FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- S. Consumer Credit continues to climb higher to record $3.754 trillion in July.
- China CPI accelerated to +1.8% Y/Y in August.
- Italian Industrial Production up slightly in July.
CONSUMER CREDIT UP +$18.5 BILLION M/M IN JULY:
On Friday, the Federal Reserve released its report on consumer credit for the month of July, showing overall consumer credit increased a seasonally-adjusted +$18.498 billion to a record $3.754 trillion. This is the second largest monthly gain of the year, thus total credit accelerated to +5.9% Y/Y (versus +5.8% Y/Y prior). Non-revolving credit increased +$15.880 billion to $2.759 trillion (+6.6% Y/Y vs. +6.2% prior) and revolving credit increased +$2.618 billion M/M to $0.995 trillion (+5.9% Y/Y versus +6.5% prior).
Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$16.90 billion in July to $3.661 trillion. In the month, government loans (student loans) increased for the 65th consecutive month (+$3.976 billion to a record $1.140 trillion). Also, non-government loans increased for the fourth consecutive month (+$12.924 billion), led by significant increases in loans from Credit Unions and Depository Institutions.
CHINA CPI UP +1.8% Y/Y IN AUGUST:
According to the China Bureau of Statistics, the Consumer Price Index increased +0.4% M/M in August. Furthermore, on a Y/Y basis, CPI accelerated to +1.8% Y/Y (versus +1.4% Y/Y prior), which is the highest pace since January. In the month, Food prices declined -0.2% Y/Y (-1.1% prior) and Non-food prices increased +2.3% Y/Y (+2.0% Y/Y prior). Lastly, China PPI increased +0.9% M/M and +6.3% Y/Y (+5.5% Y/Y prior).
JAPAN CORE MACHINERY ORDERS REBOUNDED IN THE MONTH BUT STILL DOWN Y/Y:
Japanese Core Machinery Orders increased for the first time in four months in July, according to the Japan Economic and Social Research Institute. In the month, Core Machinery Orders rebounded +8.0% M/M to ¥853.3 billion; however, orders are now down -7.51% Y/Y (versus -5.18% Y/Y prior). In the month, Total Machinery Orders increased +4.91% M/M to ¥2.382 trillion, with Overseas Orders up +9.15% M/M to ¥995.9 billion but Government Orders fell -3.34% M/M to ¥267.8 billion.
ITALIAN INDUSTRIAL PRODUCTION UP SLIGHTLY IN JULY:
According to iStat, Italian Industrial Production increased +0.10% M/M in the month of July. However, total output slowed slightly to +4.43% Y/Y when adjusted for working days (versus +5.21% Y/Y prior). In the month, Investment Goods output rebounded +1.64% M/M, Intermediate Goods output increased +0.32% M/M, and Consumer Goods output increased +0.53% M/M; however, Energy Output declined -3.63% M/M.
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. However, given that 1H 2017 GDP is currently estimated at just 2.0% growth, it will be difficult for GDP to achieve our official forecast of 3.0% for 2017.
U.S. Inflation: U.S. CPI appears to have peaked and the Fed’s preferred inflation metric, the Core PCE Deflator, increased +1.5% Y/Y in June (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 decline as well, although the street expects balance sheet action to begin in September.
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, we believe the S&P is now fully valued. We continue to favor the homebuilders, given the demographic tailwind and lack of inventory and are encouraged by the improvement in pending home sales.
Argentina: In short, the economic data out of Argentina remains bad (but less bad than it was a year ago). Industrial Production increased +5.9% Y/Y in July (+6.6% Y/Y prior), CPI is up +22.9% Y/Y in July (+23.4% Y/Y prior), Consumer Confidence remains depressed but ticked higher in August, and GDP is up just +0.3% Y/Y.
Brazil: The macro data in Brazil continue to improve. Retail sales are now up +3.0% Y/Y, unemployment has fallen for four straight months to 12.8%, PMI’s continue to trend higher, tax receipts are growing, inflation is falling – 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: Given concerns about Canada’s housing market (Existing home sales fell again in July and Building Permits are slowing) 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, retail sales are accelerating, and Canada’s monthly GDP continues to increase (+4.3% Y/Y in June).
Mexico: Recent economic data in Mexico have been worsening. GDP slowed to +1.8% Y/Y in Q2, Unemployment increased to 3.4% in July, Industrial Production declined -1.6% Y/Y in July, and Retail Sales slowed significantly in June (+0.4% Y/Y vs. +4.1 Y/Y prior).
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 remains resilient. Consumer Confidence has deteriorated, Retail Sales slowed in July, and Q2 GDP slowed to 1.7% Y/Y (+2.0% prior); however, Unemployment continues to decline, home price gains are steady, inflation is in an uptrend, and PMI’s improved in July. We are watching the U.K. for further deterioration.
European Union: Economic data has recently slowed in Europe. Unemployment increased slightly, PMIs indicate slower growth, Industrial Production fell -0.6% M/M, and Consumer Confidence remains negative. However, we are seeing improvement in Southern EU nations as well (including Greece). As such, 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. 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%). 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 (higher PMI’s, higher retail sales, lower inflation, and improving business confidence), however, Unemployment remains persistently high at 27.7%.
Turkey: Despite the political situation, the macro backdrop has been strong. Consumer confidence has been rising for months, business confidence increased in June, Unemployment is turning lower again, and inflation has reversed its recent rising trend. One area to watch for signs of weakness is housing as Home Prices slowed slightly in May (still up +12.6% versus +13.1% prior) followed by a sharp decline in home sales thereafter (-8.1% Y/Y in June). Furthermore, industrial production declined -3.6% Y/Y in June. Note that July manufacturing PMI slowed slightly as well.
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 been steady, 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). We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.
China: Recent data suggest some modest improvement in China’s manufacturing sector. Note that China PMIs indicated steady growth in August, Industrial profits were up a solid +16.5% Y/Y in July, and 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 stress within China’s credit and housing markets.
India: Indian economic activity took a nosedive in July following the new Goods and Services Tax (GST) as PMI’s fell into contractionary territory. This downturn in activity follows months of weakening durable goods sales and slowing industrial production. With the SENSEX index just off its all-time high and up 21% this year, we are monitoring India for further deterioration, but a de-escalation on the border with China should help markets. Given declines in inflation, the central bank cut rates this month.
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, employment, and small business confidence, although the 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 GDP accelerated in Q2. Furthermore, PMI’s accelerated in August, Retail Sales have rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.1% in July. 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:
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WEEK IN REVIEW – BEST & WORST PERFORMERS:
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COMMODITIES MARKET PERFORMANCE:
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