California Association of Joint Powers Authorities

Size: px

Start display at page:

Download "California Association of Joint Powers Authorities"

Jared Ball
6 years ago
Views:

1 California Association of Joint Powers Authorities Economic Update April 28, 2016 Scott Prickett, CTP EVP, Portfolio Strategist CHANDLER ASSET MANAGEMENT chandlerasset.com

2 1 SECTION 1 Economic Update & Market Data

3 2 Major Indicators Employment report, (1st Friday of month) CPI: Consumer Price Index, (Mid-month) PCE: Personal Consumption Expenditures, (End of month) Retail Sales, (Mid-month) Institute for Supply Management (ISM) Survey, (1st day of new month) Quarterly GDP

4 MOM Change In (000's) Rate (%) 3 Employment Nonfarm Payroll (000's) 15.0% 14.0% 13.0% Unemployment Rate Underemployment Rate (U6) Unemployment Rate (U3) % 11.0% 10.0% % 8.0% % % 5.0% 0 4.0% Source: US Department of Labor Source: US Department of Labor The March employment report was stronger than expected. Nonfarm payrolls rose by 215,000 in March, exceeding the consensus forecast of 205,000. January and February payrolls were revised down slightly by a net total of 1,000. The unemployment rate inched up to 5.0% from 4.9%, as the participation rate increased to 63.0% from 62.9%. A broader measure of unemployment called the U-6, which includes those whom are marginally attached to the labor force and employed part time for economic reasons, also ticked up to 9.8% from 9.7%. Wages rose 0.3% in March, exceeding expectations. During the first quarter of 2016, payrolls increased by an average of 209,000 per month, compared to the trailing six-month average of 246,000. Overall, the March jobs report points to ongoing strength in the labor market.

5 YOY( %) Change YOY( %) Change 4 Inflation 3.0% 2.5% 2.0% Consumer Price Index (CPI) CPI YOY % Change Core CPI YOY % Change 3.0% 2.5% 2.0% Personal Consumption Expenditures (PCE) PCE Price Deflator YOY % Change PCE Core Deflator YOY % Change 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% -0.5% -0.5% Source: US Department of Labor Source: US Department of Labor Inflation pressures remain contained for now. The Consumer Price Index (CPI) was up just 0.9% year-over-year in March, vs. 1.0% in February. Core CPI (CPI less food and energy) was up just 2.2% year-over-year in March, vs. 2.3% in February. The Personal Consumption Expenditures (PCE) index was up 1.0% year-over-year in February, vs. up 1.3% in January. Core PCE (excluding food and energy) was up 1.7% year-over-year in February, unchanged from January. PCE remains below the Fed s 2.0% target.

6 YOY (%) Change Index Level 5 Consumer 6.0% 5.0% Retail Sales YOY % Change Consumer Confidence 4.0% % 2.0% 1.0% 0.0% Source: US Department of Commerce Source: Federal Reserve Retail sales trends remain underwhelming. On a year-over-year basis, retail sales were only up 1.7% in March, down from 3.7% in February. Excluding gas, retail sales were up 3.3% in March, down from 5.4% in February. Retail sales decline 0.3% on a month-overmonth basis in March, below expectations for a 0.1% increase. Meanwhile, the consumer confidence index increased to 96.2 in March from 94.0 in February. We believe ongoing improvement in the labor market and low gas prices should eventually provide a tailwind to consumer spending.

7 MOM ( %) Change 3 Month Average 6 Economic Activity 1.2% Leading Economic Indicators (LEI) 0.50 Chicago Fed National Activity Index (CFNAI) 1.0% % % 0.4% 0.2% 0.0% -0.2% -0.4% Source: The Conference Board Source: Federal Reserve Bank of Chicago The index of Leading Economic Indicators (LEI) rose 0.1% in February, following a 0.2% decline in January. On a year-over-year basis, the LEI was up 2.3% in February vs. up 2.1% in January. The index points to modest economic growth with little chance of an economic downturn in the near-term. The Chicago Fed National Activity Index (CFNAI) 3-month moving average improved to in February from in January. Overall, this index is indicative of below-average economic activity. A reading below on a 3-month moving average basis has historically corresponded with the onset of a recession; fortunately the CFNAI remains safely above that level.

8 7 Housing Sector Data The housing bubble of was a major contributor to the Great Recession. The housing sector struggled during the initial stages of a tepid recovery, but has experienced recent gains. The volume of home sales are closely linked to mortgage lending rates, job growth and consumer confidence.

9 MOM Change (In Thusands of Units) YOY( %) Change 8 Housing Muli Family Housing Starts Single Family Housing Starts Housing Starts 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% S&P/CaseShiller 20 City Composite Home Price Index Source: US Census Bureau Source: S&P Total housing starts rose 5.2% on a month-over-month basis in February, exceeding expectations. Single-family housing starts grew 7.2% while multi-family starts rose 0.8%. Housing starts tend to be volatile on a month-to-month basis, but the underlying trend is solid with total housing starts up 30.9% on a year-over-year basis. Overall, we believe housing market trends remain healthy. Meanwhile, home pricing has remained firm. According to the Case-Shiller 20-City home price index, home prices remained up 5.7% year-overyear in January.

10 9 The ISM Survey (Formerly NAPM) A leading indicator released on the first business day of the new month. Survey of national purchasing managers gives us a good indication of the health of manufacturing sector. Composite index above 50 indicates expansion, below 50 indicates contraction. Historically, as ISM approaches 60, investors worry about a overheating economy. A slide toward 40 signals recession.

11 Rate (%) 10 Manufacturing Institute of Supply Management Purchasing Manager Index Expanding Contracting 80.0% 79.5% 79.0% 78.5% 78.0% 77.5% 77.0% 76.5% 76.0% 75.5% 75.0% 74.5% 74.0% Capacity Utilization Source: Institute for Supply Management Source: Federal Reserve The Institute for Supply Management (ISM) manufacturing index rose to 51.8 in March from 49.5 in February, which puts the index above the 50.0 breakeven level for the first time since last fall. The ISM new orders index surged roughly 7 points to 58.3 in March. Overall, the ISM manufacturing report suggests that trends in the manufacturing sector are improving. Notably, a reading above 43.1 over a period of time is generally indicative of overall economic expansion, based on the historical relationship between the index and GDP growth. Meanwhile, capacity utilization, which is production divided by capacity, declined to 74.8% in March from 75.3% in February. The capacity utilization rate is much lower than the long-run average of 80.0% ( ), suggesting there is still excess capacity in the industrial sector.

12 11 GDP Statistical Data The most common indicator of economic growth measures the change in value of all final goods and services produced in the U.S. Two consecutive quarters of negative GDP indicates recession. GDP averaged +3.2% from 1947 to 2015, although the -5.1% contraction rate during the Great Recession was the worst in seven decades. GDP has yet to reach +2.5% in any single year during the 7-year recovery cycle, despite massive stimulus. From , real GDP increased by at an annual rate of +2.1%. Lagging indicator Source: U.S. Department of Commerce, Bureau of Economic Analysis

13 12 Gross Domestic Product (GDP) Components of GDP 3/15 6/15 9/15 12/15 Gross Domestic Product (GDP) 5.0% Personal Consumption Expenditures 1.2% 2.4% 2.0% 1.7% 4.0% Gross Private Domestic Investment 1.4% 0.9% -0.1% -0.2% 3.0% Net Exports and Imports -1.9% 0.2% -0.3% -0.1% 2.0% 1.0% Federal Government Expenditures 0.1% 0.0% 0.0% 0.2% 0.0% State and Local (Consumption and Gross Investment) -0.1% 0.5% 0.3% -0.1% -1.0% -2.0% GDP QOQ % Change GDP YOY % Change Total 0.7% 3.9% 2.0% 1.4% Source: US Department of Commerce Source: US Department of Commerce Fourth quarter GDP growth was revised up again to 1.4% from the second estimate of 1.0%. The initial estimate was 0.7%. A boost to personal consumption expenditures was the primary source of the most recent upward revision. Market participants are forecasting GDP growth of about 1.2% in the first quarter of 2016.

14 13 Incorporating Economic Data into Investment Strategy Watch for trends in the data, and how the market reacts to data releases Weigh current yields against future expectations to assist in determining optimal portfolio structure. Irrespective of your interest rate outlook, stay disciplined and avoid significant inconsistencies with your portfolio s assigned benchmark. Investors can t consistently beat the market through economic data analysis Diversify by maturity date

15 Yield (%) Yield (%) 14 Bond Yields 3.0% 2.5% US Treasury Note Yields 2-Year 5-Year 10-Year 3.5% 3.0% US Treasury Yield Curve Mar-16 Dec-15 Mar % 2.5% 1.5% 1.0% 0.5% 0.0% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Bloomberg Source: Bloomberg During the first quarter, the yield curve flattened with the 2-year Treasury yield down about 33 basis points and the 10-year Treasury yield down about 50 basis points. Over much of the past year, financial market volatility has been elevated due to weak global economic growth, declining commodity prices, and divergent global central bank monetary policy. These concerns will likely continue to fuel financial market volatility over the medium-term.

16 15 Disclosures The information herein is provided for informational purposes only and should not be construed as a recommendation of any security, strategy or investment product, nor an offer or solicitation for the purchase or sale of any financial instrument. References to investment indices are for informational purposes and do not imply that managing portfolios to those styles will achieve comparable returns. Indices do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not indicative of future results. Any forecasts, forward-looking statements and assumptions are inherently limited and should not be relied upon as an indicator of future results. Any opinions and views constitute judgments made by the author at the date of this presentation and may become outdated or superseded at any time without notice. Any statements concerning financial market trends are based on current market conditions, which will fluctuate. Economic factors, market conditions and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. The data contained in this presentation is the property of those providers, which were obtained from sources believed to be reliable, but are subject to change at any time at the provider s discretion. Fixed income investments are subject to interest, credit and market risk. Interest rate risk: the value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market in general could decline due to economic conditions, especially during periods of rising interest rates.

California Association of Joint Powers Authorities

California Association of Joint Powers Authorities Economic Update April 27, 2017 Scott Prickett, CTP EVP, Portfolio Strategist CHANDLER ASSET MANAGEMENT info@chandlerasset.com chandlerasset.com 800.317.4747