Economic Outlook Webinar - US Bank · 2020. 6. 30. · • Fed is not considering negative interest...

U . S. Bank C onfidentia l

Economic outlook webinar

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Government relations

Federal Reserve actions

Economic outlook

Explore current trends that affect your business


Government relations


2020 presidential election


First-time voter population represents changes occurring in the country


Key issues impacting the 2020 presidential election


President Trump’s COVID-19 Response: • Proposed $1 Trillion Stimulus

Spending, included $250 billion in direct stimulus checks to American citizens.

• Signed PPP extension, extending the program deadline to August 8th.

• On May 29, President Trump announced his intention to immediately halt US membership in the World Health Organization.

Overall Campaign Issues: • Trump signed an executive order in June

2020 focused on policing reforms.• The campaign continues to focus on the

economy, deregulation of sectors, and growing the United States’ GDP.

• The President’s campaign has focused on reducing the flow of undocumented immigrants into the United States and building a barrier between the U.S. and Mexico.

President Donald Trump


Trump’s approval has decreased in recent weeks around the pandemic and protests


Biden’s COVID-19 Response Plan includes: • Relief or forbearance for federal

student loans and federally-backed mortgages.

• Establish a temporary small-and medium-sized business loan facility.

• Create a federally funded emergency paid leave plan requiring 14 days of paid leave.

• Free testing, treatment, and vaccines for all people

Additional Campaign Issues: • Biden supports $15 minimum wage,

empowering the ability to unionize and collectively bargain

• Biden has expressed desire to eliminate capital gains tax

• Biden wants to eliminate cash bail, for-profit prisons, mandatory minimum sentences.

• Biden will create a $20 billion competitive grant program to spur states to focus on prevention and reduce incarcerated populations.

Former Vice President Joe Biden


Polls show Joe Biden with a lead


85 electoral votes are in toss up states


2020 congressional elections


Senators up for re-election in 2020


Senators up for re-election in states won by the opposing party’s 2016 presidential candidate


14 Democrat-held House seats are in the top 20 most likely to flip party control


2020 legislative outlook


Federal actions and COVID-19


Congress’s multi-phase response to the coronavirus crisis


Potential provisions in the Phase 4 stimulus package


Congress needs to improve the budget by October and pass other legislation this year


Federal Reserve actions


Aggressive Fed actions in credit programs

Quick response time• Extremely aggressive in creating programs to

help support the economy during pandemic.• What took months in 2008-09, only took days

and weeks in 2020. • No credit market left behind as multiple

programs were announced.

Numerous program announced• Commercial Paper Funding Facility • Money Market Mutual Fund Liquidity Facility• Paycheck Protection Program Liquidity Facility• Primary Market Corporate Credit Facility • Main Street Loan Facility • And others


2.6T

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0.5

1

1.5

2

2.5

3

0

20

40

60

80

100

120

140

3/16

3/23

3/30

4/06

4/13

4/20

4/27

5/04

5/11

5/18

5/25

6/01

6/08

6/15

6/22

6/29

$ Tr

illio

ns

$ B

illio

ns

Tsys/Day MBS/Day Cumulative (rs)

Applied Fed monetary policy and reg relief

• Cut interest rates to zero.• Cut reserve requirements and cost to

access discount window.• Provided capital/liquidity buffer relief

for banks.

• Unlimited “Quantitative Easing” by purchasing:

– US Treasuries – Agency Mortgage Backed Securities

FED FUNDS RATE RECENT FED BOND PURCHASES


Dramatic balance sheet growth

• Fed nearly grew it’s balance sheet faster in two months than it did in the previous “QE”s combined.

• Rapid purchases at first to ensure a functioning market.• Purchases going forward used to stimulate investment.

Source: Federal Reserve

0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021Total Assets Reserves at Fed

($ trillions) QE1 QE2 Twist QE3 Taper$1.7T $1.6T$0.6T Unwind-$0.75T Pandemic$3.0T

FEDERAL RESERVE BALANCE SHEET


-0.02

0.00

0.02

0.04

0.06

0.08

0.10

Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21

5/5/2020

6/30/2020

Fed still has a lot of tools available

• Negative Rates: Reduce target short-term rates into negative territory as has been done in Europe.

• Fed is not considering negative interest rates, but market is pricing in some probability of the event.

Notes: Current Fed Funds = 0.08%Data as of June 30

• Forward Guidance: communicating to markets that rates will remain low for a period of time.

• Yield Curve Control: Pegging longer-term interest rates to a “target rate.”

FED FUNDS CONTRACTFOMC ASSESSMENT OF APPROPRIATE MONETARY POLICY


Fed drives “lower for longer” yield curve

3M 1Y 2Y 3Y 5Y 7Y 10Y 30Y0.00

0.50

1.00

1.50

2.00

2.50

3.00

6/28/19 12/31/19 3/31/20 Current (6/30)

TREASURY YIELD CURVE (RECENT HISTORY)

• Front-end remains anchored by expectations for Fed to keep rates on hold at near zero.

• Long end has been drifting lower on Fed’s purchase of securities.


2,000

2,250

2,500

2,750

3,000

3,250

3,500

1-Ja

n15

-Jan

29-J

an12

-Feb

26-F

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-Mar

25-M

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-Jan

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Bond and equity markets recover after volatility

10-YEAR U.S. TREASURY S&P 500

Fastest to “Bear Market” and fastest

“Recovery” ever.

10-year Treasury blows thru previous

all-time low of 1.30% set in 2016.


Substantial uncertainty in outlook for interest rates

Economy Inflation Treasury Supply Fed Support in Treasury Markets

An increase in duration and/or severity of economic shock

globally could trigger a renewed round of

flight-to-quality buying of Treasuries.

Near-term outlook is deflationary while

extraordinary levels of monetary stimulus may

lead to inflation over the medium to long-

term.

Record net issuance of T-Bills will likely be

refinanced into longer tenors. Additional fiscal

stimulus will add to supply.

Uncertain outlook around QE and other

monetary policy efforts.


Banks well positioned for pandemic event

• Liquidity in the banking industry has greatly increased since the Great Recession

• Banks have a greater quality of capital than heading into the current recession

0.6

1.1

Jun-07 Dec-19

LIQUIDITY ($TRILLIONS) CAPITAL ($TRILLIONS)

1.0

3.1

Jun-07 Dec-19

209% more

87%more

Source: FR Y-9C, SNL Data. Peer group includes BAC, CFG, FITB, JPM, KEY, PNC, RF, TFC, USB, WFC


Banking industry growth supportive of economy

$1.9 Trillion$0.7 Trillion

• Loans are up 7% as companies rely on banks for liquidity

• Fed policies have helped grow deposits to record levels


-0.2% -0.3%

-1.4%-1.6% -1.6%

-2.0% -2.1%-2.4%

-2.6%-2.9%

-4%

-3%

-2%

-1%

0%

USB PNC KEY BAC FITB WFC TFC RF JPM CFG

Banks fare well in Fed’s annual stress test

• Each year the Fed assess bank capital adequacy by pushing banks through a hypothetical stress test

• All bank passed the stress test by having capital levels well above the required minimum of 4.5%

• Importantly, this scenario was conducted prior to the COVID pandemic occurring

9.8% 9.6% 9.2% 9.1% 8.9%8.1% 8.0%

7.4% 7.3% 7.1%

0.0%

2.5%

5.0%

7.5%

10.0%

JPM BAC PNC WFC USB FITB KEY TFC RF CFG

Regulatory Minimum

CET1 MINIMUM VS 4Q19 ACTUALCET1 MINIMUM


Fed to further test banks in COVID scenarios

V-shaped Deep recession in 2020 but with quick and sustained recovery in 2021-22

U-shaped Prolonged social distancing where the recovery period is sluggish

W-shapedSecond COVID event begins in late 2020 and leads to another severe increase in unemployment, drop in GDP

• Given the current environment, Fed will ask banks to evaluate their capital plans thru updated scenarios

• Initial sensitivity analysis by the Fed was disclosed showing the banking sector, in aggregate, can manage through the pandemic

• Fed asks banks to refrain from buying back stock and capping dividends to give time to assess the broader economic trends

FED SENSITIVITY ANALYSISFED COVID SCENARIOS


Economic outlook


U.S. macro signpostsScope & speed of downturn was unprecedented; but signs economy is rebounding

Economic data uniformly points to a record breaking collapse in economic activity after COVID-19 lockdowns began in mid-March.

Recent measures show economy turning the corner as stay-at-home orders ease & businesses partially reopen.

U.S. RETAIL SALES BILLIONS OF $

U.S. INDUSTRIAL PRODUCTIONINDEX, 2012 = 100

300

350

400

450

500

550

'05 '10 '15 '20

↓8%

Apr↓15%

COVID-19 Health Crisis

Feb

MarMay

↑18%

85

90

95

100

105

110

115

'05 '10 '15 '20

↓5%

Apr↓13%


Feb

Mar

May↑1%

Sources: US Bank, Bloomberg, Moody’s AnalyticsUpdated: 7/13/2020


↓20.7m

Mar

Economic recovery has begunImpact of COVID perhaps most visible in labor market

Employers shed over 22 million jobs in March and April. And unemployment rate jumped from 50-yr low of 3.5% to post–WWII high of 14.7%.

Recent employment reports vastly exceeded expectations, with combined 7.5 million jobs returning & unemployment falling to 11.1%.

U.S. TOTAL EMPLOYMENTMILLIONS

U.S. UNEMPLOYMENT RATEPERCENT

↓1.4m

Apr


FebMar

May↑2.7m ↑4.4%


Feb3.5%

Apr↑14.7%

May↓13.3%

125

130

135

140

145

150

155

'05 '10 '15 '20

Jun↑4.8m

0

2

4

6

8

10

12

14

16

'05 '10 '15 '20

↓11.1%Jun



-80

-70

-60

-50

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-30

-20

-10

0

10

A deep holeEmployment and output remain far below pre-pandemic levels

Alternative high-frequency data suggest economic activity is rebounding, although some activity remains depressed.

U.S. CREDIT / DEBIT-CARD SPENDING PERCENT CHANGE FROM JAN 2020, 7-DAY AVERAGE

Total

Restaurants & Hotels

Entertainment & Recreation

Transportation

↓9.0%

↓34%

↓49%↓49%

Overall economic growth looks to have been down ~10% in 2Q vs. year ago, or 2 to 3 times peak-to-trough decline in 2008-09 recession.

U.S. WEEKLY ECONOMIC INDEX NY FEDERAL RESERVE

-12

-10

-8

-6

-4

-2

0

2

4

6

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

U.S. Weekly Economic Index(2Q 2020 Average: -9.8%)

U.S. Real GDP (Y/Y % Chg)

Sources: US Bank, Bloomberg, Federal Reserve, Opportunity Insights, Moody’s Analytics.Updated: 7/13/2020

March 15 April 1 May 1 June 1 July 1


0

5

10

15

4Q19 4Q20 4Q21-15

-10

-5

0

5

4Q19 4Q20 4Q21

Long road back from pandemicHouseholds and businesses wait for more clarity on path of virus

Consensus forecasts still expect economic recovery to resemble more of a Swoosh-shaped crawl than a V-shaped sprint.

Expect initial bounce this summer as economy reopens. But then activity is seen to go largely sideways until gain clarity on virus’ path.

U.S. REAL GDP PROJECTIONS% CHANGE FROM 4Q 2019, PRIVATE FORECAST COMPARISON*

U.S. UNEMPLOYMENT RATE PROJECTIONS%, PRIVATE FORECAST COMPARISON*

2Q 2020: ↓11.6%

4Q 2021: ↓1.7%

2Q 2020: 13.0%

4Q 2021: 6.7%

*Includes Moody's Analytics, IHS Markit, Oxford Economics, JP Morgan, Goldman Sachs, UBS, Barclays, Bank of America, Wells Fargo, Citigroup, Deutsch Bank, Morgan Stanley.



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1.3m

Still fraught with risksCourse of economy depends on course of pandemic & measures to contain it

Labor market improvement risks stalling, as initial period of rehiring starts to wind down, or amid another wave of still-elevated layoffs.

U.S. INITIAL JOBLESS CLAIMSMILLIONS, SEASONALLY ADJUSTED

0

1

2

3

4

5

6

7

8

'70 '80 '90 '00 '10 '20COVID-19 Health Crisis

Feb Mar Apr May Jun

6.9m

Enormous uncertainty regarding path of COVID-19 viewed as principal reason economy is unlikely to quickly kick back into gear.

U.S. CURRENT COVID-19 HOSPITALIZATIONSTHOUSANDS, NUMBER OF PATIENTS*

U.S.

March 15 Apr 12 May 12 June 12 July 12

7-Day Average

Jobs data coverweek that includes 12th day of month.

June

Jobs

Rep

ort

*Excludes Hawaii, and Kansas—as do not publicly report data on current COVID-19 hospitalizations. Also extrapolated to incorporate recent inclusion of Florida.

Sources: US Bank, The COVID Tracking Project, Bloomberg, Moody’s AnalyticsUpdated: 7/13/2020

U.S. w/o Northeast Latest Week - Ending July 4

Peak Week - Ending Mar 28

May

Jobs

Rep

ort

Apri

l Job

s Rep

ort


↓72 May↑37

Feb50

Fiscal support fadingPolicy responses have helped put a floor under economic fallout; but what now?


To date, fiscal & monetary policymakers have provided massive support to keep economy & markets afloat; and to shore up confidence.

How well the economy performs after this summer’s initial bounce, may depend critically on what policymakers do next.

U.S. CONSUMER CONFIDENCEINDEX, UNIVERSITY OF MICHIGAN

U.S. BUSINESS CONFIDENCE MANUFACTURING & SERVICESCOMPOSITE INDEX, >50 = EXPANSIONARY, IHS MARKIT

50

60

70

80

90

100

110

'05 '10 '15 '20

↓89

Apr


Feb

Mar

MayJun

↑78

101

→72

20

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65

'05 '10 '15 '20

↓41


MarJun

↑47

Apr↓27

Economic outlook webinarExplore current trends that affect your businessGovernment relations2020 presidential electionFirst-time voter population represents changes occurring in the countryKey issues impacting the 2020 presidential electionPresident Donald TrumpTrump’s approval has decreased in recent weeks around the pandemic and protestsFormer Vice President Joe BidenPolls show Joe Biden with a lead85 electoral votes are in toss up states2020 congressional electionsSenators up for re-election in 2020Senators up for re-election in states won by the opposing party’s 2016 presidential candidate14 Democrat-held House seats are in the top 20 most likely to flip party control2020 legislative outlookFederal actions and COVID-19Congress’s multi-phase response to the coronavirus crisisPotential provisions in the Phase 4 stimulus packageCongress needs to improve the budget by October and pass other legislation this yearFederal Reserve actionsAggressive Fed actions in credit programsApplied Fed monetary policy and reg reliefDramatic balance sheet growthFed still has a lot of tools availableFed drives “lower for longer” yield curveBond and equity markets recover after volatilitySlide Number 28Banks well positioned for pandemic eventBanking industry growth supportive of economyBanks fare well in Fed’s annual stress testFed to further test banks in COVID scenarios Economic outlookU.S. macro signposts�Scope & speed of downturn was unprecedented; but signs economy is reboundingEconomic recovery has begun�Impact of COVID perhaps most visible in labor marketA deep hole�Employment and output remain far below pre-pandemic levelsLong road back from pandemic�Households and businesses wait for more clarity on path of virusStill fraught with risks�Course of economy depends on course of pandemic & measures to contain itFiscal support fading�Policy responses have helped put a floor under economic fallout; but what now?

Economic Outlook Webinar - US Bank · 2020. 6. 30. · • Fed is not considering negative interest...

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