Private and Confidential Ramirez & Co., Inc.
61 Broadway, 29th Floor
New York, NY 10006
(800) 888-4086
July 2016
The Macroeconomic Outlook
Page 2
Political Risk While the US is embroiled in election politics, the unexpected Brexit vote changes the overall political outlook not just for
the UK, but for the rest of Europe. Yet, the markets seem to shrug off Brexit worries
Economic Growth
(US)
(International)
The pace of improvement in labor market conditions slows down in April and May, and picks up in June, with a falling 6M
moving average, but GDP appears to be rising faster than in the first quarter
IMF lowers its global growth forecast, with Brazil, China and Russia taking the bulk of the blame, and Brexit clouds the
horizon
Labor Markets (US)
(International)
Although the unemployment rate declines to a near full-employment level, job gains diminish and the pace of improvement
in the labor market slows—pulling down the Fed’s Labor Market Conditions Index. Real wage growth picks up, yet
productivity remains lackluster
Employment conditions in the Eurozone bifurcate as countries such as Germany shine, whereas Mediterranean-rim
countries exhibit strains
Inflation The FOMC still expects that inflation will rise to its long-run level of 2%, once oil and import prices stop falling
Market, but not survey-based, measures of inflation expectations fall again to lower levels
US goods inflation falls below zero, with services inflation approaching 3%
As the Euro area and Japan move into disinflation, the number of countries experiencing negative rates rises
Monetary Policy
(Fed)
(International)
The Fed’s median projected funds rate for 2016 YE stays constant from March to June at 0.875%, but fails to fall towards the markets’ lowered expectations. However, the number of Fed economists predicting a single rate hike in 2016 rises from one to six. The Fed maintains its policy of rolling over its Treasuries and mortgage-backed securities until normalization is well under way. The ECB takes over from the Fed as the dominant driver of global liquidity
As the ECB overtakes the Fed as the major provider of global liquidity, international capital flows into the US, lowering US bond yields. These developments make it difficult for the Fed to raise rates
Fiscal Policy Consensus is beginning to emerge that fiscal policy needs to overtake monetary policy as the predominant instrument to
lead the world out of its malaise
The Markets
In the beginning of the year, financial market stress indicators reach their third highest level (the 2007-2009 contraction, the 1999-2000 bursting of the TMT bubble) in almost three decades but stabilize as the quarter comes to a close
Flight to safety and negative interest rates drive yields on government bonds to new lows internationally and domestically
The Macroeconomic Roadway
Tailwinds Neutral Headwinds
Page 3
Medial projections one year out suggest about the same level in the 10Y and 30Y rates
Goldman seems bullish on the economy, while Morgan Stanley and Wells Fargo remain bearish
Actual and forecast rates decline significantly in response to the unexpected Brexit vote
Note: JP Morgan reports effective Federal Funds rate Source: Barclays, Citi, Goldman Sachs, JP Morgan; Morgan Stanley, Wells Fargo. Calculations by Ramirez.
US Government Rates Outlook , 3Q16 – 2Q17, July 15, 2016
Morgan Stanley
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.375 0.375 0.375 0.375
2Y - - - -
10Y 1.50 1.25 1.00 1.10
30Y - - - -
Barclays
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.25-0.50 0.50-0.75 0.50-0.75 0.50-0.75
2Y 0.70 0.75 0.80 0.85
10Y 1.50 1.55 1.60 1.65
30Y 2.30 2.35 2.35 2.35
JP Morgan
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.5 0.75 1 1
2Y 0.70 0.90 1.15 1.25
10Y 1.45 1.55 1.70 1.80
30Y 2.20 2.25 2.35 2.40
Wells Fargo
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.5 0.75 0.75 1
2Y 0.66 0.83 0.92 1.13
10Y 1.41 1.50 1.55 1.60
30Y 2.09 2.13 2.17 2.24
Citi
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.5 0.75 0.75 1
2Y 0.70 0.75 0.80 0.85
10Y 1.60 1.60 1.65 1.65
30Y 2.25 2.20 2.20 2.20
Goldman Sachs
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.25-0.50 0.50-0.75 - -
2Y - - - -
10Y 1.60 2.00 - -
30Y - - - -
All (medians)
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.31-0.50 0.50-0.75 0.50-0.75 0.50-1.00
2Y 0.70 0.79 0.86 0.99
10Y 1.50 1.55 1.60 1.65
30Y 2.23 2.23 2.28 2.30
Historical Rates
9/30/2015 12/31/2015 7/15/2016
FF 0.00-0.25 0.25-0.5 0.25-0.5
2Y 0.63 1.05 0.70
10Y 2.04 2.27 1.59
30Y 2.85 3.02 2.30
Ramirez
3Q16 (%) 4Q16 (%) 1Q17 (%) 2Q17 (%)
FF 0.25-0.50 0.25-0.50 0.50-0.75 0.50-0.75
2Y 0.70 0.80 0.90 1.00
10Y 1.65 1.70 1.75 1.80
30Y 2.40 2.45 2.50 2.55
Page 4
Source: Bloomberg
US GDP and its Components, June 2015 – March 2016
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Ma
r-1
6
Dec-1
5
Sep
-15
Jun-1
5
Ma
r-1
5
Dec-1
4
Sep
-14
Jun-1
4
Ma
r-1
4
Dec-1
3
Sep
-13
Jun-1
3
Ma
r-1
3
Dec-1
2
Sep
-12
Jun-1
2
Ma
r-1
2
Dec-1
1
Sep
-11
Jun-1
1
Ma
r-1
1
Dec-1
0
Sep
-10
Jun-1
0
Ma
r-1
0
Dec-0
9
Sep
-09
Jun-0
9
Ma
r-0
9
Dec-0
8
Sep
-08
Jun-0
8
Ma
r-0
8
Dec-0
7
Sep
-07
Jun-0
7
Ma
r-0
7
Dec-0
6
Sep
-06
Jun-0
6
Ma
r-0
6
Dec-0
5
Sep
-05
Co
ntr
ibu
tio
n t
o %
Ch
an
ge
in
GP
D
Consumption Investment
Net Exports Government Expenditures
* The numbers in the text may not match the numbers in the tables, as one pertains to quarter-on-quarter
change and the other year-on-year
GDP increases by 2.4% in 2015, held back by weak net exports and a
negative contribution from inventories. 1Q16 GDP comes in positive
but very weak. US GDP growth expectations in 2016 decline to 1.9% -
2.0%
Consumption grows mildly in Q1, with consumer demand for durable
goods softening
Investment slows sharply in 1Q16 by -1.8%
Government Expenditures grow modestly in Q1, with state and local
spending showing significant improvement
Net Exports show very meek growth in Q1, reversing a significant
negative growth in Q4
Addenda. US real personal disposable income grows by 4.0% in 1Q16,
supported by job gains and declines in oil prices.
Contribution to Change in GDP. Consumption and government
expenditures are the only positive contributors to GDP
06/30/15 09/30/15 12/31/15 03/31/16
Real GDP (QoQ, SAAR) 3.9% 2.0% 1.4% 1.1%
Personal consumption 3.6 3.0 2.4 1.5
Goods 5.5 5.0 1.6 0.1
Durables 8.0 6.6 3.8 (1.6)
Nondurables 4.3 4.2 0.6 1.0
Services 2.7 2.1 2.8 2.1
Gross private domestic investment 5.0 (0.7) (1.0) (1.8)
Fixed investment 5.2 3.7 0.4 (0.4)
Nonresidential 4.1 2.6 (2.1) (4.5)
Structures 6.2 (7.2) (5.1) (7.9)
Equipment 0.3 9.9 (2.1) (8.7)
Intellectual Property Products 8.3 (0.8) (0.2) 4.4
Residential 9.3 8.2 10.1 15.6
Government expenditures & gross investment 2.6 1.8 0.1 1.3
Federal spending 0.0 0.2 2.3 (1.6)
State and local spending 4.3 2.8 (1.2) 3.2
Net exports of goods & services
Exports 5.1 0.7 (2.0) 0.3
Imports 3.0 2.3 (0.7) (0.5)
Addenda
Final sales of domestic product (a)
3.9 2.7 1.6 1.3
Gross domestic income (GDI) (b)
2.2 2.0 1.9 2.9
Gross national product (GNP) (c)
3.9 1.3 1.1 0.2
Disposable personal income 2.6 3.2 3.3 4.0
Contributions to % Change in GDP
Personal Consumption 2.42 2.04 1.66 1.02
Gross Private Domestic Investment 0.85 (0.11) (0.16) (0.29)
Change in Private Inventories 0.02 (0.71) (0.22) (0.23)
Government Consumption and Investments 0.46 0.32 0.02 0.23
Net Exports of Goods and Services 0.18 (0.26) (0.14) 0.12(a) GDP less change in private inventories (b) GDI-GDP = statistical discrepency (c) GDP plus net foreign
payments for US factors of production
Page 5
* Notation: Est. = Establishment Survey by BLS, HH = Household Survey by BLS, DoL = US Department of Labor, BLS = Bureau of Labor Statistics. Source: Bloomberg
US Macroeconomic Indicators , April 2016 – July 2016
The Consumer. Consumption indicators
remain strong to moderate. Housing sector
shows improvement.
The Labor Market. Latest employment data
show volatility with an overall negative trend
Production. Production indicators remain
mixed, with services showing more strength
than manufacturing
Prices. Inflation continues to run below the
Fed’s long-run objective, partly reflecting
declines in energy prices and decreasing
prices of non-energy imports
Market-based measures of inflation remain
low, while survey-based measures of long-
term inflation expectations remain up to 100
basis points higher than the Fed’s 2%
objective
4/30/2016 5/31/2016 6/30/2016 7/31/2016⁽¹⁾ LTM Max LTM Min
State of the Consumer
US Auto Sales (SAAR, mil.) 17.3 17.4 16.6 -- 18.1 16.5
New One Family Houses Sold (SAAR, 000's) 572.0 572.0 592.0 -- 592.0 457.0
Existing Homes Sold (SAAR, mil.) 5.4 5.5 5.6 -- 5.6 4.9
Housing Starts (SAAR , 000's) 1,155.0 1,135.0 1,189.0 -- 1,213.0 1,073.0
Housing Permits (SAAR, 000's) 1,130.0 1,136.0 1,153.0 -- 1,286.0 1,077.0
U. of Mich. Consumer Confidence 89.0 94.7 93.5 89.5⁽²⁾ 94.7 87.2
Conference Board Consumer Confidence 94.7 92.4 97.4 97.3 102.6 92.4
US Pending Home Sales Index (SA, 2001=100) 115.0 110.8 -- -- 115.0 105.4
US Personal Income(SA, MoM%) 0.5 0.2 -- -- 0.5 0.1
US Consumer Spending (SA, MoM%) 1.1 0.4 -- -- 1.1 0.0
US Retail Sales (SA, MoM%) 1.2 0.2 0.6 -- 1.2 (0.5)
Labor Market*
Change in Non-Farm Payroll (SA, 000's), Est. 144.0 11.0 287.0 -- 295.0 11.0
Unemployment (SA, %), HH 5.0 4.7 4.9 -- 5.1 4.7
Unemployed Workers Total (SA, 000's), HH 7,920.0 7,436.0 7,783.0 -- 8,018.0 7,436.0
Unemployed and Part Time (SA, %), HH 9.7 9.7 9.6 -- 10.3 9.6
Labor Participation Rate (SA, %), HH 62.8 62.6 62.7 -- 63.0 62.4
Civilian Labor Force Level (SA, 000's), HH 158,924.0 158,466.0 158,880.0 -- 159,286.0 156,867.0
US Civilian Noninstitutional Population Total (SA, 000's), HH 252,969.0 253,174.0 253,397.0 -- 253,397.0 251,096.0
Employed in Civilian Labor Force, Net Change (SA, 000's), HH (316.0) 26.0 67.0 -- 615.0 (316.0)
ADP National Employment Report (SA , 000's) 149.3 167.6 171.6 -- 287.0 149.3
US Initial Jobless Claims (SA, 000's, weekly )⁽³⁾, DoL 274.0 268.0 270.0 -- 286.0 253.0
US Average Hourly Earnings (SA, YoY%), Est. 2.5 2.5 2.6 -- 2.6 2.3
Employment Cost Index (SA, QoQ%, quarterly ), BLS -- -- -- -- 0.6 0.5
US Avg. Weekly Hr. Worked, Nonfarm Private, Nonsupervisory (SA), Est. 33.6 33.6 33.6 -- 33.8 33.6
Production
US Industrial Production MoM (SA, %) 0.5 (0.3) 0.6 -- 0.6 (1.0)
US Durable Goods New Orders MoM (SA, %) 3.2 (2.3) -- -- 4.8 (3.9)
US Durable Goods New Orders Ex Transportation MoM (SA, %) 0.3 (0.3) -- -- 1.5 (1.5)
ISM Manufacturing PMI (SA, %) 50.8 51.3 53.2 -- 53.2 48.0
ISM Non-Manufacturing PMI (%) 55.7 52.9 56.5 -- 58.3 52.9
Philadelphia Fed Business Outlook Survey (SA, %) (1.6) (1.8) 4.7 (2.9) 12.4 (10.2)
Empire State Manufacturing Survey (SA, %) 9.6 (9.0) 6.0 0.6 9.6 (19.4)
Chicago Purchasing Manager Index (SA, %) 50.4 49.3 56.8 -- 56.8 42.9
Prices
CPI (SA, YoY%) 1.1 1.0 1.0 -- 1.4 0.0
Core CPI (SA, YoY%) 2.1 2.2 2.3 -- 2.3 1.8
PCE Core (SA, MoM%) 0.2 0.2 -- -- 0.3 0.1
PCE Core (SA, YoY%) 1.6 1.6 -- -- 1.7 1.3
U. of Mich. Expected Change in Prices During the Next Year: Median (%) 2.8 2.4 2.6 2.8 2.8 2.4
U. of Mich. Expected Change in Prices During the Next 5-10 Years (%) 2.5 2.5 2.6 2.6 2.7 2.5
US Personal Consumption Expenditures Chain Type (SA, MoM%) 0.3 0.2 -- -- 0.3 (0.1)
US Personal Consumption Expenditures Chain Type (SA, YoY %) 1.1 0.9 -- -- 1.2 0.2
PPI Final Demand (SA, MoM%) 0.2 0.4 0.5 -- 0.5 (0.5)
Case-Shiller Composite-20 City (YoY%) 5.4 5.2 -- -- 5.7 5.0
TIPs Break Even 5Y (daily )⁽⁴⁾ 1.6 1.5 1.4 1.3 1.6 1.1
⁽¹⁾ most recent number for the period 6/30/16 - 7/26/16, ⁽²⁾ preliminary number, ⁽³⁾ For past months numbers are end-of-period; for current month, all available numbers are
listed ⁽⁴⁾ For past months numbers are end-of-period; for current month, most recent number available
Page 6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2016 2017 2018 Longer Run
Targ
et
Fe
dera
l F
un
ds R
ate
(%
)
March 16, 2016
June 15, 2016
FOMC Outlook, Meeting by Meeting, Sep 2015 – Jun 2016 Outlook on Pace of Policy Firming as of Jun 2016
Source: Federal Reserve; Bloomberg
The Fed’s Dots and the Markets’ Forecasts Fall and Diverge
Option-Implied Probability of Target at Dec 2016 Meeting Various Fed Funds Forecasts* as of Jun 2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2016 2017 2018 Longer run
Ta
rge
t F
ed
era
l F
un
ds
Rate
(%
)
9/17/2015
12/16/2015
3/16/2016
6/15/2016
* Primary Dealer Survey is sampled in early June ‘16, whereas other forecasts sampled at the moment of the FOMC’s June 2016 meeting
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Mar-
16
Ju
n-1
6
Sep
-16
De
c-1
6
Mar-
17
Ju
n-1
7
Sep
-17
De
c-1
7
Mar-
18
Ju
n-1
8
Sep
-18
De
c-1
8
Mar-
19
Exp
ecte
d F
ed
Fu
nd
s R
ate
(%
)
Futures-Implied (as of Jul 26) Futures-Implied (as of Jun 16)
Taylor Rule (w/ Fed Forecast) Fed Forecast
Primary Dealers
0
10
20
30
40
50
60
70
80
90
100
1/29/16 2/28/16 3/29/16 4/28/16 5/28/16 6/27/16 7/27/16
Pro
ba
bil
ity (
%)
0.00% - 0.25% 0.25% - 0.50% 0.50% - 0.75% over 0.75%
Page 7
Source: Federal Reserve; Bloomberg
Inflation Indicators
US Wages & Inflation Indicators, Apr 2014 – Jun 2016
U.S. Wage Growth, Jan 2009 – Jul 2016
Inflation measured by core PCE runs
consistently below the Fed’s 2% target
Goods inflation dips below zero, while
services inflation approaches 3%
US Goods & Services , Jun 1989 – Jun 2016
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Yo
Y %
Ch
an
ge
US Avg. Hourly Earnings Empl Cost Index CPI
CPI ex Food/Energy PCE Defl. PCE ex Food/Energy
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Yo
Y %
Ch
an
ge
US Recessions
US CPI Urban Consumers Services Less Energy Services (SA)
US CPI Urban Consumers Commodities Less Food & Energy (SA)
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
Jan
-09
Au
g-0
9
Jan
-10
Jul-1
0
Jan
-11
Jul-1
1
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
Jan
-15
Jul-1
5
Jan
-16
Jul-1
6
Mo
M %
Ch
an
ge
US Avg. Hourly Earnings, Nonsupervisory Private Nonfarm Payrolls (Nom. Dollars, SA)
6-month Geom. MA
Page 8
Source: Bloomberg, FRED
Labor Market Conditions
Fed’s Labor Market Conditions Index, Dec 1989 – Jun 2016
While the unemployment rate gets closer
to full employment, labor conditions
worsen with declines in the six-month
moving average job creation and a
worsening of the Fed’s Labor Markets
Conditions Index
Monthly Payroll Gains, Dec 2012 – Jun 2016
Unemployment Rate, Jan 1994 – Jun 2016
-50
-40
-30
-20
-10
0
10
20
30
40
Dec-8
9
Jan
-91
Fe
b-9
2
Ma
r-93
Ap
r-94
Ma
y-9
5
Jun
-96
Jul-9
7
Au
g-9
8
Se
p-9
9
Oct-
00
Nov-0
1
Dec-0
2
Jan
-04
Fe
b-0
5
Ma
r-06
Ap
r-07
Ma
y-0
8
Jun
-09
Jul-1
0
Au
g-1
1
Se
p-1
2
Oct-
13
Nov-1
4
Dec-1
5Avera
ge
Mo
nth
ly C
ha
ng
e
Recession Fed Labor Market Conditions Index
0
50
100
150
200
250
300
350
Dec-1
2
Ma
r-13
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-15
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-16
Jun
-16
Se
p-1
6
Net
Ch
an
ge (
Mo
M, 1000s)
Nonfarm Payrolls (MoM, net change, thousands) 6M Moving Average
56
58
60
62
64
66
68
70
72
74
0
2
4
6
8
10
12
14
16
18
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
La
bo
r Fo
rce P
artic
ipa
tion
Rate
(%)
Un
em
plo
ym
en
t (%
)
Employment Rate: Part-Time for Economic Reasons, Nonagricultural Industries
U3 Unemployment Rate
U6 Unemployment Rate
Civilian Labor Force Participation Rate (Right)
Page 9
Source: Bloomberg
Financial Stress Indicators and GDP
St. Louis Fed & Bloomberg Financial Stress Index, Jan ’09 – Jul ’16 Goldman Sachs Financial Conditions Index, Jan ’09 – Jul ’16
Response of GDP to Goldman Sachs Financial Stress Index, Mar 2005 – Sep 2017
-10
-8
-6
-4
-2
0
2
4
6
8
-10
-8
-6
-4
-2
0
2
4
6
8
Ma
r-05
Jun
-05
Se
p-0
5
Dec-0
5
Ma
r-06
Jun
-06
Se
p-0
6
Dec-0
6
Ma
r-07
Jun
-07
Se
p-0
7
Dec-0
7
Ma
r-08
Jun
-08
Se
p-0
8
Dec-0
8
Ma
r-09
Jun
-09
Se
p-0
9
Dec-0
9
Ma
r-10
Jun
-10
Se
p-1
0
Dec-1
0
Ma
r-11
Jun
-11
Se
p-1
1
Dec-1
1
Ma
r-12
Jun
-12
Se
p-1
2
Dec-1
2
Ma
r-13
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-15
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-16
Jun
-16
Se
p-1
6
Dec-1
6
Ma
r-17
Jun
-17
Se
p-1
7
% Δ
, Qo
Q %
Δ, Q
oQ
GDP
GDP w/o Financial Shocks
98.0
99.0
100.0
101.0
102.0
103.0
104.0
105.0
Jan
-09
Au
g-0
9
Jan
-10
Au
g-1
0
Jan
-11
Au
g-1
1
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
Jan
-15
Jul-1
5
Jan
-16
Jul-1
6
Le
vel
GS Financial Conditions Index
-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0
Jan
-09
Au
g-0
9
Jan
-10
Au
g-1
0
Jan
-11
Au
g-1
1
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
Jan
-15
Jul-1
5
Jan
-16
Jul-1
6
Le
vel
Bloomberg Financial Conditions Index
St Louis Fed Financial Stress Index
Page 10
Source: Bloomberg.
Overseas Economies
World GDP Map World Unemployment Map
Selected
Countries
-13.9 13.9 0.5 26.7
Name Real GDP YoY Unemployment Name Real GDP YoY Unemployment
% Date % Date % Date % Date
France 1.3 3/16 9.9 5/16 Spain 3.4 3/16 19.8 5/16
Germany 1.6 3/16 4.2 5/16 United Kingdom 2.0 3/16 5.0 5/16
Greece -1.4 3/16 24.1 3/16 China 6.7 6/16 4.0 3/16
Italy 1.0 3/16 11.5 5/16 Japan 0.1 3/16 3.2 5/16
Portugal 0.9 3/16 11.6 5/16 Brazil -5.4 3/16 11.2 5/16
Russia -1.2 3/16 5.6 5/16 US 2.1 3/16 4.9 6/16
Page 11
Source: Bloomberg.
Treasury Term Premium
Treasury yields can be decomposed into expectations of the future path of short-term Treasury yields and the
Treasury term premium
The term premium is not readily observable in the market and is the compensation that investors require for
bearing the risk that short-term Treasury yields do not evolve as expected
Based on a methodology that they have developed, Adrian, Crump and Moench (“ACM”) of the Federal Reserve
Bank of New York publish term premiums for the 10-year Treasury
The term premium is visibly cyclical and is correlated with the slope of the yield curve (63% for monthly changes
since 1962) and the short-term rate (negative 27% for the same data)
Recent term premia have been low and often negative, compared to an average of 1.65% since 1961. Observers
suggest that this is due to the effects of QE and high demand for Treasury notes and bonds
ACM 10Y UST Term Premium vs. Slope of Treasury Curve ACM 10Y UST Term Premium vs. Unemployment
0
2
4
6
8
10
12
-1
0
1
2
3
4
5
6
Jun-6
1
Nov-
63
Apr-
66
Sep-6
8
Feb
-71
Jul-73
Dec-
75
May-
78
Oct-80
Mar-
83
Aug-8
5
Jan-8
8
Jun-9
0
Nov-
92
Apr-
95
Sep-9
7
Feb
-00
Jul-02
Dec-
04
May-
07
Oct-09
Mar-
12
Aug-1
4
(%)
(%)
Recession ACM 10Y Treasury Term Premium
Unemployment Rate (RA)
-3
-2
-1
0
1
2
3
4
5
6
Jun-6
1
Aug-6
3
Oct-65
Dec-
67
Feb
-70
Apr-
72
Jun-7
4
Aug-7
6
Oct-78
Dec-
80
Feb
-83
Apr-
85
Jun-8
7
Aug-8
9
Oct-91
Dec-
93
Feb
-96
Apr-
98
Jun-0
0
Aug-0
2
Oct-04
Dec-
06
Feb
-09
Apr-
11
Jun-1
3
Aug-1
5
(%)
Recession ACM 10Y Treasury Term Premium Slope 3M to 10Y
Page 12
-5.6%
-4.5%
-4.3%
-4.1%
-3.7%
-3.6%
-2.9%
-1.9%
-0.9%
0.1%
-6% -5% -4% -3% -2% -1% 0% 1%
Financials
Materials
Information Technology
Industrials
Consumer Discretionary
Energy
Health Care
Consumer Staples
Telecommunication Services
Utilities
-14.4%
-13.3%
-13.2%
-9.0%
-8.8%
-8.4%
-8.3%
-7.1%
-5.9%
-4.0%
-3.7%
-3.5%
-3.4%
-3.3%
-3.2%
-3.2%
-3.1%
-3.0%
-2.9%
-2.8%
-2.3%
-2.2%
-2.1%
-1.8%
-1.7%
-1.6%
-1.3%
-0.8%
-0.4%
-14.8%
-13.9%
-13.8%
-10.1%
-12.3%
-9.6%
-4.8%
-8.4%
-7.3%
-7.7%
-3.6%
-4.6%
-5.6%
-3.3%
-4.8%
-10.0%
-5.3%
-2.9%
-3.8%
-5.6%
-3.6%
-3.0%
-2.7%
-3.1%
-3.0%
-2.1%
-2.1%
-3.3%
-3.3%
-16% -14% -12% -10% -8% -6% -4% -2% 0%
Athens Ex (GR)
Ftse Mib (IT)
Ibex 35 (SP)
Euro Stoxx 50 Pr (EC)
Omx Stockholm 30 (SW)
Cac 40 (FR)
Nikkei 225 (JN)
Dax (GE)
Aex (NE)
Ftse/Jse Africa Top40 Ix (SA)
S&P 500 (US)
Swiss Market (SZ)
Bist 100 (TU)
Dfm General (UA)
S&P/Asx 200 (AU)
Ftse 100 (GB)
Kospi (SK)
Hang Seng (HK)
Brazil Ibovespa (BZ)
Mexico Ipc (MX)
Taiwan Taiex (TA)
Nifty 50 (IN)
Straits Times (SI)
Micex (RU)
S&P/Tsx Composite (CA)
Stock Exch Of Thai (TH)
Csi 300 (CH)
Jakarta Composite (ID)
Ftse Bursa Malaysia Klci (MA)
USD Local Currency
Returns of S&P 500 Sub-Sectors Returns of World Indexes
The stock markets in Southern Europe
were hardest hit by the Brexit results,
judging by respective one day losses
The UK market lost approximately 10%
in dollar terms although in GBP the
loss was far less dramatic
Across US sectors, utilities and
telecoms appeared to be the most
resilient to the news, while the
financials lost most
Notes: Returns are calculated from the close prior to the Brexit vote results to the close on the following trading day. Source: Bloomberg.
Impact of Brexit Announcement: Equities
Page 13
BofA ML Index Industries: Change in Credit Spreads Returns of World Indexes
US markets recovered while Treasury rates remain low
Notes: Returns are calculated from the close prior to the Brexit vote results to the close on 7/20/2016.
Source: Bloomberg.
Brexit: Longer-term Impact
-7.2%
-6.7%
-3.8%
-2.6%
-2.6%
-2.2%
-1.9%
-1.1%
0.6%
1.5%
1.9%
1.9%
2.3%
2.6%
2.8%
3.0%
3.1%
3.1%
3.8%
4.2%
5.0%
5.2%
5.3%
5.3%
5.4%
6.0%
6.2%
7.7%
9.7%
-10.1%
-9.5%
-11.1%
-5.6%
-2.2%
-5.2%
-4.9%
-4.1%
-2.4%
0.0%
-3.0%
-0.6%
-5.4%
1.4%
2.8%
1.9%
3.0%
1.0%
1.6%
4.0%
2.7%
3.3%
5.4%
5.3%
5.3%
4.0%
5.5%
7.6%
13.1%
-15% -10% -5% 0% 5% 10% 15%
Athens Ex (GR)
Ftse Mib (IT)
Bist 100 (TU)
Ibex 35 (SP)
Ftse/Jse Africa Top40 Ix (SA)
Euro Stoxx 50 Pr (EC)
Cac 40 (FR)
Dax (GE)
Aex (NE)
Kospi (SK)
Ftse Bursa Malaysia Klci (MA)
Omx Stockholm 30 (SW)
Swiss Market (SZ)
Micex (RU)
Nikkei 225 (JN)
S&P 500 (US)
S&P/Tsx Composite (CA)
Mexico Ipc (MX)
Nifty 50 (IN)
S&P/Asx 200 (AU)
Csi 300 (CH)
Stock Exch Of Thai (TH)
Hang Seng (HK)
Dfm General (UA)
Straits Times (SI)
Taiwan Taiex (TA)
Ftse 100 (GB)
Jakarta Composite (ID)
Brazil Ibovespa (BZ)
USD Pos USD Neg Local Currency Pos Local Currency Neg
US Yield Curve
-40 -30 -20 -10 0 10
PipelineMetals & MiningEnergyFood & DrugPharmaChemicalsPaper & PackagingHealthcareMediaIndustrialBeverageNon Food & DrugRestaurantTelecomTransportationFinancial Svc.TobaccoHG MasterConsumer ProductsAutomotiveReitsUtilityMulti-LineP&C InsuranceAerospace & DefenseInsuranceLife InsuranceBankingBuilding Materials
Basis Points
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 5 10 15 20 25 30
Tre
asu
ry Y
ield
(%
)
Maturity (Years)
07/20/16 06/23/16
Page 14
0 5 10 15
PharmaHealthcare
Consumer ProductsMediaReits
RestaurantTobacco
P&C InsuranceAerospace & Defense
AutomotiveNon Food & Drug Retail
IndustrialEnergy
Food & Drug RetailPaper & Packaging
PipelineChemicals
Financial Svc.Building Materials
TransportationHG MasterInsurance
Life InsuranceBeverage
UtilityMulti-Line InsuranceTelecommunications
BankingMetals & Mining
Basis Points
European banks are among most affected individual
names in terms of spreads widening from June 23 to
June 24, 2016
Among sectors, the most affected were Metals and
Mining and Banking
The 10-year US Treasury yield declined by
approximately 19 bps, while the 30-year declined by 15
bps
BofA ML Index Industries: Increase in Credit Spreads Selected Banking Bonds
US Yield Curve
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 5 10 15 20 25 30
Tre
asu
ry Y
ield
(%
)
Maturity (Years)
06/24/16 06/23/16
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
120140160180200220240260280300320340360380400
Yie
ld (%
, US
T)
Sp
read
(b
ps)
C 3.4 05/01/26 JPM 3.2 06/15/26 HSBC 4.3 03/08/26
BACR 4 3/8 01/12/26 BNP 4 3/8 05/12/26 SANTAN 5.179 11/19/25
T 1 5/8 05/15/26
Notes: The changes are calculated from the close prior to the Brexit vote results to the close on the following trading day. Merrill Lynch bond indexes include USD bonds issued by foreign issuers. Source: Bloomberg.
Impact of Brexit Announcement: Fixed Income Markets
Page 15
* Real rate of Interest is measured as yield on respective inflation protected securities. Expected inflation is measured as the difference between nominal and real government rates. Source: Bloomberg.
Brexit and Government Rates
Selected Government Rates
Changes in the government rate can be decomposed into changes in the real rate of interest and
changes in inflation expectations, disregarding the short-term effects of “flight to quality”
The uniform decline in the real rate of interest in the US, Germany, and the UK since the Brexit
announcement may suggest slowing growth for the three countries
Inflation expectations declined in the US and Germany in sync with the real rates. Inflation expectations
in the UK, however, increased, possibly pointing to higher inflation
Country Date, Date Range Real Rate of Interest
(%) *
Change In Real Rate
of Interest Since June
23, 2016 (bps)
Expected Inflation
(%) *
Change In Expected
Inflation Since June
23, 2016 (bps)
5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y
US June 23, 2016 -0.256 0.195 - - 1.495 1.549 - -
June 24, 2016 -0.322 0.103 -7 -9 1.384 1.459 -11 -9
June 30, 2016 -0.415 0.034 -16 -16 1.400 1.438 -9 -11
Germany June 23, 2016 - -0.787 - - - 0.890 - -
June 24, 2016 - -0.816 - -3 - 0.790 - -10
June 30, 2016 - -0.954 - -17 - 0.830 - -6
UK June 23, 2016 -1.273 -0.936 - - 2.301 2.310 - -
June 24, 2016 -1.600 -1.221 -32 -29 2.321 2.307 2 0
June 30, 2016 -1.908 -1.507 -64 -57 2.416 2.374 12 6
Page 16
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