final macro rfp 2016

2016 Macroeconomics Anna Zhang

Macroeconomics Overview

• 2016 GDP should approach 2.4% while 2017 GDP shows healthy growthUS Economy Overview

• Low but stabilizing oil prices continue to benefit consumers while threatening manufacturers, including U.S. producers

Oil Outlook

• Emerging Markets improve while risks and uncertainties increase in EuropeGlobal Economy Update

GDP Sector Oil International SummaryGDP Sector Oil International Summary

GDP Sector Oil International Summary

Q3 US GDP in Healthy Growth➢ Q3 2016 GDP growth up 3.2% vs the second quarter’s sluggish 1.4%

➢ Increases in consumer spending, private inventory investment, and exports all contributed to strong growth

➢ Exports rose to a 7-year high in Q3 2016, bolstering GDP despite looming trade changes

➢ 2017 optimistic with estimates of 2.5% GDP growth

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-560.0-540.0-520.0-500.0-480.0-460.0-440.0-420.0

Net Exports

Net Exports (Billions USD)

Exp

orts

(Bill

ions

US

D)

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U.S. GDP Growth

U.S. Compounded GDP Growth

Per

cent

Overall growth in the third quarter contributed to a substantial increase in GDP

Source: International Monetary Fund, Reuters, Wall street Journal

Service Economy Remains Stable ➢ ISM Non-Manufacturing data shows strength in

business activities and investors’ confidence

➢ Consumer prices approach Fed target• Core PCE is at 1.7% Y/Y, indicating the

consumer’s ability to buy remains strong

➢ Retail sales in subtle but consistent growth


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-15.0

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-5.0

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Real Retail Sales YoY

Real Retail Sales Percentage Change YoY

Per

cent

Cha

nge

YoY

Consumer spending will cool a little but continue supporting the economy


Source: International Monetary Fund, FRED

Manufacturing Returns to Modest Expansion

Teamwork

➢ Despite the strong dollar, manufacturing expanded mildly in October after a slight Q2 contraction

• PMI, New Orders, Production, Exports are strong – indicating a continued manufacturing strength

• Employment remains stable


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100.0000

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Broad Trade Weighted Dollar

Trade Weighted Dollar (Index=1997)

Dol

lar W

eigh

t Ind

ex

US Manufacturing may struggle due to the dollar but expansion in Q3 is a positive sign looking to 2017

Source: ISM, FederalReserve, Fred

Consumers’ Assessment of Current Conditions Improved

➢ Consumer confidence is on the rise• Stable Michigan index findings

since early 2016

➢ Real disposable personal income has increased by 4.1% in the second quarter of 2016 while savings rate remained constant at 5.7%

➢ Real median earnings continue to increase as well, rising nearly 2% year-over-year in Q3



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Savings, Sentiment, and Income

Personal Savings Rate Consumer Sentiment Real Disposable IncomeIn

dece

s

Rea

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posa

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Inco

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(Bill

ions

)

High disposable income will continue to drive the consumer market


Housing Remains Hot in 2016

Housing demand continues to outweigh supply Case-Shiller 20-City Composite Home

Price Index increased 5.13% YoY

Home Ownership slightly increased in 2016 but is still relatively low compared to pre-crisis levels

➢ Rising interest rate environment will likely cool down some of the demand➢ S&P Second Mortgage Default Index

also started to rise since July


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Quarterly and Seasonally Adjusted Homeownership Rates

Per

cent

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

200400600800

10001200140016001800

Housing Starts

Thou

s of

uni

ts, S

AA

R 1323


Housing price is expected to slow down its growth in 2017


➢ As supply remains in surplus, OPEC agrees to cut its production for the first time since 2008

➢ Dilemmas faced by major players➢ US: Bankruptcies for small companies; rig counts dropped

significantly➢ Russia: Declined Govt. Revenue; Cold weather may damage shut

down rigs➢ Iran: Returning to oil market after sanction lifted, remains in

struggle to regain market share➢ Saudi Arabia: Oil makes up 70% of the economy; Govt. cut into $2

Trillion sovereign wealth fund to make up for the $200 Billion loss in oil revenues

➢ If prices go above $55, US Oil companies output may surge to offset the balance again ➢ Jan 9th, 2015, WTI Oil Price: $48.35; Rig Counts: 1750➢ Nov 21st 2016, WTI Oil Price: $47.48; Rig Counts: 593


Oil Became More Stable Compared to the Beginning of 2016

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Crude Oil Price

WTI Crude Oil Prices Brent Crude Oil Prices

Dol

lars

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rel

WTI: 47.48Brent: 45.96

CountryProduction Cost per Barrel Current Margin Margin in JanuaryMargin Increase

USA $23.35 $22.85 $3.65 626.03%

Russia $19.21 $28.19 $7.79 361.87%

Iran $9.08 $38.32 $17.92 213.84%

Saudi Arabia $8.98 $38.42 $18.02 213.21%

As of 11/19/16

Oil price is expected to stay low and stable in 2017


Source: BHI Rig Count, BPReportWorldEnergy

Emerging Markets outlooks improved while risks and uncertainties increased in Europe

Global Performance UpdateRecap of 2016 Global Events

Chinese Stock

Market and its currency

both crashed

WTI oil settles at nearly 13-year low

below $27 a barrel

US Domestic Economic Indicators Recover

Confidence

Pound Plunges

after Brexit; Most

European Bonds

went into negative

yields

Japan‘s 20-Year Govt Bond Yield

Goes Negative for First

Time

Brazil Senate voted to

impeach its president

Stock Rallied and

Mexican Peso

plunged following Trump's

win

Narendra Modi Bans

India’s Largest

Currency Bills in Bid

to Cut Corruption

OPEC has agreed to its first oil

output cuts since 2008


Source: US Federal Reserve, Wall Street Journal, Bloomberg, Economist Intelligence Unit

➢ Emerging Markets• China underwent stabilization in 2016 and

we expect stable growth in 2017• Mexico looks to continue their structural

reform• India remains strong in growth, while

undergoing economic reforms

International Developed Economies: • ECB looks to continue their QE in order to

stimulate further growth • Major political changes expect to take

place next year, such as an upcoming referendum in Italy and elections in France and Germany in 2017 that indicate unrest

Emerging Markets outlooks improved while risks and uncertainties increased in Europe

Global Performance Update

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1.10001.20001.30001.40001.50001.60001.70001.8000

Dollar to Pound Exchange Rate

Dol

lars

to P

ound

1.23

2010 2011 2012 2013 2014 2015 2016-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%12.00%

European Union, India, Mexico GDP Growth Rate

EU India Mexico

7.62

2.09 1.93

Going Forward in 2017


Source: US Federal Reserve, Wall Street Journal, World Bank, Economist Intelligence Unit

Top-Down Economic Summary

Monetary and Fiscal PolicyCentral Bank Supportive• Fed is expected to hike 25 basis points on

December and continue the trend in 2017

Fiscal Policy Neural to Positive• Cautious fiscal outlook with positivity in

new administration • Potential infrastructure spending increases

and lightened tax policy

Inflation and Interest Rates• GDP is expected to grow at 2.5% in 2017• Inflation is on the rise to target • Rates are expected to continue to rise 50-

100 basis points in 2017

Consumer• Growing consumer spending • Debt service payments

falling compared to disposable income

Business• Manufacturing grows

smoothly• Service sector remains

stable

Equity• Short Term:

• Positive• Overweight Sectors

• Technology• Financials

Other• Strong dollar remains

negative for Manufacturing• Low Oil Price continue to aid

consumer

Bonds• Short Term:

• Neutral/Negative• Rate hikes make

treasuries unattractive• Rising rates

environment may post some concerns in MBS

GDP Sector Oil International Summary GDP Sector Oil International Summary

Economic growth is expected to continue in 2017 to aid Equity market growth

SMIF Projections through 2017SMIF Fed / CME Futures

2016 Q4 2017 Q1(f)

2017 Q2(f)

2017Q3(f)

2017Q4(f)

2016 Q4 2017 Q1(f)

2017 Q2(f)

2017Q3(f)

2017Q4(f)

Unemployment 4.9 4.9 4.9 4.8 4.8 4.9 4.8 4.7 4.7 4.7

Inflation 1.8 1.8 1.9 2.0 2.0 1.8 1.8 1.8 1.9 1.9

US GDP 2.2 2.1 2.3 2.5 2.3 2.2 2.0 2.2 2.2 2.1

Short Term Rate 0.75 0.75 1 1.25 1.25 0.52 0.66 0.755 0.85 0.955

Long Term Rate 2.00 2.14 2.25 2.37 2.63 2.00 2.14 2.25 2.37 2.63

SMIF IMF

2017 2017

World GDP 3.5 3.4

GDP Sector Oil International SummaryGDP Sector Oil International Summary

Economic growth is expected to continue in 2017 to aid Equity market growth

Appendix

Appendix

Global Economy Performance Update

Bottom Line InvestmentGrowt

h &

Economy

• Equities losses in EU are continue, but devalued currency may bring investment

• Substantial increases in emerging markets throughout the year

• US economy and equities continue to be more stable than other regions.

• Eurozone risk high, reward uncertain

• High potential in foreign emerging markets, though reliability is low

I-Rates &

Inflation

• I-rate looks to increase by 25 basis points in December, with 2-3 increases in 2017

• Neutral to negative impact on FI securities due to strong probability of rate hikes

• Positive/Neutral impact on Equities due to relative domestic strength.

GDP Sector Consumer International Summary

US economy strong relative to other developed countries

Appendix

Macro Team and Responsibilities

Provide global market research and insight• Reasonable conclusions based on facts

Understand possible outcomes and act on what is likely to happen

• Prepare for alternative possibilities Update economic forecasts

• Communicate information to the team Current Team

• Anna Zhang, Research Team Leader• Jonathan Larson, Team Co-lead• Wally Spillane, Analyst• Helen Hu, Analyst• Marc Pinski, Intern• Bryan Vo, Intern• Chang Qu, Intern

Appendix

Economic Conclusion Economic Category Economic Comments Short Term Long Term Economic Conclusion Bond Outcome Equity Outcome Sector OutlookConsumer - Growing consumer spending

- Maintained personal savings rate- Disposable income growth- Optimistic consumer confidence - Debt service payments falling compared to disposable income

Trend: Positive

Impact: Positive

Trend: Improving

Impact: Stable to positive

While savings rate remains consistent, increasing wage will continue to support a moderate growth in consumer spending

Neutral / Negative Positive (+) Technology(+)Commodities

Business - PMI Growing- New orders express deceleration in growth- Steady Employment

Trend:Slightly positive

Impact:Neutral to positive

Trend:Slightly positive

Impact:Positive

Potential tax cuts in corporates and stronger fiscal spending will help stimulate the business sector

Neutral / Negative Positive (-) Consumer Staples(-) Financials

Government - Cautious fiscal outlook with positivity in new administration- Potential infrastructure spending increases in new administration- Lightened tax policy- Potential reform vision in healthcare

Trend: Slightly positive

Impact:Slightly Positive

Trend: Neutral / positive

Impact:Neutral

Potential increase public infrastructure; cutting corporate and individual tax rates; uncertainty in trade policies; tends to favor a low rate environment

Neutral Positive (+) Healthcare(-) Financials

Central Bank - Highly likely December rate hike-

Sustainable economic growth will contribute to 2-3 potential rate hikes

(-) Treasuries; MBS

Neutral (+) Financials(-) Housing

Inflation - CPI on target- PCE slightly below Fed target

TrendPositive

Impact:Positive

Trend: Steady

Impact Positive

Inflation to meet Fed's target rate of 2 percent.

Negative Positive (-) Consumer Staples

Housing - Housing starts growing- Home ownership slightly increasing- Increasing Case-Shiller 20-city index- Slight rise in second mortgage default

Trend: Positive

Impact:Positive

Trend:Neutral

Impact: Neutral

Supply remains low in low end housing markets; mortgage rates remain low to support demand. Concerns in commercial / residential property sectors keep us cautious.

Neutral Neutral / Positive (+) Real Estate (+)Industrial sector

Appendix

final macro rfp 2016

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