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Atlanta Fed President 1 2 Treasury Yield Curve-2017 Source: Bloomberg 3 Municipal Aaa Yield Curve-2017 Source: Bloomberg 4 Treasury vs. Muni Aaa Yield Curve –Jan 17 Source: Bloomberg 5 Treasury vs. Muni Aaa Yield Curve-Nov 17 Source: Bloomberg 6 Interest Rates – from 3000 BC Source: Business Insider 7 Economic Growth – 2007-2017 Source: BEA & Bloomberg 8 Economic Growth – GDPNow Forecast Source: Atlanta Fed GDPNow Model 9 U.S. Unemployment Rate U-3 Source: BLS and Bloomberg 10 U.S. Unemployment Rate U-6 Source: BLS and Bloomberg 11 U.S. Non-farm Payrolls (2007-Present) Source: BLS and Bloomberg 12 Weekly Initial Jobless Claims(1967-Present) Source: DOL and Bloomberg 13 Inflation (PCE Core YoY) – 2007-2017 Source: BEA & Bloomberg 14 Inflation (CPI Core YoY) – 2007-2017 Source: BEA & Bloomberg 15 Inflation (PPI Core YoY) – 2007-2017 Source: BEA & Bloomberg 16 Average Hourly Earnings (YoY) – 2007-2017 Source: BLS & Bloomberg 17 Equity Market (Dow) – 2009 (low)-2017 Source: Bloomberg 18 High Yield – 2012-2017 Source: Bloomberg 19 U.S. Econ Forecasts – Street November 15, 2017 Source: Bloomberg Q4 Q1 Q2 Q3 Q4 Q1 2017 2018 2019 2019 17 18 18 18 18 19 GDP 2.7% 2.2% 2.5% 2.2% 2.2% 2.0% 2.2% 2.4% 2.1% 2.1% (2.50%- 3.50%) Core PCE 1.4% 1.5% 1.7% 1.8% 1.9% 1.9% 1.5% 1.7% 2.0% 2.0% 2.0% (U-3) 4.2% 4.1% 4.1% 4.1% 4.1% 4.0% 4.4% 4.1% 4.1% 4.1% Non-farm 193k 165k 160k 150k 150k 141k 171K 157k 134K 134K Payrolls 20 U.S. Interest Rate Forecasts - Street November 15, 2017 Source: Bloomberg Current Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Fed Funds - UB 1.25% 1.50% 1.60% 1.85% 2.00% 2.15% 2.30% Fed Funds - LB 1.00% 1.24% 1.36% 1.58% 1.72% 1.90% 2.01% 3-mon Libor 1.42% 1.53% 1.67% 1.86% 2.02% 2.16% 2.33% 2-yr note 1.69% 1.66% 1.83% 2.00% 2.15% 2.29% 2.46% 10-yr note 2.34% 2.47% 2.58% 2.70% 2.80% 2.89% 3.01% 30-yr bond 2.80% 2.99% 3.11% 3.22% 3.32% 3.39% 3.47% 2s/10s Spread 66 81 75 70 65 60 55 21 22 Locations of the Federal Reserve Banks Source: The Federal Reserve 23 Fed Has a Dual Mandate Maximize Employment (i.e. – emphasis on economic growth) Prefer to grow GDP in a 2.5%-to-3.5% range 3.0% in 3rd quarter 4Q Forecasts: Atlanta Fed – 3.3% NY Fed – 3.2% Street – 2.7% Stabilize Prices Inflation not a problem at this time PCE Core YoY target of 2.0% Currently (September)-1.33% 24 What’s the Fed Doing? – Interest Rates Interest Rate Policy Began Rate Hikes in December 2015 Raised 4x by 25 bps Currently at 1.00%-1.25% Fed funds target rate Fed “expected to raise 25 bps in December 97.1% Chance Two-to-three additional rate hikes in both 2018 and 2019 Normalized fed funds target of 3.00% (2.75%-3.25%) Current Taylor Rule Estimate is 3.89% Fed-to-Taylor Spread of -264 bps Interest on Excess/Required Reserves (IOER)/(IORR) – 1.25% $2.3 trillion in Reserves at the Fed 25 What Do Traders Think? Fed Fund Futures – Implied (Chance of 25 bps increase) – December 26 What’s the Fed Doing? – Balance Sheet SOMA is $4.2 Trillion ($2.4+ Treasuries/$1.8 MBS) Reduction began last month (October 13) Time Treasuries MBS Total Cum Tot Oct‐Dec 17 $6 b $4 b $10 b $30 b Jan‐Mar 18 $12 b $8 b $20 b $90 b Apr‐Jun 18 $18 b $12 b $30 b $180 b Jul‐Sep 18 $24 b $16 b $40 b $300 b From Oct 18 $30 b $20 b $50 b $450 b 2019 $30 b $20 b $50 b $1.05 t 2020 $30 b $20 b $50 b $1.65 t Source: New York Federal Reserve 27 FOMC – 2017 Voters Janet Yellen – Chair (2) Stanley Fischer – Vice Chair* (4) William Dudley – NY Fed President (2) Lael Brainard – Governor (1) Jerome Powell – Governor (3) Randall Quarles – Governor** (Vice Chair – Supervision) (4) Charles Evans– Chicago Fed President (2) Patrick Harker– Philadelphia Fed President (4) Robert Kaplan– Dallas Fed President (4) Neel Kashkari– Minneapolis Fed President (1) On a 1-5 Scale with 1=Dove and 5=Hawk 2017 Score = 3.00 (Neutral) *Retired in October **Started in October 28 FOMC – 2018 Voters Janet Yellen – Chair (2) – will leave Chair in February William Dudley – NY Fed President (2) – gone mid-year 2018 Lael Brainard – Governor (1) Jerome Powell – Governor (3) Chair beginning in early February Randall Quarles – Vice Chair for Supervision (4) Loretta Mester– Cleveland Fed President (5) Raphael Bostic– Atlanta Fed President (1) John Williams– San Francisco Fed President (4) Mark Mullinix– Richmond Fed First Vice President (4) (acting) Unfilled Board Slots – 3 (2-if Yellen remains on Board) Governor/Vice Chair/Governor-Community Bank Rep On a 1-5 Scale with 1=Dove and 5=Hawk 2017 Score = 3.00 (Neutral) 29 FOMC – More Newcomers? Mohamed El-Erian Possible Vice Chair Allianz Chief Economic Advisor Marvin Goodfriend Economics Professor at Carnegie Mellon Former Director of Research at Richmond Fed Michelle Bowman Community Bank Position Bank Commissioner for the State of Kansas John Taylor Economics Professor at Stanford Former CEA for the first Bush White House 30 31 Geopolitical The Big Three “Problems” North Korea BSC Leadership Hobby is launching ballistic missiles - Sea of Japan China Military Expansion Investments Globally – especially in Africa Island Building in South China Sea Russia Disruptions of Foreign Elections Military Resurgence Especially Naval Power Naval Bases in Crimea 32 Political EU Is Frexit, Grexit, or Germxit Next? Brexit Negotiations-major impact on the future of the EU U.S. Leadership Leadership’s Questionable Decisions U.S. Ceding Leadership Role to China TPP - Was Intended to Combat China’s Growing Economic Influence Paris Climate Accord No longer at the Table to have a Say NAFTA Are We in a New Age of Isolationism? Debate that began in the late 90’s (1890’s) 33 More Things that Interrupt My Beauty Sleep Tax Reform – Not Just Tax Cuts Corporate Tax Rate Needs to be Reduced Simplification of Individual Income Taxes U.S. Deficit To paraphrase Mr. Dirksen - “A trillion here and trillion there and pretty soon you are talking about some real money” $20,497,341,175,850 (US Debt Clock.org) $169,375 debt per taxpayer $62,824 debt per citizen 34 35 Holders of Municipal Bonds Source: Federal Reserve & CreditSights 36 Weekly Municipal Bond Fund Flows 37 Municipal Bond Issuance (Supply) Source: SIFMA 38 Tax Reform Implications for Municipals Source: Barclays House: Curtails (25-30% of market) Advance Refunding (90+ days) 25% of the market Private Activity Bonds 19% of the market PABs -3% 501c3-16% Tax-exempt Stadium Bonds Tax Credit Bonds Senate: Curtails Tax Exempt Stadium Bonds Advance Refunding 39 Tax Reform Implications for Municipals Demand – Likely to Increase Higher brackets are not changing much House – 39.6% Senate – 38.6% Fewer tax “shelters” for high income filers Reduction/limitations Mortgage Interest State & Local Taxes Medical Supply – Could Decrease Expected to be $380-$400 billion in 2017 Could be reduced to $250-$270 billion Includes $70-$80 billion 40 Muni Returns vs. Other Asset Classes 41 Municipal Market Total Returns 42 More Municipal Market Total Returns 43 Muni Market Dashboard 44 Disclaimers The opinions expressed are those of the presenters and not necessarily of Robert W. Baird & Co. Past performance is not a guarantee of future results. Robert W. Baird & Co., Inc. Member SIPC 45 Sources: Bloomberg Bank America Merrill Lynch Barclays Bloomberg Barclays Indices Bureau of Economic Analysis Bureau of Labor Statistics Business Insider CBO U.S. Census Bureau CreditSights Department of Labor Federal Reserve Bank Federal Reserve Bank of Atlanta – GDPNow Model Federal Reserve Bank of New York– SOMA Account Holdings SIFMA USDebtClock.org 46.
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