market update call – audio transcript september 22, 2015...sep 22, 2015 · september 22, 2015...

MARKET UPDATE CALL TRANSCRIPT – September 22, 2015 Important disclosures provided on page 14. 1

Market Update Call – Audio Transcript September 22, 2015

Featured Speakers:

Krishna Guha Jennifer L. Vail Vice Chairman Head of Fixed Income Research Evercore ISI U.S. Bank Wealth Management

Opening: This is a recording of the U.S. Bank Wealth Management Market Update Call held on September 22, 2015. The discussion featured views on the recent decision by the U.S. Federal Reserve not to raise interest rates at the current time. Our speakers also shared perspectives on what may occur in the future.

Jennifer Vail: Hello and welcome to our Market Update discussion, which is hosted by U.S. Bank Wealth Management. I’m Jennifer Vail, head of fixed income

research. I also serve as Chief Investment Officer for U.S. Bank Institutional and Corporate Trust. I’m extremely pleased to have a very special guest speaker joining me — Krishna Guha, Vice Chairman of Evercore ISI and head of the global policy and central bank strategy team based in Washington, DC. Prior to joining ISI, Krishna was Executive Vice President, member of the management committee and head of the communications groups at the New York Fed. In this capacity, he led the New York Fed’s external relations, acted as a senior advisor to Fed President William Dudley on monetary policy strategy and policy communication, and served as a member of the New York Fed’s executive committee on financial stability and regulatory policy.

Krishna was educated at Sidney Sussex College, Cambridge University, and

the Kennedy School of Government at Harvard where he was a Fullbright Scholar and won the CV Star award. Krishna, thank you for joining our conversation.

Krishna Guha: Huge pleasure. Investment products and services are:


Jennifer Vail: Let’s dig right in. With the Federal Open Market Committee (FOMC) meeting

concluding Thursday (September 17), it appears investors have more questions than answers at this point. The market fears a policy mistake, and many investors are not really certain the economy is strong enough to withstand an increase in the fed funds rate.

So today we’re going to discuss what we can expect from the Federal Reserve

(Fed) going forward, the factors that will affect the lift-off decision, and the pace of policy rate increases and its impact of these decisions on the actual market.

As I begin my conversation with Krishna, please keep in mind that the views

he expresses are his and do not necessarily reflect the opinions or positions of U.S. Bank. Welcome again, Krishna.

Krishna Guha: It’s good to be talking to you. Jennifer Vail: Thursday’s FOMC statement, the summary of economic projections, and the

press conference — they didn’t really provide a clear picture of the Fed’s intent. So how much improvement in global growth and financial market conditions does the Fed actually need to see in order to hike rates by year-end?

Krishna Guha: I think the Fed has done a pretty poor job of communications in the recent

weeks. And the meeting itself wasn’t a great success in that respect either. So certainly a lot of people have been left quite confused.

I think, though, the signal was really quite simple from the Fed — pretty

straightforward. I think the Committee was telling us that they expect to hike rates in December, provided that the domestic economy continues to improve between now and then, and provided that the emerging markets in China obviously, in particular, do not look particularly threatening at the time of that December decision. So December is the base case. December is the default. But they’ve given themselves a sensible get-out clause if the emerging world looks dangerously weak at that point.

So what are they looking for? I think in the base case what they’re saying is,

look, we’re going to get more headwinds from weak global growth, probably dollar strength, and the difficulties in emerging markets that caused the tightening in financial conditions. So that means we just need to ask a bit more of the domestic data. We need to get unemployment a little lower. We want to get some more jobs. We want to clock in some more growth.

So we’ve got a little bit momentum to push our way through those external

headwinds. At the same time, of course, they want to use the, I think, three months to the December meeting to evaluate a little bit more what’s going on in the emerging world and to get an early read on the U.S. data, since the China devaluation in the stock market selloff, to confirm that U.S. hiring, U.S. investment, U.S. spending has not been materially affected by this.


Jennifer Vail: So focusing more on the federal focus, more on meeting that stronger

domestic data and the three months are probably required in order for us to be able to get a good feel for the impact of the devaluation of the yuan.

Krishna Guha: Yes. I sort of think of this on two tracks. There’s the base case track where the

emerging world stays weak but doesn’t slip into further stress and doesn’t start generating bigger shocks for the U.S. If that’s where we are, then all the Fed will need to see is some further good domestic data to get them confident that the U.S. is going to be able to sustain a moderate pace of rate increases, a cautious pace of rate increases starting in December.

But at the same time, of course, they will be studying those international

developments and their effects on markets. And if it looks like we’ve got not just a weak emerging world but we’ve got deepening problems intensifying stress, real shocks coming out of the emerging world, then I think they’ll take a pass in December even if the domestic data is looking reasonably good.

Jennifer Vail: So speaking of that domestic data, during the press conference, Yellen

expressed some concerns over inflation. And we know that they have stated that some inflation is likely transitory as a result of oil prices. Yellen also indicated in the past that market-based measures of inflations, such as breakevens, are subject to term premium movements and may not be a good indicator of their desire to have a reasonable confidence that inflation’s going to reach their 2 percent target.

But which inflation indicators do you believe will have the greatest impact on

the Fed’s decision going forward? Krishna Guha: Well, the Fed has been very clear that what it’s basing its policy judgment on

is the outlook for inflation — so not inflation today but where they think it’s going tomorrow, more specifically out two or three years. And as you know, the test for raising rates is that they need to be reasonably confident that it will get back to 2 percent on that two to three year timeframe.

Now, the new set of economic projections showed that the median FOMC

participants think we only get back to 2 percent at the end of 2018. So they’re already talking about it being a pretty slow, hard climb back to 2 percent inflation. Of course, in part because of all the drag from overseas because of the weaker commodity price, but also the drag from the dollar going forward.

So what are they going to be looking at? Well, a combination of things, as

usual. First up, they do put a lot of weight on the domestic labor market, on employment and so forth. Because of this belief, which is I think is well founded in the end, if unemployment keeps declining and, more broadly, resource utilization in the U.S. keeps tightening, at some point sooner or later it’s going to generate wage and domestic cost pressures. And, of course, that’s the core part of the mechanism to move inflation back to 2 percent.

So the first thing they’re looking at is they’re looking at the labor market as a

guide to future inflation, if you like.


Secondly, of course, they’re looking at actual measures of inflation — in

particular, the core PCE (personal consumption expenditure) measure, which is notably weak right now at about 1.2 percent. That excludes energy prices, so you can’t just excuse that away as being a result of oil.

They’ll also look at things like core services prices because they want to get a

sense of what’s going on in the parts of the economy that are not directly affected by the exchange rates. So services tend not to be traded, unlike goods.

So you’ve got a better read on what the purely domestic inflation in the U.S.

looks like. Again, core services inflation in the U.S. today is below levels that would be consistent with the Fed getting to 2 percent inflation. They will also look at wages, average hourly wages, and the ECI (employment cost index) measure of compensation.

And they will also look at market inflation breakevens. Now, as you said, the

Fed has warned us that there are moments in risk premium that can muddy the picture from inflation breakevens in financial markets. But I was struck by actually how much emphasis Yellen put on market breakevens in the press conference after the meeting because it’s clearly indicated that they are not ignoring that metric, and that metric, obviously, is telling them that the market sees more downside risk to inflation than upside risk, even over the medium term.

Jennifer Vail: So in addition to breakevens, that tighter labor market leading to wage and

domestic cost pressures and then also keep an eye on the core services prices because that’ll give another good indicator.

Krishna Guha: Yes, that’s exactly right. Of course, you can also very obviously throw in the

dollar here as well because if the dollar strengthens further from here, that’s going to be more drag on import prices. Obviously, as the dollar weakens or stabilizes from here, you’ve still got a lot in the pipeline but you’re not going to get more of that restraint.

Jennifer Vail: So speaking of the dollar, there’s been a lot of press about the Fed’s inaction

on Thursday resulting in additional easing by other central banks, possibly even leading to a currency war. How plausible do you see that scenario?

Krishna Guha: Well, it’s certainly the case that while the Fed taking a pass on raising rates is

actually good for emerging markets because the emerging markets tend to suffer when the dollar is strong, in part because a lot of their companies have borrowed in dollars. The Fed taking a pass makes life more difficult for the other developed worlds’ economies. So here we’re thinking primarily the eurozone and Japan, because obviously the Fed’s not pushing through with rate hikes in the U.S. The dollar will weaken relative to the euro and the yen. And with Japan and the eurozone, obviously for different reasons and in different ways, being even further behind in terms of trying to get inflation back to normal around 2 percent, the last thing they need is for their currencies to appreciate relative to the U.S. dollar.


So I think it’s absolutely the case that the ECB (European Central Bank) is very likely to ease further between now and December, and possibly at their next meeting. And I also think there’s a good chance that the BOJ (Bank of Japan) will do so too. In both cases they’d add more QE (quantitative easing).

You can look at this one of two different ways. Some people would say this is

just around zero some competitive devaluations of your currencies. Others would say that, no, this is how the global system should respond. If the global economy is weaker than we thought, then global monetary policy should ease.

Now, in economies like the U.S., which have made more progress, easing

takes the form of not going ahead with tightening. In economies that have made less progress, like the eurozone and Japan, easing takes the form of more QE. So if we get easing in effect by all the major economies, then that will help prop up global growth. It’ll be a helping hand to the emerging markets who are in particular difficulties at the moment, and that’s good for the system.

I think there’s a bit of truth to both of those views. I do think that a round of

global easing is probably what’s called for right now. But it is also true that a fair part of this — not by any means all — but a fair part, involves poaching demand from other places by getting your exchange rate lower.

Jennifer Vail: Getting us back to a zero sum game. Krishna Guha: Yes. So there’s a bit of zero sum. It’s not totally zero sum, but there’s a

meaningful element of zero sum. Jennifer Vail: So moving back to the U.S. dollar, how much appreciation in the trade-

weighted dollar index would be required in order to significantly slow the projected pace of hikes that the Fed has been telegraphing to us?

Krishna Guha: You know, I don’t have a precise formula for you, I’m afraid, that “x” amount

on the dollar is going to take out “y” amount of tightening. What I would say is obviously all other things being equal, if we get any meaningful further appreciation of the dollar from here, then that will be a substitute at the margin for Fed rate hikes.

Now, the Fed typically bases its policy plans on the assumption that the

exchange isn’t very, very different from the current spot price and futures market. And the futures tend to be pretty flat to the spot. So, while perhaps a tiny bit of more dollar strength might be factored into their plans. Very likely, significant further dollar strength is not. And so if we get it, then it will take the place of some of the Fed tightening.

Now, of course, the currency isn’t the only game in town. What’s happening to longer-term yields, equity prices and net worth, credit risk premium, back lending — all the usual factors that go into the mix — will ultimately determine how much tightening we get. But certainly particularly starting


from a position where the Fed doesn’t think it can get inflation back to target until the end of 2018, it’s not going to take a lot of additional dollar strength or restraint from any other direction to require the Fed to lower that rate path again.

Jennifer Vail: Perhaps in viewing the dollar’s relative strength, they would be concerned

over something like that which occurred between July and April, that really sharp move in the dollar, but the more modest moves that we saw like from mid-August to mid-September wouldn’t be enough to take them off track.

Krishna Guha: I certainly think anything like that July to April move, yes. Absolutely. That

would fundamentally alter the policy path. But I think the appreciation even in the last month or six weeks or so prior to the meeting, I think that did have a meaningful effect on their thinking in terms of not going through with a rate hike in September.

Around the middle of the year, late June, beginning of July, one of the factors

that was making the Fed more confident that it was getting close to pulling the trigger was that the dollar had softened a bit since the spring and looked as if it had sort of stabilized. And maybe that wave of dollar appreciation was behind them. Of course, the dollar then started to move again, this time driven more by the cross rates with the emerging world than the cross rates with other developed economies. But that, I think, was an important part of their thinking. It’s not that it was a massive shift, but it was a reasonably big shift in a short period of time.

So I think that the currency markets are very sensitive to policy expectations

right now — not surprising if you think that one part of the world is going in one direction — the U.S., maybe the UK — and the rest of the world is going in the opposite direction — emerging markets, Europe, Japan — towards more easing.

You can see why exchange rates might be pretty sensitive to policy

expectations. And if the exchange rate moves aggressively in terms of a fair distance in a short period of time or substantially a larger change over a longer period of time, both cases I think there would be an influence on the Fed’s strategy.

Jennifer Vail: It’s a bit of a catch-22 in that any time the market gets a bit more confident

that lift-off is going to occur, that causes dollar appreciation. So it is a bit of a catch-22 in that “danged if you do, and danged if you don’t” as it relates to dollar strength.

Krishna Guha: I think that’s right, but I just qualify that in two ways. The first is, as always

with currencies, it really matters why your currency is strong. If your currency is strengthening because your medium term economic outlook is strengthening, that’s fine. But if your currency is strengthening because the country is on the other end of those exchange rates are doing worse, that’s not fine. So that’s kind of a bad appreciation, if you like, rather than a good appreciation.


I think whether it was Europe in the second half of last year, whether it was emerging markets since August, quite a lot of this recent dollar strength, not all of it, but quite a lot of recent strength has been driven by bad developments on the other end rather than necessarily fantastic developments on the U.S. end.

The U.S. near-term data has not been bad at all, but it’s not been spectacularly

good either. So I think a lot depends on what’s driving the dollar, number one. Number two, in terms of the situation, you’re absolutely right that we should

expect that the dollar will strengthen a bit as the Fed gets into the final run up to raising rates, whenever that is. And what’s more to the point, the Fed also should expect that the dollar will strengthen a bit at that point.

My argument has been that if you just looked at the data over the last year or

so that you highlighted, currencies have moved a lot relative to a very small change in what we’re expecting by way of interest rates, up or down.

So when the Fed gets ready, it should assume that it’s going to get not a little

dollar strength but a fair amount of dollar strength, and make sure it’s confident that the economy’s strong enough. So as it gets to that point, it’s you know what? Sure, the dollar’s a bit strong for a while, but we’ve factored that in. So it’s okay.

Jennifer Vail: Excellent observations and qualifiers. The rationale behind the dollar strength

is certainly something that we should keep a close eye on. At the end of the day, Krishna, what do you believe is going to be the Fed’s

next move? And when do you see that actually occurring? Krishna Guha: So I think it’s extremely unlikely that the Fed will hike in October — virtually

impossible although, of course, you never get right down to zero percent. In the base case, they’ll hike in December, in my view. That’s what they’re telling us with the dots and the SEP (Summary of Economic Projections).

And almost by definition in the base case, you don’t get the full-blown crisis

in the emerging world and so on. And I think if we get to December and unemployment is down in the fours, the U.S. economy’s growing solidly and we haven’t seen any cracks appear in the very near term due to these global influences, and if EM (emerging markets) looks weak but isn’t dramatically more stressed than it is today, then I think the case for the Fed getting started in a very, very, very cautious way will probably win out.

But if I think there’s probably not much more than like a 5 percent chance that

they hike in October, probably something like maybe 50-55 percent chance that they hike in December. But that’s leaving you with a strong 40 percent probability that they do not feel comfortable when they get to December raising rates, probably because the rest of the world is too fragile or we’re seeing real emergence of stress, in which case lift-off will slip into 2016.


Jennifer Vail: Maybe that explains the futures market. Moving over to the markets, the futures market does seem to have lagged the Fed’s projections for quite a while now. Is that part of the reason why you think the market does not believe where the Fed says they’re headed on rates? Or is there some other factor holding down futures as it relates to the trajectory of policy?

Krishna Guha: So you’re absolutely right that for literally years now — I’d say for the last

couple of years — the rate path that the Fed has sketched out in the summary of economic projections has been a lot higher than the market path. And in fact, rather than the market being forced to sort of converge with the Fed, the convergence to the extent we’ve had convergence has been more the other way. The Fed has moved more towards the market, but still leaving a big wedge in terms of the amount of tightening that is implied over the next several years and one that builds over time.

There are a lot of different explanations for that. Some of them are relatively

technical. The market is pricing a probably-weighted outcome, the Fed is giving you a base case. It may be that the market implied path isn’t quite as low as it looks because there might be a negative term premium on those Fed fund contracts.

But you can qualify it a lot of different ways, technically, but still it does look

like the Committee thinks that more tightening is going to be necessary over the next several years to prevent inflation from significantly overshooting as we get back to more normal conditions than the market thinks is going to be warranted. And equivalently, the market implying that the Fed is more at risk of making a hawkish policy error than a dovish policy error. And again, you see that in the inflation break evens which are quite soft.

Jennifer Vail: So in other words, part of the disparity could be the technicals in the term

premium factor, but then the other piece of it could be truly be relate to fears of a policy mistake they’d have to reverse course?

Krishna Guha: Yes. It could be a policy mistake or it could simply be learning by doing in the

sense that market participants may be looking at the Fed and say they think that’s the amount of tightening they’re going to do. But they’re not crazy, so what they’ll do is they’ll start. They’ll tap the brakes very lightly. They’ve told us that’s what they’ll do.

And then they’ll take pause to evaluate the data, see how things are going.

Then if things are alright, they’ll tap the brakes again. And it could be a policy error but it could just be what happens. The market envisages that what happens is that as the Fed learns by doing, feeling its way, it learns that the economy can’t handle as much tightening as they thought would be appropriate. And so they adjust appropriately.

Jennifer Vail: So what would be your expectations for the number of hikes that we should

expect to see in 2016?


Krishna Guha: If we get one hike this year in December, which as I said would be my base case though I think there’s a 40 percent chance or so that it’s next year, I would expect three hikes next year, which is a little more than the market but is one less than the Fed is telling us today. And in fact, specifically, I suspect that when we get to December and things are okay, the Committee will go ahead and hike but will soften the blow of it by taking out one of those planned hikes for next year.

I think it’s just the case that the rest of the world looks very weak. Inflation

looks pretty soft everywhere. The dollar looks like it’s probably going to be quite strong during this period because the U.S. is in a much stronger position relative to virtually all the other parts of the world economy.

And if that’s the case, I think that in terms of whether the Fed starts in

December or whether it starts a little bit into 2016, it’s going to have to go quite slowly. And I appreciate, of course, that what the Fed is saying -- which is 100 basis points in a year, four hikes - is very slow by historic standards. But not sure it’s slow enough relative to the state of the world economy today. So I’d go for three hikes, not four, next year.

Jennifer Vail: And would you say the risks are to the upside or to the downside on the three

hikes for year-end 2016? Krishna Guha: I think they’re reasonably balanced. If you forced me so I couldn’t stick there.

I have to go up or down. I’d rather drop a hike than add a hike. But I think the reason why they’re reasonably balanced is that I can see lots of

global growth and dollar type reasons why the Fed might not be able to do even three hikes next year. But on the other side, I can imagine that by the middle of next year unemployment is down in the mid-fours or lower. And we could start to see some meaningful pickup in inflation pressures and wage pressures. That’s what we want, of course, so it’s not a disaster, but it would require the Fed to speed up a little bit on the tightening side.

Jennifer Vail: So inflation, again, being that key component. At the end of the day, it’s

amazing to me how everything we talk about as it relates to Fed policy, even the futures market, it really is hinging on inflation at this point.

Krishna Guha: That’s absolutely right. The Fed, of course, has its dual mandate and for much

of the post-crisis period from 2008 onward, unemployment was so high that the natural focus of policy and of policy communication — which is two different things — was on the need to bring unemployment down and to get the economy back to full employment.

But we’ve actually made in recent years, in particular, much faster progress

than we thought we would in bringing down unemployment. And as that problem has receded, if you like — not over, but as it’s receded — the problem of stubbornly very low inflation and globally disinflationary forces has really become the central consideration in U.S. monetary policy.


Jennifer Vail: Well, Krishna, given all that we have discussed today, how do you think the markets will respond over the next few weeks, and then also into year-end?

Krishna Guha: So I think that the initial risk off response to the Fed decision was overdone. I

don’t think that that in some sense is, quote, unquote “the right response.” I think people were short-term confused by what the Fed is up to. As I said to you earlier, they’ve done a bad job of their communications but I think their plan is really simple. So what you’re worried about is uncertainty. There isn’t any. They’ll hike at year-end if China and emerging markets are not blowing up, and they won’t if they are.

So we have a plan and it’s not a bad plan. I think people worried in the short

run a lot about whether the Fed knows something we don’t about how weak global growth is. So the next shoe to drop somewhere is problems in China. No, don’t think so. I think the Fed doesn’t know anything more about emerging markets than we do. It’s just being sensibly prudent in the face of increased uncertainty in some risk. But I think as that message gets across, people realize nothing’s just about to blow up on us again. Again, risk sentiment can improve a bit.

Yellen is speaking on September 24 and other Fed officials will have a chance

to clarify their message and help us to understand that it’s not that the world is a lot weaker than we thought, but it’s that they’re going to be still more careful and give us more risk insurance with monetary policy than they were previously offering. So that’s all good for the risk-taking, not bad.

There is a caveat here, which is I think something that’s going to be tough for

the Fed to grapple with, and I think it’s the following. I’ve argued before the FOMC meeting that there’s a sort of problem here that

if it is the case that what’s going on in China and the emerging markets represents some material threat to the U.S. outlook, and that we definitely would need to take that seriously because we’re at or even in the future going to be quite close to the zero bounds. So we don’t have much ability to cut interest rates and ward off, offset shocks from overseas.

If those risks are serious, then delaying lift-off by 12 weeks doesn’t begin to

look like an adequate response to that risk. So there’s some danger that the Fed has appeared, at least, to fall between two stools. It flagged up this risk, but while they’re doing something about it they’re not really doing something very aggressive about it. And then we understand why, because they’re also looking the other way at the tightening domestic labor market and the possibility of inflation picking up at home.

I do think that in the weeks ahead in order to get the markets back to playing

with them rather than against them, if you like, and to be putting risk on, the Fed has to explain how it squares that circle, why it is that delaying only until December is appropriate, but not delaying to March or June of next year.


You can make that case. I’ll tell you that my personal preference right now would be they just stood up and said, you know what — the world is too uncertain, massively disinflationary. Inflation at home is very weak. Therefore, we’re not going to hike in the base case until March next year. That’d be my personal policy preference.

It’s not what I think they’ll do. I think if they want to go ahead with December

and they’re suggesting that they do, they owe it to us to explain why they’ve flagged up these risks and here’s how we’re going to address them. And I suspect the message would be something like — we address them in part by lifting off in December rather than September. We address them in part by going more slowly in the first year. So I said maybe take out a hike that’s planned for 2016. We address them in part by pushing off the roll-off of the QE balance sheet even further. We address it in part by just being very clear to you that if we see any acceleration, intensification of these global problems, we’re just going to stop our tightening cycle until we get better visibility.

So you can imagine them putting together a package that adds up to a credible

response to the China risks. But just delaying to December and doing nothing else probably doesn’t cut it.

Jennifer Vail: So explaining the delay, potentially reducing the 2016 dot, how they’re going

to reduce the balance sheet, and that they are willing to pause should we see some additional emerging market stress?

Krishna Guha: Yes. But you can see the distinction I’m drawing. One answer to this is just to

say I’m not lifting off for another six months. But the other answer is to say I’m going to have a portfolio response where I’m going to be a little easier on virtually every front — the timing of the lift-off, the pace of the lift-off, the balance sheet plan, and the sensitivity to foreign weakness during the tightening. And it may be that they prefer to say rather than delaying six months, let’s be a little easier on each of those margins and maybe that can add up to something that is enough of a lean against these China and EM risks.

Jennifer Vail: So a gradual toe in the water with a lot of qualifiers to temper the market

reaction to liftoff? Krishna Guha: Yes. And as I said, that’s what we’ll get, I think if we get to December. The

U.S. is in good shape and China and EM do not look particularly scary. If China and EM do look particularly scary, then they won’t go ahead and they would be right not to.

Jennifer Vail: Let’s hope not. Krishna Guha: Indeed. Jennifer Vail: So in summing it up, it sounds like Evercore ISI is of the opinion that they

expect to see a lift-off in December as their base case, at least with the 50 percent probability at this point, that we would be looking for some calming


or — I’m going back to a phrase that you used — if the emerging markets don’t blow up before December.

So some improvement in domestic data that emerging market stresses don’t

accelerate again, that wage and domestic cost pressures will likely at some point create some inflation to make them comfortable with inflation, that so long as the dollar doesn’t skyrocket, we’re still looking at a December lift-off with 25 basis points, potentially three in 2016 assuming all of those items fall into place?

Krishna Guha: That’s right, yes. Jennifer Vail: Okay, wonderful. Excellent. Well, Krishna, I can’t thank you enough for

taking the time to speak with us. Krishna Guha: Its’ a very great pleasure. I look forward to doing it again. Jennifer Vail: Thank you. Krishna Guha: All the best. Jennifer Vail: The information we’ve covered on this call may have important implications

for investment portfolios, so I’d like to share some thoughts with you in this regard. Please keep in mind that not all investment solutions or strategies mentioned may be appropriate or available to all clients. Your U.S. Bank relationship manager will be happy to discuss your particular situation.

At U.S. Bank, we believe the Fed is not comfortable maintaining the

emergency zero interest rate policy much longer, despite some of the concerns over the trajectory of inflation. The FOMC, we believe, will be looking for a stabilization of those international economic and financial conditions and a decline in the tightening of domestic financial conditions as that door to enter a cycle of policy rate normalization.

That said, the lack of that strong signal from the FOMC meeting events will

likely generate that increased market uncertainty over the actual timing of the lift-off. Even though at U.S. Bank we believe the trajectory is ultimately much more important than the lift-off, we believe that the market currently is focused on the actual liftoff date.

So following the FOMC meeting, our positions remain unchanged. We

continue to maintain a constructive outlook for equities, believing that the macro and fundamental environments remain supportive of stock prices and the classic signs of a frothy market are not evident. Inflation is restrained. Earnings are increasing, albeit at a much more moderate pace. Interest rates are low and sentiment is constructive.

Additionally, the list of compelling alternatives does appear limited at this

point. So third quarter results and company guidance beginning in the middle


of October is likely the key driver of equity prices leading into the year-end and also early 2016. Our 2015 S&P price target remains at 2.100 based on the multiple of eighteen times over our 2015 earnings estimate of $117. That’s roughly 5 percent above our current levels. We continue to favor a cyclical bias. Technology, Consumer Discretionary, Healthcare, Industrials, and Financials are our favorite sectors.

Following this initial market reaction of downward pressure on interest rates,

we would expect pressure on the shortest end of the yield curve to actually resume. Although we expect to see some upward pressure on the intermediate part of the curve, it will not be nearly as substantial as the short end. So as a result, we expect the yield curve to flatten further. As the Fed moves closer to normalizing policy, it puts the greatest amount of pressure on the short end of the curve. So our forecast for year-end in the Treasury market is about 25-50 basis points on the Fed funds and around 2.5 percent on the ten-year Treasury.

Since the glide path of the future increases in the policy rate is expected to be

much shallower than previous Fed tightening, this actually creates an unusual situation where clients may not have the ability to reinvest their short-term bond proceeds into substantially higher bonds. Thus, we are encouraging our clients to avoid the shortest end of the curve in favor of the intermediate or long end of the curve.

Whereas high yield emerging debt and lower credit quality municipals provide

the greater benefit in that steeper portion of the intermediate yield curve, clients should exercise a preference for the safety of high quality investment grade corporates, municipals and Treasuries for the positions on the longer end of the curve.

To sum things up, we continue to maintain our bias to an underweight and

fixed income in favor of U.S. equity exposure. I want to thank you very much for your relationship with U.S. Bank. Please

contact your US Bank relationship manager if you’d like more information about today’s discussion topic or other timely topics. Have a great day.

Closing: Thank you for listening. We invite you to join us for future calls. Details can be obtained from your U.S. Bank Wealth Management Advisor.

Website: reserve.usbank.com


The information provided by Krishna Guha reflects his views and opinions and those of Evercore ISI. The information shared by Jennifer Vail represents the opinion of U.S. Bank Wealth Management and does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any particular individual. Since economic and market conditions change frequently, there can be no assurance that the trends described will continue or that the forecasts will come to pass. These views were presented on September 22, 2015 and are subject to change at any time based upon market or other conditions. The information presented is for discussion purposes only and is not intended to serve as a recommendation or solicitation for the purchase or sale of any type of security. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Data and research information and statistics have been gathered from a variety of sources. Any companies and organizations mentioned are not affiliated with U.S. Bank in any way. Past performance is no guarantee of 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. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. 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. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principal and interest than higher rated securities. 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. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

market update call – audio transcript september 22, 2015...sep 22, 2015 · september 22, 2015...

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