Economic Outlook In the Shoes of an FOMC Member This material must be read in conjunction with the disclosure statement. 9 April 2018 PRESENTED BY: MARKUS SCHOMER Chief Economist PineBridge Investments The 2017 FOMC Line-up: No Hawks among the voters PAGE 1 Voting Members PAGE 1 Source: Reuters, as of 9 March 2018 1
The 2018 FOMC Line-up: A More Hawkish Team PAGE 2 Voting Members PAGE 2 Source: Reuters, as of 9 March 2018 The Bigger Picture: US in another growth mini-cycle US Real GDP Growth 6 Forecast Range PAGE 3 5 Quarterly Annualized GDP Growth Rate 4 change from previous period, in % 3 2 1 0-1 Annual GDP Growth Rate Average GDP growth rate since 2010 PAGE 3-2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2
The Bigger Picture: Output Gap Looks Late Cycle PAGE 4 Output Gap has closed Weak Productivity Growth Output per Hour (with HP Trend) US Output Gap (CBO measure) Persistent High Profit Share Wages / GDP No rebound in Household Leverage Government Debt / GDP Household Debt / GDP Non-fin. Corp. Debt / GDP Corporate Profits / GDP PAGE 4 The Dual Mandate I: Full Employment Achieved US Unemployment Rate & Non-Farm Payrolls PAGE 5 Nonfarm Payrolls (12-month Mov. Avg.) (Right Axis) Non-inflationary Rate of Unemployment (CBO) (Left Axis) Unemployment Rate (U3) (Left Axis) Fed s forecast of the long-term sustainable Unemployment Rate PAGE 5 3
The Dual Mandate I: Solid Jobs Market Fundamentals PAGE 6 Number of Job Openings still rising Part-time Employment still falling JOLTS Job Openings Part-time workers for economic reasons Number of Voluntary Job Leavers still rising Labor Force Participation Rate has stabilized Job Leavers ( Quits Rate ) Layoffs Labor Force Participation Rate PAGE 6 PAGE 7 The Dual Mandate II: Inflation Has Normalized US Headline and Core CPI Inflation Rates CPI All Items Fed s Inflation Target CPI Core PAGE 7 4
The Dual Mandate II: Wage Growth Remains Subdued US Wage Growth Measures PAGE 8 Atlanta Wage Growth Tracker Average Hourly Earnings Growth Employment Cost Index PAGE 8 PAGE 9 Fiscal Policy: Why was US growth so disappointing? US GDP Growth vs Growth in Private Domestic Demand Private Domestic Demand Growth = Consumption + Housing + Investment 3% average Private Domestic Demand Growth Private Domestic Demand Growth Overall GDP Growth 2.1% average Overall GDP Growth PAGE 9 5
Fiscal Policy: Ill-Timed Stimulus Worsens Debt Crisis PAGE 10 US Debt Forecasts looked bad before Tax Reform This Time Is Different? Fiscal stimulus typically used as a buffer in downturns Deficit/GDP Unemployment Rate Debt/GDP Deficit/GDP PAGE 10 Trump Bump: De-regulation has boosted Sentiment PAGE 11 Trump Bump: Small Business Sentiment showed surge in optimism NFIB Index Trump Bump: Small businesses are less worried about taxes and regulation Biggest Problem: Taxes ISM Manufacturing Index Biggest Problem: Quality of Labor Biggest Problem: Red Tape PAGE 11 6
The New Focus on Trade: Deficits are a Problem Deteriorating Total US Trade Balance despite improving US Petroleum Balance PAGE 12 Petroleum Trade Balance US Trade Surplus: Hong Kong ($23B) Netherlands ($22B) Singapore ($15.3B) UAE ($14.7B) Australia ($14.4B) Belgium ($13.5B) UK ($7.8B) (annual data, 2017) US Trade Deficits: China ($351B) Mexico ($108B) Germany ($66B) Canada ($64B) Japan ($62.7B) Vietnam ($39.2B) Italy ($33B) (annual data, 2017) Total Trade Balance (Goods & Services) PAGE 12 The Global Picture: Strong Developed World Growth Developed Markets PMI Manufacturing Indices show synchronized rebound PAGE 13 60 Eurozone US (2 Index Avg.) Manufacturing PMI 56 52 UK Japan 48 44 2012 2013 2014 2015 2016 2017 2018 PAGE 13 7
The Global Picture: Emerging Markets still lagging Emerging Markets PMI Manufacturing Indices show lack of synchronization PAGE 14 60 Manufacturing PMI 55 50 Brazil India China Russia 45 40 2012 2013 2014 2015 2016 2017 2018 PAGE 14 The Global Picture: Europe still facing low inflation Unemployment Rate is close to NAIRU, CPI inflation still well below ECB target PAGE 15 Unemployment Rate CPI Inflation PAGE 15 8
PAGE 16 The Global Picture: Is China about to slow? Annual GDP Growth has stabilized, Activity Indices show slowing growth momentum Real GDP Growth Li Keqiang Index PAGE 16 PAGE 17 The Global Picture: EM vs DM all about inflation 7 Global Inflation Trends - Developed Markets vs Emerging Markets 6 5 year/year, in % 4 3 Emerging Markets Global 2 Developed World 1 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 PAGE 17 9
8/ 18/2 016 3/ 6/20 17 9/ 22/2 017 4/ 10/2 018 10 /27 /201 8 5/ 15/2 019 12 /1/2 019 6/ 18/2 020 1/ 4/20 21 7/ 23/2 021 2/ 8/20 22 4/9/2018 US Monetary Policy Outlook US Federal Reserve Nominal and Real Policy Rates PAGE 18 Nominal Policy Rates (Fed Funds Target Range) Real Policy Rates PAGE 18 US Monetary Policy Outlook FOMC s infamous Dot-Plot indicates 7 more rate hikes in the next 2.5 years(!) PAGE 19 4 End of Year Policy Rates, in % 3 2 1 Mar 18 Dot Plot Dec 17 Dot Plot 0 Median: 2.125% (unch.) Median: 2.875% (+0.19) Median: 3.375% (+0.31) Median: 2.875% (+0.125) 2017 2018 2019 2020 Longer-Run PAGE 19 10
US Monetary Policy Outlook What is Priced In? - Cumulative probability of Fed rate hike scenarios (Bloomberg) 100 PAGE 20 Higher probability of rate hikes Implied Probability, in % 75 50 25 1 or more rate hikes by Jun 18 2 or more rate hikes by Sep 18 3 or more rate hikes by Dec 18 Lower probability of rate hikes 0 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 PAGE 20 Outlook for Bond Yields Upside for 10-year Yields limited, Yield Curve expected to flatten more PAGE 21 UST 30-year UST 10-year UST 30-year UST 10-year UST 5-year UST 2-year UST 5-year UST 2-year PAGE 21 11
Key US Macro Themes PAGE 22 US in the middle of investment-driven growth acceleration Expect growth acceleration to peak this year and growth to slow back to previous trend Ill-timed Fiscal Stimulus threatens to exacerbate US public debt trajectory Federal Reserve is feeling more confident in rate hike cycle Ineffective US economic policy as Treasury used future tax payer money to stimulate growth, while Federal Reserve is raising rates to offset that stimulus Inflation upside capped as long as wage growth remains moderate US economy is increasingly hitting supply constraints a employment trend slows Lack of wage growth acceleration means slowing employment trend will cap upside for consumer spending Renewed slowdown in 2019 and 2020 key to prevent sharper increase in Treasury yields PAGE 22 Global Economic Outlook Europe PAGE 23 North America 2018 (e) 2.5% 2019 (e) 2.2% 2018 (e) 2.7% 2019 (e) 2.6% Asia Latin America 2018 (e) 1.9% 2019 (e) 2.5% 2017 (e) 2.5% 2018 (e) 2.8% 2018 (e) 5.5% Middle East/Africa 2019 (e) 5.5% Faster growth expected Neutral growth expected Slower growth expected Global GDP Growth: 2018 (e): 3.8% 2019 (e): 3.7% PAGE 23 12
PAGE 24 Questions PAGE 24 13