“If we delay too long in taking the next normalization step and then find ourselves in a situation where the labor market becomes unsustainably tight, price pressures become excessive and we have to move rates up steeply, we could risk a recession.”
Loretta Mester, President of the Federal Reserve Bank of Cleveland, 5/8/17
FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- Q1 earnings set to rise 21% Y/Y.
- Consumer Credit growth picks up, but it’s all due to gov’t student loans.
- China Trade data worsen.
- Canadian Housing Starts slip, but remain at elevated levels.
NEARLY 74% OF THE S&P 500 HAVE BEATEN Q1 ESTIMATES:
As of the end of last week, 409 of the S&P 500 companies have reported Q1 earnings and 73.84% have beaten estimates compared to 18.83% that have missed estimates. The earnings beat this quarter (albeit on lowered expectations) has been led by Tech (83.67%), Financials (83.61%), and Health Care (80.85%).
Note that over the past week, street estimates have actually been revised higher due to the strong Q1 earnings reports. Wall Street analysts have increased their FY 2017 earnings forecast by +$0.23 to $129.71 (of which Q1 was revised by +$0.38) and they increased their 2018 FY earnings forecast by +$0.10 to $146.75. This would represent earnings growth of +22.1% Y/Y and +13.1% Y/Y in 2017 and 2018, respectively.
CONSUMER CREDIT UP +$16.4 BILLION M/M IN MARCH:
On Friday, the Federal Reserve released its report on consumer credit for the month of March, showing overall consumer credit increased a seasonally-adjusted +$16.431 billion to a record $3.806 trillion. Thus, Consumer credit has increased for the 67th consecutive month, up +$1.097 trillion during that time. In March, total credit increased +6.0% Y/Y and increased at a +5.2% annualized rate. In March, non-revolving credit increased +$14.471 billion to $2.806 trillion (+6.9% Y/Y and +56.2% annualized rate) and revolving credit increased +$1.96 billion M/M to just shy of $1.0 trillion (+6.31% Y/Y and +2.4% annualized rate).
Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$1.284 billion in March to $3.702 trillion. In the month, government loans (student loans) increased for the 61st consecutive month (+$2.864 billion to $1.12 trillion). Conversely, non-government loans declined for the third consecutive month (-$1.58 billion), led by a significant decline in loans from Depository Institutions.
CHINA TRADE SURPLUS IMPROVED TO $38 BILLION IN MARCH DUE TO SLOWER TRADE:
In U.S. Dollar terms, China’s National Bureau of Statistics reported that China’s trade surplus increased +$14.13 billion to +$38.05 billion in March (+$23.92 billion prior). However, the improvement in the month was due to a slowdown in overall trade. In the month, China’s exports slipped -$0.60 B M/M to $180.0 billion, which is a slowdown to +8.0% Y/Y (versus +16.4% Y/Y prior). Meanwhile, China imports declined -$14.72 billion M/M to $141.96 billion, which is a slowdown to +11.9% Y/Y (versus +20.3% prior).
Note that, Crude Oil imports slowed to +5.6% Y/Y (+19.4% Y/Y prior) and Copper Ore imports slowed to +7.9% Y/Y (+19.0% Y/Y prior) in the month of March. Moreover, exports to Hong Kong fell -15.3% Y/Y (-4.8% Y/Y prior), exports to the EU slowed to +4.0% Y/Y (+16.6% prior), and exports to the US slowed to +11.7% Y/Y (+19.7% Y/Y prior).
GERMAN FACTORY ORDERS UP +1.0% M/M IN MARCH:
According to the German Economy Ministry, German factory orders increased for the second consecutive month, up +1.0% M/M on a seasonally and inflation adjusted basis in the month of March. However, factory orders slowed to +2.4% Y/Y (+4.7% Y/Y prior). In March, Foreign factory orders increased +4.8% M/M and +2.5% Y/Y (+3.6% Y/Y prior) but Domestic orders fell -3.8% M/M and slowed to +2.2% Y/Y (+6.2% Y/Y prior).
U.S. GDP: Our GDP model points toward stronger growth in 2H 2017 (+3.1% Real GDP) given improvements in workforce population growth and workforce participation. Our official forecast for 2017 is 3.0%.
U.S. Inflation: U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator slowed to +1.56% Y/Y in March (away from the Fed’s 2% inflation target). As we anniversary the drop in commodities prices, we expect headline inflation to peak within the next few months, taking pressure off of the Fed’s current hawkish rate stance.
U.S. Federal Reserve: Given our belief that U.S. inflation will peak within the next few months, we believe the FOMC will become increasingly more data-dependent. We believe the Fed will hike rates 1-2 more times in 2017 and talk of the Fed reducing its balance sheet will become moot.
U.S. Treasuries: With headline CPI potentially hitting a near-term peak of 2.7% Y/Y, we believe the 10-year U.S. Treasury is now range-bound through the end of the year. We would be inclined to be buyers of Treasuries if the 10-year yield were to approach its recent high of 2.63%.
U.S. Equities and Earnings: S&P 500 operating earnings will rise materially in 2017, but our yearend S&P 500 target of 2400 has already been attained. We favor the Financials and Energy sectors, as well as the Homebuilding sub-sector, and are offsetting that against underweight views in Consumer Staples and Utilities, which are overvalued by historical measures.
Argentina: In short, the economic data out of Argentina remains bad (but less bad). Exports increased +2.3% Y/Y in March, Industrial Production declined -0.4% Y/Y in March (-6.0% Y/Y prior), Consumer Confidence remains depressed but improved in March, and GDP is still negative.
Brazil: Recent data suggests that Brazil is rolling over again and with Brazilian markets up so much since Rousseff’s removal, we recently initiated a short view on Brazil’s Bovespa. Retail Sales worsened to -3.2% Y/Y in March. Consumer Credit Card transactions have slipped in Q1. Confidence, albeit high, ticked slightly lower in March. The Unemployment Rate has jumped to a record high 13.7% in March. Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in March, thus supporting Brazil’s recent rate cut.
Canada: Given concerns about Canada’s housing market, trade disputes, and potential fallout from lower oil prices, we are adding Canada to our downside risk watch today; however, so far Canada’s economic data remain healthy (actually most data are improving). Consumer Confidence remains in a rising trend, manufacturing PMI’s are improving, unemployment has been falling, and Canada’s monthly GDP has increased for three straight months.
Much focus is on falling sales activity in the Vancouver housing market, but so far, we are yet to see any spill over into other areas. In fact, Toronto new home prices continue to accelerate, rising +8.6% Y/Y in February (+8% prior). Today, we learn that housing starts slipped M/M in April, but solely because March had been unusually robust.
Mexico: Inflation continues to rise, yet Consumer Confidence improved in Q1, following a sharp decline. Meanwhile, Manufacturing is slowing. We’re neutral on Mexico given the political uncertainty, but certainly the fundamental backdrop has worsened.
Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again. We are hopeful …
United Kingdom: The U.K. economy seems to be on decent footing post-BREXIT, but Q1 growth appears to have slowed. With some modest economic deterioration and Article 50 triggered on March 29th, we recently closed out our bullish view on GBP.
European Union: With political uncertainty lifted (Macron won, Greece gets bailed out on 9/22, and Merkel gets reelected in September), we can now focus on the improvement seen in economic data in Europe (higher PMIs and lower unemployment). As such, we are bullish on the Euro STOXX 50 Index.
European Central Banks: The ECB is doing exactly what we thought they would do by favoring asset purchases over furthering lowering rates into negative territory and now the ECB is facing rising inflation. The ECB has now begun to taper its asset purchases and certainly a discussion will begin on the process of how/when to raise rates. We will watch to see if ECB tapering has any meaningful impact on zero (or near-zero) interest rates throughout the continent.
Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).
South Africa: Recent data show improvements in PMI, Business Confidence, mining production, and Vehicle Sales following weak Q4 data, which inflation data weakened in January. Given South Africa’s commodity-driven exports, a stronger U.S. dollar could continue to hamper export growth.
Turkey: What’s not to love about Turkey? Not only does Turkey have a worsening political dictatorship, but inflation is rising (+11.9% Y/Y in April), industrial production has turned negative, and unemployment has turned higher. Overall, Turkey’s economic and political situation appears to be too challenging.
ASIA / PACIFIC:
Australia: The RBA has cut rates twice in the past year and we may be seeing some of the after effects as it was reported that Australian home prices have surged. Although, PMI’s have improved in recent months, retail sales have slowed slightly and the unemployment rate recently ticked higher. Recent trade data suggests that Australian trade with China has improved. We are monitoring Australia for further improvement. Note that the ASX 200 index trades at a P/E of 20x and yields 4.2% (when compared to other developed economies, the ASX is cheaper than its peers). We remain neutral on Australia until further economic improvement is evidenced.
China: Recently, we closed out our China equity market short view on the back of stronger trade data, and some subtle improvements in PMI’s (which recently weakened again). It appears that China still plans to stabilize markets ahead of the National Communist Party Congress later this year, and we no longer believe a short China equities position offers compelling risk/reward at this time.
India: Money supply growth is beginning to recover following last year’s currency demonetization. M1 growth has “improved” to -4.3% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.1% Y/Y (was +6.4% in January). Manufacturing and Services PMI’s improved in Q1 (but slowed in April), and inflation appears stable. As exports and imports in India are surging in Q1, it appears economic activity is rebounding. However, the recovery may be priced in as the Sensex index is up 12.4% this year and trades at an above-average P/E.
Indonesia: Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, but Consumer Confidence and inflation appear to be turning higher. As a result, it is reasonable to assume that the central bank’s dovish policy stance (six rate cuts in 2016) may revert to a more neutral stance this year.
Japan: Data from Japan in Q1 showed modest, positive improvements in Unemployment, CPI, PPI, retail sales, and manufacturing; however, Industrial Production and Exports have recently slipped.
Russia: Russian economic data continues to improve alongside rising oil prices. Industrial Production rebounded, manufacturing PMI’s remain strong, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.4% in March. Meanwhile, CPI is moderating, which allowed the Bank of Russia to cut rates once again. Russian equities remain the cheapest in the industrialized world and we remain bullish.
GLOBAL CENTRAL BANK SCORECARD:
MACRO TRADING IDEAS:
WEEK IN REVIEW – BEST & WORST PERFORMERS:
S&P 500 SECTOR PERFORMANCE:
BEST/WORST PERFORMING GLOBAL STOCK MARKETS:
BEST/WORST PERFORMING WORLD BOND MARKETS:
BEST/WORST PERFORMING CURRENCIES:
COMMODITIES MARKET PERFORMANCE:
MAJOR GLOBAL STOCK MARKETS:
MAJOR GLOBAL BOND MARKETS:
This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author’s opinion at a particular point in time and April change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested.