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DESPITE EPS BEATS, ESTIMATES TICK LOWER

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • 70% of the S&P beat Q2 estimates, but future estimates tick lower.
  • Japan GDP increased +1.0% Q/Q in Q2-highest in over two years.
  • China economic data increased but slowed on Y/Y basis in July.
  • EU Industrial Production down -0.6% M/M in July.

STREET ESTIMATES TICK LOWER DESPITE 70% BEATS:

As of August 10th, 459 of the S&P 500 Index companies have reported Q2 earnings, of which 324 have beaten earnings (70.59%) and 92 have missed (20.04%), albeit on lowered estimates.  Thus far, the beats have been led by the Health Care, Tech, and Financial sectors, as 49 out of the 57 Tech that reported earnings, 47 of 57 Health Care companies that reported earnings, and 50 out of the 66 Financials companies that reported earnings have beaten estimates.

 

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Over the past week, Wall Street analysts lowered their Q2 EPS estimates by -$0.25/share to $30.78.  Thus, the street also lowered their 2017 EPS estimates by -$0.49/share to $127.14 and their 2018 EPS estimates by -$0.35/share to $144.42.  This implies EPS growth of +19.6% Y/Y and +13.6% Y/Y in 2017 and 2018, respectively.  For the reasons mentioned above, we are still below those lofty forecasts, but we still see strong EPS growth for 2017 and 2018.

 

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JAPAN Q2 2017 GDP UP +1.0% Q/Q:

According to the Japan Cabinet Office, the GDP in Japan increased for the sixth consecutive quarter, up +0.98% Q/Q during Q2 2017 (+0.36% Q/Q in Q1).  Also, Q2 GDP increased at an annualized rate of +3.90%, which is the fastest pace since Q1 2015.  In the quarter, Private Consumption increased +0.91% Q/Q, Government Consumption increased +0.33% Q/Q, Private Residential Investment increased +1.46% Q/Q, Private Non-Residential Investment increased +2.39% Q/Q, and Public Inventories increased +¥212.5 billion in the quarterOn the other hand, Exports declined -0.47% Q/Q and Imports increased +1.37% Q/Q; therefore, trade was a net drag on GDP.

 

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

The National Bureau of Statistics of China released their reports on Industrial Production, Fixed Asset Investment, and Retail Sales for the month of July and the results showed that activity in China slowed.  In the month, China Retail Sales increased +0.73% M/M but slowed to +10.4% Y/Y (versus +11.0% prior).  Also, Industrial Production increased +0.41% M/M and slowed to +6.4% Y/Y (versus +7.6% prior) and China Fixed Asset Investment increased +0.61% M/M and +8.3% cumulatively YTD (versus +8.6% prior).

 

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EURO AREA INDUSTRIAL PRODUCTION DOWN -0.6% M/M IN JUNE:

According to Eurostat, industrial production in the Euro Area fell for the first time in four months, down -0.6% M/M in June.  Thus, on a year over year basis, industrial production in the Euro Area slowed to +2.6% Y/Y when adjusted for working days (versus +3.9% Y/Y prior).  In the month, Euro Area Durable goods output fell -1.2% M/M, Non-Durable goods output fell -0.4% M/M, and Capital Goods output fell -1.9% M/M; however, Energy output increased +1.8% M/M.  Lastly, Eurozone output declined -0.5% M/M and slowed to +2.9% Y/Y (+3.9% 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.  However, given that 1H 2017 GDP is currently estimated at just 2.0% growth, it will be difficult for GDP to achieve our official forecast of 3.0% for 2017.

U.S. Inflation:  U.S. CPI appears to have peaked and the Fed’s preferred inflation metric, the Core PCE Deflator, increased +1.5% Y/Y in June (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 peaked for the year a few months ago, 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 decline as well, although the street expects balance sheet action to begin in September.

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 +6.6% Y/Y in June (+2.7% Y/Y prior), CPI is up +22.9% Y/Y in June (+23.4% Y/Y prior), Consumer Confidence remains depressed in June, and GDP is up just +0.3% Y/Y.

Brazil:  Recent data has shown Business and Consumer Confidence continue to leak and Industrial Production slowed to +0.5% Y/Y, but retail sales are now up +2.4% Y/Y and there have been modest improvement in PMI’s.  With inflation trending lower, the central bank can become more dovish.  Although we are evaluating Brazil for upside potential, the Bovespa Index is already trading near its all-time high.  

Canada: Given concerns about Canada’s housing market (Existing home sales were down -6.7% M/M) 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 have been improving, and Canada’s monthly GDP continues to improve (+4.6% Y/Y in May).

Mexico: Unemployment rate improved to 3.3%, Consumer Confidence continues to improve, and Retail Sales appear to be turning up as well (+4.1 Y/Y in May versus +1.4% prior).   Furthermore, Manufacturing PMI and Orders indicated slower growth in July and Inflation is still in a rising trend.

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, Retail Sales have improved, home price gains are steady, inflation is in an uptrend, and PMI’s improved in July.  We are watching the U.K. for further deterioration.   

European Union:  Economic data has recently slowed in Europe.  PMIs indicate slower growth, Industrial Production fell -0.6% M/M, and Consumer Confidence remains negative.  However, we are seeing improvement in Southern EU nations as well (including Greece). As such, 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 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%).   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, and PMI’s have held up, despite weakness in commodities prices.    So far, housing data remains steady, but recent data have shown some weakness.  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 some modest improvement in China’s manufacturing sector.  Note that China Industrial profits appear to be reaccelerating, and China’s consumer and services sectors remain 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 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.  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, industrial production has accelerated, and consumer confidence remains in a slow up-trend.

Russia: Russian economic data continue to suggest economic growth as GDP accelerated in Q2, although PMI’s slowed in July on the back of lower oil prices.  However, Retail Sales have rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.1% in June (4 straight months of improvement).  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.

HEALTH CARE, TECH, AND FINS LEAD Q2 EPS

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • S&P 500 Fully Valued as we approach 2500.
  • German Industrial Production slipped for the first time in six months in June.
  • Japan’s Leading Index (106.3) at the highest level in over 3 years in June.

HEALTH CARE, TECH, AND FINANCIALS LEAD Q2 S&P EARNINGS:

As of August 3rd, 422 of the S&P 500 Index companies have reported Q2 earnings, of which 296 have beaten earnings (70.14%) and 87 have missed (20.62%), albeit on lowered estimates.  Thus far, the beats have been led by the Health Care, Tech, and Financial sectors, as 43 of 50 Health Care companies that reported earnings, 45 out of the 53 Tech that reported earnings, and 50 out of the 65 Financials companies that reported earnings have beaten estimates.

 

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STREET ESTIMATES TICK LOWER AS S&P VALUATION ASSUMES ROBUST EARNINGS GROWTH:

Note that over the past two weeks, Wall Street analysts lowered their Q2 EPS estimates by -$0.12/share to $31.03.  Moreover, the street lowered their 2017 EPS estimates by -$0.23/share to $127.63 and their 2018 EPS estimates by -$0.05/share to $144.77.  This implies EPS growth of +20.1% Y/Y and +13.4% Y/Y in 2017 and 2018, respectively.  For the reasons mentioned above, we are still below those lofty forecasts, but we still see strong EPS growth for 2017 and 2018.

 

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It’s important to note that Wall Street analysts are baking in 20% Y/Y earnings growth expectations for 2017, and are assuming another 13% growth on top of that for 2018.  At the S&P’s current valuation, the market is placing a 17.1x forward multiple on Full Year 2018 street estimates.  Street estimates are generally revised lower over time.  With that in mind, the market is currently applying an unusually high multiple on street earnings estimates over the next 6 quarters.  We would take the under on such lofty estimates given that the street believes energy sector earnings will DOUBLE from here, while the Financials sector will see an estimated 20% earnings growth.  With oil stuck at $46 and with the yield curve flattening, it’s going to be tough to obtain street estimates in the year ahead.  As we show in the table below, even if we believe street estimates and place a peak multiple of 18.5x those estimates, we are dangerously close to full S&P 500 valuation of 2532.

GERMAN INDUSTRIAL PRODUCTION DOWN -1.1% M/M IN JUNE:

According to Destatis, German Industrial Production fell for the first time in six months, down -1.1% M/M in June.  Furthermore, on a year over year basis, German Industrial Production slowed to +2.5% Y/Y (versus +4.9% Y/Y previously).  In the month, Manufacturing output declined -1.4% M/M and Construction output declined -1.0% M/M; however, Energy output increased +1.4% M/M.

 

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JAPAN’S LEADING INDEX AT HIGHEST LEVEL IN OVER 3 YEARS:

According to the Cabinet Office of Japan, the Leading Index increased +1.6 points M/M to 106.3 in June.  In fact, this is the highest level since March 2014.  In the month, the Coincident Index increased +1.4 points to 117.2 and the Lagging Index increased +1.7 points to 118.1.

 

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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.  However, given that 1H 2017 GDP is currently estimated at just 2.0% growth, it will be difficult for GDP to achieve our official forecast of 3.0% for 2017.

 

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U.S. Inflation:  U.S. CPI appears to have peaked and the Fed’s preferred inflation metric, the Core PCE Deflator, slowed to +1.39% Y/Y in May (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 peaked for the year a few months ago, 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 decline as well, although the street expects balance sheet action to begin in September.

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 rebounded +2.7% Y/Y in May (-2.6% Y/Y prior), CPI is up +23.4% Y/Y in June (+25.4% Y/Y prior), Consumer Confidence remains depressed and fell again in June, and GDP is up just +0.3% Y/Y.

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.  With inflation trending lower, the central bank can become more dovish.  Although we are evaluating Brazil for upside potential, the Bovespa Index is already trading near its all-time high.  

Canada: Given concerns about Canada’s housing market (Existing home sales were down -6.7% M/M and Housing Starts fell -1.9% M/M in June ), 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 have been improving, and Canada’s monthly GDP continues to improve (+4.6% Y/Y in May).

Mexico: Consumer Confidence continues to improve and Retail Sales appear to be turning up as well (+4.1 Y/Y in May versus +1.4% prior).   In June, Manufacturing PMI and Orders surged higher, but slowed in July.  However, Inflation is still in a rising trend, Unemployment has increased and Exports have slowed.

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 seems to be showing some cracks of late.  Retail Sales have slowed materially, Consumer Confidence has deteriorated, home price gains are slowing, manufacturing PMIs trended lower in Q2 and Q2 GDP slowed to 1.7% Y/Y (+2.0% prior).  Meanwhile, inflation is in an uptrend, and PMI’s improved in July.  We are watching the U.K. for further deterioration.  

European Union:  Economic data continue to be robust in Europe despite the slight slip in Composite PMI in July.  Business confidence is elevated throughout Europe and we are seeing improvement in Southern EU nations as well (including Greece). As such, 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 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%).   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 quite strong.   Consumer confidence has been rising for months, business confidence increased in June, industrial production was up +4.1% Y/Y in May, 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).  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, and PMI’s have held up, despite weakness in commodities prices.    So far, housing data remains steady, but recent data have shown some weakness.  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 some modest improvement in China’s manufacturing sector.  Note that China Industrial profits appear to be reaccelerating, and China’s consumer and services sectors remain 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 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.  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, industrial production has accelerated, and consumer confidence remains in a slow up-trend.

Russia: Russian economic data continue to suggest economic growth, although PMI’s slowed in July on the back of lower oil prices.  However, Retail Sales have rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.1% in June (4 straight months of improvement).  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.

LACK OF INTEREST IN PERSONAL INCOME

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

  • Personal Income continues to trend lower, as interest income falls.
  • Wages and Salaries have slowed for four consecutive months … hmm.
  • ISM Manufacturing slows, but remains at robust levels.
  • EU GDP at best pace in 6 years.
  • Official China PMI indicates slow growth in July.

U.S. PERSONAL INCOME SLIPPED DUE TO LACK OF INTEREST:

The Bureau of Economic Analysis reported that Personal Income fell for the first time in seven months, down -$3.5 billion to $16.378 trillion (SAAR) in June.  This is a decline -0.02% M/M and income slowed to +2.61% Y/Y (versus +2.97% Y/Y prior).  Disposable Personal Income (Income less Taxes) fell -$4.2 billion (down -0.03% M/M and slowed to +2.63% Y/Y).  Note that Personal Income taxes increased +0.03% M/M and +2.52% Y/Y to $2.013 trillion (versus +3.26% Y/Y prior).

 

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WAGES AND SALARIES SLOW FOR THE FOURTH CONSECUTIVE MONTH:

In June, wages and salaries increased +0.37% M/M and +2.52% Y/Y, as private wages increased +0.39% M/M and +2.53% Y/Y and government wages increased for the 47th consecutive month, up +0.28% M/M and +2.43% Y/Y.  Note that Wages and Salaries have SLOWED FOR FOUR CONSECUTIVE MONTHS (+2.63% Y/Y versus +2.81% last month and +3.83% in February).   Furthermore, Supplements to Wages & Salaries increased +0.27% M/M and Rental Income increased +0.64% M/M; however, Interest & Dividend Income fell -1.78% M/M and Proprietors’ Income fell -0.09% M/M.

 

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U.S. PERSONAL SPENDING SLOWED IN JUNE:

Personal Spending (PCE) increased for the 29th consecutive month, up +$8.1 billion to $13.305 trillion in June.  Thus, spending increased +0.06% M/M and +3.82% Y/Y, which is the slowest pace since May 2016 (+4.28% Y/Y prior).  Since Disposable Income lagged PCE in dollar terms, Personal Savings fell -$18.3 billion and the “Savings Rate” fell to 3.80% (from 3.93%).

NOBODY IS “SAVING” ANYTHING (EXCEPT FOR MAYBE THE WEALTHY):

As we’ve shown in prior notes, the “savings rate” is a plugged number and actually isn’t savings at all.  It is defined as Income minus Spending minus Taxes.  But “Income” isn’t exactly income, as it includes government transfer payments such as Medicare, Medicaid, Unemployment Benefits, and Social Security.  When you factor in that individuals are receiving more in government benefits than they are paying into those programs, it becomes clear that savings isn’t actually savings; rather the government is running up the debt on our behalf.  This debt is essentially an off-balance sheet item.  When we add it back, we find that the true “savings rate” is actually -6.20% (far off from the +3.80% reported number)!

 

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CORE PCE UP +1.5% Y/Y IN JUNE:

The Bureau of Economic Analysis also reported that the Fed’s preferred inflation metric (Core PCE Deflator) increased +0.11% M/M and +1.50% Y/Y in June (also +1.50% Y/Y prior).  Thus, Core PCE remains at the slowest pace since December 2015.  Meanwhile, the headline PCE deflator increased +0.02% M/M but slowed to +1.42% Y/Y (versus +1.53% Y/Y previously).

 

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U.S. ISM MANUFACTURING INDEX SLOWED TO 56.3 IN JULY:

The ISM Manufacturing Index fell -1.5 points to 56.3 in July.  Despite the slowdown, this is the second highest level since March and this is the 11th consecutive month of growth in the manufacturing sector (16 of the past 17 months).  In the month, there were notable slowdowns in New Orders (-3.1 points to 60.4), Employment (-2.0 points to 55.2), Production (-1.8 points to 60.6), Backlogs (-2.0 points to 55.0) and Exports increased (-2.0 points to 57.5).   Conversely, there were increases in Inventories (+1.0 point to 50.0) and Prices (+7.0 points to 62.0).

 

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U.S. CONSTRUCTION DOWN -1.3% M/M IN JUNE:

According to the Census Bureau, U.S. Construction Spending declined -1.3% M/M in June to a total value of $1,205.8 billion SAAR.  Note that the prior month was revised higher to +0.3% M/M versus unchanged previously reported.  Thus, construction spending slowed to +1.6% Y/Y (versus +3.8% Y/Y prior).  In the month, Residential Construction fell -0.3% M/M and slowed to +9.0% Y/Y (+9.7% Y/Y prior) and Nonresidential Construction fell -2.0% M/M and -3.1% Y/Y (-0.1% Y/Y prior).  Lastly, Private Construction fell -0.1% M/M and slowed to +5.3% Y/Y and Public Construction fell -5.4% M/M and -9.5% Y/Y (-2.9% Y/Y prior).

 

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EURO AREA GDP (+2.1% Y/Y) AT BEST PACE IN 6 YEARS:

According to preliminary data from Eurostat, economic growth in the Euro Area increased +0.6% Q/Q in Q2 2017 (+0.5% Q/Q in Q1).  Moreover, GDP increased +2.1% Y/Y in Q2, which is the highest pace since Q1 2011 (versus +1.9% Y/Y in Q1). EU28 GDP increased +0.6% Q/Q and +2.2% Y/Y in Q1 2017 (+0.5% Q/Q and +2.1% Y/Y in Q1).

 

8

 

CAIXIN CHINA PMI CONFIRMS SLOW GROWTH IN JULY:

The Caixin China Manufacturing PMI increased +0.7 points to 51.1 in July, which is the highest reading since March.  In the month, output and new orders increased at the fastest pace since February and export orders increased at the second fastest pace in three years.  Note that it was reported recently that the official Manufacturing PMI fell -0.3 points to 51.4.

 

9

 

SOUTH KOREA TRADE SURPLUS REBOUNDED IN JUNE:

South Korea’s trade surplus rebounded +$5.145 billion to $10.796 billion in June, according to the Ministry of Trade, Industry, and Energy.  In the month, exports rebounded +14.2% M/M and +13.5% Y/Y to $51.4 billion (vs. +13.1% Y/Y prior).  Furthermore, imports increased +3.2% M/M and +19.8% Y/Y to $40.604 billion (+19.1% Y/Y prior).  Note that exports to China were up on M/M basis but slowed to +5.1% Y/Y (+7.5% Y/Y prior), exports to Japan increased +10.4% Y/Y (+8.1% Y/Y prior), exports to the EU increased +21.0% Y/Y (+21.8% Y/Y prior), and exports to the US fell -1.1% Y/Y (-1.8% Y/Y prior).

RESERVE BANK OF AUSTRALIA LEAVES RATES UNCHANGED:

Once again, the Reserve Bank of Australia decided to leave its benchmark cash rate unchanged at 1.5%.  It should be noted that CPI in Australia slowed to +1.9% Y/Y in Q2 2017.  The RBA stated, “The Bank’s forecasts for the Australian economy are largely unchanged. Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent… The current high level of residential construction is forecast to be maintained for some time, before gradually easing. One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending.”

Once again, the Reserve Bank of Australia is concerned about household debt.  In its statement, the RBA said, “There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes.”  According to the Reserve Bank of Australia, Household Debt to Income levels increased to a record high 190.4% in Q1 2017, with Housing Debt to Income increased to a record 135.0%.

 

11

 

BRAZILIAN INDUSTRIAL PRODUCTION SLOWED TO +0.5% Y/Y IN JUNE:

According to the IBGE, industrial output in Brazil was flat M/M (seasonally adjusted) in June (+1.17% M/M prior).  Thus, industrial production in Brazil slowed to +0.46% Y/Y (NSA) (+4.17% Y/Y prior) and year to date output is now up +0.5%.  In the month, Capital Goods output increased +0.3% M/M and Intermediate Goods output increased +0.1% M/M; however, Consumer Goods output fell -1.1% M/M (led by -6.0% M/M decline in Durable Goods output).

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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