“It’s okay to raise rates a little bit but I don’t think we need a major adjustment at this juncture in order to stay on track and keep inflation near target. This is not an environment where the data is screaming at the Fed that you have to move.”
James Bullard, Federal Reserve Bank of St. Louis President, 3/31/17
FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- S. ISM Manufacturing Index indicates solid growth in March, but Prices hit 6-year high.
- S. Construction Spending up +0.8% M/M in February.
- EU Unemployment Rate fell to lowest level since May 2009.
U.S. ISM MANUFACTURING INDEX SLIPPED TO 57.2 IN MARCH:
The ISM Manufacturing Index slipped -0.5 points to 57.2 in March. Despite the slight slowdown, this is the second highest level since November 2014 and it indicated growth in the manufacturing sector for the seventh consecutive month (12 of the past 13 months). In the month, there were notable improvements in Employment (+4.7 points to 58.9), Exports (+4.0 points to 59.0), Prices (+2.5 points to 70.5), and Backlogs (+0.5 points to 57.5). However, the New Orders index fell -0.6 points to 64.5 (still very healthy level) and the Production index fell -5.3 points to 57.6.
ISM PRICES HIT SIX YEAR HIGH:
94% percent of ISM participants said that prices are the same (47%) or higher (47%), which pushed the Price Diffusion index to 70.5 (highest level since May 2011). Note that participants listed 23 commodities that were up in price, while not one commodity was down in price. Some of the responses were meaningful as well:
- “Starting to see some prices creeping up. We are raising our sales prices as well.” (Food, Beverage & Tobacco Products)
- “Overall, material inflation is now clearly upon us.” (Paper Products)
U.S. CONSTRUCTION REBOUNDED +0.8% M/M IN FEBRUARY:
According to the Census Bureau, U.S. Construction Spending increased for the first time in three months, up +0.8% M/M in February to a total value of $1,192.8 billion SAAR. Nevertheless, construction spending slowed to +3.0% Y/Y (+3.4% Y/Y prior). In the month, Residential Construction increased +1.8% M/M and +6.2% Y/Y (+5.6% Y/Y prior) whereas Nonresidential Construction was flat M/M and slowed to +1.0% Y/Y (+1.9% Y/Y prior). Lastly, Private Construction increased +0.8% M/M and +6.9% Y/Y and Public Construction increased +0.6% M/M but it is still down -8.0% Y/Y (-7.2% Y/Y prior).
EURO AREA UNEMPLOYMENT IMPROVED TO 9.5% IN FEBRUARY:
According to Eurostat, the unemployment rate in the Euro Area (EA-19) fell to 9.5% in February (9.6% prior). Thus, the unemployment rate fell to the lowest level since May 2009! Furthermore, Eurozone unemployment rate improved to 8.0% versus 8.1% previously. Note that the total number of unemployed in the Eurozone declined for the 23rd consecutive month, down -153k to 19.750 million in February, with unemployment in the EA19 down -140k to 15.439 million. Lastly, Youth Unemployment (25 and under) in the Euro Area improved to 19.4% (versus 19.8% prior) and Eurozone youth unemployment improved to 17.3% (versus 17.5% prior), which is the lowest rate since November 2008.
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 (+1.75% in February). 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 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 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. Conversely, unemployment increased to a record high 13.2% and retail sales fell -7.0% Y/Y in January. 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 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 (higher PMIs and lower unemployment), 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 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. 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:
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WEEK IN REVIEW – BEST & WORST PERFORMERS:
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COMMODITIES MARKET PERFORMANCE:
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MAJOR GLOBAL BOND MARKETS:
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