“We’re not in the same world we were in 20, 30 years ago. In particular, our workforce is growing much more slowly, so just pure demographics, the number of people available to work is not consistent with 4 percent growth.”
Former U.S. Federal Reserve Bank Chair, Ben Bernanke, 5/1/17
FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- Core PCE fell -0.14% in March, taking pressure off the Fed.
- S. Personal Income up +4.5% Y/Y in March.
- China Manufacturing PMIs indicate slower growth in March.
CORE PCE DEFLATOR SLIPPED IN MARCH-WHAT WILL FOMC DO NOW?
We don’t generally lead out with PCE (actually, we’ve never led out with it). But here’s why PCE is important … as we pointed out last week, Real GDP disappointed, but nominal GDP accelerated. With commodities prices trending lower again, a reduction in inflationary pressures provides us with two positive developments: 1) It slows the necessity for the Fed to hike rates. 2) Lower inflation makes real growth rates improve.
The Bureau of Economic Analysis also reported that the Fed’s preferred inflation metric (Core PCE Deflator) declined -0.14% M/M and slowed to +1.56% Y/Y in March (+1.77% Y/Y prior). Meanwhile, the headline PCE deflator fell -0.23% M/M and slowed to +1.83% Y/Y (versus +2.14% Y/Y previously).
U.S. PERSONAL INCOME UP +4.5% Y/Y IN MARCH:
The Bureau of Economic Analysis reported that Personal Income increased +$40.0 billion to a record $16.473 trillion (SAAR) in March. This is an increase of +0.24% M/M and +4.51% Y/Y (+4.54% Y/Y prior), which is the 13th consecutive monthly gain (40 out of 41 months). Disposable Personal Income (Income less Taxes) increased +$35.0 billion (+0.24% M/M and +4.31% Y/Y). Note that Personal Income taxes increased +0.25% M/M and +5.95% Y/Y to $2.044 trillion (versus +5.69% Y/Y prior).
GOVERNMENT WAGES & RENTAL INCOME LED THE GAINS IN MARCH:
In March, Wages and salaries increased +0.06% M/M, as private wages increased +0.02% M/M and +5.92% Y/Y and government wages increased for the 44th consecutive month, up +0.23% M/M and +3.49% Y/Y. Furthermore, there were increases in Rental Income (+0.67% M/M), Proprietors’ Income (+0.64% M/M), Interest & Dividend Income (+0.29% M/M), and Supplements to Wages & Salaries (+0.16% M/M).
U.S. PERSONAL SPENDING UP SLIGHTLY IN MARCH:
Personal Spending (PCE) increased +$5.8 billion to $13.10 trillion in March. Thus, spending increased +0.04% M/M and +4.71% Y/Y (also +4.71% Y/Y previously). Since Disposable Income outpaced PCE in dollar terms, Personal Savings increased +$30.1 billion and the “Savings Rate” increased to 5.88% (from 5.69%).
NOBODY IS “SAVING” ANYTHING (AND WHY SHOULD THEY WHEN SAVINGS YIELDS NOTHING?):
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 -3.92% (far off from the +5.88% reported number)!
U.S. ISM MANUFACTURING INDEX SLOWED TO 54.8 IN APRIL:
The ISM Manufacturing Index fell -2.4 points to 54.8 in April. Despite the slowdown, this is the eighth consecutive month (13 of the past 14 months). In the month, there were notable declines in New Orders (-7.0 points to 57.5), Employment (-6.9 points to 52.0), and Prices (-2.0 points to 68.5). However, there were improvements in Inventories (+2.0 points to 51.0), New Exports (+0.5 points to 59.5), and Imports (+2.0 points to 55.5).
U.S. CONSTRUCTION SLIPPED -0.2% M/M IN MARCH:
According to the Census Bureau, U.S. Construction Spending fell for the first time in three months, down -0.2% M/M in March to a total value of $1,218.3 billion SAAR. Thus, construction spending slowed to +3.6% Y/Y (versus +5.4% Y/Y prior). In the month, Residential Construction increased +1.2% M/M and +7.3% Y/Y (+8.9% Y/Y prior) whereas Nonresidential Construction declined -1.2 M/M and slowed to +1.0% Y/Y (+3.1% Y/Y prior). Lastly, Private Construction was up slightly M/M and +7.0% Y/Y and Public Construction fell -0.9% M/M and -6.5% Y/Y (-6.3% Y/Y prior).
CHINA PMI INDICATES SLOWER GROWTH IN APRIL:
The official China Manufacturing PMI fell -0.6 points to 51.2 in April, according to the National Bureau of Statistics. Despite the slowdown in the month, this marks the ninth consecutive month of growth and it should be noted that the prior month was the highest level since April 2012. In the month, Output fell -0.4 points to 53.8, New Orders fell -1.0 point to 52.3, New Exports fell -0.4 points to 50.6, and Employment fell -0.8 points to 49.2. Meanwhile, the official China Non-Manufacturing PMI fell -1.1 points to 54.0, as New Orders fell -1.4 points to 50.5 and Expectations fell -1.6 points to 59.7.
SOUTH KOREA TRADE DATA SURPLUS SLIPPED DUE TO REBOUND IN IMPORTS:
South Korea’s trade surplus fell -$0.746 billion to $6.321 billion in March, according to the Ministry of Trade, Industry, and Energy. In the month, exports increased +13.2% M/M and +13.7% Y/Y to $48.9b (vs. +19.7% Y/Y prior). Furthermore, imports surged +17.8% M/M and +27.7% Y/Y to $42.58b (+24.0% Y/Y prior). Note that geographically, exports increased M/M but slowed or fell on Y/Y basis. Exports to China slowed to +12.1% Y/Y (+28.7% Y/Y prior), exports to Japan slowed to +17.6% Y/Y (+20.6% Y/Y prior), exports to the EU fell -8.9% Y/Y (+27.4% Y/Y prior), and exports to the US fell -5.0% Y/Y (+1.7% Y/Y prior).
U.S. GDP: Our GDP model points toward stronger growth in 2H 2017 (+3.1% 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 approaches 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 and talk of the Fed reducing its balance sheet will become moot.
U.S. Treasuries: With headline CPI potentially hitting 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. Industrial Production declined -6.0% Y/Y in February (-1.1% Y/Y prior), Exports declined -6.2% Y/Y in February, Consumer Confidence remains depressed 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 which remain negative on a Y/Y basis worsened in February. Consumer Credit Card transactions have slipped in Q1. Confidence, albeit high, ticked slightly lower in March. The Unemployment Rate has jumped from 11.8% to 13.7% since October. Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in February, thus supporting Brazil’s recent rate cut.
Canada: Recent economic data suggest improvement in Consumer Confidence, manufacturing, and Housing. Canada’s monthly GDP has been remarkably steady at roughly 2.0% Y/Y over the past four months and Unemployment improved to 6.6% in February. As the U.S. economy experiences liftoff, we are watching Canada for signs that it too may follow suit and certainly improvement in energy prices are helping in that regard. We will watch for further signs of improvement in Canada in the coming weeks.
Mexico: Inflation continues to rise, yet Consumer Confidence improved in Q1, 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 …
United Kingdom: The U.K. economy seems to be on decent footing post-BREXIT, but Q1 growth appears to have 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, 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 Africa: Recent data show improvements in PMI, Business Confidence, mining production, and Vehicle Sales following weak Q4 data, which inflation data weakened in January. Given South Africa’s commodity-driven exports, a stronger U.S. dollar could continue to hamper export growth.
Turkey: What’s not to love about Turkey? Not only does Turkey have a worsening political dictatorship, but inflation is rising (+11.3% Y/Y in March), 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: The RBA has cut rates twice in the past year and we may be seeing some of the after effects as it was reported that Australian home prices have surged. Although, PMI’s have improved in recent months, retail sales have slowed slightly and the unemployment rate recently ticked higher. Recent trade data suggests that Australian trade with China has improved. We are monitoring Australia for further improvement. Note that the ASX 200 index trades at a P/E of 20x and yields 4.2% (when compared to other developed economies, the ASX is cheaper than its peers). We remain neutral on Australia until further economic improvement is evidenced.
China: Recently, we closed out our China equity market short view on the back of stronger trade data, and some subtle improvements in PMI’s. Q1’s stronger than expected GDP release confirms that China is improved somewhat. It appears that China plans to continue to stabilize markets ahead of the National Communist Party Congress later this year, and we no longer believe a short China equities position offers compelling risk/reward at this time.
India: Money supply growth is beginning to recover following last year’s currency demonetization. M1 growth has “improved” to -3.6% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.7% Y/Y (was +6.4% in January). Manufacturing and Services PMI’s improved in Q1, 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 11.4% 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: Despite an unexpected drop in Industrial Production and a worsening in unemployment, Russian economic data continues to improve alongside rising oil prices. Real Disposable Income and Wages have turned up, manufacturing PMI’s are trending higher, and Car Sales were up 9% Y/Y in March. Meanwhile, CPI is moderating, which allowed the Bank of Russia to cut rates. Russian equities remain the cheapest in the industrialized world and we remain bullish.
GLOBAL CENTRAL BANK SCORECARD:
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WEEK IN REVIEW – BEST & WORST PERFORMERS:
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