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MITEF Forecasters

Luncheon

January 2017

BBVA Research USA

2

MITEF Forecasters Luncheon

Key messages

Uncertainty to remain high in 2017 as geopolitical tensions shift abroad

and emerging markets deal with protectionism, financial and fiscal

imbalances and lower global liquidity

Domestic economy on solid footing and nearing equilibrium levels after

investment slump in 2016

Despite concerns of the length of the current cycle pro-growth policies

and renewed optimism suggests upside to growth in next administration

High degree of uncertainty over magnitude, mix and timing of Trump

agenda

3


World GDP, QoQ%

1 Populism to remain on the ballot. Will EU

give rebuke to rising tide?

Global growth drivers and supportive

policies will keep 2017 growth above 3%

Higher commodity prices and stronger U.S.

growth to support recovery in EM

Risks Brexit, European elections,

dissolution of EU, Chinese imbalances,

protectionism, geopolitical conflict

2

GDP growth, current forecasts*

4

Source: BBVA Research

Unchanged

Upward Review

Downward Review

3

2017: Certain about the uncertain

0.82

0.88

0.4

0.6

0.8

1.0

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

CI 20% CI 40% CI 60% Point Estimates Period average

US EMU Spain Mex

LATAm-5

Turkey China

Em.

Asia Arg Brazil Andean

2015 2.6 1.9 3.2 2.5 2.5 -3.9 2.2 4.0 6.9 6.6

2016 1.6 1.6 3.3 1.8 -2.0 -3.0 2.3 2.3 6.6 6.5

2017 2.3 1.5 2.5 2.2 3.2 0.9 2.2 3.0 5.8 6.0

4


Market Risk Indicators CBOE Market Volatility,%

Financial markets

Source: BBVA Research, Bloomberg & Haver Analytics

SP Equity Indexes, Jan-2016=100

Low High

10

20

30

40

50

60

70

80

10

15

20

25

30

35

40

45

10 11 12 13 14 15 16

Equities Crude OIl

S&P 500

Energy

Construction

Consumer

Banks

3-Month Yield

10-Year Yield

Corporate Spreads-AAA

Corporate Spreads-BBB

Market Volatility Index

Crude Oil Volatility Index

C&I Loans

Real Estate Loans

CRE Loans

Credit Card Loans

Brazil

Italy

Turkey

Venezuela

Argentina

Financial Stress

Consumer Comfort

Busines Conditions Index

Exchange Rate

Mis

c.

Current1-month

ago

3-months

ago

6-monts

ago

1-year

ago

Eq

uitie

sB

on

ds

Volatility

Cre

dit

So

ve

reig

ns

(C

DS

)

60

80

100

120

140

160

Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16Energy Construction Consumer Banks

5


Investment slump fading

Real Private Fixed Investment

+/- s.d.

Nonfinancial Corporate Profits & Gross

Private Domestic Investment*, Billions $

Weak corporate balance sheets, credit constraints and uncertainty

dampen investment in ‘16

400

600

800

1000

1200

1400

1600

1800

1000

1200

1400

1600

1800

2000

2200

2400

Sep-2

000

Aug-2

001

Jul-2

002

Jun-2

003

Ma

y-2

004

Apr-

2005

Ma

r-2

006

Feb

-2007

Jan-2

008

De

c-2

008

No

v-2

009

Oct-

2010

Sep-2

011

Aug-2

012

Jul-2

013

Jun-2

014

Ma

y-2

015

Apr-

2016

Gross Domestic Investment Corporate Profits-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

Q3-2016Q4-2015Q1-2015Q2-2014Q3-2013

Mining Manufacturing

Equipment IP

Structures ex. Mining & Manu. Residential

Fixed Investment

Source: BBVA Research, BEA & Haver Analytics

6


Finding the next investment cycle

Private Fixed Investment Forecasts Average year-over-year, %

Real Private Fixed Investment +/- s.d.

Single family and multifamily investment cycle in line with historical

averages; mining sector correcting.

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

De

c-1

999

Oct-

2000

Aug-2

001

Jun-2

002

Apr-

2003

Feb

-2004

De

c-2

004

Oct-

2005

Aug-2

006

Jun-2

007

Apr-

2008

Feb

-2009

De

c-2

009

Oct-

2010

Aug-2

011

Jun-2

012

Apr-

2013

Feb

-2014

De

c-2

014

Oct-

2015

Manufacturing Mining

Single Family Multifamily

0

1

2

3

4

5

6

7

8

9

Structures Equipment IP Residential Total

2012-2016

2017-2020

Source: BBVA Research, BEA & Haver Analytics

7


Consumer on solid footing

Banks’ Income & Consumer Loans,

Year-over-year %

HH Debt-to-GDP & Financial Obligations

%

Long household deleverage cycle and strong supply-side credit

conditions supporting consumption rebound

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Ma

r-2

012

Jun-2

012

Sep-2

012

De

c-2

012

Ma

r-2

013

Jun-2

013

Sep-2

013

De

c-2

013

Ma

r-2

014

Jun-2

014

Sep-2

014

De

c-2

014

Ma

r-2

015

Jun-2

015

Sep-2

015

De

c-2

015

Ma

r-2

016

Jun-2

016

Consumer Loans Net Interest Income0

20

40

60

80

100

120

14.0

15.0

16.0

17.0

18.0

19.0

1980 1985 1990 1995 2000 2005 2010 2015

Debt-to-GDP (rhs)

Financial Obligations

8


Labor Markets Unemployment and Participation Rate %

Nonfarm Payrolls Cumulative % change, Index to January

Part time/full time & Long-term Unemployment

Source: BBVA Research & Haver

Conflicting labor force indicators

generate noise around full

employment and remaining

economic slack debate

19

20

21

22

23

24

25

26

0

5

10

15

20

25

30

35

40

45

50

90 91 93 95 96 98 00 01 03 05 06 08 10 11 13 15 16

Share 27wks+

Part-time/Full-time(rhs)

62

63

64

65

66

67

0

2

4

6

8

10

12

06 07 08 09 10 11 12 13 14 15 16

UR Part Rate

100

100.5

101

101.5

102

102.5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 2016 2017*

*Figure based on 2017 payroll forecast

9


Labor market at full employment

Employment Growth

Year-over-year %

Unemployment Rate Gap

UR-NAIRU

Boosting employment above current trend (~1.5%) could risk a

significant undershooting NAIRU

-6

-4

-2

0

2

4

6

Ja

n-0

5

Ma

r-0

6

Ma

y-0

7

Jul-08

Se

p-0

9

No

v-1

0

Ja

n-1

2

Ma

r-1

3

Ma

y-1

4

Ju

l-1

5

Se

p-1

6

No

v-1

7

Ja

n-1

9

Ma

r-2

0

-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.54.04.55.05.5

Ja

n-0

5

Ma

r-0

6

Ma

y-0

7

Ju

l-0

8

Se

p-0

9

No

v-1

0

Ja

n-1

2

Ma

r-1

3

Ma

y-1

4

Ju

l-1

5

Se

p-1

6

No

v-1

7

Ja

n-1

9

Ma

r-2

0

Source: BBVA Research , BLS & CBO

10


Inflation

Consumer Inflation

Year-over-year %

Contribution to CPI

Relative importance & 12-month % change

Inflation pressures building with rising energy prices, tightening labor

market and expectations of fiscal expansion

0.0

0.5

1.0

1.5

2.0

2.5

PCE Expectations Core CPI TrimedMean*

Today 6 months ago One year ago

Source: BBVA Research, BEA, BLS & Dallas Fed

-1%

0%

1%

2%

3%

4%

5%

0 10 20 30 40 50 60 70 80 90 100

Comm. ex

Food/Energy

Food

Rent

Energy

Med

Services

Edu &

Comm.

Services

Trans.

Services

Other

Services

OER

11


Fed next move in June Fed Funds: FOMC vs. Futures Curve %

Probability of at Least One Rate Hike %

FOMC Appropriate pace of policy firming

Median %, last release

Rotation of voting members implies

a slightly more dovish FOMC.

Expecting Fed to maintain its

gradual tightening pace

Source: BBVA Research, FRB, Bloomberg & Haver

0.0

1.0

2.0

3.0

4.0

Oct-

16

Ja

n-1

7

Apr-

17

Ju

l-1

7

Oct-

17

Ja

n-1

8

Apr-

18

Ju

l-1

8

Oct-

18

Ja

n-1

9

Apr-

19

Ju

l-1

9

Futures (Pre-Election) FOMC

Futures (Post-Election) Futures (Jan-2017)

0

0.5

1

1.5

2

2.5

3

3.5

2016 2017 2018 2019 LongerTerm

Sep-16 Dec-16 Dec-16 w/ rotation bias 0

10

20

30

40

50

60

70

80

90

Jul-16 Aug-16Aug-16Sep-16 Oct-16 Oct-16 Nov-16Nov-16Dec-16 Jan-17

Feb. Meeting Mar. Meeting

May Meeting Jun. Meeting

12


U.S. Outlook

U.S. GDP Growth %,

Growth to recover to moderate pace in 2017

Pressures from weak investment fading

Upturn in Oil & Gas

Despite labor market deceleration,

consumption to hold steady

Strong dollar to weigh on exports

Fed gradual tightening cycle to generate

headwinds

Near term risks include weak global demand,

political instability in Europe, disorderly

correction in China, emerging market

vulnerabilities (Mexico)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4Q15 1Q16 2Q16 3Q16 4Q16 2016 '17-'20 LTModelProj

13


Uncertainties in Trump presidency Broad-based change, entitlement reform and fiscal conservatism?

• $1tn over 10 years • Revenue neutral? • Appetite for private-public partnerships?

Infrastructure

• Impact of tax cuts on marginal propensity to consume?

• Tax break for investors willing to lend to state and local

• Border tax, 10% tax on retained foreign earnings, tariffs?

Tax

• Reassess NAFTA; symbolic or withdrawal?

• China’s currency policy; hard or soft stance?

• Kill TPP and make TTIP more difficult

Trade

• Repeal Obama’s executive orders

• Focus on border security; virtual or physical wall?

• Mass deportations?

Immigration

• Repeal ACA; replace it with what?

• EPA, Dodd-Frank, FCC, DOL

• Streamlined and simplified regulations?

Deregulation

Who is Trump?

• Face Value?

• Traditional Republican?

• Populist?

• Disruptor?

• Twitterer-in-chief?

14


Uncertainties: Trumponomics

Potential Impact from Trump Policy Proposals

Central tendency, %

Magnitude, mix and timing of policy initiatives uncertain, but current

proposals imply stronger growth

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

High Probability

Medium Probability

Low Probability

Survey: Trump most likely actions

0 25 50 75 100

Cut Taxes

Deport 2-3M

Exit NAFTA

Tariffs China

Border wall

Clinton Probe

Most Likely

Highly likely

Likely

Source: BBVA Research, Bloomberg & WSJ

15


Uncertainties: fiscal policy

Trump Plan: Cumulative Debt Increase (% GDP) GOP Plan: Cumulative Debt Increase (% GDP)

Trump Plan: Annual Revenue Loss (% GDP) GOP Plan: Annual Revenue Loss (% GDP)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

0

5

10

15

0

10

20

30

40

50

Excluding macroeconomic effects. Source: BBVA Research and TCP

16


Uncertainties: FX and inflation

Headline CPI Impulse Response Functions

%

Real Exchange Rates & Exports

YoY % change

Fluctuations in the dollar could counterbalance Trump

policies

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Apr-

2013

Jul-2

013

Oct-

2013

Jan-2

014

Apr-

2014

Jul-2

014

Oct-

2014

Jan-2

015

Apr-

2015

Jul-2

015

Oct-

2015

Jan-2

016

Apr-

2016

Jul-2

016

Oct-

2016

Real Trade Weighted FX Real Exports

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Inflation Oil Prices FX Broad Weighted

Inf. Expectations Avg. Impact

Source: BBVA Research, FRB, BLS, Haver & Census

17


Uncertainties: monetary policy

Marginal Probability of Fed Rate Increase

%

Unemployment Gap and Inflation Expectations PP, %

Implied impact of Trump policies suggest Fed will continue on it gradual

tightening path; unexpected inflation could speed up process

-1

0

1

2

3

4

5

6

7

8

9

10

t t-1 t-2 t-3

UR Gap (Inverse) Unexpected Inflation

Actual Inflation Inflation Deviation

Source: BBVA Research, CBO & Haver Analytics

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

-1

0

1

2

3

4

5

20

03q

2

20

04q

1

20

04q

4

20

05q

3

20

06q

2

20

07q

1

20

07q

4

20

08q

3

20

09q

2

20

10q

1

20

10q

4

20

11q

3

20

12q

2

20

13q

1

20

13q

4

20

14q

3

20

15q

2

20

16q

1

20

16q

4

Unemployment Gap(rhs) Inflaiton Expectations

18


Scenarios

Fed Funds, % Unemployment Rate, %

-2.0

0.0

2.0

4.0

15 16 17 18 19 20

Upside Downside Baseline

CPI, YoY % Change Real GDP, YoY % Change

-1.0

0.0

1.0

2.0

3.0

4.0

15 16 17 18 19 20


3.0

5.0

7.0

9.0

15 16 17 18 19 20


0.0

1.0

2.0

3.0

4.0

15 16 17 18 19 20



19


Treasury yields

Treasury Yield Curve Slope

10Y-2Y, %

10-Year Treasury Yield Forecast

%

Stronger growth and inflation expectations, and greater risk appetite will

push yields higher

Scenarios 2016 2017 2018 2019 2020

Baseline 60% 2.5 2.68 2.96 3.25 3.35

Upside 25% 3.15 4.22 4.79 4.84

Downside 15% 1.88 1.39 1.37 1.41

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

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

Historic BaselineDownside UpsideSPF (EOP, Nov 14) NABE (EOP, Dec 4)CBO (Yr. Avg, Dec 1) Blue Chip (Jul 19)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

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

Historic

Baseline

Downside

Upside


20


Survey: post-election expectations

10YTN

EOP, %

Fed

EOP, %

0.00

1.00

2.00

3.00

2017 2018

Oct Nov Dec

CPI

%

Real GDP

4Q/4Q, %

2.00

2.10

2.20

2.30

2.40

2.50

2017 2018

Oct Nov Dec

0.00

1.00

2.00

3.00

4.00

2017 2018

Oct Nov Dec

0.00

1.00

2.00

3.00

2017 2018

Oct Nov Dec

Source: BBVA Research & WSJ

21


Recession risks fading

Only handful of energy-dependent areas remain in recession

2016 growth mirrored 1986 decoupling,

acutely impacting commodity producing

states

Texas probability of recession ~60% (3Q16)

Fading pressures on the dollar and

stronger global growth lowers risk to

manufacturers

Including mining intensive states, the

probability of recession remains below

average (13%)

Consumer-driven economies stand to

benefit

Florida: 0%

Colorado: 0%

California: 3%

State-level Recession Probability Probability of being in recession within 12-months, %


22


Texas: why this time was different Production and GDP %

Unemployment Rate

%

Employment Growth Year-over-year %

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

79 82 85 88 91 94 97 00 03 06 09 12 15

Production($)-to-GDP

Production(bbl)-to-GDP(2009$)

• Relative exposure low

• Dependency nearly half as large as ‘80s

• Risks contained in Major MSAs

Source: BBVA Research & Haver Analytics

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

06 07 08 09 10 11 12 13 14 15 16

Texas DFW Houston Midland

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Apr-11 Feb-12 Dec-12 Oct-13 Aug-14 Jun-15 Apr-16

North Dakota Wyoming

Texas Louisiana

23


Oil price forecasts Upward revision to 2017 and 2018

Crude oil price forecasts*

Brent, $ per barrel, avg.

*Forecast subject to change.

Source: BBVA Research & Haver Analytics

Crude oil price forecasts*

Brent, $ per barrel, avg.

Baseline Upside Downside

2015 52.8 52.8 52.8

2016 45.2 45.2 45.2

2017 57.0 66.9 46.2

2018 58.7 75.8 36.6

2019 59.6 79.3 34.1

2020 59.6 79.3 34.1 0

20

40

60

80

100

120

140

2014 2015 2016 2017 2018 2019 2020

Actual Baseline

Upside Risk Downside Risk

24


Texas GDP Growth

(Chained $2009)

Texas Outlook


4.3%

3.8% 3.8%

-0.3%

2.2%

2.8% 3.1%

-1%

0%

1%

2%

3%

4%

5%

2013 2014 2015 2016(f)

2017(f)

2018(f)

2019(f)

Risk balance tilting to the

upside for Texas

• Maintain 2016 baseline

– -0.3% growth

– Downsides risks realized in

current oil price environment

• Baseline is for return to positive growth

in ‘17

• Oil-dependent MSAs resilient in the face

of slumping oil prices

• Steady gains in oil prices will accelerate

the recovery

• Current reversal in oil price gains, border

adjustment, balance sheet pressures on

O&G firms, dollar strengthening,

increased trade barriers, emigration

25


Houston Economy

Industry Employment Growth

Change, annualized %

Pressures on mining and manufacturing sectors slowing, but 2nd

round effects materializing

• Houston annual pace of job

creation at 16K

• Down from 120K in Dec. 2014

• Houston UR above the U.S.

average for first time since 2006

(5.1%)

• Job losses primarily in goods

producing sectors slowing

• Home prices continue to

decelerate

-10

-8

-6

-4

-2

0

2

4

6

8

Year-over-year %2010-2015

Source: BBVA Research, BLS & Haver Analytics

26


Houston GDP Growth

(Chained $2009)

Houston Outlook


5.8%

2.7%

4.6%

-0.2%

2.8%

4.2% 3.8%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2013 2014 2015 2016(f)

2017(f)

2018(f)

2019(f)

Houston, we’ve found a

bottom • Petrochemicals helping to offset pressures on

upstream activity

• Bottom realized in 3Q16

• 2016: -0.2% growth

• Like Texas, growth to return in ‘17

• Long-run potential still high (~3-4%)

• Longer-run opportunities remain, as city is one of

the most attract in country despite exposure to

commodity cycles

• Reorienting to business services, healthcare and

leisure will quicken pace of recovery

• Risks include high emigration rates due to

consolidation in O&G sector, additional oil shocks

and pressures on healthcare from increased

regulation

27


Post-Election Scenarios Post-election probability distribution implies fatter tails

Macro Scenarios*

2013 2014 2015 2016 2017 2018 2019 2020

GDP 1.7 2.4 2.6 1.6 2.3 2.4 2.1 2.0

Upside 1.7 2.4 2.6 1.6 2.7 3.5 3.2 3.0

Downside 1.7 2.4 2.6 1.6 1.5 -0.5 -0.2 1.1

UR 7.4 6.2 5.3 4.8 4.5 4.4 4.3 4.3

Upside 7.4 6.2 5.3 4.9 4.6 4.3 4 4.1

Downside 7.4 6.2 5.3 4.9 5.4 7 6.6 5.9

CPI 1.5 1.6 0.1 1.2 2.3 2.0 2.2 2.2

Upside 1.5 1.6 0.1 1.2 2.6 3.1 3 2.6

Downside 1.5 1.6 0.1 1.2 1.9 1.1 0.8 0.8

Fed[eop] 0.25 0.25 0.50 0.75 1.25 1.75 2.25 2.75

Upside 0.25 0.25 0.50 0.75 1.50 2.5 3.25 3.25

Downside 0.25 0.25 0.50 0.75 0.75 0.25 0.25 0.25

10-Yr [eop] 2.9 2.2 2.2 2.5 2.7 3.0 3.3 3.4

Upside 2.9 2.2 2.2 2.5 3.2 4.2 4.8 4.8

Downside 2.9 2.2 2.2 2.5 1.9 1.4 1.4 1.4 *Subject to revision

28


Outlook & forecasts

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Real GDP (% SAAR) 1.6 2.2 1.7 2.4 2.6 1.6 2.3 2.4 2.1 2.0

Real GDP (Contribution, pp)

PCE 1.6 1.0 1.0 2.0 2.2 1.8 1.7 1.5 1.5 1.5

Gross Investment 0.7 1.5 1.0 0.7 0.8 -0.4 0.4 1.0 0.8 0.6

Non Residential 0.9 1.1 0.4 0.8 0.3 -0.1 0.4 0.8 0.7 0.4

Residential 0.0 0.3 0.3 0.1 0.4 0.1 0.1 0.2 0.2 0.2

Exports 0.9 0.5 0.5 0.6 0.0 0.1 0.4 0.5 0.6 0.7

Imports -0.9 -0.4 -0.2 -0.7 -0.7 0.1 0.6 0.8 0.8 0.8

Government -0.7 -0.4 -0.6 -0.2 0.3 0.2 0.2 0.2 0.0 -0.1

Unemployment Rate (%, average) 8.9 8.1 7.4 6.2 5.3 4.9 4.6 4.4 4.4 4.3

Avg. Monthly Nonfarm Payroll (K) 167 177 200 236 231 185 166 166 208 211

CPI (YoY %) 3.1 2.1 1.5 1.6 0.1 1.3 2.2 2.0 2.1 2.1

Core CPI (YoY %) 1.7 2.1 1.8 1.7 1.8 2.2 1.9 2.2 2.3 2.5

Fiscal Balance (% GDP) -8.7 -6.8 -4.1 -2.8 -2.5 -3.0 -3.0 -2.9 -3.1 -3.3

Current Account (bop, % GDP) -3.0 -2.8 -2.2 -2.8 -2.4 -2.8 -3.0 -3.1 -3.1 -3.2

Fed Target Rate (%, eop) 0.25 0.25 0.25 0.25 0.38 0.64 1.25 1.75 2.25 2.75

Core Logic National HPI (YoY %) -2.9 4.0 9.9 6.9 5.4 5.6 5.9 4.1 4.4 4.1

10-Yr Treasury (% Yield, eop) 1.98 1.72 2.90 2.21 2.24 2.49 2.68 2.96 3.25 3.35

Brent Oil Prices (dpb, average) 94.9 94.1 97.9 93.3 48.7 43.3 54.8 56.4 57.1 57.1

MITEF Forecasters

Luncheon

January 2017

BBVA Research USA

MITEF Forecasters Luncheon · MITEF Forecasters Luncheon Key messages ... CRE Loans Credit Card Loans Brazil Italy Turkey Venezuela Argentina Financial Stress Consumer Comfort ...

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