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Bluestone Market Research

CROSS CURRENTS LEAD US TO JAPAN

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • Too many cross currents … the U.S. macro picture has becoming blurred.
  • Japan, despite all its problems, may be a safe haven for risk assets at this time.
  • S. Durable Goods Orders fall, despite prior month being revised lower.
  • S. Chicago Fed National Activity Index fell in May, Dallas Fed slowed in June.

The macro picture is getting blurrier.   U.S. equities are at record highs, yet economic data is softening.   The Fed is hiking rates, yet U.S. bond yields are trending lower.   As both U.S. equities and U.S. bonds rise, the U.S. Dollar Index is weakening.  While the U.S. Dollar has weakening, many commodities (particularly agricultural commodities, but also oil and iron ore) have also declined.   What this tells us is that the macro picture is currently out of balance.  There are too many cross currents and that likely means that a meaningful adjustment is coming.  Here are some thoughts on the matter:  

  • A flatter yield curve, in concert with worsening economic data and declining commodities prices (namely oil) is a headwind for U.S. earnings growth. With the S&P now above our yearend target, we have shifted to a neutral view.
  • Inflation peaked months ago. Unless the job market tightens further and wages rise, the Fed’s desire to hike interest rates and reduce its balance sheet is likely untimely.
  • With commodities prices declining, some emerging market economies will begin to experience macro stressers again.
  • Many investors are eyeing tax reform in the U.S. as a bullish development. However, it is important to note that healthcare reform is designed to raise revenues to the Federal Government (which is inherently equivalent to a tax) and some tax reform proposals (such as the elimination of the corporate interest tax deduction) would result in higher effective tax rates and a fundamental re-think of corporate capital structures.  Although over the long-term such developments may be fundamentally sound, such changes would cause short-term readjustment.
  • International risks are still highly elevated. The North Korean situation is still coming to a head.  Senator Rob Portman said today on CNBC that a possible next step would be for the U.S. to sanction Chinese companies doing business in North Korea.   Meanwhile, tensions in Syria are rising, so much so that Australia’s Royal Air Force suspended air operations in Syria last week due to Russian threats.

Our best guess is that lower interest rates will help housing in the coming months and a weaker dollar will help U.S. manufacturing and export data as well.  However, with U.S. equities at record highs, we need to ask if the market is compensating us enough to take such a bet.   We think not, and thus we will remain neutral on U.S. equities at this time.

JAPAN – A SAFE HAVEN AGAINST ALL OF THE ABOVE?

As mentioned above, the U.S. macro picture is exceedingly blurry.  Meanwhile, some emerging markets are exposed to declining commodities prices.   With that in mind, money must flow to where it is treated best (on a risk-adjusted basis) and one such economy may in fact be Japan at this time.  Not only are Japanese equities cheaper than their U.S. and European counterparts, but Japanese economic data is in a clear up-trend.   Not to mention, if there is a place on earth that benefits the most from declining commodities/oil prices, it’s undoubtedly Japan.  With that in mind, today we initiate a bullish view on the Nikkei 225.

 

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DURABLE GOODS ORDERS DOWN -1.1% M/M IN MAY:

The US Census Bureau reported that U.S. Durable Goods Orders fell for the second consecutive month, down -1.08% M/M in May.  It is important to note that the prior month was revised lower to -0.92% M/M (vs. -0.67% previously reported).  Nonetheless, Durable Goods orders are now up +5.13% Y/Y (versus -0.02% Y/Y prior).  Also, note that Durable Goods orders ex-Transports increased +0.12% M/M and +7.27% Y/Y (+3.40% Y/Y prior).  On an ex-Defense basis, orders fell -0.56% M/M but increased +4.56% Y/Y (-0.02% Y/Y prior).  Also, Shipments increased +0.78% M/M and Inventories increased +0.16% M/M, but Unfilled Orders fell -0.20%.

The decline in the month was led by Transportation Equipment orders, which declined -3.44% M/M, led by Defense aircraft (-30.8% M/M) and Non-Defense aircraft (-11.7% M/M) but Auto orders increased +1.2%.  Moreover, Fabricated Metals orders fell -0.17% M/M and Computers & Electrical Products orders fell -0.22% M/M; however, Primary Metals orders increased +0.34% M/M and Machinery orders increased +0.63% M/M.

 

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CHICAGO FED NATIONAL ACTIVITY NEGATIVE IN MAY:

According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) declined -0.83 points to -0.26 in the month of May.  This is the lowest level since January.  Moreover, the three-month average fell -0.17 points to +0.04.  In the month, Production & Income fell -0.69 points to -0.16, Employment & Hours fell -0.14 points to -0.02, and PCE & Housing slipped -0.02 points to -0.09; however, Sales & Inventories increased +0.03 points to +0.02.

 

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DALLAS FED MANUFACTURING INDEX INDICATED STEADY GROWTH IN JUNE:

Today, the Dallas Federal Reserve reported that the Current General Business Activity Index fell -2.2 points to +15.0 in the month of June Note that this month marks the ninth consecutive month of growth in the region.  Certainly, the increase in oil rigs in the region has helped bring back some growth.  In the month, there were slower growth in Production (-11.0 points to 12.3), New Orders (-8.5 points to 9.6), and Shipments (-16.2 points to 8.5).  Lastly, manufacturers had a slightly more positive business outlook, as the Forecast increased +0.3 points to +31.9.

 

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GERMAN IFO BUSINESS CLIMATE INDEX AT RECORD HIGH:

The German IFO Institute Business Climate Index increased for the fifth consecutive month, up +0.5 points to 115.1 in June.  In fact, this is the highest level on record. In the month, the Business Situations Index increased +0.8 points to 124.1 (also the highest level on record) and the Business Expectations Index increased +0.3 points to 106.8 (highest since February 2014).

 

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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%, however, recent data suggest downside risk to our forecast. 

U.S. Inflation:  U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator slowed to +1.54% Y/Y in April (away from the Fed’s 2% inflation target).  As we anniversary the drop in commodities prices, we expect headline inflation has hit a near-term peak, 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 odds of another Fed hike in 2017 have come down given recent declines in inflation.  The odds of balance sheet reduction should also be in decline as well.

 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.

 Argentina:  In short, the economic data out of Argentina remains bad (but less bad than it was a year ago).   Industrial Production declined -2.3% Y/Y in April (-0.4% Y/Y prior), CPI is up +25.4% Y/Y in May (+29.4% Y/Y prior), Consumer Confidence remains depressed and fell again in May, and GDP is still negative.

Brazil:  Recent data has shown Business and Consumer Confidence continue to leak and Industrial Production is down -4.5% Y/Y, but retail sales are now up +2% Y/Y and there have been modest improvement in PMI’s in Q2.  As a result, we recently closed our short view on Brazil’s Bovespa and are now evaluating Brazil for upside potential.   

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 at high levels, manufacturing PMI’s remain strong, unemployment has been in a declining trend, and Canada’s GDP accelerated in Q1 (+5.4% Y/Y).

Mexico: Consumer Confidence is improving following a sharp decline but April Retail Sales slowed materially (+1.4% Y/Y versus +6.1% prior). Meanwhile, Inflation continues to rise, Unemployment has increased, Exports have slowed, Manufacturing PMI have been mixed, and Industrial Production declined -4.4% Y/Y in April.

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 the political situation/BREXIT talks remain cloudy. Moreover, Retail Sales have slowed, Industrial Production has declined, and Inflation is on the rise.  We are watching the U.K. for further deterioration and now we can add even greater uncertainty regarding the political landscape and BREXIT negotiations.    

European Union:  Through May, economic data in Europe continue to improve (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:  Political chaos and debt downgrade risk aside, South African data have improved in Q2 (higher PMI’s, lower inflation, improving business confidence), however, Vehicle Sales have suffered a meaningful decline.

 Turkey:  Despite the political situation, consumer confidence has been rising for months, business confidence increased in June, and industrial production accelerated to +5.9% Y/Y in April; however, inflation is rising (+11.7% Y/Y in May).

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, but PMI’s and Commodities prices began to weaken a bit again in May.  Not to mention, housing data are starting to show signs of fatigue.  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:   Recent data suggest slow growth in manufacturing in Q2; however, the consumer and services sectors have been resilient.  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 weakness.

 India:  Money supply growth is beginning to recover following last year’s currency demonetization, but industrial production and PMI’s have weakened of late and inflation is declining.  Any economic improvement may already be priced in as the Sensex index is up 18% 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:  As discussed above, we now have a bullish view on Japan’s Nikkei 225.

Russia: Russian economic data continue to post improvements (Composite PMI steady at 56 for months) although the recent decline in oil prices is a risk.  Industrial Production has rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.2% in May.  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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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.

CORPORATE TAXES DOWN Y/Y

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • S. Tax Receipts up +2.5% Y/Y in June.
  • Japan Trade data worsened in May, thanks to lower exports.
  • Industrial / Factor output weakens in India, Italy and Japan.

U.S. TAX RECEIPTS UP +2.5% Y/Y IN JUNE BUT CORPORATE TAXES FELL:

According to the U.S. Treasury, tax receipts are up +2.5% through June 15th and they are up +5.3% Calendar YTD (+5.7% at the end of May).  The increase in the month was led by Income and Employment Withholdings Taxes, as they increased +5.5% Y/Y and +6.2% Calendar Y/Y (+6.2% Y/Y at the end of May).  It should be noted that the increase in Income withholdings June be due to the +7.3% increase in the maximum amount of earnings subject to Social Security tax ($127,200 in 2017 vs. $118,500 in 2016).  Furthermore, Excise & Other Taxes increased +13.8% Y/Y and +5.7% Calendar Y/Y (+4.9% Y/Y at the end of May).  However, Corporate Income Taxes fell -4.6% Y/Y and -1.2% Calendar YTD (versus +0.9% Y/Y at the end of May).

 

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JAPAN TRADE BALANCE FELL AS EXPORTS SLIPPED IN MAY:

According to Japan’s Ministry of Finance, Japan’s trade balance fell -¥23.9 billion to +¥133.8 billion in the month of May.  This is the sixth monthly decline in the past seven months.  On a seasonally-adjusted basis, exports declined marginally M/M, whereas imports increased +0.3% M/M.  Moreover, on a Y/Y basis, Japan exports increased +14.9% Y/Y (+7.5% Y/Y prior), while imports increased +17.8% Y/Y (+15.2% Y/Y prior).  Thus, the trade balance on a not seasonally adjusted basis fell -¥684.5 billion to -¥203.4 billion (versus +¥481.1 billion prior).  Lastly, it should be noted that Petroleum imports dropped -7.3% M/M to ¥527.5 billion and oil imports slowed to +17.2% Y/Y (versus +61.0% 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 +1.54% Y/Y in April (away from the Fed’s 2% inflation target).  As we anniversary the drop in commodities prices, we expect headline inflation has hit a near-term peak, 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.  In fact, balance sheet reduction should begin 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.

 Argentina:  In short, the economic data out of Argentina remains bad (but less bad than it was a year ago).   Industrial Production declined -2.3% Y/Y in April (-0.4% Y/Y prior), CPI is up +25.4% Y/Y in May (+29.4% Y/Y prior), Consumer Confidence remains depressed and fell again in May, and GDP is still negative.

Brazil:  Recent data has shown Business and Consumer Confidence continue to leak and Industrial Production is down -4.5% Y/Y, but retail sales are now up +2% Y/Y and there have been modest improvement in PMI’s in Q2.  As a result, we recently closed our short view on Brazil’s Bovespa.   

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 at high levels, manufacturing PMI’s remain strong, unemployment has been in a declining trend, and Canada’s GDP accelerated in Q1 (+5.4% Y/Y).

Mexico: Consumer Confidence is improving following a sharp decline and Retail Sales have improved to +6.1% Y/Y. Meanwhile, Inflation continues to rise, Unemployment has increased, Exports have slowed, Manufacturing PMI have been mixed, and Industrial Production declined -4.4% Y/Y in April.

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 the political situation is quite a mess. Moreover, Retail Sales have slowed, Industrial Production has declined, and Inflation is on the rise.  We are watching the U.K. for further deterioration since Article 50 was triggered on March 29th, and now we can add even greater uncertainty regarding the political landscape and BREXIT negotiations.   

European Union:  Through May, economic data in Europe continue to improve (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:  Political chaos and debt downgrade risk aside, South African data have improved in Q2 (higher PMI’s, lower inflation, improving business confidence), however, Vehicle Sales have suffered a meaningful decline.

 Turkey:  Despite the political situation, consumer confidence has been rising for months, and industrial production accelerated to +5.9% Y/Y in April; however, inflation is rising (+11.7% Y/Y in May).

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, but PMI’s and Commodities prices began to weaken a bit again in May.  Not to mention, housing data are starting to show signs of fatigue.  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:   Recent data suggest slow growth in manufacturing in Q2; however, the consumer and services sector has been resilient.  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 weakness.

 India:  Money supply growth is beginning to recover following last year’s currency demonetization, but industrial production and PMI’s have weakened of late and inflation is declining.  Any economic improvement may already be priced in as the Sensex index is up 18% 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:  Early data from Japan in Q2 show positive improvements in Unemployment, CPI, PPI, industrial production, and retail sales; however, confidence surveys have been mixed. 

Russia: Russian economic data continues to improve although the recent decline in oil prices is a risk.  Industrial Production has rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.3% in May.  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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BEST/WORST PERFORMING CURRENCIES:

 

8

 

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.

C&I LOANS ROLL OVER, BUT OUR MODEL TURNS UP

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • C&I Loans are rolling over, and history suggests that’s a POSITIVE.
  • Our GDP Model still forecasts economic acceleration, despite recent weakness in data.
  • Industrial / Factor output weakens in India, Italy and Japan.

C&I LOANS ARE ROLLING OVER, AND THAT’S A GOOD THING:

There was focus over the weekend on the fact that weekly Commercial & Industrial Loan data from the Federal Reserve continue to roll over and are now up just 1.6% Y/Y (they were up +10% Y/Y at this time last year).   Here’s two things you need to know about the C&I data series:  1) Given that this is a weekly release, it’s very timely.  2) The data are coincidental and utterly useless for forecasting purposes.

The chatter over the weekend was that this data were supposedly forecasting a recession.  But a look at the chart below shows that that is in fact NOT the case.  Generally speaking, C&I loans spike as we enter into a recession and are generally up roughly 10-20% Y/Y at the START of recessions (1991 excluded).  However, note that C&I loans roll over AFTER recessions begin.   In fact, looking at the chart below, C&I loans roll over rather frequently in times of expansion.   The history on this data series tells us that C&I loans are useful tool for identifying periods of over investment (CAPEX bubbles), which generally precede recessions.  Right now, we are not in such an environment.  If anything, a sharp rollover in C&I loans generally is a sign that the economy is about to strengthen, as that is what happens at the end of every recession.

 

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NO WEAKNESS SEEN IN OUR MODEL … IN FACT, IT’S ONLY TURNED HIGHER:

Certainly, we’ve seen economic weakness in a variety of recent data.  However, the macro factors that influence our GDP model (interest rates, energy prices, demographics, jobs data, tax receipts, etc) have not had any meaningful negative impact on our model.  In fact, our GDP model continues to point toward accelerating growth in 2018.

 

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INDIAN CPI SLOWED TO +2.2% Y/Y IN MAY:

According to the Ministry of Statistics and Programme Implementation, Indian Consumer Prices increased +0.23% M/M but slowed to +2.18% Y/Y (versus +2.99% Y/Y prior) in the month of May.  This is the slowest yearly pace in the history of this data series (dating back to January 2012).  In the month, Food & Beverage prices increased +0.15% M/M but fell -0.22% Y/Y (+1.29% Y/Y prior), Fuel prices fell -0.31% M/M and slowed to +5.46% Y/Y (+6.13% Y/Y prior), Housing prices increased +0.30% M/M and +4.84% Y/Y (+4.86% Y/Y prior), and Clothing prices increased +0.15% M/M and slowed to +4.41% Y/Y (+4.58% Y/Y prior).  The record low inflation in India means that inflation risks are skewed to the downside; therefore, the Reserve Bank of India may be forced to cut rates at its next meeting in August.

 

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INDIAN INDUSTRIAL PRODUCTION SLOWED IN APRIL:

According to the Ministry of Statistics and Programme Implementation, Indian Industrial Production fell -11.22% M/M (not seasonally adjusted) and slowed to +3.06% Y/Y (versus +3.75% Y/Y prior) in April.  In the month, Manufacturing output (which comprises 75% percent of industrial production) fell -10.82% M/M but increased +2.61% Y/Y (+2.40% Y/Y prior), Mining output fell -21.89% M/M and slowed to +4.17% Y/Y (+10.26% Y/Y prior), and Electricity output increased +1.83% M/M and slowed to +5.39% Y/Y (+6.17% Y/Y prior).

ITALIAN INDUSTRIAL PRODUCTION DOWN -0.4% M/M IN APRIL:

According to iStat, Italian Industrial Production declined -0.42% M/M in the month of April (+0.42% M/M prior).  Furthermore, total output slowed to +0.98% Y/Y when adjusted for working days versus +2.87% Y/Y prior.  In the month, Consumer Goods output fell -0.54% M/M, Intermediate Goods output fell -0.43% M/M, and Investment Goods output fell -1.65% M/M; however, Energy Output increased +2.24% M/M and +1.32% Y/Y (-2.08% Y/Y prior).

 

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JAPAN CORE MACHINERY ORDERS DOWN -3.1% M/M IN APRIL:

Japanese Core Machinery Orders declined -3.07% M/M in April, according to the Japan Economic and Social Research Institute.  Nonetheless, Core Machinery Orders are now up +2.70% Y/Y (versus -0.70% Y/Y prior).  In the month, Total Machinery Orders increased +2.73% M/M to ¥2.297 trillion, with Overseas Orders up +17.36% M/M to ¥993.2 billion but Government Orders down -10.31% M/M to ¥236.5 billion.

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 +1.54% Y/Y in April (away from the Fed’s 2% inflation target).  As we anniversary the drop in commodities prices, we expect headline inflation has hit a near-term peak, 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.

 Argentina:  In short, the economic data out of Argentina remains bad (but less bad than it was a year ago).   Industrial Production declined -2.3% Y/Y in April (-0.4% Y/Y prior), Consumer Confidence remains depressed and fell again in May and GDP is still negative.

Brazil:  Recent data has shown modest improvement in PMI’s in Q2, but Business and Consumer Confidence continue to leak and retail sales are -4% Y/Y.  As a result, we are maintaining our short view on Brazil’s Bovespa.   

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 at high levels, manufacturing PMI’s remain strong, unemployment has been in a declining trend, and Canada’s monthly GDP accelerated in March.

Mexico: Inflation continues to rise, yet Consumer Confidence is improving following a sharp decline. Meanwhile, Manufacturing data have been mixed.

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 and the political situation is quite a mess. We are watching the U.K. for further deterioration as it has experienced some modest economic deterioration since Article 50 was triggered on March 29th, and now we can add even greater uncertainty regarding the political landscape and BREXIT negotiations.    

European Union:  Through May, economic data in Europe continue to improve (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:  Political chaos and debt downgrade risk aside, South African data have improved in Q2 (higher PMI’s, lower inflation, improving business confidence), however, Vehicle Sales have suffered a meaningful decline.

 Turkey:  Despite the political situation, consumer confidence has been rising for months, and industrial production rebounded in March; however, inflation is rising (+11.7% Y/Y in May).

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, but PMI’s and Commodities prices began to weaken a bit again in May.  Not to mention, housing data are starting to show signs of fatigue.  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:   Recent data suggest further slowing in manufacturing in Q2, however, the consumer and services sector has been resilient.  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 weakness.

 India:  Money supply growth is beginning to recover following last year’s currency demonetization, but industrial production and PMI’s have weakened of late and inflation is declining.  Any economic improvement may already be priced in as the Sensex index is up 16.8% 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:  Early data from Japan in Q2 show positive improvements in Unemployment, CPI, PPI, industrial production, and retail sales; however, Exports have recently slowed and factory orders fell in April.

Russia: Russian economic data continues to improve although the recent decline in oil prices is a risk.  Industrial Production has rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.3% in April.  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

 

BEST/WORST PERFORMING CURRENCIES:

 

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.

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