Hosted by: James Hotchkiss Director, Member Strategy and … · 2019. 10. 3. · Construction Spending August: 0.1% vs. July: 0.1% • Missed expectations of a 0.5% increase and only

Hosted by:James HotchkissDirector, Member Strategy and Solutions

Date:October 3, 2019

Contacts

Federal Home Loan Bank of Chicago | Member owned. Member focused. 2

James HotchkissDirector, Member Strategy and [email protected]: @econ_james_

Melissa DevenDirector, Member Strategy and [email protected]: @econ_melissa_

Discussion Topics


• Weekly Interest Rate Comparisons

• Economic Data Releases

• U.S. Manufacturing

• Federal Reserve Q2 Financial Accounts Report

• Preview of the Coming Week

• Q and A

Weekly Interest Rate MovementsFor the Week Ending 10/3/2019


U.S. Treasury Yields

10/3/19 9/26/19

3mo 1.72% 1.87%

2yr 1.46% 1.64%

5yr 1.41% 1.56%

10yr 1.58% 1.68%

FHLBank Chicago Advance Rates

10/3/19 9/26/19

3mo 2.02% 2.06%

2yr 1.65% 1.83%

5yr 1.65% 1.81%

10yr 1.99% 2.10%

Source: U.S. Treasury, FHLBank Chicago

Federal Reserve Interest Rate ProbabilityFor the Week Ending 10/3/2019

There is a 0.00% probability of a rate hike in 2019.

Following the rate cut in September, the market implied probability of an additional rate cut of at least 25 bps occurring in October 2019 is 70.78%.

The probability of a third rate cut in December 2019 is 89.59%, as of this week.

Federal Home Loan Bank of Chicago | Member owned. Member focused.

Source: Bloomberg

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Federal Reserve Interest Rate ProbabilityProbability of a 25 Basis Point Cut

Third Cut: October 2019Third Cut: December 2019

U.S. Economic Data ReleasesFor the Week Ending 10/3/2019


Chicago Purchasing Managers Index (PMI)September: 47.1 vs. August: 50.4

• Declined 3.3 points to 47.1 in September. Business confidence dropped below the 50-mark to 47.3; leaving the index at the lowest level on a quarterly basis since 2009. Supplier Deliveries and Employment are the only components to increase. Both rose to 54.8 and 45.6, respectively.

Construction SpendingAugust: 0.1% vs. July: 0.1%

• Missed expectations of a 0.5% increase and only rose 0.1% in August. Contributing to the index, residential construction fell 5.0% while nonresidential construction increased 0.3%.

Source: Institute for Supply Management, U.S. Census Bureau

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ADP Employment September: 135K vs. August: 157K

• Rose by 135K in September, missing expectations of a 140K growth. The largest growth was seen in large sized businesses, with an increase of 77K, while midsized business employment increased by 39K and small business employment increased by 30K.

ISM Non-Manufacturing IndexSeptember: 52.6 vs. August: 56.4

• Fell 3.8 percentage points to 52.6 in September. This represents continued growth, but at a slower rate. The business activity index fell 6.3 points to 55.2. This was partially offset by the prices index, which increased 1.8 points to 60.0.

Source: ADP, Institute for Supply Management

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Initial Jobless ClaimsSep 28: 219K vs. Sep 21: 213K

• Increased by 4K to 219K in the week ending September 28. The previous week was upwardly revised from 213K to 215K.The 4-week moving average was unchanged from the previous week at 212.5K.

Continuing ClaimsSep 21: 1,651K vs. Sep 14: 1,650K

• Decreased by 5K to 1,650K in the week ending September 21. The prior week was revised higher by 6K to 1,656K. The 4-week moving average fell by .575K to 1,661.5K. The insured unemployment rate remained unchanged at 1.1%.

Source: Department of Labor

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Continuing Claims

U.S. Manufacturing: Monthly Decline

The ISM Manufacturing Index registered 47.8 in September, a decline of 1.3 percentage points from 49.1 in August.

A reading above 50 indicates that the manufacturing economy is generally expanding; below 50 indicates that it is generally contracting.

September was the second consecutive month of contraction; with a faster rate of contraction than August. This suggests a continuing decrease in consumer confidence and shows that global trade remains a significant issue.

New Orders, Production, Backlogs, Raw Materials Inventories and Employment all contracted in September while Supplier Deliveries are slowing at a slower rate. Prices have decreased for the fourth consecutive month.

Regional data showed that manufacturing in the Chicago area registered 47.1 in September, a decline of 3.3 percentage points from 50.4 in August.

Overall, the economy has expanded for 125 consecutive months.

Source: Institute for Supply Management

9Federal Home Loan Bank of Chicago | Member owned. Member focused.

U.S. Manufacturing: Monthly DeclineISM Manufacturing Index Contracts

The index measuring productivity negatively contributed to ISM manufacturing growth. The Production Index fell 2.2 percentage points to 47.3 in September. This marks its second consecutive month with a reading below 50.



U.S. Manufacturing: Monthly DeclineISM Manufacturing Index Falls

Another component that led the ISM manufacturing decline was the Employment Index, which decreased 1.1 percentage points to 46.3 from the previous month. This indicates a decline in employment for the fourth consecutive month.



U.S. Manufacturing: Monthly DeclineISM Manufacturing: New Orders and Export Orders

Despite the decline of the ISM Index, measurements of new orders rose while new export orders decreased in September.

New orders rose 0.1 percentage points to 47.3.

The new export orders index decreased 2.3 percentage points to 41.0.



U.S. Manufacturing: Monthly Decline ISM Manufacturing and GDP Growth

The ISM Index is closely correlated with changes in GDP, leading changes in the overall economy by about one quarter.

The gap between real GDP and ISM Manufacturing is narrowing as overall economic growth and manufacturing continue to slow.

Source: Institute for Supply Management, Bureau of Economic Analysis


U.S. Manufacturing: Monthly Decline Midwest Manufacturing Still Strong but Contracting


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The ISM Chicago Index fell 3.3 percentage points to 47.1 in September.

Business confidence dipped below the 50-mark to 47.3 in Q3. This is down 4.9 percentage points from the previous quarter.

About 65% of firms expect supplier delivery times to remain unchanged.


U.S. Manufacturing: Monthly Decline

Summary:

• The ISM Manufacturing Index declined month-over-month, falling 1.3 percentage points to 47.8 in September.

• Manufacturing continued the trend of slowing expansion; September was the second straight month with faster contraction.

• Within the index, New Orders increased 0.1 percentage points to 47.3.• Production declined 2.2 percentage points to 47.3, Employment fell 1.1

percentage points to 46.3, Supplier Deliveries decreased 0.3 percentage points to 51.1, and Inventories fell 3.0 percentage points to 46.9.



Federal Reserve Q2 Financial Accounts Report

• The Federal Reserve 2019 Q2 Flow of Funds report showed that consumer household debt rose to $15.8T in Q2.– Household debt rose an annual rate of 4.3% in the second quarter of 2019.– Household net worth rose in Q2 to $113.5T, previously $111.6T in Q1.– State and local government debt increased at an annual rate of 2.5% in Q2,

compared to 1.2% in Q1.– Federal government debt rose at an annual rate of 2.1%.

• This is the fourth time prior to the crisis that household equity equaled more than household mortgage debt outstanding.

Source: Federal Reserve Board of Governors


Federal Reserve Q2 Financial Accounts Report Household Debt and Net Worth

Household net worth increased to $113.5T in the second quarter of 2019.

Net worth has risen $57T (90%) from the recession low seen in 2009.

On the other hand, household debt rose an annual rate of 4.3% in the second quarter of 2019.

Source: Federal Reserve


Federal Reserve Q2 Financial Accounts Report Household Equity and the Housing Rebound

Household equity in real estate rose in Q2, a 0.22% quarterly increase.

This was supported by a 0.43% increase in home prices from Q1 2019 to Q2 2019.

The value of household real estate is finally above the bubble peak in early 2006.

Source: S&P Case-Shiller, Federal Reserve


Federal Reserve Q2 Financial Accounts Report Household Net Worth and the Equity Market

In line with rising equity, household net worth improved in Q2 2019, ending at 113.5.

Despite a decline in the S&P 500 in Q4 2018, the index recovered over the first half of this year and finished the Q2 at 2,941.

Household net worth and the equity market’s performance have shown similar trends since the 1980s.

Source: S&P, Federal Reserve


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U.S. Household Net Worth S&P 500 Index

Federal Reserve Q2 Financial Accounts Report Household Debt

American’s willingness to borrow fell in Q2, increasing by only $44B in Q2 after rising by approximately $106B in both Q1.

Household debt increased 1.46% to $15.899 trillion as of June 30, which is the 28th consecutive quarterly increase.



Federal Reserve Q2 Financial Accounts Report Household Equity Surpasses Mortgage Debt Outstanding

Since Q2 2018, household equity equaled more than household mortgage debt outstanding.

This is the first time equity has been greater than debt outstanding for mortgages since before the crisis in Q2 2006.

Household mortgage debt outstanding topped $15.62T in Q2, while equity increased to $18.69T.



Federal Reserve Q2 Financial Accounts Report Household Debt-to-Income Ratio

Consumers have made significant progress in repairing their balance sheets by reducing debt and deleveraging.

Consumer leverage has remained below the pre-crisis trend line for several quarters as household debt has fallen to 95.61% of income, down from 130% in 2007.



Federal Reserve Q2 Financial Accounts Report Household Liquid Assets

While total household assets rose 1.59% quarter-over-quarter, liquid assets increased 0.11%.

Liquid assets are made up of cash, checkable deposits, savings deposits, and money market funds.

Liquid assets, as a percent of total assets, fell to 10.6% compared to 10.8% in Q1 2019 and 12.8% in Q1 2009 during the crisis.



The Federal Reserve Bank (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released a new rule that increases the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000.The threshold was last changed in 1994 and the change will provide relief without compromising safety and soundness. For transactions exempted from the new rule, the institutions must obtain an evaluation to provide an estimate of the market value of real estate collateral. This rule goes into effect on January 1, 2020.


This and That

Source: Federal Reserve Bank


Prior to the weekend, all eyes will be focused on the Employment Report.

Next week begins with economic data releases on the Small Business Optimism, the Producer Price Index Final, and JOLTS.

The week ends with the release of the FOMC Meeting Minutes and economic data to be released on the Import Price Index and Consumer Sentiment.

Economic Data Release CalendarOctober 2019

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30 1 2 3 4

7 8 9 10 11

14 Columbus Day 15 16 17 18

21 22 23 24 25

28 29 30 31 Notes:

Dallas Fed Manufacturing Pending Home Sales ADP Employment Report Personal Income

GDP Chicago PMI FOMC Rate Decision

Chicago Fed Natl. Activity S&P Case-Shiller HPI MBA Mortgage Applications Jobless Claims

New Home Sales

Existing Home Sales MBA Mortgage Applications Durable Goods Orders Consumer Sentiment FHFA House Price Index Jobless Claims

NAHB Housing Market Industrial Production Beige Book

FHLBC Closed Retail Sales Jobless Claims Business Inventories Philadelphia Fed Outlook

Federal Holiday MBA Mortgage Applications Housing Starts

Wholesale Trade FOMC Meeting Minutes

Small Business Optimism MBA Mortgage Applications Consumer Price Index Import Price IndexProducer Price Index Final JOLTS Jobless Claims Consumer Sentiment

Dallas Fed Manufacturing ISM Manufacturing Index ADP Employment Report Factory Orders Construction Spending ISM Non-Manufacturing

October 2019Monday Tuesday Wednesday Thursday Friday

Chicago PMI Total Vehicle Sales MBA Mortgage Applications Jobless Claims Employment


Certain information included in this presentation speaks only as of a particular date or dates included in this presentation. The information in the presentation may have become out of date. The Federal Home Loan Bank of Chicago (FHLBC) does not undertake an obligation, and disclaims any duty, to update any of the information in this presentation. “Mortgage PartnershipFinance®”, “MPF®”, “MPF Xtra®”, “Downpayment Plus®”, “DPP®”, “Downpayment Plus Advantage®”, “DPP Advantage®”, and “Community First®” are registered trademarks of the Federal Home Loan Bank of Chicago . The “MPF Mortgage Partnership Finance” logo is a trademark of the Federal Home Loan Bank of Chicago.

The data, scenarios and valuations provided to you in this presentation are for information purposes only and are provided as anaccommodation and without charge and are not intended for further distribution. The data, scenarios and valuations are estimates only and may not represent the actual or indicative terms at which new (or economically equivalent) transactions couldbe entered into or the actual or indicative terms at which existing (or economically equivalent) transactions could be prepaid, terminated, liquidated, assigned or unwound. The scenarios and valuations were derived using proprietary pricing models and estimates and assumptions about relevant future market conditions and other matters, all of which are subject to change without notice. The scenarios and valuations were prepared without specific information about your institution’s balance sheet composition, hedging strategies or financial assumptions and plans, any of which may affect the relevance of these valuations toyour own analysis.

The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this presentation, and no representation of non-infringement. This presentation is not intended to constitute legal, accounting, investment or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants and/or other advisors regardingthe extent these scenarios and valuations may be useful to you and with respect to any legal, tax, business and/or financial matters or questions. This presentation may contain forward-looking statements which are based upon the FHLBC’s current expectations and speak only as of the date hereof. These forward-looking statements involve risks and uncertainties including, but not limited to, the risk factors set forth in the FHLBC’s periodic filings with the Securities and Exchange Commission, which are available on its website at www.fhlbc.com

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Documents

Hosted by: James Hotchkiss Director, Member Strategy and … · 2019. 10. 3. · Construction Spending August: 0.1% vs. July: 0.1% • Missed expectations of a 0.5% increase and only