Presentation Transcript

1. US Economic and Financial Market Review

   MAY 2014 Presented By: MARKUS SCHOMER Chief Economist PineBridge Investments, New York
2. PineBridge Investments – US Economic And Financial Market Review Key US Macro Themes: “Icy Patch” is likely to still weigh on US GDP growth in Q1, but most recent data flow points to stronger than expected rebound over the spring with some forecasts exceeding 4% for the quarter We expect a mid-cycle slowdown in late 2016/early 2017 as a result of higher rates, we therefore forecast a longer pause in the Fed’s rate hike cycle in 2016 We still expect stronger business investment driven by rising resource utilization to push US growth from the current 2% to 2.5% range to a 3% to 3.5% range by the end of 2014 Housing data has been extremely volatile in recent months, partly due to weather, but also in reaction to more uncertain outlook; we are still looking for a stronger catch-up recovery in coming months US payroll growth has started to rebound from the ‘Icy Patch’. We expect a pick-up in payroll growth to a 250,000 average this year and slower improvements in the Unemployment Rate as Labor Force participation stabilizes Recent inflation data is showing end of disinflation, but still running well below Fed’s 2% target; we don’t expect inflation to exceed Fed’s tolerance levels until 2017 Fed tapering is on a US $10 billion/month auto-pilot. QE3 is likely to end in January 2015, with the first rate hike expected in early 3Q14, which is consistent with Yellen’s taper/hike gap of “around six months” Global economy still on recovery track; growth trend in Developed Markets has shown some winter damage, EM growth remains generally weaker
3. I. Financial Market Review
4. US Treasuries US Treasury Yields Treasuries have remained in a tight range in recent months, consistent with a 2% to 2.5% growth trend; we expect growth acceleration will push rates to 3% Source: Thomson Reuters Datastream, as of 22 April 2014.
5. Global Equity Markets Developed and Emerging Market Indices Turmoil in EM – Fragile Five, Crimea Crisis – has extended performance gap vs DM; EM valuations look attractive once fundamentals stabilize Source: Thomson Reuters Datastream, as of 22 April 2014.
6. Fixed Income Credit Markets US High Yield and Global Emerging Market Yield Spreads EM spreads improved recently despite tapering; US high-yield spreads continue to rally on US “Goldilocks” (stronger growth/low inflation) Source: Thomson Reuters Datastream, as of 22 April 2014.
7. Currencies Strong US Dollar Trend Now Mostly Against EM US dollar has trended weaker against majors in recent months; EM currencies on roller-coaster recovery from Fragile Five crisis Source: Thomson Reuters Datastream, as of 22 April 2014.
8. II. US Macro
9. Key US Macro Forecasts Q4 GDP growth was revised up to 2.6% in 3rd estimate from 2.4% Left ‘14Q1 forecast unchanged at 1.9%; despite stronger Retail Sales and Industrial Production data However, Retail Sales and Production suggest Q2 is running much stronger than prev. expected; We raised our forecast to 3.2%, but >4% possible Fed will likely leave rates low until middle of next year allowing recovery to gather speed in 2015 Still expect ‘Mid-Cycle Slowdown’ in late 2016/early 2017 Source: Bloomberg and PineBridge Investments forecasts as of 22 April 2014.
10. US GDP Growth Real GDP Growth With 2013/2014 Forecasts Latest data shows stronger-than-expected “Icy Patch” rebound – 3% trend as early as 2Q14. Still looking for 2016 mid-cycle slowdown Source: Thomson Reuters Datastream and PineBridge Investments forecasts as of 22 April 2014.
11. US Industrial Sector Manufacturing Workweek and Capacity Utilization Rising capacity utilization and longer workweek is expected to fuel stronger business investment to maintain productivity growth Source: Thomson Reuters Datastream, as of 22 April 2014.
12. US Industrial Sector US Business Activity Survey Leads Spending by Six Months Share of US Companies Planning Capex Increase in a Year’s Time is Rising Business surveys still consistent with expected investment rebound despite “Icy Patch” related decline in January/February Source: Thomson Reuters Datastream, as of 22 April 2014.
13. US Consumer Sector Disposable Income and Wage Growth are Picking Up Average hourly earnings have been increasing for well over a year, disposable income trend is also showing signs of rebounding Source: Thomson Reuters Datastream, as of 22 April 2014.
14. US Housing Sector Recent Drop in Home Sales is Weakening the Continued Housing Boom Case Home Builder Survey Still Hints at Stronger Growth Contribution From Housing Fundamentals for a housing boom – lack of supply, rising prices and incomes – remain in place despite recent weakness in home sales Source: Thomson Reuters Datastream, as of 22 April 2014.
15. US Labor Markets Nonfarm Payrolls and Unemployment Rate Nonfarm payrolls have recovered from the “Icy Patch;” stronger labor force growth is expected to slow the pace of decline in the unemployment rate Source: Thomson Reuters Datastream, as of 22 April 2014.
16. US Inflation US Consumer Prices, Consumption Deflator Inflation remains well below Fed’s 2% target; we expect only a very gradual rebound in the next two years Source: Thomson Reuters Datastream, as of 22 April 2014.
17. US Monetary Policy Federal Reserve Balance Sheet Assets and Policy Rates Fed tapering on a US $10 billion/meeting reduction auto-pilot, despite FOMC assertion that “asset purchases are not on a preset course” Source: Thomson Reuters Datastream, as of 22 April 2014.
18. III. Global Macro
19. Global Macro Forecasts Global GDP growth forecasts slightly stronger than consensus in 2015, weaker in 2016 on US “Mid-Cycle Slowdown.” Global recovery should accelerate notably from 3.1% in 2013 through this year and next Main driver of global growth pick up this year is stronger DM growth; augmented by a pick up in EM growth in 2015 US to post most serious improvement this year; We expect Japan’s recovery to maintain pace and eurozone rebound to broaden Slightly more bearish in Developing Asia and Eastern Europe; more bullish on Latin America and MEA Source: Bloomberg, Thomson/Reuters Historical Data and PineBridge Investments Forecasts as of 22 April 2014.
20. Global Industrial Sector Developed Markets PMI Manufacturing Indices DM industrial growth momentum still generally strong, though reversals in US and Japan challenge recovery trend Source: Thomson Reuters Datastream, Bloomberg, Markit, as of 22 April 2014.
21. Global Industrial Sector Emerging Markets PMI Manufacturing Indices BRICs industrial momentum remains generally weak; India is showing tentative signs of recovery; Russia was heading for recession even pre-Crimea Source: Thomson Reuters Datastream, Bloomberg, Markit as of 22 April 2014.
22. PineBridge Investments – Economic Commentary To read the latest Market Watch publication www.pinebridge.com/Commentary.aspx To follow us on LinkedIn www.linkedin.com/company/pinebridge-investments‎
23. Biographies MARKUS SCHOMER, CFA Managing Director, Chief Economist PineBridge Investments, New York Mr. Schomer joined the firm’s predecessor company in 1996. As the Chief Economist for PineBridge Investments, Mr. Schomer is responsible for providing economic forecasts, analysis and commentary for all groups of PineBridge Investments. He is a member of various strategy committees and responsible for coordinating the PineBridge Investments interest rate and currency strategies. Mr. Schomer transferred to the U.S. in 2002 from the firm's London office, where between 1996 and 2001 he also managed various fixed income portfolios. Prior to joining PineBridge Investments, he was a Fixed Income Analyst at Commerzbank in Frankfurt, Germany. Mr. Schomer holds degrees in Economics from the University of Bonn in Germany and the University of East Anglia, in the UK. He also studied at the London School of Economics and is a CFA charterholder. PAUL HSIAO Economic Analyst PineBridge Investments, New York Paul Hsiao joined the firm in 2013. As the Economic Analyst for PineBridge Investments, Mr. Hsiao provides economic forecasts, analysis and commentary for all groups of PineBridge Investments. He is a member of various strategy committees and is responsible for leading the firm-wide daily morning call. Mr. Hsiao holds a degree in Economics from Columbia University in the City of New York. He also studied at the London School of Economics and The Johns Hopkins University.
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