Economic Update: Fed Delay Bought Calm. But is it Calm Enough to Hike Rates? May 2016 2016 AAM Investment Conference Chris Low FTN Financial Chief Economist
Executive Summary 1 FOMC recognizes global inflation influence FOMC signaled slower pace of tightening Same growth, same inflation Which way is next surprise? Inflation debate is key, though was eclipsed by new internationalism. Disclaimer is on the last page of this presentation.
The Backdrop: Global Turmoil
The Trade-Weighted Dollar 3 100 95 90 Trade-Weighted US Dollar Major Currencies Index Index 1973=100 85 80 75 70 65 2010 2011 2012 2013 2014 2015 2016 Source: Federal Reserve
Global Winners and Losers 4 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 Dollar strong Fed hikes. Dollar Rises. Yuan and EM currencies rise, too. Euro and yen sink. Japan and EU exports and manufacturing rise. Their economies outperform. US, China and EM exports and manufacturing stumble. Their stock markets sink. Fed on hold. Source: FTN Financial
Global Winners and Losers 5 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 Dollar strong Fed hikes. Dollar Rises. Yuan and EM currencies rise, too. Euro and yen sink. Japan and EU exports and manufacturing rise. Their economies outperform. US, China and EM exports and manufacturing stumble. Their stock markets sink. Fed on hold. Dollar weak Fed on hold. Euro and Yen rise. Dollar drops. Yuan and EMs weaken, too. EU and Japan GDP US, China and EM GDP Source: FTN Financial
Stocks Fell $16tn From June to Feb 6 $75.0tn World Equity Market Capitalization $70.0tn $65.0tn $60.0tn $55.0tn Bloomberg World Exchange Market Capitalization USD $50.0tn 2013 2014 2015 2016 Source: Bloomberg
Market Tightened for the Fed 7 950bp 850bp Option Adjusted Spread (weighted by market value) of the US Dollar High Yield All Cash Bonds sector 750bp 650bp 550bp 450bp 350bp 250bp 2012 2013 2014 2015 2016 Source: Bloomberg
China Debt Surged Post Crisis 8 210% 190% 170% 150% 130% 110% 90% 70% China Private non-financial sector debt as % of GDP Private non-financial sector debt as % of GDP 50% 1985 1990 1995 2000 2005 2010 Source: Bank for International Settlements
World Trade Less than 08 Peak 9 $1,900bn $1,700bn $1,500bn $1,300bn $1,100bn $900bn $700bn $500bn $300bn IMF World Exports FOB Billions USD $100bn 2000 2005 2010 2015 Source: International Monetary Fund
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2012 2013 2014 2015 2016 Source: Baker Hughes, Bloomberg The Economy: Stumble in Q4 Rig Count US, oil & gas
Growth in 2016: Modest Slowdown 11 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% GDP Forecast With Sector Contributions -2.0% -3.0% Consumption Res Investment Bus. Fixed Invest Inventories Net exports Government GDP Final Sales Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Source: Bureau of Economic Analysis and FTN Financial
Consumption: Slowed to 2% 12 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Personal Consumption 3m/3m % annualized Nominal consumption Real consumption -1.0% Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15 Jan '16 Source: Bureau of Economic Analysis
13 Weak Profits Mean Weak Markets
14 Threaten Investment & Employment
Car Sales Peaked in October 15 30.0% 20.0% 10.0% 0.0% -10.0% Total Light Vehicle Sales, SAAR (right) Car Sales, YoY% (left) Truck Sales, YoY% (left) 19.0m 18.0m 17.0m 16.0m 15.0m 14.0m 13.0m 12.0m 11.0m -20.0% 2012 2013 2014 2015 2016 Source: Autodata Corporation 10.0m
16 Employment too Strong? Not lately.
If it weren t for global factors, we d hike sooner. -John Williams, Mar 21 Fed: Normalization Underway
Divided Mandate 18 Jobs: Full employment half the dual mandate. Fed s full employment estimate hit in August. Inflation: The other half of the mandate. Outlook uncertain.
The Internationalist FOMC 19 District President Start Date Background Richmond Jeffrey Lacker 8/1/04 Professor Atlanta Dennis Lockhart 3/1/07 Professor, private equity manager, banker Cleveland Loretta Mester 6/1/07 Career Fed economist, professor Boston Eric Rosengren 7/23/07 Career Fed supervisor and regulator Chicago Charles Evans 9/1/07 Career Fed economist St. Louis James Bullard 4/1/08 Career Fed economist New York Bill Dudley 1/27/09 Head of NY Fed markets group, former Chief Economist Goldman Sachs San Francisco John Williams 3/1/11 Career Fed economist, took leave from Fed to serve as CEA Senior Economist during the Clinton Administration Kansas City Esther George 10/1/11 Career in Fed supervision and risk management Philadelphia Patrick Harker 7/1/15 University of Delaware president and professor. Goldman trustee. Dallas Robert Kaplan 9/8/15 Author, asset manager, Harvard Business School professor and Sr. Associate Dean. Former Vice Chair, Goldman Sachs. Minneapolis Neel Kashkari 1/1/16 Ran for governor of CA, former MD at PIMCO. Ran TARP program for Obama's Treasury Department. Started career at Goldman Sachs.
Secular Stagnation? 20 $10,000Bn Households and Nonprofit Debt (SA, Bil.$) The end of a 5-decade credit boom Log scale $1,000Bn Slower credit growth = lower inflation $100Bn 1960 1970 1980 1990 2000 2010 Source: Federal Reserve Board
Credit Stagnation Is Global 21 25.0% 20.0% Outstanding Total Private Non-financial Sector Credit Growth Developed and Major Emerging Economies, Yr/Yr% 15.0% 10.0% 5.0% 0.0% -5.0% Yr/Yr% -10.0% 2000 2002 2004 2006 2008 2010 2012 2014 Source: Bank for International Settlements
Credit Accelerating in US Only 22 48.0% 40.0% 32.0% 24.0% 16.0% 8.0% 0.0% -8.0% -16.0% -24.0% Outstanding Total Private Non-financial Sector Credit Growth Yr/Yr% 2010 2012 2014 Source: Bank for International Settlements China US Euro Area Japan
Inflation Rising? 23 3.5% 3.0% 2.5% Core CPI, Yr/Yr% Core PCE Deflator, Yr/Yr% 2.0% 1.5% 1.0% 0.5% 0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bureau of Economic Analysis & Bureau of Labor Statistics
24 Yr/Yr Price Changes: 165 CPI Components
Inflation Will Settle at 1.0-1.5% 25 5.00% 4.00% 3.00% PCE, Yr.Yr% Core PCE, Yr/Yr% Fed Core PCE Forecast, Yr/Yr% 2.00% 1.00% 0.00% -1.00% -2.00% 2006 2008 2010 2012 2014 2016 2018 Source: Federal Reserve, FTN Financial, Bureau of Economic Analysis
26 Market Inflation Expectations Extraordinarily Low 2.75% 2.50% 5-yr Forward 5-yr Breakeven 2.25% 2.00% 1.75% 1.50% 1.25% Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15 Jan '16 Apr '16 Source: Bloomberg
27 Consumer Inflation Expectations Well Anchored, But Slipping 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% U Mich Long-Term Inflation Expectations 2.00% 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: University of Michigan
Market Doubts Fed Policy Conviction 28 4.00% 3.50% 3.00% 2.50% Tightening implied by FOMC forecasts - Mar 2016 Fed funds futures 5/6/16 FOMC dotplot year-end medians. 2.00% 1.50% 1.00% 0.50% 0.00% May '16 Nov '16 May '17 Nov '17 May '18 Nov '18 Source: Federal Reserve, Bloomberg & FTN Financial
Conclusions 29 Inflation is higher, but unlikely to rise much more. World is deleveraging. Best evidence of secular slowdown. Global core inflation still low, suggesting US core is overstated. Strong $ hurts EMs, weak $ hurts EU & Japan. Yellen concerned recent core inflation increases won t stick. Core PCE and neutral rate likely to guide policy pace.
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