macro for trust level review€¦ · macro for trust level review john rothfield investment office...
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Macro for Trust Level Review
John RothfieldInvestment Office
Item 8a, Attachment 1, Page 1 of 40
2
TrendingPositive Same Trend Negative
- US economic growth - US leverage - Cycle prolongation yet to be demonstrated
Accelerated to high 2s in the latest year vs low 2s in the
prior year.
US non financial debt is stable at ~ 250%/GDP, right
through the expansionLabor force participation and productivity need to
improve in order to prolong the US expansion.
- US consumer - External imbalances - Low personal savings ratio
Sharp upward revision to measured savings flow =
more ammunition to spend going forward.
Stable US external deficit (2.5%/GDP) broadly matched
by combined surplus of Euro area, Japan and China.Low savings cushion increases risk when financial
markets (or expectations) turn adverse.
- Small business plans - HH balance sheet drivers less robust
To expand and hire … despite difficulties in finding
qualified workers.Plans to buy home (as affordability drops) and
expectations for stock market may have peaked.
- US corporate earnings and sales - QE and rates unwind are happening
8% sales and 20% earnings growth in year to 2Q18.
Catalyzing accelerated investment in IT equipment.Lower monetary base growth meets stil l-rising debt,
especially in EM space.
- US mining and manufacturing - Emergent trade wars
Arguably a global phenomenon. Strong hiring
outperformance by 'mining' states.Significant misunderstanding of trade imbalance
drivers ignites policies where everybody loses.
Housing trends - Disruptive geopolitics
Accelerating household growth + shift from renters to
owners, esp. for younger and lower income cohorts.Nationalism and bloc realignments create uncertainty
that bleeds into the economic sphere.
- US financial stability
Fed: U.S. financial system remains substantially more
resil ient than during decade before financial crisis.
- Global business cycle
A robust starting point from which to prosecute 'trade
wars'.
Item 8a, Attachment 1, Page 2 of 40
3
Diminishing market response to good economic news
2.2
1.3
0.4
8.7
1.9
13
.1
4.4
2.8
1.6
1.1
8.8
3.6
12
.7
6.0
0
4
8
12
16
GDP Jobs Lab. Force CONCONF SBOI S&P500 House P
Yearly Change in Certain Aggregates
first 8 years of expansion
subsequent year
yearly growth
2.6
1.5
0.6
15
.7
2.6
17
.9
7.4
3.1
1.7
1.5 1.9
4.6
7.8
4.6
0
4
8
12
16
20
GDP Jobs Lab. Force CONCONF SBOI S&P500 House P
Latest Year in Two Halves
J'17 to Dec '17
D'17 to J'18
yearly growth
Item 8a, Attachment 1, Page 3 of 40
4
US labor market – pushing against constraints
8
9
10
11
12
13
14
94 96 98 00 02 04 06 08 10 12 14 16 18
US "Non-Employment Index"
Note: Non-employment is a calculated measure of labor resources left to hire – or expand hours.
Item 8a, Attachment 1, Page 4 of 40
5
Also, amongst prime age persons, a standout is low participation by 25-34 year old males.
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
Ageing population – with more still to come – is the major driver of tepid US labor force participation.
62
63
64
65
66
67
68
99 01 03 05 07 09 11 13 15 17
Labor Force Participation Rate - age effect
Actual Labor Force
Partcipation Rate
LFPR w/Dec'99 age
proportions
s ince 1999
US labor market – supply headwinds
Item 8a, Attachment 1, Page 5 of 40
6
US productivity – imminent boost?
-2%
-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 2.5
1.1
% yoy
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
98 00 02 04 06 08 10 12 14 16 18
US ISM - Production Less Employment Indices
4qtr avg
The current economic expansion is characterized by low measured productivity growth.
Firm surveys are at least showing a stronger expected rise in production than jobs (= productivity) ahead.
Item 8a, Attachment 1, Page 6 of 40
7
Business 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
Intended Capex* vs Actual Capex
Intended capex, lhs
Business investment,real, saar, RHS
* avg of Phi lly, KC and Richmond
-10%
-5%
0%
5%
10%
15%
20%
25%
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18F
S&P500 Earnings
SP500
SP500 ex fins andenergy, rhs
2nd
wind
-2%
0%
2%
4%
6%
8%
10%
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18
S&P500 Sales
SP500
SP500 ex fins andenergy, rhs
2nd
windStrong corporate sales and earnings, and capex intentions, have - so far -been slow to ignite actual capex.
Item 8a, Attachment 1, Page 7 of 40
8
US inflation
-3
-2
-1
0
1
2
3
4
5
6
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
US CPI Inflation
Actual JR Model Barclays Natwest
projectedJun'18= 2.9%
1.0
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
Jun'18
52%
54%
56%
58%
5%
8%
11%
14%
80 83 86 89 92 95 98 01 04 07 10 13 16
Share of US GDP
profits, lhs
wages, rhs
Peak in energy, flatter “Phillips curve”
and low wage share of GDP all argue against a major inflation event.
Item 8a, Attachment 1, Page 8 of 40
9
Business Cycle SUMMARY – ROOM TO RUN• Many US indicators are still considered
mid cycle.• Fed is around ½ way through expected
rate cycle (somewhat earlier in its balance sheet roll-off.)
• Euro area hard and soft data easing back, capacity pressures starting to build.
• Japan has very high output gap and surge in labor supply may wane without more foreign workers.
• China to loosen fiscal, RRR (and FX) to offset debt workout, trade uncertainty.
Early Mid Late
KC Fed LMCI Job Offers vs Pool
Employed to Pop U-Rate
Chicago Fed NAI SBOI Hard to Fill
Real Disp. Income Personal Savings Ratio
Housing Affordability Consumer Confidence
Small Business Plans Net Worth/ DI
Plans to Buy Home Output gap
Real Oil Price Yield Curve
Fed tightening
Profit share
Leverage + RoW
China Japan Europe
SOFT/ EASING LATE MID+
Rebounding Mid Mid
Residential ESRI Leading Index Ifo
Cargo, rail Economy Watchers PMIs
Electricity Late Consumption
Foreign trade Output gap Employment
Decelerating Tankan Factor Ut'n U-rate
Fixed Asset Invest. U-Rate ECB taper (Apr'17)
Car sales OECD LEI Late
Peaking Conf. Board LEI Business Climate
Li Keqiang index Bus. Limiting factors
CPI, PPI
CNY TWI
United States
Item 8a, Attachment 1, Page 9 of 40
10
Risks: Trade War
-1%
0%
1%
2%
3%
4%
5%
6%
7%
-2
0
2
4
6
8
10
12 13 14 15 16 17 18
World Trade Monitor vs US Leading Index
US Leading Index, lhs
World Trade Monitor, rhs
% yoy6-mo annualized rate of change
Example of tariff “incidence”: Since tariffs
announced on washing machines, prices +7%, quantity sold -3%.
US economic momentum has been fueled by global trade acceleration. Trade wars will jeopardize that.
70
74
78
82
86
90
94
98
40
44
48
52
56
14 15 16 17 18
Personal Spending Washing Machines
quantity price
20% tari ffs announced
Item 8a, Attachment 1, Page 10 of 40
11
Risks: Leverage and Valuation
120%
140%
160%
180%
200%
220%
240%
260%
81 85 89 93 97 01 05 09 13 17
US: All Nonfinancial Debt to GDP
grey areas recessions
7 1/2 yrs
10 yrs
6 yrs
9yrs
4.2
4.7
5.2
5.7
6.2
6.7
7.2
75 79 83 87 91 95 99 03 07 11 15
Household Net Worth As Multiple of Disp. Income
6.1x (1Q00)
6.5x(4Q06)
6.9x(1Q18)
7.1 now?
Low riskFed: “Borrowing among highly levered and lower-rated businesses remains elevated, although the ratio of household debt to disposable income continues to be moderate.”
Higher riskFed: “Asset valuations continue to be elevated despite
declines since the end of 2017 in the forward price-to-earnings ratio of equities and the prices of corporate bonds.”
Item 8a, Attachment 1, Page 11 of 40
12
Risks: Comparison with 1990s expansion
50
100
150
200
250
300
350
400
450
0 52 104 156 208 260 312 364 416 468 520
S&P500 in Past and Current Expansions
90s 00s 10s
FOMC +50 to 6 1/2%
Weeks ...
20
40
60
80
100
120
140
160
75 80 85 90 95 00 05 10 15
Equities as GDP Multiple (Buffet Indicator)
151x (1Q00)
128x(1Q15)
111x(3Q07)
138x(current)
Current expansion is a year away from the 1990s record. “Great recession” displacement and demographics have
arguably driven a less frothy stock market.Last Fed hike in that cycle was May 2000, ten months before expansion ended. By December 2000 Fed was focused on downside economic risks.
As a multiple of nominal GDP, equities have rarely exceeded today’s valuations.
Item 8a, Attachment 1, Page 12 of 40
13
Risks: Central banks
-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
Cautious Fed• Symmetric inflation target.• Fiscal stimulus peaks next year.• Wary of trade disengagement’s
impact on business uncertainty.• Aware of easing global QE.• Fed balance sheet to stay ‘much
bigger’ than before crisis’.
• Rules are complex and varied.
Economic success brings with it liquidity withdrawal, thus harder for financial markets to respond favorably.
Item 8a, Attachment 1, Page 13 of 40
14
ScenariosDOWNSIDE (33%) CENTRAL (50%) UPSIDE (17%)
"Valuation and pol icy ri sks" "Growth improvement susta ins" "Pos i tive Synchronici ty"
"Free lunch" in early s tage of fi sca l
s timulus gives way to higher rates and
'crowding out'.
Modest ri se in US potentia l growth
susta ins expans ion through 2020.
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.
Global ly, infrastructure accelerates ,
tech worries turn out to be
idiosynchratic.
US' dis ruptive engagement threatens
global upswing and CA recycl ing. Watch
China flows and CNY.
Federal Reserve a l lows the expans ion
(and inflation) to run for longer.
China has the tools to manage the
downs ide to i ts economy from trade
dis ruptions .
Wel l s ignaled (and flexible) removal of
s timulus here and abroad.
Item 8a, Attachment 1, Page 14 of 40
Macro: Supporting Charts
John RothfieldInvestment Office
Item 8a, Attachment 1, Page 15 of 40
16
US economic growthAcceleration in past year.• Consumer solid on income, taxes
balance sheet and confidence.• Higher defense, S&L spending.• Business supported by two year
global upswing.• Initial free ride on fiscal crowding
out.• Strong mining investment.• Some front running of US exports
where retaliatory tariffs are feared.
2.2 2.3
5.2
6.0
0.2
-0.3
0.2
2.8
2.7
6.7
1.4
4.2
0.0
-0.2
-2
0
2
4
6
8
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 yrs
Latest yr
% yoy
Item 8a, Attachment 1, Page 16 of 40
17
Consumer - spending
0
1
2
3
4
5
6
7
8
9
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Personal Consumer Spending
current expansion: avg 4.0%
last expansion: avg 5.7%
Consumer spending growth picks up to above its expansion average.
The 2Q18 US GDP report showed a huge upward revision to US household savings flow = much bigger spending cushion should balance sheets falter.
0
2
4
6
8
10
12
97 99 01 03 05 07 09 11 13 15 17
US Personal Savings Ratio (vs prior estimates)
'16 '17 '18
% yoy
!!
Item 8a, Attachment 1, Page 17 of 40
18
Consumer - debt
0
4
8
12
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
%
20%
21%
22%
23%
24%
25%
26%
27%
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
5 % point rise in personal income share for consumer credit, but outstanding mortgages flat as income share.
Delinquencies creeping up for credit cards and autos, with small banks seeing a spike in credit card delinquencies.
Item 8a, Attachment 1, Page 18 of 40
19
Consumer - credit
-60
-40
-20
0
20
40
60
96 98 00 02 04 06 08 10 12 14 16 18
Fed Senior Loan Officers: Consumers (Demand)
demand for consumer loans
for auto loans
for credit card
-40
-20
0
20
40
60
80
96 98 00 02 04 06 08 10 12 14 16 18
Fed Senior Loan Officers: Consumers (Standards)
standards for credit cards
other
for credit card
tighter
Easing demand and tightening standards for consumer loans
Soft demand for mortgages
Item 8a, Attachment 1, Page 19 of 40
20
Business capex
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
40
60
80
100
120
140
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Real Private Capex - Mining Investment
GDP impact %, RHS Level $bn saar
$bn saar
Positive mining investment related to rebounding energy prices.
Business investment in information processing equipment has improved rapidly in recent quarters.
50
55
60
65
70
75
10 11 12 13 14 15 16 17 18
Core Capital Goods Shipments and Orders
Orders Shipments
$bn
Upswing began with the improvement in global trade, starting in 2016.
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
150
200
250
300
350
400
450
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
US Real Private Capex - Info Processing Equipment
GDP impact %, RHS Level $bn saar
$bn saar
Item 8a, Attachment 1, Page 20 of 40
21
Corporates
250
500
750
1000
80
120
160
200
240
14 15 16 17 18
US Corporates Spread Over Treasuries
Investment Grade, lhs
High Yield, rhs
-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 borrowing costs have risen as debt increases.
Commercial and industrial loans – softer demand and tighter lender standards, but still close to neutral.
Item 8a, Attachment 1, Page 21 of 40
22
Housing
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2000
2100
2200
2300
2400
2500
2600
01 03 05 07 09 11 13 15 17
House Sq Ft Size vs Housing Contribution to GDP
GDP contribution, rhs
Median Sq Ft, lhs
50
100
150
200
250
300
350
400
450
500
200
700
1200
1700
2200
97 99 01 03 05 07 09 11 13 15 17
US Single vs Multi-Family Starts
Single Family (lh axis)
Multis (rh axis)
Single family has recently picked up relative to multi family starts.
Square footage declines have been one reason for low GDP impact of housing cycle upswing.
Item 8a, Attachment 1, Page 22 of 40
23
Housing – affordability
1
2
3
4
5
6
7
8
5
15
25
35
45
55
65
75
85
95
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
US NAHB Housing Sentiment vs Consumer Plans to Buy
NAHB FutureSales, lhs
Plans to Buy,
lead 1yr rhs
Source: NAR
0
5
10
15
20
25
30
35
40
45
35
45
55
65
75
85
95
92 95 98 01 04 07 10 13 16
NAHB Housing Opportunity Index
National, lhs
San Francisco, rhs
Share of homes sold that were affordable to median income family
Apart from Bay Area, LA etc, housing has not become a 00s style bubble.
That said, jump in plans to buy have likely reached saturation.
-1
0
1
2
3
4
5
6
7
0
10
20
30
40
50
60
70
80
90
100
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
US Unfurnished Apartment Completions
completions, lhs rent inflation, rhs
000s % yoy
Bullish completions and rents cycle may be ending.
Item 8a, Attachment 1, Page 23 of 40
24
Housing - formation
-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
-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 Household Formation
yoy%
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 45-54 55-64 65+
By age cohort
Rebound in Home Ownership Rate Since Mid 2016
…. and for
young age cohorts
Item 8a, Attachment 1, Page 24 of 40
25
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
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 8a, Attachment 1, Page 25 of 40
26
Government - debt
-1700
-1500
-1300
-1100
-900
-700
-500
-300
15A 16A 17A 18 19 20 21 22 23 24 25 26 27 28
Post Tax Bill Projections on US Federal Deficit
CBO-Jan'17
CBO-Jun'17
CBO-Apr'18
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
Latest CBO Projections on Federal Debt
CBO-Jan'17 CBO-Jun'17
CBO Apr'18
Fiscal year
%/GDP
US federal debt and deficits set to rise sharply, even assuming personal tax “fiscal
cliff” takes back last year’s tax cuts in 2025.
Item 8a, Attachment 1, Page 26 of 40
27
Foreign Trade
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
90 93 96 99 02 05 08 11 14 17
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 91Q18 -156 4 -18 -15 0 -93 -19 6 -17 1
US Balance of Trade in Goods and Services with:
Trade deals or tariffs are unlikely to narrow the US trade deficit.
-6%
-5%
-4%
-3%
-2%
-1%
0%
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
91 93 95 97 99 01 03 05 07 09 11 13 15 17
US: Real Net Exports
bn chained $ % GDP, rhs
Item 8a, Attachment 1, Page 27 of 40
28
Global - IMF Outlook Update July 2018• Global growth is projected to reach 3.9
percent in 2018 and 2019, in line with the forecast of the April WEO, but the expansion is becoming less even, and risks to the outlook are mounting.
• The rate of expansion appears to have peaked in some major economies and growth has become less synchronized.
• Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018.
• Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals.
Item 8a, Attachment 1, Page 28 of 40
29
Debt still growing in Emerging Markets
100
120
140
160
180
200
220
240
260
280
300
99 00 00 01 02 03 04 05 05 06 07 08 09 10 10 11 12 13 14 15 15 16 17
BIS: Global Debt
DM countries
EM countries
%GDP, weighted by mkt fx rates
150
200
250
300
350
400
99 00 00 01 02 03 04 05 05 06 07 08 09 10 10 11 12 13 14 15 15 16 17
BIS: G3 Debt
US Euro area Japan
%GDP
Item 8a, Attachment 1, Page 29 of 40
30
China doing ok, but risks around trade and flows
-140
-120
-100
-80
-60
-40
-20
0
20
40
60
80
10 11 12 13 14 15 16 17 18
China Capital Flow Tracker - IIF
May
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
China Industrial Indicators
Rebar steel price, lhs
Li Keqiang Index, rhs
%YoY
-30
-20
-10
0
10
20
30
40
50
60
11 12 13 14 15 16 17 18
China Residential Floor Space
sold
completed
% yoy
Industrial sector hanging on
Residential mini-cycle may be bottoming out.
91
93
95
97
99
101
Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
Trade Weighted CNY
China policy degrees of freedom needs benign flows to continue
… but
watch for any signs of weakness in Chinese Yuan
Item 8a, Attachment 1, Page 30 of 40
31
Japan is growing above potential
-3
-2
-1
0
1
2
3
4
5
91 93 95 97 99 01 03 05 07 09 11 13 15 17
Japan: Jobs Growth By Sex
Male Female
Abenomics
%yoy
-3
-2
-1
0
1
2
3
4
5
10 11 12 13 14 15 16 17
Japan: Real GDP Growth
% yoy
Consumption
tax hiked
Global trough
Abe elected
Tsunami
QQE
Abe average
GDP growth through “Abenomics”
period is actually a good result given demographics drag.
Measures to attract females into workforce have been successful, albeit lower paying/ productivity work on average.
Item 8a, Attachment 1, Page 31 of 40
32
Japan … but with a short runway
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
11 12 13 14 15 16 17 18
Japan: Output Gap
BoJ
Cabinet Office
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
-25
-20
-15
-10
-5
0
5
10
15
20
25
97 99 01 03 05 07 09 11 13 15 17
Japan: Tankan Factor Utilization Index
tankan factor utilization index
unemployment rate, rhs
Output gap shows that the Japanese economy is overheated.
Same goes for unemployment rate and “use of existing capacity” from tankan
survey.
Item 8a, Attachment 1, Page 32 of 40
33
Euro Area- hard and soft data are easing back
Consumption growth is easing back.
Slowing world trade is impacting large exporting nations.
Forward momentum in growth is softening
-6
-4
-2
0
2
4
6
-6
-4
-2
0
2
4
6
2010 2012 2014 2016 2018
EZ GDP and Sentiment Indicators
EU GDP Ifo indicator
BE Confidence Indicator PMI Indicator
apc Index
-4
-3
-2
-1
0
1
2
3
4
-4
-3
-2
-1
0
1
2
3
4
2000 2002 2004 2006 2008 2010 2012 2014 2016
Employment growth and consumption spending
H/H and NPISH Final Consumption Expenditure, volume
Eurozone employment growth, ahead 3months (RHS)
apc %apc %
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-5
-4
-3
-2
-1
0
1
2
3
4
5
2010 2011 2012 2013 2014 2015 2016 2017 2018
Germany GDP: Quarterly contribution
Private consumption h/h Machinery and equiy
Construction Inventories
Exports Imports
Germany GDP qoq
Annual growth Total GDP qoq
Capacity pressures are starting to build
0
10
20
30
40
50
60
70-20
-10
0
10
20
30
40
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Limiting factors of business, EU19
EquipmentFinancial constraintsLabourOtherInsufficient demand (RHS reversed)
Index
Item 8a, Attachment 1, Page 33 of 40
34
Euro Area- cautious ECB unwind• QE purchases to reduce from €30bn/month to €15bn/month from October 2018;
• QE purchases to end December 2018;• Depo rate unchanged until “at least through the summer of 2019”; and
• Reinvestment plan still unclear• ECB favors the stock of assets to move only very slowly.• Capital key restrictions make duration neutral purchases very difficult.
ECB balance sheet and UBS projection
-30
-20
-10
0
10
20
30
May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18
Futures curve changes
EU US UK
Dec 18 contract vs Dec 19 contract, compared to August 2017 levels, bps
Item 8a, Attachment 1, Page 34 of 40
35
Euro Area - political risk down but still presentItaly update – right-wing rhetoric has been pared back
• The new Italian government is comprised of an unconventional combination of right and left wings: Lega + M5S.
• The new government is “only” seeking 0.5% of GDP fiscal leeway for 2019, which is
quite a dramatic decrease from the pre-election 6% pledges. • The outcome has been market friendly, although Italian bond yields remain elevated.
Spain update – Catalonia crisis is over
• Puigdemont was not successful trying to force central government’s hands; Quim
Torra was appointed as the new President of Catalonia by the King of Spain. (Torrawas a former lawyer and journalist from Catalonia, and does not belong to any political party.)
• Spanish PM Rajoy was ousted due to corruption within his party, Sanchez became the acting PM.
• Sanchez promised to have an early election but it is in his favor to delay. His party controls only 84 of 350 seats in the Congress.
Germany coalition government update – delicately balanced
• A grand coalition was eventually agreed between the CDU, CSU, and SPD parties;• The SPD leader, Martin Schulz, resigned his position due to SPD’s poor polling figures;
• Coalition delicately balanced but if it fails, there is a risk the AfD, the far right anti-immigration party, could increase its power in Bundestag.• In a recent poll, the AfD surpassed the SPD in popularity and is gaining on the CSU.
Item 8a, Attachment 1, Page 35 of 40
36
UK - Mediocre bounce back from cold winter
Lending growth is tapering and auto loan growth falls.
Householders are facing uncertainty.
Rising income tax and VAT receipts reduced govt deficit and borrowings.
-6
-4
-2
0
2
4
6
2012 2013 2014 2015 2016 2017 2018
UK lending growth
Total private
business (non-
financial)
Total household
lending (ex student
loans)
apc
Growth weakened over the end of 2017 but analysts expect it to recover in 2019-2021.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1955 Q1 1964 Q1 1973 Q1 1982 Q1 1991 Q1 2000 Q1 2009 Q1 2018 Q1
UK GDPapc
Avpost2009
Avpre-Thatcher
Fcts
Av postbanking
deregulation
-15
-10
-5
0
5
10
15
20
-6
-4
-2
0
2
4
6
8
1996 2000 2004 2008 2012 2016
Households lack clarity
Household Real Final Consumption (GDP)
GFK Confidence, Expected Future Finances (rhs)
apc Index, 6months ahead
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-40
-20
0
20
40
60
80
100
120
140
160
180
1956 1964 1972 1980 1988 1996 2004 2012
Tho
usa
nd
s
UK Govt Borrowing
Net borrowing Net borrowing as % of GDP
bio
Item 8a, Attachment 1, Page 36 of 40
37
UK Brexit – increasingly looking difficult The UK Conservative party continues to fight internally about its agreed stance on what the UK is willing to present as a negotiating stance to the EU.This has led to a number of high profile resignations (Boris Johnson, David Davis) and risks a vote of no confidence, either ousting May as
PM or leading to a general election.
Time is running out to negotiate with the EU.The next European Parliament meeting is in October, where the EU will decide whether to move forward with negotiations. A lack of clarity of
the UK’s stance will stymie this.
A Canada-type model is the most recent working hypothesis.
Prime Minister May ruled out a Norwegian-type model for the UK’s relationship in a post-Brexit world. This model would mean the UK paid to be part of the single market and receive full access (goods and services trade) but would mean the UK is bound to accept all EU laws;The Canada-type model – May’s preferred option – will leave goods trade tariffs with the EU at zero but would result in restricted services trade (UK financial services are a major driver of growth and productivity). This model has implications for borders checks, and may require a border between Northern Ireland and its southern EU counterpart, something that would be contrary to The Good Friday Agreement and will not be accepted by Northern Ireland.
The UK and EU have started its next negotiation round, where the EU will consider the latest UK plan, known as the Chequers plan.
The implications for the UK changes daily, and is dependent upon politicking and tactics.
Item 8a, Attachment 1, Page 37 of 40
38
US dollar
60
80
100
120
140
160
180
1981 1986 1991 1996 2001 2006 2011 2016
DXY and over /undervaluation based on PPP
Derived PPP DXY Index REER DXY
The dollar is already expensive.
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
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
DXY vs 2yr Swap Spread
2yr swap spread, lhs
DXY, rhs
HIA
Tepid USD response to attractive rates (and repatriation).
Item 8a, Attachment 1, Page 38 of 40
39
US balance of payments - repatriations
-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
FOF: NFC Foreign Earnings Retained Abroad
$bn, saar
-200
-150
-100
-50
0
50
100
150
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
FDI: Reinvested Earnings
$bn, saar
Positive FDI flows results from tax reform on retained earnings abroad …
much bigger impact than 2005
60
70
80
90
100
110
120
-4%
-3%
-2%
-1%
0%
1%
2%
91 93 95 97 99 01 03 05 07 09 11 13 15 17
US Basic Balance vs USTW$
BB/GDP, lhs
USTW$, rhs
rolling 4qtr avg
basic balance = current account
+FDI+portfolio flows
But overall, improvement in US “basic balance” stalls .. as does US$.
Item 8a, Attachment 1, Page 39 of 40
40
US dollar
-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$, lhs
Twin Deficits, lead 6qtrs, rhs
projected (CBO, IMF)
60
70
80
90
100
110
120
130
140
150
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
USTW$
grey areas recessions
No guarantee of $US strengthUS deficits can be difficult to fund during late-business cycle periods
… especially
when “twin
deficits” are
rising
-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
Trade wars with US’ major
funders unlikely to end well.
Item 8a, Attachment 1, Page 40 of 40