Global Economic Outlook
Tim Quinlan, Economist
November 13, 2014
Bitcoin Price
Bitcoin Price
USD
$1200
$1200
Bitcoin: Nov-4 @ 329.0
$1000
Following last year’s massive
price surge, bitcoin has cratered
$1000
$800
$800
$600
$600
$400
$400
$200
$200
$0
2012
$0
2013
Source: Bloomberg LP and Wells Fargo Securities, LLC
Economics
2
2014
Bitcoin Supply
Bitcoin Supply
Millions of USD
There is a finite amount of
bitcoins that can be created
$25
$25
$20
$20
$15
$15
$10
$10
$5
$5
Projected
Actual
$0
$0
2009
2019
2029
2039
Source: https://en.Bitcoin.it/wiki/Controlled_supply and Wells Fargo Securities, LLC
Economics
3
2049
Volatility
Volatility Comparison
Average Daily Absolote Move vs. USD, Since Jan 2012
The amount of volatility bitcoin
experiences relative to other
assets may undermine its
acceptance by broader global
markets
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
EUR
JPY
S&P 500
Gold
Source: Bloomberg LP, www.bitcoincharts.com and Wells Fargo Securities, LLC
Economics
4
Bitcoin
Broad Trade Weighted Dollar
US Trade Weighted Dollar Index
January 1997=100
The greenback has experienced
strength in recent months, but
remains well off highs of past
cycles
140
140
130
130
120
120
110
110
100
100
90
90
Broad Currency Index: Oct-31 @ 106.7
80
80
00
01
02
03
04
05
06
07
08
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Economics
5
09
10
11
12
13
14
FX Outlook

The move toward Fed tightening should help the U.S. dollar over the medium term,
although with positioning extended and restrained U.S. Treasury yields, a near-term
pullback is possible.

Slow growth and a dovish European Central Bank suggest further euro declines, while
additional Bank of Japan easing should weigh on the yen.

We see potential for a recovery in the pound with Bank of England rate hikes rates
expected next year.

The Canadian, Australian and New Zealand dollars all have scope for a near-term
recovery, but should soften further as the Fed starts raising rates.

Subdued Chinese growth and moderate inflation means we expect only moderate
renminbi gains in the quarters ahead.

European currencies could be restrained by deflation and central bank easing, while the
Brazilian real appears more vulnerable and the Mexican peso more resilient when Fed
tightening begins.
Economics
6
Global Forecast
Wells Fargo Bank Currency Strategy Group Forecast
(End of Quarter Rates)
2014
Q4
Major Currencies
Euro ($/€)
U.K. ($/£)
U.K. (£/€)
Japan (¥/$)
Canada (US$/C$)
Australia (US$/A$)
Switzerland (CHF/$)
Fed rate hikes should help to
boost the value of the U.S. dollar
Other Currencies
China (CNY/$)
South Korea ($/KRW)
Singapore ($/SGD)
Taiwan ($/TWD)
India ($/INR)
Mexico ($/MXN)
Brazil ($/BRL)
Colombia ($/COP)
2016
Q3
Q4
Q1
1.26
1.63
0.77
107
1.08
0.91
0.96
1.24
1.64
0.76
108
1.08
0.91
0.98
1.22
1.65
0.74
109
1.09
0.90
1.00
1.21
1.65
0.73
110
1.11
0.88
1.01
1.20
1.64
0.73
111
1.13
0.86
1.02
6.12
1060
1.26
30.00
61.00
13.20
2.44
2040
6.10
1050
1.25
29.75
60.50
13.00
2.40
2030
6.08
1050
1.25
29.75
60.50
13.00
2.24
2030
6.06
1055
1.26
30.00
60.75
13.10
2.42
2050
6.04
1060
1.27
30.50
61.00
13.30
2.44
2070
6.02
1070
1.29
30.75
61.25
13.30
2.46
2090
Source: Wells Fargo Securities, LLC
7
Q2
1.28
1.62
0.79
106
1.10
0.89
0.95
Forecast as of: October 10, 2014
Economics
2015
Q1
Ukrainian Crisis
U.S. and E.U. Trade with Russia
Percent of Total, 2013
14%
14%
United States
12%
12.1%
European Union
10%
10%
8%
The European Union has
extensive trade ties, especially in
energy products, with Russia
8%
7.0%
6%
6%
4%
4%
2%
0.7%
1.2%
0%
2%
0%
Exports
Source: International Monetary Fund and Wells Fargo Securities, LLC
Economics
12%
8
Imports
Ukrainian Crisis
Exposure to Russian Energy
Natural Gas - 2012
40%
40%
Gas Imports from Russia as a Percent of Total Imports
36%
Gas Imports from Russia as a Percent of Total Demand
35%
35%
31%
30%
25%
25%
Many EU countries are highly
dependent on energy imports
from Russia
30%
28%
25%
20%
20%
16% 16%
15%
15%
10%
10%
5%
5%
0%
0%
Germany
Italy
France
Source: IEA, OECD, IMF and Wells Fargo Securities, LLC
Economics
9
0%
UK
0%
0%
U.S.
0%
Eurozone Real GDP
Eurozone Real GDP
Bars = Compound Annual Rate
Line = Yr/Yr % Change
8%
8%
Compound Annual Growth: Q2 @ 0.1%
Year-over-Year Percent Change: Q2 @ 0.7%
4%
The Eurozone has exited
recession, the problems
have not gone away
Forecast
0%
0%
-4%
-4%
-8%
-8%
-12%
2002
-12%
2004
2006
2008
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
4%
10
2010
2012
2014
2016
Eurozone PMI
Eurozone Purchasing Managers' Indices
Index
The purchasing managers’
indices skating on thin ice
65
65
60
60
55
55
50
50
45
45
40
40
35
30
1998
30
2000
2002
2004
2006
Source: Bloomberg LP and Wells Fargo Securities, LLC
Economics
35
E.Z. Manufacturing: Oct @ 50.6
E.Z. Services: Oct @ 52.3
11
2008
2010
2012
2014
Eurozone CPI
Eurozone Consumer Price Inflation
Year-over-Year Percent Change
5%
5%
Core CPI: Oct @ 0.7%
CPI: Oct @ 0.4%
Dangerously close to deflation
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
1997
-1%
1999
2001
2003
2005
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
12
2007
2009
2011
2013
Government Bond Yields in the Euro Area
10-Year Government Bond Yields
Percent
Financial market tensions in
Europe have eased, but Europe
is not “fixed” yet
8.0%
8.0%
7.0%
7.0%
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
Italy: Oct 31 @ 2.5%
Spain: Oct 31 @ 2.2%
Germany: Oct 31 @ 0.8%
0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
13
1.0%
0.0%
China Real GDP
Chinese Real GDP Forecast
Year-over-Year Percent Change
Growth in China has stabilized,
we do not expect it to return to
the double-digit growth rates
seen in the past
13%
13%
12%
12%
11%
11%
10%
10%
9%
9%
Forecast
8%
8%
7%
7%
6%
6%
5%
5%
Year-over-Year Percent Change: Q3 @ 7.3%
4%
4%
00
02
04
06
08
Source: Bloomberg LP and Wells Fargo Securities, LLC
Economics
14
10
12
14
16
Chinese Loan Growth
Chinese Loan Growth
Year-over-Year Percent Change
Loan growth in China is also
stabilizing
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
Chinese Loan Growth: Sep @ 13.2%
0%
0%
99
00
01
02
03
04
05
Source: CEIC and Wells Fargo Securities, LLC
Economics
15
06
07
08
09
10
11
12
13
14
Loans Outstanding
U.S. vs. China Debt Outstanding by Sector
Percent of GDP
250%
250%
Central Government
Non-Financial Corporate
Household
200%
If there is a leverage issue in the
Chinese economy it resides in
the non-financial corporate
sector
150%
150%
100%
100%
50%
50%
0%
0%
08
09
10
11
12
United States
13
08
09
10
11
China
Source: CEIC, BIS, U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
200%
16
12
13
Japanese Monetary Base
Japan's Monetary Base
Trillions of Yen
¥350
¥350
¥300
¥300
Bank of Japan Revised
Policy Path
¥250
The expansion of the monetary
base will expand the size of the
BoJ’s balance sheet considerably
¥250
¥200
¥200
¥150
¥150
¥100
¥100
¥50
¥0
2000
¥50
¥0
2002
2004
2006
2008
2010
Source: Bank of Japan, IHS Global Insight and Wells Fargo Securities, LLC
Economics
17
2012
2014
Monetary Base Comparison
Central Bank Monetary Base
January 2008 =100
550
500
450
400
The planned expansion of the
monetary base in Japan is really
just playing catch-up ball with
the Fed and ECB
550
Fed: Sep @ 487.5
ECB: Sep @ 138.7
BoJ: Oct @ 290.1
BoE: Sep @ 488.4
BoJ Projection
500
450
400
350
350
300
300
250
250
200
200
150
150
100
100
50
0
2007
50
0
2008
2009
2010
2011
2012
Source: Bank of Japan, Bloomberg LP and Wells Fargo Securities, LLC
Economics
18
2013
2014
2015
Japanese Inflation
Japanese Consumer Price Index
Year-over-Year Percent Change
Early signs of success
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-3%
2001
-2%
"Core" CPI: Sep @ 2.2%
CPI: Sep @ 3.3%
-3%
2003
2005
2007
2009
Source: Bank of Japan, Bloomberg LP and Wells Fargo Securities, LLC
Economics
19
2011
2013
Canadian Real GDP Forecast
Canadian Real GDP
8%
Bars = Compound Annual Rate
Line = Yr/Yr % Change
8%
6%
6%
Forecast
4%
The long-awaited rotation is
finally arriving
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
-10%
Compound Annual Growth: Q2 @ 3.1%
-10%
Year-over-Year Percent Change: Q2 @ 2.5%
-12%
2002
-12%
2004
2006
2008
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
20
2010
2012
2014
2016
Exports Then & Now
Canadian Exports
2000
European Union,
4.6%
“When the United States
Sneezes…”
Japan, 2.2%
United States,
87.4%
Developing
Countries, 3.9%
Other, 1.9%
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
21
Exports Then & Now
Canadian Exports
2012
European Union,
8.5%
Japan, 2.3%
Still true, but the picture is
changing
United States,
74.5%
Other, 3.0%
Source: IHS Global Insight and Wells Fargo Securities, LLC
Economics
Developing
Countries,
11.6%
22
U.S. Housing and Canadian Exports
U.S. Housing Starts vs. Canadian Lumber Exports
Thousands of Starts, Millions of CAD
2500
C$2500
Lumber Exports: Aug @ $1074.6 (Right Axis)
Housing Starts: Sep @ 1017K (Left Axis)
2250
Undeniable link to the
U.S. economy
2000
C$2000
1750
C$1750
1500
C$1500
1250
C$1250
1000
C$1000
750
C$750
500
C$500
250
C$250
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: U.S. Department of Commerce, IHS Global Insight and Wells Fargo Securities, LLC
Economics
C$2250
23
C$0
Global Forecast
Wells Fargo International Economic Forecast
(Year-over-Year Percent C hange)
GDP
Growth in the global economy
likely will remain slow in 2013
before picking up somewhat in
2014
CPI
2014
2015
2016
2014
2015
2016
Global (PPP weights)
Global (Market Exchange Rates)
3.3%
2.7%
3.7%
3.2%
3.8%
3.3%
3.9%
n/a
3.9%
n/a
3.8%
n/a
Advanced Economies 1
United States
Eurozone
United Kingdom
Japan
Korea
Canada
1.9%
2.2%
0.8%
3.0%
1.2%
3.5%
2.4%
2.5%
2.9%
1.3%
2.6%
1.4%
3.7%
2.8%
2.6%
3.1%
1.8%
2.3%
0.9%
3.6%
2.7%
1.6%
1.8%
0.5%
1.7%
2.9%
1.4%
2.0%
1.8%
2.0%
0.9%
1.9%
1.8%
2.2%
2.0%
2.0%
2.4%
1.3%
2.2%
1.3%
2.4%
2.2%
Developing Economies 1
China
India2
Mexico
Brazil
Russia
4.6%
7.3%
5.4%
2.0%
0.2%
0.6%
4.9%
6.8%
5.8%
3.2%
1.8%
1.5%
5.0%
6.5%
6.2%
3.5%
2.3%
2.3%
6.0%
2.1%
7.8%
3.9%
6.1%
7.4%
5.8%
2.4%
6.8%
3.8%
4.9%
6.9%
5.7%
2.6%
6.0%
3.8%
5.1%
5.7%
Forecast as of: October 8, 2014
1
Aggregated Using PPP Weights
2
Forecasts Refer to Fiscal Year
Source: International Monetary Fund and Wells Fargo Securities, LLC
Economics
24
Real GDP Forecast
U.S. Real GDP
Bars = CAGR
Line = Yr/Yr Percent Change
10%
10%
GDP - CAGR: Q3 @ 3.5%
8%
GDP - Yr/Yr Percent Change: Q3 @ 2.3%
6%
6%
Forecast
4%
Big downward revision sets up a
tough base for full year growth,
big rebound in Q2, continued
strength in Q3
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
-10%
2000
-10%
2002
2004
2006
2008
2010
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
8%
25
2012
2014
2016
FOMC
The FOMC has reaffirmed its concern with inflation remaining below its longer-run objective,
while more participants feel 2015 is the appropriate time for policy firming.
Timing of Firming
Target Fed Funds Rate
Appropriate Pace of Policy Firming
Appropriate Timing of Policy Firming
16
14
Number of Participants
Target Federal Funds Rate at Year-End
16
September Release
June Release
5.0%
4.5%
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
2014
2015
26
September Projection
4.5%
4.0%
4.0%
3.5%
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
2016
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Economics
5.0%
June Projection
2014
2015
2016
2017
Longer Run
0.0%
U.S. Housing Market
Housing Starts
Seasonally Adjusted Annual Rate, In Millions
2.4
Despite the tough start to the
year, housing is a key bright spot
for the outlook
2.4
2.0
2.0
1.6
1.6
1.2
1.2
0.8
0.8
0.4
0.4
Housing Starts: Sep @ 1017K
0.0
0.0
90
92
94
96
98
00
02
04
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
27
06
08
10
12
14
Housing Starts
Housing Starts
2.4
2.1
1.8
Housing starts remain well
below historical levels, but are
expected to increase in the
coming years
2.4
Multifamily Starts
Multifamily Forecast
Single-family Starts
Single-family Forecast
2.1
Forecast
1.5
1.5
1.2
1.2
0.9
0.9
0.6
0.6
0.3
0.3
0.0
0.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
1.8
28
Thousands
Millions of Units
Housing: Emergence of Renters as Occupants
U.S. Homeowners vs. Renters
Annual Change in Occupied Units, In Thousands
2,500
2,500
Renters: 2013 @ 525.5 Thousand
Homeowners: 2013 @ -76.5 Thousand
2,000
The number of renters has been
accelerating steadily since 2007,
while homeowners have been
declining
1,500
1,500
1,000
1,000
500
500
0
0
Series
Break
1981
-500
-500
-1,000
-1,000
-1,500
-1,500
66
70
74
78
82
86
90
94
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
2,000
29
98
02
06
10
Debt Service Ratio
Household Debt Service Ratio
Debt Payments as a Percent of Disposable Personal Income
13.5%
13.5%
DSR: Q2 @ 9.9%
Low interest rates are
supportive to consumer
spending and housing
13.0%
13.0%
12.5%
12.5%
12.0%
12.0%
11.5%
11.5%
11.0%
11.0%
10.5%
10.5%
10.0%
10.0%
9.5%
9.5%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
30
Real PCE Forecast
Real Personal Consumption Expenditures
Bars = CAGR
8%
Line = Yr/Yr Percent Change
8%
6%
6%
4%
Continued deleveraging likely
will constrain growth in
consumer spending over the
next year or so
Forecast
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-8%
2000
-6%
PCE - CAGR: Q3 @ 1.8%
PCE - Yr/Yr Percent Change: Q3 @ 2.3%
-8%
2002
2004
2006
2008
2010
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
4%
31
2012
2014
2016
Core Capital Goods Orders
Nondefense Capital Goods Orders, Ex-Aircraft
Series Are 3-Month Moving Averages
40%
40%
3-Month Annual Rate: Sep @ 10.4%
Year-over-Year Percent Change: Sep @ 7.8%
30%
30%
20%
20%
10%
10%
0%
Orders and production are
gaining momentum
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
-50%
-50%
-60%
-60%
04
05
06
07
08
09
10
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Economics
32
11
12
13
14
Business Surveys
ISM Manufacturing & Non-Manufacturing
Composite Index
65
Business activity is still growing,
and at an accelerating pace in
both the manufacturing and
service sectors
65
60
60
55
55
50
50
45
45
40
40
35
35
30
30
ISM Non-Manufacturing Index SA: Oct @ 57.1
ISM Manufacturing Index SA: Oct @ 59.0
25
25
98
99
00
01
02
03
04
05
06
07
08
09
Source: Institute for Supply Management and Wells Fargo Securities, LLC
Economics
33
10
11
12
13
14
Business Spending
Real Equipment Investment
Bars = CAGR
Line = Yr/Yr Percent Change
40%
40%
30%
30%
20%
20%
Forecast
10%
0%
We anticipate modest growth in
capital expenditures
10%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
-50%
Equipment Investment - CAGR: Q3 @ 7.2%
-50%
Equipment Investment - Yr/Yr Percent Change: Q3 @ 7.7%
-60%
2000
-60%
2002
2004
2006
2008
Source: U.S. Dept. of Commerce and Wells Fargo Securities, LLC
Economics
34
2010
2012
2014
2016
U.S. Forecast
Wells Fargo U.S. Economic Forecast
Actual
2014
Real Gross Domestic Product
Personal Consumption
Inflation Indicators
PCE Deflator
1
Actual
2012
2013
2014
Forecast
2015
2016
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
-2.1
4.6
3.5
1.6
2.4
2.6
2.8
2.9
2.3
2.2
2.2
2.7
3.0
1.2
2.5
1.8
2.5
2.5
2.6
2.5
2.6
1.8
2.4
2.2
2.4
2.6
1.1
1.6
1.5
1.4
1.4
1.3
1.5
1.9
1.8
1.2
1.4
1.5
2.0
1.4
2.1
1.8
1.5
1.5
1.3
1.6
2.2
2.1
1.5
1.7
1.7
2.4
2
Consumer Price Index
Industrial Production
1
Corporate Profits Before Taxes
Trade Weighted Dollar Index
Unemployment Rate
Housing Starts
Forecast
2015
2
3
4
Quarter-End Interest Rates 5
Federal Funds Target Rate
3.9
5.5
3.2
5.9
5.0
4.9
4.9
4.9
3.8
2.9
4.1
5.0
4.2
-4.8
0.1
3.8
4.0
4.1
4.2
4.4
4.5
11.4
4.2
0.9
4.3
3.4
76.9
75.9
81.3
82.5
83.0
83.8
84.5
85.5
73.5
75.9
79.1
84.2
87.2
6.7
6.2
6.1
5.8
5.7
5.6
5.5
5.4
8.1
7.4
6.2
5.6
5.2
0.92
1.01
1.16
1.26
0.93
0.99
1.02
1.00
1.06
1.13
1.21
1.24
0.78
0.25
0.25
0.25
0.25
0.25
0.50
0.75
1.00
0.25
0.25
0.25
0.63
2.00
Conventional Mortgage Rate
4.34
4.16
4.16
4.26
4.31
4.44
4.46
4.62
3.66
3.98
4.23
4.46
5.32
10 Year Note
2.73
2.53
2.52
2.45
2.50
2.71
2.79
2.86
1.80
2.35
2.56
2.71
3.40
Forecast as of: November 12, 2014
1
C ompound Annual Growth Rate Quarter-over-Quarter
2
Year-over-Year Percentage C hange
3
Federal Reserve Major C urrency Index, 1973=100 - Quarter End
4
Millions of Units
5
Annual Numbers Represent Averages
Economics
35
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Economics
36