calpers trust level review · calpers trust level review economic and market overview period ending...
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CalPERS Trust Level ReviewEconomic and Market Overview
Period Ending December 31, 2018
John Rothfield, Investment Director
Lauren Rosborough Watt, Investment Manager
Investment Committee
February 19, 2019
Item 7b, Attachment 1, Page 1 of 58
2
Trending
Positive Same Trend Negative
- US jobs market - US leverage - Soft US housing and credit, no capex uplift
18: labor supply kept up with strong demand. Less
involuntary part time and more quitting for better jobs.
US non financial debt is stable at ~ 250%/GDP, right
through the expansionDip in US housing, mortgage and other credit markets,
and no acceleration of aggregate business capex.
- US GDP growth accelerated - External imbalances - Maturing business cycles meet demographics
3.1%E during '18 vs expansion averaged of 2.2%, on
fiscal and global impulses.
Stable US external deficit (2 to 2.5%/GDP) broadly
matched by combined surplus of Euro area, Japan and
China.
US, Japan reaching expansion records. Demogrpahics
worsening in Japan, China, Europe.
- Improved supply side - World Trade, PMIs etc
2018 labor force +217K per month. In first 3 qtrs of '18,
hours worked and productivity combined +3.8% saar.World trade pre-tariff boost followed by sharp drop
away; so have PMIs, truck tonnage etc.
- US consumer: spending, cushion, sentiment - US debt trajectory and ceiling
Stable at 5% growth, with only small drop in savings
ratio. Lower personal taxes gave one-time support.Going into '20 election year, resolution of debt ceiling
and mini fiscal cliff will be difficult.
- Small businesses remain determined to build - QEnd
To expand and hire … despite difficulties in finding
qualified workers.QE unwind meets stil l rising debt, esp. in EM and some
DM markets ($bloc, Scandi housing, US businesses).
- Resilient US corporate earnings and sales - Negative sum game trade wars
2018 saw +5% sales, +8% profits S&P500 ex Fin/Energy.
Not too far below 8%/12% during 2017.Significant misunderstanding of trade imbalance
drivers ignites policies where everybody loses.
State and Local - Heightened Political Uncertainty
7 year high in state revenue growth supported improved
S&L construction and hiring.Nationalism and bloc realignments create uncertainty
that bleeds into the economic sphere.
Positives tend to be more backward looking
Item 7b, Attachment 1, Page 2 of 58
3
2018 was a good year for the US2
.2 2.4
5.1 5
.9
-0.6 -0.4
0.2
3.0
2.8
6.7
-2.8
2.4
-0.5
0.3
-6
-4
-2
0
2
4
6
8
10
Tota
l GD
P
Cons
umer
Cap
ex
Ho
usi
ng
Gov
t
Fo
reig
n t
rad
e
Inve
nto
ries
US Economic Growth During This Expansion
1st 8 1/2 yrs
2018E
% yoy
US GDP grew by an estimated 3.1% during 2018, vs the expansion average of 2.2%.
The chart above shows the contributions to what is expected to be a temporary uptick in growth.
Consumer – one-time impact from lower personal taxes but
possible bleed into 2019.
Capex – acceleration has been underwhelming.
Housing – reasons for its smaller role in this cycle.
Government – S&L/ defense lead the way and has
momentum into 2019 (TCJA17 then BBA18).
Foreign trade – a drag due to desynchronized growth and
pre-tariff goods flows.
Item 7b, Attachment 1, Page 3 of 58
4
“So What” for Markets
-10
-5
0
5
10
15
20
25
30
35
1.0
1.5
2.0
2.5
3.0
3.5
10 11 12 13 14 15 16 17 18
Growth and Markets Don't Always Align
US GDP growth, lhs S&P500 YoY, rhs
Why?
Crowding Out
CB takes away the Punchbowl
Markets are forward looking
Don’t forget Rest of World
“High-pressure” growth could
compress business cycle
Item 7b, Attachment 1, Page 4 of 58
5
Demand vs Supply.
‘Sugar high’ vs ‘Tax Reform’.
2018 was a good year for supply side.
Watch …
1. Labor force participation;
2. Productivity;
3. Fed “flexibility”.
Topic: Have Administration policies
compressed or extended the US expansion?
Item 7b, Attachment 1, Page 5 of 58
6
Participation by males continues to lag
Adjusted for demographics, upside in
US labor force may be limited
(a) Labor force participation
57
58
59
60
61
62
63
64
65
66
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
US Employed to Population
actual
without aging
%
69
71
73
75
77
79
87
88
89
90
91
92
93
94
95
96
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Labor Force Participation Rates - 25-34 year olds
men, lhs women, rhs
56
57
58
59
60
61
62
78
79
80
81
82
83
84
85
86
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Labor Force Participation Rates - Latino
men, lhs
women, rhs
Trump
Item 7b, Attachment 1, Page 6 of 58
7
(b) Productivity
-1%
0%
1%
2%
3%
4%
5%
6%
7%
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
US Productivity Growth
2.02.3 2.6
1.1
% yoy
The current economic expansion is
characterized by low measured
productivity growth.
It’s possible
that past
capex
improvement
will deliver a
productivity
boost
0
2
4
6
8
10
12
0.5
1.5
2.5
3.5
4.5
85 88 91 94 97 00 03 06 09 12 15 18 21
US: Capex vs Productivity
productivity, lhs business capex lead 5yrs, rhs
% ch. 5yr saar % ch. 5yr saar
-10%
-5%
0%
5%
10%
15%
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Productivity in US Manufacturing
recessions
Productivity
Early stage of
manufacturing
rebound has
been hiring
new workers.
Item 7b, Attachment 1, Page 7 of 58
8
(c) Fed flexibility
-6
-4
-2
0
2
4
6
8
10
93 95 97 99 01 03 05 07 09 11 13 15 17 19
Fed Funds Target Vs Nominal GDP
Nominal GDP
Fed Funds
Greenspan’s Fed was able to cut rates
twice during the 1990s tightening cycle
in both ‘95 and ‘98
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
10 11 12 13 14 15 16 17 18 19
US CPI Inflation
Actual JR Model Barclays Natwest
projected
Dec'18 = 1.9%
Benign inflation, if realized, would help
Fed’s flexibility on rates
Item 7b, Attachment 1, Page 8 of 58
9
Wage inflation unlikely to ‘alarm’ Fed
52%
53%
54%
55%
56%
57%
58%
59%
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
US: Employee Compensation as GDP Share
grey areas are recessions
Wages growth in the economy is finally accelerating as the jobs market tightens.
That said, employee income as a share of the economy is still very low
1.5
2.0
2.5
3.0
3.5
1 2 3 4 5 6 7 8 9 10
ho
url
y ea
rnin
gs %
yo
y
persons available per job offer
Hourly Earnings vs Available Persons Per Job Offer- during current expansion
Jan'19
Item 7b, Attachment 1, Page 9 of 58
10
Challenging backdrop for economies/ markets
Ageing business cycles
• US expansion is within months of a record 10 years.
• Japan’s expansion just reached post-WW2 record 74 months.
• Euro Area’s expansion is a relatively short six years to date. But the current
slowdown is not in the PIGS, but the Big 3. Europe can no longer rely on US
growth as a catalyst for its own growth.
• China growth slowdown appears deeper than the official data show.
• There is less runway for policy calibration
Trade engagement, US debt trajectory and pockets of leverage concern, QEnd
policy errors, and European populism.
Item 7b, Attachment 1, Page 10 of 58
11
Challenge: Ageing Business Cycles
Labor Market Early Late %
Want A Job per Job Offer 98%
Unemployment Rate 95%
Smal l Bus iness Hard to Fi l l 100%
KC Fed Labor Market Conditions 12%
Emp/Pop ex aging 83%
Activi ty Early Late %
National Activi ty Index 34%
Personal Savings Ratio 61%
Consumer confidence 76%
Real Personal Disp. Income 35%
US Yield Curve (2yr vs 10yr) 82%
Quarterly Early Late %
Profi t share of GDP 25%
Current Account/GDP 40%
Leverage less core CPI YoY 31%
Net Worth/DI 100%
Hous ing affordabi l i ty 57%
Mid Late Recession
Chicago Fed NAI Fed tightening
Real Disp. Income Employed to Pop
Personal Savings Ratio Job Offers vs Pool
Small Business Plans Unemployment Rate
Profit share SBOI Hard to Fill
Leverage + External Consumer Confidence
Household formation Net Worth/ DI
Late-mid Output gap
Housing Affordability Yield Curve
Labor Market Conditions
Credit cycle
Plans to Buy Home
China Japan Europe
SOFT/ EASING LATE MID+
Elevated Mid Mid
Li Keqiang index Economy Watchers Credit growth
Steel output Unemployment rate Output gap
Cargo, rail, electricity BoJ Policy Consumption
Consumer confidence Late Employment
CNY TWI, SHIBOR Output gap U-rate
Decelerating Tankan Factor Ut'n ECB taper (Apr'17)
Fixed Asset Invest. ESRI Leading Index Late-mid
Exports, imports/ PMIs Cap U
Monthly flows H/H deposit growth
CPI, PPI Unemployment
M2, TSF growth Consumer Confidence
Flat to Neg. Late
Residential Markit PMIs
Car sales Bus. Limiting factors
EU ESI
United States
External Manager Business Cycle assessment
US Business Cycle assessment
Item 7b, Attachment 1, Page 11 of 58
12
Challenge: US labor market constraints
Households
see a strong
sellers
market for
their labor.
1.2
1.5
1.8
2.1
2.4
2.7
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Net "Jobs Plentiful" vs JOLT Quits Rate
Net Jobs Plentiful, LHS
JOLTS Quits Rate inverted
150
200
250
300
350
400
450
500
550
600
650
700
97 99 01 03 05 07 09 11 13 15 17 19
US' Initial Jobless Claims
weekly
4wk avg
Record low
jobless
claims
Some labor market indicators are pushing against post 1994 maximums.
Item 7b, Attachment 1, Page 12 of 58
13
Challenge: Trade wars are a US own-goal
-2
0
2
4
6
8
-6
-4
-2
0
2
4
6
8
10
12
12 13 14 15 16 17 18
US Truck Tonnage vs World Trade Growth
US truck tonnage, lhs world trade, rhs
% yoy
Boost to
US from
global
trade
faded into
year end
US
divergence
from rest of
world has
held up .. In
manufacturing
-1%
0%
1%
2%
3%
4%
5%
6%
7%
45
50
55
60
65
70
12 13 14 15 16 17 18 19
World Trade Monitor vs US Manufacturing Orders
manufacturing ISM - new orders, lhs
World Trade Monitor, rhs
% yoy
48
50
52
54
56
58
Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18
Markit Manufacturing PMIs - US vs Global
US PMI, lhs
Global PMI, rhs
% yoy
49
50
51
52
53
54
55
45
47
49
51
53
55
57
59
Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18
Markit Non Manufacturing PMIs - US vs Global
US PMI, lhs
Global PMI, rhs
% yoy
Item 7b, Attachment 1, Page 13 of 58
14
Challenge: China slowdown ….
Official data show smooth soft
landing to 6.4% but proprietary
aggregations show much slower
-5
0
5
10
15
20
25
30
35
09 10 11 12 13 14 15 16 17 18
Chinese Activity Indices
Morgan Stanley China Economic Index
Li Index
%yoy
Fiscal expansion accelerates …and more room to accelerate credit
Broad measures show pronounced slowing Policy response has been incremental
-200
-150
-100
-50
0
50
100
150
10 11 12 13 14 15 16 17 18
China Capital Flow Tracker - Bloomberg
outflow
inflowImpossible Trinity:
• Can China control capital outflows as it
pulls policy levers?
• ’14 reversal took two years
Item 7b, Attachment 1, Page 14 of 58
15
Challenge: US debt trajectory
-1700
-1500
-1300
-1100
-900
-700
-500
-300
15A 16A 17A 18 19 20 21 22 23 24 25 26 27 28 29
Post Tax Bill Projections on US Federal Deficit
CBO-Jan'17
CBO-May'18
CBO-Jan'19
Fiscal year
$bn
yr to Sep'18
yr to Sep'17
70%
75%
80%
85%
90%
95%
100%
15A 16A 17A 18 19 20 21 22 23 24 25 26 27 28 29
Latest CBO Projections on Federal Debt
CBO-Jan'17 CBO-Apr'18
CBO Jan'19
Fiscal year
%/GDP
US tax
packages (Tax
Cuts and Jobs
Act 2017 and
Bipartisan
Budget Act
2018 sharply
increased
prospective
deficits
… although
the January
2019 CBO
update
favorably
modified
future
spending on
emergencies
and debt
interest5
7
9
11
13
15
17
19
21
23
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
US Federal Debt and Ceiling
suspended ...
gross federal debt
debt limit
$trn
crisis
crisis
crisis?
-1600
-1200
-800
-400
0
400
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25
US Federal Budget Balance
$bn, 12 mo sum
Setting up
focus this
year on the
US debt
ceiling
Item 7b, Attachment 1, Page 15 of 58
16
Challenge: Central bank liquidity withdrawal
-1000
-500
0
500
1000
1500
2000
2500
09 10 11 12 13 14 15 16 17 18 19
G4 QE With Assumed Tapers
BoE ECB BoJ Fed Total
Central banks
have begun to
end QE or to
start QT
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
-20
-15
-10
-5
0
5
10
15
20
25
30
10 11 12 13 14 15 16 17 18 19
Yearly Change: Global Stocks vs QE/QT
FTSE Global All Cap, lhs
G3 CB balance, sheet, rhs
1yr change, $trn
% yoy
It may already have had some impact on global
assets pricing.
Item 7b, Attachment 1, Page 16 of 58
17
Challenge: European populismMay EU Parliament Elections
• The EU Parliament traditionally has split center-left/ center-right and
pro/anti-EU.
• The anti-EU faction has had little power and ability to maneuver.
• However, if the UK leaves the EU; France, Spain, and Italy gain seats in
the next EU Parliament.
• All three countries have non-mainstream parties that are more skeptical of
the EU-project.
• Germany, while does not gain seats, has a more anti-EU balance of power,
with AfD now the third largest party in the Bundestag
• Risk for the elections: The elections become a vote around the future to
Europe or its priorities.
Risks
If anti-populist parties gain traction:
• Parliament becomes fragmented; policies are blocked (e.g. migration and
the budget); and forward movement is curtailed.
• League of Leagues may emerge (anti-populist parties form a coalition).
Item 7b, Attachment 1, Page 17 of 58
18
Challenge: Leverage and Valuation
120%
140%
160%
180%
200%
220%
240%
260%
81 84 87 90 93 96 99 02 05 08 11 14 17
US: All Nonfinancial Debt to GDP
grey areas recessions
7 1/2 yrs
10 yrs
6 yrs
9 1/4yrs
4.5
5.0
5.5
6.0
6.5
7.0
7.5
81 84 87 90 93 96 99 02 05 08 11 14 17
Household Net Worth As Multiple of Disp. Income
6.1x (1Q00)
6.7x(1Q07)
7.0x(3Q18)
with est for 4Q18 current
6.3x(3Q15)
5.3x(3Q11)
Specialized risk
FOMC (Nov 7-8): “vulnerabilities from leverage in the
nonfinancial business sector elevated and … a pickup in
the issuance of risky debt and the continued deterioration
in underwriting standards on leveraged loans.”
Higher risk
FOMC (Nov 7-8): “vulnerabilities associated with asset
valuation pressures continued to be elevated”
Item 7b, Attachment 1, Page 18 of 58
19
Opportunities
• Each “challenge” to the global business cycle outlined earlier could either have less impact on the business
cycle than feared, or be resolved in a favorable manner.
• It’s possible that China-US trade and UK/European Union engagement over Brexit could be resolved
with short term stability in mind;
• China has plenty of levers to pull (budget, credit, property, autos etc) and its steel sector had held up
surprisingly well.
• Risk skew to the Fed’s 2.3% call on US growth is a bifurcation between a virtuous and vicious cycle.
• At one point financial markets were arguably pricing in negligible US growth this year.
• 2018 was a good year for supply siders and we should not discount that it’s possible for 2019.
• The US consumer is in good shape: the cushion of the high household savings rate, resilience of their
optimism and balance sheets. Consumers may have over-withheld last year and will like their refunds.
• Another key is central bank communication to financial markets that there is policy flexibility, should
catalysts to a growth rebound not be evident.
Item 7b, Attachment 1, Page 19 of 58
20
Scenarios
DOWNSIDE (45%) CENTRAL (40%) UPSIDE (15%)
"Valuation and pol icy ri sks" "Shaking off dis tractions" "Pos i tive Synchronici ty"
US' dis ruptive engagement threatens
global upswing and balance of
payments recycl ing.
Modest ri se in US potentia l growth
susta ins expans ion for now.
Sel f reinforcing acceleration in US
productivi ty, helping tax reform to
partly 'pay for i tsel f'.
'Vi rtuous ' cycle of ba lance sheet repair
and spending unwinds .
Momentum in global economy levels
out but does not fa l l away.
US and China real ize mutual interest in
backing off confrontation
China's ki tchen s ink approach to
s timulus fa i l s to ra l ly that economy.
China and US corporates can manage
the downs ide from trade dis ruptions .
"Free lunch" in early s tage of fi sca l
s timulus gives way to pre-election
tactica l chaos .
Wel l s ignaled (and flexible) removal of
s timulus here and abroad.
Item 7b, Attachment 1, Page 20 of 58
Macro: Supporting ChartsFebruary 2019
John Rothfield, Lauren Rosborough Watt
Investment Office
Item 7b, Attachment 1, Page 21 of 58
22
47 51 5639 40 34
2630 25
17 15 28
30
45
9
925
40
30
40
50
60
70
80
90
100
110
0
20
40
60
80
100
120
140
13 14 15 16 17 18
Jobs Growth By State, Through Year
CA+NY RUST BELT
ENERGY WTI Oil, rhs
3
5
7
9
110.75
1.50
2.25
3.00
3.75
4.50
07 08 09 10 11 12 13 14 15 16 17 18 19
Wage Growth vs Unemployment Rate
Production workers earnings - lhs
All workers
u-rate (reversed) - rhs
-20
-10
0
10
20
30
40
50
60
70
80
Mfg
Co
nst
r.
Min
ing
Fin
an
ce
Leis
ure
Re
tail
He
alth
Ed
uca
tio
n
Bu
sin
ess
Tem
p
Go
vt
Monthly Job Change by Industry
'15 '16 '17 '18 19:1
15.5%
16.5%
17.5%
18.5%
19.5%
20.5%
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
US: Part Time Employed (as % of Total Employed)
000s
US jobs market – onward and upward
Energy and
rust belt
states
outperform
Strongest
jobs
categories
includes
business
services
Shrining
pool of
those still
on
involuntary
part time
Wage
growth
starts to
catch up
with tight
labor
market
Item 7b, Attachment 1, Page 22 of 58
23
Consumer – robust spending
Consumer spending has stabilized at close to a
5% run rate
Year to …. Nov'17 Nov'18
Private Sector Wages 5.0% 4.5%
Tota l Wages 4.7% 4.2%
Proprietor Income 6.2% 5.3%
Interest Income 8.4% 3.2%
Dividends 1.9% 3.8%
Benefi ts 2.7% 5.2%
Tota l Gross Income 4.6% 4.2%
Taxes 4.5% 0.4%
Disposable Income 4.6% 4.7%
Ch. Savings Ratio -0.2 -0.2
Spending 4.9% 4.9%
US Personal Income and Outlays
-20
0
20
40
60
80
100
120
140
1601
3
5
7
9
11
06 07 08 09 10 11 12 13 14 15 16 17 18
US Personal Savings Ratio vs Confidence
Savings Ratio Consumer Confidence rhs, reversed
% of disposable income
Despite buoyant economic conditions,
consumers did not reduce their savings out of
income to the degree they did in the 00s
Item 7b, Attachment 1, Page 23 of 58
24
Consumer debt: little stress
0
2
4
6
8
10
12
14
16
06 07 08 09 10 11 12 13 14 15 16 17 18
US households: 90+ delinquency rate
HELOC student loans mortgage
auto credit card
%
Source: NY Fed
1
2
3
4
5
6
7
8
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US: Delinquency Rates on Credit Cards
large banks
small banks, rhs
%
5
10
15
20
25
30
35
40
60
65
70
75
80
85
90
95
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Household Debt as Multiple of Disposable Income
Mortgages + HELOC, lhs
other HH credit *, rhs
* mostly s tudent,
auto and credit card loans
Rebound in
non housing
related debt
only
Moderate pick
up in
delinquency
rates
50
250
450
650
850
1050
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
# of Consumers with New Foreclosures or Bankruptcies
foreclosures bankruptcies
Source: NY Fed
000s
Low levels
of failureSmall banks
seeing a spike
in credit card
delinquencies.
Item 7b, Attachment 1, Page 24 of 58
25
Consumer credit – modest deterioration
-60
-40
-20
0
20
40
60
92 94 96 98 00 02 04 06 08 10 12 14 16 18
Senior Loan Officer: Consumer Demand for Loans
All loans credit cards
auto loans Other
more demand
less demand
-40
-20
0
20
40
60
80
92 94 96 98 00 02 04 06 08 10 12 14 16 18
Senior Loan Officer: Consumer Loans - Standards
credit cards Non CC
auto loans Other
Tighter standards
easier standards
Item 7b, Attachment 1, Page 25 of 58
26
Consumer - resilient sentiment … but watch expectations
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
0
1
2
3
4
5
6
7
8
14 15 16 17 18
US: Income Expectations
US personal income growth
NY Fed survey, 1yr ahead income exp.
1
2
3
4
5
6
7
8
5
15
25
35
45
55
65
75
85
95
07 08 09 10 11 12 13 14 15 16 17 18 19 20
US NAHB Housing Sentiment vs Consumer Plans to Buy
NAHB Future Sales, lhs
Plans to Buy, lead 1yr rhs
Source: NAR
1
3
5
7
9
11
13
15
17
10
20
30
40
50
60
70
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
US: Consumer Plans to Buy Within Six Months
Major Appliances, lhs Auto, rhs
-15
-10
-5
0
5
10
15
20
25
30
35
-15
-10
-5
0
5
10
15
20
25
30
35
13 14 15 16 17 18 19
US Consumers: Expectations for Stocks in Year Ahead
net expectations for higher stocks, lhs
actual S&P500 performance, yoy%, rhs
Steady expectations for income growth
Resilient plans to buy
Jump in plans to buy a home
Stock market expectations related to past performance
-120
-100
-80
-60
-40
-20
0
20
40
60
80
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
US Consumer Confidence - Expected vs Present
grey areas recessions
Gap between present and expected sentiment is getting late cycle.
Item 7b, Attachment 1, Page 26 of 58
27
Consumer – mild political feedback loop in spite of
disruptive policies
10
20
30
40
50
60
70
80
90
10 11 12 13 14 15 16 17 18 19
Consumer Comfort By Political Affiliation
Democrats
Republicans
Trump
36
37
38
39
40
41
42
43
44
45
45
47
49
51
53
55
57
59
61
63
Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
US : Consumer Comfort vs Trump Approval
Bloomberg consumer comfort, lhs
Trump approval rate, rhs
0
20
40
60
80
100
120
140
160
10 11 12 13 14 15 16 17 18 19
Consumer Confidence by AgeUnder 35s vs Over 55s
55+
Under 35
Trump
Older cohorts have benefited most since US
Presidential election
Identified
REPUBS
feel more
comfort than
DEMS in
this cycle
Disruptive
policies
have
caused mild
reversal in
comfort
Item 7b, Attachment 1, Page 27 of 58
28
Business capex is tapering
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
40
60
80
100
120
140
160
180
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Real Private Capex - Mining Investment
yearly GDP impact %, rhs Level $bn saar
$bn saar
Mining
investment
rebound has
leveled out
Manufacturers
have so far
relied on
higher use of
existing
capacity, and
more hires
Will trade
slowdown
hit capex
orders?
-0.3%
-0.3%
-0.2%
-0.2%
-0.1%
-0.1%
0.0%
0.1%
0.1%
0.2%
0.2%
0
20
40
60
80
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Real Capex - Manufacturing Structures
GDP impact %, RHS Level $bn saar
$bn saar
-1
0
1
2
3
4
5
6
7
-15
-10
-5
0
5
10
15
14 15 16 17 18
Core Capital Goods Orders vs World Trade
core capex orders, lhs
world trade, rhs
%yoy %yoy
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
100
200
300
400
500
600
700
800
900
1000
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Real Private Capex - IT Equipment and Software
GDP impact %, RHS Level $bn saar
$bn saar
IT uplift
since
2016
Item 7b, Attachment 1, Page 28 of 58
29
Potential uplift is less than advertised
Strong
capex
intentions,
have yet
to ignite
actual
capex.
-40
-30
-20
-10
0
10
20
30
40
-30
-20
-10
0
10
20
30
40
50
99 01 03 05 07 09 11 13 15 17 19
Intended Capex* vs Actual Capex
Intended capex, lhs
Business investment,real, saar, RHS
* avg of Phi lly, KC and Richmond
4Q, 1Q est.
CEO
confidence
hit by DC
headline risk
0
50
100
150
200
250
20
30
40
50
60
70
80
90
100
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Political Uncertainty and CEO Confidence
CEO Confidence, lhs polticial uncertainty, rhs
12
17
22
27
32
37
42
47
0
4
8
12
16
20
24
28
32
36
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Small Businesses
Good time to
expand, lhs
Capex Plans, rhs
Variety of
factors
cooling off
small
business
plans
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0 08 09 10 11 12 13 14 15 1 1 18 19
1 Month Guidance Ratio
3 Month Guidance Ratio
Average Guidance Ratio
S&P 500 capex guidance ratio (# above- vs. below-consensus), as of 1/25/19
Fall-off in
capex
intentions
Item 7b, Attachment 1, Page 29 of 58
30
Corporates not unduly stressed
-100
-60
-20
20
60
91 93 95 97 99 01 03 05 07 09 11 13 15 17
Senior Loan Officer: C&I - Demand for Loans
Large/med firms
small firms
more demand
less demand
-40
0
40
80
120
91 93 95 97 99 01 03 05 07 09 11 13 15 17
Senior Loan Officer: C&I - Tightening Standards
Large/med firms
small firms
tighter standards
easier standards
Corporate
spread
widening
materially less
than 2011,
2015Commercial
and industrial
loans – softer
demand and
tighter lender
standards
0
100
200
300
400
500
600
700
800
900
1000
0
50
100
150
200
250
300
11 12 13 14 15 16 17 18 19
US Corporate Yield Spreads vs UST
Investment Grade, lhs High Yield, rhs
25%
30%
35%
40%
45%
50%
55%
81 85 89 93 97 01 05 09 13 17
US Corporate Debt to Net Worth*
grey areas are recessions
* net worth at market va lue
Corporate
debt is stable
relative to
estimated net
worth
Item 7b, Attachment 1, Page 30 of 58
31
Corporate earnings: base effect erosion was expected
Sector 4Q17 1Q18 2Q18 3Q18 4Q18 4Q17 1Q18 2Q18 3Q18 4Q18
Consumer Disc 6.2% 8.4% 8.2% 8.2% 5.0% 5.0% 11.9% 18.2% 22.7% 13.0%
Consumer Staples 4.7% 4.5% 5.0% 2.6% 2.0% 8.2% 10.0% 10.5% 9.1% 2.4%
Energy 22.1% 11.5% 20.3% 20.3% 11.2% 117% 94.2% 124.0% 114.9% 62.7%
Financia ls 3.6% 4.5% 7.0% 8.4% 1.7% 14.0% 24.5% 22.9% 38.2% 18.3%
Health Care 6.3% 7.3% 6.8% 7.1% 8.2% 7.4% 14.6% 16.3% 14.7% 10.7%
Industria ls 8.8% 10.4% 9.3% 6.8% 6.4% 5.8% 23.3% 17.8% 16.7% 18.0%
Technology 12.5% 14.8% 13.6% 10.8% 1.4% 22.3% 28.1% 30.4% 24.5% 4.9%
Materia ls 19.6% 21.3% 25.4% 10.4% 8.0% 39.8% 43.6% 49.8% 36.2% 1.6%
Real Estate 7.0% 13.9% 14.3% 13.4% 11.2% 1.1% 7.4% 5.1% 6.9% 4.5%
Telecom 3.8% 3.3% 3.5% 12.5% 12.6% 7.9% 17.0% 21.7% 29.1% 13.7%
Uti l i ties 7.4% 3.1% 0.8% 2.1% -4.1% 9.2% 18.4% 8.2% 14.0% -9.1%
S&P 500 8.3% 8.4% 9.3% 8.6% 5.5% 14.4% 22.6% 23.8% 25.9% 12.1%
ex. Fins & Energy 7.7% 8.8% 8.5% 7.4% 5.4% 12.2% 19.5% 20.5% 19.6% 8.6%
Sales YoY% Earnings YoY%
-2%
0%
2%
4%
6%
8%
10%
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
F
S&P500 Sales
SP500
SP500 ex fins and energy, rhs
2nd wind + tax cuts
$ rebound, trade etc
Peak base effect% yoy
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
F
S&P500 Earnings
SP500
SP500 ex fins and energy, rhs
2nd wind +
tax cuts
$ rebound, trade etc
Peak base effect% yoy
-800
-600
-400
-200
0
200
400
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US NF Corporate Earnings Retained Abroad
$bn, saar
Tax induced earnings
repatriation cools off
Item 7b, Attachment 1, Page 31 of 58
32
Housing playing a smaller role
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1900
2000
2100
2200
2300
2400
2500
2600
05 06 07 08 09 10 11 12 13 14 15 16 17 18
House Sq Ft Size vs Housing Contribution to GDP
GDP contribution, rhs
Median Sq Ft, lhsWe are unlikely to see again the same
kind of cyclical impacts from residential
Square
footages
have
peaked
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
US: Residential Capex Share of Real GDP
recessions
Build this
cycle has
been multi
focused
50
100
150
200
250
300
350
400
450
500
200
700
1200
1700
2200
91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
US Single vs Multi-Family Starts
Single family, lhs Multis, rhs
Item 7b, Attachment 1, Page 32 of 58
33
Housing is not a credit event this cycle
-40
-20
0
20
40
60
80
92 94 96 98 00 02 04 06 08 10 12 14 16 18
Senior Loan Officer: Mortgage Standards
All mortgages
prime
GSE eligible
tighter
easier
-100
-80
-60
-40
-20
0
20
40
60
80
100
92 94 96 98 00 02 04 06 08 10 12 14 16 18
Senior Loan Officer: Mortgage Demand
All mortgages prime
GSE eligible
higher
lower
100
1100
2100
3100
4100
5100
6100
7100
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Mortgage Refi Applications
100
150
200
250
300
350
400
450
500
550
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Mortgage Purchase Applications
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Outstanding Home Equity Revolving Lines (% of PDI)
Source: NY Fed
3
8
13
18
23
28
10 11 12 13 14 15 16 17
US: Negative Equity Homes as % of Homes w/Mortgages
Source: Core Logic
Item 7b, Attachment 1, Page 33 of 58
34
Housing – modest
“crowding out”
Higher mortgage rates have put a
dampener on home sales
-30
-20
-10
0
10
20
30-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
30Yr Mortgage Rate vs Pending Home Sales
1yr change in 30yr mortgage rate, lhs (reversed)
pending home sales, yoy, rhs
%
3
5
7
9
11
13
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Months Supply of Housing
months' supply of new homes
of existing homes
More new
homes are
on the
market but
existing
stock is still
low
2400
2800
3200
3600
4000
4400
4800
800
1200
1600
2000
2400
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
US Vacant Houses On Market
For sale, lhs
For rent, rhs
000s 000s
Vacant
house
numbers
still low
Item 7b, Attachment 1, Page 34 of 58
35
35
45
55
65
75
85
92 94 96 98 00 02 04 06 08 10 12 14 16 18
NAHB Housing Opportunity Index - National
Share of homes sold that were affordable
to median income family
Housing – affordability
National
affordability
is just
below
average
but certain
areas are
stretched
(eg SF, LA)
Spike in
plans to
buy house
0
10
20
30
40
50
60
0
10
20
30
40
50
60
92 94 96 98 00 02 04 06 08 10 12 14 16 18
NAHB Housing Opportunity Index
LA, lhs
SF, rhs
1
2
3
4
5
6
7
8
5
15
25
35
45
55
65
75
85
95
07 08 09 10 11 12 13 14 15 16 17 18 19 20
US NAHB Housing Sentiment vs Consumer Plans to Buy
NAHB Future Sales, lhs
Plans to Buy, lead 1yr rhs
Source: NAR
NAR measure affirms that affordability is much improved on the
situation in 2006
Averages
…
Median
Single
Fami ly
Mortgage
rate
Monthly
P&I
Fami ly
Income
Payment
as % of
Income
89-02 123,348 7.96 713 42,461 20.3
3Q06 225,333 6.76 1,170 58,763 23.9
1Q13 176,367 3.56 639 63,115 12.1
Nov'18 260,500 4.99 1,117 77,216 17.4
National Association of Realtors Affordabi l i ty Index
Item 7b, Attachment 1, Page 35 of 58
36
Housing - comfortable by international standards
40%
60%
80%
100%
120%
140%
160%
180%
200%
US
Japa
n
Ger
man
y
Fran
ce
Ital
y
Spai
n
Irel
and
UK
Can
ada
Au
stra
lia NZ
Swed
en
No
rway
Dallas Fed: House Price/Disposable Income
Sep-18
vs range since 1990
Source: Dallas Fed
50
60
70
80
90
100
110
120
130
140
150
CA
N
NZL
CO
L
SWE
LUX
ISL
ISR
TU
R
ME
X
LVA
DEU
NO
R
SVK
CH
E
AU
S
AU
T
JPN
CH
L
HU
N
GB
R
CZE
USA
DN
K
BE
L
PR
T
IRL
ZAF
FRA
SVN
KO
R
PO
L
NLD FIN
ESP
GR
C
ITA
LTU
EST
RU
S
IMF: House Price to Rents
50
60
70
80
90
100
110
120
130
140
150
NZL
AU
T
LUX
CA
N
SWE
AU
S
CH
E
CH
L
DEU PR
T
EST
USA IR
L
GB
R
NO
R
CZE
BE
L
JPN
LVA
DN
K
SVK
FRA
FIN
HU
N
NLD
SVN
LTU
KO
R
GR
C
ESP ITA
PO
L
IMF: House Price to Income
Item 7b, Attachment 1, Page 36 of 58
37
Housing formation is still on an improving trend
-4
0
4
8
12
16
94 96 98 00 02 04 06 08 10 12 14 16 18
Cumulative Households by Type
Owner households
Renter households
1994-2006
2006-current
mi l lions, cum. change
… and within
the total,
owner
households
cohort has
improved
Overall
household
formation
has improved
47
48
49
50
51
52
53
54
77
78
79
80
81
82
83
84
85
86
94 96 98 00 02 04 06 08 10 12 14 16 18
Home Ownership Rate By Income
Above median
income, LHSBelow median
income, RHS
Ownership
rate most
improved for
below
median
income
earners
0.0
0.5
1.0
1.5
2.0
2.5
3.0
U35 35-44 55-64 65+ 45-54
By age cohort
Rebound in Home Ownership Rate Since Mid 2016
…. and for
young age
cohorts
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
US Occupied Housing Units
3mma, yoy%
Item 7b, Attachment 1, Page 37 of 58
38
-2
-1
0
1
2
3
4
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Hutchins Center Fiscal Impact
% saar
3Q18 = 0.55%
17.2
17.4
17.6
17.8
18.0
18.2
18.4
18.6
18.8
Jun-15 Jun-16 Jun-17 Jun-18
US Real GDP
Actual
trend in first 8 years
Actual ex fiscal impulse
$trn
Fiscal explains at least ½ growth acceleration in 2018
2019 should be similar fiscal
impulse to 2018, because of likely
spike in tax refunds.
Real fiscal cliff is in 2020.
Item 7b, Attachment 1, Page 38 of 58
39
State Governments’
improved positions
Source: Pew Charitable Trusts
Change in Tax Revenue From Each State’s Peak Quarter, Adjusted for Inflation
Item 7b, Attachment 1, Page 39 of 58
40
Government - spending
18.6
18.8
19.0
19.2
19.4
19.6
19.8
20.0
220
240
260
280
300
06 07 08 09 10 11 12 13 14 15 16 17 18 19
State and Local Government Activity
S&L construction, lhs
S&L jobs, rhs
$bn millions
-40
-30
-20
-10
0
10
20
30
40
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
US Federal Defense Outlays
%yoy
Public spending has been increasing for defense and at state and local level.
Item 7b, Attachment 1, Page 40 of 58
41
Foreign Trade
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
US: Current Account vs Saving "Shortfall"
Saving less Investment
Current Account
%/GDP
Exports will
get
temporary
relief from
strong
shipments of
soybeans etc
ahead of
retaliatory
tariffs.
Ultimately the
external
imbalance
reflects the US
savings-
investment
gap.
$bn Total Canada Mexico Japan Korea China Germany UK Other EU OPEC
2001 -362 -48 -26 -55 -12 -81 -31 2 -29 -34
2002 -419 -44 -33 -57 -12 -102 -40 -2 -32 -31
2003 -494 -47 -37 -54 -12 -123 -43 -4 -39 -50
2004 -610 -61 -42 -61 -18 -162 -50 -1 -45 -70
2005 -714 -72 -45 -67 -13 -201 -54 -2 -52 -90
2006 -762 -61 -59 -76 -10 -234 -55 2 -52 -100
2007 -705 -53 -69 -72 -9 -257 -51 11 -40 -119
2008 -709 -61 -59 -60 -7 -263 -50 9 -18 -169
2009 -384 -3 -42 -28 -5 -220 -32 10 -1 -52
2010 -495 -6 -58 -43 -4 -261 -39 9 -16 -86
2011 -550 -11 -57 -45 -5 -279 -53 15 -20 -114
2012 -537 -5 -54 -58 -8 -295 -66 12 -22 -81
2013 -461 -4 -48 -59 -9 -295 -73 5 -16 -47
2014 -490 -11 -51 -54 -15 -315 -80 11 -25 -27
2015 -499 4 -58 -55 -18 -334 -77 12 -38 31
2016 -502 7 -62 -56 -17 -308 -67 15 -40 17
2017 -552 3 -69 -57 -9 -336 -67 16 -50 918(ar) -596 1 -76 -58 -5 -367 -67 20 -63 -1
US Balance of Trade in Goods and Services with:
Trade deals or tariffs are unlikely to
narrow the US trade deficit.
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
-1,050
-950
-850
-750
-650
-550
-450
-350
-250
-150
-50
91 93 95 97 99 01 03 05 07 09 11 13 15 17
US: Real Net Exports
bn chained $ % GDP, rhs
Item 7b, Attachment 1, Page 41 of 58
42
US inflation – benign year ahead
1.30
1.80
2.30
2.80
3.30
3.80
4.30
50
100
150
200
250
300
350
400
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Gasoline vs Oil
Gasoline futures
Actul and estimated gas price, rhs
Dec'18
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
12 13 14 15 16 17 18 19
Shelter CPI, MoM SA
MoM
assumed
US gasoline prices set to be lower than
last year (we put in a cushion for wider
refining spread).
The important Shelter component of
core CPI has arrested its downdraft but
now we assume stability.
Item 7b, Attachment 1, Page 42 of 58
43
Global - IMF Outlook Update January 2019
• Risks to global growth tilt to the
downside. An escalation of trade
tensions beyond those already
incorporated in the forecast remains a
key source of risk to the outlook.
• Financial conditions have already
tightened since the fall. A range of
triggers beyond escalating trade
tensions could spark a further
deterioration in risk sentiment with
adverse growth implications, especially
given the high levels of public and
private debt.
• These potential triggers include a “no-
deal” withdrawal of the United Kingdom
from the European Union and a
greater-than-envisaged slowdown in
China.
Item 7b, Attachment 1, Page 43 of 58
44
Global slowdown is persistent
90
92
94
96
98
100
102
104
106
108
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
OECD Leading Indices
US Japan Euro Area
UK Korea China
$bn per quarter
Item 7b, Attachment 1, Page 44 of 58
45
Scorecard shows weakness in Asia (and Italy)
2/5/19
US Canada Japan Australia NZ UK Sweden Norway Israel Eurozone
NOM GDP 5.5 4.7 -0.3 5.2 3.7 3.6 4.1 8.8 4.3 3.0
vs yr ago 1.3 -0.5 -2.6 -1.0 -2.9 -0.5 0.2 2.9 2.0 -1.1
Lead. Index 99.6 99.1 99.7 99.7 101.2 98.6 99.0 100.8 99.7 99.4
6-mo ch. -0.7 -0.9 -0.1 0.0 0.1 -1.2 -0.7 -0.2 -0.7 -0.9
PMI 56.6 53.0 50.3 52.5 55.1 52.8 51.5 58.3 57.0 50.5
6-mo ch. -1.8 -3.9 -2.0 0.0 2.3 -1.1 -5.4 10.2 4.4 -4.6
Core CPI 2.2 1.7 0.3 1.8 1.7 1.9 2.2 2.1 1.0 1.1
vs yr ago 0.4 0.5 0.0 0.0 0.3 -0.6 0.3 0.7 0.9 0.1
Credit 5.0% 4.6% 2.4% 4.3% 7.3% 3.7% 1.6% 5.4% 4.4% 1.9%
vs prior 12 1.4% -2.2% -0.1% -0.5% -0.6% -0.7% -1.8% -1.0% 2.6% 0.1%
Surprise 17 42 11 -12 -27 -12 -84 25 -- -72
vs 6-mo avg 21 18 25 -24 -41 -4 -69 16 -- -26
FX vs 200d 0.2% -0.1% 1.2% -1.0% 1.7% -0.2% -1.0% -1.3% 1.7% -1.1%
MACRO SCORECARDS - DM 2/5/19
Germany France Austria Belgium Nether. Finland Italy Spain Portugal Ireland
NOM GDP 3.0 2.2 3.9 2.6 4.8 4.4 1.5 3.2 3.3 4.7
vs yr Ago -1.2 -1.4 0.0 -0.2 0.5 1.5 -0.8 -1.7 -1.0 -9.3
Lead. Index 99.8 99.1 100.2 99.4 99.7 99.0 99.4 98.9 99.3 98.2
6-mo ch. -0.6 -1.0 -0.8 -0.8 -0.8 -2.3 -1.0 -1.1 -0.6 -1.4
PMI 49.7 51.2 52.7 -- 55.1 -- 47.8 52.4 -- 52.6
6-mo ch. -7.2 -2.1 -4.1 -- -2.9 -- -3.7 -0.5 -- -3.7
Core CPI 1.4 0.6 1.4 1.4 1.5 0.8 0.5 1.1 0.5 0.5
vs yr ago 0.0 -0.4 -0.8 -0.1 0.7 0.5 0.0 0.2 -0.7 0.1
Credit 4.8% 5.8% 6.0% 8.6% -0.5% 4.9% -3.7% -2.6% -1.3% 6.8%
vs prior 12 1.3% 0.0% 2.2% 3.8% 0.5% 2.1% -0.7% -1.0% 1.4% 5.5%
Surprise -54 -198 -54 83
vs 6-mo avg -34 -106 -36 82
MACRO SCORECARDS - Eurozone
2/5/19
Brazil Mexico Russia Turkey Poland Sth Afr. China HK Taiwan Korea Sing India
NOM GDP 4.7 7.9 12.8 21.8 6.9 7.8 9.1 6.7 0.7 2.0 4.5 12.0
vs yr Ago 0.7 0.2 6.4 -3.0 -1.2 0.3 -1.6 -0.2 -1.7 -5.5 -0.2 2.5
Lead. Index 102.1 99.5 100.0 95.4 98.8 99.2 98.8 99.2 101.0
6-mo ch. -1.1 1.1 -1.0 -4.8 -1.0 -0.8 -0.1 -0.7 0.4
PMI 52.7 48.2 50.9 44.2 48.2 49.9 49.5 48.0 47.5 48.3 50.7 53.9
6-mo ch. 2.2 -1.4 2.8 -4.8 -4.7 0.0 -1.7 0.3 -5.6 0.0 -1.6 1.6
Core CPI 3.6 3.7 3.7 19.0 0.4 4.4 1.8 2.5 0.5 1.2 1.9 5.7
vs yr ago 0.0 -1.2 1.6 6.8 -0.4 0.2 -0.4 0.8 -1.1 0.1 0.6 0.8
Credit 5.5% 10.0% 29.8% 4.1% 5.1% 13.5% 4.4% 4.5% 6.7% 3.0%
vs prior 12 5.9% -2.1% 5.9% -4.8% -1.6% 0.8% -11.7% -0.5% 0.1% -2.6%
Surprise -4 -18 42 -79 -5 46 -21 -67 -21 61 -51 -52
vs 6-mo avg 3 -18 25 -63 -15 55 -2 -57 -20 81 -47 -79
FX vs 200d 4.7% 2.0% 0.0% 0.0% -0.5% 2.9% -0.1% 0.2% -0.7% -0.2% 0.7% -1.8%
MACRO SCORECARD - EM etc
Item 7b, Attachment 1, Page 45 of 58
46
China: GDP and Current Account are stable
5
6
7
8
9
10
11
11 12 13 14 15 16 17 18
Chinese GDP Growth Steps Lower
GDP SAAR
Yearly average
%pa
-2
0
2
4
6
8
10
12
14
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
China Current Account GDP
Official data shows a smooth step-down in Chinese GDP growth China has a persistent external surplus with the US but not the
whole world
Item 7b, Attachment 1, Page 46 of 58
47
0
2
4
6
8
10
12
14
16
1500
2000
2500
3000
3500
4000
4500
5000
5500
11 12 13 14 15 16 17 18 19
China Industrial Indicators
Rebar steel price, lhs
Li Keqiang Index, rhs
%YoY
45
47
49
51
53
55
57
-30
-20
-10
0
10
20
30
40
50
13 14 15 16 17 18 19
China: Exports vs Export Orders (PMI)
export growth, lhs
export orders PMI, rhs
% yoy
-30
-20
-10
0
10
20
30
40
50
60
11 12 13 14 15 16 17 18 19
China Residential Floor Space
sold
completed
% yoy
-5
0
5
10
15
20
25
30
11 12 13 14 15 16 17 18
China - Passenger Car Sales
rol l ing 12 month YoY
change
China: partial data are mixed
Item 7b, Attachment 1, Page 47 of 58
48
China: softer industrial jobs market
China industrial survey, which covers 374,000 large firms, shows that total employment had declined by about 2.8mn people over the 12 months to
November. Export-focused light manufacturing sectors such as textiles, apparel and shoes had some of the biggest job losses, though jobs were
also shed in domestically-focused heavy industry sectors.
Item 7b, Attachment 1, Page 48 of 58
49
China: Stabilizing debt is a conflicting objective
Debt to GDP in China has stabilized, led by corporate sector
Source: CEIC, WIND, Morgan Stanley Research
Item 7b, Attachment 1, Page 49 of 58
50
China: competitive edge already receding
UBS Report: "Away from China? To
where? 1/15/19
(i) We find FDI investors are indeed
diversifying away from China, and the
process seemed to have started well
before the current US-China trade war.
(ii ) Both macro evidence and UBS
China CFO survey seem to suggest that
the economies in Northeast Asia are
investors' favored destinations for
diversification
Item 7b, Attachment 1, Page 50 of 58
51
Japan’s aging business cycle
This
expansion
is supply
side
driven-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
-7.5
-5.0
-2.5
0.0
2.5
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Japan: Output Gap
BoJ output gap, lhs
Cabinet Office output gap, lhs
tankan output prices - largefirms, rhs
Izanami boom (73-mo) current boom (74-mo)
70
71
72
73
74
75
76
77
78
79
47
48
49
50
51
52
53
54
92 94 96 98 00 02 04 06 08 10 12 14 16 18
Japan: Labor Force Participation Rate
Female
Male
Abenomics
-20
-10
0
10
20
30
40
50
60
70
15～24 25～34 35～44 45～54 55～64 65+
Japanese Employment Growth since 2010 By Age Cohort
All Male Female
Cum. % change
Current ‘boom’ reaches post WW2
record in length
Item 7b, Attachment 1, Page 51 of 58
52
Bank of Japan capitulates on outlook
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1yr 2yr 3yr 5yr 7yr 10yr 15yr 20yr 30yr 40yr
JGB Yield Curve Back to Pre July Decision
7/20/18
10/4/18
PX_LAST
0
20
40
60
80
100
120
0
10
20
30
40
50
60
01 03 05 07 09 11 13 15 17
BoJ Balance Sheet ...
% of JGB outs. held, lhs
balance sheet/ GDP, rhs
-20
0
20
40
60
80
100
11 12 13 14 15 16 17 18
BoJ Balance Sheet Growth
rolling 12 mo change Y trn
Jan 19 Oct'18 Jul'18 Apr'18
FY17 1.7 1.7 1.7 1.9
FY18 0.9 1.4 1.5 1.6
FY19 0.9 0.8 0.8 0.8
FY20 1.0 0.8 0.8 0.8
Jan'19 Oct'18 Jul'18 Apr'18
FY17 0.7 0.7 0.7 0.7
FY18 0.8 0.9 1.1 1.3
FY19 0.9 1.4 1.5 1.8
FY20 1.4 1.5 1.6 1.8
BoJ Projections
CPI ex fresh food, cn tax
Real GDP growth
BoJ is
saturated
with JGBs
Item 7b, Attachment 1, Page 52 of 58
53
Euro Area - growth momentum slumps
… and
spending is
weakening
Government
spending is
limited, with
Italy’s fiscal
boost at its
limit without
triggering a
Excessive
Deficit
Procedure
response by
the EU.
Asset
prices are
responding
to surprise
downside
data prints
Growth is
deteriorating.
Predominately
due to a lack of
a second wind
(leverage) and
faltering China
and global
trade.
Item 7b, Attachment 1, Page 53 of 58
54
UK – tight jobs market keeps consumer spending, for now
The
consumer
matters in
the UK
Forward
indicators
suggest
slowing
consumption
into early
2019.
Businesses
are
circumspect
Labor market
tightness
remains but
unemployment
claims have
turned
Item 7b, Attachment 1, Page 54 of 58
55
UK risk – Brexit: Options remain wide open
Chance of a hard Brexit (leave without an agreement) is low
• Fluidity remains; Parliament ruled out asking for an Extension but the EU welcomes it.
• Either the EU or the UK ‘red lines’ (refusal to move on a position) will need to budge to see a resolution.
• There is little political will for a second referendum.
EU offers olive branch
(anytime )Agreement and UK exits the EU
Vote
PassWithdrawal Agreement
approved
FailNew amendments
tabled
Go back to EU
Accept
Reject
Hard Brexit
Article 50 Retraction
Second referendum
UK agrees to alternative solution,
e.g. Norway-plus model
Snap election
Coalition or minority government
Second referendum
Government collapses
Extension request
Conservative
Second referendum?
Hard Brexit?
Article 50 retraction?
Some agreement approved
Extension request
Labour
Second referendum
Extension request?
Extension request
Hard Brexit
Article 50 retraction
Extension request
Hard Brexit
Second referendum
Snap Election
Item 7b, Attachment 1, Page 55 of 58
56
US dollar
60
70
80
90
100
110
120
130
140
150
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
USTW$
grey areas recessions
-250
-150
-50
50
150
250
07 08 09 10 11 12 13 14 15 16 17 18
Key External Imbalances
combined CA surpluses of EU, Japan and China
US CA deficit
$bn per quarter
75
85
95
105
115
125
135
73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Real Broad Value of the US
1973:3 = 100
long term avg
Dollar is above its long term average
$ is not
necessarily
strong late
cycle
Global
imbalances
are fairly
stable = low
FX vol
Item 7b, Attachment 1, Page 56 of 58
57
US dollar – benefit from tighter US liquidity may be waning
78
81
84
87
90
93
96
99
102
105-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
14 15 16 17 18
US: Banks' Excess Reserves vs US Dollar Index
1yr change in US banks' excess reserves, $trn, lhs
falling excess reserves, higher $
rising excess reserves, lower $
The US dollar appeared to
benefit from less easy
liquidity conditions in the US
… but less accommodative
policy from the ECB – and a
more wary Fed - may drive a
wedge in that relationship
Item 7b, Attachment 1, Page 57 of 58
58
US dollar – may have reached peak support
Rising twin deficits may compromise
greenback
70
80
90
100
110
120
130
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
DXY vs 2yr Swap Spread
2yr swap spread, lhs
DXY, rhs
HIA TC
JA
Tepid USD response to attractive rates
(and repatriation).
-15%
-12%
-9%
-6%
-3%
0%
3%
60
70
80
90
100
110
120
92 95 98 01 04 07 10 13 16 19 22 25
US Dollar vs US Twin Balances
USTW$, lhs
Twin Deficits, lead 6qtrs, rhs
projected (CBO, IMF)
Item 7b, Attachment 1, Page 58 of 58