Will the Fed Hike Once This Year? Longevity of the Current Expansion DR. RAJEEV DHAWAN DIRECTOR Presented at the Global Interdependence Center’s Central Banking Series meeting at Stationers’ Hall in London, U.K. • June 3, 2016
April 27, 2016
Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.
‘15 Q4
‘16 Q1
Real GDP
1.4%
0.5%
Consumption
2.4%
1.9%
Confidence
102.6 (Sept. ‘15)
92.6 (May‘16)
Sentiment
96.0 (July ‘15)
94.7 (May‘16)
Vehicle Sales
18.2 mil. (Nov. ‘15)
17.5 mil. (May ‘16)
240K
203K
‘15 Q4
‘16 Q1
Housing Starts
1.135 mil.
1.148 mil.
Nonres. Invest.
-2.1%
-5.9%
a. Structures
-5.1%
-10.7%
b. Equipment
-2.1%
-8.6%
c. IP Products
-0.2%
1.7%
-2.0%
-2.6%
Job Growth
A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft.
Exports
Investment and its Components
Nonresidential Investment
(%, Y-O-Y) 15
(%) 10
Tech Equipment & Intellectual Property
10 5 5 0
0 -5 -10
2010
-5 2011
Total
2012
2013
Less Mining & Wells
2014
2015
2016
-10
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
What is the Definition of Investment? Sometimes, investments that we might think of as capital spending get counted as operating expenditures.
Abby Joseph Cohen Goldman Sachs
…when Amazon.com decides to build its Amazon Prime business at a loss because it wants to attract new Amazon shoppers, is it really a loss, or a form of 21st century capital spending? Barron’s – January 18, 2016 Share of Total U.S. Apparel Sales by Retailer Wal-Mart
7.5%
Amazon
6.7%
Target
5.2%
Macy's
5.2%
TJX
4.9%
Gap
4.6%
Kohl's
4.5%
Ross Stores
4.5%
Nordstrom
2.7%
Source: The Wall Street Journal, May 13, 2016
The Case of Unicorns Biggest American Startups Worth More Than $1bn Company valuation, $bn*, July 2015
(2009) Taxi hailing
41
(2008) Accommodation for tourists and millennials
26
(2011) Ephemeral messaging app
16
(2004) Big data
15
(2002) Rocket Science
51
Funds raised, $bn
Revenue, $m, 2014 (estimate)
Employees, 000^
6
800
7.5
2.3
450
3.0
1.2
nil
0.4
1.1
600
12
1.1
825
(2009) Photo Sharing
11
1.3
15
0.7
(2007) Cloud-based file sharing
10
1.1
400
1.5
(2010) Office space provision
10
(2003) Diagnostics through blood sampling (2009) Mobile-payments system
9
20
0.1 1.0
0.6 6 Source: The Economist, 7/25/2015
900
1.5 3.0
145
0.4
45
0.2 1.4
The Case of Unicorns Biggest American Startups Worth More Than $1bn Company valuation, $bn*, July 2015
(2009) Taxi hailing
41
51
Turn
(2011) Ephemeral messaging Appirio 16 app Taboola.com Domo 15 20 Dropbox (2002) Rocket Science Delphix 12 23andMe MongoDB11 (2009) Photo Sharing Zenefits (2007) Cloud-based file AppNexus10 Nutanix sharing Oportun Finance 10 (2010) Office space provision Moderna Pronutria Biosciences (2003) Diagnostics through 9 Cloudflare blood sampling (2009) Mobile-payments Stemcentrx
system
6
Revenue, $m, 2014 (estimate)
800
“Unicorn� Markdowns by Fidelity in First Quarter 2016
(2008) Accommodation for 26 tourists and millennials Dataminr
(2004) Big data
Funds raised, $bn
-4.8% 450 -6.6% 1.2-6.8% nil -8.4% 1.1-8.7% 600 -10.3% -11.7% 825 1.1 -12.8% -13.4%15 1.3 -14.2% -15.6% 400 1.1 -16.9% -18.4% 145 0.1 -25.0% -28.9% 45 1.0-30.6% -37.7%
2.3
0.6 6 Source: The Economist, 7/25/2015
900
Employees, 000^ 7.5 3.0 0.4 1.5 3.0 0.7 1.5 0.4 0.2 1.4
March 16, 2016
However, global economic and financial developments continue to pose risks.
IndexPP erform ance Index erform ance 140 130
Oct. – Dec. ‘15 % change
YTD % Change
S&P 500
6.2%
1.9% [12.1% Since Feb11]
MSCI
4.7%
0.8% [11.9% Since Feb11]
KeyMetrics Metrics Key
120 120 110 10 10 00 90 80 80 60 70
JAN JAN 2016 2016
FEBFEB
MAR MAR
JapaneseYen Yenvs. vs.DD ollar Japanese ollar S&P500 500 S&P
APR APR
MAY MAY
old GG old WTI Oil B Price 10-Year ond Rate
JUN JUN
The Yellen Put in Action! Percentage Change in Stock Indexes Experiencing a Bear Market or Correction or Recovery January to February 10, 2016
Since February 11
Nikkei Japan
-18.92%
Bovespa Brazil
24.5%
Shanghai Comp
-16.69%
DAX Germany
17.3%
DAX Germany
-14.89%
TSX Composite Canada
16.7%
Stoxx Europe 600
-14.85%
Sensex India
16.1%
CAC 40 France
-13.84%
CAC 40 France
15.6%
Hang Seng Hong Kong
-13.13%
Nasdaq
15.6%
Nasdaq
-12.98%
Stoxx Europe 600
15.1%
Sensex India
-10.43%
S&P 500
14.8%
FTSE 100 U.K.
-9.13%
DJIA
14.1%
S&P 500
-9.12%
FTSE 100 U.K.
13.1%
DJIA
-8.68%
Nikkei Japan
12.5%
ASX 200 Australia
-8.53%
ASX 200 Australia
12.1%
Bovespa Brazil
-6.70%
Hang Seng Hong Kong
11.1%
TSX Composite Canada
-6.50%
Shanghai Comp
Source: Yahoo Finance & EFC Calculations, May 27, 2016
2.7%
Understanding the Global Economy
“Jack Daniel’s sales were hurt by a 16% decline in the brand’s ready-todrink products like Jack & Cola and Jack & Ginger.
Those drinks are popular in
Australia…”
Source: The Wall Street Journal, August 27, 2015
Exports of Selected Countries to China (In percentage of their total exports)
1992
1997
2003
2008
2013
Korea
3.4%
9.4%
18.1%
21.7%
26.1%
Japan
3.5%
5.2%
12.2%
16.0%
18.1%
Singapore
1.8%
3.2%
6.3%
9.2%
11.8%
Vietnam
1.1%
3.4%
12.4%
19.8%
28.7%
Hong Kong
29.6%
34.9%
42.6%
48.5%
54.8%
USA
1.7%
1.9%
3.9%
5.5%
7.7%
Australia
3.2%
4.6%
8.4%
14.6%
36.1%
Germany
0.9%
1.2%
2.8%
3.5%
5.4%
Brazil
1.2%
2.0%
6.2%
8.3%
19.0%
Chile
2.2%
2.4%
8.8%
13.2%
24.9%
Saudi Arabia 0.1% Kazakhstan -
0.7%
5.5%
9.3%
13.9%
6.8%
13.4%
10.8%
23.4%
Angola
12.7% -
23.6%
32.8%
45.3%
2.4%
6.0%
32.0%
0.8% South Africa -
Source: Chinese Global Connectivity: A Decade of Rapid Change by Dhawan and Zilio (2014)
Is China the Factory-of-the-World? China’s Trade With the World Exports
Imports
Trade Deficit / Surplus
1. Japan
136
143
(7)
2. South Korea
101
175
(74)
3. Taiwan
45
143
(98)
4. Germany
69
88
(19)
5. Australia
40
74
(34)
6. Malaysia
44
53
(9)
7. Brazil
27
44
(17)
8. Russia
35
33
2
9. U.S.
410
149
261
10. Europe
403
293
110
China’s exports and imports (mil. $) to:
Source: http://china-trade-research.hktdc.com/, April 13, 2016
A Tale of Two Stocks
Google Apple
The Macro ModelMacro Model NEW Investment
US Consumer DC Politics ECB
Federal Reserve
U.S. Stock Mkt & Bond Mkt Grexit
Europe Commodities
Emerging Markets
Russia
Japan Central Bank
China
Oil (OPEC)
Dropped Call DOW 30 and Apple’ Revenues (YOY % change)
35% DOW 30
25%
Apple
15% 5% -5% -13%
-15% 2012 2013 Q4 Q1
Q2
Q3
Q4
2014 Q1
Q2
Q3
Q4
2015 Q1
Q2
Q3
Q4
2016 Q1
Is the Fed a Political Animal? I do not agree that they will try to take it up later in the year because it’s an election year, and a wild year.
Never forget that the Fed is a creature of Congress. It has to keep Congress happy. Dan Fuss Manager Loomis Sayles Bond Fund
If you’re the Fed, you can have the president get angry with you, but you cannot have Congress get mad at you and take action.
FOMC Dates
GDP Q1 ’16
GDP Q2 ‘16
GDP Q3 ‘16
June 14-15, 2016 July 26-27, 2016 September 20-21, 2016 November 1-2 December 13-14 January 2017
Data
No Data
Source: The Wall Street Journal, February 8, 2016
GDP Q4 ‘16
Is the Fed a Political Animal? I do not agree that they will try to take it up later in the year because it’s an election year, and a wild year. Fed Actions and Stock Market Performance U.S. Long and Short Treasury-Bond Rates Never forget that the Fed is a creature of Congress. 150 (% ) (% 1.10 It has to keep Congress happy. 2.60
140If you’re the Fed, you can have the president get angry with you, 1.00 but you cannot have Congress get mad at you and take action. Dan Fuss 2.40 Source: The Wall Street Journal, February 8, 2016 Loomis Sayles Bond Fund 130 0.90
Probability of Fed Rate Hike
90% 80% 70%
0.80 120
May 5, 2016
60% 50% 40% 30% 20% 10% 0% Target Rate0.50%
0.70 110
0.60 100
Jun. 15, 2016
90%
Sep. 21, 2016
80%
Dec. 21, 2016
70%
Feb. 1, 2017
60%
2.20
Jun. 15, 2016
May 31, 2016
Sep. 21, 2016
0 Dec. 21,2.0 2016 Feb. 1, 2017
50%
1.80
40%
0.50 30% 90 I II III IV I II III IV I II I II III IV I II III IV 20% 1.60 0.40 2012 2013 2014 2015 2016 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 2015
0.75%
DowJones Index
10%
0% 1.00% 1.50% 10 Year 1.25% Bond (Right)
2016
2-Year0.75% Bond 1.00% (Left) 1.25%
Target Rate0.50%
Source: www.cmegroup.com
1.50%
Forecast in 140 Characters or Less!
Fed moves once in 2016 & then Resumes in March 2017 Feb’16 Forecast
Federal Funds Rate (%)
2016Q2 2016Q3 2016Q4
2017Q1 2017Q3 2017Q4 2017Q2 2018Q1 2018Q2 2018Q3 2018Q4 March Sept Dec
Lower Bound
0.25
0.50
0.50
0.75
0.75
1.00
1.25
1.25
1.50
1.50
1.75
Upper Bound
0.50
0.75
0.75
1.00
1.00
1.25
1.25
1.25
1.50
1.50
1.75
2013
History
2014
2015
2016
Forecast
2017
2018
Real GDP
1.5
2.4
2.4
1.8
2.6
2.4
Monthly Job Additions
184
213
241
205
183
180
Consumption
1.7
2.7
3.1
2.7
2.6
2.6
Auto Sales (Mil.)
15.5
16.4
17.3
16.8
16.5
16.3
Housing Starts (Mil.)
0.93
1.00
1.11
1.15
1.25
1.30
Inflation (CPI)
1.5
1.6
0.2
0.8
2.4
2.7
10 Yr. Rate
2.4
2.5
2.1
2.0
2.6
3.2
(‘000s)
How Many Times Will the FOMC Move in 2016? FOMC’s Projected Path for Federal Funds Rate 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00
Will there be TWO rate hikes in 2016?
NO, Only 1
FOMC Fed Funds Range 2016 Dec. 2015 Projection March 2016 Projection EFC Forecast
2016
2017 Source: federalreserve.gov
2018
Longer Run
List of Suspects 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
Aging expansion China slowdown EMs political crises NIRP and currency wars Brexit Ultra low oil prices Venezuela’s implosion Stock market malaise Consumer confidence jitters Populist’s election Capex spending woes Mideast politics & OPEC Fed’s inflation battle
So Who Killed the Recovery? 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
China’s stall lasts longer than expected Exacerbating Emerging Market’s political crises NIRP policies beget currency wars Oil prices stay too low for too long Venezuela implodes Mideast monarchy aka Saudi Riyal peg tumbles Europe gets the Brexit shock Stock markets then swoon badly Eroding consumer confidence Causing corporate capex spending to stall
11. Facilitating a Populist’s election that leads to trade wars 12. Fed gets paralyzed with QE fatigue leading to capex nosedive!
Is Corporate Worried About Trump Presidency? That won’t be the main problem. Warren Buffet
Chairman & CEO Berkshire Hathaway
U.S. businesses will continue to adapt and thrive. We’ve operated under price controls, we’ve had 52% federal taxes applied to our earnings. But, in the end, business in this country has done extraordinarily well for a couple hundred years. It has adapted to society and society has adapted to business.
No presidential candidate or president is going to end that. Source: AJC, May 1, 2016; The Wall Street Journal, May 2, 2016
Less Trade, Slower Growth Annual Percentage Growth in World Trade and World GDP, 1995 - 2015 World Trade
% change
World GDP
15 10
Projections
5 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
-5
2013
2015
2017
-5%
-10 -15 Source: IMF World Economic Outlook (WEO) , January 2016
-16%
Betting Odds
Source: Iowa Electronic Markets
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Sponsors