guest commentary - bloomberg l.p. · allocations to u.s. real estate. thus, cap rates have declined...
TRANSCRIPT
Tuesday
March 29, 2016
www.bloombergbriefs.com
Fed Chair Yellen, Dallas Fed President Kaplan SpeakBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: U.S. Federal Reserve Chair speaks at an event Janet Yellenhosted by the Economic Club of New York at 12:20 p.m. in New York. Afterward, she will respond to questions from economist Alan Blinder and Columbia Business School Dean Glenn Hubbard. Dallas Fed President speaks on a moderated Robert Kaplanpanel at the Austin Chamber of Commerce at 1 p.m., then takes part in a moderated Q&A session at the University of Texas at Austin at 4 p.m.
ECONOMICS: The is S&P/Case-Shiller composite-20 city home price indexexpected to have risen 5.75 percent in January from a year earlier, 9 a.m. The Conference Board's index is forecast to rise to 94 in March Consumer Confidencefrom 92.2 in February, 10 a.m.
MARKETS: rose as most markets in the region opened for their European sharesfirst trading day this week. dropped with , while the dollar rebounded Asian stocks oilfrom its first slide in seven days
(All times local for New York.)
Click to view a live version of this chart on the Bloomberg terminal.here
Follow TOPLive for our blog on Fed Chair 's speech at the Janet YellenEconomic Club of New York starting at 12 p.m. EDT on the Bloomberg terminal .here
COMMENTARY IN THIS ISSUE
Early cracks may be forming in the credit foundation for commercial
, implying a real estatepotential slowdown that could undermine GDP growth: Kathy Bostjancic, Oxford Economics.
February personal income and spending did not present an encouraging backdrop for a -consumerled growth resurgence early in 2016: Bloomberg Intelligence Economists.
U.S. may have recovered house pricesfrom the mortgage-lending debacle of the 2000s, but millions of people who lived through the mess still have a long way to go: Mark Whitehouse.
Paul Mortimer-Lee, Chief Economist for North America at BNP Paribas discusses the Fed's measure of inflation, preferred debt dynamics and corporate profits in the U.S: Tom Keene and Barry Ritholtz.
QUOTE OF THE DAY
"Policy makers must recognize that the public views their forecasts as statements of goals, not mere academic prognostications."
— Former Minneapolis Fed President Narayana
Kocherlakota, in a Bloomberg View post
GUEST COMMENTARY KATHY BOSTJANCIC, OXFORD ECONOMICS
Stock, Job Market Strength Should Aid Consumer Attitudes
An improving stock market and solid employment situation — with the lowest levels of jobless claims in more than a year — should help bolster consumer attitudes, although higher gasoline prices may constrain the improvement. Economists polled by Bloomberg anticipate a gradual increase in the headline to 93.8 in March from 92.2 prior, which remains considerably softer than the 98.0 average for all of 2015. During the first three weeks of March, the S&P 500 has increased 7.0 percent, following declines of 6.6 percent in January and 0.7 percent in February, while regular-grade gasoline climbed 10.0 percent in March after falling 5.5 percent in January and 9.1 percent in February.
— Carl Riccadonna, Yelena Shulyatyeva and Richard Yamarone, Bloomberg Economists
March 29, 2016 Bloomberg Brief Economics 2
GUEST COMMENTARY KATHY BOSTJANCIC, OXFORD ECONOMICS
Commercial Real Estate Slowdown May Knock U.S. GrowthCommercial real estate has long been
a bright spot of the U.S. economy, recovering faster than residential housing from its slump during the Great Recession. However, early cracks may be forming in the credit foundation for commercial real estate, implying a potential slowdown that could undermine GDP growth.
As a share of GDP, non-residential and multi-family investment is just 3 percent, so a moderate slowdown in CRE would only represent a mild headwind. However, in previous recessions, even prior to the Great Recession, more significant CRE downturns have knocked a full percentage point off GDP growth on average.
Less non-residential construction activity means a slowing of job gains and possible job losses for construction workers in that sector. During this economic expansion, the total number of non-residential construction jobs created has been a healthy 610,000, outstripping the residential construction sector, which added 504,000 jobs. Given that these construction jobs tend to be relatively high paying -- with average hourly earnings of around $32 — the aggregate loss of income would also damp consumer spending.
Indirectly, a CRE slowdown would also weigh on economic growth by exacerbating downward pressure on banks’ profits as loan write-downs rise. Banks’ commercial real estate loans outstanding are approaching levels recorded at the previous peak. Increased write-downs would squeeze overall lending as bank balance sheets would be further constrained.
Additionally, increased risk premia associated with commercial real estate mortgage bonds would widen CMBS spreads versus U.S. Treasury yields, placing additional downward pressure on commercial real estate activity and property values.
Five things point to a cooling in the CRE market:
Property owners and developers nowface tougher borrowing standards. The Fed’s Senior Loan Officer Opinion Survey (SLOOS) for the first three months of 2016 revealed that for the second consecutive quarter banks are tightening lending standards for CRE loans.
Commercial mortgage-backed securities interest rate spreads versus U.S. Treasury yields have widened sharply, after falling to very narrow levels. There is a strong correlation between changes in banks’ lending standards and the CMBS spreads. Specifically, changes in banks’ lending standards lead movements in CMBS spreads by about a year.
Rising property prices have led to lower capitalization rates. Capitalization rates represent the total annual net operating income of a property divided by its cost, or value. While rental prices have risen rapidly over the past several years capital appreciation has been even stronger, supported by greater investment allocations to U.S. real estate. Thus, cap
rates have declined to historical lows in some markets.
The CRE market is increasingly vulnerable to a rise in interest rates
since investors have only accepted low cap rates predicated on continued We expect interest low interest rates.
rates to rise gradually, with the Fed likely to raise rates by 50 basis points at most this year. Given that financial markets are pricing in at most one rate hike this year, there is a risk that rates jump sharply higher, even if the Fed tightens very gradually. This represents a significant risk to a rate-sensitive sector like real estate, as the key cap rate spread would narrow rapidly.
Slower corporate profit growth is a major headwind for the office sector, despite still strong employment gains. After an outright contraction of 10.7 percent in S&P earnings per share in 2015, we forecast only a 3.5 percent rebound this year, followed by a similarly subdued 3.9 percent forecast for 2017.
— Kathy Bostjancic is Director of U.S. Macro
Investor Services at Oxford Economics
CONSUMERS CARL RICCADONNA, YELENA SHULYATYEVA AND RICHARD YAMARONE, BLOOMBERG ECONOMISTS
Changes in Banks’ Lending Standards Lead CMBS Spreads
March 29, 2016 Bloomberg Brief Economics 3
CONSUMERS CARL RICCADONNA, YELENA SHULYATYEVA AND RICHARD YAMARONE, BLOOMBERG ECONOMISTS
U.S. Consumers Get Soft Start to 2016 as Wage Gains SlipFebruary personal income and
spending did not present an encouraging backdrop for a consumer-led growth resurgence early in 2016. February personal spending was in line with expectations but a sharp downward revision to January puts the quarter on a soft trajectory.
Furthermore, a drop in wage and salary income for the month and slight increase in the household savings rate raise questions whether the funds will be readily available to fuel a spending pickup in March. This disappointing outcome raises some doubts as to whether consumers are primed to drive growth over the medium term.
The tepid data raise the possibility that the first quarter will be another weak quarter for GDP growth, which would signal to policy makers that the economy is not yet ready to withstand further rate increases. As a result, despite some policy makers’ desire to keep rate hikes on the table at the April meeting, it is more realistic that the next policy move will come in June, assuming that future income and spending reports show a firmer trend relative to the first two months of the year.
Personal spending for February was in line with expectations, increasing 0.1 percent. However the January reading was revised significantly lower and is now estimated to have increased by 0.1 percent, compared with 0.5 percent in the prior estimate. The details showed a deeper decline in spending on non-durable goods to minus 1.1 percent versus minus 0.5 percent previously, while spending on services continued to indicate moderate gains, up 0.4 percent following 0.4 percent in January.
Spending on durable goods was little changed at 0.1 percent following a 0.7 percent decline previously. The spending figures match the recent weakness in retail activity. Personal spending growth for the quarter is running at 1.5 percent (annualized), down from 2.8 percent in the fourth quarter and 4.3 percent in the third quarter.
Personal income rose 0.2 percent last month, 0.1 percentage point better than expectations, following a 0.5 percent gain
in January. This was not enough to keep the year-on-year growth rate from falling to 4.0 percent from 4.2 percent prior. In the underlying details, wage and salary income slipped 0.1 percent following an outsize gain in January of 0.6 percent, which also led to a backsliding in the year-on-year rate (4.3 percent versus 4.4 percent prior).
If inflation picks up this year, it will be necessary for wage and salary income to accelerate, as well, or household consumption will lose traction. The weakness in wage and salary income was not unexpected given the soft results for aggregate hours and aggregate income evident in the February jobs report. The personal savings rate edged up to 5.4 percent in February from 5.3 percent previously, which was the highest level in a year.
The inflation results were slightly weaker than expected. The headline PCE deflator declined 0.1 percent, in line with expectations, which allowed the year-on-year change to slip back to 1.0 percent from 1.2 percent in January. However,the core PCE deflator, which is the Fed’s preferred inflation gauge, rose just 0.1 percent following a 0.3 percent increase the prior month. A 0.2 percent increase was projected, but following back-to-back 0.3 percent increases in the core CPI, analysts were concerned that a firmer
outcome would raise alarms that inflation was swiftly returning. The year-on-year change for core inflation held steady at 1.7 percent, which is nonetheless the highest level since July 2014.
Both the core CPI and core PCE inflation rates are rising, but the latter is accelerating less dramatically, probably because housing and shelter costs account for a larger portion of the CPI. Until personal income in general, and wage and salary income in particular, show greater evidence of accelerating, the consumer inflation trend will lack the fuel to manifest a sustained flare-up.
The February income and spending report was tepid at best. If the economy is going to grow at or above trend in 2016 and core inflation is going to continue to firm, household economic conditions will need to improve relative to the first two months of the year. To be sure, a few weak reports do not establish a trend, particularly if job gains continue to drive down labor slack and create wage pressures.
Thus, the consumer-led growth thesis for 2016 is not in jeopardy yet, but a firming of conditions will be necessary for policy makers to feel that the economy’s performance is matching their expectations. At the margin, the income and spending report raises the hurdle for policy action at the April FOMC meeting.
DATA & EVENTS
Income Growth Slows From a Year Earlier
March 29, 2016 Bloomberg Brief Economics 4
DATA & EVENTS
TIME COUNTRY EVENT SURVEY PRIOR
7:00 Brazil FGV Consumer Confidence — 68.5
8:30 Canada Industrial Product Price MoM -0.20% 0.50%
8:30 Canada Raw Materials Price Index MoM -0.90% -0.40%
9:00 U.S. S&P/Case-Shiller US HPI MoM SA — 0.78%
9:00 U.S. S&P/CaseShiller 20-City Index NSA 182.74 182.75
9:00 U.S. S&P/CS 20 City MoM SA 0.70% 0.80%
9:00 U.S. S&P/CS Composite-20 YOY NSA 5.75% 5.74%
9:00 U.S. S&P/Case-Shiller US HPI NSA — 175.65
9:00 U.S. S&P/Case-Shiller US HPI YOY NSA — 5.43%
9:30 Brazil Outstanding Loans MoM — -0.60%
9:30 Brazil Total Outstanding Loans — 3199b
9:30 Brazil Personal Loan Default Rate — 6.20%
10:00 U.S. Consumer Confidence Index 94 92.2
10:00 Mexico Economic Activity IGAE YoY 2.50% 2.56%
11:00 Mexico International Reserves Weekly — $176939m
21:45 China Westpac-MNI Consumer Sentiment — 111.3Source: Bloomberg. Surveys updated at 5:35 a.m. New York.
CALENDAR
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
OVERNIGHT
As prepares to ramp up Mario Draghi debt purchases starting Friday in his biggest assault against euro-area deflation risks, he’s about to get another sense of the magnitude of the challenge.
in the currency zone Consumer pricesprobably fell for a second month in March and the unemployment rate remained in double digits in February, economists forecast in Bloomberg surveys before data this week. Another report is expected to say economic confidence was unchanged in the 19-nation region in March.
for February Japanese retail salesshow an economy struggling to rebound after contracting last quarter, when waning private consumption dragged gross domestic product into negative territory. The gain in retail sales measured year-on-year was exaggerated by the 2016 leap year, which provided more shopping time in February.
Indian Prime Minister Narendra Modi offered a wide-ranging rebuttal to critics who say he’s gotten lucky with low oil prices. Loan growth has picked up, corporate rating upgrades are now outpacing downgrades, foreign direct investment hit a record last year and some key manufacturing sectors such as carmakers are growing rapidly, Modi said at an event organized by Bloomberg LPin New Delhi on Monday. The focus is now on clean energy, farm incomes and creating jobs, he said.
Europe
Asia
COMMENTARY MARK WHITEHOUSE, BLOOMBERG VIEW
Goods Trade Rebounds in Sign of Accelerating Economy
Imports to and exports from the U.S. rebounded during February, according to the advance trade report. This marks the first time flows in both directions rose since March 2015 and adds to other reports suggesting the economy is accelerating, including three regional Federal Reserve surveys that have returned to expansionary readings. While the month’s report is positive, the move follows downtrends in both imports and exports that have been in place since the fourth quarter of 2014. See a live version of this chart on the terminal .here
— TJ Marta, Bloomberg News
March 29, 2016 Bloomberg Brief Economics 5
COMMENTARY MARK WHITEHOUSE, BLOOMBERG VIEW
The U.S. Housing Bust Casts a Long ShadowHouse prices may have recovered from
the mortgage-lending debacle of the 2000s, but millions of people who lived through the mess still have a long way to go.
A new report from the Urban Institute's Housing Finance Policy Center offers a valuable glimpse at what has happened to the U.S. population's housing and credit status since the turn of the century. Of particular interest: A group of about 19 million renters who, at some point in the past 16 years, used to be homeowners.
People can become renters for various reasons, such as moving for a job or downsizing in retirement. The data, though, suggest that this group consists largely of people who lost their homes because of unaffordable loans, the housing bust and the subsequent economic slump. They are mostly middle-aged, unusually likely to have foreclosures or other black marks on their credit records, and are concentrated in bubble states such as Arizona, California and Florida. The top chart shows a breakdown by age.
For these housing refugees, homeownership remains mostly out of reach, leaving them vulnerable to rent increases that have accelerated since the economy hit bottom in mid-2009. As of 2015, some 45 percent had credit scores of 650 or less, below the threshold typically required to qualify for a mortgage. The only group with a worse credit profile is renters who have never had a mortgage — but they tend to be much younger, so they’ve had less time to build their credit. The bottom chart shows a breakdown by housing and mortgage status.
In short, the picture isn’t pretty. Despite the Federal Reserve's efforts to shore up house prices, despite the tens of billions
of dollars in legal settlements paid by mortgage lenders, the housing crisis is still with us — and probably will be for a
long time to come.This column does not necessarily reflect the
opinion of the editorial board or Bloomberg LP
and its owners.
MARKET INDICATORS
Homeownership Lost
Distressed Credit
March 29, 2016 Bloomberg Brief Economics 6
MARKET INDICATORS
SURVEILLANCE
Source: Bloomberg. Updated 5:45 a.m. New York time.
March 29, 2016 Bloomberg Brief Economics 7
Bloomberg Brief: Economics
SURVEILLANCE
Paul Mortimer-Lee, chief economist for North
America at BNP Paribas, speaks with
Bloomberg's Tom Keene and Barry Ritholtz about
the Fed's preferred measure of inflation, debt
dynamics and corporate profits in the U.S.
Q: What's the new run rate for America?A: We think trend's 1.5 but — we're above trend at the moment. This is when the consumer's benefiting from weaker gasoline prices. And let's face it, the economy is very reliant upon the consumer. We saw from durable goods last week that investments are decreasing not increasing, and so therefore the soft consumer is very worrying indeed.
Q: The PCE year-over-year inflation number is 1.7 percent. What does that mean for the Fed? Are they stuck in neutral? Are they running out of reasons to raise rates? What does the number mean for the urgency at which they want to get off of zero interest rate policy?A: I don't think there's any great urgency. The Fed faces asymmetric risks. We've seen the economy weaken. If it goes and the economy goes into the pit, their goose is cooked. If, however, the inflation rises, well that's what they're aiming to do. They're aiming to get inflation up. So 1.7 is hardly catastrophic, and the Fed has run below it's 2 percent target for very,
very many years, it shouldn't worry about overshooting a little bit, even.
Q: Where are debt dynamics? One of the raging debates, we've already framed it a few times this morning, is the amount of debt overlay that corporations and individuals have. Are we running smarter now, Paul?A: Well, I think households are probably by and large OK. Household debt to income ratios have come back to trend after a long period adjustment, and borrowing has been very weak, but what the Fed's done is stimulate corporate borrowing. There's some parallels between the run up to the 2000, 2001 recession. But it's not the same because corporations have not overinvested. What they've done is overleveraged and built up their debt, bought back their equity, to keep earnings per share going up. But that leaves them in quite a difficult situation because profits are getting squeezed. Many of them have too much debt, and I think that's one of the reasons why we're seeing weak investment, and presumably at some stage they'll start to hire less.
Q: But their coupon is low, right? They've got such a nominal, low nominal and low real yield?A: That's right. I mean, although the spread's gone out, the actual rate at which they're borrowing is quite low, and one of the good things about this
borrowing spree that we've seen, both for corporations and emerging markets, is that the maturity of the debt is very long, and so they're not facing big rollover risk. You hurt a lot if your profits are going down and you have to refinance your debt when the markets close. That's not happening. And so I don't think we should get too worried about the corporate position, but it is definitely going to be a break on investment, and the main driver of investment at the end of the day is profits, and profits are not going anywhere, and if the consumers flowing, and global remains low, it's going to be very difficult to build margins. In fact, they're going to get squeezed.
Q: I've been hearing people scream about peak profits for seven or nine quarters. Are we in any sort of danger, in the last minute and a half that we have, are we in any sort of danger of really seeing a profit recession or are we just going to see a little come back off of these high level profits we've enjoyed the past few years?A: I think they're going to come back, because the reason is that the labor market is tight, real wages are going up, and productivity is very poor, and that means a squeeze on profits, and I think we're going to face that for several quarters to come.
This interview has been edited and condensed.
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