CalPERS Trust Level Review€¦ · capacity but new plant build may be a future story. To date markets have blown through geopolitical events = complacency. - Global trade and PMIs

Item 6b, Attachment 1, Page 1 of 35

CalPERS Trust Level Review Economic and Market Overview

Period Ending December 31, 2017

Ted Eliopoulos, Chief Investment Officer

Matt Flynn, Interim Chief Operating Investment Officer

Eric Baggesen, Managing Investment Director

John Rothfield, Investment Director

Investment Committee

February 12, 2018


Trending …

Positive Same Trend Negative

- (Modest) US GDP growth acceleration - US leverage - Tight labor

2.5% during 2017 vs 1.8% in 2016 and 2.0% in 2016 8 1/2 years into the expansion, non financial debt is

stil l exactly 250%/GDPLabor market indicators show that there are not many

healthy, skil led and short term unemployed left.

- Capex … actual and intentions - US housing - Low personal savings rate

Business investment has accelerated and intentions

suggest some forward momentum.

More gradual cycle than past ones - erosion of

affordability but stil l elevated plans to buy.At < 2.4%, is as low as the late 00s, at a time when

valuations are high.

- Hiring and comp intentions - External imbalances - Monetary accommodation unwind

Most surveys show very strong plans to hire and to

pay higher comp.

US deficit (2+%/GDP faces) surpluses in Japan (4%+),

Euro Area (3%+), and China (1%+)QE unwind might be 'conditional ', but we don’t know if

it can easily be turned back on.

- US corporate earnings and sales - Chinese growth - $ policy dilution and wider trade gap

Very strong 'second wind' for US corporate sector

starting mid 2017.

2017 quarters ran 6.9, 6.9,6.8, 6.8 Tariffs and trade deals don’t address the savings

shortfall that requires US' reliance on foreign capital

- Mining investment - What tax reform can achieve

As energy prices rebounded, mining investment added

0.3% to GDP during 2017 vs -0.1% during 2016GOP policies may not deliver what's priced into the

stock market/ financial conditions.

-Manufacturing - Geolopolitical

So far manufacturers have increased use of existing

capacity but new plant build may be a future story.To date markets have blown through geopolitical

events = complacency.

- Global trade and PMIs

Strong upswing since Spring 2016 and now IMF has

carried it through its '18 and '19 world projections.


US business cycle – most indicators still mid to late cycle

Labor Market Early Late %

Want A Job per Job Offer 99%

Unemployment Rate 95%

Jobs Growth 12mo 42%

KC Fed Labor Market Conditions 6%

Emp/Pop ex aging 70%

Activi ty Early Late %

National Activi ty Index 23%

Private Savings Ratio 89%

Consumer confidence 78%

Real Personal Disp. Income 42%

10yr UST vs 3mo LIBOR 56%

Quarterly Early Late %

Profi t share 19%

Current Account/GDP 35%

Leverage YoY 12%

Net Worth/DI 100%

Hous ing affordabi l i ty 52%

What to watch:

Labor Force Participation

Productivity


Labor market indicators are mostly later cycle

8

9

10

11

12

13

14

94 96 98 00 02 04 06 08 10 12 14 16

US "Non-Employment Index"

U-6 rate plus persons who do not want a job but are assessed a weighted probablity that they will transition back into labor market, plus finding full time work for all those want it but currently can only get part time

Few areas still have upside in the jobs market … One measure of how much is left in the labor

outside of wages market.


Supportive global

48

49

50

51

52

53

54

55

110

112

114

116

118

120

122

124

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

World Trade and Activity

World Trade Monitor, lhs

Global PMI, rhs

-250

-200

-150

-100

-50

0

50

100

150

M-10 M-11 M-12 M-13 M-14 M-15 M-16 M-17

China: Net Financial Outflow by Qtr

$ bn portfolio + other + E&O

3Q17

Momentum sustained since Spring 2016 Financial leakages from China have stalled


Valuations (high) and leverage (steady)

4.2

4.7

5.2

5.7

6.2

6.7

7.2

Sep-81 Sep-89 Sep-97 Sep-05 Sep-13

Household Net Worth As Multiple of Disp. Income

6.13x (1Q00)

6.55(4Q06)

6.73(3Q17)

7(now est.)

120%

140%

160%

180%

200%

220%

240%

260%

81 85 89 93 97 01 05 09 13 17

All Nonfinancial Debt to GDP

grey areas recessions

7 1/2 yrs

10 yrs

6 yrs

8yrs

There are some factors justifying higher valuations Leverage is unchanged as a multiple of GDP since

this expansion began


Tax reform: Will ‘success’ align with markets? 2

.2

1.3

0.4

-0.6

12

.7

7.9

2.9

2.5

1.4

0.5

-0.6

19

.1

17

.8

-7.6-10

-5

0

5

10

15

20

25

GDP Jobs Labor Force u-rate S&P500 CONCONF US dollar

Yearly Change in Certain Aggregates

First 7 1/2 years ofExpansion

Subsequent year

yearly growth

Markets have moved ahead of the economic

outcomes, yet …

- Corporate behavior typically responds to

capacity usage and sales, rather than tax

changes.

- Personal income tax cuts would be more

effective if targeted to households with

higher consumption propensity.

• Worry about distributional impacts

b/n States too;

• Debated impact of past tax changes

(60s, 80s, 90s, 00s);

• Less impactful so far into an

economic expansion.

See ‘Special Topics’ section


Tax Reform: Monetary policy may dampen stimulatory effects

5

10

15

20

25

30

35

-1000

-500

0

500

1000

1500

2000

2500

09 10 11 12 13 14 15 16 17 18 19

G4 QE With Assumed Tapers

BoE ECB BoJ Fed Total

VIX, rhs

14

15

16

17

18

19

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

Household Financial Obligations Ratio

%

estimate of debt payments, insurance, property tax and auto lease payments- as % of disposable personal income

… as interest rates rise


Scenarios

DOWNSIDE (30%) CENTRAL (45%) UPSIDE (25%)

"Valuation and pol icy ri sks" "Run Along At Growth Cei l ing" "Pos i tive Synchronici ty"

Pol icy mistakes and vol spike during

monetary accommodation unwinds .

Secular factors continue, and there is a

low tax package impact on labour force

and productivi ty.

US reforms (surpris ingly) unlock more

productivi ty, labor force, hh formation.

Late cycle US s timulus increases

inflation, rates and debt servicing.

Growth cei l ing means winners and

losers .

Global growth acceleration proceeds in

spi te of s tronger currencies .

Risk that 'vi rtuous ' cycle of ba lance

sheet repair and spending unwinds .

Potentia l for some improvement in Iow

end household formation.

Global ly, infrastructure accelerates ,

tech continues to grow quickly.

US pivot to protectionism threatens

global upswing and defici t financing.

Inflation tepid in spi te of late cycle

labor market.

Recent s igns of bottoming in emerging

markets morph into a vi rtuous cycle.

Wel l s ignaled (and flexible) removal of

s timulus here and abroad.


Impact of US Tax Reform:

Advertised benefits not guaranteed


US corporate tax – incremental investment and hiring determined by the

effective rate

Source: Tax Foundation “Corporate Income Tax Rates around the World, September

2017

US 39.1 Argentina 37.3 Argentina 22.6

Japan 37.0 Indones ia 36.4 US 18.6

Argentina 35.0 US 29.0 Japan 18.0

S.Africa 34.6 Japan 27.9 Brazi l 17.0

Brazi l 34.0 Ita ly 26.8 UK 15.7

India 32.5 India 25.6 Germany 15.5

Ita ly 31.4 S.Africa 23.5 India 15.0

Germany 30.2 Brazi l 22.3 Mexico 11.9

Austra l ia 30.0 Russ ia 21.3 Indones ia 11.8

Mexico 30.0 S.Korea 20.4 France 11.2

France 29.7 Mexico 20.3 Austra l ia 10.4

Canada 26.1 France 20.0 China 10.0

China 25.0 Turkey 19.5 Canada 8.5

Indones ia 25.0 China 19.1 Saudi 8.4

S.Korea 24.2 Austra l ia 17.0 S.Africa 6.2

UK 24.0 Canada 16.2 Turkey 5.1

Russ ia 20.0 Germany 14.5 Russ ia 4.4

Saudi 20.0 UK 10.1 S.Korea 4.1

Turkey 20.0 Ita ly -23.5

Top Statutory Average Effective

Corporate tax rates in G20 Countries

Source: CBO “International Comparisons of Corporate Income Tax Rates”, March

2017


US corporate tax – macro already favorable for hiring and investment

2%

3%

4%

5%

6%

7%

-2%

0%

2%

4%

6%

8%

10%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17E

S&P500 Sales

SP500

SP500 ex fins andenergy, rhs

2nd wind

-50

-40

-30

-20

-10

0

10

20

30

40

50

-25

0

25

50

99 01 03 05 07 09 11 13 15 17

Intended Capex vs Actual Capex

Intended capex, lhs

Equipment Investmentin Real GDP, saar, RHS

0

100

200

300

400

500

600

700

800

900

1000

M-98 M-00 M-02 M-04 M-06 M-08 M-10 M-12 M-14 M-16

US Corporates' Undistributed Profits

$ bn after tax and dividends


US personal income tax – no agreement on counterfactuals

20

30

40

50

60

70

80

90

100

60 65 70 75 80 85 90 95 00 05 10 15

US Top Marginal Income Tax Rate

JFK & LBJ

Reagan 1

Reagan 2

Clinton

BushTrump

Obama

0

1

2

3

4

5

6

7

8

LBJ Reagan 1 Reagan 2 Clinton(hike)

Bush 1 Bush 2 Obama(hike)

Trump

US GDP Growth In and Out of Personal Income Tax Events

Prior 2

Next 2

?


US personal income tax – factors that reduce impact

-20

0

20

40

60

80

100

120

1401

3

5

7

9

11

06 07 08 09 10 11 12 13 14 15 16 17

US Personal Savings Ratio vs Confidence

Savings Ratio Consumer Confidence rhs, reversed

% of disposable income

-10

0

10

20

30

40

50

60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Consumer Confidence by AgeUnder 35s less Over 55s

younger more confident

older more confident

US election

Savings ratio is already low It’s older (and wealthier) persons are already feeling

most confident


Households: Inequality constraints have slowed recovery

“Deterioration in the ability of households to borrow appears to not have recovered as of 2012, thus possibly contributing to the slow recovery that we have observed.”

Source: Chicago Fed Letter: “Inequality and recessions“, January 2018


Households: Skew toward wealthier families still growing

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2004 2007 2010 2013 2016

Cumulative Change in Mean Net Worth

US households by income percentile, adjusted for inflation

90-100

80-90

<20

60-8020-4040-60

Source: Fed Triennial Survey of Consumer Finances, 2016

-20%

-10%

0%

10%

20%

30%

40%

2004 2007 2010 2013 2016

Cumulative Change in Mean Income

US households by income percentile, adjusted for inflation

90-100

80-90

<20

60-8040-6020-40

Source: Fed Triennial Survey of Consumer Finances, 20164.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1.6

1.7

1.8

1.9

2.0

2001 2004 2007 2010 2013 2016

US SCF: Skew toward wealthier families still growing

Mean to medianincome, lhs

mean to mediannet worth, rhs

Source: Fed Triennial Survey of Consumer Finances, 2016

52%

53%

54%

55%

56%

57%

58%

80 83 86 89 92 95 98 01 04 07 10 13 16

US: Employee Compensation as GDP Share

grey areas are recessions

Employee Comp Share of GDP near lows.

Relative gains by high end cohorts continued through 2016 survey


Appendix:

Additional Charts


US activity has picked up from the wobbles of ‘14-’16

-10

-8

-6

-4

-2

0

2

4

6

8

01 03 05 07 09 11 13 15 17

US Real GDP Growth

% saar expansion avg= 2.2%

expansion avg= 2.8%

-8

-6

-4

-2

0

2

4

6

06 07 08 09 10 11 12 13 14 15 16 17

US Final Demand

6mo saar

YoY

%


For jobs market, sourcing workers is an issue …

57

58

59

60

61

62

63

64

65

66

90 92 94 96 98 00 02 04 06 08 10 12 14 16

US Employed to Population

actual

without aging

%

69

71

73

75

77

79

87

88

89

90

91

92

93

94

95

96

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Labor Force Participation Rates - 25-34 year olds

men, lhs women, rhs

1

2

3

4

5

6

7

8

9

10

01 03 05 07 09 11 13 15 17

US: Available Workers Per Job Offer



… more so with the requisite skills

0

2000

4000

6000

8000

10000

12000

97 99 01 03 05 07 09 11 13 15 17

US Unemployed by Duration of Search

27 weeks and over

less than 27 weeks

000s

1.50

2.00

2.50

3.00

3.50

4.00

4.50

3.0 5.0 7.0 9.0 11.0

job

op

enin

gs p

er e

mp

loye

dunemployment rate

Beveridge Curve - US

Nov'17

last cycle

this cycle

Savings ratio is already low In last cycle, this level of openings would have

resulted in much lower u-rate already


Finding suitable labor is the key issue

for small businesses

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

04 05 06 07 08 09 10 11 12 13 14 15 16 17

US Small Businesses: Loan Availability

000s

Loan availability is fine … good worker availability is

not.

0

5

10

15

20

25

30

35

40

-5

0

5

10

15

20

25

30

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

US Small Business Survey

Plans to raise comp, lhs

Vacancies hard to fill, rhs

20

25

30

35

40

45

50

55

60

0

4

8

12

16

20

24

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

US Small Businesses: Labor Quality a Problem

Quality the main problem, lhs

% not finding qualified workers, rhs


Consumer – very strong finish to last year

Dec qtr

Dec'16 Dec'17 (saar)

Goods 3.7% 5.0% 10.3%

Autos 9.7% 2.4% 18.2%

Household 2.2% 6.9% 11.1%

TVs etc -2.1% 3.6% 7.2%

Computers etc 6.3% 10.4% 14.5%

Sporting -5.0% 4.8% 3.1%

Fuel 9.5% 6.7% 50.8%

Groceries 1.6% 4.5% 7.5%

Services 5.1% 4.4% 4.9%

Healthcare 5.7% 4.0% 5.1%

Hous ing 5.0% 4.6% 4.6%

Rest, hotels 2.4% 4.2% 4.1%

Financia l 6.7% 10.0% 10.4%

Cel l phone 2.8% 0.3% 5.4%

Air travel 5.0% -0.8% -2.2%

PCE 4.7% 4.6% 6.7%

Consumer Spending, Yr to …


Business capex - improving

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

40

60

80

100

120

140

Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

US Real Private Capex - Mining Investment

GDP impact %, RHS Level $bn saar

$bn saar

-0.3%

-0.2%

-0.2%

-0.1%

-0.1%

0.0%

0.1%

0.1%

0.2%

0.2%

20

30

40

50

60

70

80

Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

US Real Capex - Manufacturing Structures

GDP impact %, RHS Level $bn saar

$bn saar

Mining

investment

swing added

0.3% to US

2017 GDP, vs -

0.1% in 2016

To date, upswing

in manufacturing

is in capacity

utilization, not

new capacity

50

55

60

65

70

75

10 11 12 13 14 15 16 17

Core Capital Goods Shipments and Orders

Orders Shipments

$bn

Steady upswing predated GOP ascension


Housing – affordability normalizes

but plans to buy rocketing

0

5

10

15

20

25

30

35

40

45

35

45

55

65

75

85

95

Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16

NAHB Housing Opportunity Index

National, lhs

San Francisco, rhs

Share of homes sold that were affordable to median income family

1

2

3

4

5

6

7

8

5

15

25

35

45

55

65

75

85

95

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

US NAHB Housing Confidence vs Consumer Plans to Buy

NAHB FutureSales, lhsPlans to Buy,lead 1yr rhs

Source: NAR

1.5

2.5

3.5

4.5

5.5

6.5

7.5

90

110

130

150

170

190

210

230

250

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

US Housing Affordability and Plans to Buy

Affordability, lead threeyears, lhs

plan to buy, rhs

Source: NAR


Housing – further upside despite

demographic headwinds

-4

0

4

8

12

16

94 96 98 00 02 04 06 08 10 12 14 16 18 20

Renters to Owners and Back Again

Owner households

Renter households

1994-2006

2006-current

millions, cum. change

-1

0

1

2

3

4

5

6

7

0

10

20

30

40

50

60

70

80

90

100

90 92 94 96 98 00 02 04 06 08 10 12 14 16

US Unfurnished Apartment Completions

completions, lhs rent inflation, rhs

000s % yoy

Owner

households

only starting to

awaken

Strong

completions

responding to fast

rents growth -0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

US Household Formation

yoy%

Overall household formation growth has been low during this

expansion


Foreign Trade – a risk

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

91 93 95 97 99 01 03 05 07 09 11 13 15 17

US: Real Net Exports

$bn

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

90 93 96 99 02 05 08 11 14 17

Current Account vs Saving "Shortfall"

Saving less Investment

Current Account

%/GDP

In underlying

terms the US

trade gap is

getting wider …

and a drag on

growth

Ultimately it

reflects the

savings-

investment gap

nationally

$bn Total Canada Mexico Japan Korea China Germany UK Other EU OPEC

2001 -362 -48 -26 -55 -12 -81 -31 2 -29 -34

2002 -419 -44 -33 -57 -12 -102 -40 -2 -32 -31

2003 -494 -47 -37 -54 -12 -123 -43 -4 -39 -50

2004 -610 -61 -42 -61 -18 -162 -50 -1 -45 -70

2005 -714 -72 -45 -67 -13 -201 -54 -2 -52 -90

2006 -762 -61 -59 -76 -10 -234 -55 2 -52 -100

2007 -705 -53 -69 -72 -9 -257 -51 11 -40 -119

2008 -709 -61 -59 -60 -7 -263 -50 9 -18 -169

2009 -384 -3 -42 -28 -5 -220 -32 10 -1 -52

2010 -495 -6 -58 -43 -4 -261 -38 9 -16 -86

2011 -549 -11 -57 -45 -5 -279 -53 15 -20 -113

2012 -537 -5 -54 -58 -8 -295 -66 12 -23 -83

2013 -462 -4 -47 -59 -9 -295 -73 5 -16 -49

2014 -490 -11 -51 -54 -15 -315 -80 11 -25 -29

2015 -500 4 -58 -55 -19 -334 -77 12 -37 30

2016 -505 8 -63 -57 -18 -309 -67 15 -41 18

2017* -552 3 -70 -56 -11 -331 -69 14 -44 9

US Balance of Trade in Goods and Services with:

* three quarters at an annual rate

Trade deals or tariffs unlikely to narrow the US trade

deficit


Global - IMF raises World outlook Latest revision (1/18 vs 10/17)

reflects increased global growth

momentum and the expected

impact of the recently approved

U.S. tax policy changes.

“On the downside (risks), rich

asset valuations and very

compressed term premiums raise

the possibility of a financial

market correction, which could

dampen growth and confidence

… a possible trigger is a faster-

than-expected increase in

advanced economy core inflation.


… but there are risks

Falls in volatility and increases in global economic and asset price Historically, increases in yields impact other asset classes if they move movements potentially create risk too far, too fast


China – stable for now

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

China Nominal GDP Growth

'02-'11

'12 - now

0

2

4

6

8

10

12

14

16

1500

2000

2500

3000

3500

4000

4500

5000

5500

11 12 13 14 15 16 17 18

China Industrial Indicators

Rebar steel price

Li Keqiang Index, rhs

%YoY

49

50

51

52

53

54

55

6

7

8

9

10

11

12

13

10 11 12 13 14 15 16 17

China Real GDP vs PMI

Real GDP, lhs

PMI, rhs

% YoY

Successful soft landing Real GDP stable, PMI stronger Base effects have slowed industrial growth

-2

0

2

4

6

8

10

12

14

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

China Current Account/GDP

-10

-8

-6

-4

-2

0

2

4

6

8

10

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

11 12 13 14 15 16 17

Chinese Core Inflation

CPI - Non Food, lhs

PPI - manufacturing, rhs

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

China FX Reserves

through December

$trn

Jan'17

Higher inflation has produced some External surplus back to pre super-cycle Reserves rebuild helped by softer dollar

tightening rate


Japan – central bank will keep policy easy into 2019-20

-3

-2

-1

0

1

2

3

4

5

10 11 12 13 14 15 16

Japan: Real GDP

% yoy

Consumer tax hiked

Global trough

Abe elected

Tsunami

QQE

Abe average

-3%

-2%

-1%

0%

1%

2%

3%

Jan-92 Jan-97 Jan-02 Jan-07 Jan-12 Jan-17

Japan: Employment Growth

Male Female

Abenomics

109

111

113

115

117

119

95

99

103

107

111

115

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Japan Cycle Indicators

Leading Coincident

GDP growth has risen above potential Leading indicators have improved Strong growth in female participation/ jobs

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00

Toky

o C

ore

CP

I, y

oy

unemployment rate, %

Japan - U-Rate vs Core Inflation (Since 1993)

BoJ starts QE(Apr 2013)

Now

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

10 11 12 13 14 15 16 17 18

Tokyo CPI - Core and Headline

ex fresh food and energy Total CPI

-1.0

-0.5

0.0

0.5

1.0

99

101

103

105

107

12 13 14 15 16 17

Japan : Activity vs Inflation

All Industry Activity, lhs

Core inflation, rhs

Inflation response has to date been tepid … although headline boosted buy fresh food Core rate unlikely to approach 2%


Euro Area - growth momentum continues

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Q4 2012 Q2 2014 Q4 2015 Q2 2017

Revisions to EU GDP

Original release Revised vintage

qpc

70

80

90

100

110

120

130

140

2000Q1 2002Q3 2005Q1 2007Q3 2010Q1 2012Q3 2015Q1 2017Q3

Euro area GDP

Core (Germany, France, Netherlands)

Weak (Greece, Italy)

Periphery (Portugal, Spain)

Remainder

Real € bn, indexed to 100 as at 2009Q2

Growth is

no longer a

peripheries

story

-5

0

5

10

15

20

25

30

35

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Labour as a limiting factor

EU Services EU Industry

Germany Services Germany Industry

Net balance, s.a.

France in

2017 and

now

Germany is

the next

economy

gaining

speed

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

EU MFI Statistics

MFI loans to households consumer credit

MFI Loans to households

MFI Loans to non-finc corps adjusted for sales and secutizations

annual growth %

MFI = Main Financing Institutions

NFC loan Growth growth is keeps key for being ECB revised up


Euro Area – risks remain

Spain

• Pro-secessionists won with a slim majority. Catalan Parliament proposes

Puigdemont as Catalan President.

• Puigdemont is in exile in Belgium;

• Any candidate is required to physically and personally address the

Parliament;

• The Spanish central government has indicated immediate incarceration

upon his return

• Near term mild underperformance due to headline risk.

Italy

• Election date finalized: March 4

• Untested new electoral system

• Current polls suggest it will be a tight race between M5S and center-right

coalition;

• A center-right win will smooth out some extremism but unlikely to take any

necessary reforms and may be more fiscally liberal.

• Risk to Italy – yield underperformance.

Germany coalition government negotiations

• Formal talks are underway between CDU and SPD

• Little risk as party differences are not substantial from a markets’ perspective • Current government remains in place until a new one is appointed

• Until (or if) new elections are called, risk to market is low.

0.00

0.50

1.00

1.50

2.00

2.50

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Italian and Spanish Spreads

Italy Spain

Dec. 4 Referendum

Catalonia referendum

%


UK - doing better than expected

-15

-10

-5

0

5

10

30

35

40

45

50

55

60

65

2002 2005 2008 2011 2014 2017

UK Manufacturing Production and PMI

PMI adv 3 months

Production yoy (RHS)

index adv 3 yoy

-10

-5

0

5

10

15

20

25

30

1993 1996 1999 2002 2005 2008 2011 2014 2017

apcConsumer credit

Secured

Unsecured, ex credit card

Credit card

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.02

3

4

5

6

7

8

9

10

11

1991 1996 2001 2006 2011 2016

UK Labour Market

Unemployment Rate (ILO)

Natural rate of unemployment

Labor market recruitment difficulties, reversed (RHS)

%index, reversed

Very tight Credit labor strongest in market a decade

-10

-8

-6

-4

-2

0

2

4

6

8

10

-80

-60

-40

-20

0

20

40

60

80

1995 1998 2001 2004 2007 2010 2013 2016

UK spending indicator and volume growth

CBI 6month smoothed

Retail sales, real aapc

Retail volumesCBI yoy

Spending is Continued slowing but growth, remains supported stronger by long than Brexit expected transition by Bank of period and England weaker

currency


UK Brexit – shaping up something similar to Norwegian model

Little time to negotiation a

trade deal.

EU putting on pressure to put

current agreement s (non-

trade) into UK legislation.

The end position is looking clearer if negotiations continue – Norwegian-type model

• UK agreed no physical border within Ireland …. Implies no border between mainland Ireland (EU) and the UK;

• UK wants full access to Single market but control over immigration;

• EU wants to retain freedoms for citizens.


US dollar – no guarantee of strength

-15%

-12%

-9%

-6%

-3%

0%

3%

60

70

80

90

100

110

120

92 95 98 01 04 07 10 13 16 19

US Dollar vs US Twin Balances

USTW$, lhs

Twin Deficits, lead 6qtrs, rhs

60

70

80

90

100

110

120

130

140

150

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

USTW$


US deficits can be difficult to fund during an … especially if twin deficits are rising expansion

Documents

CalPERS Trust Level Review€¦ · capacity but new plant build may be a future story. To date markets have blown through geopolitical events = complacency. - Global trade and PMIs