cfc: created and owned by america’s electric cooperative network cfc economic & interest rate...

CFC: Created and Owned by America’s Electric Cooperative Network

CFC Economic & Interest Rate Update

John Suter

Vice President Capital Markets Research & Analysis

June 2015

Created and Owned by America’s Electric Cooperative Network

2014 10-Year Treasury Yields

Jan-14

Jan-14

Feb-14

Feb-14

Mar-14

Mar-14

Apr-14

Apr-14

May-14

May-14

Jun-14Jun-14

Jul-14Jul-1

4

Aug-14

Aug-14

Sep-14

Oct-14

Oct-14

Nov-14

Nov-14

Dec-14

Dec-14

2.00

2.20

2.40

2.60

2.80

3.00

3.20 3.00

2.17

One Big Miss for Economic Forecasters• Projection for closing yield in December 2014: 3.52%• Actual at Year End: 2.17%


What the Economic Forecaster Got Right – and Wrong in 2014

Indicator Full-Year 2014 Consensus

Actual Comments

GDP Growth 2.8% 2.4% After experiencing a bad, weather-driven contraction first quarter, it appears that the economy has picked-up from 2013.

Unemployment Rate 6.3% 5.8% Almost every economist saw the jobless rate at or above 6% by the end of 2014.

Inflation 1.9% 1.3% The plunge in energy prices caused the miss in forecasting overall inflation.

Interest Rates (10-Year U.S. Treasury Yield)

3.52% 2.17% Every economist in the WSJ survey in January 2014 was far off the mark in expectations for interest rates in 2014

Crude Oil $94.65/barrel $53.27/barrel The year’s plunge in crude oil prices, from a peak of $107.26 in June, was easily the biggest economic surprise of 2014.

3


World Growth Just Incrementally Higher

Brazil

U.S.

Japan

India

China

Russia

U.K.

Eurozone

Germany

South Korea

0% 10% 20% 30% 40% 50% 60%

13%

14%

15%

25%

26%

28%

31%

44%

51%

54%

Exports as Percent of GDP

GDP Component: Net Exports (X-M)

Region/Country 2015 2016World 3.2 3.4

Australia 2.7 3.2 Canada 2.7 2.8 China 7.1 7.0

eurozone 1.5 1.7 India 6.3 6.5 Japan 1.3 1.2 U.K. 2.5 2.2 U.S. 3.0 3.1

Asia-Pacific 5.4 5.4 Latin America 2.6 2.4


World Inflation Non-Existent!

Canada France Germany Italy Japan UK United States

Euro Zone0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

1.91%

0.61%0.79%

0.21%

2.74%

1.46%1.64%

0.45%

2015 Average CPI

5


U.S. Dollar the Big Surprise in 2015

6

1.0

1.1

1.2

1.3

1.4

1.5

$1.13

Dollar versus Euro

High on 03/18/14: 1.12/EuroAverage: 1.29/EuroLow on 03/13/15: 1.05/Euro


U.S. Companies Less Competitive Abroad· Caterpillar’s dismal earnings spell trouble for global

economy due to the sharp drop in the price of oil and other commodities – sales will fall roughly 9% in 2015.

– Disappointing earnings from other big-name companies like Dupont, Pfizer, Proctor & Gamble and Bristol-Myers Squibb

· Energy and mining companies are reducing their investment – these companies account for the bulk of Caterpillar’s sales. Construction and mining equipment functions as an engine of global economic growth.

· China and Europe have reduced their growth forecasts. Emerging markets like Brazil, Turkey, and Russia are reeling amid falling oil prices and whipsawing foreign investment.

· Weakness abroad certainly isn’t good for the American economy and it is a bad sign for export-heavy companies like Caterpillar.

OverseasCompany Sales

Intel 85%Dow Chemical 67%McDonald's 66%Proctor & Gamble 66%Caterpillar 65%IBM 64%Dupont 60%Pfizer 60%General Electric 54%Ford 51%Nike 50%Bristol-Myers 50%Exxon-Mobil 45%Amazon 45%Boeing 41%Wal-Mart 26%Bank of America 20%Marriott 16%Mckesson 9%


Changes Over the Past 52 Weeks

8

04/01/2015 05/07/2015

17,698 17,9241.3%

1.3%

1.4%

0.32%

17.7%

DJ IA

NASDAQ

S&P 500

10 - Year Yield

Crude Oil

Gold

4,880 4,946

1.86% 2.18%

2,0882,060

$1,182$1,208

$50.09 $58.94

-2.1%


High Rates are the Exception, Not the Rule

$93.5b $18.1t

19391942

19451948

19511954

19571960

19631966

19691972

19751978

19811984

19871990

19931996

19992002

20052008

20112014

0

2

4

6

8

10

12

14

16

1.95

14.59

2.18


Stock Market In Not Economy!

10

-10.0

-5.0

0.0

5.0

10.0

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

0.2%

17776.12

Quarterly GDP Growth vs. Dow Performance

Quarterly GDP

Dow Jones Industrial Average

GD

P G

row

th P

erce

ntag

e

Dow

Lev

el

Dow Average Annual Increase - 15.19%GDP Average Annual Increase - 3.52%


Problem With Low Interest Rates

MOM DAD

BELOVED PARENTS ANDGRANDPARENTS

PLAYED IT TOO SAFE, DIED BROKE


Jan-07

Mar-07

Jun-07

Aug-07

Nov-07Jan

-08

Apr-08

Jun-08

Sep-08

Nov-08

Feb-09

Apr-09Jul-0

9

Sep-09

Dec-09

Mar-10

May-10

Aug-10

Oct-10Jan

-11

Mar-11

Jun-11

Aug-11

Nov-11Jan

-12

Apr-12

Jun-12

Sep-12

Nov-12

Feb-13

May-13

Jul-13

Oct-13

Dec-13

Mar-14

May-14

Aug-14

Oct-14Jan

-15 -

1,000

2,000

3,000

4,000

5,000

6,000

-

20

40

60

80

100

120

S&P 500 (LHS) NASDAQ (LHS) Barclay's Bond Fund (RHS)

What Will Be the Next Bubble?

12


2014 GDP Final Releases

2014Q1 2014Q2 2014Q3 2014Q4 -3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

-2.11%

4.60%5.00%

2.20%

Real GDP (Qtrly)

14


Advance

Q1

2nd Q1

3rd Q

1

Revised 3rd

Q1

Advance

Q2

2nd Q2

3rd Q

2

Advance

Q3

2nd Q3

3rd Q

3

Advance

Q4

2nd Q4

3rd Q

41st

Q1-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0.1%

-1.0%

-2.9%

-2.1%

4.0%4.2%

4.6%

3.5%3.9%

5.0%

2.6%2.2% 2.2%

0.3%

Reliability of the Economic Statistics


November December January February March April0

50

100

150

200

250

300

350

400

450

353

252 257

295

126

223

423

329

201

266

85

Nonfarm Payrolls Revised Nonfarm Payrolls

Revisions in Non-farm Payroll Significant


Service & Manufacturing Sectors

17

Jan-09

Apr-09Jul-0

9

Oct-09

Jan-10

Apr-10Jul-1

0

Oct-10

Jan-11

Apr-11Jul-1

1

Oct-11

Jan-12

Apr-12Jul-1

2

Oct-12

Jan-13

Apr-13Jul-1

3

Oct-13

Jan-14

Apr-14Jul-1

4

Oct-14

Jan-15

Apr-15

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

57.8

51.5

ISM Non-manufacturing ISM Manufacturing


Weak Global Demand & Strong Dollar Hurt ISM

48.0

50.0

52.0

54.0

56.0

58.0

60.0

53.5

55.5333333333333

56.8666666666667 56.8666666666667

52.6333333333333

51.5

Quarterly ISM (avg.) Monthly ISM

18


Fed’s Expected Path Drifts Lower

6


US Economy: Four Engine Plane

U.S. GDP Airlines

CI

GX


Quarterly Real GDP GrowthSe

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Mar

-15

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1.30%

3.90%

1.60%

3.90%

2.80%2.80%

-1.30%

3.20%

1.40%

4.90%

3.70%

1.20%

2.80%

0.10%

1.10%

2.50%

4.10%

2.60%

-2.10%

4.60%5.00%

2.19%

0.25%


Consumption Driven: Slow Growing GDP

71%

10%

18%

1%

Consumption - Goods (30%), Services (41%)Business Fixed Investments - Nonresidential (12%), Residential (5%)Governement SpendingChange in Business Inventories


Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

-2.11%

4.60%4.97%

2.22%

0.25%

Personal consumption expendituresGross private domestic investmentNet exports of goods and servicesGovernment consumption expenditures and gross investmentUS Real GDP Growth

What's Driving or Dragging Economic Growth?Contribution to Percent Change in Real GDP & Real GDP Growth


Non-Farm Payrolls Slowing

January

February

March AprilMay

JuneJuly

August

September

October

November

December

0

50

100

150

200

250

300

350

257

295

126

223 262

2014 2015 2014 (3ma)


U/E Now Inside of NAIRU Zone!

Feb-14

Mar-14

Apr-14

May-14

Jun-14Jul-1

4

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

4.0

4.5

5.0

5.5

6.0

6.5

7.0

5.4

NAIRU (Upper) Unemployment NAIRU (Lower)


Why Isn’t Labor Participation Rising?

Dec-99

Dec-02

Dec-05

Dec-08

Dec-11

Dec-14

Dec-17

Dec-20

Dec-23

Dec-26

Dec-29

Dec-32

Dec-35

Dec-38

Dec-41

Dec-44

Dec-47

Dec-50

Dec-53

Dec-56

Dec-59

Dec-62

Dec-65

Dec-68

Dec-71

Dec-74

Dec-77

Dec-80

Dec-83

Dec-86

Dec-89

Dec-92

Dec-95

Dec-98

Dec-01

Dec-04

Dec-07

Dec-10

Dec-13

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

60.0

61.0

62.0

63.0

64.0

65.0

66.0

67.0

68.0

5.5

11.0

29.8

Labor Participation Rate Unemployment Underemployment LT Unemployment


Wage Gains Show Little Acceleration

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Nominal Avg. Hourly Earnings Real Avg. Hourly Earnings


Wal-Mart Raises Base Wage· Walmart raised its base wage to

$9.00 an hour on 2/19/2015

· Walmart employs roughly 2.2 million employees

· The increase will cost the firm $1 billion this fiscal year

· Is the raise a see of change in the retail sector?

· “Fordism” – referring to Henry Ford’s historic 1914 decision to double wages in his factors, which not only boosted productivity and reduced turnover but also created more customers for his company’s products.

70.0

72.0

74.0

76.0

78.0

80.0

82.0

84.0

86.0

88.0

90.0

86

Wal-Mart Stock Price (Ticker: WMT)


Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-150

20

40

60

80

100

120

101.3

93.0

Conference Board University of Michigan

Confidence Measures PeakingHigh 01/31/2015 98.1

Average 1/01/2008 - 3/31/2015 73.5 Low 11/30/2008 55.3

University of MichiganHigh 01/31/2015 103.8

Average 1/01/2008 - 3/31/2015 64.6 Low 02/28/2009 25.3

Conference Board

29


Inflation Remains Tame

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 -

0.50

1.00

1.50

2.00

2.50

3.00

1.31

Core PCE (YOY) Fed Target During QE

Average: 1.51High on 6/30/08: 1.31Low on 12/31/10: .95

30


Recovered – Autos Not Housing

Dec-99Jul-0

0

Feb-01

Sep-01

Apr-02

Nov-02

Jun-03

Jan-04

Aug-04

Mar-05

Oct-05

May-06

Dec-06Jul-0

7

Feb-08

Sep-08

Apr-09

Nov-09

Jun-10

Jan-11

Aug-11

Mar-12

Oct-12

May-13

Dec-13Jul-1

4 -

1

2

3

4

5

6

7

8

9

8

10

12

14

16

18

20

22

24

Existing Home sales (mn) 30-year MBA mortgage rateU.S. Auto sales annualized (mn)

31


Homeowners Drive Consumer Spending


Housing Dilemma

Housing Demand

Gross DomesticProduct

Credit Availability

Impacts

Impacts

33


Missing from the Housing Equation

34


Negative Home Equity Trending Down


Still Weighing Down Housing Market

36


States With Troubled Housing Statistics

Arizona

Maryland

Missouri

Connecticut

Ohio

Michigan

Rhode Island

Illinois

Florida

Nevada

0% 5% 10% 15% 20% 25% 30% 35%

Negative Home Equity

North Carolina

Connecticut

Indiana

Ohio

Delaware

Nevada

Illinois

Florida

Maryland

New Jersey

- 1.0 2.0 3.0 4.0 5.0

Home Foreclosures


Fed Ramifications Across World

Fed Funds Liftoff

38


I tried to find out from Ben Bernanke!


O/N1-m

th3-m

th 2yr4yr

6yr8yr

10yr12yr

14yr16yr

18yr20yr

22yr24yr

26yr28yr

30yr0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Yield Curve

Fed Con-trolled

Normalization & Shifts in the Yield Curve

Function of : GDP Growth, Inflation


· Full Employment– “Dove”– The dove wants

maximum employment

· Price Stability (Inflation)– “Hawk”– The hawk worries

about inflation and stands for sound money.

Where Should FF Be with U/E at 5.4%?

5.0 to 5.5 percent 2 percent

41


Ben Bernanke Cites This Mistake!

42

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14-8

-6

-4

-2

0

2

4

6

8

10

Importance of Overnight Interest Rates Relative to GDP

Eurozone GDP Growth Sweden GDP GrowthECB Overnight Rate Libor Euro Overnight Rate


Is The Fed Boxed In or Not?

Falling Labor Participation Rate

Strong Dollar

Low Annualized Wage Growth

Erratic GDP Numbers

International Capital Funds Flow into U.S.

ECB QE?

Low European Interest Rates

Low Inflation(deflation?)

Slowing Non-farm Payrolls

43


Prior Fed Funds Movement

Dec-75

May-77

Oct-78

Mar-80

Aug-81

Jan-83

Jun-84

Nov-85

Apr-87

Sep-88

Feb-90Jul-9

1

Dec-92

May-94

Oct-95

Mar-97

Aug-98

Jan-00

Jun-01

Nov-02

Apr-04

Sep-05

Feb-07Jul-0

8

Dec-09

May-11

Oct-12

Mar-14

Aug-150.0

5.0

10.0

15.0

20.0

25.0

Fed Funds

Average: 5.29 Maximum: 20.00 Minimum: 0.25

Neutral: 3.75

Fed Funds RecapAverage: 5.29

Maximum: 20.00 Minimum: 0.25

Neutral: 3.75

Fed Funds Recap

Last Tightening Cycle


Future Fed Hikes – No Stairway to Normalization

Jun-03

Aug-03

Oct-03

Dec-03

Mar-04

May-04Jul-0

4

Sep-04

Nov-04

Jan-05

Mar-05

May-05Jul-0

5

Sep-05

Nov-05

Jan-06

Mar-06

May-06

Aug-06

Oct-06

Dec-06

Feb-07

Apr-07

Jun-07

Aug-070.00

1.00

2.00

3.00

4.00

5.00

6.00

1.00

5.25

Fed Funds Last Tightening Cycle

Alan Greenspan Ben Bernanke

“For monetary normalization, a smooth path upward in the federal funds rate will almost certainly not be realized” Vice Chairman Stanley Fischer, March 23,2015.

45


Short-Term Rate Forecast Disconnect

46

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

1.175%

0.625%

1.875%

Fed Futures Federal Reserve Economist Consensus

This has already moved down 16 bps since the last time I updated


Movements in Fed Funds & Term Rates

01/03/1

983

11/03/1

983

09/03/1

984

07/03/1

985

05/03/1

986

03/03/1

987

01/03/1

988

11/03/1

988

09/03/1

989

07/03/1

990

05/03/1

991

03/03/1

992

01/03/1

993

11/03/1

993

09/03/1

994

07/03/1

995

05/03/1

996

03/03/1

997

01/03/1

998

11/03/1

998

09/03/1

999

07/03/2

000

05/03/2

001

03/03/2

002

01/03/2

003

11/03/2

003

09/03/2

004

07/03/2

005

05/03/2

006

03/03/2

007

01/03/2

008

11/03/2

008

09/03/2

009

07/03/2

010

05/03/2

011

03/03/2

012

01/03/2

013

11/03/2

013

09/03/2

0140

2

4

6

8

10

12

14

16

Fed Funds Rate USGG5YR Index USGG10YR Index USGG30YR Index


LT Rates Rise First Year of Fed Hikes

2015-2016 JPM Implied byForecast FOMC

On average, 1 year after the first Fed hike, the 10yr UST has risen by ~54% of the move higher in Fed

Funds

Source: JP Morgan Forecasts

48


Fixed Rate Loans Dominate


Perfect World

Assets Liabilities

Member Loans

Bondholders

Member OwnerEquity

Loan Funds

Debt Service Debt Service

Bond Funds


Collateral Package:

· Distribution system member has equity ratio of at least 20%.

· Distribution system member has an average coverage ratio of at least 1.35x

The Main Street to Wall Street Connection

Collateral Strengths Per Investors:

· Essential Service – Electricity

· Defined Service Territory

· Limited Competition

· Geographically Disbursed

· Mostly Rate Unregulated

Home Equity Loan

Debt Capital

Loans

Rated: A1/A


The Complete Funding Picture

Variable Rate Loan Program

10% of loan portfolioMonthly interest rate reset

Quarterly amortizationTerm: 1–35 years

Variable Rate Funding Sources

Commercial Paper Programs Select Notes & Daily Liquidity Fund

Bank Bid NotesFloating Rate Notes

Fixed–term Debt Swapped to FloatingMembers’ Equity

Fixed Rate Loan Program

90% of loan portfolioFixed rate to selected term

Quarterly amortizationTerm: 1–35 years

Fixed Rate Funding Sources

Collateral Trust BondsGUP Bonds

Farmer Mac NotesMedium–term Notes

Subordinated Deferrable NotesClean Renewable Energy Bonds

Floating-term Debt Swapped to Fixed Members’ Equity

Interest Rate Swaps(pay fixed/ receive floating)

Interest Rate Swaps(pay floating/ receive fixed)

supported by supported by

52


4 Entities to Differentiate Regarding CostFederal Reserve

Federal Government

National Rural Utilities CFC

AAA/AA+

A1/A

Member

53


Rate Setting – Both Art and Science

Index – CP, 3MLTreasury

PricingRateBuild(incl.OtherCosts)

Market

Forces

CFC Rates

Credit Spread

“Given current state of world and U.S. economies, biggest risk on rates lies with underlying Treasury yield, not CFC’s credit spread and business cost adders” – John Suter 4/07/2015

54


2015 Economic ForecastGDP (YoY %) CPI (YoY %) Core PCE (YoY %) Unemployment 10-Yr UST

Bank of America Merrill Lynch 3.00 0.90 1.30 5.00 2.35Bank of Tokyo Mitsubishi 2.60 2.60 1.80 4.90 3.3Barclays 3.00 1.10 1.20 5.00 2.25Credit Suisse Group 3.00 1.70 1.40 5.10 2.85Deutsche Bank 3.20 1.50 1.50 4.70 2.35Goldman Sachs 3.00 0.80 1.10 5.20 3JP Morgan 2.50 0.80 N/A 5.20 2.4Moodys 2.60 1.20 1.30 5.20 2.55RBC 2.90 1.50 0.80 5.40 3.1Scotia 2.80 1.20 1.10 5.20 2.4Wells Fargo 3.00 0.80 0.90 5.20 2.45

0.00 0.00 0.00 0.00Bloomberg High 3.80 2.90 2.10 5.60 3.9Bloomberg Low 1.40 0.00 0.20 4.70 1.9Bloomberg Consensus 3.40 1.20 1.10 5.20 2.63

55


What To Look For In Coming Months:Economic Indicator Economic Highlights

GDP Year-over-year growth in 4Q14 of 2.2%; 2015 GDP growth ranges from 3.0-3.3% which is closer to historical average of 3.3% the strongest annual performance since 2004; mediocre global growth, with U.S. continuing to lead

Labor Market Continued +200k per month on Non-farm payrolls, weighted towards sub-par positions (i.e. part-time and low paying positions) – keep in mind that 90% of headline payroll numbers since January 2013 (so 19 out of 25 reports) have witnessed upward revisions on average of 23,000

Limited wage growth potential which has been a hindrance

Inflation Global dis-inflation to persist; inflation to remain below Fed target through 2015 in U.S. due to lower oil prices

Dollar Well positioned to extend its upward momentum due to dropping oil prices; capital inflows from developing and advanced economies increasingly attracted to safer and higher investment returns

Fed Funds Fed is still projected to make their first move at the end of Q215, but could be pushed one meeting back from June to September; “Terminal” Fed funds rate of 2.25%; below historical cycle peaks

56


2

Labor Market

57

November-14 423,000 December-14 329,000 J anuary-15 201,000 February-15 266,000 March-15 85,000 April-15 223,000

27-Mar 267,000 Week of: 03-Apr 282,000

10-Apr 295,000

17-Apr 296,000 24-Apr 262,000 01-May 265,000 November-14 11.4%December-14 11.2%J anuary-15 11.3%February-15 11.0%March-15 10.9%April-15 10.8%November-14 5.8%December-14 5.6%J anuary-15 5.7%February-15 5.5%March-15 5.5%April-15 5.4%November-14 62.9%December-14 62.7%J anuary-15 62.9%February-15 62.8%March-15 62.7%April-15 62.8%

Nonfarm Payrolls (Establishment Survey) - This indicator measures the net change in number of employees on payrolls; employed full-or part-time who received pay for any part of the pay period that includes the 12th day of the month. A pace of 200,000 + per month is consistent with 3.0% GDP growth.

Initial Unemployment Claims - Workers who lose their jobs and are covered by these programs typically file claims ("initial claims") that serve as notice that they are beginning a period of unemployment. This number represents an inflow of people receiving unemployment benefits.

Underemployment Rate - Underemployment includes three classifications of persons -unemployed workers who are actively looking for work, involuntarily part-time workers who want full-time work but have had to settle for part-time hours, and marginally attached workers who want and are available for a job, but are not actively looking. Together, they provide a more comprehensive measure of slack in the labor market.

Unemployment Rate (Household Survey) - Tracks the number of unemployed persons as a percentage of the labor force (the total number of employed plus unemployed). Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

MEASUREAREA

Labor Force

Labor Force Participation Rate - The total labor force (the total number of employed plus unemployed) as a percentage of the working age population.

NUMERICAL TREND CURRENT TREND


Consumer

58

November-14 91.00 December-14 93.10 J anuary-15 103.80 February-15 98.80 March-15 101.40 April-15 95.20 November-14 88.80 December-14 93.60 J anuary-15 98.10 February-15 95.40 March-15 93.00 April-15 95.90 October-14 0.40%November-14 0.50%December-14 -0.90%J anuary-15 -0.80%February-15 -0.50%March-15 0.90%October-14 0.30%November-14 0.20%December-14 -0.90%J anuary-15 -1.10%February-15 -0.10%

March-15 0.40%

November-14 17.08December-14 16.80J anuary-15 16.56February-15 16.16March-15 17.05April-15 16.46

Consumer

Retail Sales (mom %) - The Monthly Advance Retail Trade Survey (MARTS) includes merchandise sold (for cash or credit at retail or wholesale) by establishments primarily engaged in retail trade. Data are one of the timeliest indicators of consumer spending patterns. Release provides information on a wide range of retail establishments.

Retail Sales Ex Autos (mom %) - Excludes automobile sales.

U. of Mich. Consumer Sentiment - The University of Michigan Consumer Research Center conducts a telephone survey of about 500 consumers. Consumers are asked questions about personal finances, business conditions and buying conditions. Expectations account for 60% of the index, while the current situation is responsible for the remaining 40%.

Vehicle Sales (SAAR) - Light vehicle sales are divided between cars and light trucks (sport utility vehicles, pickup trucks, and vans). Light vehicle sales include both sales of vehicles assembled in North America that are sold in the U.S. and sales of imported vehicles (not assembled in North America) sold in the U.S. The total includes sales to consumers, business, rental fleets and government. Units sales also include leased vehicles.

Conference Board Consumer Confidence - The Consumer Confidence Survey measures the level of confidence individual households have in the performance of the economy. Survey asks a nationwide representative sample of 5,000 households, of which approximately 3,500 responses. Expectations account for 60% of the index, while the current situation is responsible for the remaining 40%.

MEASUREAREA NUMERICAL TREND CURRENT TREND


3

Business Conditions

59

November-14 57.6 December-14 55.1 J anuary-15 53.5 February-15 52.9 March-15 51.5 April-15 51.5 November-14 58.8 December-14 56.5 J anuary-15 56.7 February-15 56.9 March-15 56.5 April-15 57.8 October-14 -0.70%November-14 -1.40%December-14 -3.20%J anuary-15 2.20%February-15 -1.00%March-15 2.90%October-14 0.00%November-14 1.10%December-14 -0.10%J anuary-15 -0.40%February-15 0.10%March-15 -0.60%September-14 0.20%October-14 0.20%November-14 0.20%December-14 0.00%J anuary-15 0.00%February-15 0.30%

ISM Manufacturing Index - The ISM manufacturing index is based on surveys of 400 purchasing managers nationwide regarding manufacturing in 20 industries. Below 50 indicates contraction and above 50 indicates expansion.

Industrial Production - Industrial production is a pure measure of output, untainted by the effects of price swings, in the industrial part of the U.S. economy. Every month, the Federal Reserve calculates an index of industrial production after collecting data on 312 industry components representing manufacturing, mining, and the electric and gas industries.

Business Inventories - The report compiles data from the Census' retail trade report, wholesale trade report, and factory orders (M3) report. Analysts look for long-term trends pointing toward rising or falling inventory levels and changes in the inventories-to-sales ratio.

MEASUREAREA

Business Conditions

ISM Nonmanufacturing Index - The ISM nonmanufacturing survey measures the rate and direction of change in activity in the nonmanufacturing industries, which represent just over 80% of the U.S. economy. Questionnaires are sent to more than 370 purchasing managers in over 17 industries. Below 50 indicates contraction and above 50 indicates expansion.Durable Goods Orders - Provides broad-based monthly statistical data on current economic conditions and indications of future production commitments in the manufacturing sector. The report on Durable Goods provides statistics on manufacturers' value of shipments, new orders (net of cancellations), end-of-month order backlog (unfilled orders), and end-of-month total inventory (at current cost or market value).



Housing Market

60

October-14 5.16 November-14 4.95 December-14 5.07 J anuary-15 4.82 February-15 4.89 March-15 5.19 October-14 5.2 November-14 5.0 December-14 4.4 J anuary-15 4.6 February-15 4.7 March-15 4.6 October-14 469,000 November-14 448,000 December-14 496,000 J anuary-15 514,000 February-15 543,000 March-15 481,000 October-14 123,109 November-14 112,498 December-14 114,222 J anuary-15 106,505 February-15 101,938 March-15 122,060 September-14 4.76%October-14 4.43%November-14 4.26%December-14 4.43%J anuary-15 4.48%

February-15 5.03%

Existing Home Sales - On or about the 25th of each month, the NAR releases statistics on sales and prices of existing-single family homes for the nation and the four regions. These figures also include condo and co-ops, in addition to single-family homes. Existing-home sales generally account for 85% to 90% of total home sales, are based on a large sample, and are not subject to large prior-month revisions.

Supply of Existing Homes - The inventory sales ratio, or months' supply of homes, tells you how many months it takes to sell off the existing inventory of used homes on the market based on the latest monthly sales rate. If the ratio is too low, it's a sign that supplies are tight, which may lead to stronger price appreciation. A ratio above 6 typically denotes a soft housing market, which may lead to lower prices.

New Home Sales - The Census Bureau tracks monthly new-home sales based on telephone or personal interviews with about 10,000 builders or owners of about 15,000 selected building projects. A sale is recorded when a buyer signs a contract to purchase a house. This will typically lag the actual sale by several months. Data are available for the U.S. and the four census regions.

Foreclosures - The concept tracks residential properties where mortgage payments are in default and the lender is in the process of recoverying the balance of the loan from the borrower by seizing and/or forcing the sale of the property.

S & P Case Shiller Index - The monthly S&P/Case-Shiller indices are a three-month moving average of the selling prices of houses in 20 metropolitan statistical areas (MSA) across the United States. Measuring arms-length transactions of single-family houses, the indices serve as an indicator of the average change in house prices over time.

MEASUREAREA

Housing Market



O/N1-m

th3-m

th 2yr4yr

6yr8yr

10yr12yr

14yr16yr

18yr20yr

22yr24yr

26yr28yr

30yr0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Yield Curve

Fed Con-trolled

Normalization & Shifts in the Yield Curve

Function of : GDP Growth, Inflation


Historical Interest Rate DataFinancial Sector 1-yr Avg 3-yr Avg 5-yr Avg 10-yr Avg 20-yr Avg 30-yr Avg High High Date Low Low Date

Fed Funds Rate (%) 0.25 0.25 0.25 1.62 2.83 3.93 20.00 05/29/1981 0.25 04/03/2015Fed Reserve Prime Rate 3.25 3.25 3.25 4.62 5.84 6.69 21.50 12/31/1980 3.25 04/01/2015Fed Funds Effective Rate 0.10 0.11 0.12 1.53 2.81 3.98 22.36 07/22/1981 0.04 12/30/20111-Week LIBOR 0.13 0.15 0.18 1.67 N/A N/A 7.76 01/00/1900 0.12 05/20/20141-Month Libor 0.16 0.19 0.21 1.72 2.95 N/A 10.31 01/00/1900 0.15 05/20/20143-Month Libor 0.24 0.29 0.32 1.86 3.04 N/A 10.63 01/00/1900 0.22 05/02/20146-Month Libor 0.34 0.44 0.49 2.02 3.16 N/A 11.00 01/00/1900 0.32 10/09/201412-Month Libor 0.59 0.72 0.79 2.24 3.36 N/A 11.25 01/00/1900 0.53 06/06/20143-Month T-Bill Rate (%) 0.02 0.05 0.06 1.36 2.59 3.65 17.14 12/11/1980 -0.04 12/04/20082-Year Treasury Yield (%) 0.50 0.36 0.41 1.73 3.07 4.31 16.96 09/09/1981 0.15 09/19/20113-Year Treasury Yield (%) 0.93 0.64 0.70 1.90 3.33 4.60 16.59 09/09/1981 0.28 07/24/20125-Year Treasury Yield (%) 1.59 1.23 1.34 2.45 3.69 4.93 16.27 09/30/1981 0.54 07/24/20127-Year Treasury Yield (%) 2.02 N/A N/A N/A N/A N/A 16.05 09/30/1981 0.88 07/24/201210-Year Treasury Yield (%) 2.32 2.21 2.43 3.26 4.29 5.48 15.84 09/30/1981 1.39 07/24/201230-Year Treasury Yield (%) 3.04 3.18 3.46 3.99 4.87 5.95 15.21 10/26/1981 2.22 01/30/2015Equity Market (S&P 500 Index) 1988.55 1712.27 1519.30 1374.31 1206.82 917.60 2117.39 03/02/2015 68.56 12/31/1974Dow Jones Industrial 17184.29 15339.25 13840.92 12443.45 10621.23 7970.22 18288.63 03/02/2015 616.24 12/31/1974NASDAQ Index 4529.95 3790.18 3308.86 2755.30 2347.98 1729.36 5048.62 03/10/2000 59.82 01/00/1900VIX Index 14.62 15.26 18.41 20.13 20.83 N/A 80.86 11/20/2008 9.31 01/00/1900US$ Major Currency Index 81.51 77.32 75.49 77.25 86.32 89.27 148.12 02/25/1985 67.99 05/02/2011Non-Financial CP - 30 Day 0.072 0.088 0.113 1.524 N/A N/A 6.59 01/00/1900 0.02 02/19/2015

62


Annual High/Low Libor Ranges

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

High Low Average

Period High Low Average2006 5.420 4.398 5.096 2007 5.824 4.600 5.250 2008 4.588 0.436 2.675 2009 0.564 0.231 0.334 2010 0.354 0.228 0.274 2011 0.296 0.185 0.232 2012 0.296 0.208 0.236 2013 0.208 0.164 0.189 2014 0.171 0.148 0.155

2015 YTD 0.179 0.166 0.172

63


Historical Treasury Yield

10-Yr. 30-Yr. DateCurrent 1.90 2.51 April 2, 2015Average 4.40 4.97 High 15.84 15.21 Sep. 30, 1981 / Oct. 27, 1981Low 1.39 2.22 July 24, 2012 / July 24, 2012

64


Selected Treasury Yield Forecast

Present 2Q15 3Q15 4Q15 1Q160.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2.90%3.10%

3.30%3.55%

2.25%2.40% 2.52%

2.70%

1.92% 1.85%2.05%

2.25% 2.35%2.15% 2.25%

2.40%2.45%

High Median Low J.P. Morgan

65


Flatter Yield Curve Anticipated% Change Q/Q 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16Real U.S. GDP 2.2% 0.6% 3.0% 2.5% 2.5% 2.5%Core Consumer Price Index 1.5% 1.6% 1.7% 2.0% 2.0% 2.0%Unemployment Rate (%,sa) 5.7% 5.6% 5.3% 5.2% 5.1% 4.9%Interest Index Present 2Q15 3Q15 4Q15 1Q16

Fed funds target Fed Funds 0.13% 0.13% 0.50% 0.75% 1.00%Three-month LIBOR 3ML 0.27% 0.50% 0.80% 1.05% 1.30%2-year U.S. Treasury 2yr 0.54% 0.80% 1.05% 1.25% 1.45%3-year U.S. Treasury 3yr 0.88% 1.20% 1.40% 1.55% 1.75%5-year U.S. Treasury 5yr 1.37% 1.65% 1.80% 1.95% 2.15%7-year U.S. Treasury 7yr 1.69% 1.90% 2.10% 2.25% 2.35%

10-year U.S. Treasury 10yr 1.92% 2.15% 2.25% 2.40% 2.45%30-year U.S. Treasury 30yr 2.54% 2.65% 2.80% 2.85% 2.90%

2s/10s Curve 138bps 135bps 120bps 115bps 100bps5s/10s Curve 55bps 50bps 45bps 45bps 30bps

10s/30s Curve 62bps 50bps 55bps 45bps 45bpsSource: J.P. Morgan forecasts as of 4/03/2015

Fed Funds 3ML 2yr 3yr 5yr 7yr 10yr 30yr 0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%

Present 2Q15 3Q15 4Q15 1Q16

66


67

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