Speed Bump

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Market Perspectives Series l FIXED INCOME May 2013

MONTHLY MACROSCAN

Speed Bump Janus’ company-informed outlook on key U.S. macroeconomic indicators

For the past three years we’ve watched the economy accelerate in the first quarter, only to encounter negative headlines and hit the brakes in the second quarter. This year has been no different. A combination of banking issues in Cyprus, political uncertainty in Italy and government spending cuts and higher taxes in the United States coalesced in March and the economy once again showed signs of deceleration. While we had hoped to see a change in this annual cycle this year, we were again reminded that the U.S. economy—although in better shape than in years past—does not have a clear road ahead. We continue to believe that the road will be bumpy through the third quarter, but that we will begin to see economic stabilization and improvement by the fourth quarter, setting us up for a stronger 2014. FACTORS

TREND

OUTLOOK

CONSUMER  Consumer confidence has declined amid higher taxes and

automatic government spending cuts. The University of Michigan Consumer Sentiment Index turned lower in April.  Home prices are up 9.32% year over year (YoY), according to

the S&P/Case-Shiller 20-City Index.  Personal income growth has fallen to 2.5% YoY from 7.1% in

December, with the savings rate now down to 2.7%.  Nonfarm payroll growth was a mild 88K in March. While the

unemployment rate fell to 7.6% in February, it fell for the wrong reason: discouraged job-seekers leaving the labor force.

 We expect confidence to recover as the economy stabilizes

toward the end of 2013.  We expect continued home price appreciation. This may boost

personal net worth and spur job creation in the construction sector in the second half.  Personal income will decline again in the first half of 2013 as

businesses postpone hiring, taxes have increased and government spending cuts will lead to job losses and furloughs.  We expect the unemployment rate to fall to 7.5%, with most of

the improvement in the second half.

BUSINESS  The pace of business capital expenditure is starting to recover

but will remain slow amid uncertainty around federal tax policy.  The Institute for Supply Management (ISM) manufacturing

index has softened again after improving in February.

 Businesses remain cautious, but we believe they will begin to

spend and invest when they have clarity on tax policy.  We believe full-year gross domestic product (GDP) growth will

run between 1.5% and 1.8%, similar to the pace in 2012.

INFLATION  Inflation is moving down and out of the pipeline, as reflected in

the core Consumer Price Index (CPI) easing to a 1.9% YoY growth rate. The core personal consumption expenditures (PCE) price index is even weaker, at 1.13%.  Energy and agricultural commodity prices tumbled in April.

 We expect core CPI to ease even further, ending the year at

1.7% YoY as the housing recovery reduces demand for rental property and slows growth in owners’ equivalent rent, a major component of core CPI. Inflation, as measured by core PCE, already is well below the Fed’s 2% target rate.  Consumers should benefit from lower oil and gasoline prices.

FISCAL & MONETARY POLICY  Congress faces a deadline to raise the debt ceiling on May 18;

the continuing resolution was extended to September 30.  The Fed is buying $45 billion in Treasury bonds and $40 billion

in mortgage-backed securities (MBS) monthly. It will keep rates low until the jobless rate hits 6.5% or inflation tops 2.5%.

 We believe Congress will resolve or extend deadlines on

remaining fiscal issues, allowing for accelerating growth by the end of 2013.  We do not believe the Fed will be able to exit its Treasury bond

or MBS purchase programs this year.

MONTHLY MACROSCAN: KEY IMPLICATIONS 

While there have been recent signs of slowing U.S. growth, we continue to expect GDP expansion of 1.5% to 1.8% in 2013.



We expect core CPI to end the year at 1.7%. Inflation pressure continues to move down and out of the pipeline, with no sign that a new cycle is beginning.



We expect the unemployment rate to fall to 7.5%, with most of the improvement in the second half.

US Bancorp has seen a decline in mortgage-banking revenue as refinancing activity has slowed.

American Express has seen a decline in corporate travel and expenses as business travel has moderated.

JANUS COMPANY-INFORMED MACRO PERSPECTIVE

Manufacturer Danaher says uncertainty in Washington has been leading some of its customers to delay capital spending decisions.

Fundamental credit research has been at the core of the Janus fixed income process for over 25 years. Not only does in-depth credit research anchor our fixed income investment process, it also serves as the foundation for our macroeconomic views. While most macroeconomic forecasts originate from government data, we start at the bottom, aggregating individual company data from our fundamental research to arrive at a company-informed macro view at the company, sector, U.S. and global levels. We believe this approach differentiates us from our peers and other macroeconomic data providers.

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