經濟透視 • 2017年9月 1

環球經濟持續擴張在美元見頂而商品價格觸底的情況下，環球經濟在2016年初開始復甦，現已具備自行延續的動力。市場現時普遍察見以下跡象：工業生產強勁、經濟增長穩健，以及資本開支改善。此外，商業及消費信心飆升至高位甚至紀錄新高。股市內部因素確認經濟步向通貨復脹：

• 利率偏低。• 企業利潤回升。• 審慎氣氛正在消退。• 在最近數週，小型價值股表現優於大型增長股。

銀行指數的回報優於整體市場。利率溫和趨升亦反映投資者認為部份較近期的憂慮大幅緩和（例如通縮風險、歐洲政局動盪及中國經濟硬著陸）。

歐洲及日本：

歐元區經濟正在急速增長。區內經濟信心僅略低於17年以來高位。所有行業和國家的信心均有改善，甚至意大利企業的行政總裁亦對經濟抱持十年來最樂觀的展望。製造業採購經理指數終值為58.1，創逾六年半以來最高水平。服務及製造業綜合指數初值上升一個基點至56.7的穩健水平。私人需求帶動消費開支及投資的增長。在9月份，通脹相比去年錄得1.12%溫和增長，增幅高於第四季的0.81%。區內失業率下跌，而且職位增長穩健。德國失業率為5.6%，是90年代初統一以來最低水平。即使市場憂慮英國脫歐，亦無礙當地經濟擴張，家庭開支亦錄得增長。

專題摘要：

• 環球經濟持續擴張：

環球經濟在2016年初開始復甦，現已具備自行延續的動力。市場亦普遍同意經濟展現相關跡象。目前經濟增長動力可能正逐步觸頂，但穩健增幅應能延續至2018年。

• 增長強勁促使央行收緊政策：

環球經濟繼續擴張，不少央行正考慮收緊寬鬆貨幣政策。隨著油價上升、環球增長穩健和投資者日益鬆懈，長期主權債券孳息應會在年底走高。

• 通貨復脹再次主導資產配置：

投資者認為環球經濟可自行持續復甦，帶動週期性證券在9月份反彈。穩健的經濟環境意味市場仍有上升空間。然而，利率攀升或通脹憂慮可能觸發估值從高位回落。

經濟透視作者：Bob Baur、Zach Deitrich及經濟委員會

2017年9月

信安環球投資

經濟透視 • 2017年9月 2

隨著環球經濟繼續同步穩健擴張，而且勢頭未見減弱，各地央行正在重新評估金融危機後推出的特殊措施。

Bob Baur •信安環球投資首席環球經濟師

日本第三季經濟難以延續第二季按年增長2.5%的穩健步伐。然而，可觀的經濟數據已足以讓首相安倍晉三宣佈於10月22日提前舉行大選，希望藉此擴大其國會優勢。勞工市場參與率創近15年新高，但已是意料之內，因為失業率只有2.8%，而職位對求職人數

比率為1.52，是自1974年2月以來最高。企業利潤持續升至紀錄高位，而投資亦逐步回升。

中國：

中國國家統計局的採購經理指數反映內地製造業及服務業均有改善。製造業指數觸及52.4的五年高位，而服務業指數則上升兩個基點至55.4。8月工業利潤較去年升24%。衡量私營企業表現的財新╱Markit採購經理人指數則輕微下跌，但仍反映經濟錄得增長。中國人民銀行宣佈即將實施定向降準，鼓勵銀行向小型及微型企業借貸。故此，儘管財政刺激措施的影響局部消退，市場流動性仍可望維持充裕。雖然經濟增長未有加速，但亦無出現短期硬著陸的跡象。然而，考慮到內地的債務增長步伐高於名義經濟增長，中國在未來確實有可能出現金融動盪。

美國：

標準的洛杉磯天氣預報如下：今、明兩日天氣和暖。過去一年的美國經濟正是如此。平均實質經濟增長為2.2%，與年內整體經濟擴張步伐一致。經濟信心偏高、職位增長穩健，而且通脹保持低水平，反映美國的利好經濟環境尚未改變。

8月份的全國獨立商業聯盟小型企業信心指數升至105.3，接近1月所創的12年高位。其他整體信心指標可能因颶風影響而受壓，表現好淡紛呈，但仍處於2000年以來高位。在失業率偏低的環境下，當地職位錄得優秀增長。美國在過去三個月平均每月新增185,000個職位，接近191,000的24個月平均水平。

在9月份，美國聯儲局公佈的地區製造業調查非常強勁。企業利潤反彈，而資本開支亦明顯回升。鑑於颶風哈維(Harvey)、艾瑪(Irma)及瑪莉亞(Maria)造成災害，預期將削弱第三季經濟增長零點幾個百分點。不過，災後修復風雨造成的破壞可能在未來數季為增長帶來輕微貢獻。隨著經濟全面走揚，美國在未來數月可能重現2016年底的景象。我們對美國的預測在本評論末以圖表方式列示。以下圖表列出個別美國經濟數據展望。

經濟透視 • 2017年9月 3

美國預測圖表 2016 年（實質） 2017年（預估） 2018年（預估）

實質國內生產總值 +1.5% +2.2% +2.6%

國內最終銷售 +2.1% +2.5% +2.6%

美國汽車銷售（數量） 1,750 萬 (0.4%) 1,720萬 (-1.5%) 1,740萬 (1.0%)

工業生產 -1.2% 1.5% +1.2%

房屋動工（百萬間） 1,117 (6.3%) 1,212 (3.0%) 1,285 (6.0%)

稅後企業利潤（國民收入及生產賬戶） 2.2% +8% +6%

聯邦預算餘額（財年） -6,000億美元 -7,000億美元 -6,000億美元

公民失業率 4.9% 4.5% 4.2%

消費物價指數 – 整體 +1.3% +2.1% +2.4%

消費物價指數 – 食品及能源除外 +2.2% +1.9% +2.1%

國內生產總值物價指數 +1.3% +1.5% +1.9%

資料來源在本評論末以圖表方式列示。

經濟週期到達高峰：

假若政府於經濟穩健而非衰退或困難時期推出財政刺激措施，將會帶來怎樣的影響？我們可能即將找到答案。美國國會準備討論稅制改革法案，內容包括大幅削減企業稅率。日本官員提議把未來加稅所得收益用作支持教育。德國大選結果塵埃落定，加上法國總統馬克龍有意促進歐洲一體化，可能導致兩國放寬預算限制。中國降準亦能為經濟帶來刺激。假若經濟未能以自身動力觸發通貨復脹，則可能在財政刺激措施的帶動下實現，甚至引起投資者對經濟過熱的憂慮。

增長強勁促使央行收緊政策：由於環球經濟同步擴張的勢頭依然強勁，而且未見減弱，各地央行均重新評估在金融危機後推行的寬鬆政策。聯儲局首先收緊政策，在2015年12月初次上調聯邦基金利率，隨後在去年12月第二次加息，並在2017年初至今進一步加息兩次。聯邦基金利率目前介乎於1.0%至1.25%的區間。此外，當局亦宣佈將於10月份開始削減規模龐大的債券投資組合。市場預期聯儲局在本年12月第五次加息的機會高於50%，促使利率升至1.28%的平均水平。加拿大央行亦開始撤銷寬鬆貨幣政策，並已加息0.25%兩次，使其政策利率調整至1.25%。

目前為止，歐洲央行及日本央行似乎樂意由聯儲局帶領加息步伐。歐洲央行管理委員會在9月份會議上並未改變現有政策，亦無宣佈改變原訂於年底結束的買債計劃。歐洲央行行長德拉吉明確指出，將於第四季公佈詳細措施，而投資者認為有關時機為10月份。行長德拉吉重申，政策利率預期將維持不變，直至「淨買入資產期限結束後一段時間」，並強調「需要推行非常大型的貨幣寬鬆政策，以確保通脹可持續上升」。區內通脹低迷和歐元走強（2017年至今兌美元已累升12%），令當局面對的問題更為複雜。雖然歐元強勢利淡進口價格，但有助核心消費物價指標（食品和能源除外）維持在1.1%水平，略低於8月份的1.2%，但仍高於2016年底的0.8%。

經濟透視 • 2017年9月 4

12/31/2013 12/31/2014 12/31/2015 03/13/2017（高位）*

09/30/2016（低位）*

09/29/2017目前

兩年期 0.38% 0.66% 1.05% 1.37% 0.76% 1.49%

十年期 3.03% 2.17% 2.27% 2.63% 1.60% 2.33%

十年與兩年期息差 2.65% 1.51% 1.22% 1.26% 0.84% 0.84%

三十年期 3.97% 2.75% 3.02% 3.21% 2.32% 2.86%

利率

*12個月高位和低位，以過去12個月的十年期國庫券為基礎資料來源：彭博資訊

另一方面，日本經濟表現強韌，但通脹仍然甚為疲弱，整體物價較去年8月僅升0.7%。核心物價（新鮮食品和能源除外）僅升0.2%，而工資增長亦未能趕上經濟增長的步伐。因此，日本央行不大願意改變其極寬鬆政策。

利率上揚：

在經濟可持續擴張下，全球增長強勁、油價上漲和投資信心增強，推動政府債券孳息上升，扭轉其在7月至8月期間的跌勢。十年期美國國庫券孳息在9月底收報2.32%，較8月底高0.2%，第三季整季而言則持平。十年期英國金邊債券孳息於月內躍升0.34%至1.36%。十年期德國政府債券孳息微升至0.46%，整季而言大致持平。此外，日本央行維持十年期政府債券孳息近乎0%，但市場活動則使有關孳息升至0.05%。下圖載列美國近年的利率水平。

利率展望：

目前的主要問題是，長期利率往後的去向如何。孳息一直處於歷史低位，部份由於央行的買債計劃和持有大量主權債券，但金融危機衝擊造成的陰影，以及投資者轉投避險資產，亦使孳息維持低企。

短期利率：

聯儲局主席耶倫近日的言論重申，其相信經濟增長高於趨勢、勞工市場轉強、通脹預期穩定，以及通脹面對上行壓力。耶倫立場似乎不再溫和，並認為近期疲弱的通脹報告彼此並無關連，而且只要增長維持穩健，有關情況將會減退。耶倫在上次發言時指出，聯儲局不應以過慢步伐撤銷寬鬆貨幣政策，原因是職位增長目前高於長期潛力，可能導致工資增長過熱的風險和通脹問題。上述言論似乎支持當局於12月再度加息一次，但我們認為機會只有五成。若特朗普政府可於年底前通過稅務改革，則12月份將很可能會加息。

利率較長時間維持偏低？

部份市場人士指出，已發展國家的長期政府債券孳息或維持遠低於歷史水平，主要基於兩項結構性因素：潛在增長下跌及通脹偏低。已發展國家的人口結構老化，意味著對比近數十年，勞工人數增長將會下降。目前，美國勞動人口每年增長約1%，即使高於現時0.5%至0.75%的人口增長率，但仍低於70年代的3%。勞動人口增長放緩，意味經濟增長轉弱。

經濟透視 • 2017年9月 5

此外，通脹亦可能在一段時間維持在聯儲局目標以下。亞馬遜效應(Amazon e�ect)令競爭趨於極端和價格具透明度，使物價升幅持續收窄，加上科技革新的步伐正在加快和提升效率，以及機械人和人工智能技術的發展或會取代大部份職位─導致工資增長維持溫和，而非洲和其他欠發展地區的基建開支或有助擴大環球勞工供應量，新增數以億計的勞工。上述情況反映未來的通縮問題可能較通脹更為嚴峻。增長放緩和通脹溫和均屬結構性因素，使利率不大可能重返過往的正常水平。

週期性增長：

環球經濟持續依賴自身動力顯著擴張，而歐洲能源業甚至錄得增長。在經合組織追蹤的45個國家當中，所有國家均錄得增長，其中不少市場的步伐更正在加快。環球金融危機已結束將近十年，其所引發的市場恐慌、憂慮和審慎取態正開始消退。因此，即使結構性壓力使長期孳息走低，但增長動力穩健帶來週期性動力，應會推動利率於短期內上揚。十年期美國國庫券孳息目前處於2.3%，與高達4%或以上的美國名義增長率並不一致。故此，雖然我們觀望長期孳息會否較長時間維持偏低的跡象，但預料長期主權債券孳息將於年底上升。下表顯示我們對美國國庫債券孳息的預測。

利率 2017年底 2018年底

聯邦基金 1.13%-1.38% 1.88%

兩年期美國國庫券孳息 1.75% 2.0%-2.25%

十年期美國國庫券孳息 2.75%-3.0% 3.0%-3.25%

兩年與十年期息差 1.0%-1.25% 1.0%

通貨復脹再次主導資產 配置投資者於9月再度為通貨復脹作出部署，而2016年亦曾出現明顯的通貨復脹跡象。通貨復脹是指週期經濟活動轉趨活躍，刺激企業利潤回升，並帶動通脹和利率溫和上升。此外，通貨復脹將使市場的領先範疇出現輪轉，由增長股轉至價值股，由大型股轉至小型股，並且由防守性股份轉至受惠於經濟活動改善的週期性股份。9月份正好出現上述情況。

縱使市場存在隱憂，廣泛股票指數表現仍相對穩健。標準普爾500指數9月份總回報為2.1%，季度回報為4.5%。廣泛MSCI綜合世界指數月內升1.8%，在第三季則升4.7%。能源和工業為表現最佳的行業之一。利率上升令銀行股指數受惠。房地產投資信託月內和季內表現疲弱，因為利率走高構成阻力。隨著通貨復脹的跡象浮現，大部份債券指數在9月報跌。儘管如此，歐元區和美國高收益債券投資仍能夠締造可觀回報。

展望將來：

平均而言，道瓊斯工業平均指數第四季的表現最佳。自2010年以來，該指數於11月的單月平均回報最高，其次是10月。今年10月的情況或略有不同，因為美國和全球經濟強勁，按年盈利增長仍在加速（過去12個月盈利較第二季高近20%），而利率亦維持偏低水平。我們預期通貨復脹市將於季內大部份時間持續。

經濟透視 • 2017年9月 6

新興市場股票和債券一般在通貨復脹期間表現出色，但這情況並沒有在9月出現。MSCI新興市場指數跌0.6%，而以當地貨幣計價的新興市場債券指數亦錄得遜色回報。我們認為有關指數將繼續表現落後。但即使9月份表現欠佳，新興市場股票和債券年初至今表現仍然最佳。美元疲弱、利率下跌、商品價格回升，均對新興市場證券非常有利。然而，有關優勢經已結束，並轉而成為阻力。歐洲和日本股票主要指數在9月表現強勁，而且在未來一段時間應取代新興市場的領先地位。

雖然股市短期內可進一步上揚，但長期走勢才更重要，而且後市展望已漸失色。央行已持續八年多維持超低利率和非常積極的政策，加上經濟錄得穩健增長，推動股票和債券價格走高。最初買入價格是決定長遠回報是否出色的最關鍵因素。最初買入價格高昂，意味長遠最多只能賺取溫和回報。

通脹數據以及長遠利率會否進一步上升，將影響股市的中期潛力。股市進一步走高5%尚算合理，而目前市場亦不大可能出現真正熊市（即錄得約25%或以上的跌幅）。這種跌幅通常於經濟衰退期間出現，而目前經濟並無於短期內出現衰退的跡象。然而，利率突然或持續上升，以及投資者對通脹的憂慮重燃，可輕易觸發估值偏高的市場大幅回落。目前環球經濟的增長動力可能處於高峰。若增長於今年底或之後放緩，而且長期利率揚升，則可能導致市場出現調整。因此，市場仍有進一步上升的空間，但中期風險正在升溫。承險意欲較低的投資者應趁此升市減持部份倉盤。

經濟透視 • 2017年9月 7

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Economic Insights • September 2017 1

Global expansion stays on trackThe global economic recovery that began in early 2016, after the U.S. dollar peaked and

commodity prices troughed, has reached self-sustaining velocity. Even the consensus

now recognizes the evidence: strong industrial production, robust growth, and improved

capital spending. Plus business and consumer confidence is surging to high or record

levels. Stock market internals confirm the reflation:

• Interest rates are low. • Profits are rebounding. • Caution is fading. • Small-cap and value stocks performed better relative to large-cap growth stocks in recent weeks.

Bank indices had better returns than the overall market. Mildly rising interest rates also

suggest that investors appreciate some of the more recent worries (i.e., risks of deflation,

political turmoil in Europe, or a China hard landing) have fallen significantly.

Europe, Japan:

The Eurozone economy is surging. Economic sentiment there is within a whisker of a

17-year high. Confidence improved in every sector and country. Even Italian CEOs have

the most optimistic outlook in a decade. The final survey of manufacturing purchasing

managers was 58.1, the highest in over six and a half years. The flash composite of

service and manufacturing indices rose a point, to a robust 56.7. Private demand is

driving growth in both consumer spending and investment. In September, inflation

stayed modest at 1.12% over the prior year, above the 0.81% level of the fourth

quarter. Unemployment is falling and job gains are healthy. The 5.6% jobless rate

in Germany is the lowest it’s been since reunification in the early 1990s. Even Brexit

fears can’t keep the UK economy from expanding, or household spending there from

growing.

Topic summaries:

• Global expansion stays on track:

The global economic recovery that began in early 2016 has reached a self-sustaining velocity. Even the consensus accepts the evidence. Momentum is likely peaking now, but solid growth should persist well into 2018.

• Robust growth, less accommodation:

The global expansion rolls on and many central banks are contemplatingreducing monetary ease. With higher oil prices, solid global growth, and fading investor caution, long-term sovereign bond yields should work higher into year-end.

• Asset allocation - return to reflation:

Cyclical securities rebounded in September because investors judged the global upturn to be self-sustaining. Robust economic conditions suggest there’s more rally ahead. However, rising interest rates or inflation concerns could trigger a correction from high valuations.

Economic Insights Commentary by Bob Baur, Zach Deitrich, and the Economic Committee

Principal Global Investors

For the month of September 2017

Economic Insights • September 2017 2

As the synchronized global economic expansion continues robust and unabated, central banks are re-evaluating the extraordinary policies put in place after the financial crisis. Bob Baur • Chief Global Economist, Principal Global Investors

Third-quarter growth in Japan won’t equal the healthy 2.5% annualized pace of the second. But the data is strong enough for

Prime Minister Abe to gamble on increasing his majority in the Diet by calling a snap election for October 22nd. The labor force

participation rate is the highest in nearly fifteen years; it should be, since the jobless rate is a measly 2.8%, with 1.52 job offers

for every job applicant, the highest since February 1974. Corporate profits keep rising to record highs and investment is picking

up.

China: Purchasing manager indices from the National Bureau of Statistics suggest that both manufacturing and service businesses

are improving in China. The former survey hit a five-year high at 52.4, and the service index jumped two points to 55.4. August

industrial profits are up 24% from the prior year. The private-sector gauge from Caixin/Markit slipped a bit, but still shows

growth. The People’s Bank of China revealed a targeted cut in required reserves for banks that increase lending to small and

very small enterprises, so while fiscal stimulus has faded some, there will be plenty of liquidity. Growth is not accelerating, but

no near-term hard landing is anywhere in sight. Still, with debt rising faster than nominal growth, there is real potential for a

financial disturbance somewhere down the road.

United States: A weather forecaster in Los Angeles has a standard outlook: warm today, warm tomorrow. That has described the U.S. economy

very well the past year. Real economic growth averaged 2.2%, matching the rate over the entire expansion. Confidence is high,

job growth is robust, and inflation is subdued. The story hasn’t changed, and it’s a good story.

Small-business optimism from the National Federation of Independent Business rose to 105.3 in August, near the twelve-year

high of January. Other measures of overall confidence are mixed, perhaps reflecting hurricane-related stress, but stay at the

highest levels since 2000. Job gains have been excellent in the face of a low unemployment rate. Payrolls rose an average of

185,000 per month the past three months, right at the twenty-four-month average of 191,000.

Regional manufacturing surveys from the Federal Reserve (Fed) were very strong in September. Profit growth is rebounding,

and capital spending is clearly picking up. We expect third-quarter growth to be cut a few tenths by the tragedies that

came with Hurricanes Harvey, Irma, and Maria. Rebuilding efforts could add a bit to growth in following quarters. With

the economy firing on all cylinders, the next few months could look like the economic environment of late 2016. Our U.S.

forecasts are in tables at the end of the commentary. The outlook for selected U.S. data is in the chart below.

Economic Insights • September 2017 3

At cycle peaks: What happens when governments supply fiscal stimulus to already robust economies rather than during recessions or tough

times? We may find out. The U.S. Congress will soon discuss a tax bill with large business tax cuts. Japanese officials suggest

future tax hike proceeds be used to support education. The German election combined with French President Macron’s plans

for a more integrated Europe may result in looser budget constraints. Cuts to required reserves in China are also a stimulus. If

reflation doesn’t ignite on its own, fiscal stimulus may do it, perhaps even bringing concerns of overheating.

Robust growth, less accommodationAs the synchronized global economic expansion continues robust and unabated, central banks are re-evaluating the extraordinary policies put in place after the financial crisis. The Federal Reserve was first out the gate with an initial hike in the fed funds rate in December 2015, followed by a second one last December, and two more so far in 2017. The fed funds rate is now in a range of 1.0% to 1.25%. The Fed also announced the first step in reducing its huge bond portfolio would be in October. Market expectations for a fifth Fed rate hike this December are well above 50%, which would push the rate to an average 1.28%. The Bank of Canada also began to remove its monetary ease with two 0.25% hikes to bring its policy rate to 1.25%.

So far, the European Central Bank (ECB) and the Bank of Japan (BOJ) seem content to let the Fed set the pace. The ECB Governing Council made no change in its current policy at the September meeting, and made no statement about any change in its bond-purchase program that is scheduled to stop this year-end. ECB President Draghi did indicate such notice would occur in the fourth quarter, which investors assume means October. Draghi reaffirmed that policy rates would remain unchanged until “well past the horizon of our net asset purchases,” and emphasized the “need for a very substantial degree of monetary accommodation to secure a sustained return of inflation.” The ECB’s job is complicated by stunted inflation and by a strong currency, which has risen 12% versus the dollar in 2017. The strong currency is a drag on import prices, though it helped keep the measure of core consumer prices (ex food and energy) at 1.1%, down a bit from 1.2% in August. Still, that is up from 0.8% at the end of 2016.

U.S. Forecast Table 2016 (A) 2017 (E) 2018 (E)

Real GDP +1.5% +2.2% +2.6%

Domestic Final Sales +2.1% +2.5% +2.6%

U.S. Auto Sales (units) 17.5m (0.4%) 17.2m (-1.5%) 17.4m (1.0%)

Industrial Production -1.2% 1.5% +1.2%

Housing Starts (million) 1,117 (6.3%) 1,212 (3.0%) 1,285 (6.0%)

After Tax Corporate Profits (National

Income and Products Accounts)2.2% +8% +6%

Federal Budget Balance (Fiscal Years) -$0.6t -$0.7t -$0.6t

Civilian Unemployment Rate 4.9% 4.5% 4.2%

CPI – Overall +1.3% +2.1% +2.4%

CPI – ex Food & Energy +2.2% +1.9% +2.1%

GDP Price Index +1.3% +1.5% +1.9%

Sources are in the tables at the end of the commentaryA - ActualE - Estimated

Economic Insights • September 2017 4

The economy in Japan is doing well, but inflation stays very weak and overall prices are up just 0.7% over the prior year in August. Core prices (ex fresh food and energy) are up only 0.2%, and wages haven’t kept pace with economic growth. So, the BOJ has little interest in changing its extremely accommodative policy.

Rates moved higher: Robust world growth, higher oil prices, and rising investor confidence in the self-sustaining expansion, pushed government bond yields higher, reversing their July-August dip. Yields on ten-year U.S. Treasurys ended September at 2.32%, up 0.2% from the end of August, and flat for the third quarter. Yields on 10-year UK gilts jumped 0.34% during the month to 1.36%. 10-year German bund yields rose a bit to 0.46%, also about flat for the quarter. The BOJ keeps the 10-year government bond yield near zero, although markets pushed the yield to 0.05%. Recent U.S. rate history is in the chart below.

Interest Rate Outlook: The key question is where long-term rates go from here. Yields have been historically low, in part from central bank purchases and ownership of large quantities of sovereign bonds. But, yields have also stayed low from the shadow of the severe financial crisis, and the flight to safety by investors.

On short rates: In recent comments, Fed Chair Yellen, reiterated her belief in above-trend growth, stronger labor markets, stable inflation expectations, and upward pressure on inflation. Yellen seems dovish no more, and believes the recent weak inflation reports are unrelated to each other and will fade so long as growth remains solid. In her last speech, Yellen noted that the Fed shouldn’t be too slow to remove monetary ease because job gains are above long-term potential, risking overheated wage gains and an inflation problem. These comments appear to support one more rate hike in December, although we think it’s only an even chance. If the Trump administration can pass tax reform by the end of the year, the December rate hike is probably a lock.

Lower for longer? Some make a case that long-term developed-country government bond yields could stay far lower than historically for two structural reasons: falling potential growth and low inflation. Aging demographics in developed countries means the growth in the number of workers will be less than recent decades. U.S. labor force growth is currently about 1% annually, versus 3% in the 1970s. Even that 1% is well above the 0.5% to 0.75% current population growth. Slower growth in the number of people working implies weaker economic growth.

12/31/2013 12/31/2014 12/31/2015 03/13/2017(High)*

09/30/2016(Low)*

09/29/2017Current

2 year 0.38% 0.66% 1.05% 1.37% 0.76% 1.49%

10 year 3.03% 2.17% 2.27% 2.63% 1.60% 2.33%

10-2 spread 2.65% 1.51% 1.22% 1.26% 0.84% 0.84%

30 year 3.97% 2.75% 3.02% 3.21% 2.32% 2.86%

Interest Rates

*Twelve month high and low, based on the 10-year Treasury bond over the prior 12 monthsSource: Bloomberg

Economic Insights • September 2017 5

Inflation could also stay below the Fed’s target for some time. There’s the Amazon effect of extreme competition and price transparency keeping price rises slim, the rate of technological change is accelerating and pushing advances in efficiency, robotics and artificial intelligence may replace many jobs - keeping wage gains modest, and infrastructure spending in Africa and other less-developed areas could expand the global labor supply by hundreds of millions of new workers. All this suggests deflation could be more of a problem than inflation in the future. Slower growth and modest inflation are structural reasons

interest rates may never return to normal past levels.

Cyclical gains: The global expansion is vigorous and self-sustaining, with energy lifting even in Europe. Of the 45 countries tracked by Organization of Economic Cooperation and Development, all are growing and many are accelerating. With the global financial crisis nearly a decade in the rear-view mirror, the dread, fear, and caution it generated is starting to fade. So, even if structural forces pressure long-term yields lower, cyclical forces of solid growth momentum should push rates higher in the near-term. Today’s 10-year U.S. Treasury yields of 2.3% are inconsistent with 4% or more nominal U.S. growth. So, while we await evidence about whether long-term yields will stay lower for longer, we expect long-term sovereign bond yields to work higher into year-end. Our forecasts for U.S. Treasury bond yields are below.

Interest Rates Year-end 2017 Year-end 2018

Federal Funds 1.13%-1.38% 1.88%

2-Year UST Yield 1.75% 2.0%-2.25%

10-Year UST Yield 2.75%-3.0% 3.0%-3.25%

2-10 Year Spread 1.0%-1.25% 1.0%

Asset allocation - return to reflation September was the month when the investment consensus began to revisit their flirtation with reflation that was so evident in 2016. Reflation, of course, is a pickup in cyclical economic activity, bringing a rebound in profits, a modest boost to inflation, and a mild rise in interest rates. Reflation’s counterpart in markets is a rotation in returns from growth to value, from large caps to small caps, and from defensive sectors to cyclical ones that benefit from improving activity. That’s exactly what occurred in September.

Broad equity indices performed relatively well, despite churning underneath the surface. Total return of the S&P 500 Index was 2.1% during September, and 4.5% for the quarter. The broad MSCI All Country World Index rose 1.8% for the month and 4.7% in the third quarter. Energy and industrial companies were among the best-performing sectors. Indices of bank stocks benefited from the rise in interest rates. Real estate investment trusts had a tough month and weak quarter because higher rates were a headwind. Many bond indices lost ground in September when reflation took hold. Even so, investors in the euro area and U.S. high yield bonds eked out decent returns.

A look ahead:

On average, Dow Industrials perform best in the fourth

quarter. November has had the strongest average

monthly return since 2010, followed by October. This

year, October should be little different, because the U.S.

and global economies are strong, year-over-year earnings

growth is still accelerating (up nearly 20% for reported

trailing twelve-month earnings to the second quarter),

and interest rates are still low. We look for the reflation

trade to continue through much of the quarter.

Economic Insights • September 2017 6

Stocks and bonds of emerging market companies typically perform well in periods of reflation. That was not true in Sep-tember. The MSCI Emerging Market Index lost 0.6%, and emerging market bonds indices in local currency also had poor returns. We think that underperformance will persist. Emerging market stocks and bonds have been the best performers year-to-date even with a rough September. The U.S. dollar was weak, interest rates were falling, and commodity prices rebounded, all strong tailwinds for emerging market securities. Those advantages are over and have become headwinds. Europe and Japanese stocks will likely replace them as the leaders for a while; their major indices had a strong September.

While the stock market rally will likely continue a bit longer, the long term is what’s important, and that outlook is less exciting. Eight or more years of super-low interest rates and very active central banks, combined with decent growth, have driven stock and bond prices to high valuations. The most important determinant of good long-term returns is the initial price paid These high initial prices suggest long-term returns will be modest at best.

The interim potential for the stock market will be determined by reports of inflation and further increases in long-term interest rates if any. Another 5% or so of continued advance doesn’t seem unreasonable. The odds of a real bear market, a drop of around 25% or more, seem remote at this time. That type of decline is usually associated with a recession and current economic conditions don’t suggest one anytime soon. However, a sudden or continued rise in interest rates, and a revival of inflation concerns could easily bring a significant correction to this highly valued market. The global economy is likely at peak growth momentum now. Any deceleration into year-end or beyond coupled with higher long-term rates could precipitate a correction. So, the potential for a longer rally is still there, but interim risk is rising. Those of the faint of heart might want to use this rally to take a few more chips off the table.

Economic Insights • September 2017 7

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10/03/2017 8:15 AM# Classification: Company Confidential

Table I: Global Economic Trends

Unemployment Benchmark 10 yr. TreasuryReal GDP CPI Rate Rate EOP Rate EOP

US: 2014 2.4% 1.6% 6.2% 0.25% 2.18%2015 2.4% 0.1% 5.3% 0.38% 2.27%2016 1.5% 1.3% 4.9% 0.62% 2.46%2017 F 2.2% 2.1% 4.5% 1.38% 2.50%2018 F 2.7% 2.4% 4.2% 2.13% 2.75%

Canada: 2014 2.6% 1.9% 6.9% 0.75% 1.78%2015 0.9% 1.1% 6.9% 0.50% 1.39%2016 1.5% 1.4% 7.0% 0.50% 1.72%2017 F 2.8% 1.7% 6.5% 1.25% 2.20%2018 F 2.0% 2.0% 6.4% 1.50% 2.50%

UK: 2014 3.1% 1.5% 6.3% 0.50% 1.75%2015 2.2% 0.0% 5.4% 0.50% 1.96%2016 1.8% 0.7% 4.9% 0.25% 1.24%2017 F 1.5% 2.7% 4.6% 0.25% 1.40%2018 F 1.3% 2.5% 5.0% 0.50% 1.70%

Eurozone: 2014 1.3% 0.4% 11.6% 0.05% 0.54%2015 2.0% 0.0% 10.9% 0.05% 0.63%2016 1.8% 0.2% 10.0% 0.00% 0.21%2017 F 2.1% 1.6% 9.2% 0.00% 0.70%2018 F 1.9% 1.5% 8.7% 0.00% 1.00%

Japan: 2014 0.3% 2.7% 6.3% 0.10% 0.31%2015 1.1% 0.8% 3.4% 0.10% 0.26%2016 1.0% -0.1% 3.1% -0.10% 0.04%2017 F 1.4% 0.5% 2.9% -0.10% 0.05%2018 F 1.0% 0.8% 2.8% -0.10% 0.10%

Australia: 2014 2.8% 2.5% 6.1% 2.50% 2.75%2015 2.4% 1.5% 6.1% 2.00% 2.88%2016 2.5% 1.3% 5.7% 1.50% 2.77%2017 F 2.5% 2.0% 5.7% 1.50% 2.80%2018 F 2.8% 2.2% 5.6% 1.75% 3.15%

2014 7.3% 2.0% 5.60%China: 2015 6.9% 1.4% 4.35%Official 2016 6.7% 2.0% 4.25%Statistics 2017 F 6.6% 2.0% 4.35%

2018 F 6.2% 2.2% 4.35%

F - Forecast, EOP - End of PeriodSource: International Monetary Fund, OECD & Sovereign Group, China NBS, Principal Global Investors

10/03/2017 8:16 AM# Classification: Company Confidential

Table II: U.S. Economic Indicators

Indicator Jun-17 Jul-17 Aug-17 Jun-17 Jul-17 Aug-17 2016 2017 F 2018 F 2016 2017 F 2018 F

1 Industrial Production Index (2007=100) 105.3 105.7 104.7 2.1% 2.4% 1.5% 103.1 104.6 106.5 -1.2% 1.5% 1.8%

2 Capacity Utilization Rate, Total Industry (1997=100) 76.7 76.9 76.1 1.2% 1.3% 0.4% 75.7 76.5 77.4 -1.4% 1.0% 1.2%

3 Total Private Housing Starts (SAAR) 1,217 1,190 1,180 2.3% -2.7% 1.4% 1,177 1,250 1,377 6.3% 6.2% 7.0%

4 Total Light Vehicle Sales (YTD) 8,401.7 9,809.7 11,285.6 -2.2% -3.0% -2.8% 17,465 17,203 17,375 0.4% -1.5% 1.0%

5 Civilian Labor Force (thousands) 160,145 160,494 160,571 0.8% 0.8% 0.7% 159,186 160,429 162,088 1.3% 0.78% 1.11%6 Civilian Employment (thousands) 153,168 153,513 153,439 1.4% 1.3% 1.2% 151,437 153,295 155,295 1.7% 1.2% 1.3%7 Total Unemploment (thousands) 6,977 6,981 7,132 -10.5% -9.9% -9.2% 7,750 7,134 6,793 -6.5% -8.1% -4.8%

Q4-16 Q1-17 Q2-17 Q4-16 Q1-17 Q2-17 2016 2017 F 2018 F 2016 2017 F 2018 F

8 After-Tax Corporate Profits (billions $, quarterly) 1,787.4 1,810.5 1,774.7 19.6% 11.8% 7.4% 1,687.9 1,772 1,867 2.2% 8.0% 6.0%

9 Index of Hourly Compensation 115.7 117.1 117.6 -0.3% 1.9% 1.1% 116.0 118.1 120.5 1.0% 2.0% 2.0%Non-farm Business (2009=100, quarterly)

2014 2015 2016 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 2017 F 2018 F

10 Consumer Price Index, All Urban Consumers Y/Y% 1.6% 0.1% 1.3% 2.4% 2.2% 1.9% 1.6% 1.7% 1.9% 2.1% 2.4%11 Consumer Price Index, Ex. Food & Energy Y/Y% 1.7% 1.8% 2.2% 2.0% 1.9% 1.7% 1.7% 1.7% 1.7% 1.9% 2.1%

12 Non-farm Payroll Growth (thousands) 2,998 2,713 2,240 50 207 145 210 189 156

13 Unemployment Rate, All Workers 6.2 5.3 4.9 4.5 4.4 4.3 4.4 4.3 4.4 4.5 4.214 Unemployment Rate, All Workers, >15 Weeks 3.0 2.3 2.0 1.7 1.7 1.8 1.6 1.7 1.7 - -15 Unemployment Rate, Adult Men 5.7 4.9 4.5 4.3 4.0 3.8 4.0 4.0 4.1 - -16 Unemployment Rate, Adult Women 5.6 4.8 4.4 4.0 4.1 4.0 4.0 4.0 4.0 - -17 Unemployment Rate, Teenagers (16-19) 19.5 16.9 15.7 13.7 14.7 14.3 13.3 13.2 13.6 - -

Level Y/Y Level Y/Y %

Level Y/Y % Level Y/Y %

Source: Federal Reserve Board, U.S. Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, U.S. Dept. of Commerce, Principal Global InvestorsY/Y% - Year Over Year Percent, F - Forecast, SAAR - Seasonally Adjusted Annual Rate, YTD - Year to Date

Annual Monthly Monthly Annual

8:17 AM 10/03/2017# Classification: Company Confidential

Baseline Economic Forecasts for 2017-2018, by Quarter

Baseline ForecastsA. Growth in Real GDP - Qtr-Qtr (% Change, Annualized):

Real GDP 16,903.2 1.2% 17,031.1 3.1% 17,140.4 2.6% 17,270.5 3.1% 16,471.5 2.9% 16,716.2 1.5%

Personal Consumption Expenditures 11,758.0 1.9% 11,853.0 3.3% 11,915.6 2.1% 12,009.3 3.2% 11,264.3 3.6% 11,572.1 2.7%Durable Goods 1,647.3 -0.1% 1,677.8 7.6% 1,682.0 1.0% 1,702.6 5.0% 1,511.9 7.8% 1,595.1 5.5%Non-Durables 2,540.2 1.1% 2,566.6 4.2% 2,579.3 2.0% 2,604.8 4.0% 2,446.8 3.1% 2,514.3 2.8%Services 7,621.0 2.5% 7,664.4 2.3% 7,702.4 2.0% 7,750.1 2.5% 7,340.2 3.2% 7,507.3 2.3%Gross Private Domestic Invest. 2,897.0 -1.2% 2,924.7 3.9% 2,942.8 2.5% 2,978.5 4.9% 2,905.4 5.2% 2,858.2 -1.6%Bus. Fixed Invest. 2,263.6 7.1% 2,300.6 6.7% 2,323.2 4.0% 2,348.8 4.5% 2,223.5 2.3% 2,210.4 -0.6% Structures 468.0 14.8% 476.0 7.0% 478.4 2.0% 483.1 4.0% 465.4 -1.8% 446.4 -4.1% Equipment 1,059.4 4.4% 1,082.0 8.8% 1,097.9 6.0% 1,111.4 5.0% 1,084.5 3.5% 1,047.8 -3.4% Intellectual Property Products 738.6 5.8% 745.3 3.7% 749.0 2.0% 756.4 4.0% 677.8 3.8% 720.4 6.3%Residential Invest. 605.5 11.1% 594.1 -7.3% 589.6 -3.0% 599.7 7.0% 556.9 10.2% 587.5 5.5%Change in Inventory 1.2 - 5.5 - 30.0 - 30.0 - 100.6 - 33.4 -Net Exports -622.2 - -613.6 - -619.2 - -624.0 - -545.3 - -586.3 -Exports 2,162.3 7.3% 2,181.1 3.5% 2,195.7 2.7% 2,210.3 2.7% 2,127.1 0.4% 2,120.1 -0.3%Imports 2,784.5 4.3% 2,794.8 1.5% 2,814.8 2.9% 2,834.3 2.8% 2,672.4 5.0% 2,706.3 1.3%Gov't Purchases of Goods & Services 2,896.6 -0.6% 2,895.2 -0.2% 2,899.3 0.6% 2,904.9 0.8% 2,878.5 1.4% 2,900.2 0.8%Federal 1,108.4 -2.4% 1,113.7 1.9% 1,115.3 0.6% 1,116.4 0.4% 1,114.1 -0.1% 1,114.6 0.0% National Defense 658.6 -3.3% 666.2 4.7% 667.9 1.0% 667.9 0.0% 672.0 -2.2% 667.0 -0.7% Non-Defense 449.0 -1.1% 446.9 -1.9% 447.5 0.5% 448.6 1.0% 441.6 3.2% 447.0 1.2%State & Local 1,786.2 0.5% 1,779.6 -1.5% 1,784.0 1.0% 1,788.5 1.0% 1,762.8 2.3% 1,783.7 1.2%Real Final Sales 16,883.5 2.7% 17,006.6 2.9% 17,110.4 2.5% 17,240.5 3.1% 16,354.3 2.6% 16,664.1 1.9%Real Domestic Final Sales 17,502.7 2.4% 17,618.3 2.7% 17,729.6 2.6% 17,864.5 3.1% 16,900.4 3.3% 17,250.3 2.1%

y/y 2.0% 2.2% 2.2% 2.5%

Real GDP 17,397.4 3.0% 17,506.1 2.5% 17,602.4 2.2% 17,682.2 1.8% 17,086.3 2.2% 17,547.0 2.7%

Personal Consumption Expenditures 12,097.5 3.0% 12,172.9 2.5% 12,247.1 2.5% 12,314.1 2.2% 11,884.0 2.7% 12,207.9 2.7%Durable Goods 1,723.5 5.0% 1,736.3 3.0% 1,751.3 3.5% 1,762.1 2.5% 1,677.4 5.2% 1,743.3 3.9%Non-Durables 2,624.1 3.0% 2,640.3 2.5% 2,656.7 2.5% 2,669.9 2.0% 2,572.7 2.3% 2,647.7 2.9%Services 7,798.1 2.5% 7,844.5 2.4% 7,887.3 2.2% 7,930.3 2.2% 7,684.5 2.4% 7,865.1 2.3%Gross Private Domestic Invest. 3,010.7 4.4% 3,037.8 3.6% 3,053.9 2.1% 3,061.9 1.1% 2,935.7 2.7% 3,041.1 3.6%Bus. Fixed Invest. 2,372.3 4.1% 2,393.3 3.6% 2,409.9 2.8% 2,421.3 1.9% 2,309.1 4.5% 2,399.2 3.9% Structures 485.5 2.0% 487.9 2.0% 490.3 2.0% 490.3 0.0% 476.4 6.7% 488.5 2.5% Equipment 1,125.0 5.0% 1,136.1 4.0% 1,144.5 3.0% 1,150.2 2.0% 1,087.7 3.8% 1,138.9 4.7% Intellectual Property Products 763.8 4.0% 771.4 4.0% 777.1 3.0% 782.8 3.0% 747.3 3.7% 773.8 3.5%Residential Invest. 608.5 6.0% 614.4 4.0% 619.0 3.0% 620.5 1.0% 597.2 1.7% 615.6 3.1%Change in Inventory 30.0 - 30.0 - 25.0 - 20.0 - 16.7 - 26.3 -Net Exports -629.2 - -632.5 - -633.7 - -634.0 - -619.7 - -632.4 -Exports 2,228.9 3.4% 2,245.4 3.0% 2,262.1 3.0% 2,276.1 2.5% 2,187.4 3.2% 2,253.1 3.0%Imports 2,858.1 3.4% 2,877.9 2.8% 2,895.8 2.5% 2,910.1 2.0% 2,807.1 3.7% 2,885.5 2.8%Gov't Purchases of Goods & Services 2,916.6 1.6% 2,926.1 1.3% 2,933.3 1.0% 2,938.4 0.7% 2,899.0 0.0% 2,928.6 1.0%Federal 1,121.4 1.8% 1,124.2 1.0% 1,127.0 1.0% 1,129.8 1.0% 1,113.5 -0.1% 1,125.6 1.1% National Defense 671.2 2.0% 672.8 1.0% 674.5 1.0% 676.2 1.0% 665.1 -0.3% 673.7 1.3% Non-Defense 450.2 1.5% 451.4 1.0% 452.5 1.0% 453.6 1.0% 448.0 0.2% 451.9 0.9%State & Local 1,795.1 1.5% 1,801.8 1.5% 1,806.3 1.0% 1,808.6 0.5% 1,784.6 0.1% 1,803.0 1.0%Real Final Sales 17,367.4 3.0% 17,476.1 2.5% 17,577.4 2.3% 17,662.2 1.9% 17,060.2 2.4% 17,520.8 2.7%Real Domestic Final Sales 17,996.6 3.0% 18,108.6 2.5% 18,211.1 2.3% 18,296.2 1.9% 17,678.8 2.5% 18,153.1 2.7%

y/y 2.9% 2.8% 2.7% 2.4%Source: Historical Statistics - U.S. Dept. of Commerce, Bureau of Economic Analysis (http://www.bea.gov/bea/dn1.htm), Projections - Internal Estimates.

2015 ACTUAL 2016 ACTUAL

Forecast Forecast Forecast Forecast 2017 FORECAST 2018 FORECAST1st QUARTER 18 2nd QUARTER 18 3rd QUARTER 18 4th QUARTER 18

1st QUARTER 17 2nd QUARTER 17 3rd QUARTER 17 4th QUARTER 17Actual Actual Forecast Forecast