June 20, 2014
E co co n o m i c s G r o u p Weekly Economic & Financial Commentary U.S. Review
"Core" CPI vs. "Core" PCE Year-over-Year Percent Change 4.0%
Inflationary Pressures Mounting, But Fed Holds Tight •
•
•
4.0% Core CPI: May @ 2.0%
Both headline and core CPI posted large gains in May. Meanwhile, the Fed downplayed rising inflation and generally maintained its previous outlook for monetary policy. Industrial production came in stronger than expected, making the factory sector look healthier after the harsh winter hampered activity. The pace of residential construction is struggling to move higher, with permits and starts falling in May.
Core PCE: Apr @ 1.4%
3.5%
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5% 92
94
96
Global Review
98
00
02
04
06
08
10
12
14
United Kingdom Retail Sales Year-over-Year Growth Rate of Index 10%
Economic Activity in Major Economies Resilient in Q2 •
•
Data released this week showed that economic activity in most major foreign economies continues to expand at a modest rate in Q2. Retail spending in the United Kingdom has been solid over the past three months, and output in the Eurozone construction sector is starting to trend higher. Retail spending in Canada jumped in April, and the CPI inflation rate rose to a two-year high. That said, inflation remains within the Bank of Canada's target range, and we believe that the Bank will remain on hold until the early part of next year.
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4% -6% 1999
-6% 2001
2003
2005
Forecast
2013 1Q
Real Gross Domestic Product Personal Consumpt ion Inflation Indicators PCE Deflat or
1
Actual
2014 3Q
4Q
1Q
2Q
2011 3Q
2012
Forecast 2013
2014
2015
4Q
1.1
2.5
4.1
2.6
- 1.0
2.9
2.7
2.9
1.8
2.8
1.9
2.0
2.9
2.3
1.8
2.0
3.3
3.1
3.8
2.4
2.6
2.5
2.2
2.0
2.9
2.7
2
1.4
1.1
1.1
1.0
1.1
1.6
1.6
1.8
2.4
1.8
1.1
1.5
2.0
1.7
1.4
1.5
1.2
1.4
1.9
1.9
2.2
3.1
2.1
1.5
1.9
2.2
4.2
1.9
2.5
4.9
4.5
3.1
4.1
4.3
3.3
3.8
2.9
3.8
4.6
2.1
4.5
5.7
6.2
- 3.0
3.6
3.8
4.0
7.9
7.0
4.6
2.2
4.3
76.2
77.5
75.2
76.4
76.9
76.8
76.8
77.0
70.9
73.5
75.9
76.8
78.4
7.7
7.5
7.2
7.0
6.7
6.3
6.2
6.1
8.9
8.1
7.4
6.3
5.9
0.95
0.86
0.88
1.03
0.92
1.06
1.05
1.06
0.61
0.78
0.92
1.02
1.16
Consumer Pric e Index Industrial Production
1
Corporate Corporate Profits Before Taxes Trade Weighted Dollar Index Unemployment Rat e Housing Housing St arts
2Q
2
3
4
Quarter-End Interest Rates 5 Federal Funds Target Rate
2007
2009
2011
2013
Inside
Wells Fargo U.S. U.S. Economic Economic Forecast Actual
-4%
Retail Sales, Growth Rate: May @ 3.9% 3-M Moving Average: May @ 5.0%
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.44
Conventional Mortgage Rate
3.57
4.07
4.49
4.46
4.34
4.30
4.31
4.40
4.46
3.66
3.98
4.34
4.51
10 Year Note
1.87
2.52
2.64
3.04
2.73
2.65
2.71
2.84
2.78
1.80
2.35
2.73
3.01
U.S. Review U.S. Outlook Global Review Global Outlook Point of View Topic of the Week Market Data
Forecast as of: June 11, 2014 1 Compound Annual Growth Rate Quarter-over-Quarter 2
Year-over-Year Percentage Change
3
Federal Reserve Major Currency Index, 1973=100 - Quarter End
4
Millions of Units
5
Annual Numbers Represent Averages
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, IHS Global Insight and Wells Fargo Securities, Securities, LLC
2 3 4 5 6 7 8
Economics Group
U.S. Review
Wells Fargo Securities, LLC
U.S. Review The Fed Downplays Price Acceleration The CPI increased 0.4 percent in May and 2.1 percent from a year earlier. Consumer prices have been accelerating, particularly in the last two months. Food prices have been notably strong driving the headline number higher, but inflationary pressures are widespread, with transportation services, medical care commodities, and shelter costs all accelerating in the month. If this trend persists, the Fed may be faced with choosing a monetary policy; while one mandate, inflation, runs ahead of target and the other, full employment, falls behind. During her press conference, Chair Yellen revealed that the Fed could tolerate a continuation of loose policy in such an event. Despite stronger price growth, Yellen insisted that inflation was still well below the central bank’s objective. In addition, she noted that consumer prices are volatile month to month and generally downplayed the inflationary pressures. Although Yellen seemed unfazed by the acceleration in inflation at the news conference, it may be a larger factor for a rate hike to other members of the FOMC. Although the Fed lowered its GDP projections considerably for 2014, the median projection for the fed funds rate inched up for 2015 and 2016. The change was small, however, and new voting members are likely changing the Fed’s central tendency forecasts. The longer-term projection for the fed funds rate was brought down some, however, which indicates that the Fed is less optimistic about long-term growth. The Fed is concerned about the long-term unemployed and discouraged workers, and whether these groups will regain employment or remain a drag on economic growth. Factories Humming, Housing Slumming Other indicators released this week paint a mixed picture. On the plus side, the factory sector is looking considerably better, April’s decline in industrial production looks a bit smaller, while the 0.6 percent growth in May more than made up for that loss. Although motor vehicles and parts manufacturers posted a strong increase in production, gains were solid among other producers, including machinery and computer and electronics. Strength in manufacturing is poised to continue into June as well. The Fed manufacturing surveys out of New York and Philadelphia beat expectations for June. The housing sector continues to disappoint. After posting strong growth in April, housing starts fell again in May, erasing hopes that 2014 would be the year when residential construction finally accelerated. With the exception of the South, where lots are more available, every region saw a decline in homebuilding. Singlefamily construction has struggled the most, though starts are still 4.7 percent higher than a year ago. Although single-family permits increased in May, they are still lower than a year ago, which indicates that the pace of construction will not see much acceleration in the near term. The multifamily market has also hit a rough patch, with permits tumbling in May to below its yearago levels. On the plus side, though, multifamily starts are still 18.2 percent higher than a year earlier.
Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End 5.0%
5.0% June 2014 Median Response March 2014 Median Response
4.5%
4.5%
4.0%
4.0%
3.5%
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0% 2015
2014
2016
Longer Run
Total Industrial Production Growth Output Growth by Volume 15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
-20%
-20%
Yr/Yr Percent Change: May @ 4.3% 3-Month Annual Rate: May @ 4.8%
-25%
-25% 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Single-Family Housing Starts vs. Building Permits SAAR, In Millions, 3-Month Moving Average 2.0
2.0
1.8
1.8
1.6
1.6
1.4
1.4
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
Single-family Housing Starts: May @ 644K Single-family Building Permits: May @ 605K
0.2
0.2 90
92
94
96
98
00
02
04
06
08
10
12
14
Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC
2
Economics Group
U.S. Outlook
Wells Fargo Securities, LLC
Existing Home Sales • Monday Existing home sales rose 1.3 percent in April to a 4.65 million-unit pace after declining for three months in a row. Condo sales surged 7.3 percent for the month while single-family sales rose a more modest 0.5 percent. Inventories also rose, climbing to their highest level since August 2012. In an ongoing trend, first-time home buyers continued to play only a minor role in new sales activity, reflecting the ongoing challenges with this demographic. We expect that existing home sales rose another 0.6 percent in May to a 4.68 million-unit pace. Although we continue to expect the housing market to improve, the pace of growth in both sales and new construction activity will not likely begin to surge anytime soon. Our expectation is that the recovery in the housing market, much like the economy as a whole over the past few years, will recover at a less-than-stellar pace over the quarters ahead.
Existing Home Resales Seasonally Adjusted Annual Rate - In Millions 7.5
7.5
7.0
7.0
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
3.5
Previous: 4.65 Million
3.5
Wells Fargo: 4.68 Million
Existing Home Sales: Apr @ 4.7 Million 3.0
Consensus: 4.74 Million
3.0 99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Durable Goods Orders • Wednesday Nondefense Capital Goods Shipments, Ex-Aircraft Series are 3-Month Moving Averages 40%
40% 3-Month Annual Rate: Apr @ 3.9%
30%
Year-over-Year Percent Change: Apr @ 3.3%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
-40%
Durable goods orders for the month of April rose 0.8 percent, which was later revised to a 0.6 percent increase. The jump in new order activity was partially attributable to a 39.3 percent surge in defense orders along with a rise in fabricated metals orders. The nondefense capital goods shipments excluding aircraft fell 0.4 percent in April; however, the three-month annualized rate of growth in these shipments is still up at a 3.9 percent pace. The report continued to support our view for a firming manufacturing sector in the second quarter. Our expectation is that durable goods orders likely reversed course in May, declining 0.2 percent with the volatile transportation component weighing down the headline number. However, once transportation goods are excluded, we expect new orders to rise 0.1 percent for the month, further reflecting a more broad-based firming in manufacturing sector activity. Previous: 0.6%
Wells Fargo: -0.2%
Consensus: 0.0%
Personal Income and Spending • Thursday Personal income rose 0.3 percent in April to start the quarter however consumer spending slowed on the month, declining 0.1 percent. In line with the employment growth and increases in average hourly earnings, wage and salary growth increased 0.2 percent for the month. More importantly, real disposable income also rose 0.2, marking the fourth straight month of real disposable income growth. The decline in consumer spending was a disappointing start to the second quarter. More concerning was the decline in real spending of 0.3 percent. Our expectation is that personal income growth continued at a 0.4 percent pace in May while consumer spending bounced back, rising 0.4 percent for the month. Second quarter consumer spending growth should still be better than the 3.1 percent pace observed in the first quarter, however with inflation beginning to pick up, there could be some downside risk to spending growth in the quarters ahead. Previous: Spending: -0.1%
Wells Fargo: 0.4%
Real Consumer Spending Seasonally Adjusted 10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
3-Month Annual Rate: Apr @ 4.2% Year-over-Year Percent Change: Apr @ 2.7%
-8%
-8% 00
02
04
06
08
10
12
14
Consensus: Spending: 0.4% Source: U.S. Department of Commerce, NAR and Wells Fargo Securities, LLC
3
Economics Group
Global Review
Wells Fargo Securities, LLC
Global Review British Economy Remains Resilient in Q2 Data released this week showed that economic activity in most major foreign economies continues to expand at a modest rate in the second quarter. In the United Kingdom, the volume of retail sales dropped 0.5 percent in May, but this decline, which was widely expected, hardly put a dent in the spending growth that had been exhibited in the preceding three months. Indeed, real retail spending in the March-May period was up 5.o percent on a year-ago basis (see chart on front page). Although the British economy is clipping along at a decent pace at present, inflation remains benign, at least for now. To wit, CPI inflation fell to 1.5 percent in May from 1.8 percent in April (top chart). At present, CPI inflation is comfortably below the Bank of England’s 2 percent target, although we do look for consumer prices to accelerate somewhat in coming months. Bank of England Governor Carney made headlines recently when he said that the first rate hike “could happen sooner than markets currently expect.” Carney’s remarks sent interest rates higher— the yield on the two-year British government bond has risen about 15 bps on balance over the past week—which helped to propel sterling to a five-year high versus the U.S. dollar.
U.K. Consumer Price Index Year-over-Year Percent Change 6%
6% CPI: May @ 1.5%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0% 1997
0% 1999
2001
2003
2005
2007
2009
2011
2013
Construction Output in the Eurozone Seasonally Adjusted, 3-Month Moving Average, 2010=100 130
130
120
120
110
110
100
100
Economic Activity in Eurozone Grinds Higher Recent monthly indicators suggest that economic activity in the Eurozone continues to expand, if only at a subdued rate, for the fifth consecutive quarter. Construction in the overall euro area rose 0.8 percent in April relative to the previous month. Although the construction sector remains depressed relative to the precrisis period, output in the sector appears to be trending higher for the first time in six years (middle chart). The ZEW index, which measures the assessment among institutional investors of current economic conditions in Germany, rose again in June. Will the optimism among investors be confirmed by actual businesses when the “flash” purchasing managers’ indices for Germany and the broader euro area are re leased next week? As noted on page 5, most analysts expect both the manufacturing and service sector PMIs in June will remain above the demarcation line separating expansion from contraction. Canadian Economy Gaining Traction? On this side of the Atlantic, data released this week showed that retail sales in Canada jumped 1.1 percent in April relative the previous month, which was much stronger than the consensus forecast. The sizeable increase in retail spending in April, in conjunction with an upward revision to March, means that consumer spending in Canada started the second quarter with strong momentum. On a year-over-year basis, retail sales in April were up 5.1 percent, stronger than the 4.1 percent rate that was registered in Q1 (bottom chart). In addition, CPI inflation rose from 2.0 percent in March to 2.3 percent in April, the highest rate in two years but still within the Bank of Canada’s 1 percent to 3 percent target range. In our view, the Bank will keep its main policy rate unchanged at 1.00 percent until the early part of next year.
90
90
Construction Production: Apr @ 93.4 80 2000
80 2002
2004
2006
2008
2010
2012
2014
Canadian Retail Sales Year-over-Year Percent Change, 3-Month Moving Average 10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
Retail Sales: Apr @ 5.1% 3-Month Moving Average: Apr @ 4.5%
-8% 2000
-8% 2002
2004
2006
2008
2010
2012
2014
Source: IHS Global Insight and Wells Fargo Securities, LLC
4
Economics Group
Global Outlook
Wells Fargo Securities, LLC
Eurozone PMIs • Monday The Eurozone economy in recent months has been characterized by economic growth that remains tepid and price growth that is weak enough to raise concerns about the potential for a deflationary cycle to take hold. In an effort to stimulate the economy and spur on bank lending, the ECB recently announced a combination of accommodative policy moves. The clarity from the ECB was welcome after months of speculation about what moves it might take. What remains to be seen is the impact of the policy announcements on actual bank lending and business activity. Although actual lending data are not yet available, we will get some indication of business sentiment in the wake of the ECB announcement when the various PMI numbers become available on Monday.
Eurozone Purchasing Managers' Indices Index 65
65
60
60
55
55
50
50
45
45
40
40
35
35 E.Z. Manufacturing: May @ 52.5 E.Z. Services: May @ 53.2
Previous: Manufacturing: 52.5 Services: 53.2 30 1998
Consensus: Manufacturing: 52.2 Services: 53.3
30 2000
2002
2004
2006
2008
2010
2012
2014
Brazilian Unemployment • Thursday Brazilian Unemployment Rate Six Major Metropolitan Areas 14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
Thanks largely to thriving exports, the labor market in Brazil has improved on trend over the past several years. However exports have faced some headwinds more recently as tepid growth in Europe and an appreciating Brazilian real have conspired to weaken the trade dynamic with Europe. Economic growth has been trending lower with the year-over-year rate of real GDP growth slowing in each of the past three quarters. The labor market has been resilient thus far with the unemployment rate falling in back-to-back months in March and April. The May employment report for Brazil is due out on Thursday and will offer a more current assessment of how the job market is holding up.
Previous: 4.9%
Unemployment Rate: Apr @ 4.9% 4%
4% 02
03
04
05
06
07
08
09
10
11
12
13
14
Consensus: 5.0%
Japanese CPI • Thursday After years of chronic deflation, the Bank of Japan (BoJ) last year embarked on a mission to break the vicious cycle and drive prices higher through highly accommodative monetary policy. Through March 2014, the BoJ’s efforts were somewhat successful with the year-over-year rate of CPI inflation having risen to 1.6 percent. The 3 percentage point increase in the consumption tax which went into effect in April fanned the flames of price growth and lifted the inflation rate to 3.4 percent. On Friday of next week, financial markets will get a look at consumer prices for May. The effects of the tax hike will not boost prices forever, but we suspect the year-ago comparisons will set the table for elevated inflation rates (at least by Japanese standards) for at least the next few months.
Japanese Consumer Price Index Year-over-Year Percent Change 4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
Previous: 3.4% (Year-over-Year) Consensus: 3.7%
-2% "Core" CPI: Apr @ 2.2% CPI: Apr @ 3.4%
Wells Fargo: 3.6% -3% 2001
-3% 2003
2005
2007
2009
2011
2013
Source: IHS Global Insight, Bloomberg LP a nd Wells Fargo Securities, LLC
5
Economics Group
Point of View
Wells Fargo Securities, LLC
Interest Rate Watch
Credit Market Insights Central Bank Policy Rates
Fed Stands Still, Markets Cannot. While the Federal Open Market Committee maintained the current path of policy, the underlying patterns in the economy and expected future interest rates provide a basis for action on the part of market decision makers. In the very short run and at the very short end of the yield curve, the FOMC can indeed set the path for nominal interest rates. However, over the past six months, real interest rates have declined. For savers and cash investors, this pattern of financial repression is an incentive to take on additional duration or credit risk to provide a positive rate of return to meet spending and retirement goals. Therefore, it is not surprising that equities continue to rally in the face of negative returns on cash. Meanwhile, fixed income investors are moving out the curve, taking on duration risk, to garner positive investment returns. For example, the two-year Treasury yields only 0.48 percent as of June 18, far below the one-year inflation pace of 2.1 percent. In fact, an investor has to go out to 7 years (2.2 percent returns) to beat the one-year (current) inflation rate and that is before taxes. Finally, other fixed income investors are taking on credit risk to lock in higher yields than that available on Treasury debt. Meanwhile, the FOMC did nudge up its expectations for the PCE deflator for 2014 (now at 1.5-1.7 percent). Given the rise in the CPI over the past six months, this was to be expected. Our outlook is for the PCE deflator to average 1.8 percent by the fourth quarter of this year on the same basis of comparison with the FOMC.
7.5% US Federal Reserve: Jun - 20 @ 0.25% ECB: Jun - 20 @ 0.15% Bank of Japan: Jun - 20 @ 0.10% Bank of England: Jun - 20 @ 0.50%
6.0%
6.0%
4.5%
4.5%
3.0%
3.0%
1.5%
1.5%
0.0%
0.0% 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Yield Curve U.S. Treasuries, Active Issues 4.5%
4.5%
4.0%
4.0%
3.5%
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0% June 20, 2014
0.5%
May 23, 2014
0.5%
June 21, 2013 0.0%
0.0%
Bank Lending Assets at U.S. Commercial Banks, YoY Percent Change 40%
40% Accounting Rule Change
30%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
C&I: Jun-4 @ 10.1% Real Estate: Jun-4 @ 1.2% Consumer: Jun-4 @ 2.9%
-30%
-30% 05
06
07
08
09
10
11
12
13
14
The Federal Reserve recently released its H.8 report on assets and liabilities which gives us an idea of lending activity in different sectors of the economy. Commercial and industrial (C&I) lending has rebounded nicely following the Great Recession and continues to grow at double digit rates, posting a 10.8 percent growth rate in May. Although this level is off postrecession highs, we have seen an upward trend return in recent months. This could prove to be positive for the outlook for Q2 GDP because C&I lending has historically trended with business inventories and thus we could see inventory building provide a boost to Q2 GDP if gains continue. When looking at lending at the 25 largest domestic commercial banks, C&I lending is the only one that has been trending upward. Real estate lending has recently fallen to about 55 percent of lending, while consumer lending has fallen to about 70 percent. The drop in these categories is likely a reflection of tighter credit standards while C&I lending seems to be breaking through this headwind. After tumbling mightily from about 30 percent in 2000, the loan-to-deposit ratio is slowly coming off historical lows of essentially half the reading in 2000. The improvement in C&I lending is consistent with our expectation for business fixed investment to pick up throughout the forecast horizon. We expect business fixed investment to pick up modestly to 3.3 percent growth in 2014 and to rise notably to 5.7 percent in 2015.
Source: IHS Global Insight, Bloomberg LP and Wells Fargo Securities, LLC
Credit Market Data
Credit and Bank Lending Negative real rates and a suppressed yield curve also provide the incentive for firms and households, who are not liquidity constrained, to borrow aggressively in the marketplace. Therefore, contrary to the FOMC’s expressions of concern, there are rational economic incentives for firms and households to borrow today at very low rates when they perceive that the expected rate of return on their investments exceed the cost of financing that investment.
C&I Lending Continues to Improve
7.5%
Mortgage Rates
30-Yr Fixed 15-Yr Fixed 5/1 ARM 1-Yr ARM Bank Lending
Commercial & Indus trial Revolving Home Equity Residential Mortgages Commerical Real Esta te Consumer
Week
4 Weeks
Year
Current
Ago
Ago
Ago
4.17% 3.30% 3.00% 2.41%
4.20% 3.31% 3.05% 2.40%
4.12% 3.21% 2.96% 2.41%
3.93% 3.04% 2.79% 2.57%
1-Week
4-Week
Year-Ago
Current Assets (Billions)
$1,696.9 $465.7 $1,573.7 $1,540.2 $1,168.7
Change (SAAR) Change (SAAR)
-21.57% -4.96% -9.70% 9.40% 4.69%
0.73% -2.69% 12.29% 7.15% 6.26%
Change
10.09% -5.46% -1.67% 6.63% 2.88%
Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities, LLC
6
Economics Group
Topic of the Week
Wells Fargo Securities, LLC
Topic of the Week Structural Reform in Japan Coming Into Focus The sweeping economic program in Japan known as Abenomics is comprised of three primary components. The first two, stimulative fiscal policy and substantively accommodative monetary policy have generally had the desired short-term effects of boosting growth and stoking inflation. What has been notably missing is a specific plan in terms of structural reform. On Monday of this week, Japanese Prime Minister Shinzo Abe hosted an annual industrial conference at which he laid out the highlights of his “Japan Revitalization Strategy” and also released a draft proposal of his plan to select media outlets as well as a summary version released to the general public. The financial market reaction this week was positive, though not overwhelmingly so. As more details become officially available in the coming weeks, we will address the proposed structural reforms in detail through dedicated special commentary. In the interim, here are the key aspects of the potential reforms and what to watch for as the official details unfold. The most headline-grabbing proposal involves cutting Japan’s high corporate tax rate. Specific details are not yet in focus, but Japan’s corpor ate tax rate of more than 38 percent in 2013 was among the highest in the world. One challenge we focused on in a recent special report , is the sustainability of Japan’s enormous debt. Although a corporate tax cut does not immediately seem like the right medicine for that problem, the government is also proposing a plan to aggressively reduce the primary budget deficit to achieve a balanced budget by fiscal year 2020. We will reserve judgment until we see details, but our first impression is that sounds unrea listic. As the nearby chart show, Japan’s population has in recent years begun to shrink which presents a significant problem for economic growth. Full-blown immigration reform is probably not in the cards but the creation of designated strategic zones to receive foreign workers is discussed as a potential compromise.
Japanese Real GDP Bars = Compound Annual Rate
Line = Yr/Yr % Change
12%
12%
8%
8% Forecast
4%
4%
0%
0%
-4%
-4%
-8%
-8%
-12%
-12%
-16%
-16%
Compound Annual Growth: Q1 @ 6.7% Year-over-Year Percent Change: Q1 @ 2.8%
-20%
-20% 05
06
07
08
09
10
11
12
13
14
15
Japanese Population Millions of People, NSA 130
130 Total Population: Apr @ 127.1 Million
115
115
100
100
85
85
70
70 50
55
60
65
70
75
80
85
90
95
00
05
10
Source: IHS Global Insight and Wells Fargo Securities, LLC
Subscription Info Wells Fargo’s Weekly Economic & Financial Commentary is distributed to subscribers each Friday afternoon by e-mail. To subscribe please visit: www.wellsfargo.com/economicsemail The Weekly Economic & Financial Commentary is available via the Internet at www.wellsfargo.com/economics Via The Bloomberg Professional Service at WFRE. And for those with permission at www.wellsfargoresearch.com
7
Economics Group Market Data
Market Data
Wells Fargo Securities, LLC
Mid-Day Friday
U.S. Interest Rates
Foreign Interest Rates Friday
1 Week
1 Year
Friday
1 Week
1 Year
6/20/2014
Ago
Ago
6/20/2014
Ago
Ago
3-Month T-Bill
0.01
0.03
0.04
3-Month Euro LIBOR
0.18
0.21
0.13
3-Month LIBOR
0.23
0.23
0.27
3-Month Sterling LIBOR
0.55
0.55
0.51
1-Year Treasury
0.14
0.15
0.13
3-Month Canada Banker's Acceptance
1.27
1.27
1.27
2-Year Treasury
0.46
0.45
0.33
3-Month Yen LIBOR
0.13
0.13
0.15
5-Year Treasury
1.70
1.69
1.30
2-Year German
0.04
0.03
0.25
10-Year Treasury
2.64
2.60
2.41
2-Year U.K.
0.91
0.86
0.50
30-Year Treasury
3.48
3.41
3.51
2-Year Canadian
1.08
1.09
1.19
Bond Buyer Index
4.36
4.37
4.37
2-Year Japanese
0.09
0.09
0.14
10-Year German
1.34
1.36
1.67
10-Year U.K.
2.77
2.75
2.29
Foreign Exchange Rates Friday
1 Week
1 Year
10-Year Canadian
2.27
2.31
2.33
6/20/2014
Ago
Ago
10-Year Japanese
0.59
0.60
0.86
($/€)
1.359
1.354
1.322
British P ound ($/₤)
1.704
1.697
1.551
British P ound (₤/€)
0.797
0.798
0.852
Friday
1 Week
1 Year
102.060 102.040
97.280
6/20/2014
Ago
Ago
106.49
106.91
95.40
Euro
Japanese Yen (¥/$)
Commodity Prices
Canadian Dollar (C$/$)
1.082
1.086
1.039
WTI Crude ($/Barrel)
Swiss Franc (CHF/$)
0.896
0.900
0.928
Gold ($/Ounce)
Australian Dollar (US$/A$
0.940
0.940
0.920
Hot-Rolled Steel ($/S.Ton)
670.00
668.00
600.00
Mexican Peso (MXN/$)
13.022
13.015
13.366
Copper (¢/Pound)
309.10
302.95
306.20
Chinese Yuan (CNY/$)
6.226
6.211
6.129
14.23
14.25
15.31
Indian Rupee (INR/$)
60.188
59.773
59.575
4.60
4.74
3.88
Brazilian Real (BRL/$)
2.228
2.234
2.182
17,908
14,126
80.404
80.576
81.915
535.55
520.46
U.S. Dollar Index
1309.37 1276.89 1285.05
Soybeans ($/Bushel) Natural Gas ($/MMBTU) Nickel ($/Metric Ton) CRB Spot Inds.
18,472 530.96
Source: Bloomberg LP a nd Wells Fargo Securities, LLC
Next Week’s Economic Calendar Monday
Tuesday
Wednesday
Thursday
Friday
23
24
25
26
27
US Ma nu fa ct urin g PMI
Con su mer Con fi den ce In dex
Du ra ble Goods Order s
Person al In com e
Ma y 83 .0
A pr il 0 .8 %
A pr il 0.3 %
Ju n e 84 .4 (W)
May -0 .2 % (W)
Ma y 0 .4 % (W)
a Ma y 5 6 .4 t a D Ju n e 5 6 .0 (C) . Exisit n g Hom e Sa les S . U A pr il 4 .6 5 M Ma y 4 .6 8M (W)
Eu rozon e a t PMIs (Com posit e) a D Pr ev iou s (Ma y ) 5 3 .5 l a b Ar gen t in a o l GDP YoY G Pr ev iou s (4 Q) 1 .4 %
New Hom e Sales
Persona l Spen din g
A pr il 4 3 3 K
A pr il -0. 1 %
Ma y 4 3 5 K (W)
Ma y 0 .4 % (W)
Germ a ny
It aly
Ja pa n
Un it ed Kingdom
IFO Bu sin ess Clim a t e
Con su m er Confidence Index
CPI YoY
GDP YoY
Pr ev iou s (Ma y ) 1 1 0.4
Pr ev iou s (Ma y ) 1 06 .3
Pr ev iou s (A pr ) 3 .4 %
Pr ev iou s (4 Q) 3 .1 %
Bra zil
Fr an ce
Un em ploy m en t Ra t e
GDP YoY
Pr ev iou s (A pr ) 4 .9 %
Pr ev iou s (4 Q) 0 .8 %
Note: (W) = Wells Fargo Estim ate (C) = Consensus Estima te
Source: Bloomberg LP and Wells Fargo Securities, LLC
8
Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg
Global Head of Research, (704) 410-1801 Economics & Strategy (212) 214-5070
[email protected]
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
[email protected]
Mark Vitner
Senior Economist
(704) 410-3277
[email protected]
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
[email protected]
Sam Bullard
Senior Economist
(704) 410-3280
[email protected]
Nick Bennenbroek
Currency Strategist
(212) 214-5636
[email protected]
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
[email protected]
Anika R. Khan
Senior Economist
(704) 410-3271
[email protected]
Azhar Iqbal
Econometrician
(704) 410-3270
[email protected]
Tim Quinlan
Economist
(704) 410-3283
[email protected]
Eric Viloria, CFA
Currency Strategist
(212) 214-5637
[email protected]
Sarah Watt House
Economist
(704) 410-3282
[email protected]
Michael A. Brown
Economist
(704) 410-3278
[email protected]
Michael T. Wolf
Economist
(704) 410-3286
[email protected]
Zachary Griffiths
Economic Analyst
(704) 410-3284
[email protected]
Mackenzie Miller
Economic Analyst
(704) 410-3358
[email protected]
Blaire Zachary
Economic Analyst
(704) 410-3359
[email protected]
Donna LaFleur
Executive Assistant
(704) 410-3279
[email protected]
Cyndi Burris
Senior Admin. Assistant
(704) 410-3272
[email protected]
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