FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- China economic data improve in the second quarter.
- NY Manufacturing Index indicates lower growth in July.
CHINA Q2 2017 GDP UP +6.9% Y/Y:
Today, the National Bureau of Statistics of China reported that Q2 2017 Real GDP increased +1.7% Q/Q and +6.9% Y/Y (versus +1.3% Q/Q and +6.9% Y/Y in Q1). On a nominal basis, Q2 GDP was 20,080.7 billion yuan, which is an increase of +11.1% Y/Y (versus +11.8% Y/Y prior).
Primary Industry: On a nominal basis, increased +0.3% Y/Y to 1,333.3 billion yuan. Accelerated to +3.5% real cumulative Y/Y (versus +3.3% Y/Y previously).
Secondary Industry: On a nominal basis, increased +12.7% Y/Y to 8,298.3 billion yuan. Increased +6.4% real cumulative Y/Y (also +6.4% Y/Y previously).
Tertiary Industry: On a nominal basis, increased +11.4% Y/Y to 10,449.1 billion yuan. Increased +7.7% real cumulative Y/Y (also +7.7% Y/Y previously).
CHINA RETAIL SALES, INDUSTRIAL PRODUCTION, & FIXED ASSET INVESTMENT IMPROVED IN JUNE:
The National Bureau of Statistics of China also released their reports on Industrial Production, Fixed Asset Investment, and Retail Sales and the results showed that activity in China was strong in the month of June. China Retail Sales increased +0.93% M/M and +11.0% Y/Y (versus +10.7% prior) and Industrial Production increased +0.81% M/M and +7.6% Y/Y (versus +6.5% prior). Furthermore, China Fixed Asset Investment increased +0.73% M/M and +8.6% cumulatively YTD (also +8.6% prior).
NY FED MANUFACTURING INDEX INDICATES SLOWER GROWTH IN JULY:
The NY Fed’s Empire State Manufacturing Index fell -10.0 points to +9.8 in July. Thus, the index now indicates growth in the region once again, albeit at a slower pace than the prior month. In the month, there were declines nearly across the board, led by Current New Orders (-4.8 points to +13.3), Current Shipments (-11.8 to +10.5), Unfilled Orders (-9.3 points to -4.7), Inventories (-5.3 points to +2.4), Current Number of Employees (-3.8 points to +3.9) and Average Workweek (-8.5 points to 0.0). Lastly, the Future General Business Index fell -6.8 points to +34.9, with Capital Expenditures down -5.8 points to 15.0.
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%, however, recent data suggest downside risk to our forecast.
U.S. Inflation: U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator slowed to +1.39% Y/Y in May (away from the Fed’s 2% inflation target). As we anniversary the drop in commodities prices, we expect headline inflation has hit a near-term peak, taking pressure off of the Fed’s current hawkish rate stance.
U.S. Federal Reserve: Given our belief that U.S. inflation peaked for the year a few months ago, we believe the FOMC will become increasingly more data-dependent. We believe the odds of another Fed hike in 2017 have come down given recent declines in inflation. The odds of balance sheet reduction should also be in decline as well.
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.
Argentina: In short, the economic data out of Argentina remains bad (but less bad than it was a year ago). Industrial Production rebounded +2.7% Y/Y in May (-2.6% Y/Y prior), CPI is up +23.4% Y/Y in June (+25.4% Y/Y prior), Consumer Confidence remains depressed and fell again in June, and GDP is up just +0.3% Y/Y.
Brazil: Recent data has shown Business and Consumer Confidence continue to leak and Industrial Production is down -4.5% Y/Y, but retail sales are now up +2% Y/Y and there have been modest improvement in PMI’s in Q2. With inflation trending lower, the central bank can become more dovish. We are now evaluating Brazil for upside potential.
Canada: Given concerns about Canada’s housing market, trade disputes, and potential fallout from lower oil prices, we added Canada to our downside risk watch; however, so far Canada’s economic data remain healthy. Consumer Confidence remains at high levels, manufacturing PMI’s remain strong, unemployment has been in a declining trend, and Canada’s monthly GDP continues to improve (+3.3% Y/Y in April).
Mexico: Consumer Confidence is improving following a sharp decline but April Retail Sales slowed materially (+1.4% Y/Y versus +6.1% prior). Meanwhile, Inflation continues to rise, Unemployment has increased, Exports have slowed, but Manufacturing PMI and Orders surged higher in June.
Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again. We are hopeful …
United Kingdom: The U.K. economy seems to be showing some cracks of late. Retail Sales have slowed materially, Consumer Confidence has deteriorated, and manufacturing PMI’s trended lower in Q2. Meanwhile, inflation is in an uptrend. We are watching the U.K. for further deterioration.
European Union: Through May, economic data in Europe continue to improve (higher PMIs and lower unemployment). The improvement in the PMI data has been led by Germany but we are starting to see improvement in the Southern nations as well (including Greece). 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 Africa: Political chaos and debt downgrade risk aside, South African data have improved in Q2 (higher PMI’s, higher retail sales, lower inflation, and improving business confidence), however, Unemployment remains persistently high.
Turkey: Despite the political situation, the macro backdrop has been quite strong. Consumer confidence has been rising for months, business confidence increased in June, industrial production accelerated to +5.9% Y/Y in April, Unemployment is turning lower again, and inflation has reversed its recent rising trend.
ASIA / PACIFIC:
Australia: 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, and PMI’s have held up, despite weakness in commodities prices. So far, housing data remains steady, but recent data have shown some weakness. We remain neutral on Australia at this time, on concerns about China slowing.
China: Recent data suggest some modest improvement in the second quarter; while China’s consumer and services sectors remain resilient. We continue to believe China has the levers necessary to stimulate ahead of the National Communist Party Congress later this year, but we are watching for further signs of weakness.
India: Money supply growth is beginning to recover following last year’s currency demonetization, but industrial production and PMI’s have weakened of late and inflation is declining. Any economic improvement may already be priced in as the Sensex index is up 19% 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: We have a bullish view on Japan’s Nikkei 225 given improvement in Japan economic activity. Bank lending is improving on a Y/Y basis in Japan, as PMI’s have been steady, industrial production has accelerated, and consumer confidence remains in a slow up-trend.
Russia: Russian economic data continue to post improvements (Composite PMI steady for months) although the recent decline in oil prices is a risk. Retail Sales have rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.2% in May. Meanwhile, inflation 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:
MACRO TRADING IDEAS:
WEEK IN REVIEW – BEST & WORST PERFORMERS:
S&P 500 SECTOR PERFORMANCE:
BEST/WORST PERFORMING GLOBAL STOCK MARKETS:
BEST/WORST PERFORMING WORLD BOND MARKETS:
BEST/WORST PERFORMING CURRENCIES:
COMMODITIES MARKET PERFORMANCE:
MAJOR GLOBAL STOCK MARKETS:
MAJOR GLOBAL BOND MARKETS:
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.