* We think there is no substance to the “truce”, aside from an attempt to buoy markets.

* U.S. ISM Index turned higher in November, while Construction Spending fell in October.

* China PMI’s still bouncing around the ‘50’ level.


During the very early months of World War I, an unofficial ‘Christmas Truce’ occurred in December 1914.  Such ceasefires were reported on a widespread basis, and in some instances soldiers reportedly exchanged souvenirs and food with opposing forces.  There were joint burial ceremonies, prisoner swaps, Christmas caroling, and many say that a friendly game of soccer broke out between English and German troops on Christmas Day.   You can read about it here:

Truces give hope and ease the pain of war.  But we must remember that WW1 continued on for nearly four years after the Christmas Truce.   An estimated 40 million military and civilian casualties occurred during WW1, most coming after this so-called ‘Truce’.   Unfortunately, the Christmas Truce didn’t stop the German army from deploying chemical weapons against the Russians just one month later during the Battle of Bolimow.   The Christmas Truce certainly didn’t prevent one of the bloodiest battles in human history, the Battle of Somme, where one million men were injured or killed. 

In fact, after a couple years of intense fighting and chemical weapons use (you can read about that here: the desire to have ceasefires with the enemy came to an abrupt end.  By the end of 1916, all that the opposing soldiers wanted to do was kill each other.

This brings us to the current “Trade Truce” between the United States and China.   As best we can tell, absolutely nothing meaningful came from the weekend ‘truce’, aside a pushout of further tariffs by 90 days (probably would have happened anyway).  

Trump is tweeting that “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%” but we can’t actually find any confirmation that China has said that at all.  In fact, this was old news from April when Chinese President Xi Jinping pledged to lower the tariff from 25% to 15%.  However, by July, China had added a 25% retaliatory tariff surcharge on top of the 15%, to bring the total tariff to 40%.   We will assume that the 25% auto import surcharge is about to be removed, which means there still will be a 15% tariff on U.S. cars going into China, which is exactly what it would have been in July had the trade war not heated up.

We remind you that nothing has been said about progress on IP protection.   Nothing has been said about stopping technology transfer, which would require China to re-write laws on foreign corporate ownership.  Nothing has been said about an espionage truce.   In fact, Treasury Secretary Mnuchin is already throwing cold water on the truce.   In a phone interview with the Financial Times, Mr. Mnuchin said, “There’s a 100 per cent unanimous view on our economic team that this needs to be a real agreement.  These can’t be soft commitments from China. There need to be specific dates, specific action items.”   We wish Mr. Mnuchin good luck but we doubt there will be a meaningful agreement.   We still believe China’s economy is in the midst of meaningful deterioration and we expect more tariff headaches to come in three months.  


The ISM Manufacturing Index increased +1.6 points to 59.3 in November This is the 27th consecutive month of growth in the manufacturing sector.  In the month, there were notable increases in New Orders (+4.7 points to 62.1), Production (+0.7 points to 60.6), Employment (+1.6 points to 58.4), Inventories (+2.2 points to 52.9), and Backlogs (+0.6 points to 56.4).  Conversely, Prices Paid plunged -10.9 points to 60.7, which is the lowest level since June 2017. 




According to the Census Bureau, U.S. Construction Spending declined for the third consecutive month, down -0.1% M/M in October to a total value of $1,308.9 billion SAAR On a Y/Y basis, construction spending slowed to +4.9% Y/Y (vs. +5.7% prior).  In the month, Nonresidential Construction increased +0.1% but slowed to +7.3% Y/Y (+8.3% Y/Y prior) and Residential Construction declined -0.5% M/M and slowed to +1.7% Y/Y (+2.2% Y/Y prior) Lastly, Public Construction increased +0.8% M/M but slowed to +8.5% Y/Y (+10.6% Y/Y previously) and Private Construction fell -0.4% M/M and slowed to +3.9% Y/Y (+4.3% Y/Y prior).




We like to compare the ‘official’ government PMI data against the independent Caixin/Markit PMI data.  In November, the Caixin Manufacturing PMI increased +0.1 points to 50.2.    Note, that the “official” Manufacturing Index fell -0.2 points to 50.0.  Thus, either way you spin it, manufacturing in China has stalled and it is barely above trend in the month of November.  In the month, New Orders increased and Input Costs fell to the lowest level in seven months; however, New Exports and Employment declined.

According to Caixin, “Overall, domestic demand across the manufacturing sector improved in November, while overseas demand was still subdued. Production slowed, confidence was relatively stable, capital turnover was improved, and upward pressure on industrial product prices eased. China’s economy was weak, but did not show significant signs of deterioration.”




U.S. GDP:  Our GDP model sees 3%+ Real GDP growth through Q1 2019, but slower growth thereafter (downshifting to 2%).  Our model doesn’t factor in the stimulus from the recent tax cut, so the growth reversal in 2019 could be more pronounced than our model appreciates (it is presumed that 2018 will be better than our model due to the tax cut, whereas the delta for 2019 would be worse than our model predicts).

U.S. Inflation:  U.S. inflation appears to have hit a peak three months ago and with oil prices down and the dollar index up, we believe inflation has peaked (for now).   

U.S. Federal Reserve:  With signs that both inflation and growth are moderating a touch, we think there is increasing odds that we are approaching a ‘Fed Pause’ in 2019.

U.S. Treasuries:  Although recent inflation data has been cooling, the job market remains tight and Real GDP trending is still trending well above +3.0%.  With that in mind, we still believe the yield on the 10-year U.S. Treasury will trend higher (but it’s getting harder to reach 3.50% as inflation and growth slow). 

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the market seems to be repricing forward earnings.  Our SPX target is for an 18.5x P/E on 2019 forward earnings of $165, bringing our 2018 SPX target to 3,050.  We prefer financials given expectations for economic growth and an improving (steepening) yield curve.

Argentina:  The macro looks abysmal in Argentina, and they have IMF involvement, but there is a silver lining here in that Q2 GDP was so bad that it might be hard for Q3 to be negative!  Overall, Argentina’s economic condition appears to have weakened in 2018.   Inflation is at a lofty 39.5%, Industrial Production is down -11.5% Y/Y, Exports are down -4.8% Y/Y, Consumer Confidence has deteriorated since January, the Economic Activity Index collapsed in May, and Unemployment jumped to 9.6% in Q2 (7.2% in Q4 2017).

Brazil:  Following Brazil’s election, Consumer Confidence has turned higher and PMI’s have indicated a return to growth.  We are encouraged by recent developments, but with the Bovespa near its record high, we need to see more follow-through with macro data.  Currently, GDP is up just 1% Y/Y, Industrial Production is down -2.0% Y/Y, Retail Sales slowed to +0.1% Y/Y, and Unemployment continues to be elevated (11.7% in October, which is an improvement).

Canada: Canada’s housing market has been weak but recent data have shown signs of life in housing starts.  Not to mention, Retail Sales have improved for two straight months.  Canada’s monthly Real GDP had been in a slowing trend for a year.  Employment picked up in October as the Unemployment Rate fell to 5.8% from 6% two months ago.

Mexico: Mexico’s macro data is mixed.  Manufacturing PMI’s are hovering at or below the “50” level, But retail sales accelerated to a 4.1% Y/Y rate, Confidence is strong, and GDP is up 2.5% Y/Y.  Note that Unemployment improved to 3.2% in October, which had been trending up slightly since May.

Venezuela: Remains uninvestable.


United Kingdom:  BREXIT drama aside, inflation has been in a slowing trend in 2018, unemployment has been declining, wages have been turning up, and PMI’s have been steady.   Even the big macro risk, housing, hasn’t shown much weakness.  In fact, home prices improved slightly in August on a Y/Y basis.

European Union:  Although Unemployment continues to trend lower, Industrial Production is now up +0.9% Y/Y, and Retail Sales are now up +0.8% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs, and the political situation has gotten so bad that Merkel isn’t going to run again.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  We still believe Europe is uninvestible.  

European Central Banks:  The ECB is slowly removing accommodation and has reiterated its claim that bond buying is over in December.  But Mario Draghi hasn’t given a timeline for raising rates and the recent decline in CPI will give them even further pause for doing so

Eastern Europe: Ukraine situation aside, we saw earlier in the year with Italy, nations with high debt levels can rapidly become front-burner macro items.  The same can be said 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%).   We also have the EU Article 7 issues against Hungary and Poland to watch as well.  The world is turning farther right, and pressure from unelected EU leaders will only push these nations further right.

South AfricaWe remain highly negative on South Africa, but we have noticed recent efforts by the ANF to walk back some of the rhetoric.   The ANF is now trying to reengage with foreign capital and wants to liberalize some of the rules around mining investment.   Politics aside, the macro picture is getting bleaker by the day as Business Confidence is rolling over, GDP is negative, Inflation has turned up, Retail Sales are barely positive, and PMI’s are bouncing around the ‘50’ level.  None of this will help unemployment (27.2% in Q2).   In our view, the mere risk of having assets appropriated will grind foreign capital commitments and new business investment to a screeching halt, and more time is going to need to pass in order for foreign investors to feel any degree of confidence.  Our best guess is that more downside exists for South Africa’s economy and we believe the currency and equity market will suffer as a result.

Turkey:  Remains uninvestable.


Australia:  The Australian data remain mixed but we have serious concerns about the decline in building approvals and new home loans, as well as China exposures.  With that in mind, we have a short view on Australian equities.  So far, the macro remains OK as the Unemployment Rate appears to be ticking lower (to +5.0% in October), Real GDP accelerated to +3.4% Y/Y in Q2, Exports are up +15.9% Y/Y, Wages are up +2.1% Y/Y, Retail Sales accelerated to +3.7% Y/Y in September, and Consumer Sentiment has ticked slightly higher recently.  However, consumer credit remains elevated and the value and number of home loan approvals and permits have turned negative, which is a bad sign as home prices have turned negative as well.

China:   Is this a Trace Truce or is this Fake News?  Maybe we’ll coin it Fake Truce.   We don’t believe anything meaningful has come out of the Trump/Xi dinner and we wonder how long it will take before the market digests that.   Meanwhile, China’s economic data continue to deteriorate, as PMI’s are now bouncing around the ‘50’ level.   That doesn’t sound like 6% growth at all.  Or 5%, or 4% or 3%……

India:  Indian economic activity appears strong, which runs counter to worries about shadow banking issues.  Commercial Credit accelerated to +14.6% Y/Y in October, Industrial production has been strong, M3 money growth has been steady at 10%, and PMI’s still show growth (albeit slower).  We are watching to see if any deterioration happens.

Indonesia:  Indonesia had gone four years without raising rates, but now rates have been hiked +125bps since Mid-April.   Indonesia’s GDP and Private Consumption Expenditures are up over +5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI had been stable in the 49-51 range for a year and slowed to 50.5 in October, Industrial Production rebounded +9.0% Y/Y.  However, Retail Sales slowed slightly to +3.9% Y/Y and Exports slowed to +3.6%.  If there’s one emerging market that we’d be inclined to be bullish, this would be it, but we’d need to see the free-fall in the currency come to an end first.

Japan:  Overall, the economic data have been mixed but we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation.   We are slowly becoming positively biased.

Russia: Russia just can’t help itself.   The sanctions are beginning to have an impact on Russia and Russia is up to its antics again with Ukraine.  We find Russia uninvestible at this time.

South KoreaLate last week, the Bank of Korea raised rates +25 basis points to 1.75% (first hike in a year.  Overall, the economic data have been mixed.  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which increased +17.7% Y/Y in October.   Also, GDP increased +2.0% Y/Y in Q3, Income is up +4.2% Y/Y, Industrial Production increased +0.9% Y/Y, and the Unemployment Rate improved to 3.9% in October.  Conversely, Retail Sales slowed to +3.0% Y/Y.





























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