* Chicago Fed National Activity suggest steady growth but Dallas Fed slowed.

* German IFO Business Climate Index fell for 7th time in 8 months in September.


According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) was unchanged at +0.18 in August However, it should be noted that the prior month was revised higher to +0.18 versus +0.13 previously reported.  Furthermore, the three-month average rebounded +0.22 points to +0.24 In the month, there were improvements in Production & Income (+0.06 points to +0.16), Sales & Inventories (+0.06 points to +0.07), and PCE & Housing (+0.02 points to -0.04).  Conversely, Employment & Hours declined -0.14 points to -0.01.





Today, the Dallas Federal Reserve reported that the Current General Business Activity Index fell for the third consecutive month, down -2.8 points to +28.1 in the month of September Despite the slowdown, it marks the 24th consecutive month of growth in the region.   In the month, there were declines across the board, led by: Current New Orders (-9.2 points to +14.7), Growth Rate of New Orders (-8.4 points to +11.5), Unfilled Orders (-7.3 points to +1.8), Shipments (-5.2 points to +20.8), Number of Employees (-11.2 points to +17.7), and Average Workweek (-6.3 points to -12.7) Furthermore, there were declines in Prices for Raw Materials (-0.9 points to +44.4) and Prices Received for Finished Goods (-1.7 points to +13.6).  As for the outlook, manufacturers had a slightly more positive business outlook, as the Forecast increased +3.3 points to +38.0 (highest level since February).





The German IFO Institute Business Climate Index declined for the seventh time in the past eight months, down -0.2 points to 103.7 in August.  However, it is still the second highest level since February Note, the Business Situations Index fell -0.1 point to 106.4 and the Business Expectations Index fell -0.3 points to 101.0.





U.S. GDP:  Our GDP model sees 3%+ Real GDP growth through Q1 2019, but as higher oil and interest rates flow through the system, our model sees slower growth thereafter.   Note that our model doesn’t factor in the stimulus from the recent tax cut, so the 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 remains in an upward trend (although inflation slowed last month), and we continue to believe that wage inflation should continue to rise as labor slack (particularly in prime working age groups) continues to decline.

U.S. Federal Reserve:  We believe two more rate hikes will happen in 2018 and the market assumes that those hikes will come in September and December (the market seems to think that rate hikes can only happen at FOMC meetings that have an attached press conference).

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.  We expect to see yields approach 3.50% by year end 2018. 

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the question remains, will the market put a 20 P/E multiple on forward earnings?  We think a 20 forward multiple is aggressive, but 18.5 may not be.   Our SPX target is for an 18.5x P/E on 2019 forward earnings of $165, bringing our new 2018 SPX target to 3,050).  We prefer financials given expectations for economic growth and an improving (steepening) yield curve.   We also have a positive bias on the Technology and Health Care sectors.

Argentina:  The macro looks abysmal in Argentina, and they are rumored to have already asked for MORE money from the IMF, 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 34%, Industrial Production is down -5.7% 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). Meanwhile, Argentina’s bonds have collapsed since late June.

Brazil:  Overall, Brazil’s data has weakened in 2018, and the political situation has now taken a knife to the gut.  GDP is up just 1% Y/Y.  Note that Unemployment continues to be elevated (12.3% in July, which is an improvement), Retail Sales are now down -1.0% Y/Y, and the Composite PMI hooked back into negative territory in August.

Canada: Canada’s housing market has been weak, as building starts and permits have gone negative and home prices are slowing (Toronto area is now negative).  Moreover, the NAFTA headlines certainly don’t paint a picture that a deal is in the works.  Note that Canada’s monthly Real GDP has been in a slowing trend since October (3.5% in October, but now down to 2.4%), while monthly Nominal GDP has slowed from +6.5% in June 2017 to +4.1% Y/Y in Q2 … remember, nominal pays the bills.

Mexico: Mexico apparently has a NAFTA deal, just don’t tell Canada.  Overall, Mexico’s macro data looks to be improving.  Despite negative GDP in Q2, GDP actually accelerated to +2.6% Y/Y (from +1.4%).  Retail Sales accelerated to +4.2% Y/Y, PMI’s have been steady, and Consumer Confidence jumped in July.

Venezuela: Remains uninvestable.


United Kingdom:  We’re no longer sure that anyone can handicap BREXIT in any meaningful way, but the E.U.’s Barnier claims that a deal is reachable within weeks (6-8 weeks according to European time, which we would say is probably more like 6-8 months in actual time).  We are GBP bullish because we believe the BREXIT bark is way worse than the bite (there’s no incentive for these politicians to do anything other than talk tough and otherwise blabber about)  But if we take a step back, we can make a case that BREXIT doesn’t even matter at this time.   The U.K. economy has been reasonably resilient throughout the BREXIT process.  Unemployment continues to improve, PMI’s have been strong (but slipped a little in July), and Economic Sentiment hit its highest level since February this month.  This gives the BOE room to be a bit more hawkish.

European Union:  Although Unemployment continues to trend lower, Economic Sentiment is turning lower, Industrial Production is down -0.1% Y/Y, Retail Sales slowed to +1.1% Y/Y, and PMI’s have turned back from recent highs.  The events in Italy foreshadow possible macro risks for Europe in 2019, after monetary accommodation is removed.  

European Central Banks:  The ECB is slowly removing accommodation and will end its bond buying in December (it will cut bond purchases in half to 15B a month in September and then stop all buying next year).  But Mario Draghi has given no indication about raising rates and the recent decline in CPI will give them even further pause for doing so With that in mind, there are now rumors that the ECB isn’t going to remove accommodation, rather they will reinvest their bond portfolios into long duration bonds, similar to the U.S. Fed’s Operation Twist in 2011.

Eastern Europe: As 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%).   Yet, economic data have been robust this year across most of Eastern Europe.

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 – and we regret not putting the short on here.


Australia:  The RBA has cut rates twice in the past year and Australian data is mixed.  So far, the Unemployment Rate appears to be ticking lower (to +5.3% in August), Real GDP accelerated to +3.4% Y/Y in Q2, Wages are up +2.1% Y/Y, Retail Sales accelerated to +2.9% Y/Y in July, 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.  We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.

China:   It’s officially a trade war and Jack Ma things we’ve got 20 more years to go.  China isn’t even interested in meeting with the Trump Administration at this time.  In fact, China wrote a white paper of the weekend, that stated the following:

”trade and economic friction between the two sides has escalated quickly over a short period of time, causing serious damage to the economic and trade relations which have developed over the years through the collective work of the two governments and the two peoples, and posing a grave threat to the multilateral trading system and the principle of free trade.”

We continue to believe that trade talks aren’t going to get better for quite some time and China will use every tool in its arsenal, which includes Renminbi depreciation.  With China cracking down on shadow banking, pollution, industrial overcapacity, and removing migrant workers from its cities, we expect China GDP to continue to trend lower as well (although, they may never actually report it).  It is notable that China is already working to stimulate its banking sector by lowering reserve requirements and encouraging banks to do “debt for equity’ swaps and now China’s sovereign wealth fund wants to buy Chinese domestic equities.  Note that PMI’s continue to indicate slow growth and deteriorated further in

August and Exports slowed to +9.8% Y/Y in August (versus +12.2% Y/Y prior).  However, unemployment remains low, Retail Sales accelerated to +9.0% Y/Y in August, Industrial Production accelerated slightly to +6.1% Y/Y, and Home Prices are up +8.0% Y/Y in August (+6.6% Y/Y prior).

India:  Indian economic activity appears to have recovered nicely since the new Goods and Services Tax (GST) was implemented as Commercial Credit accelerated to +13.5% Y/Y and Exports accelerated to +19.2% Y/Y.  However, Industrial Production slowed to +6.6% Y/Y in July, CPI slowed to +3.7% Y/Y in August, and PMI’s slowed in August.

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 came in at 51.9 in August, Industrial Production rebounded +9.0% Y/Y.  However, Retail Sales slowed slightly to +2.8% Y/Y and Exports slowed to +4.1%.  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: As we stated recently, the sanctions are beginning to have an impact on Russia.  And it is never a good thing when officials talk about their ability to cushion “crashes”.   We find Russia uninvestible at this time.

South KoreaOverall, 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 +20.8% Y/Y in August.   Also, GDP increased +2.8% Y/Y in Q2, Income is up +4.2% Y/Y, Industrial Production increased +0.9% Y/Y, and Retail Sales accelerated to +7.4% Y/Y.  Conversely, the Unemployment Rate increased to 4.2% in August and the Nikkei South Korea Manufacturing PMI has been below ‘50’ for six months in a row.






































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