“If it [a Parliament bill supporting the death penalty] comes in front of me, I will approve it. But if there is no support [from Parliament]… then what shall we do? Then we could have another referendum for that.”
Turkish President, Recep Tayyip Erdogan, 4/16/17
FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- Turkey is now both an economic and political disaster, but it may be too soon to short.
- Brazil data showing weakness again, and it’s pretty ripe for shorting, as we initiate today.
- S. economic data and inflation appear to be hitting inflection point. Has inflation peaked?
HOWARD STERN HAS NOTHING ON TURKISH PRESIDENT ERDOGAN:
Move aside Howard Stern, there is a new King of All Media in town, and that’s Turkish President Recep Tayyip Erdogan. This morning, following Turkey’s narrowly-won referendum, NATO finds itself with an uncomfortable ally in the semi-dictatorship that is now Turkey. Although the referendum was only won by roughly 51.4% of the vote, the remaining 48.6% have relatively no voice. Mainstream media in Turkey is controlled by the government. Those who openly objected to the referendum on social media were rounded up for questioning (see here: https://is.gd/iEfJc2), and election monitors are outraged that unstamped ballots were included in the vote count and may have altered the vote.
And here: https://is.gd/u7B6Ot
During the run-up to the referendum, Mr. Erdogan made it clear how he felt about those who were planning to vote “No.” In his view, those who vote “No” are equivalent to terrorists, traitors, and are aligned with supporters of the failed July 15th coup attempt. And Erdogan wants to bring back the death penalty as punishment for those types of miscreants. As we see it, if you voted “No” in Turkey, you had no voice and could ultimately find yourself dead. Seems to us, the election monitors may have a point here.
NY FED MANUFACTURING INDEX SLOWED TO 5.2 IN APRIL:
The NY Fed’s Empire State Manufacturing Index fell -11.2 points to +5.2 in April. This is the lowest level since November 2016; however, the index now indicates growth in the region for the sixth consecutive month. The slowdown in the month was led by Current New Orders (-14.3 points to +7.0), Unfilled Orders (-1.8 points to +12.4), and Average Workweek (-6.2 points to +8.8). On the other hand, there were improvements in Shipments, Delivery Times, Inventories, Prices, and Number of Employees. Furthermore, the Future General Business Index increased +2.5 points to 39.9.
NAHB/WELLS FARGO U.S. HOUSING MARKET INDEX SLOWED FROM 12 YEAR HIGH:
The NAHB Housing Market Index slipped -3 points to 68 in the month of April. However, last month was the highest level since June 2005 and it still marks the 34th consecutive month above 50! In the month, Current sales fell -3 points to 74, Future Sales fell -3 points to 75, and Traffic flows fell -1 point to 52. Geographically, the West was unchanged at 77 and there were slowdowns across the rest of the U.S.: the Northeast (-8 points to 45), Midwest (-5 points to 67), and the South (-1 point to 70).
U.S. RETAIL SALES DOWN FOR THE SECOND STRAIGHT MONTH IN MARCH:
On Friday, the U.S. Department of Commerce reported that U.S. Retail Sales fell for the second consecutive month, down -0.22% M/M in March. Note that the prior month was revised lower to -0.26% M/M versus +0.08% previously reported. Nevertheless, on a Y/Y basis, retail sales increased +5.16% Y/Y (versus +5.12% prior). Note that Auto Sales declined -$1.17 billion or -1.22% M/M. Therefore, on an ex-Autos basis, Retail Sales increased +0.04% M/M and +5.04% Y/Y (versus +5.50% prior).
THE HAVES AND HAVE NOTS IN RETAIL SALES:
In the month of March, Retail Sales increased in seven of the 12 major categories (ex-Autos). The increase in the month was led by Electronics sales (+2.59% M/M), Miscellaneous sales (+1.76% M/M), and Clothing sales (+1.00% M/M). Conversely, Building & Materials sales fell -1.50% M/M (February was up +2.62% and warm weather likely pulled forward March sales), Gasoline Stations sales fell -0.96% M/M, Sporting Goods sales fell -0.79% M/M, and Restaurant sales fell -0.57% M/M.
U.S. HEADLINE CPI DOWN -0.3% M/M IN MARCH:
Also on Friday, the Bureau of Labor Statistics reported that Headline CPI feel for the first time in 13 months, down -0.29% M/M in March. Furthermore, CPI slowed to +2.38% Y/Y (versus +2.74% Y/Y prior), which is the slowest pace in 2017. Energy prices fell -3.20% M/M and slowed to +10.94% Y/Y (+15.19% Y/Y prior), led by the -6.19% M/M decline in gasoline. Also, Food prices increased +0.34% M/M and +0.48% Y/Y (flat Y/Y prior). “Core” CPI (ex- Food and Energy) declined for the first time in 86 months, down -0.12% M/M and slowed to +2.00% Y/Y (+2.22% Y/Y prior). This is the 17th consecutive month above 2% Y/Y. Note that, Overall shelter costs increased for the 84th consecutive month, up +0.12% M/M and +3.45% Y/Y (+3.52% Y/Y prior), Transportation prices increased +0.36% M/M and Medical Care prices increased +0.14% M/M. However, Apparel fell -0.70% M/M, New Car prices fell -0.30% M/M, and Used Car prices fell -0.90% M/M.
CHINA Q1 2017 GDP UP +6.9% Y/Y:
Today, the National Bureau of Statistics of China reported that Q1 2017 Real GDP increased +1.3% Q/Q and +6.9% Y/Y (versus +1.7% Q/Q and +6.7% Y/Y in Q4). On a nominal basis, Q1 GDP was 18,068.3 billion yuan, which is an increase of +11.8% Y/Y (versus +9.6% Y/Y prior). It should be noted that in Q1 2017, China exports increased +14.8% Y/Y to 3,326.8 billion yuan, whereas China imports increased +31.1% Y/Y to 2,871.8.
Primary Industry: On a nominal basis, declined -1.7% Y/Y to 865.4 billion yuan. Slowed to +3.0% real cumulative Y/Y (versus +3.3% Y/Y previously).
Secondary Industry: On a nominal basis, increased +14.2% Y/Y to 7,000.5 billion yuan. Increased +6.4% real cumulative Y/Y (versus +6.1% Y/Y previously).
Tertiary Industry: On a nominal basis, increased +11.6% Y/Y to 10,202.4 billion yuan. Increased +7.7% real cumulative Y/Y (versus +7.8% Y/Y previously).
The press release indicated that “The industrial structure continued to be optimized. In the first quarter, the value added of the tertiary industry accounted for 56.5 percent of GDP, 17.8 percentage points higher than that of the secondary industry. The demand structure was further improved. In the first quarter, the final consumption expenditure’s contribution to GDP was 77.2 percent…Energy conservation and consumption reduction have achieve stable progress. In the first quarter, the energy consumption per unit of GDP dropped by 3.8 percent year on year.”
CHINA RETAIL SALES, INDUSTRIAL PRODUCTION, & FIXED ASSET INVESTMENT IMPROVED IN MARCH:
The National Bureau of Statistics of China also released their reports on Industrial Production, Fixed Asset Investment, and Retail Sales and the results showed that activity in China was strong in March. China Retail Sales increased +0.84% M/M and +10.9% Y/Y (also +10.9% prior) and Industrial Production increased +0.83% M/M and +7.6% Y/Y (versus +6.0% prior). Furthermore, China Fixed Asset Investment increased +0.87% M/M and +9.2% cumulatively YTD (versus +8.9% 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: As evidenced above, U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator approaches 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. Industrial Production declined -6.0% Y/Y in February (-1.1% Y/Y prior), Exports declined -6.2% Y/Y in February, Consumer Confidence remains depressed 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, today we initiate a short view on Brazil’s Bovespa. Retail Sales which remain negative on a Y/Y basis worsened in February. Consumer Credit Card transactions have slipped in Q1. Confidence, albeit high, ticked slightly lower in March. The Unemployment Rate has jumped from 11.8% to 13.2% since October. And the Banco Central do Brasil’s Economic Activity Index turned negative in February, thus supporting Brazil’s recent rate cut.
Canada: Recent economic data suggest improvement in Consumer Confidence, manufacturing, and Housing. Canada’s monthly GDP has been remarkably steady at roughly 2.0% Y/Y over the past four months and Unemployment improved to 6.6% in February. As the U.S. economy experiences liftoff, we are watching Canada for signs that it too may follow suit and certainly improvement in energy prices are helping in that regard. We will watch for further signs of improvement in Canada in the coming weeks.
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.
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: All eyes are now on round one of the French election (April 23) and while the market remains jittery about Marine Le Pen, Communist Party Candidate Jean-Luc Melanchon now has 18% voter support. Despite the political uncertainty, economic data is still improving 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 (+11.3% Y/Y in March), industrial production is slowing, 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. Today’s stronger than expected GDP release confirms that China is improved somewhat. It appears that China plans to continue 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 -3.6% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.7% Y/Y (was +6.4% in January). Manufacturing and Services PMI’s improved in Q1, 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 11% 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: Despite an unexpected drop in Industrial Production and a worsening in unemployment, Russian economic data continues to improve alongside rising oil prices. Real Disposable Income and Wages have turned up, manufacturing PMI’s are trending higher, and Car Sales were up 9% Y/Y in March. Meanwhile, CPI is moderating, which allowed the Bank of Russia to cut rates. 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 WORLD BOND MARKETS:
BEST/WORST PERFORMING GLOBAL STOCK MARKETS:
BEST/WORST PERFORMING CURRENCIES:
COMMODITIES MARKET PERFORMANCE:
MAJOR GLOBAL STOCK MARKETS:
MAJOR GLOBAL BOND MARKETS:
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