Global Macro Outlook: Uncertainty about the coronavirus, the policy response, and the election Torsten Slok, Ph.D. Chief Economist Managing Director 60 Wall Street New York, New York 10005 Tel: 212 250 2155 [email protected]March 2020 DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 066/04/2019. Deutsche Bank Research Distributed on: 05/03/2020 15:48:08 GMT 7T2se3r0Ot6kwoPa Provided for the exclusive use of [email protected] on 2020-03-05T16:14+00:00. DO NOT REDISTRIBUTE
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Global Macro Outlook: Uncertainty about the coronavirus,
the policy response, and the electionTorsten Slok, Ph.D.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 066/04/2019.
Deutsche Bank
Research
Distributed on: 05/03/2020 15:48:08 GMT
7T2se3r0Ot6kwoPa
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Deutsche Bank Research 1Torsten Slok, [email protected] +1 212 250-2155 March 2020
Source: FRB, DB Global Research
Once Fed does 50bps intra-meeting they normally go 50bps again at next regular meeting
Date Action Action at next FOMC Event
22-Jan-08 Cut 75bps Cut 50bps Financial crisis
17-Sep-01 Cut 50bps Cut 50bps September 11th
18-Apr-01 Cut 50bps Cut 50bps Slowing economy
3-Jan-01 Cut 50bps Cut 50bps Dot com bubble
15-Oct-98 Cut 25bps Cut 25bps LTCM crisis
A history of recent Fed intermeeting rate cuts
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Deutsche Bank Research 2Torsten Slok, [email protected] +1 212 250-2155 March 2020
Impact of coronavirus on global growth
Source: DB Global Research
-4
-2
0
2
4
6
8
-4
-2
0
2
4
6
8World (G4)* GDP growth
Pre virus Feb 5 baselineNew baseline Worse case
%q/q AR %q/q AR
-4-3-2-1012345
-4-3-2-1012345
US GDP growth
Pre virus Feb 5 baselineNew baseline Worse case
%q/q AR %q/q AR
* Weighted average of US, EA, China and Japan
-5-4-3-2-10123
-5-4-3-2-10123
EA GDP growthPre virus Feb 5 baselineNew baseline Worse case
%q/q AR %q/q AR
-10-8-6-4-2024
-10-8-6-4-2024
Germany GDP growthPre virus Feb 5 baselineNew baseline Worse case
%q/q AR %q/q AR
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Deutsche Bank Research 3Torsten Slok, [email protected] +1 212 250-2155 March 2020
Impact of coronavirus on global growth
Source: DB Global Research
-10
-5
0
5
10
15
-10
-5
0
5
10
15
China GDP growth
Pre virus Feb 5 baselineNew baseline Worse case
%q/q AR %q/q AR
-8
-6
-4
-2
0
2
4
6
-8
-6
-4
-2
0
2
4
6
Japan GDP growth
Pre virus Feb 5 baselineNew baseline Worse case
%q/q AR %q/q AR
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Deutsche Bank Research 4Torsten Slok, [email protected] +1 212 250-2155 March 2020
Number of months U.S. economy in recession
0
10
20
30
40
50
60
70
80
90
1780
s17
90s
1800
s18
10s
1820
s18
30s
1840
s18
50s
1860
s18
70s
1880
s18
90s
1900
s19
10s
1920
s19
30s
1940
s19
50s
1960
s19
70s
1980
s19
90s
2000
s20
10s
#
0
10
20
30
40
50
60
70
80
90#
US: Since 1776 we have never before had a decade without a recession
Source: NBER, Wikipedia, DB Global Research
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Deutsche Bank Research 5Torsten Slok, [email protected] +1 212 250-2155 March 2020
1. Coronavirus: Impact and policy response2. Trade war uncertainty3. Election uncertainty
4. Positive effects of the 2018 corporate tax cut fading5. US consumer delinquency rates moving higher6. Corporate credit fundamentals more vulnerable
Investment implications for rates, FX, credit, and equities
Risks to the outlookProvided for the exclusive use of [email protected] on 2020-03-05T16:14+00:00. DO NOT REDISTRIBUTE
Deutsche Bank Research 6Torsten Slok, [email protected] +1 212 250-2155 March 2020
Risk #1:Coronavirus
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Deutsche Bank Research 7Torsten Slok, [email protected] +1 212 250-2155 March 2020
Coronavirus: Transmission channels and impact on GDP and CPI
Source: DB Global Research
Many transmission channels to the economy:
1. Quarantining and self-quarantining2. Social distancing3. Cancellation of travel, conferences, sports events etc.4. Fewer tourists staying at hotels and eating at restaurants5. Negative sentiment impact on consumer spending6. Negative impact of fewer hours worked on consumer spending7. Negative impact of lower stock prices on consumer spending8. Tighter financial conditions impacting corporates and households9. Deteriorating confidence for companies and households10. Heightened uncertainty for businesses about demand11. Supply chain disruptions
1 to 10 are deflationary shocks11 is inflationary shock1 to 11 are negative for GDP
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Deutsche Bank Research 8Torsten Slok, [email protected] +1 212 250-2155 March 2020
Number of coronavirus cases
Source: WHO, DB Global Research
150
300
600
1200
2400
4800
9600
4
40
400
4000
40000
400000
0 15 30 45 60 75 90
Log scaleLog scale
Number of days since out break
World : number of cases of SARS and COVID-19
COVID-19: World (ls) COVID-19 : Outside of China (ls) SARS (rs)
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Deutsche Bank Research 9Torsten Slok, [email protected] +1 212 250-2155 March 2020
Coronavirus: New confirmed vs New recovered
Source: Coronavirus COVID-19 Global Cases by John Hopkins CSSE, DB Global Research
Number of coronavirus confirmed vs recovered cases
0
2000
4000
6000
8000
10000
12000
14000
16000
20-J
an
22-J
an
24-J
an
26-J
an
28-J
an
30-J
an
1-Fe
b
3-Fe
b
5-Fe
b
7-Fe
b
9-Fe
b
11-F
eb
13-F
eb
15-F
eb
17-F
eb
19-F
eb
21-F
eb
23-F
eb
25-F
eb
27-F
eb
29-F
eb
2-M
ar
0
2000
4000
6000
8000
10000
12000
14000
16000
# NumbersNew confirmed New recovered
# Numbers
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Deutsche Bank Research 10Torsten Slok, [email protected] +1 212 250-2155 March 2020
China: domestic sales: passenger cars
-90
-70
-50
-30
-10
10
30
15 16 17 18 19 20
% y/y
-90
-70
-50
-30
-10
10
30% y/y
China: Car sales declined 80% yoy in February
Source: China Passenger Car Association, Bloomberg Finance LP, Haver Analytics, DB Global Research
Note: Latest February figure is based on preliminary figure.
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Deutsche Bank Research 11Torsten Slok, [email protected] +1 212 250-2155 March 2020
China: PMI
25
30
35
40
45
50
55
60
65
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Index
25
30
35
40
45
50
55
60
65
IndexManufacturing PMI Service PMI
China PMIs
Source: CFLP, CNBS, NBS, Haver Analytics, DB Global Research
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Deutsche Bank Research 12Torsten Slok, [email protected] +1 212 250-2155 March 2020
% y/yCore capital goods shipmentsNon-residential business fixed investment
Source: Census, BEA, Haver Analytics, DB Global Research
Corporate tax cut begins
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Deutsche Bank Research 17Torsten Slok, [email protected] +1 212 250-2155 March 2020
Contribution of various components in q/q growth rate of nonresidential fixed investment
-5
0
5
10
15
20
10 11 12 13 14 15 16 17 18 19
% q/q AR
-5
0
5
10
15
20
% q/q AR
Structures: Oil & power Equipment and structures: non-oil and powerIP Private nonresidential fixed investment
Current capex slowdown is broad-based
Source: BEA, Haver Analytics, DB Global Research
2014-16: Capex slowdown driven by energy
2018-today: Capex slowdown broad-based
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Deutsche Bank Research 18Torsten Slok, [email protected] +1 212 250-2155 March 2020
Risk #3:Election uncertainty
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Deutsche Bank Research 19Torsten Slok, [email protected] +1 212 250-2155 March 2020
United States: Voter turnout rates, 1789-2018
0
10
20
30
40
50
60
70
80
90
100
1789
1799
1809
1819
1829
1839
1849
1859
1869
1879
1889
1899
1909
1919
1929
1939
1949
1959
1969
1979
1989
1999
2009
2019
Voting eligible population turnout
rate
0
10
20
30
40
50
60
70
80
90
100
Voting eligible population turnout
ratePresidential election Midterm election
Voter turnout in Midterm and Presidential elections since 1789
Source: http://www.electproject.org/, DB Global ResearchNote: The voting-eligible population (VEP) represents an estimate of persons eligible to vote regardless of voter registration status in an election
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Deutsche Bank Research 20Torsten Slok, [email protected] +1 212 250-2155 March 2020
Change in Turnout rates in Midterm elections, 1794-2018election to election change
-15
-10
-5
0
5
10
15
1794
1804
1814
1824
1834
1844
1854
1864
1874
1884
1894
1904
1914
1924
1934
1944
1954
1964
1974
1984
1994
2004
2014
2024
% point
-15
-10
-5
0
5
10
15
% point
Record jump in voter turnout in 2018 midterm elections
Source: http://www.electproject.org/, DB Global Research
Note: Turnout rates are calculated from The voting-eligible population (VEP). VEP represents an estimate of persons eligible to vote regardless of voter registration status in an election
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Deutsche Bank Research 21Torsten Slok, [email protected] +1 212 250-2155 March 2020
Jump in voter turnout in Florida in 2018
Source: U.S. Census Bureau Historical Reported Voting Rates, DB Global Research
Change in voter Turnout rates in midterm elections: Florida
* Data shown for 2019 are projections. Each year represents the annual estimates period ending on June 30. Released data will report 2010 as a quarter year(April 1, 2010-June 30, 2010) instead of a full year
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Deutsche Bank Research 30Torsten Slok, [email protected] +1 212 250-2155 March 2020
10% of voters in 2020 will be foreign born
Source: PEW Research, DB Global Research
Percent of U.S. eligible voters who are foreign born
5
6
7
8
9
10
2000 2008 2012 2016 2018 20205
6
7
8
9
10
%%
Note: Data for 2020 from Pew Research Center projections based on U.S. Census Bureau population projections.
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Deutsche Bank Research 31Torsten Slok, [email protected] +1 212 250-2155 March 2020
Gallup Survey: Americans' views on what foreign trade means for the U.S.
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Deutsche Bank Research 34Torsten Slok, [email protected] +1 212 250-2155 March 2020
The share of income going to the Bottom 50% of the population is down in the US and unchanged in Europe
Share of national income: bottom 50% percentile
12
13
14
15
16
17
18
19
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
%
12
13
14
15
16
17
18
19
%US Europe
Source: Saez (2019), Blanchet, Chancel & Gethin (April 2019), WID, DB Global Research
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Deutsche Bank Research 35Torsten Slok, [email protected] +1 212 250-2155 March 2020
The share of income going to the Top 1% is up 6%-points in the US and 2%-points in Europe
Share of national income: top 1% percentile
89
101112131415161718192021
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
%
89101112131415161718192021
%US Europe
Source: Saez (2019), Blanchet, Chancel & Gethin (April 2019), WID, DB Global Research
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Deutsche Bank Research 36Torsten Slok, [email protected] +1 212 250-2155 March 2020
10% of the US population own 84% of all stocks held by households
Percent of total investment assets held, by wealth distribution
0
20
40
60
80
100
Business equity Stocks, directly or indirectlyowned*
Non-home real estate
%
0
20
40
60
80
100
%
Top 10% Bottom 90%
Source: Edward N. Wolff, (2018), Survey of Consumer Finances, DB Global Research
* Includes direct ownership of stocks and indirect ownership through mutual funds, trusts, and IRAs, Keogh plans, 401(k) plans, and other retirement accounts
84%
16%
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Deutsche Bank Research 37Torsten Slok, [email protected] +1 212 250-2155 March 2020
US: Negative savings rate for the bottom 90% of the population
Net saving rates across the income distribution
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
0.12
1970s 1980s 1990s 2000s 2010s-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
0.12Top 1% Next 9% Bottom 90%
Source: Mian, Straub & Sufi “The Saving Glut of the Rich and the Rise in Household Debt,” (Nov 2019), DB Global Research
Note: The saving of the top 1% is defined to be the after-tax income of the top 1% of the income distribution minus personal consumption of the top 1% of the income distribution, scaled by national income. Net saving of the other two groups is similarly defined. Averages for the decades are shown.
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Deutsche Bank Research 38Torsten Slok, [email protected] +1 212 250-2155 March 2020
Democratic candidates’ policy proposals
Source: Candidates’ campaign websites, Politico, DB Global Research
Joe Biden Bernie Sanders
• Raises minimum wage to $ 15/hr• Rolls back the rate cut of capital gains tax and restores it to almost 40% • Raises corporate tax rate to 28%• Intends to make two years of community college or other high quality
education and would eliminate payments on undergraduate federal student payments for those earning less than $ 25,000 annually and everyone else will pay 5% of their discretionary income
• Would nearly triple teacher pay
• Raises minimum wage to $ 15/hr• Proposes an “extreme wealth tax” on the top 0.1% households whose net worth is above $ 32
million• Companies with large gaps between CEOs and median worker pay would see progressively
higher corporate tax rates• Would raise $ 4.35 trillion over the next decade and cut the wealth of billionaires in half over 15
years• Would break up too-big-to-fail banks• Enact a federal jobs guarantee act• Proposes to bring back the Glass-Steagall act• Supports free college education and cancel all of the student debt• Supports a starting salary of $ 60,000 for teachers
Would keep the Affordable Care Act and would build on it by giving Americans more choice on public insurance like Medicaid & reducing health care costs and making the health care system less complex
• Proposes Medicare for All, single-payer national health insurance program completely free at the point of service
• Proposes eliminating $ 81 billion past-due medical debt
Does not want to use tariffs to pressure other countries; also would want changes made to the UMSCA agreement and supports joining CPTPP
Suggests rewriting all trade deals to prevent outsourcing of jobs and raise wages
Supports nuclear power to tackle climate change; suggests a possible creation of 10 million jobs on the right strategy for climate change
Create a Green New Deal which makes 100% renewable energy and create 20 million jobs and rebuilding infrastructure to create a 100% sustainable energy system
Supports citizenship for Dreamers and leaves Sec 1325 in place Supports Citizenship for Dreamers and wants to repeal Sec 1325
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Deutsche Bank Research 39Torsten Slok, [email protected] +1 212 250-2155 March 2020
Rich countries tend to have a bigger middle class, except the United States
Source: OECD report “Under Pressure: The Squeezed Middle Class” (2019), DB Global Research
Note: Middle-income classes and median incomes are defined relative to equivalised household disposable income. The middle-income class comprises individuals in households with incomes that are between 75% and 200% of the median.
ISLCZE
NORSVK NLD DNK
HUN
FRA
FINSVN AUTBEL
POLJPN
SWE
LUXCHE
DEU
KOR
IRL
PRT
ITA
CAN
GBR
AUS
GRC
ESP
LVA
ISRTUREST
LTUUSA
CHL
MEXRUS
CHN
BRAIND
ZAF
30
40
50
60
70
80
0 5000 10000 15000 20000 25000 30000 35000 40000
Middle-income share (%)
Median income (USD per year, PPP adjusted)
Share of population in middle-income households and annual median income
US at same level as China, Turkey, Russia
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Deutsche Bank Research 40Torsten Slok, [email protected] +1 212 250-2155 March 2020
More people delaying medical treatment for financial reasons
Within the last twelve months, have you or a member of your family put off any sort of medical treatment because of the cost you would have to pay?
5
10
15
20
25
30
35
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
%
5
10
15
20
25
30
35
%
% put off treatment for any condition % Put off treatment for serious condition
Source: Gallup Survey, DB Global Research
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Deutsche Bank Research 41Torsten Slok, [email protected] +1 212 250-2155 March 2020
$Number of beneficiaries receiving benefit as % of US resident population (ls)
Average amount per receipient (rs)
Source: Social Security Administration (SSA), Census, Haver Analytics, DB Global Research
20% of the US population receive social security benefitsProvided for the exclusive use of [email protected] on 2020-03-05T16:14+00:00. DO NOT REDISTRIBUTE
Deutsche Bank Research 42Torsten Slok, [email protected] +1 212 250-2155 March 2020
Fiscal crises in advanced economies normally triggered by a sudden loss of market confidence
Fiscal crises episodes (1980-2016)
0%10%20%30%40%50%60%70%80%90%
100%
Advancedeconomies (AEs)
Emerging Markets(EMs)
Low-incomecountries (LICs)
Total
Loss of market confidence Credit event
Exceptionally large official financing Implicit domestic default
%
Source: Debt Is Not Free (IMF working paper, January 2020), DB Global Research
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Deutsche Bank Research 43Torsten Slok, [email protected] +1 212 250-2155 March 2020
Risk #4:Positive effects of the 2018
corporate tax cut fading
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Deutsche Bank Research 44Torsten Slok, [email protected] +1 212 250-2155 March 2020
Source: S&P, Bloomberg Finance LP, Haver Analytics, DB Global Research
$ billionHouseholds Non-financial corporationsForeign sector Other domestic buyers
Source: FRB, Haver Analytics, DB Global Research
Note: Other domestic institutions includes Property-Casualty Insurance Companies, Life Insurance Companies, Private Pension Funds, Federal government retirement funds and state/local government employment defined benefit retirement funds
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Deutsche Bank Research 47Torsten Slok, [email protected] +1 212 250-2155 March 2020
Risk #5:US consumer credit quality deteriorating
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Deutsche Bank Research 48Torsten Slok, [email protected] +1 212 250-2155 March 2020
Credit card interest rate at highest levels in decades
Source: Federal Reserve Board, Haver Analytics, DB Global Research
Commercial bank interest rate: credit cards, accounts assessed interest
11
12
13
14
15
16
17
18
95 98 01 04 07 10 13 16 19
%
11
12
13
14
15
16
17
18
%
Note: This rate is the annualized ratio of total finance charges at all reporting banks to the total average daily balances against which the finance charges were assessed
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Deutsche Bank Research 49Torsten Slok, [email protected] +1 212 250-2155 March 2020
Auto loan interest rates increased by 2%-points in 2018
Auto loan interest rate
2
3
4
5
6
7
8
08 09 10 11 12 13 14 15 16 17 18 19
%
2
3
4
5
6
7
8%
36 month used car 60 month new car
Source: FRB, Haver Analytics, DB Global Research
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Deutsche Bank Research 50Torsten Slok, [email protected] +1 212 250-2155 March 2020
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Deutsche Bank Research 51Torsten Slok, [email protected] +1 212 250-2155 March 2020
Consumer Expenditure Survey: Motor vehicle purchases & vehicle finance charges as a share of average consumer expendtiure
0
1
2
3
4
5
6
7
8
9
Lowest 20 %income quintile
Second incomequintile
Third incomequintile
Fourth incomequintile
Highest 20%income quintile
%
0
1
2
3
4
5
6
7
8
9
%
2006 2009 2018
Auto loans: Lower income groups currently at 2006 levels in terms of debt and interest payments
Source: BLS, Haver Analytics, DB Global Research
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Deutsche Bank Research 52Torsten Slok, [email protected] +1 212 250-2155 March 2020
Interest rate on 36-month auto loan by FICO score
0
2
4
6
8
10
12
14
16
18
720-850 690-719 660-689 620-659 590-619 500-589
%
0
2
4
6
8
10
12
14
16
18
%
December 2015 February 2020
US: Auto loan interest rates higher across all FICO scores
Source: myfico.com, DB Global Research
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Deutsche Bank Research 53Torsten Slok, [email protected] +1 212 250-2155 March 2020
80% of new cars sold are financed.And 20% of new car sales are subprime
Share in total new auto loan originations in Q4 2019
0
20
40
60
80
100
Subprime Prime
%
0
20
40
60
80
100
%
Source: New York Fed Consumer Credit Panel/Equifax, DB Global Research
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Deutsche Bank Research 54Torsten Slok, [email protected] +1 212 250-2155 March 2020
Average amount financed on new car loans moving higher
Finance companies: new car loans: average amount financed
22000
24000
26000
28000
30000
32000
08 09 10 11 12 13 14 15 16 17 18 19 20
$
22000
24000
26000
28000
30000
32000$
Source: FRB, Haver Analytics, DB Global Research
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Deutsche Bank Research 55Torsten Slok, [email protected] +1 212 250-2155 March 2020
Delinquency rates moving higher
Source: BLS, ABA, Haver Analytics, DB Global Research
2
4
6
8
10
12
65 70 75 80 85 90 95 00 05 10 15 20
%
1.2
1.6
2.0
2.4
2.8
3.2
3.6
%Unemployment rate (ls)Delinquency rate on consumer loans (rs, 12m lead)
Note: Composite consumer loans consists of eight loan types: personal, automobile direct & indirect, mobile homes, recreational vehicles, marine financing loans, property improvement and home equity and second mortgage loans.
4 years
5 years1 year
?
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Deutsche Bank Research 56Torsten Slok, [email protected] +1 212 250-2155 March 2020
Credit card delinquencies above 2008 levels for smaller lenders
Source: Federal Reserve Board, Haver Analytics, DB Global Research
Credit card loans: delinquency rate
2
3
4
5
6
7
07 08 09 10 11 12 13 14 15 16 17 18 19 20
%
2
3
4
5
6
7
%
100 largest insured commercial banks Other insured commercial banks
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Deutsche Bank Research 57Torsten Slok, [email protected] +1 212 250-2155 March 2020
Consumer credit quality deteriorating despite wages growing faster for low-wage workers at the moment
Wage growth for low, middle, and high wage workers
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Deutsche Bank Research 62Torsten Slok, [email protected] +1 212 250-2155 March 2020
US leveraged loans: Recent acceleration in downgrades
US Leveraged loans: ratio of downgrades to upgrades
0
1
2
3
4
5
6
2003 2005 2007 2009 2011 2013 2015 2017 20190
1
2
3
4
5
6
Rolling 12 months
Source: S&P LCD/LSTA, Deutsche Bank Credit: Securitization CLO Research, DB Global Research
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Deutsche Bank Research 63Torsten Slok, [email protected] +1 212 250-2155 March 2020
2019 Leveraged loan downgrades, by industryTop 15 sectors
0%
2%
4%
6%
8%
10%
12%B
usin
ess
equi
pmen
t and
serv
ices
Hea
lth c
are
Ele
ctro
nics
/ele
ctric
Oil
and
gas
Ret
aile
rs (
othe
rth
an fo
od/d
rug)
Telc
omm
unic
atio
ns
Che
mic
al/P
last
ics
Util
ities
Non
ferr
ous
met
als/
min
eral
s
Food
ser
vice
Leis
ure
Bro
adca
st r
adio
and
tele
visi
on
Food
pro
duct
s
Dru
gs
Indu
stria
leq
uipm
ent 0%
2%
4%
6%
8%
10%
12%
Source: S&P LCD, DB Global Research
Industry distribution of downgrades of leveraged loans in 2019Provided for the exclusive use of [email protected] on 2020-03-05T16:14+00:00. DO NOT REDISTRIBUTE
Deutsche Bank Research 64Torsten Slok, [email protected] +1 212 250-2155 March 2020
Market cap of Bloomberg Barclays corporate indexes
0
1
2
3
4
5
6
7
8
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$ Trl
0
1
2
3
4
5
6
7
8
$ Trl
Aaa Aa A Baa Ba B Caa & below
Source: Bloomberg Finance LP, DB Global Research
US credit markets have grown from $2trn in 2008 to $7trn today.All driven by much more BBB and single-A paper outstanding
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Deutsche Bank Research 65Torsten Slok, [email protected] +1 212 250-2155 March 2020
Investment grade yields have never been lower than they are today
Source: LUACYW Index <GO>, Bloomberg Finance LP, DB Global Research
USD blnTotal stock of US corporate bonds outstanding (ls)Primary dealer inventory of corporate bonds (rs)
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Deutsche Bank Research 71Torsten Slok, [email protected] +1 212 250-2155 March 2020
How vulnerable are markets to a redemption shock?Funds with estimated liquidity shortfalls
account for half of all high-yield fund assetsAsset Share of Funds with HQLA Shortfalls
(Percent of sector’s assets)
0
5
10
15
20
25
30
35
40
45
50
Fixed-income funds High-yield funds
%
0
5
10
15
20
25
30
35
40
45
50
%
Jun. 30, 2017 Mar. 31, 2019
Source: IMF GFSR October 2019, DB Global Research
Note: Total AUM of funds analyzed: $10.5trn. The exercise assumes that redemption shocks are equivalent to the worst percentile of funds’ monthly asset outflows during 2000–19. If these shocks cannot be absorbed, funds suffer liquidity shortfalls.
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Deutsche Bank Research 72Torsten Slok, [email protected] +1 212 250-2155 March 2020
Modest decline in share of loans that are covenant-lite
Annual New Issue First-Lien Covenant-Lite Loans %
80%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%20
04
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1/1
- 10/
31/1
8
1/1
- 10/
31/1
9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Source: Deutsche Bank Credit Securitization CLO Research, DB Global Research
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Deutsche Bank Research 73Torsten Slok, [email protected] +1 212 250-2155 March 2020
Spread between BBB and AAA
Source: IHS Markit, FRB, Haver Analytics, DB Global Research
Ratio of spreads of iBoxx 10+ USD Domestic BBB and AAA annual yields with 10 year treasury note
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
05 07 09 11 13 15 17 19
Ratio
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
Ratio
Note: The chart plots (iBoxx BBB 10+ yield – 10y treasury yield) ratio with (iBoxx AAA 10+ yield – 10y treasury yield)
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Deutsche Bank Research 74Torsten Slok, [email protected] +1 212 250-2155 March 2020
U.S.: 30-year fixed-rate mortgages
2
4
6
8
10
12
14
16
18
20
1971
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2015
2017
2019
%
2
4
6
8
10
12
14
16
18
20
%
US mortgage rates near all-time lows
Source: FHLMC, Haver Analytics, DB Global Research
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Deutsche Bank Research 75Torsten Slok, [email protected] +1 212 250-2155 March 2020
Labor market and housing market
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Deutsche Bank Research 76Torsten Slok, [email protected] +1 212 250-2155 March 2020
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Deutsche Bank Research 79Torsten Slok, [email protected] +1 212 250-2155 March 2020
Number of work stoppages: beginning in year
0
100
200
300
400
500
47 52 57 62 67 72 77 82 87 92 97 02 07 12 17
# Number
0
100
200
300
400
500
# Number
Number of work stoppages moving up
Source: BLS, Haver Analytics, DB Global Research
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Deutsche Bank Research 80Torsten Slok, [email protected] +1 212 250-2155 March 2020
Median wage growth
0
1
2
3
4
5
6
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
%y/y
0
1
2
3
4
5
6
%y/y
All occupations
Maids and housekeeping cleaners *
Building & grounds cleaning & maintenance occupations **
Wage growth across occupations
Source: BLS, Haver Analytics, DB Global Research
* Maids and housekeeping cleaners - Perform any combination of light cleaning duties to maintain private households or commercial establishments, such as hotels andhospitals, in a clean and orderly manner. Duties may include making beds, replenishing linens, cleaning rooms and halls, and vacuuming.** Building & grounds cleaning & maintenance - This major group comprises the following occupations: First-Line Supervisors of Housekeeping and Janitorial Workers ; First-Line Supervisors of Landscaping, Lawn Service, and Groundskeeping Workers ; Janitors and Cleaners, Except Maids and Housekeeping Cleaners ; Maids and Housekeeping Cleaners ; Building Cleaning Workers, All Other ; Pest Control Workers ; Landscaping and Groundskeeping Workers ; Pesticide Handlers, Sprayers, and Applicators, Vegetation ; Tree Trimmers and Pruners ; Grounds Maintenance Workers, All Other.
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Deutsche Bank Research 81Torsten Slok, [email protected] +1 212 250-2155 March 2020
Univ. of Michigan: current value of stock market investments: median
Source: Elizabeth Weber Handwerker, David S. Piccone Jr, and Elizabeth Cross, "Occupational employment and wage differences across cohorts of establishments," Monthly Labor Review, U.S. Bureau of Labor Statistics, January 2020, DB Global Research
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Deutsche Bank Research 83Torsten Slok, [email protected] +1 212 250-2155 March 2020
Job switching rate, Q1 2018
0
2
4
6
8
10
12
Edu
catio
nal S
ervi
ces
Util
ities
Fina
nce
and
Insu
ranc
e
Man
ufac
turin
g
Hea
lth C
are
and
Soc
ial A
ssis
tanc
e
Man
agem
ent o
f Com
pani
es a
ndE
nter
pris
es
Info
rmat
ion
Who
lesa
le T
rade
Oth
er S
ervi
ces
(exc
ept P
ublic
Adm
inis
tratio
n)
Arts
, Ent
erta
inm
ent,
and
Rec
reat
ion
Ret
ail T
rade
Pro
fess
iona
l, S
cien
tific
, and
Tec
hnic
alS
ervi
ces
Tran
spor
tatio
n an
d W
areh
ousi
ng
Rea
l Est
ate
and
Ren
tal a
nd L
easi
ng
Con
stru
ctio
n
Agr
icul
ture
, For
estry
, Fis
hing
and
Hun
ting
Min
ing,
Qua
rryin
g, a
nd O
il an
d G
asE
xtra
ctio
n
Acc
omm
odat
ion
and
Food
Ser
vice
s
Adm
inis
trativ
e an
d S
uppo
rt an
d W
aste
Man
agem
ent a
nd R
emed
iatio
n S
ervi
ces
%
0
2
4
6
8
10
12%
Sectors with high and low job switching rates
Source: Census, Longitudinal Employer-Household Dynamics, DB Global Research
Note: The chart plots the share of new hires who were a part of a job-to-job move with a short or no observed nonemployment spell in the total employment in each industry
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Deutsche Bank Research 84Torsten Slok, [email protected] +1 212 250-2155 March 2020
Share of hires from the same industry, Q1 2018
0102030405060
Man
agem
ent o
f Com
pani
es a
ndE
nter
pris
es
Util
ities
Arts
, Ent
erta
inm
ent,
and
Rec
reat
ion
Who
lesa
le T
rade
Oth
er S
ervi
ces
(exc
ept P
ublic
Adm
inis
tratio
n)
Man
ufac
turin
g
Info
rmat
ion
Tran
spor
tatio
n an
d W
areh
ousi
ng
Min
ing,
Qua
rryi
ng, a
nd O
il an
dG
as E
xtra
ctio
nA
dmin
istra
tive
and
Sup
port
and
Was
te M
anag
emen
t and
Rem
edia
tion
Ser
vice
sP
rofe
ssio
nal,
Sci
entif
ic, a
ndTe
chni
cal S
ervi
ces
Fina
nce
and
Insu
ranc
e
Ret
ail T
rade
Con
stru
ctio
n
Edu
catio
nal a
nd H
ealth
Ser
vice
s
Acc
omm
odat
ion
and
Food
Ser
vice
s
%
0102030405060
%
Share of hires from within the same industry
Source: Indeed Hiring Lab, Census, Longitudinal Employer-Household Dynamics, DB Global ResearchNote: The chart plots the share of new hires in an industry who switched jobs from the same industry
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Deutsche Bank Research 85Torsten Slok, [email protected] +1 212 250-2155 March 2020
Share of job hires that were persistently unemployed in Q1 2018
0
10
20
30
40
50
60Fi
nanc
e an
d In
sura
nce
Min
ing,
Qua
rryin
g, a
nd O
il an
d G
asE
xtra
ctio
n
Util
ities
Who
lesa
le T
rade
Man
ufac
turin
g
Man
agem
ent o
f Com
pani
es a
ndE
nter
pris
es
Info
rmat
ion
Tran
spor
tatio
n an
d W
areh
ousi
ng
Rea
l Est
ate
and
Ren
tal a
nd L
easi
ng
Hea
lth C
are
and
Soc
ial A
ssis
tanc
e
Pro
fess
iona
l, S
cien
tific
, and
Tec
hnic
alS
ervi
ces
Con
stru
ctio
n
Adm
inis
trativ
e an
d S
uppo
rt an
d W
aste
Man
agem
ent a
nd R
emed
iatio
n S
ervi
ces
Ret
ail T
rade
Oth
er S
ervi
ces
(exc
ept P
ublic
Adm
inis
tratio
n)
Acc
omm
odat
ion
and
Food
Ser
vice
s
Agr
icul
ture
, For
estry
, Fis
hing
and
Hun
ting
Arts
, Ent
erta
inm
ent,
and
Rec
reat
ion
Edu
catio
nal S
ervi
ces
%
0
10
20
30
40
50
60%
Where do the long-term unemployed find jobs?
Source: Census, Longitudinal Employer-Household Dynamics, DB Global ResearchNote: The chart plots the share of hires who were not employed on the first day of the quarter in the total new hires in each industry
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Deutsche Bank Research 86Torsten Slok, [email protected] +1 212 250-2155 March 2020
Gallup Survey on Retirement age in United StatesWhen Do You Expect to Retire?
0
5
10
15
20
25
30
35
40
45
1995
Dec
15-
18
1995
Nov
6-8
2002
Apr
8-1
1
2003
Apr
7-9
2004
Apr
5-8
2005
Apr
4-7
2006
Apr
10-
13
2007
Apr
2-5
2008
Apr
6-9
2009
Apr
6-9
2010
Apr
8-1
1
2011
Apr
7-1
1
2012
Apr
9-1
2
2013
Apr
4-1
4
2014
Apr
3-6
2015
Apr
9-1
2
2016
Apr
6-1
0
2017
Apr
5-9
2018
Apr
2-1
1
% of Nonretirees
0
5
10
15
20
25
30
35
40
45
% of Nonretirees
Under 59 60-64 65 Over 65
People delaying retirement
Source: Gallup Survey, DB Global Research
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Deutsche Bank Research 87Torsten Slok, [email protected] +1 212 250-2155 March 2020
Do you approve or disapprove of labor unions?
0
10
20
30
40
50
60
70
80
1936 1946 1956 1966 1976 1986 1996 2006 2016
%
0
10
20
30
40
50
60
70
80
%Approve (%) Disapprove (%)
US: More support for labor unions in recent years
Source: Gallup Survey, DB Global Research
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Deutsche Bank Research 88Torsten Slok, [email protected] +1 212 250-2155 March 2020
25.6 - 32.2
22.9 – 25.6
21.2 – 22.9
20.1 – 21.2
18.2 – 20.1
14.3 – 18.2
Source: Cooper, Daniel, and Gorbachev,Olga and Jose Luengo-Prado. 2019. “Consumption, Credit, and the Missing Young.” FRB Boston Working Paper series , DB Global Research
Note: “Count Missing Young” is based on population counts of young adults in both the census and the CPP (×20 since the CPP is a 5 percent sample of US population).
Count Missing Young, Aged 18 to 34: State-Level Variation2007 2018
More young people do not have access to creditProvided for the exclusive use of [email protected] on 2020-03-05T16:14+00:00. DO NOT REDISTRIBUTE
Deutsche Bank Research 89Torsten Slok, [email protected] +1 212 250-2155 March 2020
Child care affordability of Millennials for center-based infant child carein United States
Source: The US and The High Price of Child Care: 2019, DB Global Research
>35%
30-35%
<25%
NR
Percent of Millennial income spent on Centre-based infant care
Costs of child care as % of median income in each state
25-30%
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Deutsche Bank Research 90Torsten Slok, [email protected] +1 212 250-2155 March 2020
Average Annual Household Expenses by category in United States National Average: 2018 cost
$0
$5,500
$11,000
$16,500
$22,000
Childcare Housing College TuitionTransportation Food Healthcare
$
$0
$5,500
$11,000
$16,500
$22,000
$
Average annual household expenses on child care: $22,000
Source: The US and The High Price of Child Care: 2019, DB Global Research
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Deutsche Bank Research 91Torsten Slok, [email protected] +1 212 250-2155 March 2020
-2
0
2
4
6
8
10
85 90 95 00 05 10 15 20
%
-2
0
2
4
6
8
10
%Fed Fund Target rateCore PCE inflation (%y/y)Underlying Inflation Gauge:Full data set measure
Underlying inflation metrics trending lower
Source: FRB, BEA, FRBNY, Haver Analytics, DB Global Research
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Deutsche Bank Research 92Torsten Slok, [email protected] +1 212 250-2155 March 2020
United States: Inventory of existing homes for sale
Total Existing Homes Available for Sale (ls) Months' Supply of Total Existing Home
Source: NAR, Haver Analytics, DB Global Research
Inventory of existing homes for sales at multi-decade lowsProvided for the exclusive use of [email protected] on 2020-03-05T16:14+00:00. DO NOT REDISTRIBUTE
Deutsche Bank Research 93Torsten Slok, [email protected] +1 212 250-2155 March 2020
US: The median house is 38 years old
Median age of Owner-occupied housing in United States
NumberNumberTotal number of countriesFree Not Free Partly Free
Note: The latest 2019 survey includes 195 countries.The status designation of Free, Partly Free, or Not Free, which is determined by the average of the political rights and civil liberties ratings, indicates the general state of freedom in a country or territory. The political rights and civil liberties ratings range from 1 to 7, with 1 representing the most free and 7 the least free. Free: Andorra, Antigua and Barbuda, Australia, Bahamas, Belgium, Belize, Canada, Cape Verde, Costa Rica, Croatia, El Salvador, France, Germany, Grenada, Iceland, India, Israel, Japan, Kiribati, Latvia, Lithuania, Monaco, Mongolia, Namibia, Netherlands, New Zealand, Palau, Peru, Poland, Portugal, Samoa, San Marino, Sao Tome and Principe, Slovakia, Spain, St. Lucia, St. Vincent and the Grenadines, Suriname, Taiwan, Tunisia, Tuvalu, United Kingdom, Vanuatu,Partly Free: Albania, Armenia, Bangladesh, Bhutan, Bolivia, Bosnia and Herzegovina, Burkina Faso, Colombia, Comoros, Cote d'Ivoire, Dominican Republic, Ecuador, Fiji, Georgia, Guatemala, Guinea, Guinea-Bissau, Haiti, Honduras, Hungary, Indonesia, Jordan, Kenya, Kosovo, Kuwait, Kyrgyzstan, Lebanon, Lesotho, Liberia, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Mexico, Moldova, Montenegro, Morocco, Mozambique, Myanmar, Nepal, Niger, Nigeria, Pakistan, Papua New Guinea, Paraguay, Philippines, Serbia, Seychelles, Sierra Leone, Singapore, Sri Lanka, Tanzania, The Gambia, Togo, Ukraine, Zambia, Zimbabwe,Not Free: Afghanistan, Algeria, Angola, Azerbaijan, Bahrain, Belarus, Brunei, Burundi, Cambodia, Cameroon, Central African Republic, Chad, China, Congo (Brazzaville), Congo (Kinshasa), Cuba, Djibouti, Egypt, Equatorial Guinea, Eritrea, Eswatini, Ethiopia, Gabon, Iran, Iraq, Kazakhstan, Laos, Libya, Mauritania, Nicaragua, North Korea, Oman, Qatar, Russia, Rwanda, Saudi Arabia, Somalia, South Sudan, Sudan, Syria, Tajikistan, Thailand, Turkey, Turkmenistan, Uganda, United Arab Emirates, Uzbekistan, Venezuela, Vietnam, Yemen.
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Deutsche Bank Research 107Torsten Slok, [email protected] +1 212 250-2155 March 2020
Greece: Government bond yield 10 year
0
5
10
15
20
25
30
35
40
1998 -Jan
2000 -Jan
2002 -Jan
2004 -Jan
2006 -Jan
2008 -Jan
2010 -Jan
2012 -Jan
2014 -Jan
2016 -Jan
2018 -Jan
2020 -Jan
%
0
5
10
15
20
25
30
35
40%
Greek 10-year rates below 1%
Source: Bank of Greece, Haver Analytics, DB Global Research
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Deutsche Bank Research 108Torsten Slok, [email protected] +1 212 250-2155 March 2020
Oil demand by sector
0
10
20
30
40
50
60
70
80
90
100
2010 2015 2020 2030
%
0
10
20
30
40
50
60
70
80
90
100
%
Trucks Cars Non-combusted Industry Non-road Buildings Power
Only 40% of oil demand goes to Cars and Trucks
Source: BP Energy Outlook 2019, DB Global Research
Estimates->
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Deutsche Bank Research 109Torsten Slok, [email protected] +1 212 250-2155 March 2020
The share of the population holding stocks has not recovered since the financial crisis
Source: Gallup survey, DB Global Research
* Do you, personally or jointly with a spouse have any money invested in the stock market right now –either in an individual stock or a stock mutual fund or in a self-directed 401(k) or IRA?
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Deutsche Bank Research 110Torsten Slok, [email protected] +1 212 250-2155 March 2020
0
1
2
3
4
5
6
7
16 17 18 19 20
%
0
1
2
3
4
5
6
7
%Bloomberg Barclays Muni HY yield to worst Fed funds target rate
HY muni interest rates down from almost 7% in 2016 to 3.5% today
Source: Bloomberg Finance LP, Federal Reserve, Haver Analytics, DB Global Research
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Deutsche Bank Research 111Torsten Slok, [email protected] +1 212 250-2155 March 2020
Foreigners projected to buy $1trn in Treasuries over the coming years
Source: Treasury, DB Global Research
Foreign holdings of US treasuries
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2016 2017 2018 2019 2020 2021 2022
$, tn
5.0
5.5
6.0
6.5
7.0
7.5
8.0
$, tn
Note: Projected assuming that foreigners continue to hold 40% of US treasuries outstanding; treasuries outstanding for 2020, 2021, 2022projected as the sum of previous year outstanding marketable debt and Deutsche Bank’s projections for treasury’s financing needs and debtissuance as laid out in our Global Fixed Income Outlook, 19 December 2019
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G7: Interest payments as a share of GDP
Source: OECD, DB Global Research
Net general government interest payments, 2019
-0.1
0.20.5
0.81.1
1.41.7
2.0
2.32.6
2.93.2
3.5
Italy US UK France Germany Australia Canada Japan-0.1
0.20.5
0.81.1
1.41.7
2.0
2.32.6
2.93.2
3.5
% GDP% GDP
Note: Forecast for 2019Q4
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Small cap stocks underperforming
Source: Wall Street Journal, Standard & Poor’s, Haver Analytics, DB Global Research
0.48
0.50
0.52
0.54
0.56
0.58
0.60
0.62
0.64
0.66
0.48
0.50
0.52
0.54
0.56
0.58
0.60
0.62
0.64
0.6620
07
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
RatioRatio Ratio: Russell 2000 vs S&P 500
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6 days: Fastest correction in the S&P500 on record
Source: Bloomberg Finance LP, DB Global Research
Time taken for S&P500 to correct 10% from peak
0
20
40
60
80
100
120
140
160
180
200
Aug
81M
ar-6
0Ju
n-69
Mar
-68
Jun-
53Ap
r-62
Feb-
84Ja
n-90
Apr-7
3M
ay-6
6Au
g-15
Aug-
46Se
p-99
Nov
-18
Oct
-56
Oct
-87
Nov
-07
Aug-
90Au
g-98
Feb-
46Ap
r-00
Oct
-97
Oct
-55
Feb-
18Fe
b-20
# days
0
20
40
60
80
100
120
140
160
180
200
# days
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Investorbase of advanced economies, 2019-Q2 (as % of total)
0%
20%
40%
60%
80%
100%
Gre
ece
Ger
man
y
Net
herla
nds
Irela
nd
Aust
ralia
Portu
gal
Finl
and
Den
mar
k
Nor
way
Swed
en
Uni
ted
Stat
es
Aust
ria
Fran
ce
New
Zea
land
Uni
ted
King
dom
Belg
ium
Can
ada
Spai
n
Slov
enia
Kore
a
Switz
erla
nd
Italy
Japa
n
Cze
ch R
epub
lic
0%
20%
40%
60%
80%
100%
Foreign official Foreign banks Foreign nonbanksDomestic central bank Domestic banks Domestic nonbanks
Who owns different countries’ government bonds?
Source: IMF Sovereign investor base estimate by Arslanalp and Tsuda, DB Global Research
Note: Coverage is for general government
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Investorbase of EM countries, 2019 Q2 (% of total)
0
20
40
60
80
100
Latv
iaLi
thua
nia
Bul
garia
Indo
nesi
a
Ukr
aine
Phi
lippi
nes
Egy
pt
Col
ombi
aP
olan
d
Rom
ania
Turk
ey
Per
u
Uru
guay
Mex
ico
Hun
gary
Indi
a
Mal
aysi
aC
hina
Bra
zil
Chi
leTh
aila
nd
Rus
sia
Sou
th A
frica
%
0
20
40
60
80
100
%
Foreign official Foreign banks Foreign nonbanksDomestic central bank Domestic banks Domestic nonbanks
EM: Who owns different countries’ government debt?
Source: IMF Sovereign investor base estimates by Arslanalp and Tsuda , DB Global Research
Note: Coverage is for general government
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Fed outlook – Fed to cut another 50bps at next FOMC meeting
Coronavirus and election uncertainty are headwinds for consumer spending and capex spending. Fading positive effects of 2018 tax cuts, slowing labor market, and late-cycle headwinds in consumer and corporate credit weighing on the broader US economic outlook.
Bond markets- Still downside risks to rates. Steeper curve likely
Uncertainty about Coronavirus impacting the Fed. Fading positive effects of 2018 tax cuts, slowing labor market, and late-cycle headwinds in consumer and corporate credit weighing on rates.
Credit- Credit spreads wider as slowdown continues
Dovish central banks and negative interest rates abroad without a US recession is bull case for US credit. Global QE and lower hedging costs means more foreign demand for US credit. But slower growth and deteriorating credit fundamentals and more Treasury supply argues for wider IG and HY spreads.
Stock markets- Policy uncertainty a risk
Virus uncertainty, trade war uncertainty, and election uncertainty are downside risks to equities. Low rates and dovish Fed are upside risks.
FX- Dollar down
2020 growth outlook flat for US, up for Europe. Gap between US long rates and German long rates expected to narrow further.
Commodities- Coronavirus and slower global growth
Coronavirus and slower global growth having negative impact on commodity prices.
Emerging markets- Imbalances in some EM countries
Coronavirus is a negative for commodity exporters. Flat US growth outlookis a risk to EM. But dovish Fed and ECB with no recession helpful for EM.
Investment implications summarized
Source: DB Global Research
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Torsten Slok, Ph.D.
• Chief Economist, Managing Director• Deutsche Bank Securities, Inc.
Torsten Slok joined Deutsche Bank Securities in the fall of 2005. Mr. Slok’s Economics team has been top-ranked by Institutional Investor in
fixed income and equities since 2010, including #1 in 2019. Slok currently servesas a member of the Economic Club of New York Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and
Finance Division and the Structural Policy Analysis Division. Before joining theOECD he worked for four years at the IMF in the Division responsible for writing theWorld Economic Outlook and the Division responsible for China, Hong Kong, andMongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has
published numerous journal articles and reviews on economics and policy analysis,including in Journal of International Economics, Journal of International Money andFinance, and The Econometric Journal.
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05/03/2020 21:10:14 2010 DB Blue template
Appendix 1Important Disclosures*Other Information Available upon Request
Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuersand the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation forproviding a specific recommendation or view in this report. Torsten Slok
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