July 1, 2016
Economics Group
Weekly Economic & Financial Commentary
U.S. Review
Is the U.S. in the Eye of the Brexit Hurricane?
Following the unprecedented U.K. vote to leave the EU, global financial markets have largely calmed. The direct effects to the U.S. economy will likely be minimal, but a period of uncertainty is expected until negotiations between the U.K. and EU are finalized. We are now looking for the Fed to increase its short-term target rate only one time this year.
U.S. economic activity also appears to be on solid footing. Real GDI growth was revised to a solid reading in Q1, the trend in initial jobless claims remains favorable and manufacturing activity rebounded during the month. Second quarter consumer spending is also on track to strengthen.
Global Review
The Global Economy Regains Its Weak Footing
The official Chinese manufacturing PMI for June stood at the demarcation line, 50.0 compared to a reading of 50.1 in the previous month while the Caixin index dropped further below 50 to 48.6 compared to a reading of 49.2 in May.
The central bank of Mexico, surprising markets once again, decided to move further away from the U.S. Federal Reserve and increase its benchmark interest rate once again to take it to 4.25 percent from 3.75 percent, a 50 basis point move when markets were expecting 25 basis points.
Inside
U.S. Review 2 U.S. Outlook 3 Global Review 4 Global Outlook 5 Point of View 6 Topic of the Week 7Market Data 8
Source: U.S. Dept. of Commerce, U.S. Department of Labor, Federal Reserve Board, IHS Global Insight, Bloomberg LP and Wells Fargo Securities
-6% -4% -2% 0% 2% 4% 6% -6% -4% -2% 0% 2% 4% 6% 04 05 06 07 08 09 10 11 12 13 14 15 16 Real GDI
Year-over-Year Percent Change
Real GDI: Q1 @ 2.3% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 2008 2009 2010 2011 2012 2013 2014 2015 2016
Central Bank Policy Rates
Percent
Banxico Policy Rate: Jul @ 4.25% Fed Funds Rate: Jul @ 0.50%
Wells Fargo U.S. Economic Forecast
2013 2014 2015 2016 2017 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 0.6 3.9 2.0 1.4 1.1 2.9 2.5 2.4 1.5 2.4 2.4 2.0 2.2
Personal Consumption 1.8 3.6 3.0 2.4 1.5 4.4 2.7 2.6 1.7 2.7 3.1 2.8 2.6 Inflation Indicators 2
PCE Deflator 0.2 0.3 0.3 0.5 1.0 1.0 1.1 1.5 1.4 1.4 0.3 1.1 2.0 Consumer Price Index -0.1 0.0 0.1 0.4 1.1 1.1 1.3 1.7 1.5 1.6 0.1 1.3 2.3 Industrial Production 1 -1.9 -2.7 1.5 -3.3 -1.6 -1.2 1.8 2.5 1.9 2.9 0.3 -0.9 2.1
Corporate Profits Before Taxes 2 4.6 0.6 -5.1 -11.5 -4.3 -0.6 1.9 1.9 2.0 1.7 -3.1 -0.3 1.7
Trade Weighted Dollar Index 3 92.1 90.0 92.3 94.5 89.8 89.9 92.0 93.5 75.9 78.4 91.1 91.3 97.0
Unemployment Rate 5.6 5.4 5.2 5.0 4.9 4.8 4.8 4.7 7.4 6.2 5.3 4.8 4.5 Housing Starts 4 0.99 1.16 1.16 1.13 1.15 1.19 1.23 1.24 0.92 1.00 1.11 1.22 1.27
Quarter-End Interest Rates 5
Federal Funds Target Rate 0.25 0.25 0.25 0.50 0.50 0.50 0.50 0.75 0.25 0.25 0.27 0.56 1.00 Conventional Mortgage Rate 3.77 3.98 3.89 3.96 3.69 3.60 3.55 3.60 3.98 4.17 3.85 3.61 3.68 10 Year Note 1.94 2.35 2.06 2.27 1.78 1.49 1.50 1.57 2.35 2.54 2.14 1.59 1.69
Forecast as of: July 1, 2016
1 Compound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage Change
3 Federal Reserve Major Currency Index, 1973=100 - Quarter End 4 Millions of Units
5 Annual Numbers Represent Averages
2015 2016
Forecast Actual
Forecast Actual
Economics Group
U.S. Review
Wells Fargo Securities
U.S. Review
In the Eye of the Brexit Hurricane There Is Quiet
Following the United Kingdom’s (U.K.) unprecedented vote to leave the European Union (EU), market participants are still surveying the wreckage. Polls were neck and neck leading up to the vote, with markets leaning toward a Remain vote. With global financial markets not pricing in Brexit, markets experienced two frenetic selling sessions. The upheaval in the markets has largely calmed as investors have explored all possible dislocations and deduced that the most dramatic implications would be in the U.K. More importantly, the U.K. will not immediately lose access to the Single Market, with negotiations between the U.K. and EU lasting a minimum of two years.
The direct effects from the unexpected vote should be minimal on the U.S. economy, with the most noticeable weakness remaining in U.S. trade. However, one lingering effect is the rally in the bond market, with the yield on the U.S. 10-year Treasury bond falling below 1.5 percent by the end of the week, down from 1.75 percent on the day of U.K. referendum. Along with the spike in demand for safe-haven assets, the drop in bond yields may also reflect markets pricing in more accommodative monetary policy. Given heightened global and financial market uncertainty, the Fed will likely be on hold longer than originally anticipated. Fed funds futures markets have now taken a rate hike completely off the table in the coming meetings, with the probability of easing now increasing. We disagree with markets more pessimistic assessment of the U.S. economy, but we have changed our call on the Fed rate hike, and now expect just one increase in 2016 and two in 2017, down from our previous forecast of two and three, respectively (see Interest Rate Watch on page 6).
We also expect to see more capital inflows resulting from investors taking a flight to quality approach, which means we could see continued strength in the U.S. dollar. We suspect the Fed will be watching any further rise in the greenback closely as the increase could dampen inflation as import prices move lower. Over a longer period, the biggest risk to U.S. economic activity will be uncertainty, which could further erode capital investment, stall capital goods orders and hamper hiring.
That said, labor market conditions continue to point to an economy that still has room to grow. Indeed, the trend in initial jobless claims remains favorable even after two straight months of weaker-than-expected nonfarm payrolls and downward revisions. The four-week moving average remained at 276,000 in the week ending June 25, marking the longest run for the series below 300,000. Steady initial jobless claims and record high job openings suggest the April and May payroll print likely overstated the downshift in labor market conditions (middle chart). Previous cycles have shown that a decelerating trend in employment growth is typically corroborated by a sustained uptrend in initial jobless claims (middle chart).
Moreover, first quarter real domestic income (GDI) was revised higher in the third print, rising a solid 2.9 percent, and recently released consumer spending data show a sharp pick up in the second quarter, with the three-month annualized rate up 4.2 percent in May. We also continued to see a rebound in manufacturing activity with the ISM manufacturing index posting its fourth consecutive reading in expansion territory. Prices eased during the month, and employment and the forward-looking new orders component advanced.
Source: U.S. Dept. of Labor, Baker, Bloom, & Davis, ISM and Wells Fargo Securities
Wells Fargo Securities
0 50 100 150 200 250 300 0 50 100 150 200 250 300 1/16 2/16 3/16 4/16 5/16 6/16 7/16
U.S. Economic Policy Uncertainty Index
Composite Index, 7-Day Moving Average
EPU Index: Jun-29 @ 282.3
175 250 325 400 475 550 625 700 -800 -600 -400 -200 0 200 400 600 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Change in Private Nonfarm Payrolls vs. Initial Jobless Claims
Seasonally Adjusted, In Thousands Private Nonfarm Payrolls 3-MMA: May @ 107.3K (Left Axis) Initial Claims: Jun @ 266.8K (Inverted Right Axis)
30 35 40 45 50 55 60 65 30 35 40 45 50 55 60 65 90 92 94 96 98 00 02 04 06 08 10 12 14 16
ISM Manufacturing Composite Index
Diffusion Index
ISM Manufacturing Index: Jun @ 53.2 12-Month Moving Average: Jun @ 50.3
Economics Group
U.S. Outlook
Wells Fargo Securities
Factory Orders • Tuesday
New factory orders rose in line with consensus expectations in April, increasing 1.9 percent over the month. Orders and shipments of nondefense capital goods excluding aircraft, or core capital goods, were revised up by 0.6 percent and 0.4 percent, respectively. The upward revision to core capital goods shipments points to a mildly positive Q2 equipment spending number. On the other hand, while the revision makes the initially reported decline smaller, core capital goods orders still look weak.
The advanced report for durable goods, released last week, came in weaker than expected with durable goods orders falling 2.2 percent in May. Most concerning was an additional drop in core capital goods orders, which fell 0.7 percent, marking the third decline in four months. In light of the soft durable goods report, we expect factory orders dipped in May, registering a 0.8 percent decline over the month.
Previous: 1.9% Wells Fargo: -0.8%
Consensus: -0.8% (Month-over-Month)
ISM Non-Manufacturing • Wednesday
The Institute for Supply Management’s (ISM) non-manufacturing index fell to 52.9 in May, marking a two-year low. While the weakness in the U.S. economy has primarily been concentrated in the manufacturing sector, May’s report signaled slower momentum in the service sector. Nearly all of the index’s subcomponents moderated over the month, with employment, business activity, new orders and backlogs of orders each reporting declines.
While most measures remained in positive territory over the month, the index’s employment measure fell below the breakeven, coming in at 49.6. The sub-50 reading coincides with the slower pace of hiring indicated in the May employment report. While the ISM index can be volatile on a month-to-month basis, the pace of hiring has come down considerably. We look for the index to pick up in June, reaching a level of 53.4.
Previous: 52.9 Wells Fargo: 53.4
Consensus: 53.3
Employment • Friday
Nonfarm employment disappointed in May, as payrolls rose by just 38,000 and the prior two months of data were revised down. While a softer report was expected due to the Verizon strike, which kept roughly 35,000 telecommunications workers off the payrolls, the weakness extended beyond the information sector. All goods-producing employment sectors declined over the month and private services employment recorded its smallest gain in nearly four years. The unemployment rate fell to a cycle-low of 4.7 percent, but for unfavorable reasons, specifically the sharp drop in labor force participation. In light of last month’s surprisingly weak report, policymakers look ahead to June’s employment release to see whether the recent slowing in job growth is transitory. We expect job growth rebounded in June, with nonfarm payrolls rising by 162,000 and the unemployment rate holding steady at 4.7 percent.
Previous: 38,000 Wells Fargo: 162,000
Consensus: 180,000
Source: U.S. Dept. of Commerce, U.S. Dept. of Labor, Institute for Supply Management and Wells Fargo Securities
-40% -30% -20% -10% 0% 10% 20% 30% -40% -30% -20% -10% 0% 10% 20% 30% 98 00 02 04 06 08 10 12 14 16
Manufacturers' New Orders
Year-over-Year Percent Change
Manufacturers' New Orders: Apr @ -1.8%
30 35 40 45 50 55 60 65 30 35 40 45 50 55 60 65 04 05 06 07 08 09 10 11 12 13 14 15 16
ISM Employment Index
Weighted Average of Manuf. and Non-Manufacturing Employment Employment Weighted ISM Index: May @ 49.6
-1,200 -1,000 -800 -600 -400 -200 0 200 400 600 -1,200 -1,000 -800 -600 -400 -200 0 200 400 600 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
U.S. Nonfarm Employment Change
Change in Employment, In Thousands
Monthly Change: May @ 38K
Economics Group
Global Review
Wells Fargo Securities
Global Review
The Global Economy Regains Its Weak Footing
After last week’s surprising, and for the majority of analysts, shocking results from the U.K.’s referendum on its permanence in the European Union the global economy is trying to regain its footing again. Analysts are starting to put the Brexit result behind while concentrating on economic activity rather than on stock market performance.
At this level, the news is probably very similar to what was happening before Brexit. This week we had the opportunity to look at the Chinese official manufacturing PMI to see that not much is happening with manufacturing firms that produce for the domestic economy while the Caixin manufacturing index, which takes a look at those firms that are producing for exports dropped further below the 50 demarcation point. The official PMI for June stood at the demarcation line, 50.0 compared to a reading of 50.1 in the previous month while the Caixin index dropped further below 50 to 48.6 compared to a reading of 49.2 in May. Meanwhile, the Tankan large manufacturing index for Japan stayed unchanged in the second quarter compared to the first quarter while the manufacturing outlook index improved a bit, from 3 in the first quarter to 6 in the second quarter. At the same time, the Japanese consumer price index dropped a bit more than expected on a year earlier basis, printing -0.4 percent versus expectations of -0.5 percent.
In this hemisphere, the central bank of Mexico, surprising markets once again, decided to move further away from the U.S. Federal Reserve and increase its benchmark interest rate once again to take it to 4.25 percent from 3.75 percent, a 50 basis point move when markets were expecting 25 basis points. It is clear that the bank remains concerned with the effects of the increased volatility and the depreciation of the Mexican peso on inflation expectations. The Mexican currency was negatively affected by the Brexit vote last week. This further increase in interest rates by the Mexican central bank comes as the economy continues to show weakness and some large central banks across the global economy have kept interest rates steady while others are starting to consider relaxing monetary policy further.
In Brazil, industrial production was flat in May, printing 0.0 percent on a month-on-month basis and down 7.8 percent compared to May of last year. Both numbers were weaker than during April when industrial production increased and upwardly revised 0.2 percent from March while also declining and upwardly revised 6.9 percent compared to April of 2015. Both May numbers were in line with expectations and seem to convey that, at least for now, the rate of decline of economic activity has slowed down.
What is not clear still is the path forward even as several members of the temporary government in Brazil have said lately that they see the light at the end of the tunnel for economic activity. For now, it is clear that things are stabilizing but there is no indication that the economy is on a path to economic recovery.
Source: IHS Global Insight and Wells Fargo Securities
35 40 45 50 55 60 35 40 45 50 55 60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China Manufacturing PMI
Seasonally Adjusted
Chinese Manufacturing PMI: May @ 50.1
-70 -60 -50 -40 -30 -20 -10 0 10 20 30 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Japan Tankan Survey
Index Tankan Index: Q2 @ 6.0 -20% -15% -10% -5% 0% 5% 10% 15% 20% -20% -15% -10% -5% 0% 5% 10% 15% 20% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Brazilian Industrial Production Index
Year-over-Year Percent Change IPI: May @ -8.9%
Economics Group
Global Outlook
Wells Fargo Securities
RBA Meeting • Tuesday
The Reserve Bank of Australia (RBA) cut its cash rate in May for the first time in nearly 12 months citing weakening inflation trends, slower Chinese growth and soft commodity prices among reasons for the change, which prompted markets to price-in additional rate cuts as these dynamics showed no sign of immediate improvement. Then a better-than-expected Australian GDP for Q1 relieved some of the pressure on the RBA to cut rates again. While we do expect the RBA to remain on hold during its meeting on Tuesday, a pre-emptive rate cut to offset any weakness due to Brexit-induced financial market volatility cannot be ruled out. The August meeting is a more-likely time for a rate cut, because the RBA will have a fresh read on CPI. Although because of the lower price environment for many of Australia’s exported commodity goods, an unfavorable terms of trade dynamic could limit inflationary pressure.
Previous: 1.75% Wells Fargo: 1.75%
Consensus: 1.75%
U.K. Industrial Production • Thursday
Real GDP growth in the United Kingdom came in at a fairly modest 2.0 percent annualized rate in the first quarter. The service sector was a driver of growth during the period, but manufacturing output declined.Next week will offer a fresh read of how U.K. manufacturing fared in the second quarter when the industrial production (IP) report for May prints on Thursday. A case could be made that the British factory sector is at an inflection point. The U.K. manufacturing PMI went from 49.4 in April to 50.1 in May, thereby effectively crossing over the demarcation line between contraction and growth. After a big 2.0 percent surge in U.K. IP in April, some payback in May would not be completely surprising. Note: Since this is May data, this is “pre-Brexit” information.
Previous: 2.0%
Consensus: -1.0% (Month-over-Month)
Canadian Jobs Report • Friday
Monthly jobs figures in Canada are notoriously volatile as even a cursory glance at the adjacent chart makes clear. In the past eight months, Canadian jobs have increased four times and decreased four times.
In that context, it is not surprising that the forecasts for the May jobs report, which comes out next Friday, have clustered around zero with a consensus reading of 6,500.
Goods-producing sectors have led the declines over the past year as the energy-focused parts of Canada’s economy have suffered in the low oil price environment. That said, service sector jobs fell slightly in May, although even with that decline, the service sector has added more than 100,000 net new jobs in the past three months.
Previous: +13,800 Consensus: +6,500
Source: IHS Global Insight and Wells Fargo Securities
1% 2% 3% 4% 5% 6% 7% 8% 1% 2% 3% 4% 5% 6% 7% 8% 2000 2002 2004 2006 2008 2010 2012 2014 2016
RBA Cash Rate Target
Percent
Cash Rate: Jun @ 1.75%
-15% -12% -9% -6% -3% 0% 3% 6% -15% -12% -9% -6% -3% 0% 3% 6% 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
U.K. Industrial Production Index
Year-over-Year Percent Change
IPI: Apr @ 1.6%
3-M Moving Average: Apr @ 0.5%
-175 -150 -125 -100 -75 -50 -25 0 25 50 75 100 -175 -150 -125 -100 -75 -50 -25 0 25 50 75 100 2004 2006 2008 2010 2012 2014 2016
Canadian Employment
Month-over-Month Change in Employment, In Thousands
Change in Employment: May @ 13.8K 6-Month Moving Average: May @ 11.2K
Economics Group
Point of View
Wells Fargo Securities
6
Interest Rate Watch
Credit Market Insights
Fundamentals Limit any FOMC Move.
For the FOMC, the three fundamentals of growth, inflation and global developments will limit any action both this year and next.
Moderate Growth in the U.S., Uncertainty Abroad
We estimate second quarter GDP growth will bounce back at a 2.9 percent pace (top graph) but are more uncertain on growth for the remainder of the year. While the domestic consumer and housing sector will continue to drive growth, we expect net exports will subtract around half a percentage point from growth in the second half of the year. We are also watching for second round effects from Brexit as orders for capital goods may be weaker and hiring may slow a bit more than currently anticipated.
Inflation: A More Gradual Upswing Our expectation for the PCE deflator for inflation is at 1.5 percent for the fourth quarter of this year (middle graph) and this will limit any FOMC actions to just one rate increase in 2016. However, the anticipated hits to growth in economies abroad and the strength of the dollar may further moderate any upswing in the inflation data and thereby remove the incentive for any FOMC move this year. We also have taken off the table one fed funds rate increase in 2017 as we expect the FOMC will moderate their dot-plot estimates.
Global Developments: Any Guesses? Lower growth estimates, easier monetary policies and political uncertainties abroad are a prescription for very limited FOMC actions until the dust settles—and that may take some time given Brexit and the two-year negotiation window.
Moreover, we are only just now gathering information on first round effects of Brexit. For the second round, we will have to evaluate the possibility of a Scottish referendum and the impact on financial institutions of the exchange rate volatility and downgrade of economic estimates that may further raise the risk premium (bottom graph) ahead.
Student Loan Debt Weighs on Housing Market Growth
Consumer dynamics are generally moving in a positive direction this quarter. Personal income increased 0.2 percent for May and the Consumer Confidence index saw a 5.4 point increase for June, now at its highest since October 2015.
However, student loan debt remains a weak spot amid consumer growth. Overall student loan debt was up 6.1 percent in Q1 on a year-over-year basis, and is now 37 percent of non-mortgage debt outstanding. Even during the financial crisis, student loan debt hovered at only 20 to 25 percent of total debt outstanding. In fact, student loan debt is a major roadblock to becoming a homeowner. According to The National Association of Realtors and American Student Assistance June survey, 71 percent of non-homeowners cited outstanding student loans as the main factor preventing a home purchase. Student loan debt could be contributing to stress in the improving housing market. The latest Consumer Confidence index shows only 4.8 percent of consumers plan to buy a new home within six months, down from 5.9 percent in May. Student loans also account for the highest number of household debt delinquencies, with 11 percent of balances 90+ days past due in Q1. However, we believe low mortgage rates and recent income growth should reaffirm the potential to combat housing market barriers to entry, but student loans remain an area of vulnerability.
Source: Bloomberg LP, U.S. Dept. of Commerce and Wells Fargo Securities
-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 U.S. Real GDP
Bars = CAGR Line = Yr/Yr Percent Change
GDP - CAGR: Q1 @ 1.1%
GDP - Yr/Yr Percent Change: Q1 @ 2.1%
Forecast -2% -1% 0% 1% 2% 3% 4% 5% -2% -1% 0% 1% 2% 3% 4% 5% 2000 2002 2004 2006 2008 2010 2012 2014 2016
PCE Deflator & "Core" PCE Deflator
Line = Yr/Yr Percent Change
PCE Deflator - Yr/Yr Percent Change: Q1 @ 1.0% "Core" PCE Deflator - Yr/Yr Percent Change: Q1 @ 1.7%
Forecast 10 15 20 25 30 35 40 45 50 10 15 20 25 30 35 40 45 50
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16
UK 5-Year Sovereign CDS
Percent of Notional United Kingdom: Jul 01 @ 39%
Credit Market Data
Mortgage Rates Current Week Ago 4 Weeks Ago Year Ago
30-Yr Fixed 3.48% 3.56% 3.60% 4.08%
15-Yr Fixed 2.78% 2.83% 2.87% 3.24%
5/1 ARM 2.70% 2.74% 2.82% 2.99%
Bank Lending Current Assets
(Billions) 1-Week Change (SAAR) 4-Week Change (SAAR) Year-Ago Change
Commercial & Industrial $2,052.9 -10.81% 4.14% 9.56%
Revolving Home Equity $422.6 -5.25% -5.18% -5.22%
Residential Mortgages $1,691.0 12.31% -2.17% 5.20%
Commerical Real Estate $1,877.0 18.03% 11.49% 11.45%
Consumer $1,314.0 11.02% 9.10% 8.13% Source: Freddie Mac, Federal Reserve Board and Wells Fargo Securities
Economics Group
Topic of the Week
Wells Fargo Securities
7
Topic of the Week
U.K. Recession AheadWhen we made our most recent forecast for U.K. GDP growth in early June, we looked for continued expansion in the British economy. That forecast was predicated, however, on the assumption that the United Kingdom would remain a member of the European Union. As we wrote following the Brexit vote last week, “there seems to be significant downside risks now to our most recent forecast.” (See “Brexit – Now What?” which is posted on our website.) We have now revised our forecast and look for a modest recession in the United Kingdom (top chart). On a peak-to-trough basis, we look for real GDP to decline 1.3 percent.
In our view, most of the weakness in the economy will come through investment spending as businesses cut capex plans due to uncertainty over the economic relationship that the U.K. will ultimately have with the EU. There is already anecdotal evidence of businesses freezing expansion plans in the U.K. post-referendum. We expect that these cutbacks will continue for a few more quarters (bottom chart). Weakness in investment spending should lead to rising unemployment, which will eventually weigh on personal consumption expenditures. We also expect that destocking among businesses will weigh on GDP growth in coming quarters.
Net exports should lessen the overall blow to the economy. That is, weakness in domestic demand should cause real import growth to turn negative. (Imports reduce GDP, so falling imports actually boost real GDP growth, everything else equal.) The depreciation of the British pound—sterling is down about 8 percent on a trade-weighted basis since the referendum—should help export growth at the margin. As the destocking process comes to an end, overall GDP growth should turn positive again in mid-2017. That said, we now project that real GDP at the end of 2017 will be 2.4 percent below the level that we had forecasted only a month ago. For further reading see “U.K. Recession Post-Brexit Referendum?” which will be posted on our website.
Source: IHS Global Insight and Wells Fargo Securities
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-12% -9% -6% -3% 0% 3% 6% -12% -9% -6% -3% 0% 3% 6% 00 02 04 06 08 10 12 14 16
U.K. Real GDP
Bars = Compound Annual Rate Line = Yr/Yr % Change
Compound Annual Growth: Q1 @ 1.8% Year-over-Year Percent Change: Q1 @ 2.0%
Forecast -40% -30% -20% -10% 0% 10% 20% 30% -40% -30% -20% -10% 0% 10% 20% 30% 00 02 04 06 08 10 12 14 16
U.K. Real Investment Spending
Bars = Compound Annual Rate Line = Yr/Yr % Change
Gross Fixed Capital Formation: Q1 @ -0.2% Gross Fixed Capital Formation: Q1 @ 0.7%
Economics Group
Market Data
Wells Fargo Securities
8
Market Data
Mid-Day Friday
Next Week’s Economic Calendar
Source: Bloomberg LP and Wells Fargo Securities
U.S. Interest Rates Foreign Interest Rates
Friday 1 Week 1 Year Friday 1 Week 1 Year
7/1/2016 Ago Ago 7/1/2016 Ago Ago
3-Month T-Bill 0.25 0.25 0.02 3-Month Euro LIBOR -0.29 -0.29 -0.01
3-Month LIBOR 0.65 0.64 0.28 3-Month Sterling LIBOR 0.56 0.59 0.58
1-Year Treasury 0.53 0.66 0.25 3-Month Canada Banker's Acceptance 0.88 0.89 0.99
2-Year Treasury 0.59 0.63 0.69 3-Month Yen LIBOR -0.02 -0.03 0.10
5-Year Treasury 1.00 1.07 1.71 2-Year German -0.65 -0.64 -0.24
10-Year Treasury 1.45 1.56 2.42 2-Year U.K. 0.16 0.27 0.61
30-Year Treasury 2.25 2.41 3.20 2-Year Canadian 0.52 0.54 0.48
Bond Buyer Index 3.18 3.18 3.80 2-Year Japanese -0.33 -0.27 0.00
10-Year German -0.13 -0.05 0.81
Foreign Exchange Rates 10-Year U.K. 0.86 1.09 2.11
Friday 1 Week 1 Year 10-Year Canadian 1.06 1.16 1.69
7/1/2016 Ago Ago 10-Year Japanese -0.25 -0.17 0.48
Euro ($/€) 1.114 1.112 1.105
British Pound ($/₤) 1.327 1.368 1.562 Commodity Prices
British Pound (₤/€) 0.839 0.813 0.708 Friday 1 Week 1 Year
Japanese Yen (¥/$) 102.590 102.220 123.170 7/1/2016 Ago Ago
Canadian Dollar (C$/$) 1.291 1.300 1.259 WTI Crude ($/Barrel) 48.34 47.64 56.96
Swiss Franc (CHF/$) 0.973 0.972 0.948 Gold ($/Ounce) 1336.45 1315.45 1168.83
Australian Dollar (US$/A$) 0.748 0.747 0.765 Hot-Rolled Steel ($/S.Ton) 618.00 628.00 465.00
Mexican Peso (MXN/$) 18.387 18.928 15.778 Copper (¢/Pound) 222.25 211.05 263.55
Chinese Yuan (CNY/$) 6.660 6.622 6.202 Soybeans ($/Bushel) 11.68 11.17 10.51
Indian Rupee (INR/$) 67.323 67.969 63.605 Natural Gas ($/MMBTU) 2.95 2.66 2.78
Brazilian Real (BRL/$) 3.242 3.377 3.149 Nickel ($/Metric Ton) 9,401 9,179 11,933
U.S. Dollar Index 95.610 95.448 96.310 CRB Spot Inds. 451.31 452.68 463.31
Source: Bloomberg LP and Wells Fargo Securities
Monday Tuesday Wednesday Thursday Friday
4 5 6 7 8
Fa ct ory Orders T ra de Ba la n ce Non fa rm Pa y rolls
A pr il 1 .9 % A pr il -$3 7 .4 B Ma y 3 8 K
Ma y -0.8 % (W) Ma y -$4 0.2 B (W) Ju n e 1 6 2 K (W)
ISM Non -Ma n u fa ct u rin g Un em ploy m en t Ra t e
Ma y 5 2 .9 Ma y 4 .7 %
Ju n e 5 3 .4 (W) Ju n e 4 .7 % (W)
Ch in a A u st ra lia Un it ed Kin gdom Ca n a da
Ca ixin Ch in a PMI RBA Ca sh Ra t e In du st ria l Produ ct ion Em ploy m en t Ch a n ge
Pr ev iou s (Ma y ) 5 0.5 Pr ev iou s (Ju n e) 1 .7 5 % Pr ev iou s (A pr il) 2 .0% Pr ev iou s (Ma y ) +1 3 .8 K
Note: (W) = Wells Fa r g o Estim a te (C) = Con sen su s Estim a te
U .S . D a ta G lo b a l D a ta
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg Global Head of Research, Economics & Strategy
(704) 410-1801 (212) 214-5070
diane.schumaker@wellsfargo.com
John E. Silvia, Ph.D. Chief Economist (704) 410-3275 john.silvia@wellsfargo.com Mark Vitner Senior Economist (704) 410-3277 mark.vitner@wellsfargo.com Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 jay.bryson@wellsfargo.com Sam Bullard Senior Economist (704) 410-3280 sam.bullard@wellsfargo.com
Nick Bennenbroek Currency Strategist (212) 214-5636 nicholas.bennenbroek@wellsfargo.com Anika R. Khan Senior Economist (704) 410-3271 anika.khan@wellsfargo.com
Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 eugenio.j.aleman@wellsfargo.com
Azhar Iqbal Econometrician (704) 410-3270 azhar.iqbal@wellsfargo.com
Tim Quinlan Senior Economist (704) 410-3283 tim.quinlan@wellsfargo.com Eric Viloria, CFA Currency Strategist (212) 214-5637 eric.viloria@wellsfargo.com
Sarah House Economist (704) 410-3282 sarah.house@wellsfargo.com
Michael A. Brown Economist (704) 410-3278 michael.a.brown@wellsfargo.com
Jamie Feik Economist (704) 410-3291 jamie.feik@wellsfargo.com
Erik Nelson Currency Analyst (212) 214-5652 erik.f.nelson@wellsfargo.com Misa Batcheller Economic Analyst (704) 410-3060 misa.n.batcheller@wellsfargo.com Michael Pugliese Economic Analyst (704) 410-3156 michael.d.pugliese@wellsfargo.com Julianne Causey Economic Analyst (704) 410-3281 julianne.causey@wellsfargo.com Donna LaFleur Executive Assistant (704) 410-3279 donna.lafleur@wellsfargo.com Dawne Howes Administrative Assistant (704) 410-3272 dawne.howes@wellsfargo.com
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2016 Wells Fargo Securities, LLC.
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