Interest Rates – from 3000 BC

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Interest Rates – from 3000 BC

Source: Business Insider

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Yield Curve 101

❖ Fed Funds – 2.40% (2.25%-2.50%)

❖ +75 bps

❖ =3.15% 2-year note yield (2.52%)

❖ +100 bps

❖ =4.15% 10-year note yield (2.66%)

❖ +50 bps

❖ =4.40% 30-year bond yield (3.00%)

❖ Yield Curve is Flat

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Treasury Yield Curve-2018-2019

Source: Bloomberg

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Treasury Yield Curve 2018-2019

Source: Bloomberg

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U.S. vs. German Yield Curves

Source: Bloomberg

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Source: Walt Handelsman - Newsday

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Economic Growth – 2004-2018

Source: BEA & Bloomberg

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Economic Growth – 1947-2018


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Key to Economy – Innovative New Jobs

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Beneficiaries of Economic Innovation

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Measures of Unemployment

Source: Bureau of Labor Statistics

•U-3: Total unemployed, as a percent of the

civilian labor force (this is the definition used for

the official unemployment rate).

•U-6: Total unemployed, plus all marginally

attached workers, plus total employed part time

for economic reasons, as a percent of the civilian

labor force plus all marginally attached workers.

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U.S. Unemployment Rate U-3

Source: BLS and Bloomberg

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U.S. Unemployment Rate U-6


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U.S. Non-farm Payrolls (2009-Present)


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U.S. Non-farm Payrolls (1939-Present)


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Weekly Initial Jobless Claims(2009-Present)

Source: DOL and Bloomberg

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Weekly Initial Jobless Claims(1967-Present)

Source: DOL and Bloomberg

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German Inflation – 1918-1923


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Wages vs Inflation (PCE Core YoY) – 2007-2019

Source: BEA, BLS & Bloomberg

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Inflation CPI (YoY) – 1914-2019


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Inflation (PCE Core YoY) – 1960-2018


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Average Hourly Earnings (YoY) – 2008-2019

Source: BLS & Bloomberg

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Locations of the Federal Reserve Banks

Source: The Federal Reserve

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Fed Has a Dual Mandate

❖Maximize Employment

❖ Prefer to grow GDP in a 2.5%-to-3.5% range

❖ 2018

❖ Q1-2.2% /Q2-4.2% /Q3-3.4% /Q4-3.1% (f)

❖ 2019 (f)

❖ Q1-3.0% /Q2-2.6% /Q3-2.3% /Q4-2.2%

❖ Q4/Q1 Forecasts:

❖ Atlanta Fed – 1.5%

❖ NY Fed – 2.23%/1.08%

❖ Stabilize Prices

❖ Inflation is nearing target

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What’s the Fed Doing? – Interest Rates

❖ Interest Rate Policy

❖ Began Rate Hikes in December 2015

❖ Currently at 2.25%-2.50% Fed funds target rate

❖ Fed “expected to remain on hold in 2019

❖ 4.4% Chance rates are higher in December 2019

❖ 11.5% Chance rates are lower in December 2019

❖ Normalized fed funds target of 3.00% (2.75%-3.25%)

❖ Current Taylor Rule Estimate is 4.82%

❖ Fed-to-Taylor Spread of -232 bps

❖ Interest on Excess/Required Reserves (IOER) – 2.40%

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What’s the Fed Doing? – Balance Sheet

❖ SOMA was $4.2 Trillion ($2.4+ Treasuries/$1.8 MBS)

❖ Reduction began in October 2017 (October 13)

❖ SOMA is $3.81 Trillion ($2.2+ Treasuries/$1.6 MBS)

Time Tsy MBS Monthly Total

Quarterly Total

Cum Tot

Oct-Dec 17 $6 b $4 b $10 b $30 b $30 b

Jan-Mar 18 $12 b $8 b $20 b $60 b $90 b

Apr-Jun 18 $18 b $12 b $30 b $90 b $180 b

Jul-Sep 18 $24 b $16 b $40 b $120 b $300 b

From Oct 18 $30 b $20 b $50 b $150 b $450 b

2019 $30 b $20 b $50 b $150 b $1.05 t

2020 $30 b $20 b $50 b $150 b $1.65 t

Source: New York Federal Reserve

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FOMC –2019 Voters

❖ Jerome Powell – Fed Chair

❖ Rich Clarida – Vice Chair

❖ John Williams – NY Fed President

❖ Lael Brainard – Governor

❖ Randall Quarles – Vice Chair for Supervision

❖ Michelle Bowman-Governor

❖ Charles Evans – Chicago Fed President

❖ Esther George – Kansas City Fed President

❖ James Bullard – St. Louis Fed President

❖ Eric Rosengren – Boston Fed

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FOMC – More Newcomers?

❖ Previously Nominated but were not Resubmitted by President Trump

❖ Marvin Goodfriend

❖ Economics Professor at Carnegie Mellon

❖ Former Director of Research at Richmond Fed

❖ Senate Hearings Were Difficult

❖ Never presented for a full Senate vote

❖ New Names

❖ Herman Cain

❖ Ran for President in 2012

❖ Former pizza company executive

❖ Served on the Kansas City Fed’s Board from 1989-1996

❖ Nominee is not a top priority for President Trump at this time

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Source: Clay Bennett.com

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Economic Growth – GDPNow Forecast

Source: Atlanta Fed GDPNow Model

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U.S. Interest Rate Forecasts - Street

February 2019

Source: Bloomberg

Now Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20

Fed Funds -

UB

2.50% 2.50% 2.60% 2.70% 2.80% 2.80% 2.80% 2.80% 2.75%

Fed Funds -

LB

2.25% 2.25% 2.37% 2.46% 2.55% 2.54% 2.55% 2.54% 2.52%

3-mon Libor 2.69% 2.72% 2.81% 2.89% 2.95% 2.99% 2.99% 3.00% 2.93%

2-yr note 2.52% 2.63% 2.74% 2.81% 2.86% 2.88% 2.91% 2.90% 2.84%

10-yr note 2.66% 2.82% 2.91% 2.99% 3.03% 3.08% 3.09% 3.10% 3.08%

30-yr bond 2.99% 3.10% 3.17% 3.25% 3.29% 3.36% 3.39% 3.41% 3.38%

2s/10s

Spread

15 19 17 18 17 19 18 20 24

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What Do Traders Think?

Fed Fund Futures – Implied (Chance of 25 bps Change)

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Geopolitical

❖ The Big Three “Problems”

❖ North Korea

❖ BSC Leadership

❖ At least hobby of launching missiles has stopped

❖ China

❖ Military Expansion

❖ Investments Globally – especially in Africa

❖ Island Building in South China Sea

❖ Russia

❖ Disruptions of Foreign Elections

❖ Military Resurgence

❖ Especially Naval Power

❖ Naval Bases in Crimea

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Political

❖ EU – Does it Hold Together

❖ Is Frexit, Grexit, or Germxit Next?

❖ Brexit Negotiations- Disaster

❖ U.S. Leadership

❖ Leadership’s Questionable Decisions

❖ U.S. Ceding Leadership Role to China

❖ TPP - Was Intended to Combat China’s Growing

Economic Influence

❖ Paris Climate Accord

❖ No longer at the Table to have a Say

❖ NAFTA

❖ Are We in a New Age of Isolationism?

❖ Debate that began in the late 90’s (1890’s)

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More Things that Interrupt My Beauty Sleep

❖ Trade Wars

❖ Tariffs = Bad

❖ Does nobody remember the Smoot-Hawley harm

❖ China - Escalating into a full blown trade war?

❖ U.S. Deficit

❖ To paraphrase Mr. Dirksen - “A trillion here and trillion there

and pretty soon you are talking about some real money”

❖ $22.02 Trillion (US Debt Clock.org)

❖ $179,907 debt per taxpayer

❖ $67,020 debt per citizen

❖ U.S. Federal Budget Deficit/Surplus to GDP Ratio

❖ 1980 – 1.625% / 1990 – 3.439% / 2000 – 1.708%

❖ 2010 – 9.589% / Now – 4.168%

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Disclaimers

The opinions expressed are those of the presenters and not

necessarily of Robert W. Baird & Co.

Past performance is not a guarantee of future results.

Robert W. Baird & Co., Inc. Member SIPC

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Sources:

➢ Bloomberg

➢ Bank America Merrill Lynch

➢ Barclays

➢ Bloomberg Barclays Indices

➢ Bureau of Economic Analysis

➢ Bureau of Labor Statistics

➢ Business Insider

➢ CBO

➢ U.S. Census Bureau

➢ CreditSights

➢ Department of Labor

➢ Federal Reserve Bank

➢ Federal Reserve Bank of Atlanta – GDPNow Model

➢ Federal Reserve Bank of New York– SOMA Account Holdings

➢ SIFMA

➢ USDebtClock.org

Interest Rates – from 3000 BC

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