The International Economic Outlook Jackson Hole, WY John E. Silvia, Chief Economist July 12, 2018

Dollar Appreciation: Bias Downward

We expect the dollar to depreciate as central bank policy convergence replaces policy divergence.

Source: Federal Reserve Board and Wells Fargo Securities

Wells Fargo Economic Outlook

2

Dollar Appreciation: Bias Downward

The dollar has depreciated against all of our large trading partners over the past year, but movements have varied significantly.

Source: Federal Reserve Board and Wells Fargo Securities

Wells Fargo Economic Outlook

3

International Trade

The U.S. trade balance with Canada and Mexico is modest compared to the rest of the world—particularly China.

Source: U.S. Department of Commerce and Wells Fargo Securities

Wells Fargo Economic Outlook

4

Retaliatory Tariff Implications

Possible trade policy changes could pose downside risks to export growth.

Source: IHS Markit and Wells Fargo Securities

Wells Fargo Economic Outlook

5

Dollar and Short-Term Rates

We expect the divergence between expected short-term rates and the Fed’s dollar index to return as global monetary policy convergence continues.

Source: Federal Reserve Board, U.S. Department of the Treasury and Wells Fargo Securities

Wells Fargo Economic Outlook

6

Global Central Bank Policy Rates

Additional FOMC rate hikes traditionally are less supportive of the U.S. dollar, while any rate hikes from other central banks would be more supportive of foreign currencies. This relationship affects capital flows.

Source: Bloomberg LP, Federal Reserve Board and Wells Fargo Securities

Wells Fargo Economic Outlook

7

Global Central Bank Outlook

Global central banks appear to be on a gradual path toward monetary policy convergence

Source: Bloomberg LP and Wells Fargo Securities

Wells Fargo Economic Outlook

8

Treasury Issuance Outlook

Net Treasury issuance should decline slightly in 2017. We expect the fiscal bump in 2018 to accelerate the pace of issuance in CY 2018.

The Federal Deficit & Net Treasury Issuance

Composition of Treasury Issuance

Source: U.S. Department of the Treasury and Wells Fargo Securities

Wells Fargo Economic Outlook

9

Domestic demand for U.S. Treasuries

Over the past five years, households and U.S. banks in particular have seen robust growth in the size of their Treasury holdings, helping absorb some of the new supply that has come to market.

Domestic Bank Ownership of U.S. Treasuries

Domestic Ownership by Sector

Source: U.S. Department of the Treasury and Wells Fargo Securities

Wells Fargo Economic Outlook

10

Foreign demand for U.S. Treasuries

Relatively higher U.S. interest rates likely buoyed foreign demand for U.S. assets in 2017. The increase in foreign demand was driven by private purchases.

Net Purchases of U.S. Treasuries

Foreign Official vs. Private Purchases

Source: U.S. Department of the Treasury and Wells Fargo Securities

Wells Fargo Economic Outlook

11

Foreign Purchases of U.S. Securities: Still Solid

Capital flows and asset allocation by global investors play a strong role in rate determinations

Source: U.S. Department of the Treasury and Wells Fargo Securities

Wells Fargo Economic Outlook

12

Yield Curve: Short-Term Rates Headed Higher

The yield curve is expected to flatten further as the Fed raises short-term interest rates.

Source: IHS Markit and Wells Fargo Securities

Wells Fargo Economic Outlook

13

Global Forecast

We expect global economic growth will remain near its long-run trend.

Source: International Monetary Fund and Wells Fargo Securities

Wells Fargo Economic Outlook

14

Global Exports: Upswing

Global trade has clearly downshifted compared to past expansions, however the recent trend is encouraging.

Source: IHS Markit and Wells Fargo Securities

Wells Fargo Economic Outlook

15

Developing Markets Signal their Significance

Developing markets have become increasingly important for U.S. exporters.

Developing Markets Gaining Share

Trend Likely to Continue

Source: IHS Markit and Wells Fargo Securities

Wells Fargo Economic Outlook

16

International Forecast

Source: International Monetary Fund and Wells Fargo Securities

Wells Fargo Economic Outlook

17

FX Outlook

Source: Wells Fargo Securities

Wells Fargo Economic Outlook

18

Appendix

Wells Fargo Economics Group Publications

Recent Special Commentary

To join any of our research distribution lists please visit our website: http://www.wellsfargo.com/ economics

Wells Fargo Economic Outlook

20

Wells Fargo Securities Economics Group Global Head of Research, Economics & Strategy

Economists

Diane Schumaker-Krieg ………………… ….diane.schumaker@wellsfargo.com Global Head of Research, Economics & Strategy ……

john.silvia@wellsfargo.com

Ariana Vaisey, Economic Analyst Abigail Kinnaman, Economic Analyst Shannon Seery, Economic Analyst

Mark Vitner, Senior Economist mark.vitner@wellsfargo.com …jay.bryson@wellsfargo.com

Sam Bullard, Senior Economistsam.bullard@wellsfargo.com Nick Bennenbroek, Currency Strategist nicholas.bennenbroek@wellsfargo.com Azhar Iqbal, Econometrician

erik.f.nelson@wellsfargo.com

michael.d.pugliese@wellsfargo.com Economic Analysts

Senior Economists Jay H. Bryson, Global Economist

Erik Nelson, Currency Strategist Michael Pugliese, Economist

Chief Economist John E. Silvia

Charlie Dougherty, Economist charles.dougherty@wellsfargo.com

ariana.b.vaisey@wellsfargo.com abigail.kinnaman@wellsfargo.com shannon.seery@wellsfargo.com

Administrative Assistants

azhar.iqbal@wellsfargo.com

Tim Quinlan, Senior Economist

tim.quinlan@wellsfargo.com

Donna LaFleur, Executive Assistant

Eric J. Viloria, Currency Strategist

eric.viloria@wellsfargo.com

Dawne Howes, Administrative Assistant dawne.howes@wellsfargo.com

Sarah House, Senior Economist

sarah.house@wellsfargo.com

donna.lafleur@wellsfargo.com

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2018 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.

Wells Fargo Economic Outlook

21