“When we start to grow the economy at 4, 4.1 percent, it actually not only increases wages but it puts more money in Americans pockets each and every day. And so tax reform and lowering taxes will create and generate more income, and so we’re looking at those, where the fine balance is. But does it have to be fully offset? My personal response is no.”
House Freedom Caucus Chairman, Rep. Mark Meadows, 3/26/17
FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- Maybe the failure of the AHCA improves the odds of meaningful tax reform.
- Dallas Fed survey joins other surveys in recent weakness.
- German IFO index hits highest level since 2011.
IN THE END, IT WAS JUST A HEALTH CARE BILL:
So let’s assume the American Health Care Act actually passed the house on Friday by a measly single vote. Now what would we be dealing with? Well, first off, we’d be dealing with the U.S. Senate. The U.S. Senate, and folks like Rand Paul, would have completely trashed this bill. Democrats would be screaming about how the AHCA is going to hurt the poor, the elderly, and give a tax cut to the rich. Senators would be getting called constantly to vote down the bill. We’d be hearing today how there was no way the bill can get through the Senate. And everyone would be worried that tax reform won’t happen for months to come, if ever.
Now back to reality, the bill failed so miserably in the House of Representatives that they wouldn’t even vote on it. And everyone assumes that the failure of the AHCA lowers the odds of tax reform. However, the GOP needs to save face. The President needs to save face, Paul Ryan needs to save face, and the ideological lunatics in the House Freedom Caucus even need to save face. Maybe the failure of the AHCA actually INCREASES the likelihood and immediacy of meaningful tax reform? And that is why Mark Meadows is our quote of the day above.
DALLAS FED MANUFACTURING INDEX SLIPPED FROM 10-YEAR HIGH, SIMILAR TO OTHER SURVEYS:
Today, the Dallas Federal Reserve reported that the Current General Business Activity Index fell -7.6 points to +16.9 in the month of March. Note that the prior month was the highest level since 2006 and this month marks the sixth consecutive month of growth in the region. Certainly the decline in oil prices last month led back some growth. In the month, there were improvements in Production (+1.9 points to 18.6), Growth Rate of New Orders (+1.2 points to +3.2), and Finish Goods Inventories (+0.8 points to -1.8). However, there were declines in New Orders (-2.1 points to 9.5), Shipments (-5.7 points to 6.5), and Number of Employees (-1.2 points to 8.4). Lastly, manufacturers had a slightly less positive business outlook, as the Forecast slipped -0.7 points to +36.3.
GERMAN IFO BUSINESS CLIMATE INDEX AT HIGHEST LEVEL SINCE 2011:
The German IFO Institute Business Climate Index increased +1.2 points to 112.3 in March, which is the highest level since July 2011. In the month, the Business Situations Index increased +0.9 points to 119.3 (highest level since July 2011) and the Business Expectations Index increased +1.5 points to 105.7.
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: Recent inflation data in the U.S. has been accelerating. The Fed’s preferred inflation metric, the Core PCE Deflator continues to approach the Fed’s 2% inflation target (+1.74% in January). Meanwhile, U.S. CPI has been trending higher, with headline CPI at 2.5% and Core CPI at 2.3%. As we anniversary the drop in commodities prices, we expect headline inflation to peak within the next few months.
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 in the coming months. We believe the Fed will hike rates 1-2 more times in 2017.
U.S. Treasuries: With headline CPI at 2.7% Y/Y and peaking, we continue to believe the U.S. 10-year yield will approach 3.0% in 2017, despite the recent rally in treasuries.
U.S. Equities and Earnings: S&P 500 operating earnings will rise materially in 2017 but with oil prices trading lower again, street expectations of +20% Y/Y earnings growth are unlikely. We have a yearend S&P 500 target of 2400, which 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 has been “less bad”. Industrial Production was less negative at -1.1% Y/Y in January, which is an improvement from -8.0% Y/Y in October. However, Consumer Confidence remains depressed in March and GDP is still negative.
Brazil: Recent data in Brazil has been mixed, but heading in the direction of improvement. Inflation has turned meaningfully lower – which has allowed for interest rate cuts, consumer/business confidence continues to improve, tax receipts are trending higher, and PMI is trending positively. However, despite recent improvements in Brazilian data, Brazilian markets have rallied substantially since President Rousseff’s removal. We feel Brazil’s current economic condition is mostly priced in at this time.
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. However, with oil prices trending down again, we remain neutral on Canada.
Inflation continues to rise, yet Consumer Confidence improved in February, following a sharp decline. Meanwhile, Manufacturing is slowing. We’re neutral on Mexico given the political uncertainty, but certainly the fundamental backdrop has worsened.
United Kingdom: The U.K. economy seems to be on decent footing post-BREXIT, as was evidenced in the release of Q4 GDP and retail sales data. With some modest economic deterioration and Article 50 set to be triggered on March 29th, we recently closed out our bullish view on GBP.
European Union: With far-right candidate, Wilders, losing the election in the Netherlands, and with polls showing anti-E.U. candidate, Le Pen, not making progress in the French election (first round: April 23), we feel the political situation is more certain in the coming months (at least until Germany’s election on Sept 24). However, any further unrest or terrorism in Europe will undoubtedly push the European populace more towards protectionist positions, favoring anti-establishment (and anti-EU) candidates. As politics are improving along with economic data in Europe, we recently removed our Euro short view and initiated a long view 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 begins tapering its asset purchases next month 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.
ASIA / PACIFIC:
Australia: The RBA has cut rates twice in the past year and we may be seeing some of the fruits of the RBA’s dovish policy, as PMI’s have improved in recent months. However, 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 19.8x 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. 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 -7.7% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.0% Y/Y (was +6.4% in January). Manufacturing and Services PMI’s have improved in February, but inflation appears to be turning higher again. 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 already up 10% 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: We are concerned about the recent unexpected drop in Industrial Production and a worsening in unemployment; however, Real Disposable Income and Wages have turned up. Moreover, CPI slowed to +4.6% Y/Y in February, which allowed the Bank of Russia to cuts rates once again. Also, Russian equities remain the cheapest in the industrialized world and we remain bullish, albeit now with greater concern given oil prices are breaking lower.
Turkey: Inflation is rising in Turkey (+10.1% Y/Y in February), consumer confidence continues to decline, and given political instability, Turkey hasn’t reported GDP since Q2. Meanwhile, unemployment (last reported in November) has turned meaningfully higher at 12.7% and Turkey’s 10-year bond yield is +175 bps higher than it was in April. Overall, Turkey’s economic situation appears to be in deterioration, but without timely data releases we will refrain from initiating a view.
GLOBAL CENTRAL BANK SCORECARD:
MACRO TRADING IDEAS:
WEEK IN REVIEW – BEST & WORST PERFORMERS:
S&P 500 SECTOR PERFORMANCE:
BEST/WORST PERFORMING WORLD BOND MARKETS:
BEST/WORST PERFORMING GLOBAL STOCK 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 February 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.