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Bluestone Market Research

SLOWING FOOD COSTS KEEP CHINA CPI IN CHECK

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • NY Manufacturing Index (30.2) at the highest level in over 3 years.
  • China CPI slowed to +1.6% Y/Y in September.

NY FED MANUFACTURING INDEX AT HIGHEST LEVEL IN 3 YEARS:

The NY Fed’s Empire State Manufacturing Index increased +5.8 points to +30.2 in October (highest level since September 2014).  The increase in the month was led by Current Shipments (+11.3 to +27.5) and Current Number of Employees (+5.0 points to +15.6).  However, Current New Orders fell -6.9 points to +18.0.  Also, Prices Paid fell -8.5 points to 27.3 and Prices Received fell -6.8 points to +7.0.  Lastly, the Future General Business Index increased +5.5 points to +44.8 but Future Capital Expenditures fell -2.5 points to +21.9.

 

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CHINA CPI SLOWED TO +1.6% Y/Y IN SEPTEMBER:

According to the China Bureau of Statistics, the Consumer Price Index increased +0.5% M/M in September.  However, on a Y/Y basis, CPI slowed to +1.6% Y/Y (versus +1.8% Y/Y prior).  In the month, Food prices declined -1.4% Y/Y (-0.2% prior), whereas Non-food prices increased +2.4% Y/Y (+2.3% Y/Y prior).  Lastly, China PPI increased +1.0% M/M and +6.9% Y/Y (+6.3% Y/Y prior), which is the highest pace since March.

 

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AMERICAS:

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.  With Q2 2017 Real GDP officially at +3% growth, it is now possible for GDP to achieve our official forecast of 3.0% for 2017.

U.S. Inflation:  U.S. inflation is set to rise again over the coming months as energy prices return to positive territory on a Y/Y basis.  Additionally, recent data show that shelter costs have been turning up again.  However, the Fed’s preferred inflation metric, the Core PCE Deflator was up just +1.3% Y/Y in August (away from the Fed’s 2% inflation target).

U.S. Federal Reserve:  With inflation set to turn back up again, the odds of another Fed hike will increase (note that December hike odds are currently 77%).   Not to mention, increased inflation (as well as increasing inflation expectations) have given the Fed reason to begin balance sheet tapering.

 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:  Argentine economic data continues to improve. Consumer Confidence has improved for three consecutive months, GDP accelerated to +2.7% y/y in Q2, but inflation remains a problem at +23% Y/Y (far better than 41% from a year ago though).  However, Industrial Production has slowed for two consecutive months.

Brazil:  The macro data in Brazil continue to improve.  Retail sales are now up +3.0% Y/Y, unemployment has fallen for five straight months to 12.6%, PMI’s continue to trend higher, tax receipts are growing, inflation is still in a falling trend – 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: Despite worries about Canada’s housing market, 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 remains at a healthy 3.8% Y/Y.

Mexico: Recent economic data in Mexico suggest that the Mexican economy improved in Q3.  Manufacturing PMI’s were stronger in Q3, Unemployment has been stable, Consumer Confidence has trended higher, although retail sales are yet to turn higher.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …

EMEA:

United KingdomThe U.K. economy remains resilient, but Consumer Confidence has remained negative and inflation has begun to turn higher (+3.9% Y/Y in August).  However, Unemployment continues to decline, Retail Sales accelerated in August, home price gains are steady, inflation is in an uptrend, and PMI’s improved in August.  In fact, the Bank of England stands ready to raise rates if inflation continues to climb.

European Union:  Economic data has recently improved in Europe.  Unemployment continues to decline, PMIs indicate strong growth, Industrial Production accelerated in July, but Retail Sales have slowed and Consumer Confidence remains negative.  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 is expected 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:  Has the Turkish Lira finally realized that Turkey has a geopolitical problem?   And will a falling Lira lead CPI materially higher in Turkey?   Despite the political situation, the macro backdrop had been strong.  Consumer confidence had been rising for months (but fell 2.4 points in September), But Business confidence increased throughout Q3, and Unemployment has been steady.

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:   China data remain mixed but positive, despite today’s slip in CPI.  Recent data suggest improvement in China’s manufacturing sector, while Retail Sales, Fixed Investment, and Industrial Production all slowed on Y/Y basis in August.  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 continue to rebound, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 4.9% in August.  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:

 

3

 

MACRO TRADING IDEAS:

 

4

 

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

5

 

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

6

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

 

7

 

CURRENCIES PERFORMANCE:

 

8

 

COMMODITIES MARKET PERFORMANCE:

 

9

 

MAJOR GLOBAL STOCK MARKETS:

 

10

 

MAJOR GLOBAL BOND MARKETS:

 

11

 

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.

CREDIT CARD USE ACCELERATED IN AUGUST

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • S. Consumer Credit continues to climb in August (+$13.1 billion M/M).
  • China Caixin Services PMI slows to the lowest level since 2015 in September.
  • German Industrial Production rebounded +2.6% M/M in August.

CONSUMER CREDIT UP +$13.1 BILLION M/M IN AUGUST:

On Friday, the Federal Reserve released its report on consumer credit for the month of August, showing overall consumer credit increased a seasonally-adjusted +$13.065 billion to a record $3.767 trillion.  This is the 20th consecutive monthly gain of the year and total credit increased +5.5% Y/Y (versus +5.8% Y/Y prior).  Non-revolving credit increased +$7.306 billion to $2.766 trillion (+6.3% Y/Y vs. +6.6% prior) and revolving credit increased +$5.759 billion M/M to $1.0 trillion (+6.1% Y/Y versus +5.8% prior).

 

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Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$34.919 billion in August to $3.695 trillion.  In the month, government loans (student loans) increased for the 66th consecutive month (+$20.153 billion to a record $1.161 trillion).  Also, non-government loans increased for the fifth consecutive month (+$14.766 billion), led by significant increases in loans from Depository Institutions.

 

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CAIXIN CHINA SERVICES PMI SLOWED TO 50.6 IN SEPTEMBER:

The Caixin China Services PMI fell -2.1 points to 50.6 in the month of September, which is the lowest level since December 2015.  Thus, the Composite PMI fell -1.0 point to 51.4.  Note that this read on the services sector differs greatly from the ‘Official’ Non-Manufacturing PMI, which increased +2.0 points to 55.4 in the month of September.

 

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GERMAN INDUSTRIAL PRODUCTION REBOUNDED +2.6% M/M IN AUGUST:

According to Destatis, German Industrial Production rebounded +2.6% M/M in August (-0.1% M/M prior).  Furthermore, on a year over year basis, German Industrial Production accelerated to +4.5% Y/Y (versus +4.1% Y/Y previously).  In the month, Manufacturing output increased +3.2% M/M and Energy output increased +1.7% M/M; however, Construction output fell -1.2% M/M.

 

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AMERICAS:

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.  With Q2 2017 Real GDP officially at +3% growth, it is now possible for GDP to achieve our official forecast of 3.0% for 2017.

U.S. Inflation:  U.S. inflation is set to rise again over the coming months as energy prices return to positive territory on a Y/Y basis.  Additionally, recent data show that shelter costs have been turning up again.  However, the Fed’s preferred inflation metric, the Core PCE Deflator was up just +1.3% Y/Y in August (away from the Fed’s 2% inflation target).

U.S. Federal Reserve:  With inflation set to turn back up again, the odds of another Fed hike will increase (note that December hike odds are currently 70%).   Not to mention, increased inflation (as well as increasing inflation expectations) have given the Fed reason to begin balance sheet tapering.

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:  Argentine economic data continues to improve. Consumer Confidence has improved for three consecutive months, GDP accelerated to +2.7% y/y in Q2, but inflation remains a problem at +23% Y/Y (far better than 41% from a year ago though).  However, Industrial Production has slowed for two consecutive months.

Brazil:  The macro data in Brazil continue to improve.  Retail sales are now up +3.0% Y/Y, unemployment has fallen for five straight months to 12.6%, PMI’s continue to trend higher, tax receipts are growing, inflation is still in a falling trend – 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: Despite worries about Canada’s housing market, 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 remains at a healthy 3.8% Y/Y.

Mexico: Recent economic data in Mexico suggest that the Mexican economy improved in Q3.  Manufacturing PMI’s were stronger in Q3, Unemployment has been stable, Consumer Confidence has trended higher, although retail sales are yet to turn higher.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …

EMEA:

United KingdomThe U.K. economy remains resilient, but Consumer Confidence has remained negative and inflation has begun to turn higher (+3.9% Y/Y in August).  However, Unemployment continues to decline, Retail Sales accelerated in August, home price gains are steady, inflation is in an uptrend, and PMI’s improved in August.  In fact, the Bank of England stands ready to raise rates if inflation continues to climb.

European Union:  Economic data has recently improved in Europe.  Unemployment continues to decline, PMIs indicate strong growth, Industrial Production accelerated in July, but Retail Sales have slowed and Consumer Confidence remains negative.  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 is expected 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:  Has the Turkish Lira finally realized that Turkey has a geopolitical problem?   And will a falling Lira lead CPI materially higher in Turkey?   Despite the political situation, the macro backdrop had been strong.  Consumer confidence had been rising for months (but fell 2.4 points in September), But Business confidence increased throughout Q3, and Unemployment has been steady.

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:   China data remain mixed but positive, despite today’s slip in the Caixin Services PMI.  Recent data suggest improvement in China’s manufacturing sector, while Retail Sales, Fixed Investment, and Industrial Production all slowed on Y/Y basis in August.  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 continue to rebound, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 4.9% in August.  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:

 

5

 

MACRO TRADING IDEAS:

 

6

 

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

7

 

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

8

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

 

9

 

CURRENCIES PERFORMANCE:

 

10

 

COMMODITIES MARKET PERFORMANCE:

 

11

 

MAJOR GLOBAL STOCK MARKETS:

 

12

 

MAJOR GLOBAL BOND MARKETS:

 

13

 

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.

ISM PRICES SURGE

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • S. ISM Manufacturing at highest level since May 2004, but Prices surged.
  • S. Construction Spending improved in August.
  • European Unemployment improved further in August.
  • China PMI indicated stronger growth in September.
  • South Korean trade spiked in September.

U.S. ISM MANUFACTURING INDEX AT HIGHEST LEVEL IN OVER 13 YEARS:

The ISM Manufacturing Index increased +2.0 points to 58.8 in September.  In fact, this is the highest level since May 2004 and this is the 13th consecutive month of growth in the manufacturing sector (18 of the past 19 months).  In the month, New Orders increased +4.3 points 64.6, Production increased +1.2 points to 62.2, Employment increased +0.4 points to 60.3, and New Exports increased +1.5 points to 57.0.   More importantly, Prices surged +9.5 points to 71.5, which is the highest level since May 2011   Conversely, there were declines in Inventories (-3.0 points to 52.5) and Imports (-0.5 points to 54.0).

 

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U.S. CONSTRUCTION UP +0.5% M/M IN AUGUST:

According to the Census Bureau, U.S. Construction Spending increased +0.5% M/M in August to a total value of $1,218.31 billion SAAR.  Moreover, construction spending accelerated to +2.5% Y/Y (versus +1.9% Y/Y prior).  In the month, Residential Construction increased +0.5% M/M and +11.3% Y/Y (+11.5% Y/Y prior) and Nonresidential Construction increased +0.5% M/M and improved to -3.4% Y/Y (-4.4% Y/Y prior).  Lastly, Private Construction increased +0.4% M/M and +4.7% Y/Y and Public Construction increased +0.7% M/M and improved to -5.1% Y/Y (-7.2% Y/Y prior).

 

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EURO AREA UNEMPLOYMENT IMPROVED SLIGHTLY IN AUGUST:

According to Eurostat, the unemployment rate in the Euro Area (EA-19) was unchanged at 9.1% in August.  Thus, the unemployment rate remains at the lowest level since February 2009 for the third consecutive month!  Furthermore, Eurozone unemployment rate fell to 7.6% (versus 7.7% prior).  Note that the total number of unemployed in the Eurozone fell -104k to 18.747 million in August, with unemployment in the EA19 down -42k to 14.751 million.  Lastly, Youth Unemployment (25 and under) in the Euro Area was unchanged at 18.9% and Eurozone youth unemployment improved to 16.7% (versus 16.8% prior).

 

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CHINA PMI DATA INDICATES STRONG GROWTH IN SEPTEMBER:

The official China Manufacturing PMI increased +0.7 points to 52.4 in September, according to the National Bureau of Statistics.   In fact, this is the highest level since April 2012 and this marks the 14th consecutive month of growth in the manufacturing sector in China.  In the month, Output increased +0.6 points to 54.7, New Orders increased +1.7 points to 54.8, New Exports increased +0.9 points to 51.3, and Backlogs improved +1.3 points to 47.4.  Meanwhile, the official China Non-Manufacturing PMI increased +2.0 points to 55.4 (highest level since May 2014), as New Orders increased +1.4 points to 52.3 and Expectations increased +0.7 points to 61.7.

 

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SOUTH KOREA TRADE SURPLUS REBOUNDED TO +$13.7 BILLION IN SEPTEMBER:

South Korea’s trade surplus rebounded +$7.075 billion to +$13.70 billion in September, according to the Ministry of Trade, Industry, and Energy.  In the month, exports rebounded +17.0% M/M and +34.9% Y/Y to $55.10 billion (vs. +17.4% Y/Y prior).  Furthermore, imports increased +2.3% M/M and +21.8% Y/Y to $41.40 billion (+15.3% Y/Y prior).

 

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AMERICAS:

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.  With Q2 2017 Real GDP officially at +3% growth, it is now possible for GDP to achieve our official forecast of 3.0% for 2017.

U.S. Inflation:  U.S. inflation is set to rise again over the coming months as energy prices return to positive territory on a Y/Y basis.  Additionally, recent data show that shelter costs have been turning up again.  However, the Fed’s preferred inflation metric, the Core PCE Deflator was up just +1.3% Y/Y in August (away from the Fed’s 2% inflation target).

U.S. Federal Reserve:  With inflation set to turn back up again, the odds of another Fed hike will increase (note that December hike odds are currently 70%).   Not to mention, increased inflation (as well as increasing inflation expectations) have given the Fed reason to begin balance sheet tapering.

 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 …

EMEA:

United KingdomThe U.K. economy remains resilient.  Consumer Confidence has deteriorated and Q2 GDP slowed to 1.7% Y/Y (+2.0% prior); however, Unemployment continues to decline, Retail Sales accelerated in August, home price gains are steady, inflation is in an uptrend, and PMI’s improved in August.  In fact, the Bank of England stands ready to raise rates if inflation continues to climb.

European Union:  Economic data has recently improved in Europe.  Unemployment continues to decline, PMIs indicate strong growth, Industrial Production accelerated in July, but Retail Sales have slowed and Consumer Confidence remains negative.  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 is expected 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 improvement in China’s manufacturing sector.  Note that China PMIs indicated strong growth in September, Industrial profits were up a solid +16.5% Y/Y in July, and China’s consumer and services sectors remain resilient.  However, Retail Sales, Fixed Investment, and Industrial Production all slowed on Y/Y basis in August.  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 continue to rebound, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 4.9% in August.  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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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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CURRENCIES PERFORMANCE:

 

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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.

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