EFTA01457205.pdf

27 March 2015 US Fixed Income Weekly When: are ixe at the moment' The economy is projected to grow 2.4% in O1 Figure 2: Underlying economic 2015, nearly the same pace as the previous quarter. The inability of the growth is poised to accelerate economy to sustain a 3%-plus growth rate in the first quarter is due to several factors. One, the economy faced an unusually brutal winter for the second 4.141001 16 50 50 consecutive year. Temperatures across much of the country were unseasonably low and activity was hampered by numerous winter storms. This 25 23 likely depressed discretionary purchases and hurt construction activity. Two, a 00 00 slowdown in West Coast port activity, a function of labor strife, may meaningfully dent Q1 exports. This will likely reverse next quarter as the labor issues have been resolved. Three, the seasonal factors might not be >0 adequately capturing the currently prevailing seasonal pattern. If our quarterly .7 6 2015 GDP profile is correct, this would mark the eighth time in the last 13 years in which O1 turned out to be the weakest quarter of the year. Finally, the .10/3 2037 20011 2010 2011 2013 '2l4 2016 .100 collapse in energy prices is causing a sharp pullback in energy-related capital Sam - lirr • rArMen Date &int gnaw.* spending at the moment. However, if oil prices stabilize, the drag from diminished oil and gas capital expenditures (capex) should dissipate toward yearend. Based on DB's forecast for West Texas Intermediate oil prices, Figure 3: February was extremely energy-related capex should show an increase by Q4 of this year. (cold, thereby depressing economic activity baby, Its cold outside. We can measure weather by looking at the number of 044..06 2 , 64 04044 Jetts Oen 0.v2.104 heating degree-days relative to the average. When the figure is positive, it 200 04•4 040 means that households had to heat their homes more than normal, and vice versa. As we can see in the accompanying chart, there was a large jump in 100 100 February 2015 heating degree-days. Indeed, it was the largest positive reading 0 since December 2000, and it was one of the coldest Februarys on record. There is little doubt this had a negative impact on discretionary purchases such 100 as motor vehicles. In fact, various reports among dealerships across the country highlighted the unusually harsh weather as a factor depressing sales. The story has been the same for housing. In February, housing starts fell a 400 1304 7000 7002 2034 2206 2209 71110 2017 7314 whopping 17% to 0.897 million annualized, the lowest reading since January Sever ASIA tererMISS Oak** Ss* Mat 2014. However, housing permits increased 3.0% in the month to 1.092 million annualized. Why does this matter? For a start to be counted, ground needs to be broken. But if the ground is frozen, the start is not captured. This is not the Figure 4: The trade-weighted dollar case with a permit. With the spread between starts and permits the widest has appreciated at a rapid pace since January 2007, expect the former to snap back toward the latter as the lean+ bCAS If /Ch.M. t NA. cf weather normalizes. 120. 145.3 140 144.44 170 History repeats itself —yet another weak O1 performance. Over the past several 1 106 years. we have noticed a tendency for Q1 real GDP to be significantly weak, at least relative to the rest of the year. While this is hardly a large sample, it is BO possible the seasonal factors are not properly accounting for the currently prevailing seasonal pattern in production and spending. Shifting weather 40 patterns only further complicate the ability of the government to seasonally adjust the data. Of course, the seasonal adjustments net out to zero over the 1. , 1 e3312 2010 2015 full calendar year. 20..444 M1Y 344 14044 .6601742 DOLZSCASSorS/bnirclo i.o:titlI oil pnce;.. moan less k.nerge C2111112 The roughly 60% decline in crude oil prices from last July's high points to significantly less spending within the capital-intensive energy sector. Historically, changes in oil prices lead changes in energy spending by roughly two quarters. Not surprisingly, energy-related capex is poised to decline sharply this quarter, which is another factor weighing on measured economic output. However, when energy prices stabilize and eventually trend higher as oil and gas supply goes offline, the reduction in capex will eventually come to a halt. Given Deutsche Bank's outlook for oil prices, we should see a sequential gain in energy-related spending by O4 2015. It is also worth highlighting that energy-related capex accounts for only about 10% of total capital outlays or just 1% of GDP. Therefore, we do not believe that economy-wide capital spending will be meaningfully impaired by the decline in energy prices. Deutsche Bank Securities Inc. Page 45 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SONY-0116649 CONFIDENTIAL SDNY_GM_00262833 EFTA01457205