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CHICAGO FED INDEX IMPROVED IN APRIL

“Right now the U.S. economy is doing OK.

John Williams, Federal Reserve Bank of San Francisco, 5/19/17

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • Chicago Fed National Activity Index at the highest level since November 2014.
  • Japan Trade Balance slipped due to drop in exports in April.

 CHICAGO FED NATIONAL ACTIVITY ACCELERATED IN APRIL:

According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) increased +0.41 points to +0.49 in April.  This is the highest level since November 2014.  Moreover, the three-month average increased +0.23 points to 0.23.  In the month, Production & Income jumped +0.45 points to +0.46 and Employment & Hours increased +0.05 points to +0.10; however, PCE & Housing slipped -0.02 points to -0.08 and Sales & Inventories fell -0.07 points to 0.0.

 

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JAPAN TRADE BALANCE FELL DUE TO DROP IN EXPORTS IN APRIL:

According to Japan’s Ministry of Finance, Japan’s trade balance slipped -¥8.8 billion to +¥97.6 billion in the month of April.  This is the fifth monthly decline in the past six months.  On a seasonally-adjusted basis, exports declined -0.2% M/M, whereas imports declined -0.1% M/M.  Moreover, on a Y/Y basis, Japan exports slowed to +7.5% Y/Y (+12.0% Y/Y prior), while imports increased +15.1% Y/Y (+15.8% Y/Y prior).  Thus, the trade balance on a not seasonally adjusted basis fell to +¥481.7 billion (versus +¥614.0 billion prior)

Note that exports to China slowed to +14.8% Y/Y and imports from China slowed to +7.5% Y/Y (+10.3% Y/Y prior) and exports to the US slowed to +2.6% Y/Y (+3.5% Y/Y prior); however, exports to the EU increased +2.2% Y/Y (+1.4% Y/Y prior).  Lastly, it should be noted that Petroleum imports dropped -16.7% M/M to ¥569.0 billion but oil imports accelerated to +61.0% Y/Y (versus +45.2% Y/Y previously).  Japan imports roughly 90% of its energy, making Japan one of the world’s largest beneficiaries of low energy prices over the past few years.

 

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AMERICAS:

U.S. GDP:  Our GDP model points toward stronger growth in 2H 2017 (+3% 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 slowed to +1.56% Y/Y in March (away from 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.  Balance sheet reduction talk should increase later this year.

 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.  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.

 

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Argentina:  In short, the economic data out of Argentina remains bad (but less bad).   Exports increased +2.3% Y/Y in March, Industrial Production declined -0.4% Y/Y in March (-6.0% Y/Y prior), Consumer Confidence remains depressed but improved 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.  In March, Retail Sales worsened to -3.2% Y/Y, and Unemployment jumped to a record high 13.7%.  Although, Consumer Credit Card transactions slipped in Q1; Consumer Confidence and PMI’s appear to be improving in April.  Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in March, thus supporting Brazil’s recent rate cut.    

Canada: Given concerns about Canada’s housing market, trade disputes, 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 in a rising trend, manufacturing PMI’s are improving, unemployment has been falling, and Canada’s monthly GDP has increased for three straight months.

Mexico: Inflation continues to rise, yet Consumer Confidence is improving 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 …

EMEA:

United Kingdom:  The U.K. economy seems to be on decent footing post-BREXIT, but Q1 growth 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 (Macron won, Greece gets bailed out on 9/22, and Merkel gets re-elected in September), 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:  South Africa’s economic ministers are now meeting with ratings agencies to prevent further debt downgrades.  We are monitoring the economic data in South Africa following Zuma’s hasty firing of his finance minister, Gordhan, on March 30th.  So far, the early results show a plunge in vehicle sales and an 8 point drop in PMI, but so far there’s been no impact on business confidence.

 Turkey:  What’s not to love about Turkey?  Not only does Turkey have a worsening political dictatorship, but inflation is rising (+11.9% Y/Y in April), 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: As goes China, as goes Australia, and we’re certainly watching the drop in iron ore prices as a result.  However, so far, 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 through April and PMI’s are surging, although housing data is starting to show signs of fatigue (see above).  We are monitoring Australia to see if weakening data in China spills its way over to Australia.  We remain neutral on Australia at this time.

China:   We have noted weakening economic data in China above, but continue to believe China has the levers necessary to stimulate ahead of the National Communist Party Congress later this year.

India:  Money supply growth is beginning to recover following last year’s currency demonetization.  M1 growth has “improved” to -4.3% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.1% Y/Y (was +6.4% in January).  Manufacturing and Services PMI’s improved in Q1 (but slowed in April), 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 12.4% 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: Russian economic data continues to improve alongside rising oil prices.  Industrial Production rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.4% in March.  Meanwhile, CPI 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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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 GLOBAL STOCK MARKETS:

 

8

 

BEST/WORST PERFORMING WORLD BOND 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 May 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.

“It is indeed very clear that the threat posed by North Korea’s missile and nuclear program is now entering into a new stage. That is our recognition.”

Shinzo Abe, Prime Minister of Japan, 5/15/17

 FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • China economic data slowed on Y/Y basis in April, but near-term worries are overblown.
  • Australian Home Sales declined -0.5% M/M in March.
  • NY Fed Manufacturing contracts for first time in seven months.
  • S. NAHB Housing Market Index improved in May.

 CHINA RETAIL SALES, INDUSTRIAL PRODUCTION, & FIXED ASSET INVESTMENT SLOWED IN APRIL:

The National Bureau of Statistics of China released reports on Industrial Production, Fixed Asset Investment, and Retail Sales and the results showed that activity in China increased M/M but slowed on Y/Y basis in April.  China Retail Sales increased +0.79% M/M but slowed slightly to +10.7% Y/Y (versus +10.9% prior) and sales are now up +10.2% cumulatively YTD.  Also, Industrial Production increased +0.56% M/M but slowed to +6.5% Y/Y (versus +7.6% prior) and output is up +6.7% cumulatively YTD.  Furthermore, China Fixed Asset Investment increased +0.71% M/M but slowed to +8.9% cumulatively YTD (versus +9.2% prior).

 China worries are back on the front burner again, as China economic data has slowed.  However, the levers that China has in its arsenal to defend against economic weakness remain in place.  China’s FX reserves are at their highest level since November, the currency has risen 5% Y/Y, fiscal spending has fallen 11% Y/Y (leaving them plenty of room to ramp), three-month SHIBOR is 150 bps higher than it was last year, and wealth has risen due to higher home and equity market values.

 

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AUSTRALIAN HOME LOANS DOWN -0.5% M/M IN MARCH:

According to the Australian Bureau of Statistics, the total number of Housing Loans declined -0.49% M/M and -1.92% Y/Y to 54,468 in the month of March (-2.20% Y/Y prior).  The decline in the month was led lower by Established Dwelling loans, down -1.34% M/M and -3.49% Y/Y.  However, the total dollar amount of loans actually increased +0.88% M/M and +5.29% Y/Y to 33.177 billion (+3.42% Y/Y prior).

 

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NY FED MANUFACTURING INDEX TURNS NEGATIVE IN MAY:

The NY Fed’s Empire State Manufacturing Index fell -6.2 points to -1.0 in May Thus, the index now indicates contraction in the region for the first time since October 2016.  The decline in the month was led by Current New Orders (-11.4 points to -4.4), Unfilled Orders (-16.1 points to -3.7), Current Shipments (-3.1 to +10.6), Inventories (-4.3 points to -0.7), Number of Employees (-2.0 points to +11.9), and Average Workweek (-1.3 points to +7.5).  Furthermore, the Future General Business Index fell -0.6 points to 39.3.

 

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NAHB/WELLS FARGO U.S. HOUSING MARKET INDEX IMPROVED TO 70 IN MAY:

The NAHB Housing Market Index increased +2 points to 70 in the month of May.  Thus, it marks the 35th consecutive month above 50 and the index is at the second highest level since June 2005 (71 in March)!  In the month, Current sales increased +2 points to 76, Future Sales increased +4 points to 79, but Traffic flows fell -1 point to 52.  Geographically, there were increases across most of the U.S.: the Northeast (+5 points to 50), West (+3 points to 80), and the South (+2 points to 72).  However, the index in the Midwest fell -2 points to 65.

 

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AMERICAS:

U.S. GDP:  Our GDP model points toward stronger growth in 2H 2017 (+3% 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 slowed to +1.56% Y/Y in March (away from 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.  Balance sheet reduction talk should increase later this year.

 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.  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.

 

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Argentina:  In short, the economic data out of Argentina remains bad (but less bad).   Exports increased +2.3% Y/Y in March, Industrial Production declined -0.4% Y/Y in March (-6.0% Y/Y prior), Consumer Confidence remains depressed but improved 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 worsened to -3.2% Y/Y in March.  Consumer Credit Card transactions have slipped in Q1.  Confidence, albeit high, ticked slightly lower in March.  The Unemployment Rate has jumped to a record high 13.7% in March.  Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in March, thus supporting Brazil’s recent rate cut.  

Canada: Today, we learn that Existing Home Sales fell -1.7% M/M and -7.5% Y/Y in the month of April (note that March sales were record high).  Note that, Toronto Existing Home Sales fell -3.8% Y/Y and Vancouver sales plunged -26.2% Y/Y. Furthermore, the MLS Home Price Index increased +3.20% M/M and +19.76% Y/Y to $606,000.  Given concerns about Canada’s housing market, trade disputes, and potential fallout from lower oil prices, we added Canada to our downside risk watch last week; however, so far Canada’s economic data remain healthy.  Consumer Confidence remains in a rising trend, manufacturing PMI’s are improving, unemployment has been falling, and Canada’s monthly GDP has increased for three straight months.

Mexico: Inflation continues to rise, yet Consumer Confidence is improving 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 …

EMEA:

United Kingdom:  The U.K. economy seems to be on decent footing post-BREXIT, but Q1 growth 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 (Macron won, Greece gets bailed out on 9/22, and Merkel gets re-elected in September), 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 AfricaNeed a playbook for a chaotic government run by a President who has many ex-wives and unexpectedly fires senior officials without warning?  Oh, that would be South Africa.  Note that President Zuma has Trump beat on some key metrics (6 ex-wives and an estimated 20 children).  We are now monitoring the economic data in South Africa following Zuma’s hasty firing of his finance minister, Gordhan, on March 30th.  So far, the early results show a plunge in vehicle sales and an 8 point drop in PMI, but so far there’s been no impact on business confidence.

Turkey:  What’s not to love about Turkey?  Not only does Turkey have a worsening political dictatorship, but inflation is rising (+11.9% Y/Y in April), 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: As goes China, as goes Australia, and we’re certainly watching the drop in iron ore prices as a result.  However, so far, 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 through April and PMI’s are surging, although housing data is starting to show signs of fatigue (see above).  We are monitoring Australia to see if weakening data in China spills its way over to Australia.  We remain neutral on Australia at this time.

China:   We have noted weakening economic data in China above, but continue to believe China has the levers necessary to stimulate ahead of the National Communist Party Congress later this year.

India:  Money supply growth is beginning to recover following last year’s currency demonetization.  M1 growth has “improved” to -4.3% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.1% Y/Y (was +6.4% in January).  Manufacturing and Services PMI’s improved in Q1 (but slowed in April), 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 12.4% 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: Russian economic data continues to improve alongside rising oil prices.  Industrial Production rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.4% in March.  Meanwhile, CPI 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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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 GLOBAL STOCK MARKETS:

 

9

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

 

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BEST/WORST PERFORMING CURRENCIES:

 

11

 

COMMODITIES MARKET PERFORMANCE:

 

12

 

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 May 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.

SO FAR, 74% OF S&P 500 BEAT Q1 ESTIMATES

“If we delay too long in taking the next normalization step and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive and we have to move rates up steeply, we could risk a recession.”

Loretta Mester, President of the Federal Reserve Bank of Cleveland, 5/8/17

 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.
  • China Trade data worsen.
  • Canadian Housing Starts slip, but remain at elevated levels.

NEARLY 74% OF THE S&P 500 HAVE BEATEN Q1 ESTIMATES:

As of the end of last week, 409 of the S&P 500 companies have reported Q1 earnings and 73.84% have beaten estimates compared to 18.83% that have missed estimates.  The earnings beat this quarter (albeit on lowered expectations) has been led by Tech (83.67%), Financials (83.61%), and Health Care (80.85%).

 

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Note that over the past week, street estimates have actually been revised higher due to the strong Q1 earnings reports.  Wall Street analysts have increased their FY 2017 earnings forecast by +$0.23 to $129.71 (of which Q1 was revised by +$0.38) and they increased their 2018 FY earnings forecast by +$0.10 to $146.75.  This would represent earnings growth of +22.1% Y/Y and +13.1% Y/Y in 2017 and 2018, respectively.

 

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CONSUMER CREDIT UP +$16.4 BILLION M/M IN MARCH:

On Friday, the Federal Reserve released its report on consumer credit for the month of March, showing overall consumer credit increased a seasonally-adjusted +$16.431 billion to a record $3.806 trillion. Thus, Consumer credit has increased for the 67th consecutive month, up +$1.097 trillion during that time.   In March, total credit increased +6.0% Y/Y and increased at a +5.2% annualized rate.  In March, non-revolving credit increased +$14.471 billion to $2.806 trillion (+6.9% Y/Y and +56.2% annualized rate) and revolving credit increased +$1.96 billion M/M to just shy of $1.0 trillion (+6.31% Y/Y and +2.4% annualized rate).

 

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Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$1.284 billion in March to $3.702 trillion.  In the month, government loans (student loans) increased for the 61st consecutive month (+$2.864 billion to $1.12 trillion).  Conversely, non-government loans declined for the third consecutive month (-$1.58 billion), led by a significant decline in loans from Depository Institutions.

CHINA TRADE SURPLUS IMPROVED TO $38 BILLION IN MARCH DUE TO SLOWER TRADE:

In U.S. Dollar terms, China’s National Bureau of Statistics reported that China’s trade surplus increased +$14.13 billion to +$38.05 billion in March (+$23.92 billion prior).  However, the improvement in the month was due to a slowdown in overall trade.  In the month, China’s exports slipped -$0.60 B M/M to $180.0 billion, which is a slowdown to +8.0% Y/Y (versus +16.4% Y/Y prior).  Meanwhile, China imports declined -$14.72 billion M/M to $141.96 billion, which is a slowdown to +11.9% Y/Y (versus +20.3% prior).

Note that, Crude Oil imports slowed to +5.6% Y/Y (+19.4% Y/Y prior) and Copper Ore imports slowed to +7.9% Y/Y (+19.0% Y/Y prior) in the month of March. Moreover, exports to Hong Kong fell -15.3% Y/Y (-4.8% Y/Y prior), exports to the EU slowed to +4.0% Y/Y (+16.6% prior), and exports to the US slowed to +11.7% Y/Y (+19.7% Y/Y prior). 

GERMAN FACTORY ORDERS UP +1.0% M/M IN MARCH:

According to the German Economy Ministry, German factory orders increased for the second consecutive month, up +1.0% M/M on a seasonally and inflation adjusted basis in the month of March.  However, factory orders slowed to +2.4% Y/Y (+4.7% Y/Y prior).  In March, Foreign factory orders increased +4.8% M/M and +2.5% Y/Y (+3.6% Y/Y prior) but Domestic orders fell -3.8% M/M and slowed to +2.2% Y/Y (+6.2% Y/Y prior).

 

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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%. 

U.S. Inflation:  U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator slowed to +1.56% Y/Y in March (away from 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.

 

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Argentina:  In short, the economic data out of Argentina remains bad (but less bad).   Exports increased +2.3% Y/Y in March, Industrial Production declined -0.4% Y/Y in March (-6.0% Y/Y prior), Consumer Confidence remains depressed but improved 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 worsened  to -3.2% Y/Y in March.  Consumer Credit Card transactions have slipped in Q1.  Confidence, albeit high, ticked slightly lower in March.  The Unemployment Rate has jumped to a record high 13.7% in March.  Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in March, thus supporting Brazil’s recent rate cut.    

Canada: Given concerns about Canada’s housing market, trade disputes, and potential fallout from lower oil prices, we are adding Canada to our downside risk watch today; however, so far Canada’s economic data remain healthy (actually most data are improving).  Consumer Confidence remains in a rising trend, manufacturing PMI’s are improving, unemployment has been falling, and Canada’s monthly GDP has increased for three straight months.

Much focus is on falling sales activity in the Vancouver housing market, but so far, we are yet to see any spill over into other areas.  In fact, Toronto new home prices continue to accelerate, rising +8.6% Y/Y in February (+8% prior).   Today, we learn that housing starts slipped M/M in April, but solely because March had been unusually robust.

 

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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 …

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:  With political uncertainty lifted (Macron won, Greece gets bailed out on 9/22, and Merkel gets reelected in September), 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 (+11.9% Y/Y in April), 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 (which recently weakened again).  It appears that China still plans 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 -4.3% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.1% Y/Y (was +6.4% in January).  Manufacturing and Services PMI’s improved in Q1 (but slowed in April), 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 12.4% 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: Russian economic data continues to improve alongside rising oil prices.  Industrial Production rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.4% in March.  Meanwhile, CPI 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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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 GLOBAL STOCK MARKETS:

 

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BEST/WORST PERFORMING WORLD BOND 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 April 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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