Synchin Lower CalPER Offsite, January 22, 2019 Joachim Fels - Global conomic Outlook
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Global conomic Outlook Synchin Lower CalPER Offsite, January 22, 2019 Joachim Fels For in titutional inve tor u e only
PIMCO’s investment process
Forums: Themes that anchor portfolio construction
Annual secular forum
(3–5 year outlook)
Assess long-term trends demographics,
political factors, globalisation of trade and
capital, productivity / technology
ecular Trend
OUTLOOK
Quarterly cyclical forum
(6–12 month outlook)
Cyclical
Major economy / emerging
Trend market inflation and GDP
forecasts and fine tune the
secular outlook
SOURCE PIMCO
Refer to Appendix for additional investment strategy, outlook and risk information.
PIMCO_Phil_05
1
Global GDP growth: The peak is behind us
Real GDP Growth (y/y, %)
10
8
6
4
EM
2
Global
DM
0
-2
-4
-6
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
As of September 2018.
SOURCE Haver Analytics, PIMCO calculations.
DM = Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, UK, US. EM = Argentina, Brazil, Chile, China, Colombia, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Peru, Poland, Russia, Singapore, South Africa, Taiwan, Thailand, Turkey. Global = EM + DM. Aggregates are GDP-weighted averages using
market exchange rates. Note Australia, Argentina, South Africa and Turkey are excluded for 3Q 2018.
2Headline inflation has peaked, core inflation flat like a pancake
Headline CPI Inflation (%y/y)
Major Economy Core CPI Inflation (%y/y)
10
4
8 3
6 2
EM Euro (HICP)
1
4 US
Global
China
DM
0 Japan
2
UK
-1
0
-2
-2
2007 2009 2011 2013 2015 2017 2019 -3
07 08 09 10 11 12 13 14 15 16 17 18 19
As of November 2018.
SOURCE Haver Analytics, PIMCO calculations.
DM = Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, UK, US. EM = Argentina, Brazil, Chile, China, Colombia, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Peru, Poland, Russia, Singapore, South Africa, Taiwan, Thailand, Turkey. Global = EM + DM. Aggregates are GDP-weighted averages using
market exchange rates.
3Global policy rate higher, but real rates still historically low
Central Bank Policy Rate (%) Major Economy Central Bank Real Policy Rate (%)
10
8
8 6
4
6 Euro
EM US
2
China
Global
4 Japan
DM
0 UK
2
-2
0 -4
2007 2009 2011 2013 2015 2017 2019 2007 2009 2011 2013 2015 2017 2019
As of November 2018.
SOURCE Haver Analytics, PIMCO calculations.
DM = Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, UK, US. EM = Argentina, Brazil, Chile, China, Colombia, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Peru, Poland, Russia, Singapore, South Africa, Taiwan, Thailand, Turkey. Global = EM + DM. Aggregates are GDP-weighted averages using
market exchange rates.
4Wobbly markets have tightened financial conditions
U.S. Dollar U.S. 10 year Trea ury Yield
105 3.5
100
DXY Index Level
2.8
Yield (%)
95
2.0
90
85 1.3
Dec '15 Dec '16 Dec '17 Dec '18 Dec '15 Dec '16 Dec '17 Dec '18
U.S. Equitie 10 year BTP – Bund Spread
3000 350
2750
Spread (bps) 250
SPX Index Level
2500
2250
150
2000
1750 50
Dec '15 Dec '16 Dec '17 Dec '18 Dec '15 Dec '16 Dec '17 Dec '18
As of 3 January 2019
SOURCE Bloomberg
52019 Cyclical Outlook: ynching Lower
Composite PMIs U.S. Eurozone EM
62 Debates shaping the outlook for 2019:
60
1. How ate is it in the cyc e?
expansionary
58
56 2. The end of U.S. economic exceptiona ism?
54
3. Wi inf ation ever return?
PMI
52
50
4. The Fed pauses, then what?
48
5. U.S. versus China: truce or peace?
46
44
2012 2013 2014 2015 2016 2017 2018
As of December 2018
SOURCE Haver Analytics
62019 Cyclical Outlook: ynching Lower
RUSSIA
U.S.
GDP 1.00% - 2.00%
GDP 2.00% – 2.50%
CPI: 4.50% - 5.50%
CPI: 1.50% – 2.00%
U.K.
GDP 1.25% - 1.75%
CPI: 1.75% - 2.25%
--
EUROZONE JAPAN
GDP 1.00% - 1.50% GDP 0.75% - 1.25%
HICP: 1.00% - 1.50% CPI: 0.25% - 0.75%
MEXICO
GDP 1.50% - 2.50% CHINA
CPI: 3.75% - 4.75% GDP 5.50% - 6.50%
CPI: 2.00% - 3.00%
BRAZIL INDIA
GDP 7.00% - 8.00%
GDP 1.50% - 2.50%
CPI: 4.00% - 5.00%
CPI: 4.00% - 5.00%
Foreca t GDP Inflation
% of world GDP Change relative to 2018 2019 2018 2019
2018 data
For illustrative purposes only. Developed Market 2.20 1.50-2.00 2.00 1.25-1.75
PIMCO forecast ranges as of December 2018 Emerging Market 5.40 4.75-5.75 2.90 2.75-3.75
Real GDP and inflation projections reflect the midpoints of PIMCO’s forecast ranges.
Refer to Appendix for additional forecast, outlook, and risk information. World 3.30 2.75-3.25 2.30 1.75-2.25
Mk_3cs_intl_outlook_01 7Debate #1: How late is it in the cycle?
Recession models are flashing orange, but few traditional signs of overheating
Rece ion model how above average probabilitie No ign of overheating or over pending
US Rece ion Indicator US Core CPI
100% 14 1.0
0.9
12
0.8
75%
10 0.7
0.6
8
50% 0.5
6 0.4
4 0.3
25%
0.2
2
0.1
0% 0 0.0
1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
NBER recession Recession Probability - Combined Model Recession Core CPI y/y
Eurozone Rece ion Indicator Private ector net lending ( aving) po ition, % GDP
100% 12 1.0
0.9
10
0.8
75% 8
0.7
6 0.6
50% 4 0.5
0.4
2
0.3
25% 0
0.2
-2 0.1
0% -4 0.0
2001 2003 2005 2007 2009 2011 2013 2015 2017 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Recession Recession Probability - Combined Model Recession Net lending, % GDP
As of December 2018. SOURCE PIMCO, Bloomberg, NBER, Haver. Note Model-based recession probabilities are only one input into PIMCO’s overall assessment of recession risks
8Debate #1: How late is it in the cycle?
Note: It doesn’t take a recession for turmoil to roil financial markets
Ca e Study: Au tralia
Australia NO GDP recession for
27 years
6%
GDP (% change yoy)
5%
4%
3%
2%
1%
0%
0%
Equity market monthly drawdowns (%)
-10%
-20% Au tralian
equity market
-30% Yet… Australian equity drawdown
markets have suffered
several large drawdowns
-40%
during the expansion
-50%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
As of December 2018
SOURCE Bloomberg, Haver Analytics
9Debate #2: Is U. . economic exceptionalism coming to an end?
US economy and policy was exceptional in 2018
U.S. growth ha outpaced other More normalization in U.S. policy rate
U.S. Japan Eurozone Fed ECB BoJ BoE
4.0%
6
Real GDP growth (y/y)
3.0% 5
Policy rate (%)
4
2.0% 3
2
1.0%
1
0.0% 0
Dec '15 Jun '16 Dec '16 Jun '17 Dec '17 Jun '18 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
The dollar ha rallied again t mo t counterpart U.S. equitie have outperformed other
EM FX (ELMI+) JPY EUR GBP S&P 500 MSFI EM MSFI EAFE
Cumulative returns since 31 Dec'17
8% 15%
6%
% change since 31 Dec' 17
10%
4%
5%
2%
0%
0%
-5%
-2%
-10%
-4%
-6% -15%
-8% -20%
Dec '17 Mar '18 Jun '18 Sep '18 Dec '17 Mar '18 Jun '18 Sep '18
As of December 2018
SOURCE Bloomberg, Haver Analytics
10Debate #2: Is U. . economic exceptionalism coming to an end?
Tighter financial conditions will start to bite soon
ppt PIMCO Financial Condition Index (FCI) ppt Contribution to
102 Quarterly Change in PIMCO FCI
2
Tighter FCI ↑
Tighter FCI ↑
101 1.5
1
100
0.5
99 0
-0.5
98
-1
Ea ier FCI ↓
97 Ea ier FCI ↓
-1.5
Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Dec-18
Equity FX Rates Total
As of December 2018
Source Haver, FRBUS, PIMCO Calculations
11Debate #3: Will inflation ever return?
Wages are picking up, but inflation more likely to remain tame
Nominal wage are howing ign of life… …But Phillip Curve are flat and inflation expectation
remain well-anchored
Nominal wage growth EA 19 U.S. Japan
Japan Output Gap vs. CPI
3% 4
Data since '88 to '97
3
CPI ex food/energy YoY (%)
Data since '98 to current
Percent Change (year over year)
2%
2 Current
1%
1
0
0%
-1
-2
-1%
-8 -6 -4 -2 0 2 4 6
Sep '10 Sep '12 Sep '14 Sep '16 Sep '18
Output Gap 3 Quarter Lead (% of GDP)
As of 30 November 2018 or latest available.
SOURCE Eurostat, BEA, MHLW, Haver, PIMCO
12Debate #4: The Fed pauses, then what?
Fed has arrived in PIMCO’s New Neutral Range, no need to overshoot
Hi tory how a pau e can be difficult to communicate Market now think the Fed i done hiking
Change in Eurodollar Futures after Chair Bernanke suggested the Fed
might “pause” on April 27th, 2006 % Fed Fund , Market and FOMC Foreca t
FOMC
% 3.5
Median dots
5.4
Nov 8. 2018
3.0
Market
2.5
5.3
2.0
Current
1.5 Market
(1/03/2019)
5.2
1.0
Fed Funds -
0.5 Upper Bound
Fed Funds
5.1 Effective
0.0
Jun '06 Sep '06 Dec '06 Mar '07 Jun '07
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
Market (ED) 26 Apr '06
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Market (ED) 28 Apr '06
As of 3 January 2019
SOURCE PIMCO, Bloomberg, Minack Advisors. Bernanke, Ben. "The courage to act a memoir of a crisis and its aftermath." New York W.W. Norton & Company, 2015.
13Debate #5: U. . versus China – truce or lasting peace?
A deal on trade looks likely, but the underlying conflict won’t be resolved
90 day pau e in trade e calation : i the wor t behind u ? …But conflict between the U.S. and China i more deep-rooted and
not only about trade
U.S. tariff announcement
Information
technology Numerical
25% on $50bn of Agricultural control
Feb 7: 20% to 30% Mar 1: “Hard
Chinese goods Machinery tool /
on washing deadline” on
July 6: $34bn robotic
machines and solar negotiation with
Augu t 23: $16bn
panels China; tariff rates
set to increase Energy
Railway aving and
equipment new energy
J F M A M J J A S O N D J F M Made in vehicle
2018 2019 China
June 1: Steel Sept 24: 10%
Medicine/
2025
(25%) and on $200bn of Power
Chinese goods medical
aluminum (10%) equipment
device
Ocean
engineering/ Aero pace
high-tech equipment
hip New
material
As of December 2018
SOURCE PIMCO, Bloomberg.
14The next five years could be radically different, prepare for ‘Rude Awakenings’
Po t-cri i world Uncertain future
• Dominant central banks, financial repression • More volatility, recession likely
• Passive or restrictive fiscal policies • Productivity surprise
• Weak productivity growth, subdued inflation • Different monetary-fiscal policy mix
• Low macro and market volatility • Radical populist backlash
• Rising aggregate global debt levels • Geopolitical conflict
Global Economic Growth Rate
PIMCO 2006
“Stable Di equilibrium”
PIMCO 2018
“Rude Awakening ”
PIMCO 2009
“New Normal” PIMCO 2014
“New Neutral”
PIMCO 2016
“In ecure Stability” ?
2006 2010 2014 2018 2022
As of June 2018. SOURCE PIMCO
Refer to Appendix for additional outlook and risk information.
15The elephant in the room: The debt hockey stick
Public debt
Non-mortgage lending
Mortgage lending
Private credit
Source Òscar Jordà, Moritz Schularick, and Alan M. Taylor. 2017. “Macrofinancial History and the New Business Cycle Facts.” in NBER Macroeconomics Annua 2016, volume 31, edited by Martin
Eichenbaum and Jonathan A. Parker. Chicago University of Chicago Press.
16Appendix
FORECAST
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or
sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other
costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.
INVESTMENT STRATEGY
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially
during periods of downturn in the market.
OUTLOOK
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under
all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies
are subject to change without notice.
RISK
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in
interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low
interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth
more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled ecuritie may involve heightened risk due to currency fluctuations, and economic and political
risks, which may be enhanced in emerging markets. Equitie may decline in value due to both real and perceived general market, economic, and industry conditions.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be
considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but
not guaranteed.
PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Inve tment Management Company
LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission.
These materials are being provided on the express basis that they and any related communications (whether written or oral) will not cause Pacific Investment Management Company LLC (or any affiliate)
(collectively, “PIMCO”) to become an investment advice fiduciary under ERISA or the Internal Revenue Code, as the recipients are fully aware that PIMCO (i) is not undertaking to provide impartial
investment advice, make a recommendation regarding the acquisition, holding or disposal of an investment, act as an impartial adviser, or give advice in a fiduciary capacity, and (ii) has a financial
interest in the offering and sale of one or more products and services, which may depend on a number of factors relating to PIMCO (and its affiliates’) internal business objectives, and which has been
disclosed to the recipient. These materials are also being provided on PIMCO’s understanding that the recipients they are directed to are all financially sophisticated, capable of evaluating investment
risks independently, both in general and with regard to particular transactions and investment strategies. If this is not the case, we ask that you inform us immediately. You should consult your own
separate advisors before making any investment decisions.
These materials are also being provided on the express basis that they and any related communications will not cause PIMCO (or any affiliate) to become an investment advice fiduciary under ERISA or
the Internal Revenue Code with respect to any recipient or any employee benefit plan or IRA because (i) the recipients are all independent of PIMCO and its affiliates, and (ii) upon review of all relevant
facts and circumstances, the recipients have concluded that they have no financial interest, ownership interest, or other relationship, agreement or understanding with PIMCO or any affiliate that would
limit any fiduciary responsibility that any recipient may have with respect to any Plan on behalf of which this information may be utilized. If this is not the case, or if there is any relationship with any
recipient of which you are aware that would call into question the recipient’s ability to independently fulfill its responsibilities to any such Plan, we ask that you let us know immediately.
The information provided herein is intended to be used solely by the recipient in considering the products or services described herein and may not be used for any other reason, personal or otherwise.
CMR2019-0107-375046
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