NCCMT Cash & Term Overview NCLGIA Winter Conference February 2016 Not FDIC insured. May lose value. No bank guarantee. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. For Institutional Use Only
Agenda 1. Global Macro Update 2. Current Money Market Conditions 3. Regulatory Reform Update 4. Cash & Term Portfolio Overview 5. Question & Answer 1 For Institutional Use Only
Global Macro Update For Institutional Use Only
Global Business Cycle in a Trend of Modest Improvement Note: The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. #A growth recession is a significant decline in activity relative to a country’s long-term economic potential. We have adopted the “growth cycle” definition for most developing economies, such as China, because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and the deviation from the trend tends to matter the most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Source: Fidelity Investments (AART). 3 For Institutional Use Only
Global Trade Slumped but Inventory Correction Mostly Over Global Export Growth U.S. Durable Goods Inventory-to- Shipments Ratio Value of World Exports ($) Change (Year-Over-Year) % of Industries with Improving I/S Ratio (3-Month Average) 65% 50% 40% 60% 30% 55% 20% 10% 50% 0% 45% -10% -20% 40% -30% 35% -40% 30% -50% Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 LEFT: Grey area represents U.S. recession as defined by National Bureau of Economic Research (NBER). Export value in USD, adjusted for changes in currency. Source: International Monetary Fund, Haver Analytics, Fidelity Investments (AART), 4 as of 10/31/15. RIGHT: Source: Census Bureau, Haver Analytics, Fidelity Investments (AART), as of 11/30/15.
For Institutional Client Use Only
Late-Cycle Signals Remain Generally Absent in U.S. S&P 500 Profit Margins Bank Lending Standards S&P 500 S&P 500 ex-energy Business Loans Mortgage Loans Energy sector Net % Banks Tightening Standards 12% 10.7% 100% 10% 80% 8% 9.0% 6% 60% 4% 40% 2% Credit tightening 20% 0% -2% 0% -4% -5.2% -20% -6% Credit loosening Dec-2010 Mar-2011 Jun-2011 Sep-2011 Dec-2011 Mar-2012 Jun-2012 Sep-2012 Dec-2012 Mar-2013 Jun-2013 Sep-2013 Dec-2013 Mar-2014 Jun-2014 Sep-2014 Dec-2014 Mar-2015 Jun-2015 Sep-2015 -40% 2007 2008 2009 2010 2011 2012 2013 2014 2015 LEFT: Source: Standard & Poor’s, FactSet, Fidelity Investments (AART), as of 9/30/15. RIGHT: Source: Federal Reserve, Haver Analytics, Fidelity Investments (AART), as of 11/2/15. 6
Fed Hiked, but Global Policy Measures Are Mixed U.S. Fiscal Deficit Global Monetary Policy Percent of U.S. GDP Colombia Chile Tightening 0% Mexico U.S. Neutral Brazil -2.4% -2% Easing S. Africa Extraordinary 2016 -4% Fiscal drag Easing U.K. Projection: -3.2% Russia -6% Turkey -8% Australia Canada -10% -9.8% S. Korea India -12% Taiwan 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 New Zealand China Japan Europe LEFT: 2016 projection from Evercore ISI. Source: Congressional Budget Office, Evercore ISI, Haver Analytics, Fidelity Investments (AART), as of 12/31/15. RIGHT: Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of 12/31/15. 7
China Following Japan’s Playbook: Stimulus and Stability China’s Policy Easing Fiscal Policy 2016 budget deficit may be biggest ever Monetary Policy Broad-based easing FX Managed depreciation Post-Bubble Paths: 2 Choices Private Credit-to-GDP Japan (Q2 1990) China (Q1 2014) U.S. (Q3 2006) #2 Restructuring: #1 Stabilization: Slow burn Rapid adjustment 230% Path #1: Credit Growth Example: Example: China Today Japan in 1990s U.S. in 2000s 220% 210% Banking NPLs still only Write off bad loans forbearance 1.6% 200% Stable 190% Maintain unemployment Unemployment rises employment at 4.1% 180% 170% Corporate Industrial profits Profits sharply drop, 160% profits weak -2.0% YoY then recover 150% Path #2: Deleveraging Construction Starts -15% Construction 140% plummets, then YoY activity weak T=-12 T=-8 T=-4 T=0 T=4 T=8 T=12 T=16 T=20 T=24 T=28 recovers LEFT: NPL = Non-performing loan. Source: China Banking Regulatory Commission, China National Bureau of Statistics, Haver Analytics, Fidelity Investments (AART), as of 11/30/15. RIGHT: T=0 represents peak of home prices. Data are quarterly. Source: Bank for International Settlements, Cabinet Office of Japan, Organization for Economic Cooperation & Development, Haver Analytics, Fidelity Investments (AART), as of 11/30/15. 8
Inflation Impulse is Typically Key to Late-Cycle Transition Mid-Cycle Inflation, 1966–2010 Late-Cycle Inflation, 1966–2010 Average Annualized Inflation Average Annualized Inflation 20% 20% 10% 10% 0% 0% Commodity Prices Wages Commodity Prices Wages Improving macro conditions Deteriorating macro conditions • Profit growth solid / peaks • Profit margins under pressure • Credit accessible / spreads narrow • Credit tightens / spreads widen • Monetary policy accommodative / neutralized • Monetary policy becomes restrictive Fidelity Investments proprietary analysis of historical commodity performance, using data from BP Statistical Review of World Energy, U.S. Department of Agriculture, U.S. Geological Survey, and U.S. Foreign Agricultural Service. Wages = Average Hourly Earnings. Source: Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART), as of 11/30/15. 9
Global “Base Effect” Likely to Lift Inflation in 2016 U.S. Inflation: The Base Effect Headline CPI Core CPI Core CPI 2015 Low Nov 2015 Change (Year Over Year) Japan 0.4% 0.9% 6% Eurozone 0.6% 0.9% 5% Headline CPI Scenarios* Through 2016 4% 3% $50 oil 2.0% 2% 1% 0.5% $30 oil 0% -1% -2% -3% 2008 2009 2010 2011 2012 2013 2014 2015 2016 CHART: *Scenarios assume core CPI and food cost growth rates remain constant and vary only by the cost of oil each month. Source: Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART), as of 11/30/15. TABLE: Data shown are year over year. Japan low: April 2015. Eurozone low: March 2015. Source: Japan Ministry of Internal Affairs and Communications, Eurostat, Haver Analytics, 10 Fidelity Investments (AART), as of 11/30/15.
Outlook: Market Assessment U.S. remains mid-cycle, Global macro environment Pace of Fed tightening will supported by positive stabilizing likely be gradual consumer outlook Asset Allocation Considerations Potential Risks • Global macro stabilization should benefit developed- • Diverging global monetary policy backdrop has market risk assets potential for generating policy mistakes • Potential for upside inflation surprises not priced into • Higher volatility warrants smaller asset asset markets allocation bets and prudent risk management • Lower international equity valuations and wider credit spreads may provide more attractive opportunities Fed: Federal Reserve. Source: Market Assessment Statement of Global Asset Allocation’s Business Cycle Board, Fidelity Investments, as of 12/31/15. 11
Current Money Market Conditions For Institutional Use Only
Supply Stabilizes - Industry Assets Trend Higher 1,000 Cumulative Monthly Change in Taxable MMF AUM and US MM Supply ($B) 500 Total taxable MMF AUM ($bn) 0 -500 -1,000 -1,500 Total money market supply ($bn) -2,000 -2,500 -3,000 Total money market supply ex-Treasuries ($bn) -3,500 -4,000 -4,500 Source: J.P. Morgan, iMoneyNet as of 10/31/2015. 13 For Institutional Use Only
Federal Reserve’s RRP Adds Supply Maximum Allotment Cap, Fixed Rate, Outstanding Amounts $500 MM 400 30 $1B $3B $5B $7B $30B $10B 350 25 300 Fed Repo ($Billions) Fed Repo Rate (bps) 20 250 200 15 150 10 100 5 50 0 0 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Total Fed Overnight Repo Total Fed Term Repo Fed Repo Rate Sources: Federal Reserve and Fidelity Investments as of 12/31/2015 14 For Institutional Use Only
Fed’s Dispersion of Interest Rate Forecast Source: Federal Reserve as of 12/16/2015 15 For Institutional Client Use Only
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