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“I’m a little different from some of the others on the FOMC because I think we don’t have that much further to go on rates and therefore the next step that would be natural would be to allow the run-off of the balance sheet.”

James Bullard, President of the Federal Reserve Bank of St. Louis, 4/10/17

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • Q1 earnings set to rise 21% Y/Y.
  • Consumer Credit growth picks up, but it’s all due to gov’t student loans.

STREET TRIMS A LITTLE OFF THE TOP OF EARNINGS FORECASTS AS Q1 EARNINGS KICK OFF THIS WEEK:

With Congress on recess and earnings set to kick off this week, the odds are rising that we can make it a shortened week without disruption from D.C.   With that in mind, we’re turning toward fundamentals and Q1 S&P Operating Earnings look set to rise 21% Y/Y to a record of $29.00.

Note that over the past month, street estimates have come down a little as the FY 2017 earnings forecast has been revised lower by $1, while FY 2018 has been revised lower by $2.   Note that nearly all of the street’s earnings reductions have been coming from two sectors:  Energy and Consumer Discretionary.   We continue to believe the street is overly optimistic on earnings from Energy this year, but even with that in mind, we see earnings rising 18% in 2017.

 

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CONSUMER CREDIT UP +$15.2 BILLION M/M:

On Friday, the Federal Reserve released its report on consumer credit for the month of February, showing overall consumer credit increased a seasonally-adjusted +$15.206 billion to a record $3.792 trillion. Thus, Consumer credit has increased for the 66th consecutive month, up +$1.083 trillion during that time.   In February, total credit increased +6.3% Y/Y and increased at a +4.8% annualized rate.  In February, non-revolving credit increased +$12.29 billion to $2.792 trillion (+6.8% Y/Y and +5.3% annualized rate); however, revolving credit increased +$2.92 billion M/M to $1.001 trillion (+6.3% Y/Y and +3.5% annualized rate).

 

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Furthermore, on a not-seasonally adjusted basis, consumer credit declined -$15.11 billion in February to $3.704 trillion.  In fact, this is also the highest overall level on record.  In the month, government loans (student loans) increased for the 60th consecutive month (+$5.01 billion to $1.12 trillion).  Conversely, non-government loans declined -$20.12 billion, led by a significant decline in loans from Depository Institutions and Finance Companies.

 

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ITALIAN INDUSTRIAL PRODUCTION UP +1.9% Y/Y IN FEBRUARY:

According to iStat, Italian Industrial Production increased +0.96% M/M in the month of February (+1.37% M/M prior).  Furthermore, total output is now up +1.92% Y/Y when adjusted for working days versus -0.23% Y/Y prior.  In the month, Intermediate Goods output increased +2.19% M/M and Investment Goods output increased +2.87% M/M; however, Consumer Goods output declined -0.22% M/M and -4.83%  Y/Y and Energy Output declined -6.22% M/M and slowed to +4.09% Y/Y.

 

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AMERICAS:

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%. 

 

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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 and the Fed now discussing balance sheet reduction, 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 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 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.

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.

EMEA:

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:  All eyes are now on round one of the French election (April 23) and while the market remains jittery about Marine Le Pen, Communist Party Candidate Jean-Luc Melanchon now has 18% voter support.  Despite the political uncertainty, economic data is still improving 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.

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 -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% 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. 

Turkey:  Inflation is rising in Turkey (+11.3% Y/Y in March), but subtle improvements have been noticed in consumer and business confidence in recent weeks.  Unemployment (last reported in November) has turned meaningfully higher at 12.7% and Turkey’s 10-year bond yield is +180 bps higher than it was in April.  Overall, Turkey’s economic situation appears to be challenging and without timely data releases we will refrain from initiating a view.

GLOBAL CENTRAL BANK SCORECARD:

 

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MACRO TRADING IDEAS:

 

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WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

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BEST/WORST PERFORMING WORLD BOND MARKETS:

 

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BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

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BEST/WORST PERFORMING CURRENCIES:

 

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COMMODITIES MARKET PERFORMANCE:

 

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MAJOR GLOBAL STOCK MARKETS:

 

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MAJOR GLOBAL BOND MARKETS:

 

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DISCLOSURE APPENDIX

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 March 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.

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