fixed income monthly market update€¦ · equity investors seem to rejoice in the fed’s move...
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Fixed IncomeMonthly Market UpdateJuly 2019
PFM Asset Management LLC
213 Market StreetHarrisburg, PA 17101
717.232.2723pfm.com
Prepared by the Portfolio Strategies Group
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Current Market Themes The second quarter saw plunging interest rates, surging equity prices, mixed economic data and increasing global growth
concerns. While few economists expect the decade-long U.S. expansion to end soon, the Federal Reserve’s (Fed) cautionary tone set the stage for rate cuts in the second half of the year.
U.S. economic conditions are characterized by:• Solid gross domestic product (GDP) growth in Q1, but more tempered expectations for Q2 and Q3;• Strong job growth, with a low unemployment rate of 3.7%; • Softening inflation pressures; and• Increased downside risks, including a slowdown in manufacturing, weaker business investments and protracted trade
wars.
U.S. Treasury yields fell for a third consecutive quarter, reflecting expectations for Fed rate cuts and increased uncertainty about future global economic growth. The yield curve inversion deepened further, with yields on a majority of benchmark U.S. Treasury maturities now at their 18-month lows.
U.S. GDP grew 3.1% in Q1, up from 2.2% in Q4. Growth was driven by an unexpected improvement in net exports and outsized growth in inventories, factors that are not likely to be sustained. Forecasts for Q2 are substantially lower –generally in the 1.5% to 2.0% range.
At its June meeting, the Federal Open Market Committee (FOMC) left the overnight fed funds rate at a target range of 2.25%-2.50%, but acknowledged soft business investment, declining market-based inflation measures and increased uncertainty to the outlook. In subsequent communications, Fed chair Powell all but assured a first preemptive rate cut will occur at the Fed’s next meeting on July 30-31.
Equity investors seem to rejoice in the Fed’s move dovish stance, reaching new record highs. The S&P 500 returned 4.3% for Q2 and is now up 17.3% for the year – the best first half of a year since 1997.
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2.6%
2.4%
1.7%
Personal Consumption,
0.6%
4.2%
3.4%
2.2%
3.1%
-4%
-2%
0%
2%
4%
6%
8%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
U.S. GDP Contributors and DetractorsPersonal Consumption Fixed Investment Private Inventories Net Exports Gov't Expenditures
Q1 GDP Beats Expectations
Source: Bureau of Economic Analysis
2014 2015 2016 2017 2018 2019
The final reading for 1st quarter GDP remained unchanged at 3.1%
Personal consumption was more subdued, revised lower and posted its lowest contribution since Q1 2018.
Business investment was stronger than previously estimated, though still relatively weaker than in previous quarters
Net exports and inventorygrowth contributed strongly to GDP, but are unlikely to be sustainable.
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80
85
90
95
100
105
110
Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19
NFIB Small Business Optimism
Small business optimism starting
to wane
Economic Data Somewhat Mixed
0k
100k
200k
300k
400k
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
Monthly Change in Nonfarm PayrollsNonfarm Payrolls 12-Mo Moving Avg
Source: Bloomberg, as of 6/30/2019.
30
35
40
45
50
55
60
65
Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19
ISM Manufacturing
recent trade conflicts taking a toll on the
manufacturing sector
-0.50%
0.00%
0.50%
1.00%
1.50%
May-17 Nov-17 May-18 Nov-18 May-19
Durable Goods OrdersNew Orders 12-mo MA
orders slump as business investment
slowed
Jobs gains are strong, but lower than in 2018
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ISM Survey Indices Slowing Sharply as Trade Wars Take a Toll
Source: Bloomberg, as of 06/30/19.
45
50
55
60
65
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
ISM Manufacturing
45
50
55
60
65
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
ISM Non-Manufacturing
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Inflation Running Persistently Below Target
Source: Bloomberg, CPI as of 5/31/19. PCE as of 5/31/19.
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
May-15 May-16 May-17 May-18 May-19
PCE Core PCE
Fed’s 2% Inflation Target
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
May-15 May-16 May-17 May-18 May-19
CPI Core CPI
“Core inflation unexpectedly fell… We suspect that some transitory factors may be at work.”
– Jerome Powell, Fed ChairMay 1, 2019
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Consumer Expectations Are Weakening
Source: Bloomberg and Conference Board, as of 05/31/2019.
-100
-75
-50
-25
0
25
50
75
100
Jun '71 Jun '75 Jun '79 Jun '83 Jun '87 Jun '91 Jun '95 Jun '99 Jun '03 Jun '07 Jun '11 Jun '15 Jun '19
Consumer Assessments of Future Expectations Minus Views on Current Conditions
Expectations - Present Situation
Consumers optimistic about the future
Consumers less optimistic about the future
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0100200300400500600700
Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18
Corporate Spreads1-5 Year A-AAA (OAS)
On the Other Hand, Key Market Metrics Remain Strong
Source: Bloomberg, as of 6/30/2019.
8090
100110120130140150
Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
Consumer Confidence
2018 close
still near all-time high
still tight on historical basis
new all-time high
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
Jun '18 Jul '18 Aug '18 Sep '18 Oct '18 Nov '18 Dec '18 Jan '19 Feb '19 Mar '19 Apr '19 May '19 Jun '19
S&P Price Change
2018 close
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Retail Sales Rebound from Weakness in Late 2018
Source (top): U.S. Census Bureau, as of 05/31/2019. Source (bottom): Bloomberg.
retail+0.5%
auto and other motor vehicles+0.7%
clothing and clothing accessories0.0%
furniture and home furnishings+0.1%
food and beverage stores-0.1%
restaurants and bars+0.7%
electronics and appliances+1.1%
1.1%0.4% 0.6%
-0.1% -0.2%
1.0%
0.0%
-1.6%
0.8%
-0.3%
1.8%
0.3% 0.5%
-2.0%
-1.0%
0.0%
1.0%
2.0%
May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
Retail Sales
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0%
1%
2%
3%
4%
Fed Participants’ Assessments of ‘Appropriate’ Monetary Policy
Jun-19 FOMC Projections
Jun-19 Median
Fed Funds Futures
Market Projecting Multiple Rate Cuts by Year End
Source: Federal Reserve and Bloomberg. Individual dots represent each Fed members’ judgement of the midpoint of the appropriate target range for the federal funds rate at each year-end. Fed funds futures as of 6/19/19.
2019 2020 2021
Fed equally split between no change and expectations for
2 rate cuts
History of RecentFed Rate Hikes
Dec ’18 2.25 - 2.50%
Sept ’18 2.00 - 2.25%
Jun ’18 1.75 - 2.00%
Mar ’18 1.50 - 1.75%
Dec ’17 1.25 - 1.50%
Jun ’17 1.00 - 1.25%
Mar ’17 0.75 - 1.00%
Dec ’16 0.50 - 0.75%
Dec ’15 0.25 - 0.50%
Longer Term
Market is pricing in 3 rate cuts
by year end 2019
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• The Committee continues to view sustained expansion of economic activity, strong labor marketconditions, and inflation near the Committee’s symmetric 2 percent objective as the most likelyoutcomes, but uncertainties about this outlook have increased. In light of these uncertainties andmuted inflation pressures, the Committee will closely monitor the implications of incoming informationfor the economic outlook and will act as appropriate to sustain the expansion…
• In support of the Committee’s goals, the Committee decided to maintain the target range for thefederal funds rate at 2¼ to 2½ percent.
Fed Keeps Rates Steady in a Dovish Statement
Source: Federal Reserve.
• Information received since the FOMC met in May indicates that thelabor market remains strong and that economic activity is rising at amoderate rate.
• Job gains have been solid, on average, in recent months, and theunemployment rate has remained low. Although growth of householdspending appears to have picked up from earlier in the year, indicatorsof business fixed investment have been soft.
• On a 12-month basis, overall inflation and inflation for items other thanfood and energy are running below 2 percent. Market-based measuresof inflation compensation have declined; survey-based measures oflonger-term inflation expectations are little changed.
June
19
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The Fed’s Updated Economic Projections – June 2019
Source: Federal Reserve, as of June 2019. Green denotes an improved projection in June compared to March, red for worse.
Indicator2019 2020 2021 Longer run
Mar. Jun. Mar. Jun. Mar. Jun. Mar. Jun.
Real GDP (YoY) 2.1% 2.1% 1.9% 2.0% 1.8% 1.8% 1.9% 1.9%
Unemployment Rate 3.7% 3.6% 3.8% 3.7% 3.9% 3.8% 4.3% 4.2%
PCE Inflation (YoY) 1.8% 1.5% 2.0% 1.9% 2.0% 2.0% 2.0% 2.0%
Core PCE (YoY) 2.0% 1.8% 2.0% 1.9% 2.0% 2.0% - -
Federal FundsRate (Median) 2.4% 2.4% 2.6% 2.1% 2.6% 2.4% 2.8% 2.5%
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0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19
Federal Funds Target Rate - Midpoint
Months Between Last Hike and First Cut Months Between Last Cut and First Hike
Fed Has Historically Been Slow to Raise Rates, Quick to Cut
Source: Bloomberg, January 1989 – May 2019.
Months Between Last Rate Hike and
First Rate Cut
Months Between Last Rate Cut and
First Rate HikeMinimum 4 months 8 monthsAverage 10 months 27 monthsMaximum 18 months 85 monthsLast Cycle 15 months 85 months
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-20%
-10%
0%
10%
20%
Index of Leading Indicator (SA, YoY)
400600800
1,0001,2001,4001,600
Housing Starts (000s, saar)
-400
-200
0
200
400
600
Yield Curve (bps)10-year – 3-month
0100200300400500600700
Corporate Yield Spreads1-5 Year A-AAA (OAS)
3035404550556065
ISM Manufacturing
Market Indicators Weakening, But Not Yet Pointing to Imminent Recession
Source: Bloomberg, as of 6/30/2019.
100k
200k
300k
400k
500k
600k
700k
Initial Jobless Claims
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When is the Next Recession?
2%
36%
52%
5%2% 2%
0%
10%
20%
30%
40%
50%
60%
2019 2020 2021 2022 2025 2028
Economists’ Views of When the Next Recession Will Begin
Source: Wall Street Journal, as of 5/31/19.
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Treasury Yields Continue to Plummet
Source: Bloomberg, as of 6/30/19.
1.75%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
Jun '17 Dec '17 Jun '18 Dec '18 Jun '19
2-Year Treasury
2.01%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
Jun '17 Dec '17 Jun '18 Dec '18 Jun '19
10-Year Treasury3.24%
2.97%
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2.09%
1.77%
2.01%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
3M
1Y
2Y
3Y
4Y
5Y
10Y
30Y
Yiel
d
Maturity
June 30, 2019
December 31, 2018
September 30, 2018
Yield Curve Remains Mostly Inverted
Source: Bloomberg, as of 6/30/19.
U.S. Treasury Yield Curve
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Yield Environment as of June 30, 2019
Source: Bloomberg BVAL yield curves for Treasury and Corporate. 3-month corporate yields from commercial paper; A-1+ for AA and A-1 for A. Yields are for indicative purposes only; actual yields may vary by issue.
Maturity Treasury FederalAgency
AA Corporate
A Corporate
BBBCorporate
3-Month 2.09% 2.04% 2.18% 2.34% 2.57%
1-Year 1.93% 1.96% 2.15% 2.29% 2.54%
2-Year 1.75% 1.89% 2.09% 2.26% 2.55%
3-Year 1.71% 1.88% 2.09% 2.26% 2.59%
5-Year 1.77% 1.87% 2.23% 2.42% 2.82%
10-Year 2.01% 2.26% 2.68% 2.93% 3.48%
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Amount of Global Bonds Yielding Less Than 0% Soars to Record Levels
Source: Bloomberg, as of 6/30/19; Barclays.
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19
Trill
ion
Negative Yielding Issues in the Bloomberg Barclays Global Bond Aggregate
Record High
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Strong Fixed Income Returns Year-To-Date (1-5 Year Indices)
Source: ICE BofAML Indices. MBS and ABS indices are 0-5 year, based on weighted average life.
1.52%1.71%
0.82%
1.83%
1.16%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
U.S
. Tre
asur
y
Agen
cy
Agen
cy M
BS
ABS
(AAA
)
Cor
p (A
-AAA
)
3.06%
2.56%
3.85%
2.54%
4.32%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
U.S
. Tre
asur
y
Agen
cy
Agen
cy M
BS
ABS
(AAA
)
Cor
p (A
-AAA
)
2018 Returns 2019 YTD Returns(through 6/30/2019)
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Falling Rates Drive Strong Treasury Returns in 2019
Source: ICE BofAML Indices.
1.45%2.44%
4.04%
5.43%
6.89%7.59%
10.85%
0-1
Year
s
1-3
Year
s
3-5
Year
s
5-7
Year
s
7-10
Yea
rs
10-1
5 Ye
ars
15+
Year
s
2018 Returns YTD Returns(through 6/30/2019)
1.92% 1.58% 1.47% 1.43%0.88%
0.14%
-1.74%
0-1
Year
s
1-3
Year
s
3-5
Year
s
5-7
Year
s
7-10
Yea
rs
10-1
5 Ye
ars
15+
Year
s
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Fixed-Income Index Returns
Source: ICE BofAML Indices. Returns greater than one year are annualized.
June 30, 2019 Effective Duration Yield YTD 1 Month 3 Month 1 Year 3 Years 5 Years
1-3 Year IndicesU.S. Treasury 1.82 1.81% 2.44% 0.52% 1.44% 3.96% 1.29% 1.21% Agency 1.46 1.82% 2.28% 0.42% 1.30% 3.88% 1.46% 1.33% Corp A-AAA 1.82 2.30% 3.21% 0.68% 1.54% 4.84% 2.13% 1.93% MBS (0 to 3 Years) 3.55 2.62% 3.82% 0.59% 1.59% 5.69% 2.10% 1.88% ABS (0 to 3 Years) 1.11 2.28% 2.31% 0.36% 1.20% 3.78% 1.91% 1.61%
1-5 Year IndicesU.S. Treasury 2.56 1.78% 3.06% 0.65% 1.82% 4.89% 1.31% 1.54% Agency 1.75 1.79% 2.56% 0.47% 1.44% 4.30% 1.46% 1.53% Corp A-AAA 2.58 2.36% 4.32% 0.96% 2.01% 6.06% 2.34% 2.36% MBS (0 to 5 Years) 3.17 2.57% 3.85% 0.82% 1.86% 5.56% 1.71% 2.01% ABS (0 to 5 Years) 1.36 2.29% 2.54% 0.40% 1.35% 4.10% 1.94% 1.73%
Master Indices (Maturities 1 Year and Greater)U.S. Treasury 6.56 1.94% 5.30% 0.93% 3.06% 7.33% 1.34% 2.64% Agency 3.97 1.97% 4.19% 0.71% 2.32% 6.20% 1.89% 2.34% Corp A-AAA 7.36 2.86% 8.66% 2.08% 4.04% 10.11% 3.32% 3.90% MBS (0 to 30 Years) 3.80 2.73% 4.32% 0.84% 2.01% 6.32% 2.10% 2.56% Municipals 6.75 2.13% 5.35% 0.43% 2.33% 6.73% 2.58% 3.75%
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Sector Our Investment Preferences Comments
C O M M E R C I A L P A P E R/ C D
• Commercial paper/negotiable CD spreads remain narrow. Short credit remains higher-yielding than some longer-dated Treasuries.
T R E A S U R I E S • Treasury Bill supply increased in March but slowed in April, putting downward pressure on rates.
• The 3-month to 10-year part of the yield curve briefly inverted in the past two months, renewing concerns about a possible recession. With a flat-to-inverted yield curve, there is little expected roll-down.
T-Bill
T-Note
F E D E R A L A G E N C I E S • Federal agency spreads remain very tight. The only value has been in certain new issue securities
• With the likelihood of Fed rate cuts, callable agencies should be avoided.
Bullets
Callables
S U P R A N A T I O N A L S • USD supply has increased modestly however spreads remain near historical tights across the curve. We continue to favor UST or GSE
C O R P O R A T E S • Corporate yield spreads have narrowed back significantly, settling in around longer-term. Spreads are near post-recession tights. While the sector is no longer “cheap”, we plan to maintain allocations.
• The corporate spread curve remains positively sloped, offering modest value for extending maturities.
Financials
Industrials
S E C U R I T I Z E D • The AAA-rated ABS sector continues to offer attractive incremental income vs. government alternatives and offers a defensive outlet to credit exposure.
• With an improving fundamental landscape, Agency MBS are an attractive alternative to other government sectors due to their incremental income potential.
Asset-Backed
Agency Mortgage-Backed
M U N I C I P A L S • Munis continue to be expensive vs. Treasuries amid limited supply.
Current outlook Outlook one month ago Negative Slightly Negative Neutral Slightly
Positive Positive
Fixed-Income Sector Outlook – July 2019
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© PFM 23
Geopolitical Risks Persist Around the Globe
North Korea tensions
Russia – Ukraine tensions
Brexit, French protests, Italy’s budget woes, EU
fragmentation
Turkey currency crisis
U.S.- Iran Military
EscalationUS – Mexico border and tariff
tensions
US – China trade tensions
Venezuela political crisis
Argentina currency crisis
US – Border Security Funding
Syria - US withdrawal
Indo-Pakistani Tensions
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New or Topical Material
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© PFM 25
Global Growth Outlooks Revised Lower
Region 2019 2020
World 2.6% 2.7%
U.S. 1.7% 1.5%
Euro area 1.2% 1.4%
China 6.2% 6.1%
Emerging Markets 4.0% 4.6%
Region 2019 2020
World 3.3% 3.6%
U.S. 2.3% 1.9%
Euro area 1.3% 1.5%
China 6.3% 6.1%
Emerging Markets 4.4% 4.8%
“Emerging and developing economy growth is constrained by sluggish investment, and risks are
tilted to the downside. These risks include rising trade barriers, renewed financial stress, and
sharper-than-expected slowdowns in several major economies…”
-The World Bank, June 2019 Global Economic Prospects: Heightened Tensions, Subdued Investment
World Bank GDP Growth ProjectionsJune 2019
IMF GDP Growth ProjectionsApril 2019
Source: World Bank and IMF. Arrows indicate change from prior projection.
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© PFM 26
American Consumer Finances Are Strong
Source: Bloomberg, and Federal Reserve’s Financial Accounts of the United States - Z.1 (2019:Q1). Consumer balance sheet includes households and nonprofit organizations. Revolving credit includes overdraft plans on checking accounts and other loans without a fixed repayment schedule. All data, except the household debt service ratio is not seasonally adjusted.
Other Financial
Assets: 39%
Pension Funds: 21%
Deposits: 11%
Other tangible: 5%
Homes: 24%
Mortgages: 66%$0
$20
$40
$60
$80
$100
$120
$140
Total Assets Total Liabilities
Trill
ions
Consumer Balance Sheet - 1Q19
Total Assets: $124.7tn.
Total Liabilities: $16.1tn.
Other non-revolving: 1% Revolving: 6%Auto loans: 7%Other liabilities: 9%Student debt: 10%
4Q07:13.2%
1Q19:9.9%
9%
10%
11%
12%
13%
14%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Deb
t Pay
men
ts a
s %
of
Dis
posa
ble
Pers
onal
Inco
me
Household Debt Service Ratio
$0
$20
$40
$60
$80
$100
$120
Trilli
ons
Household Net Worth
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© PFM 27
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
09:Q
309
:Q4
10:Q
110
:Q2
10:Q
310
:Q4
11:Q
111
:Q2
11:Q
311
:Q4
12:Q
112
:Q2
12:Q
312
:Q4
13:Q
113
:Q2
13:Q
313
:Q4
14:Q
114
:Q2
14:Q
314
:Q4
15:Q
115
:Q2
15:Q
315
:Q4
16:Q
116
:Q2
16:Q
316
:Q4
17:Q
117
:Q2
17:Q
317
:Q4
18:Q
118
:Q2
18:Q
318
:Q4
19:Q
1
(trill
ions
)
Total Household Debt
Mortgage HE Revolving Auto Loan Credit Card Student Loan Other
Consumer Debt Hits New Peak; Fastest Growing Segment is Student Loans
Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax, as of Q1 2019
2019 Q1 Total: $13.67 Trillion
$0.4T (+0.6%)
$1.5T (+8.3%)
$0.8T (+0.5%)
$1.3T (+6.0%)
$0.4T (-5.7%)
$9.2T (+0.3%)
(CAGR)
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© PFM 28
3.0%
3.5%
4.0%
4.5%
5.0%
Jun-16 Jun-17 Jun-18 Jun-19
30 Year Fixed Rate Mortgage Average
Low Rates Spark Housing Market Rebound
Source: Bankrate.com U.S. Home Mortgage 30 Year Fixed National Average; Bloomberg, as of 6/30/19.
450k
550k
650k
750k
4.6
4.9
5.2
5.5
5.8
May-16 May-17 May-18 May-19
(mill
ions
)
Housing SalesExisting Home Sales (LT, mil.) New Home Sales (RT, thous.)
400
800
1,200
1,600
May '09 May '11 May '13 May '15 May '17 May '19
Housing Starts(000s, SAAR)
Highest Since 2007
Decreasing mortgage rates may be a boon to
the housing market.
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© PFM 29
But, Future Housing Market Indicators Are More Neutral
Source: Bloomberg, as of May 2019. SAAR is the seasonally adjusted annualized rate.
400
800
1,200
1,600
May '09 May '11 May '13 May '15 May '17 May '19
Housing Starts(000s, SAAR)
400
800
1,200
1,600
May '09 May '11 May '13 May '15 May '17 May '19
Building Permits(000s, SAAR)
Highest Since 2007 Highest Since 2007
$600
$800
$1,000
$1,200
$1,400
May-09 May-11 May-13 May-15 May-17 May-19
Construction Spending(billions, SAAR)
100
120
140
160
180
200
May-09 May-11 May-13 May-15 May-17 May-19
Cum
ulat
ive
Gro
wth
Inde
x
U.S. Housing Price Index
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© PFM 30
$36.0$26.9
$16.8
$79.1
$0
$20
$40
$60
$80
$100
$120
Tariffs Instituted in 2018(10%)
Add'l Tariffs Instituted in 2019(15%)
Bill
ions
U.S. Tariff Total Annual Cost to Consumers
Deadweight loss
Tax payments
Additional Tariffs on $200B of Chinese Imports Increases Costs to U.S. Consumers Tax Payments: The increased cost to the consumer that is being captured by the U.S. government
Deadweight Loss (“DWL”): The increased cost to the consumer that is lost to the U.S. economy as imports are being sourced from less efficient countries
Source: Federal Reserve Bank of New York.
+ $69.3 Billion in DWL
- $9.1 Billion in Tax Payments
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© PFM 31
Trump Administration Announces New Tariffs on Mexico
A 5% tariff on all Mexican imports, including autos, auto parts, appliances, and fruits and vegetables, will be imposed in an attempt to force the U.S.’s number one trading partner to stop migrants from entering the U.S. illegally. The tariffs will go into effect June 10th and will rise as high as 25% by October 1st if the issue is not addressed.
Approximately two-thirds of U.S. imports from Mexico take place between factories owned by the same firm.
Source: Deutsche Bank Research and Wall Street Journal.
67%
40%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Related-Party Trade Intermediate Input Trade
Share of U.S. Imports from MexicoRelated-party trade is
defined as trade within firms with at least 10% ownership
in the trading partner
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Commodity Prices Mixed Amid Trade Tensions
Source: Bloomberg, as of 6/30/19.
$40
$50
$60
$70
$80
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
WTI Crude Oil (per barrel)
$1,150
$1,200
$1,250
$1,300
$1,350
$1,400
$1,450
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
Gold (per oz.)
$8
$9
$10
$11
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
Soybeans (per bushel)
$12
$16
$20
$24
$28
$32
$36
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
Avocados (per 10 Kg)
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© PFM 33
U.S. Federal Budget Deficit And Interest Cost Projected To Soar
Sources: Bureau of Fiscal Service, Congressional Budget Office. Data as of May 2019.
+$70B+26%
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
1990 1995 2000 2005 2010 2015 2020 2025
Bill
ions
Federal Budget Deficit
CBO Forecast
2019:-$896 B
2025:-$1,189 B
$0
$100
$200
$300
$400
$500
$600
$700
$800
1990 1995 2000 2005 2010 2015 2020 2025
Bill
ions
U.S. Treasury Annual Interest Cost
CBO Forecast
2019:$382 B
2025:$721 B
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© PFM 34
The Fastest Growing Segments of Federal Spending is Net Interest
Source: Debt Management Office’s Fiscal Year 2019 Q1 Report. The boxes represent the total net marketable borrowing for that year.
$1,186 $1,164$1,097 $1,096
$963
$763 $722$657
$590 $584
60%
65%
70%
75%
80%
85%
-$600
-$400
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
GD
P
billi
on
OMB's Projection of Borrowing from the Public
Primary deficit Net interestOther Debt held by the public (RHS)Debt held by the public net of financial assets (RHS)
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© PFM 35
Disclosures
This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.