economic and financial markets monthly review & outlook ... · upward to 0.2%. personal...

Economic and Financial MarketsMonthly Review & Outlook

Detailed Report

October 2013

U.S. Bank Specialized Industries and Finance • October 2013

Source: Department of Commerce Source: Department of Labor

Source: Department of CommerceSource: Department of Commerce, Labor

Overview of the Economy

September saw the Federal Reserve (Fed) postpone tapering of quantitative easing due to insufficient economic growth, low inflation, concerns about financial conditions and fiscal policy uncertainty. Third quarter data available to date covering consumer spending, business fixed investment and residential investment suggest that third quarter growth remains near the 1.6% average of the past year. Weaker housing starts and building permits, a slower pace of consumer spending growth, soft small business sentiment and slower growth in non-manufacturing activity have muted the benefit of more robust manufacturing readings in recent months. We believe the government shutdown will have a limited effect on the economy. We see the debate over the debt ceiling as more critical to growth, with fiscal uncertainty and indirect effects from sharp fiscal tightening having a more lingering influence.

2%3%4%5%6%7%8%9%

10%11%12%

1972 1978 1984 1990 1996 2002 2008 2014

After Tax Corporate Profits % of Nominal GDP

Q2 2013


Source: Conference Board Source: Department of Commerce

Source: Department of Commerce Source: Department of Commerce, Federal Reserve

Consumer Expenditures

Personal income increased 0.4% in August, while July was revised upward to 0.2%. Personal consumption expenditures also improved in August, increasing 0.3%. Real personal income has improved slightly during the last several months, but is only growing 1.1% on a year-over-year basis. This will probably constrain consumption going forward unless Americans further reduce the saving rate. The current pace of personal income growth will remain a key limiting factor for the U.S. consumer market. Personal income has continued to grow at a moderate pace and will probably be sufficient to keep the economy expanding at its current rate. Consumer confidence fell in September, as concerns about possible U.S. involvement in another Mideast conflict weighed on the financial markets in the beginning of September. The ongoing debate about the federal budget and debt ceiling may weigh on confidence in October as well.

10

30

50

70

90

110

130

150

1994 1997 2000 2003 2006 2009 2012 2015

Consumer ConfidenceIndex Level

Aug-13


Source: Department of Commerce Sources: Department of Commerce, Nat’l Assoc. of Realtors

Source: Department of Commerce Source: Standard and Poors

Housing

Mortgage applications have fallen in recent months in response to the rise in rates over the past few months. With the Fed’s decision not to taper, mortgage rates have edged down recently, which should alleviate near-term pressure on the mortgage market. Single-family starts rebounded in August to the best reading since March, while single-family permits rose to a post-recession high. Multifamily construction slowed in August, but starts are up 24.1% year-to-year. Permits declined during August but some moderation in multifamily construction is expected after the rapid acceleration in starts over the past few years. Home prices continued to increase in July as fewer distressed properties and lean inventories continue to support home price appreciation.

400600800

10001200140016001800200022002400

1990 1993 1996 1999 2002 2005 2008 2011 2014

Housing Starts and Building Permits (Thousand Units) Seasonally Adjusted Annual Rate

Jul-13

Building Permits

Housing Starts

1.0

1.5

2.0

2.5

3.0

1989 1993 1997 2001 2005 2009 2013

Homeowner Vacancy Rate

Q2 2013


Source: National Federation of Independent Business Source: Department of Commerce

Source: Institute for Supply Management Source: Federal Reserve Board

Production and Investment

The monthly manufacturing activity indices at the regional and national levels showed further improvement in growth in September. The ISM manufacturing index posted its sharpest four-month increase since 2009. This likely reflects better economic conditions abroad and exports, as well as some inventory building among manufacturers. Export orders were positive for the ninth consecutive month in August. Despite the concerns of fiscal sequestration, weakness in emerging markets and slow growth in Europe, firms are seeing modest gains in both domestic and export orders. This suggests the outlook remains for modest growth going forward into the second half of this year. We continue to expect domestic economic growth to remain in line with recent trends in the coming quarters despite less fiscal drag, as opposed to the consensus forecasts that anticipate acceleration.

1.2

1.3

1.4

1.5

1.6

1989 1992 1995 1998 2001 2004 2007 2010 2013

Business Inventory to Sales Ratio

Jul-13

30

35

40

45

50

55

60

65

1990 1993 1996 1999 2002 2005 2008 2011 2014

ISM Manufacturing Index

Aug-13

80

85

90

95

100

105

110

1990 1992 1995 1998 2001 2004 2007 2010 2013

National Federation of Independent Business Small Business Optimism Index

Aug-13


Source: Department of Commerce Source: Department of Commerce

Source: Bloomberg Sources: U.S. Department of Commerce

International Trade

The U.S. trade deficit in goods and services widened to $39.1 billion in July from $34.5 billion in June. Exports fell 0.6% after surging 2.2% last month, and imports rebounded 1.6% after falling 2.2%. The pullback in exports was concentrated in capital goods (-3.5%), indicating the decline in capital goods shipments seen in July’s durables goods report was largely accounted for by lower overseas shipments rather than weak domestic demand. The import gain was mostly due to a rebound in petroleum products (+7.7%) from a three-year low, reflecting both higher prices and a rebound in depressed volumes. The trade deficit has been unusually volatile in recent months, but the three-month moving average shows the underlying trade deficit has been little changed over the past three months. We believe that July trade data suggest that the economy is advancing at around a 1.5% annual rate in the third quarter.

-70

-60

-50

-40

-30

-20

-10

0

1992 1995 1998 2001 2004 2007 2010 2013

US Real Goods Trade Balance$ Billions

Jul-13

70

80

90

100

110

120

130

1989 1992 1995 1998 2001 2004 2007 2010 2013

U.S. Dollar Indexvs. Major Currencies

Aug-13

-75

-65

-55

-45

-35

-25

-15

-5

5

1992 1995 1998 2001 2004 2007 2010 2013

US Trade Balance $ Billions

Jul-13


Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

Labor Market Conditions

In the absence of the Labor Department’s jobs data (due to the government shutdown), the general tone of the available data is consistent with the employment trends over the past few months. Initial jobless claims were a source of strength in the economic data in September, with weekly claims falling to a new cyclical low of 294,000 and rising only modestly since. The ISM Employment Index increased to 55.4, with eight industries reporting an improvement in jobs. The job data from ADP indicated that companies added 166,000 employees in September while August was revised up to 159,000 employees.

-900

-700

-500

-300

-100

100

300

500

700

1990 1994 1998 2002 2006 2010 2014

Employees on Nonfarm Payrolls Monthly Net Change and 3 Month Average

Aug-13

Nonfarm Payroll Change (000)

3 Month Average

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

1990 1993 1996 1999 2002 2005 2008 2011 2014

Civilian UnemploymentRate

Aug-13


Source: Bureau of Labor Statistics Source: Federal Reserve Board

Source: Bureau of Labor Statistics Source: Reuters

Inflation and Monetary Policy

In a major surprise to most market participants and economic forecasters, the Federal Open Market Committee (FOMC) refrained from tapering its quantitative easing program at the September meeting. It gave four primary reasons: (1) economic growth was not strong enough (2) inflation remained below the Fed’s objectives (3) tighter financial conditions in recent months and (4) fiscal policy uncertainty. Given the Fed’s four reasons, we expect further continuation at the October FOMC meeting. The economy has not shown signs of material acceleration, inflation remains below the Fed’s objective at just 1.5% year-over-year and fiscal policy risk is playing out. This suggests the Fed will most likely consider beginning the tapering process at the December or January FOMC meetings.


Source: Bloomberg Source: FactSet

Source: FactSet Source: Bloomberg

Equity Market

The S&P 500 Index rose 2.97% in September after falling in August. The market responded to the more dovish-than-expected FOMC decision that delayed tapering, despite highlighting potential uncertainty about the stability of the U.S. economic recovery. Third quarter earnings reports will be released in the coming weeks. The broad economic data trends suggest slow earnings growth will continue in the third quarter. Earnings pre-announcement trends have been negative and consensus expectations for third quarter earnings have declined significantly over the past three months. This has likely lowered the bar sufficiently to allow a majority of companies to beat expectations at the reporting date. Given policy uncertainties, earnings reports seem unlikely to be a source of major market movements in the near term. We continue to expect earnings per share (EPS) growth in 2013 but see downside revisions to consensus expectations for earnings of $107.70 per share in 2013, particularly in 4Q13 estimates.

0%

20%

40%

2012

2013 YTD

Total Return by Sector08/31/13

-60%

-40%

-20%

0%

20%

40%

60%

1992 1995 1998 2001 2004 2007 2010 2013

S&P 500 Year/Year Percent Change

Aug-13

-40%-30%-20%-10%

0%10%20%30%40%

2012

2013 YTD

08/31/13Total Return by Style


Source: MSCI Barra Source: MSCI Barra

Source: MSCI Barra Source: MSCI Barra

International Markets

In September, emerging market (EM) equity markets outperformed developed market (DM) markets after the more-dovish-than-expected FOMC statement and better economic data out of China boosted risk appetite. The MSCI EM Europe Index was the most improved. The MSCI Russia and MSCI Turkey Indices both rallied in September after the Federal Reserve refrained from reducing monetary stimulus, which increased the appetite for riskier assets. We maintain a favorable view of the likely performance of foreign markets relative to the U.S. as we look to 2014 on the basis of improving economic conditions and more favorable valuations.

0

1

2

3

4

5

6

7

1989 1992 1995 1998 2001 2004 2007 2010 2013

S&P 500 Index Relativeto MSCI AC World Ex US Index

Aug-13

-25%-20%-15%-10%-5%0%5%

10%15%20%25%

2012

2013 YTD

Total Return By Market Segment 08/31/13

0

100

200

300

400

500

600

1989 1992 1995 1998 2001 2004 2007 2010 2013

MSCI AC World ex US Total Return Index

Aug-13

0.000.050.100.150.200.250.300.350.400.45

1989 1992 1995 1998 2001 2004 2007 2010 2013

MSCI Emerging Markets vs. MSCI EAFE Ratio

Aug-13


Source: Bloomberg Source: Bloomberg

Source: Barclays Capital Source: Barclays Capital

Fixed-Income Market

The 10-year U.S. Treasury yield fell to 2.61% in September after reaching another new high in 2013 of 2.99% on September 5. The 10-year yield had increased just under 75% from the beginning of May to when the Fed decided to not taper on September 18. Since then, yields have fallen 5% and have remained at around 2.6%. We continue to forecast a 10-year U.S. Treasury yield in the 2.0% to 3.0% range. 0%

1%

2%

3%

4%

5%

3 Mo 2Yr 5Yr 10Yr 30Yr

U.S. TreasuryYield Curve

8/30/2012

8/30/2013

-2

0

2

4

6

8

10

1990 1993 1996 1999 2002 2005 2008 2011 2014

US Treasury YieldsPercent

Aug-13

3 Month Treasury Yield

10 Year Treasury Yield

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000 2002 2004 2006 2008 2010 2012 2014Aaa AaA Baa

Credit Spreads by Quality (percent)Aug-13

-2.98%-3.35%

-2.29% -2.15%

-3.16%

0.02%

-8.05%

-3.93%-2.80% -2.76% -2.27%

-3.56%-2.16% -2.71%

-5.71%-5.19%

-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

Agg

rega

te

Trea

s.

Age

ncy

Cor

p

Mor

t

HY

Tips

Mun

i

Total Return by Market Sector

12 Months ending 8/30/2013

3 Months ending 8/30/2013


Economic, Rates and Earnings Forecast

2013 Bloomberg 2014 Bloomberg2012 (A) 2013 (F) 2014 (F) Consensus* Consensus*

Real GDP (Q4/Q4) 1.7% 1.0% - 2.0% 1.5% - 2.5% 1.6% 2.6% Personal Consumption Expenditures 1.9% 1.5% - 2.5% 1.5% - 2.5% Investment 3.1% 3.0% - 5.0% 4.0% - 6.0% Net Exports ($) -$405B -$430B -$420B Government Spending -1.6% -1.0% - 0.0% 0.0% - 1.0%Unemployment Rate*** 7.8% 7.3% 7.0% 7.5% 6.9%

CPI*** 1.7% 1.0% - 2.0% 1.5% - 2.5% 1.5% 1.9%CPI Excluding Food & Energy 1.9% 0.8% - 1.8% 1.5% - 2.5%

Fed Funds*** 0.25% 0.00% - 0.25% 0.00% - 0.25% 0.25% -10 Year Treasury*** 1.75% 2.0% - 3.0% 2.0% - 3.0% 2.80% -

Corporate Earnings (S&P Operating) $96.82*** $105.00 $108.00 $107.58*** $121.66***Trade Weighted Dollar*** 79.8 $80-$90 $80-$90*Bloomberg - October 16, 2013**End of Period Level***Standard & Poors - October 10, 2013


The Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities.

The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the US and Canada.

The MSCI Emerging Markets Index captures large and mid cap representation across 21 Emerging Markets (EM) countries

The MSCI ACWI (All Country World Index) Index is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets.

The MSCI ACWI (All Country World Index) Index ex U.S. is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

The MSCI EM (Emerging Markets) Asia Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Asia.

The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe.

The MSCI Europe & Middle East Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe and the Middle East.

The MSCI EM (Emerging Markets) Latin America Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America.

The MSCI North America Index is designed to measure the performance of the large and mid cap segments of the US and Canada markets.

The MSCI Pacific Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in the Pacific region.

The Russell 1000® Growth Index is a market-capitalization-weighted index that measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000® Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000® Index is composed of the 2,000 smallest stocks in the Russell 3000® Index and is widely regarded in the industry as the premier measure of small-cap stock performance.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap is a subset of the Russell 1000® Index.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.

Index Definitions


DisclosureSource: These views were prepared by Keith Hembre, Chief Economist for U.S. Bank. These views are subject to change at any time based upon market or other conditions and are current as of the date indicated on these materials. This information is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or be construed as an offering of securities or a recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. U.S. Bank and its representatives do not provide tax or legal advice. Each tax and financial situation is unique. Consult a tax and/or legal advisor for advice and information concerning a particular situation

Past performance does not guarantee future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is a capitalization weighted index of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Russell 1000 Value measures the performance of those Russell 1000 Index securities with lower price-to-book ratios and lower forecasted growth values, and is representative of U.S. securities exhibiting value characteristics. Russell 1000 Growth measures the performance of those Russell 1000 Index securities with lower price-to-book ratios and lower forecasted growth values, and is representative of U.S. securities exhibiting value characteristics. Russell Midcap measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. Russell 2000 measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The NASDAQ Composite Index is market capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market. MSCI EAFE Index is an unmanaged index that includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). MSCI Emerging Markets EMG Index is designed to measure equity market performance in global emerging markets. This index includes sub-indexes for various countries (such as China and Brazil). MSCI All Country World Index (excluding U.S.) tracks the performance of stocks representing developed and emerging markets around the world that collectively comprise most foreign stock markets. U.S. stocks are excluded from this index. MSCI World Index is an unmanaged index which tracks equity market performance of developed markets through individual country indices. MSCI Country Indices represent the market for a particular country.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Growth stocks are typically more volatile than value stocks; however, value stocks have a lower expected growth rate in earnings and sales. The value of large cap stocks will rise and fall in response to the activities of the company that issued them, general market conditions, and/or economic conditions. Stocks of small-and mid-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies. International investing involves risks not typically associated with domestic investing, including risks of adverse currency fluctuations, potential political and economic instability, different accounting standards, foreign government regulations, currency exchange rates, limited liquidity, and volatile prices. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investments in fixed income debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in real estate can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties, such as rental defaults. An inflation protected security is a special type of note or bond designed to offer protection from inflation. Interest payments vary with the rate of inflation. These securities offer a lower return compared to other similar investments. The principal value may increase or decrease with the rate of inflation. Investments in high-yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact ofadverse political or financial factors. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks and bonds. Hedge funds are speculative and involve a high degree of risk. Investments in private equity are illiquid by nature and typically represent a long-term binding commitment. The investments made by private equity funds are not readily marketable and the valuation procedures for these positions are often subjective in nature.

10/2013

NOT A DEPOSIT NOT FDIC INSURED MAY LOSE VALUE NOT GUARANTEED BY THE BANK

NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

economic and financial markets monthly review & outlook ... · upward to 0.2%. personal...

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