield Projections Current Vining Projections (October) Bloomberg Survey Median (October) Range of Bloomberg Forecasts (October) Forward Curve (October 16, 2017) FF 3M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Sources: Bloomberg Survey of Economists, Vining Sparks

33 Year-End Interest Rate Expectations Longer maturity interest rates are still expected to rise slightly into year-end, although forecasters continue lowering their year-end rate forecasts YE2018 Yield Projections Current Vining Projections (October) Bloomberg Survey Median (October) Range of Bloomberg Forecasts (October) Forward Curve (October 16, 2017) FF 3M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Sources: Bloomberg Survey of Economists, Vining Sparks 33

34 4Q 2017 Economic Outlook The Synchronization of Growth Domestically and Globally Areas of Concern The Fed and Other Central Banks Have Turned Less Accommodative Weak Inflation Persists 2017 and 2018 Interest Rate Outlook Risks to Outlook

35 Change in Complexion of FOMC With three vacant Board of Governors positions, this year s FOMC voters are about as biased to the dovish side as can be. However, that is likely to change in Bullard (St. L.) Kashkari (Minn.) Evans (Chi.) Brainard (Gov.) Bostic (Atl.) Kaplan (Dal.) Dudley (N.Y.) Powell (Gov.) Yellen (Gov.) Rosengren (Bos.) Williams (San F.) Mester (Cle.) Harker (Phi.) Quarles (Gov.) George (Kan. C.) Mullinix (Rich.) Dove Hawk Vacant (Gov.) Vacant (Gov.) Vacant (Gov.)

36 FOMC Likely to Become More Hawkish The Federal Open Market Committee will change complexion in 2018 with four wildcards that could swing the Committee s bias even more decidedly hawkish. Kevin Warsh 36 John Taylor Bullard (St. L.) Kashkari (Minn.) Evans (Chi.) Brainard (Gov.) Kaplan (Dal.) Bostic (Atl.) Dudley (N.Y.) Powell (Gov.) Yellen (Gov.) Rosengren (Bos.) Harker (Phi.) Williams (San F.) Mester (Cle.) Quarles (Gov.) George (Kan. C.) Mullinix (Rich.) Dove Hawk Vacant (Gov.) Vacant (Gov.) Vacant (Gov.)

37 Tax Reform: What We Know - Corporate The Big Six, a group of key Republican leaders, released the framework for the changes they would like to see made to the tax code. There are still key details to be worked out. C-Corp 35% 20% Passthrough Individual 25% Sources: White House, Vining Sparks Alternative Minimum Tax Deemed repatriation of accumulated foreign earnings Before Territorial system (100% dividend exemption if own >10% of foreign sub) Year 1 Year 2..Useful Life. $ $ $ $ $ $ After Limit R&D LIHTC Immediate expensing of depreciable assets for 5 years Interest expense Minus: Interest income Equals: Net interest expense Tax Credits & Deductions but not much else 37

38 Tax Reform: What We Know - Individual The Big Six, a group of key Republican leaders, released the framework for the changes they would like to see made to the tax code. There are still key details to be worked out. >$418.4k $416.7k to $418.4k $191.7k to $416.7k $91.9k to $191.7k $38k to $91.9k $9.3k to $38k $0 to $9.3k Single Filer 39.6% 35% 33% 28% 25% 15% 10% Fewer 7 > 3 Brackets with Congress option for a fourth on high-earners Sources: White House, Vining Sparks 35% 25% 12% No more AMT Estate tax Generation-skipping transfer tax $6,350 Standard deductions $12,000 Single filer $12,700 $24,000 Married filing jointly Tax Credits & Deductions - Larger Child Tax Credit (first $1k refundable) - New $500 non-refundable credit for non-child dependent - Keep mortgage interest and charity deduction, but eliminate the rest (including state and local) - Retain tax benefits that encourage work, higher education, and retirement security but do away with personal exemptions 38

39 Trillions Who s Paying? Heavy Lifting Politically One of the biggest questions surrounding tax reform is - How will it be paid for? Economic Growth? Deficit-funded inside of 10-year budget window? Revenue offsets/base-broadening? Trillions 1.6 $ Cost of cutting Tax-expenditure item 1.4 corporate rate 1.2 Individual % 30% 25% 20% Corporate Rate Exc. of employer-provided health insurance Exc. of retirement savings (401k, IRS, pension) Preferential rates for dividends/capital gains State and local tax deduction Mortgage interest deduction Charitable giving deduction Basis step-up on capital gains at death Exclusion of capital gains from home sales Exclusion of Social Security benefits Exclusion of municiapl bond interest income Medical expense deduction and HSAs Exclusion of income from life insurance Child tax credit Deferral of income from foreign corporations R&D tax credit and expensing Accelerated depreciation Deduction for US production activities 85% 15% Corporate 39 Sources: JPMorgan, OMB, U.S. Treasury, Vining Sparks

40 Burden Splits Make for Tough Politics Individuals continue to account for the largest share of government tax revenues while the corporate share has halved since the 1960 s. That could create a hard sell for the administration % 2% 90 Excise 10% 80 Corporate Income 70 34% Social Insurance and Retirement Receipts Individual Income % Sources: JPMorgan, OMB, Vining Sparks

41 CBO Study Shows Skewed Income, Taxes The White House wants the individual income tax code to be just as progressive as it has been prior to reforms. As such, the costs is likely to be borne by the middle class and wealthy. 70% 60% 50% 40% 30% 20% 10% 0% Quintile s Share of Before-Tax Market Income Quintile s Share of Federal Taxes 5% 1% Bottom 20% 9% 4% Second Quintile 14% 9% Third Quintile 20% 17% Fourth Quintile Top 1% 15% 38% 25% 44% Top 20% 41 Sources: CBO 2013 Study, Vining Sparks

42 4Q 2017 Economic Outlook - Summary The Synchronization of Growth Domestically and Globally Areas of Concern Housing, Autos, and Asset Valuations The Fed and Other Central Banks Have Turned Less Accommodative Short Term Rates Likely to Rise Weak Inflation Persists Weigh on Future Policy Tightening 2017 and 2018 Interest Rate Outlook Gradually Rising Rates Risks to Outlook Change in Fed Bias, Uncertainty of Taxes

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