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FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • Brazilian economy continues to improve and we increase our outlook.
  • Caixin China Services PMI improved in August.
  • S. Factory Orders down -3.3% M/M in July.
  • Euro Area retail Sales slipped -0.3% M/M in July.
  • Reserve Bank of Australia leave rates unchanged despite higher exchange rate.

BRAZILIAN INDUSTRIAL PRODUCTION UP +2.5% Y/Y IN JULY:

According to the IBGE, industrial output in Brazil increased +0.81% M/M (seasonally adjusted) in July (+0.23% M/M prior).   In fact, this is the fourth consecutive monthly increase and industrial production in Brazil accelerated to +2.45% Y/Y (NSA) (+0.57% Y/Y prior).  Furthermore, year to date output is now up +0.8%.  In the month, Durable Goods output increased +2.7% M/M, Capital Goods output increased +1.9% M/M, and Intermediate Goods output increased +0.9% M/M.

 

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RECENT DATA CONFIRM IMPROVEMENT IN BRAZILIAN ECONOMY:

Last week, the IBGE reported that the unemployment rate in Brazil fell to 12.8% in July as those employed increased +441k to 90.677 million and those unemployed fell -160k to 13.326 million The improvement in jobs followed Brazil’s return to positive GDP growth in Q2.  Brazilian Q2 GDP increased to +0.26% Y/Y, which was the first positive Y/Y growth rate since Q1 2014!  The Brazilian depression has officially ended.

 

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WITH CONTINUED ECONOMIC IMPROVEMENT, WE INITIATE A BULLISH VIEW ON THE IBOVESPA:

On August 21st, we initiated a positive macro view on Brazilian bonds (see here:  https://is.gd/lZdzfX) given improved economic conditions and declining odds of default risk.   Today, we are adding a bullish view on the Brazilian equity market as well.  Although the Ibovespa is not cheap (22.6 times trailing earnings), we believe that a meaningful economic inflection is now in place and based off 2018 forward earnings, the forward P/E is just 12.5x. 

 

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CAIXIN CHINA SERVICES PMI IMPROVED TO 52.7 IN AUGUST:

The Caixin China Services PMI increased +1.2 points to 52.7 (highest level since May).  Thus, the Composite PMI increased +0.5 points to 52.4, which is the highest level since February (note that the Caixin Manufacturing PMI increased +0.5 points to 51.6).  Note that it was reported last week that the ‘Official’ Non-Manufacturing PMI fell -1.1 points to 53.4 in the month of August.

 

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U.S. FACTORY ORDERS DOWN -3.3% M/M IN JULY:

The Census Bureau reported that U.S. Factory orders declined -$15.793 billion to $466.36 billion in the month of July.  Thus, orders fell -3.28% M/M and slowed to +5.38% Y/Y (versus +9.34% Y/Y prior).  However, Factory orders ex-transportation increased for the second consecutive month, up +0.47% M/M and +6.48% Y/Y to $392.234 billion (versus +4.78% Y/Y prior).  Lastly, Durable Goods orders fell -6.83% M/M but Non-Durable Goods orders increased +0.42% M/M.

 

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EURO AREA RETAIL SALES FELL -0.3% M/M IN JULY:

Today, Eurostat reported that Euro Area retail sales volume declined -0.3% M/M in July.  Furthermore, Euro Area retail sales slowed to +2.6% Y/Y (versus +3.3% Y/Y previously).  In the EA19, Food, Drinks, & tobacco sales fell -0.5% M/M and slowed to +1.5% Y/Y (+2.7% Y/Y prior), Pharmaceutical sales fell -0.5% M/M, and Automotive fuel sales fell -0.9% M/M and slowed to +0.8% Y/Y (+4.2% Y/Y prior); however, Non-food products sales increased +0.1% M/M and +3.9% Y/Y (+3.6% Y/Y prior).  Lastly, EU28 sales fell -0.2% M/M and slowed to +2.7% Y/Y (+3.4% Y/Y prior).

 RESERVE BANK OF AUSTRALIA LEAVES RATES UNCHANGED:

Once again, the Reserve Bank of Australia decided to leave its benchmark cash rate unchanged at 1.5%.  The RBA stated, “The recent data have been consistent with the Bank’s expectation that growth in the Australian economy will gradually pick up over the coming year. The decline in mining investment will soon run its course. The outlook for non-mining investment has improved recently and reported business conditions are at a high level. Residential construction activity remains at a high level, but little further growth is expected. Retail sales have picked up recently, although slow growth in real wages and high levels of household debt are likely to constrain future growth in spending.” Note that CPI in Australia slowed to +1.9% Y/Y in Q2 2017 (+2.1% Y/Y in Q1).  Moreover, according to the Reserve Bank of Australia, Household Debt to Income levels increased to a record high 190.4% in Q1 2017, with Housing Debt to Income increased to a record 135.0%.

It should also be noted that the Reserve Bank of Australia is concerned about the increase in exchange rates.  In its statement, the RBA said, “The Australian dollar has appreciated over recent months, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to the subdued price pressures in the economy. It is also weighing on the outlook for output and employment.”

 

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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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