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“It is indeed very clear that the threat posed by North Korea’s missile and nuclear program is now entering into a new stage. That is our recognition.”

Shinzo Abe, Prime Minister of Japan, 5/15/17

 FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • China economic data slowed on Y/Y basis in April, but near-term worries are overblown.
  • Australian Home Sales declined -0.5% M/M in March.
  • NY Fed Manufacturing contracts for first time in seven months.
  • S. NAHB Housing Market Index improved in May.

 CHINA RETAIL SALES, INDUSTRIAL PRODUCTION, & FIXED ASSET INVESTMENT SLOWED IN APRIL:

The National Bureau of Statistics of China released reports on Industrial Production, Fixed Asset Investment, and Retail Sales and the results showed that activity in China increased M/M but slowed on Y/Y basis in April.  China Retail Sales increased +0.79% M/M but slowed slightly to +10.7% Y/Y (versus +10.9% prior) and sales are now up +10.2% cumulatively YTD.  Also, Industrial Production increased +0.56% M/M but slowed to +6.5% Y/Y (versus +7.6% prior) and output is up +6.7% cumulatively YTD.  Furthermore, China Fixed Asset Investment increased +0.71% M/M but slowed to +8.9% cumulatively YTD (versus +9.2% prior).

 China worries are back on the front burner again, as China economic data has slowed.  However, the levers that China has in its arsenal to defend against economic weakness remain in place.  China’s FX reserves are at their highest level since November, the currency has risen 5% Y/Y, fiscal spending has fallen 11% Y/Y (leaving them plenty of room to ramp), three-month SHIBOR is 150 bps higher than it was last year, and wealth has risen due to higher home and equity market values.

 

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AUSTRALIAN HOME LOANS DOWN -0.5% M/M IN MARCH:

According to the Australian Bureau of Statistics, the total number of Housing Loans declined -0.49% M/M and -1.92% Y/Y to 54,468 in the month of March (-2.20% Y/Y prior).  The decline in the month was led lower by Established Dwelling loans, down -1.34% M/M and -3.49% Y/Y.  However, the total dollar amount of loans actually increased +0.88% M/M and +5.29% Y/Y to 33.177 billion (+3.42% Y/Y prior).

 

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NY FED MANUFACTURING INDEX TURNS NEGATIVE IN MAY:

The NY Fed’s Empire State Manufacturing Index fell -6.2 points to -1.0 in May Thus, the index now indicates contraction in the region for the first time since October 2016.  The decline in the month was led by Current New Orders (-11.4 points to -4.4), Unfilled Orders (-16.1 points to -3.7), Current Shipments (-3.1 to +10.6), Inventories (-4.3 points to -0.7), Number of Employees (-2.0 points to +11.9), and Average Workweek (-1.3 points to +7.5).  Furthermore, the Future General Business Index fell -0.6 points to 39.3.

 

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NAHB/WELLS FARGO U.S. HOUSING MARKET INDEX IMPROVED TO 70 IN MAY:

The NAHB Housing Market Index increased +2 points to 70 in the month of May.  Thus, it marks the 35th consecutive month above 50 and the index is at the second highest level since June 2005 (71 in March)!  In the month, Current sales increased +2 points to 76, Future Sales increased +4 points to 79, but Traffic flows fell -1 point to 52.  Geographically, there were increases across most of the U.S.: the Northeast (+5 points to 50), West (+3 points to 80), and the South (+2 points to 72).  However, the index in the Midwest fell -2 points to 65.

 

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AMERICAS:

U.S. GDP:  Our GDP model points toward stronger growth in 2H 2017 (+3% Real GDP) given improvements in workforce population growth and workforce participation.  Our official forecast for 2017 is 3.0%. 

U.S. Inflation:  U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator slowed to +1.56% Y/Y in March (away from the Fed’s 2% inflation target).  As we anniversary the drop in commodities prices, we expect headline inflation to peak within the next few months, taking pressure off of the Fed’s current hawkish rate stance.

U.S. Federal Reserve:  Given our belief that U.S. inflation will peak within the next few months, we believe the FOMC will become increasingly more data-dependent.  We believe the Fed will hike rates 1-2 more times in 2017.  Balance sheet reduction talk should increase later this year.

 U.S. Treasuries:  With headline CPI having hit a near-term peak of 2.7% Y/Y, we believe the 10-year U.S. Treasury is now range-bound through the end of the year.  We would be inclined to be buyers of Treasuries if the 10-year yield were to approach its recent high of 2.63%. 

U.S. Equities and Earnings:  S&P 500 operating earnings will rise materially in 2017, but our yearend S&P 500 target of 2400 has already been attained.  We favor the Financials and Energy sectors, as well as the Homebuilding sub-sector, and are offsetting that against underweight views in Consumer Staples and Utilities, which are overvalued by historical measures.

 

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Argentina:  In short, the economic data out of Argentina remains bad (but less bad).   Exports increased +2.3% Y/Y in March, Industrial Production declined -0.4% Y/Y in March (-6.0% Y/Y prior), Consumer Confidence remains depressed but improved in March, and GDP is still negative.

Brazil:  Recent data suggests that Brazil is rolling over again and with Brazilian markets up so much since Rousseff’s removal, we recently initiated a short view on Brazil’s Bovespa.  Retail Sales worsened to -3.2% Y/Y in March.  Consumer Credit Card transactions have slipped in Q1.  Confidence, albeit high, ticked slightly lower in March.  The Unemployment Rate has jumped to a record high 13.7% in March.  Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in March, thus supporting Brazil’s recent rate cut.  

Canada: Today, we learn that Existing Home Sales fell -1.7% M/M and -7.5% Y/Y in the month of April (note that March sales were record high).  Note that, Toronto Existing Home Sales fell -3.8% Y/Y and Vancouver sales plunged -26.2% Y/Y. Furthermore, the MLS Home Price Index increased +3.20% M/M and +19.76% Y/Y to $606,000.  Given concerns about Canada’s housing market, trade disputes, and potential fallout from lower oil prices, we added Canada to our downside risk watch last week; however, so far Canada’s economic data remain healthy.  Consumer Confidence remains in a rising trend, manufacturing PMI’s are improving, unemployment has been falling, and Canada’s monthly GDP has increased for three straight months.

Mexico: Inflation continues to rise, yet Consumer Confidence is improving following a sharp decline. Meanwhile, Manufacturing is slowing.  We’re neutral on Mexico given the political uncertainty, but certainly the fundamental backdrop has worsened.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …

EMEA:

United Kingdom:  The U.K. economy seems to be on decent footing post-BREXIT, but Q1 growth slowed. With some modest economic deterioration and Article 50 triggered on March 29th, we recently closed out our bullish view on GBP.   

European Union:  With political uncertainty lifted (Macron won, Greece gets bailed out on 9/22, and Merkel gets re-elected in September), we can now focus on the improvement seen in economic data in Europe (higher PMIs and lower unemployment).  As such, we are bullish on the Euro STOXX 50 Index.

European Central Banks:  The ECB is doing exactly what we thought they would do by favoring asset purchases over furthering lowering rates into negative territory and now the ECB is facing rising inflation.  The ECB has now begun to taper its asset purchases and certainly a discussion will begin on the process of how/when to raise rates.  We will watch to see if ECB tapering has any meaningful impact on zero (or near-zero) interest rates throughout the continent.

Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).

South AfricaNeed a playbook for a chaotic government run by a President who has many ex-wives and unexpectedly fires senior officials without warning?  Oh, that would be South Africa.  Note that President Zuma has Trump beat on some key metrics (6 ex-wives and an estimated 20 children).  We are now monitoring the economic data in South Africa following Zuma’s hasty firing of his finance minister, Gordhan, on March 30th.  So far, the early results show a plunge in vehicle sales and an 8 point drop in PMI, but so far there’s been no impact on business confidence.

Turkey:  What’s not to love about Turkey?  Not only does Turkey have a worsening political dictatorship, but inflation is rising (+11.9% Y/Y in April), industrial production has turned negative, and unemployment has turned higher.  Overall, Turkey’s economic and political situation appears to be too challenging.

ASIA / PACIFIC:

Australia: As goes China, as goes Australia, and we’re certainly watching the drop in iron ore prices as a result.  However, so far, the RBA has cut rates twice in the past year and Australian data is holding up.  So far, business and consumer confidence have been strong through April and PMI’s are surging, although housing data is starting to show signs of fatigue (see above).  We are monitoring Australia to see if weakening data in China spills its way over to Australia.  We remain neutral on Australia at this time.

China:   We have noted weakening economic data in China above, but continue to believe China has the levers necessary to stimulate ahead of the National Communist Party Congress later this year.

India:  Money supply growth is beginning to recover following last year’s currency demonetization.  M1 growth has “improved” to -4.3% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.1% Y/Y (was +6.4% in January).  Manufacturing and Services PMI’s improved in Q1 (but slowed in April), and inflation appears stable.  As exports and imports in India are surging in Q1, it appears economic activity is rebounding.  However, the recovery may be priced in as the Sensex index is up 12.4% this year and trades at an above-average P/E.

Indonesia:  Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, but Consumer Confidence and inflation appear to be turning higher.  As a result, it is reasonable to assume that the central bank’s dovish policy stance (six rate cuts in 2016) may revert to a more neutral stance this year.

Japan:  Data from Japan in Q1 showed modest, positive improvements in Unemployment, CPI, PPI, retail sales, and manufacturing; however, Industrial Production and Exports have recently slipped.

Russia: Russian economic data continues to improve alongside rising oil prices.  Industrial Production rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.4% in March.  Meanwhile, CPI is moderating, which allowed the Bank of Russia to cut rates once again.  Russian equities remain the cheapest in the industrialized world and we remain bullish.

GLOBAL CENTRAL BANK SCORECARD:

 

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MACRO TRADING IDEAS:

 

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WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

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BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

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BEST/WORST PERFORMING WORLD BOND MARKETS:

 

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BEST/WORST PERFORMING CURRENCIES:

 

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COMMODITIES MARKET PERFORMANCE:

 

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MAJOR GLOBAL STOCK MARKETS:

 

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MAJOR GLOBAL BOND MARKETS:

 

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DISCLOSURE APPENDIX

This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author’s opinion at a particular point in time and May change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested.

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