FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- S. Personal Income and Spending accelerated in September.
- Dallas Fed Manufacturing Index at highest level since March 2006.
- German Retail Sales up +4.1% Y/Y in September.
TECH AND FINANCIALS LEAD Q3 S&P EARNINGS:
As of October 26th, 272 of the S&P 500 Index companies have reported Q3 earnings, of which 204 have beaten earnings (75.0%) and only 45 have missed (16.54%), albeit on lowered estimates. Thus far, the beats have been led by the Tech, Financial, Industrials, and Health Care sectors, as 30 out of the 33 Tech that reported earnings (including tech giants Google, Amazon, and Microsoft), and 41 out of the 52 Financials companies that reported earnings have beaten estimates.
EARNINGS WILL SET MORE RECORDS, BUT IS THE STREET TOO OPTIMISTIC ON 2018?
Over the past week, Wall Street analysts increased their Q3 EPS estimates by +$0.10/share to $31.76. However, the street lowered their 2017 EPS estimates by -$0.15/share to $125.50 and their 2018 EPS estimates by -$0.10/share to $144.07. This implies EPS growth of +18.1% Y/Y and +14.8% Y/Y in 2017 and 2018, respectively. For the reasons mentioned above, we are still below those lofty forecasts, but we still see decent EPS growth for 2017 and 2018.
We feel that it’s important to note that Wall Street analysts are baking in 15% Y/Y earnings growth expectations for 2018, despite the fact that the U.S. Fed is likely to hike rates 3-4 more times over the coming year. We have some concerns about earnings expectations, and feel the street is too optimistic on 2018, but our concerns aren’t elevated yet as our GDP model sees 3% growth for next year. From a macro perspective, we will take the under on street estimates for 2018, but we still believe 10-11% earnings growth is likely, particularly if we get a recovery in the energy sector and the yield curve doesn’t flatten. As we show in the table below, even if we believe street estimates and place a peak multiple of 18.5x those estimates, we are close to full S&P 500 valuation of 2665.
U.S. PERSONAL INCOME ACCELERATED IN SEPTEMBER:
The Bureau of Economic Analysis reported that Personal Income increased for the 10th consecutive month, up +$67.0 billion to $16.533 trillion (SAAR) in September. This is an increase of +0.41% M/M and +3.05% Y/Y (versus +2.75% Y/Y prior). Disposable Personal Income (Income less Taxes) increased +$53.0 billion (up +0.37% M/M and +2.90% Y/Y). Note that Personal Income taxes increased +0.68% M/M and +4.09% Y/Y to $2.067 trillion (versus +3.49% Y/Y prior).
WAGES AND SALARIES ACCELERATE:
In September, wages and salaries increased for the 10th consecutive month, up +0.45% M/M and +3.22% Y/Y, which is the highest Y/Y gain since March (+2.75% Y/Y prior). Private wages increased +0.47% M/M and +3.37% Y/Y (+2.85% Y/Y prior) and government wages increased +0.31% M/M and +2.44% Y/Y (+2.22% Y/Y prior). Note that Supplements to Wages & Salaries increased +0.30% M/M and +3.37% Y/Y (+3.18% prior).
‘OTHER STUFF’ BOOST “INCOME” HIGHER:
Note that Rental Income increased +0.55% M/M and accelerated to +5.37% Y/Y (versus +5.28% prior). Furthermore, Proprietors’ Income increased +0.58% M/M and +2.62% Y/Y (versus +2.80% prior), and Interest & Dividend Income increased +0.51% M/M and +2.90% Y/Y (versus +2.50% prior). Basically, asset holders continue to outperform those who don’t have assets.
U.S. PERSONAL SPENDING UP FOR 32ND MONTH IN A ROW IN SEPTEMBER:
Personal Spending (PCE) increased for the 32nd consecutive month, up +$136.0 billion to $13.531 trillion in September. Thus, spending increased +1.02% M/M and +4.37% Y/Y (versus +3.97% Y/Y prior). Since Disposable Income lagged PCE in dollar terms, Personal Savings fell -$79.5 billion and the “Savings Rate” fell to 3.05% (from 3.62%), which is the lowest savings rate since December 2007.
NOBODY IS “SAVING” ANYTHING (EXCEPT FOR MAYBE THE WEALTHY):
As we’ve shown in prior notes, the “savings rate” is a plugged number and actually isn’t savings at all. It is defined as Income minus Spending minus Taxes. But “Income” isn’t exactly income, as it includes government transfer payments such as Medicare, Medicaid, Unemployment Benefits, and Social Security. When you factor in that individuals are receiving more in government benefits than they are paying into those programs, it becomes clear that savings isn’t actually savings; rather the government is running up the debt on our behalf. This debt is essentially an off-balance sheet item. When we add it back, we find that the true “savings rate” is actually -6.94% (far off from the +3.05% reported number)!
CORE PCE UP MARGINALLY IN SEPTEMBER:
The Bureau of Economic Analysis also reported that the Fed’s preferred inflation metric (Core PCE Deflator) increased +0.13% M/M and +1.33% Y/Y in September (versus +1.30% Y/Y prior). Thus, Core PCE accelerated marginally. Meanwhile, the headline PCE deflator increased +0.37% M/M and accelerated to +1.63% Y/Y (versus +1.44% Y/Y previously).
DALLAS FED MANUFACTURING INDEX AT HIGHEST LEVEL SINCE 2006:
Today, the Dallas Federal Reserve reported that the Current General Business Activity Index increased for the fourth consecutive month, up +6.3 points to +27.6 in the month of October. Note that this month marks the 13th consecutive month of growth in the region and the highest level since March 2006. In the month, many of the current categories remain elevated and there were notable improvements in New Orders (+6.2 points to 24.8), Production (+6.1 points to 25.6), Unfilled Orders (+2.3 points to 10.4), Number of Employees (+0.4 points to 16.7), and Finished Inventories (+14.4 points to 9.9).
As for the outlook, manufacturers had a more positive business outlook, as the Forecast increased +4.0 points to +38.5 (highest level since January). However, the outlook for Prices Paid for Raw Materials increased +0.6 points to 36.5, which is the highest level since March.
GERMAN RETAIL SALES UP +4% Y/Y IN SEPTEMBER:
The German Statistical Office Destatis reported today that retail sales increased for the first time in three months, up +0.53% M/M in September. Furthermore, on a Y/Y basis, retail sales accelerated to +4.15% Y/Y (+3.0% Y/Y prior). In nominal terms, sales increased +0.99% M/M and +6.56% Y/Y (+4.59% Y/Y prior).
U.S. GDP: Our GDP model points toward stronger growth in the quarters ahead (+2.8% Real GDP growth in 2H 2017, and 3% growth in 2018) given improvements in workforce population growth, workforce participation, and low interest rates and energy prices. With Q2 2017 Real GDP officially at +3% growth and Q3 preliminary estimate at 3% growth, it is now possible for GDP to achieve our official forecast of 3.0% for 2017.
U.S. Inflation: U.S. inflation is set to rise again over the coming months as energy prices return to positive territory on a Y/Y basis. Additionally, recent data show that shelter costs have been turning up again. However, the Fed’s preferred inflation metric, the Core PCE Deflator was up just +1.33% Y/Y in September (below the Fed’s 2% inflation target).
U.S. Federal Reserve: With inflation set to turn back up again, the odds of another Fed hike will increase (note that December hike odds are currently 84%). Not to mention, increased inflation (as well as increasing inflation expectations) have given the Fed reason to begin balance sheet tapering.
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. In fact, the S&P is closing in on our 2018 target too! We continue to favor the homebuilders, given the demographic tailwind and lack of inventory. We also prefer financials given expectations for economic growth.
Argentina: Argentine economic data continues to improve. Consumer Confidence has improved for three consecutive months, GDP accelerated to +2.7% y/y in Q2, but inflation remains a problem at +26% Y/Y (far better than 45% from a year ago though). However, Industrial Production has slowed for two consecutive months.
Brazil: The macro data in Brazil continue to improve. Retail sales are now up +3.6% Y/Y, unemployment has fallen for five straight months to 12.6%, Industrial Production is up +4.0% Y/Y, PMI’s continue to trend higher, tax receipts are growing, inflation is still in a falling trend – which allows the central bank to cut rates further, and GDP finally turned positive on a Y/Y basis (+0.3% Y/Y). Of all the major global bond markets, Brazilian 10-year bond yields are the richest in the world at 10%. As the economy improves, and inflation cools, we would expect to see investors reach for yield in Brazil. As such, we recently initiated a Long Brazil 10-Year Sovereign Bond view.
Canada: Despite worries about Canada’s housing market, 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, retail sales are elevated, and Canada’s monthly GDP remains at a healthy 3.8% Y/Y.
Mexico: Recent economic data in Mexico suggest that the Mexican economy has been mixed in Q3. Manufacturing PMI’s were stronger in Q3 (but slowed in September), Consumer Confidence has trended higher, and exports are up +10.3% Y/Y; however, Unemployment has increased to 3.6% and retail sales have yet to turn higher.
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 had been resilient but it is starting to show signs of weakness. Although unemployment continues to decline and PMI’s improved in September; note that Retail Sales fell in September, Consumer Confidence has remained negative, home prices have begun to turn lower in London, while inflation has turned higher (+3.0% Y/Y in September). In fact, the Bank of England stands ready to raise rates if inflation continues to climb, which could pose a dilemma for the BOE given recent weakness in economic data.
European Union: Economic data has recently improved in Europe. Unemployment continues to decline, PMIs indicate strong growth, Industrial Production accelerated in August, but Retail Sales have slowed and Consumer Confidence remains negative. We remain 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. Also, next year the ECB will begin 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%). Yet, economic data have been robust this year across most of Eastern Europe.
South Africa: Political chaos and debt downgrade risk aside, South African data improved in Q2 and the start of Q3 (higher PMI’s, higher retail sales, low inflation, and improving business confidence). However, Unemployment remains persistently high at 27.7%.
Turkey: Has the Turkish Lira finally realized that Turkey has a geopolitical problem? And will a falling Lira lead CPI materially higher in Turkey (CPI already had accelerated to 11.2% Y/Y)? Despite the political situation, the macro backdrop had been strong, as business confidence increased throughout Q3, and Unemployment has been steady. However, Consumer Confidence has ticked lower for three consecutive months.
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, the job market has improved, and PMI’s have held up, despite weakness in commodities prices. That being said, we are starting to see weakness in the housing market (private sales down -3.7% and building approvals down -13.9% Y/Y) and Auto Sales turned negative in September. We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.
China: China data remain mixed but positive. Recent data suggest improvement in China’s manufacturing sector, while Retail Sales, Fixed Investment, CPI, and Industrial Production have all slowed on Y/Y basis. We continue to believe China has the levers to stimulate its economy, but we are watching for further signs of stress within China’s credit and housing markets.
India: Indian economic activity appears to have recovered nicely since the new Goods and Services Tax (GST) was implemented as Industrial Production, Commercial Credit, and Retail Sales ended Q3 on an improving note. Note that since the Indian central bank cut rates in August, inflation appears to have turned slightly higher.
Indonesia: Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, inflation moderated in Q3, Consumer Confidence has been stable, but industrial production and PMI’s weakened in Q3. Our best guess is that the central bank’s dovish policy stance may revert to a more neutral stance going forward (they declined to cut rates again in October).
Japan: With Abe winning his snap elections by a long shot, we are emboldened in our bullish view on Japan’s Nikkei 225. Overall, Japan’s economic activity remains in an improving trend, although weakness in PMI’s over the past two months raises concern. Bank lending is improving on a Y/Y basis in Japan, unemployment continues to improve, industrial production remains elevated, and consumer confidence remains in a slow up-trend.
Russia: Russian economic data continue to suggest economic growth as PMI’s have improved recently. Furthermore, Retail Sales continue to rebound, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 4.9% in August. 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:
COMMODITIES MARKET PERFORMANCE:
MAJOR GLOBAL STOCK MARKETS:
MAJOR GLOBAL BOND MARKETS:
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