excess supply/ past credit sweet spotfiles.ctctcdn.com/120f7c71301/b842f53a-285f-476d-be18-e5... ·...
TRANSCRIPT
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! Copyright (c) Mizuho Securities USA Inc. All Rights Reserved.
Excess Supply/ Past Credit Sweet SpotApril 2016
! Steven Ricchiuto, U.S. Economist, 212-209-9432
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Conclusions
•
! Domestic Economy
! Disappointing first half with real growth
! No acceleration into the second half
! Growth expected to stay comfortably in 1.75% to 2.25%% range through December
! 2016’s growth critically dependent on how quickly the Fed raises short-term rates and begins normalizing its portfolio.
! Currency market dynamics also key to 2016 outlook as it becomes clear Japan and Europe stuck in deflation
! Importance of the Balance Sheet
! Economies are able to withstand unforeseen developments or external shocks when all of their balance sheets are healthy
! Recent financial crisis shows what happens when balance sheets become compromised
! After several years of restructuring, both the household and banking industry balance sheet restructuring are complete
! Excess Supply a Problem for the Fed
! Lack of pricing power very evident in second quarter earnings reports as companies face an excess supply of both tradable
goods and commodities
! Dollar exchange rate is sensitive to an even marginal expected change in monetary policy
! Productivity decline over stated in terms of effect on potential growth
! Global economy also mired in below-trend growth trajectory, as China downshifts, and Japan and Europe face deflation
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Model Based Real GDP Forecast
Mizuho U.S. Macro Forecast
Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 2015 2016 2017
Real GDP (Q/Q%): 2.00% 1.4 1.75 2 2.1 2.25 2.4 1.8 2.1
PCE Deflator (Y-O-Y%): 1.3 1.3 1.5 1.4 1.3 1.3 1.5 1.4 1.6
Fed Funds Rate (Q4,%) 0-0.25% 0.25-0.5% 0.25-0.5% 0.5-0.75% 0.5-0.75% 0.5-0.75% 0.25-0.5% 0.5-0.75% 0.75-1.0%
10-year Treasury Note (%): 2.22% 2.19% 1.91% 2.15% 2.00% 2.05% 2.14% 2.06% 2.25
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Inflation no longer determines the business cycle
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Credit flows determine business cycle
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Credit cycles evolve differently than inflation cycles
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Monetary Policy
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Dual mandate trade-off ?
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Financial system health is no longer a key policy concern
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Monetary policy remains accommodative
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End of QE already evident in reserve market
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Demand and liquidity risk showing up in spreads
Commercial Paper Spread
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Credit Considerations
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Banks seem to be sensing increased risk in lending (C&I loans)
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Banks a lot less aggressive in lending (Consumer)
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A lack of demand shows banks have been more conservative than suggested
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Banking System Balance Sheet
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Banking system nearing completion of its restructuring
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Corporate Balance Sheet
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Corporate sector leveraging its balance sheet
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Credit markets no longer constraining the economy
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Non-financial corporate leverage has increased to drive up stocks
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Duration extension has run its course
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Corporate debt burden is healthy
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Household Balance Sheet
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Household savings should continue to rise
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Household deleveraging still underway
NET HOUSEHOLD LIABILITIES = TOTAL HOUSEHOLD LIABILITIES MINUS CASH, CHECKING ACCOUNTS, TIME DEPOSITS, AND MONEY FUND BALANCES
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Consumer balance duration extension has run its course
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Household debt burden is a positive
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Asset side of household balance sheet recovery has lost momentum
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Corporate share of national income: Inflection or turning point ?
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Valuation Considerations
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Low long-term rates has boosted P/E but is the bloom off the rose
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Some models suggest stocks are no longer cheap
* = Non-Financial corporate profits are profits from domestic operations only and include privately held companies, LLCs and sub chapter “s” corporates while S&P EBITDA includes financial companies as well as profits of overseas subsidiaries not just those repatriated.
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Earnings are not driving valuations
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Deflation risk is rising
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TIPS inflation breakeven back to Fed PCE target
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Liquidity premium remains evident in the market
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Consumers shift purchases to avoid price increases
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Auto Appendix
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Auto sales dominating retail activity
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Auto assemblies out of step with the rest of manufacturing
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Auto dealer inventory inflated
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Housing market appendix
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Housing market correction has run out of steam
Vacant single-family homes weighing less on the market
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Rents seems to be keeping pace with home prices
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Banks are less accommodative
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Recovery in new starts is shallow
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• MSUSA, its clients or an affiliate may act as counterparty to any order that you place, enter into transactions contrary to any recommendations contained herein or in any other recommendation you have received from MSUSA, or have short or long positions or act as principal or agent in any assets or instruments mentioned herein, or enter into derivative transactions relating thereto or perform or seek financial or advisory services for the issuers of those assets or instruments.
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