current global economy and its outlook · 2016-05-20 · © 2016 cme group. all rights reserved....

© 2016 CME Group. All rights reserved.

Current Global Economy

and its Outlook

Blu Putnam, Chief Economist & Managing Director,

CME Group, Inc.

April 2016


Investment advice is neither given nor intended

The research views

expressed herein

are those of the

author and do not

necessarily

represent the views

of CME Group or its

affiliates.

All examples in this

presentation are

hypothetical

interpretations of

situations and are

used for

explanation

purposes only.

This report and the

information herein

should not be

considered

investment advice

or the results of

actual market

experience.

2


Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of

a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders

should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one

trade because they cannot expect to profit on every trade. All references to options refer to options on futures.

Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the

meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s

value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use

funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because

they cannot expect to profit on every trade.

Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its affiliates.

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago

Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX, New

York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity

Exchange, Inc. KCBOT, KCBT and Kansas City Board of Trade are trademarks of The Board of Trade of Kansas City, Missouri, Inc. All other

trademarks are the property of their respective owners.

The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for

any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should

not be considered investment advice or the results of actual market experience.

All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current rules should be

consulted in all cases concerning contract specifications.

Copyright © 2015 CME Group. All rights reserved.

Disclaimer


• US Economy

• Commodity Markets & Global Economy

• Interpretations of Quantitative Easing and Negative

Rates

• Japanese Economy & Markets Dynamics

Current Global Economy and its Outlook:

Presentation Topics

4


• Long-Run Potential US real GDP growth only 2%

• Inflation low in US due to commodity supply boom and

demographics, not China deceleration

• Federal Reserve rate rises delayed, maybe only one or

two in second half of 2016.

• US Presidential election

- Congressional gridlock likely to continue

- Future budgets depend as much on US Senate

election as the Presidential vote

- US Dollar likely to be seen internationally as

becoming a more risky currency

US Economy

5


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Qu

arte

rly

US

Re

al G

DP

vs

Pre

vio

us

Qu

arte

r (A

nn

ual

ize

d)

Source: St. Louis Federal Reserve Bank FRED Database (GDPC1).

US Real GDP

2002-07 AVG = 2.77%

2009/H2-15 AVG = 2.11%

2016-17 Estimated AVG = 1.50%

2008-09/H1 AVG = -2.89%


0%

1%

2%

3%

4%

5%

6%

7%

Year

-ove

r-Ye

ar In

flat

ion

//

Pe

rce

nt

Inte

rest

R

ate

Source: Federal Reserve Bank of St. Louis FRED Database (PCEPILFE, FEDFUNDS)

US Core Inflation and Federal Funds Rate

???Core Inflation

Federal Funds Rate


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Year

-ove

r-Ye

ar In

flat

ion

//

Pe

rce

nt

Inte

rest

R

ate

Source: Federal Reserve Bank of St. Louis FRED Database (PCEPILFE, FEDFUNDS)

US Core Inflation and 10-Year Treasury Yield

???

US Treasury 10-year

Core Inflation


• Slowing global growth – No one engine of growth

• Commodity production boom

• New commodity market dynamics

- Metals and all rebounding off lows of 2015

• End of Fear of Ever Lower Prices

• Finding new trading ranges

- Technology of Oil

• More efficient transportation

• More efficient extraction techniques

• US shale oil production now the swing producer /

price setter for global crude oil

Commodities and Global Growth

9


0% 3% 6% 9% 12%

US

UK

Euro-Zone

Japan

China

India

Brazil

Russia

Source: World Bank via Bloomberg Professional.

Global Growth Deceleration

2016-17 Est

2010-2015

2002-2007

© 2016 CME Group. All rights reserved. 11

0

20

40

60

80

100

120P

rice

s In

dex

ed

to

30

Ju

ne

20

15

= 1

00

Source: Bloomberg Professional (CL, HG, IO, Most Active Contract Prices)

Oil, Copper, Iron Ore: Bouncing off their Lows

Iron Ore

Copper

Oil


• US Federal Reserve -- $3.6 trillion of QE since

September 2008 – Virtually no inflation.

• European Central Bank -- € 1.3 trillion of QE since 2008

– Virtually no inflation.

• Bank of Japan -- ¥ 250 trillion of QE since December

2012 – Virtually no inflation.

• Negative rates are a tax on the banking system.

• The costs are unlikely to be passed on to consumers.

• Higher taxes virtually never stimulate credit growth.

Quantitative Easing (QE) did not create

Inflation, and Negative Rates are not likely

to work either

12


$0

$1

$2

$3

$4

$5

US$

Tri

llio

ns

Source: Federal Reserve Bank of St. Louis FRED Database

Composition of Federal Reserve Assets

Long-Term Treasuries

Short & Medium Term

Mortgage-BackedSecurities

Other


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1999 2001 2004 2006 2009 2011 2014

Euro

Bill

ion

s

Source: European Central Bank Monthly Bulletins, obtained through the Bloomberg Professional.

European Central Bank Assets

Securities & Govt Debt

Loans

Other

FX and Gold


¥0

¥50

¥100

¥150

¥200

¥250

¥300

¥350

¥400

¥450

Trill

ion

s o

f Ja

pan

ese

Ye

n

Source: Bank of Japan (www.boj.or.jp)

Bank of Japan Assets

Japanese Government Securities

Loans


-6%

-4%

-2%

0%

2%

4%

6%

-4% -2% 0% 2% 4% 6% 8%

De

gre

e o

f St

imu

lus

Nominal Interest Rate (Assuming 2% Inflation)

Source: CME Group, Strategic Intelligence & Analytics

Different Interpretations of Negative Rates

Negative Rates are a tax and discourage economic activity

The more negative the nominal rates, the more the stimulus -- Linear Thinking


-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Year

-ove

r-Ye

ar P

erc

en

t C

han

gein

Co

nsu

me

r P

rice

Ind

ex

Source: Bloomberg Professional (JCPNGEN)

Japanese Inflation

Sales Tax Rise


• Bank of Japan negative rates are a tax on the banking

system; do not increase lending; have been followed

by yen appreciation

• Central bank asset purchases do not increase lending;

do reduce liquidity of bond markets

• Long-Run potential Japan real GDP growth in the 1% to

1.5% range.

Japanese Economy

18


• Slower global growth typically leads to increased

global political risk

• Demographic divide (young economies compared to

mature economies) is becoming more of a challenge to

global growth

• Era of lower commodity prices may bring some

improvements in global growth only after commodities

find their trading ranges and fear of further declines in

prices have abated. That is what is happening in 2016.

• Markets have become more volatile, as they appear to

be learning to live with more realistic expectations

Market Dynamics

19


0

60

120

180

240

300

360

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

20

16

Yen

pe

r U

S D

olla

r

Source: Bloomberg Professional (JPY)

Japanese Yen per US Dollar


0

30

60

90

120

150

0

5,000

10,000

15,000

20,000

25,000

Dec

-201

0

May

-201

1

Oct

-201

1

Mar

-201

2

Au

g-20

12

Jan

-201

3

Jun

-201

3

No

v-20

13

Ap

r-20

14

Sep

-201

4

Feb

-201

5

Jul-

2015

Dec

-201

5

May

-201

6

Yen

per

USD

(R

iisin

g lin

e is

dep

reci

atin

g ye

n)

Nik

kei 2

25 In

dex

Source: Bloomberg Professional (JPY & NKY)

Japanese Equities and the Yen

Yen per USD, Right Scale >>>

<<< Nikkei 225, Left Scale


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Sto

ck In

dex

Val

ue

, No

FX

Ad

just

me

nt

Source: Bloomberg Professional (INDU & NKY)

The Japan Nikkei 225 and the US Dow Jones Industrial Average Since 1970

Japan Nikkei 225

US Dow Jones Ind Average

current global economy and its outlook · 2016-05-20 · © 2016 cme group. all rights reserved....

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