quarterly economic report1018-0241dmexp093019 thoughts from the desk svb asset management |...

32
Quarterly Economic Report Inside views on economic and market factors affecting global markets and business health Q4 2018

Upload: others

Post on 05-Jan-2020

1 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

Quarterly Economic ReportInside views on economic and market factorsaffecting global markets and business health

Q4 2018

Page 2: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

SVB Asset Management | Quarterly Economic Report Q4 2018 2

Economic Report: Q4 2018

3 Thoughts From the Desk

4 Domestic Economy

11 Global Economy

17 Central Banks

23 Markets and Performance

Page 3: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Thoughts From the Desk

SVB Asset Management | Quarterly Economic Report Q4 2018 3

U.S. economic fundamentals continue to impress with growth rates surpassing the four percent handle, an all-time high in small business sentiments, and at-trend inflationary readings. As a result, front-end interest rates continue to gradually march higher while longer term rates held steady during the quarter. The Federal Reserve followed through with its policy normalization plan and lifted overnight rates by 25 basis points to a range of 2.00 to 2.25 percent. Furthermore, policymakers further slowed the pace of their asset purchase plan.

The impact of gradual increases in front-end interest rates has been a net positive for corporate cash investors as new cash and reinvestments benefit from higher yields while credit spreads exhibit strong performance across all sectors of investment grade issues. With higher rates and anticipation for more restrictive monetary policy, the strength of the U.S. dollar is weighing on dollar-linked currencies, particularly currencies of emerging markets. As foreign currencies weaken and policymakers attempt to stabilize their local currency through interest rate hikes, fiscal restraint or direct intervention, their economic activity could slow.

Back to U.S. markets. Investors will have plenty to digest, such as the latest on trade policy disputes with China, global central bank response to U.S. policies, increasing cost of funds resulting from higher benchmark rates and mid-term elections. Although an inverted yield curve has preceded previous recessions, zero interest rate policies and quantitative easing from other global central banks should fuel demand for U.S. Treasuries, despite recent surge in issuances. While headlines and speculation of the future of fiscal and monetary policies will surely affect markets in the short term, we will continue to focus on core fundamentals. We acknowledge the U.S. economy is in the late stages of this economic expansion; however, we are encouraged by the strong cash positions and net debt levels of investment grade issuers.

Page 4: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

4

Domestic Economy

SVB Asset Management | Quarterly Economic Report Q4 2018

Page 5: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Overview

SVB Asset Management | Quarterly Economic Report Q4 2018 5

The U.S. economy grew by 4.2 percent in Q2 2018, the highest increase in almost four years. Growth was propelled by consumer spending, nonresidential fixed investment, exports and government spending that were partially offset by lower inventory investment and residential fixed investment. Looking ahead, trade policy changes are expected to modestly affect growth and the effects of tax reform are likely to fade moving into 2019.

Consumer activity rebounded in Q2 with a 3.8 percent increase for the quarter. The strong job market combined with the benefits of tax reform has boosted consumer confidence.

The unemployment rate touched an almost 50-year low of 3.7 percent in Q3. The U.S. labor market continues on solid footing, adding an average of 205,000 jobs per month so far this year. Meanwhile, the labor force participation rate for 25 to 54-year-olds remains steady.

The housing market has taken a softer tone recently as climbing interest rates coupled with high home prices reduce home affordability and dampen homebuyer demand. Furthermore, home affordability will likely be under pressure as rates continue to rise.

Finally, all inflation measures are at or above 2.0 percent. The acceleration in inflation further supports the

forecasts for three more interest rate increases in 2019.

Domestic economy

Page 6: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

The U.S. economy grew by 4.2 percent in Q2 2018, the highest increase in almost four years. Growth was propelled by consumer spending, nonresidential fixed investment, exports and government spending that were partially offset by lower inventory investment and residential fixed investment. Looking ahead, trade policy changes are expected to modestly affect growth and the effects of tax reform are likely to fade moving into 2019.

SVB Asset Management | Quarterly Economic Report Q4 2018 6

GDP: Sustained strength, for now

GDP and Components

Source: Bureau of Economic Analysis, Congressional Budget Office and SVB Asset Management. Data as of 10/3/2018. GDP values shown in legend are percent change versus prior quarter, on an annualized basis.

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018

Perc

en

tag

e c

han

ge

Personal consumption Gross private domestic investment Net exports Government GDP

Page 7: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

80

90

100

110

120

130

140

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Perc

en

t

Perc

en

t

Personal consumption Household debt to disposable income ratio

SVB Asset Management | Quarterly Economic Report Q4 2018 7

Consumption: The consumer reboundsConsumer activity rebounded in Q2 with a 3.8 percent increase for the quarter. The strong job market combined with the benefits of tax reform has boosted consumer confidence. However, as the effects of tax reform wane, the consumer may pull back.

Consumption Overview

Source: Bloomberg and SVB Asset Management. Data as of 10/4/2018.

Retail and Food Services Sales

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

250.0

300.0

350.0

400.0

450.0

500.0

550.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Veh

icle

sale

s (

$ m

illio

ns)

Re

tail

an

d f

oo

d s

erv

ice

s sa

les

($ b

illi

on

s)

Retail and food service sales Vehicle sales

Page 8: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

-5.0

0.0

5.0

10.0

-300.0

0.0

300.0

600.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Perc

en

t

Th

ou

san

ds

Non-farm payroll Unemployment rate

SVB Asset Management | Quarterly Economic Report Q4 2018 8

Employment: Touching lowsThe unemployment rate touched an almost 50-year low of 3.7 percent in Q3. The U.S. labor market continues on solid footing, adding an average of 205,000 jobs per month so far this year. Meanwhile, the labor force participation rate for 25 to 54-year-olds remains steady.

Labor Force Participation

Source: U.S. Bureau of Labor Statistics, Bloomberg and SVB Asset Management.Data as of 10/5/2018.

Employment Landscape

78

79

80

81

82

83

84

85

60

62

64

66

68

70

2001 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2017 2018

Perc

en

t

Perc

en

t

Labor force participation rate Labor force participation rate 25 to 54-year-olds

Page 9: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ho

me s

up

ply

(m

on

ths)

Ho

me s

ale

s (

millio

ns)

Total sales (new and existing) Existing home supply

SVB Asset Management | Quarterly Economic Report Q4 2018 9

U.S. Housing: SofteningThe housing market has taken a softer tone recently as climbing interest rates coupled with high home prices reduce home affordability and dampen homebuyer demand. Furthermore, home affordability will be likely under pressure as rates continue to rise.

Home Sales and Supply

Source: Bloomberg and SVB Asset Management. Data as of 10/4/2018.

Home Prices Indexed to 100

0

100

200

300

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Th

ou

san

ds (

$)

Median home price FHFA purchase Case-Schiller 20 city

Page 10: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Perc

en

tag

e c

han

ge f

rom

pri

or

year

Core PCE Fed core PCE target Average hourly earnings

0.0

1.0

2.0

3.0

4.0

5.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Pri

ce p

er

gallo

n (

$)

Pri

ce p

er

barr

el

($)

Crude oil Daily national average of gasoline prices

SVB Asset Management | Quarterly Economic Report Q4 2018 10

Inflation: Steady momentum All inflation measures are finally at or above 2.0 percent. The acceleration in inflation further supports the

for three more interest rate increases in 2019.

Target with Wage Pressure Building

Source: Bloomberg and SVB Asset Management. Data as of 10/4/2018.

Oil Prices

Page 11: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

11

Global Economy

SVB Asset Management | Quarterly Economic Report Q4 2018

Page 12: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Overview

SVB Asset Management | Quarterly Economic Report Q4 2018 12

Global economy

Economies across developed and emerging markets are experiencing positive growth, with few exceptions. Growth rates remain higher in emerging economies (EE) than developed economies, which are expected to grow in the low single digit range compared to the mid-single digit range for EE.

A stronger U.S. dollar, helped by fiscal expansion and monetary tightening, is putting pressure on economic conditions in some EE, as responses to falling local currencies have negative economic impacts. Continued U.S. dollar strength increases the risk of a surprise sell-off of EE currencies, which could result in policy actions that could slow economic growth. Falling EE currencies are also putting downward pressure on earnings for large multinational corporations, some of which rely significantly on EE for growth.

Recent changes in trade policies have not had a material effect on global economic activity. Negative revisions to economic growth will more likely come from the consequences of tighter monetary actions taken by central banks in both developed and emerging economies.

Even as some central banks have raised their benchmark interest rates, with others poised to take tightening measures, the U.S. dollar has remained strong and is expected to end the year with solid returns.

Page 13: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Global Economy in Expansion Mode Growth Forecast for 2019

SVB Asset Management | Quarterly Economic Report Q4 2018 13

Global Growth IntactThe vast majority of countries continue to be in expansion mode despite some moderation in financial conditions, particularly in emerging economies (EE). Manufacturing and service activity have been solid this year. Even with tempered outlooks for next year, most economies are still projected to experience positive growth in 2019.

Source: JPMorgan, Markit and Bloomberg. Data as of 10/4/2018.

-8 -6 -4 -2 0 2 4 6 8

VenezuelaItaly

TurkeyArgentina

U.K.RussiaFrance

South AfricaGermany

CanadaMexicoNorway

BrazilU.S.

TunisiaSaudi Arabia

NigeriaChile

GuatemalaThailandMalaysiaPakistan

IndonesiaEgyptKenyaChina

GhanaVietnam

Cote D'IvoireIndia

Real GDP, year-over-year percent change

2019 Median GDP Change Estimates

46

47

48

49

50

51

52

53

54

55

Global Developedeconomies

Emergingeconomies

Eurozone U.S. Russia China India Brazil

PM

I In

de

x <5

0 =

Co

ntr

act

ion

>50

= E

xpa

nsi

on

Composite PMI Indices - September 2018

Page 14: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

EE Currencies Have Slumped This Year EE With Twin Deficits Are More Susceptible

SVB Asset Management | Quarterly Economic Report Q4 2018 14

Vulnerabilities In Emerging EconomiesHigher interest rates and a stronger U.S. dollar have contributed to significant depreciation of emerging economy (EE) currencies. Weaker currencies have particularly hurt economies with a current account deficit and a budget deficit. Attempts to stabilize currencies, including the use of interest rate hikes, currency intervention, fiscal restraint and regulatory changes, have had a negative effect on domestic economic activity.

Source: Bloomberg. Data as of 10/4/2018.

-55

-45

-35

-25

-15

-5

5

Perc

en

tag

e s

po

t re

turn

vers

us U

.S.

do

llar

EE Currency Performance

Kenya

Turkey

Argentina

U.K.

U.S.

Canada

MexicoChile

Brazil

France

China

Malaysia

Russia

Korea

Norway

Germany

Thailand

Ireland

Switzerland

Netherlands

-8

-6

-4

-2

0

2

4

6

-8 -3 2 7 12

Nati

on

al

bu

dg

et,

as p

erc

en

tag

e o

f G

DP

Current account, as percentage of GDP

2019 Median Estimates for Fiscal and External Account Positions

Page 15: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

SVB Asset Management | Quarterly Economic Report Q4 2018 15

FOMC Hike Boosts the DollarWith another rate hike in Q3, the U.S. dollar got more lift against most of its counterparties. Economic metrics continue to be solid with a robust labor market and anticipation of further growth. The bullish outlook for the economy and expectations for another hike in Q4 should give the greenback more support to finish the year with solid returns.

or United States-Mexico-Canada Agreement (USMCA), was reached after many months of negotiations. Most 2020, as it needs to be authorized by the legislatures in all three countries. The two major winners from the pact will be automobile parts manufacturers and dairy farmers. The Mexican peso and Canadian dollar have both benefited from the headlines. The peso is up six percent and the loonie has gained three percent since the beginning of July.

Canadian Dollar (CAD) Per One U.S. Dollar

Source: Bloomberg, Silicon Valley Bank and SVB Asset Management. Data as of 9/28/2018.

Mexican Peso (MXN) Per One U.S. Dollar

1.25

1.30

1.35

Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

CA

D

1 USD to CAD

17

19

21

Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

MX

N

1 USD to MXN

Page 16: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

1.121.141.161.181.201.221.24

Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

US

D

1 EUR to USD

SVB Asset Management | Quarterly Economic Report Q4 2018 16

Euro and Pound: Brexit remains the focusInternal squabbles between Prime Minister Theresa May and some Conservative party members are highlighting divisions over the Brexit agreement. Talks between U.K. and EU officials have not fared much better. Tension has been running high, as each side lobbed criticisms against their counterparts over various issues. The next major milestone is on January 21, 2019, when the British government must make a statement within five days on what the U.K. plans to do. As a result, the pound has dropped about one percent over the past three months.

U.S. Dollar Per One Euro (EUR)

Source: Bloomberg, Silicon Valley Bank and SVB Asset Management. Data as of 9/28/2018.

U.S. Dollar Per One British Pound (GBP)

Despite a more hawkish tone in recent European Central Bank (ECB) weighing down the euro. The ECB is expected to end quantitative easing (QE) soon and potentially hike rates towards the latter half of next year.

pickup in underlying Regardless, the benchmark rate variance between the FOMC and ECB continues to widen, and the euro has weakened further in recent months.

1.25

1.35

1.45

Apr-18 May-18 Jun-18 Jul-18 Jul-18 Aug-18 Sep-18

US

D

1 GBP to USD

Page 17: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

17

Central Banks

SVB Asset Management | Quarterly Economic Report Q4 2018

Page 18: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Overview

SVB Asset Management | Quarterly Economic Report Q4 2018 18

Hawkish sentiment continues to build across the global monetary policy landscape. Recent projections from the Federal Reserve imply one additional rate hike of 25 basis points in 2018, for a total of four hikes, with three more hikes penciled in for 2019. Front-end Treasury yields continue to rise as a result.

A synchronized global recovery and improving growth outlooks have slowed versus the start of the year as trade tensions bubble up and monetary policy accommodation continues to be removed. At its September meeting, the European Central Bank (ECB) confirmed the start of its asset purchase tapering, with purchases winding down by the end of 2019. At the same time, with a dovish tilt, ECB President Mario Draghi reiterated that the ECB deposit rate would remain unchanged through the summer of 2019.

Uncertainties still remain, such as the ultimate impact of trade tariffs, bilateral trade agreement negations, timing and uses of repatriated corporate cash and how the Fed progresses on its path of policy tightening. The Fed is well underway on its tightening cycle, having raised rates eight times this cycle, and its unprecedented balance sheet reduction is smoothly progressing.

Central banks

Page 19: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

Perc

en

t

2-year Treasury yield 1-year Treasury yield Fed funds midpoint

Historical Interest Rates

SVB Asset Management | Quarterly Economic Report Q4 2018 19

Fed policy normalization and the resultant policy rate hikes have elevated yields in the front end of the U.S. fixed income market.

2Q18: Treasury yields marched higher as the FOMC met expectations by raising rates at their June meeting. In contrast to March, median FOMC member projections increased to four total rate hikes in 2018, up from three in March.

Fed rate hike

Source: Bloomberg and SVB Asset Management. Data as of 10/3/2018.

3Q18: The FOMC raised rates for the third time in 2018, and 12 of 16 committee members projected they would raise rates in December 2018 as well. Median projections for 2019 were unchanged at three rate hikes.

4Q17: Treasury yields continued their ascent as the FOMC raised rates at their December roundtable and again communicated median committee projections for three hikes in 2018.

1Q18: As expected, the FOMC raised rates at their March meeting and communicated their belief that growth and inflation will accelerate in the U.S. economy. Median committee projections showed three rate hikes in 2018 at that point.

Page 20: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Central Bank Economic Projections

SVB Asset Management | Quarterly Economic Report Q4 2018 20

Global growth and employment remain strong and synchronous while inflation remains relatively subdued.

and Bank of England. Data as of 10/3/2018. Forecasts are not available for all periods.

Economic projections 2018 2019 2020

United States

Change in real GDP 3.1% 2.5% 2.0%

Unemployment rate 3.7% 3.5% 3.5%

Core PCE inflation 2.0% 2.1% 2.1%

United Kingdom

Change in real GDP 1.4% 1.8% 1.7%

CPI inflation 2.3% 2.2% 2.0%

Unemployment rate 3.9% 3.9% 3.9%

Eurozone

Change in real GDP 2.0% 1.8% 1.7%

CPI inflation 1.7% 1.7% 1.7%

Unemployment rate 8.3% 7.8% 7.4%

China

Change in real GDP 6.5%

CPI inflation 3.0%

Unemployment rate 4.5%

Japan

Change in real GDP 1.5% 0.8% 0.8%

Core CPI inflation 1.1% 2.0% 2.1%

Page 21: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

0.0

1.0

2.0

3.0

4.0

5.0

Perc

en

t

202020192018 2021 Longer term

Sep-18 Jun-18 Mar-18 Dec-17

The FOMC Dot PlotCurrent and historical fed projections for the federal funds rate (Median rate)

Federal Reserve Rate Projections

21SVB Asset Management | Quarterly Economic Report Q4 2018

Source: Bloomberg and Federal Reserve. Data as of 10/3/2018. Median rate references forecast rate at the end of each period. Median rate for Sep-18 included projection for 2021; prior projections did not.

Page 22: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

-0.05%

4.35%

0.00%

0.75%

2.25%

1.30%

6.70%

2.10%

1.20%

2.90%

1.30%

2.30% 2.10%

2.70%

2.70%

2.40%

3.83%

6.80%

4.00%3.70%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Benchmark interest rate Growth rate - YoY change Inflation - YoY change Unemployment rate

Central Banks: The slow lane

SVB Asset Management | Quarterly Economic Report Q4 2018 22

Global monetary conditions remain accommodative even as central banks begin to reverse the easing policies enacted over the past decade. Positive economic growth and steady employment conditions provide scope for removing easing measures, while mild inflation, political uncertainties, and currency weakness allow for changes to be made at an unhurried pace.

Bank of Japan, Bloomberg and SVB Asset Management. Data as of 10 9 .

Analysis

JAPAN: Committed to current easing policies, including asset purchases, until 2% inflation target reached. Economy growing at low & uneven pace.

CHINA: Reserve requirements cut for fourth time this year in October. Easing policies partly aimed to offset weaker conditions from trade policy changes.

EU: Asset purchase program to conclude by year-end, but enlarged balance sheet to remain. Committed to not raising rates beforeSeptember 2019.

UK: After hiking rates in August, BOE to pause its tightening path to accommodate uncertain policy changes surrounding the U.K. exit from the EU.

US: A fourth interest rate hike in December is likely due to strong employment conditions. Additional rate hikes expected in first half of 2019.

Page 23: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

23

Markets and Performance

SVB Asset Management | Quarterly Economic Report Q4 2018

Page 24: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Overview

SVB Asset Management | Quarterly Economic Report Q4 2018 24

The U.S. economic backdrop remains robust as consumer confidence hit its highest level since 2000, monthly job gains continue, wages have grown to its highest level since 2009, further supporting consumer spending, while inflation continues to hover around its target. The Fed acknowledged thecurrent strength of the U.S. economy, which has led the central bank to raise the federal funds rate athird time this year.

Against a strong economic backdrop and fading macro concerns, the U.S. Equity market was the best performer in the third quarter relative to other asset classes. On the fixed income side, returns were largely positive for the quarter as credit, particularly short duration, outperformed government bonds. The credit outperformance can be attributed to spread tightening.

After a decade of cash hoarding, excess cash for S&P 500 companies is expected to continue the gradual decline over time as tax reform passage paves the way for foreign cash repatriation. Notably, the cash deployment has been largely associated with share repurchases from cash-rich issuers within the technology sector.

While capital expenditure has picked up marginally, any boost to investment effects due to repatriation will likely take time to materialize. Debt levels have largely plateaued in most sectors. Credit implication is expected to be neutral and will be driven by any change in financial policy over time.

Markets and performance

Page 25: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Broad Market Performance

25

All returns above are on a total return basis. 2018 YTD returns are on an aggregate basis up to 9/28/2018. U.S. Aggregate refers to Bloomberg Barclays Aggregate Bond Index; U.S. High Yield

refers to Bloomberg Barclays U.S. High Yield Index; Gold refers to S&P GSCI Gold Spot; Crude Oil refers to Spot West Texas Intermediate Crude Oil; Wilshire refers to Wilshire 5000 Total

Market Index; REIT refers to MSCI US REIT Index; S&P 500 refers to S&P 500 Index.

Ass

et c

lass

ret

urn

s

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

Crude Oil Gold Gold REIT Wilshire REIT S&P 500 Crude Oil S&P 500 S&P 5007.70%

U.S. High Yield REIT26.97%

Crude Oil Wilshire S&P 500 S&P 500 REIT U.S. High Yield Wilshire Wilshire7 3

Wilshire Wilshire U.S. Aggregate S&P 500 U.S. High Yield Wilshire Wilshire Wilshire Gold U.S. High Yield57

S&P 500 U.S. High Yield%

REIT U.S. High Yield Crude Oil U.S. Aggregate U.S. Aggregate S&P 500 Crude Oil REIT

REIT Crude Oil U.S. High Yield Gold REIT U.S. High Yield U.S. High Yield Gold U.S. High Yield Crude Oil-1.30%

Gold S&P 500 S&P 500 U.S. Aggregate U.S. Aggregate Gold Gold REIT REIT U.S. Aggregate0

U.S. Aggregate U.S. Aggregate Wilshire Crude Oil Gold Crude Oil Crude Oil U.S. Aggregate U.S. Aggregate Gold6

SVB Asset Management | Quarterly Economic Report Q4 2018Source: Thomson Reuters and Bloomberg Barclays indices.Past index performance is no guarantee of future results.

Page 26: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Current duration

Currentyield

Non-annualized periodic total return (percent)

Q318 Q218 Q118 Q417 Q317 Q217 Q117 Q416 Q316

U.S.Aggregate Index

U.S. Treasuries 5.99 2.95 -0.59 0.10 0.05 0.38 1.19 0.67

U.S. Agencies 3.92 3.02 -0.01 0.00 0.06 0.82 0.93 1.13 0.25

Corporates 7.24 4.07 0.97 1.17 1.34 2.54 1.22 1.41

U.S. MBS 5.28 3.59 -0.12 0.24 0.15 0.96 0.87 0.47 0.60

U.S. ABS 2.16 3.19 0.49 0.42 0.42 0.60 0.54 0.20

U.S. CMBS 5.28 3.58 0.46 0.35 0.79 1.31 0.86 0.59

U.S. Short Duration

1-3 yr U.S. Treasuries

1.93 2.81 0.19 0.21 0.24 0.19 0.27

1-3 yr U.S. Agencies 1.76 2.84 0.31 0.25 0.27 0.28 0.35 0.00

1-3 yr corporates 1.93 3.31 0.70 0.47 0.59 0.59 0.69 0.32

AAA Credit Card ABS

2.34 3.14 0.45 0.36 0.41 0.67 0.56 0.15

AAA Auto ABS 1.83 3.15 0.53 0.43 0.37 0.46 0.41 0.15

Fixed Income Returns: Staying short

26

Credit broadly outperformed government bonds in Q3. Credit spreads narrowed as concerns around trade and emerging markets led to an uptick in demand, offsetting tighter Fed policy and robust corporate bond supply. Short-duration credit lead the way, outperforming the aggregate index by approximately 200 basis points on a YTD total return basis (+0.44% versus -1.60%). The large inflows into short-duration strategies contributed to

SVB Asset Management | Quarterly Economic Report Q4 2018Source: Bloomberg Barclays Indices. Data as of 9/28/2018. Heatmap colors based on periodicreturn percentage for time period shown. Past performance is not a guarantee of future results.

Page 27: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

SVB Asset Management | Quarterly Economic Report Q4 2018 27

S&P 500: Unwinding of excess cashFollowing the U.S. tax reform that eliminated prior tax disincentives on repatriation of foreign earnings, excess cash for S&P 500 companies is expected to gradually decline over time. The greatest impact is expected to come from issuers that previously retained most foreign subsidiary profits, particularly in the healthcare and technology sectors.

Cash Decline from Historic High Level

Source: Bloomberg. Data as of 8/31/2018.

Cash Balance from Cash-Rich Sectors

0

100

200

300

400

500

600

Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16 Jan-17 Oct-17 Jul-18

US

D p

er

Sh

are

Cash & short-term investments

0

20

40

60

80

100

120

140

160

Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16 Jan-17 Oct-17 Jul-18

US

D p

er

sha

re

Healthcare Technology

Page 28: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

SVB Asset Management | Quarterly Economic Report Q4 2018 28

S&P 500: Cash deploymentThere was a large pickup in share repurchases, reaching a record high for S&P 500 companies. However, the overall credit impact is largely neutral as companies retire upcoming debt maturities and the pace of debt issuance has slowed due to greater access to foreign cash.

Source: Bloomberg. Data as of 8/31/2018.

Active Cash Deployment Notably in Share Repurchase and Capital Expenditure

Outstanding Debt Levels Plateauing, Notably in Cash-Rich Healthcare and Technology Sectors

40

45

50

55

60

65

70

75

80

85

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

US

D p

er

sha

re (

mil

lio

ns)

Buyback (USD per share) Capex (USD per share)

20

70

120

170

220

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

US

D p

er

sha

re (

mil

lio

ns)

Healthcare Technology

Page 29: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Flat Yield Curve

29

2s10s Treasury Curve

The 2s10s curve closed the third quarter at +24 and averaged +26 throughout the quarter. Comparing the current rate-hiking cycle to the one from 2004 to 2006, the curve has room to flatten further. Contributing to the continued flatness is larger front-end Treasury issuance, the Fed continuing to signal its plan to gradually increase interest rates, and other central banks continuing with quantitative easing, which is making the U.S 10-year yield attractive to global investors.

SVB Asset Management | Quarterly Economic Report Q4 2018

Source: SVB Asset Management and Bloomberg. Data as of 9/28/2018. Past performance is nota guarantee of future results. The above is not to be construed as a recommendation for yourparticular portfolio.

-50

0

50

100

150

200

250

300

350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sp

read

(b

ps)

2s10s spreadIn 2015, the FOMC signaled they would be increasing the federal funds rate. The first increase occurred at the December FOMC meeting with a new range of 0.25 to 0.50 percent. The FOMC raised the

federal funds rate three times in 2017 and so far three times in 2018. At the September FOMC meeting, the Fed continued to project an additional rate rise in 2018.

During the financial crisis, the FOMC cut rates to a low range of 0 to 0.25 percentstarting in 2009.

From 2004 to 2006, the FOMC raised the federal funds rate 17 straight times.

Page 30: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Relative Value: Attractive credit yields

SVB Asset Management | Quarterly Economic Report Q4 2018 30

Front-end Yields

Credit spreads tightened across the curve in the third quarter.

Front-end spreads led the rally as demand for short-duration credit in this cycle continues.

In addition, solid economic data and corporate earnings are contributing to the demand for corporate bonds and commercial paper.

Credit historically offers an attractive yield pickup over comparable Treasuries. In a rising rate environment, credit helps mitigate the impact from negative bond prices due to higher income.

Source: SVB Asset Management and Bloomberg. Data as of 9/28/2018. Past performance is nota guarantee of future results. The above is not to be construed as a recommendation for yourparticular portfolio.

2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40

3 Month 6 Month 9 Month 1 Year 1.5 Year 2 Year 2.5 Year 3 Year

Perc

en

t

Treasuries Credit (AA to A-)

Page 31: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

SVB Asset Management | Quarterly Economic Report Q4 2018 31

Our Team and Report Authors

Lauri MossPresident, SVB Asset [email protected]

Eric SouzaSenior Portfolio [email protected]

Hiroshi IkemotoFixed Income [email protected]

Daeyoung Choi, CFACredit Risk [email protected]

Ninh ChungHead of Investment Strategy and Portfolio [email protected]

Jose SevillaSenior Portfolio [email protected]

Jason GraveleyFixed Income [email protected]

Tim Lee, CFACredit Risk & Research [email protected]

Melina Hadiwono, CFAHead of Credit [email protected]

Paula SolanesSenior Portfolio [email protected]

Renuka Kumar, CFADirector, Portfolio [email protected]

Steve Johnson, CFASenior Portfolio [email protected]

Guest contributor

Minh Trang, CFASenior FX [email protected]

Page 32: Quarterly Economic Report1018-0241DMEXP093019 Thoughts From the Desk SVB Asset Management | Quarterly Economic Report Q4 2018 3 U.S. economic fundamentals continue to impress with

1018-0241DMEXP093019

Are not insured by the FDIC or any other federal government agency

Are not deposits of orguaranteed by a bank

May lose value

SVB Asset Management | Quarterly Economic Report Q4 2018 32

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information

from third-party sources that we believe to be reliable but which has not been independently verified by us and, as such, we do not represent that the information is

accurate or complete. This information should not be viewed as tax, investment, legal or other advice, nor is it to be relied on in making an investment or other decision.

You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation,

offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.

None of this material, nor its content nor any copy of it, may be altered in any way, transmitted or distributed to any other party without the prior express written

permission of SVB Asset Management. SVB Asset Management is a registered investment advisor and nonbank affiliate of Silicon Valley Bank, and member of SVB

Financial Group.

Investment products:

©2018 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of

SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary

of SVB Financial Group (Nasdaq: SIVB). Rev 10 17