10 Macroeconomic Forecasts for 2016

10 Macroeconomic Forecasts for 2016

Macroeconomic and Investment Research

January 2016

Overview

1. El Niño Will Boost U.S. GDP Growth

2. The U.S. Unemployment Rate Will Approach 4 Percent

3. U.S. Headline CPI Will Jump Due to Base Effects

4. Net Issuance of U.S. Treasury Notes and Bonds Will Fall by $200 Billion

5. U.S. New Home Construction Will Increase

6. Tighter Labor Market Will Spur Wage Growth

7. Diverging Monetary Policies Will Drive Further Dollar Appreciation

8. The Euro Zone Recovery Will Continue to Strengthen

9. China Will Weaken the RMB to Support Growth

10. World Oil Supply/Demand Will Move Closer to Balance

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El Niño Will Boost U.S. GDP Growth

Source: NOAA, Haver Analytics, Bloomberg, Guggenheim Investments. Data as of 3Q2015.

3

U.S. Personal Consumption Expenditures Contribution to GDP Growth Rises During Strong El Niños (1950-Present)

-10%

-5%

0%

5%

10%

15%

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5

PCE Contribution to Real GDP Growth (QoQ SAAR)

NOAA Oceanic Niño Index (>0.5 defined as El Niño; <-0.5 defined as La Niña)

Mild El Niño (Avg.=2.0%)Normal (Avg.=1.8%)

Strong El Niño (Avg.=4.1%)

La Niña (Avg.=2.4%)

1.4%

1.8%

2.2%

2.6%

3.0%

3.4%

3.8%4%

5%

6%

7%

8%

9%

10%

11%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Unemployment Rate (LHS, Four-Month Lag) Job Openings Rate (RHS)

The U.S. Unemployment Rate Will Approach 4 Percent

Source: Bloomberg, Guggenheim Investments. Data as of 11.30.2015. Note: shading area highlights recession.

4

Elevated Job Openings Portend Further Declines in the Unemployment Rate

U.S. Headline CPI Will Jump Due to Base Effects

Source: Bloomberg, Guggenheim Investments. Data as of 12.31.2015. Note: Projection assumes constant core CPI of 2.0 percent.

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Headline CPI (YoY%) Is Set to Rise Under Various Oil Price Scenarios

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2012 2013 2014 2015 2016

$30 $40 $50

Net Issuance of U.S. Treasury Notes and Bonds Will Fall by $200 Billion

Source: Guggenheim Investments, Haver Analytics, U.S. Treasury, Federal Reserve. Note: in USD billions. Excludes net issuance of T-bills.

6

Treasury Will Cut Note Issuance to Make Room for Increased Bill Supply

-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Of Which Purchased by the Fed Net Issuance of U.S.T Notes & Bonds Forecast

500K

700K

900K

1100K

1300K

1500K

1700K

1900K

2100K

900K

1400K

1900K

2400K

2900K

3400K

1980 1985 1990 1995 2000 2005 2010 2015

Two-Year Change in Total Households, 24-Month Moving Avg. (LHS) Housing Starts, 24-Month Moving Avg. (RHS)

U.S. New Home Construction Will Increase

Source: Haver Analytics, Guggenheim Investments. Data as of 12.31.2015.

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Rising Household Formation Supports a Pickup in New Home Construction

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%-2%

-1%

0%

1%

2%

3%

4%

5%1985 1990 1995 2000 2005 2010 2015

Unemployment Gap (Inverted, LHS) Average Hourly Earnings, YoY% Change (RHS)

Tighter Labor Market Will Spur Wage Growth

Source: Haver Analytics, Guggenheim Investments. Data as of 12.31.2015. Note: Unemployment Gap is defined as the U3 unemployment rate minus the CBO’s NAIRU estimate.

8

Average Hourly Earnings Are Set to Accelerate as Slack Diminishes

Diverging Monetary Policies Will Drive Further Dollar Appreciation

Source: Haver Analytics, Bloomberg, Guggenheim Investments. Data as of 12.31.2015.

9

Two-Year Yield Differentials Tend to Drive EUR/USD

1

1.1

1.2

1.3

1.4

1.5

1.6-200

-150

-100

-50

0

50

100

150

200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Two-Year Treasury-Bund Spread (LHS) EUR/USD (Inverted, RHS)

The Euro Zone Recovery Will Continue to Strengthen

Source: Bloomberg, Guggenheim Investments. Data as of 12.31.2015.

10

European Central Bank Action Will Support the Euro Zone Economy

44

46

48

50

52

54

56

58

60

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Euro Zone Real GDP (%YoY) (LHS) Composite Output PMI (RHS)

China Will Weaken the RMB to Support Growth

Source: Haver Analytics, Guggenheim Investments. Data as of 4Q2015.

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80

85

90

95

100

105

110

115

120

125

130

135

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2010=100GDP YoY (LHS) RMB Real Effective Exchange Rate (RHS)

The Chinese Currency Has Continued to Strengthen Even as Growth Has DownshiftedThe Chinese Currency Has Continued to Strengthen Even as Growth Has Downshifted

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2008 2009 2010 2011 2012 2013 2014 2015 2016

mb/d

World Oil Supply / Demand Will Move Closer to Balance

Source: IHS, Guggenheim Investments. Data as of 12.31.2015.

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Demand Growth Outpacing Supply Growth Will Help Rebalance the World Oil Market in 2H2016

ForecastWorld Oil Market Balance

Demand Growth Outpacing Supply Growth Will Help Rebalance the World Oil Market in 2H2016

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