Tuesday COMMENTARY IN THIS ISSUE - Bloomberg L.P. · Tuesday May 24, 2016 New Home Sales; Regional Manufacturing; Greece BEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS WHAT TO

Tuesday

May 24, 2016

www.bloombergbriefs.com

New Home Sales; Regional Manufacturing; GreeceBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS

WHAT TO WATCH: Sales of are to rise 2.3 percent in April new U.S. homes forecastfrom a month earlier to a 523,000 seasonally adjusted annualized rate, 10 a.m. The increase for the month would be the first of the year. Also at 10 a.m., the Richmond Fed

is expected to drop to a level of 8 in May from 14 a month ago.manufacturing index

ECONOMICS: ECB Supervisory Board Chair Daniele Nouy speaks at an Institute of meeting in Madrid at 8:30 a.m. Event speakers on Wednesday International Finance

include ECB Executive Board member Peter Praet and Governing Council members Klaas Knot, Francois Villeroy de Galhau and Luis Maria Linde.

GOVERNMENT: Euro-area finance ministers meet at 9 a.m. in Brussels to discuss how to conclude , including debt-relief measures and Greece’s bailout reviewcontingency plans in case budget targets are missed. A full EU finance ministers’ meeting starts Wednesday morning. state holds its Republican Washington presidential primary.

MARKETS: The dollar rallied and crude oil fell with gold and most industrial metals. European stocks rose. U.S. Treasury Department’s acting assistant secretary for financial markets will speak at the Fixed Income Market Structure Daleep Singhseminar in New York City at 1:35 p.m.

(All times local for New York.)    

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COMMENTARY IN THIS ISSUE

An increase in survey-based measures of expectations would give the inflationFed more comfort to raise rates in July, says , Head of Inflation-Martin HegartyLinked Bond Portfolios at BlackRock Financial Management.

If Donald Trump wins the presidential election and implements his proposed policies, they could hurt U.S. trade and the industry: freight transportation Lee

and Klaskow Talon Custer.

St. Louis Fed President James Bullardsaid he doesn’t see the vote Brexitinfluencing the U.S. central bank policy makers’ meeting that will be held the week before the referendum. He said that even if the U.K. decides to leave, the country will enter into departure negotiations bound to go “very slowly.”

EQUITIES MONITOR

WHAT TO READ

"Analysis suggests that the boom and bust in housing has been a key factor," in younger adults' slower pace of household formation, writes San Francisco Fedgroup vice president in an Fred Furlong

.Economic Letter

Q&A

U.S.-Germany 10-Year Yield Spread Widening Faces Hurdle

Divergence of yields between U.S. Treasuries and bunds may face stiff technical resistance ahead of speeches this week by Federal Reserve members, including Chair Janet Yellen. The spread could stay contained within the so-called triangle pattern as U.S. bonds may be underpinned by relatively higher yields, global disinflationary woes and anxiety of equity investors over the timing and pace of tightening. Yields on 10-year Treasuries jumped 14 basis points last week, the most since November, as the minutes of the Fed’s April FOMC meeting and comments of officials increased the probability of an interest rate increase in June or July.

— Tanvir Sandhu, Bloomberg News

Source: Bloomberg

May 24, 2016 Bloomberg Brief Economics 2

Q&A

Negative Risk Premium in Inflation-Linked Bonds Presents Opportunity: BlackRock

An increase in survey-based measures of

inflation expectations would give the Fed more

comfort to raise rates in July, says Martin

, Head of Inflation-Linked Bond Portfolios Hegarty

at BlackRock Financial Management. New York-

based Hegarty spoke with Bloomberg TV's Nina

Melendez on May 18. His comments have been

edited and condensed

Q: What is your inflation outlook for the end of the year?A: We expect at this stage core inflation to be in the vicinity of 2.3 percent. Obviously the path of the dollar going forward is important on that outlook. The dollar had appreciated fairly handsomely into January and February and is subsequently cheaper on the year. If we maintain these current evaluations, I would expect our year-end 2016 forecast to probably be revised higher.

Q: You said you think the Fed will hike in July. What should we be looking for until then?A: I think that we should continue to look at the same economic data that we've been looking for, anything to do with GDP,the labor market and inflation. I think the Brexit vote is a definite concern for them. One thing that is very important even for July is the expectations of inflation not only embedded in the marketplace, but some of the survey-based measures. Themarkets trended down very sharply and so their base measures have started to tick down. But if we start to see some uptick in the survey-based measures, that would give them some comfort in moving.

Q: Where do you see opportunities in inflation-linked bonds?A: I see opportunities when we compare them against nominal-duration assets. We think that the level of inflation risk premium embedded in inflation-linked bonds is actually negative — you are giving equity to own inflation-linked bonds over nominal. But long-term investors should be looking to harvest that negative risk premium. An easy example to talk about now is the front end of the inflation

curve, where we're pricing at a run rate of core CPI or even ex-energy CPI very close to 1.5 percent, or slightly below, for the next couple of years. That is substantially below the level of core CPI that we're forecasting for the end of 2016, and even substantially lower than the current run rate.

Q: Has the inflation market picked up on the recent rise of inflation? Bloomberg Radio asked you this in April, and you said not necessarily.A: It has. What I alluded to earlier when I talked about what the inflation market is pricing in relative to the run rate of CPI was, if we had talked about this in January or February, those same one-year forward rates were at 55 basis points. So we've had a 100 basis point rise in front inflation rates, yet that pickup has not been transmitted further up the curve. And it's created a tremendously flat inflation curve, basically saying we're going to pick up for inflation in the next 12 to 24 months and then we're going to flat line or even decline from those levels. I don't think the Fed's comfortable with that. It would like there to be some inflation risk premium out the curve.

Q: What does that mean for the market?A: What's really hard to distinguish is howmuch of this is technical and how much ofis actual inflation expectations, where youhave equity premium and inflation risk premium. What has transpired post-crisis is that the large participants in the U.S. inflation market have been the global central banks and sovereign wealth community. As their reserves grew, they were responsible for digesting a

tremendous amount of the uptick in supply from the U.S. Treasury. Subsequent to mid-2014 those reserves aren't growing in nearly the same way, they're actually declining. So it's safe to assume those investors are not making allocations with the same fervor, and are perhaps even reducing exposure as their reserve levels come down. That has resulted in an oversupply of inflation-linked assets in the U.S. and to an extent globally, which is pushing down these longer forwards. Given the sensitivity of global financial conditions to U.S. real interest rates, the Fed has to take some of these moves as potentially concerning.

Q: What's the risk the Fed is behind the curve and will be playing catch-up?A: I think the risk is growing, but that is part of the playbook. By behind the curve,I mean allowing inflation to get to 2.5-3.5 percent, not necessarily running north of 5 percent or whatever the case may be. But I do think that given the sensitivity ofglobal financial conditions to U.S. real rates, the Fed needs to be behind the curve.

Q: What's your outlook for the dollar?A: I think the Fed is cognizant of dollar strength, not only for the U.S. economy and the softness and the manufacturing sector, but more for global conditions. When you look at what happened in the emerging market world in 2014-15, they got a 15-20 percent appreciation of the dollar, and at the same time they had a tremendous drop on the income side from the decline in commodity prices. So I think the Fed is very reluctant to let the dollar appreciate meaningfully from here, at least in a straight line.

Best investment advice: Focus on the long termFavorite restaurant: Nobu 57, New York CityFavorite emerging market country to visit: Zimbabwe — home is home!Number of days a year spent traveling for business: Around 30If you could have another career it would be: PGA Tour golfer

May 24, 2016 Bloomberg Brief Economics 3

BI INSIGHTS   LEE KLASKOW AND TALON CUSTER, BLOOMBERG INTELLIGENCE ANALYSTS

May 24, 2016 Bloomberg Brief Economics 4

BI INSIGHTS   LEE KLASKOW AND TALON CUSTER, BLOOMBERG INTELLIGENCE ANALYSTS

Trump Proposals May Bite the Hands That Feed the U.S. EconomyIf presumptive Republican nominee

Donald Trump wins the presidential election and implements his proposed policies, they could hurt U.S. trade and the freight transportation industry.

His controversial comments and policy stances regarding trade and immigration may damage relations with China and Mexico, which are among the largest trade partners. This could hinder economic growth and lead to higher costs, forcing manufacturers to seek alternative product sourcing or shift transportation modes.

Trump has proposed a 45 percent tariff on Chinese imports and building a wall on the Mexico border to curb immigration. Both could spark retribution from those nations.

If elected, Donald Trump says he plans to cut outsourcing, bring manufacturing jobs back to the U.S. and curb illegal immigration. His ability to make good on his promises may be small. Still, his rhetoric alone, which calls for higher tariffs, could strain relations with major trade partners and affect the U.S. economy.

Trade comprises about 30 percent of GDP, with China the largest partner at 16 percent of U.S. trade, followed by Canada (14 percent) and Mexico (13 percent). Stricter immigration laws could create tension with Mexico.

Integrated logistics providers, truckers, railroads and container liners facilitate U.S. international trade. These carriers would be affected by changes in the supply chain or souring relations with major trade partners.

Trump's proposed 45 percent tariff on Chinese exports to the U.S. could pack a large punch for tech and retail since many companies in those industries make products in China.

It could spur global supply-chain changes, which may impact the revenues and margins of freight transporters that haul goods to and within the U.S. Air-freight carriers may be pressured as they typically move tech products such as smart phones, while container liners may

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be hurt since they usually ship retail goods such as apparel and toys.

Relations with Mexico could be tarnished by Donald Trump's strong stance against immigration, illustrated by his desire to a build wall on the U.S.-Mexico border. Opposition to Trump could spur reduced trade opportunities for the

U.S. with Mexico, affecting transport companies with cross-border operations. Class I railroad Kansas City Southern derives 48 percent of revenue from Mexico, while truckload carrier Werner gets 9 percent from the country. Other carriers XPO, Swift and Ryder also have operations in Mexico.

DATA & EVENTS

Container Volumes From Asia-North America

*TEUs = Twenty-Foot Equivalent Units, a measure of a container's shipping capacity

U.S. Import Growth From Mexico by Rail and Truck

May 24, 2016 Bloomberg Brief Economics 5

DATA & EVENTS

TIME COUNTRY EVENT SURVEY PRIOR

7:00 Brazil FGV Consumer Confidence — 64.4

9:00 Chile PPI MoM — 2.40%

9:00 China Conference Board China April Leading Economic Index — —

9:30 Brazil Current Account Balance -$900m -$855m

9:30 Brazil Foreign Direct Investment $6150m $5557m

10:00 Canada Bloomberg Nanos Confidence — 57.3

10:00 U.S. Richmond Fed Manufact. Index 8 14

10:00 Mexico International Reserves Weekly — $177653m

10:00 U.S. New Home Sales 523k 511k

10:00 U.S. New Home Sales MoM 2.30% -1.50%

15:00 Argentina Trade Balance $350m -$266m

20:00 Singapore GDP YoY 1.90% 1.80%

20:00 Singapore GDP SAAR QoQ 0.60% 0.00%Source: Bloomberg. Surveys updated at 5:45 a.m. New York time.

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CALENDAR

Click on the to see the full range of economists' forecasts on the terminal.   highlighted releases

OVERNIGHT

German investor confidence dropped for the first time in three months in May in a sign that growth momentum is set to slow amid concerns over a U.K. exit from the European Union. The ZEW Center

in for European Economic Research Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, fell to 6.4 from 11.2 in April. Economists in a Bloomberg survey predicted an increase to 12.  

A surge in investment propelled to its fastest German economic growth

pace in two years in the first quarter as mild winter weather encouraged construction. Building activity jumped 2.3 percent at the start of the year, driving up capital investment by 1.8 percent, the

in Wiesbaden Federal Statistics Officesaid today. Private consumption rose 0.4 percent. Gross domestic product increased a seasonally-adjusted 0.7 percent in the January-March period, in line with a May 13 estimate.

Bank of England Governor Mark once again defended his Carney

obligation to assess risks including Britain’s upcoming referendum on European Union membership. Speaking to the Treasury Select Committee, Carney said the central bank has “a responsibility under our remit to report not just the current trade-off that may hold in terms of returning inflation to target in a sustainable manner, but the risks, the principle risks around that trade-off.”

The Reserve Bank of Australia’s outgoing Governor Glenn Stevensdefended the central bank’s inflation target and said the framework had proved a successful tool in deciding interest rates.“It’s not at all a very rigid thing that demands knee jerk responses on our part,” Stevens said of the 2 percent to 3 percent target band, in remarks to the Trans-Tasman Business Circle in Sydney. “It’s easiest the best monetary policy framework we’ve ever had.”

Europe

Asia

MARKET INDICATORS

Trend of New Home Sales' Modest Gains Should Continue

The pace of improvement in new home sales has been shallower than the moderate trajectory of existing home sales gains. New homes are 30 percent more expensive on average than existing ones. Regulatory costs imposed by different levels of government account for about a quarter of the price of a new home, according to the recent survey by the National Association of Home Builders. Less-affordable prices and limited supply, despite low mortgage rates, are limiting the pace of improvement in new home sales. The underlying trend of modest gains in new home sales should continue.

— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence Economists

May 24, 2016 Bloomberg Brief Economics 6

MARKET INDICATORS

COMMENTARY  BLOOMBERG VIEW EDITORIAL BOARD

Source: Bloomberg. Updated 5:50 a.m. New York time.

May 24, 2016 Bloomberg Brief Economics 7

Bloomberg Brief: Economics

COMMENTARY  BLOOMBERG VIEW EDITORIAL BOARD

Puerto Rico Deal May Put Congress on Road to RecoveryHouse Speaker Paul Ryan deserves

credit for getting the policy right — and a lot of the politics — when it comes to a debt-relief for Puerto Rico. Now he planmust be willing to stand up to members of his own party.

The shows that practical revised billbipartisanship and legislative-executive cooperation are possible even in an election year. It will make it more likely that any restructurings of Puerto Rico's $70 billion in debt are consensual. It pledges to honor the "relative lawful priorities" of the bonds issued by 17 different entities on the island, especially the general-obligation bonds whose payments are guaranteed by the island's constitution. And it strengthens the powers of a proposed fiscal control board to fix Puerto Rico's finances.

That's not enough for some die-hard Republican legislators, especially members of the . House Freedom CaucusSome of their criticisms are easily dismissed: Contrary to some misleading attack , the bill is not a "bailout" for adsPuerto Rico. No taxpayer money is involved. Moreover, because the bill's

provisions apply only to territories with a federal control board, they are irrelevant to states. No dangerous precedents are being set, and there's no threat of contagion to state or municipal bond markets.

Critics have also bridled at the bill's

The bill is far from perfect — it does little,

for instance, to rekindle growth in the

island's economy.

provision to allow a two-thirds supermajority of bondholders to overrule holdouts and agree to a restructuring. And they really don't like the board's ability, under certain conditions, to allow a court-ordered restructuring.

But collective action clauses are

becoming standard practice in dealing with holdouts. And even with the best of intentions and mediation, some involuntary restructurings are inevitable. That they can only happen with the approval of five of the board's seven members will make them rare exceptions.

The bill is far from perfect — it does little, for instance, to in rekindle growththe island's economy. And the process has taken too long — it's unlikely the bill will become law in time to avert Puerto Rico's next fiscal crisis, in July, when it is scheduled to pay about $2 billion it doesn't have.

But it's an essential first step. Ryan should bypass the so-called Hastert Rule(under which a speaker doesn't send a bill to the House floor without a majority of the majority) and move for passage as soon as possible. Maybe this bill can begin not only Puerto Rico's long road to recovery, but also Congress's path out of a hyperpartisan wilderness.

Editorials are written by the Bloomberg View

editorial board.

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