* Manufacturing is clearly slowing in China, so much so that even the government admits it.

* But China Service PMI is up?  We’ll wait to see what Caixin has to say about that.

* Prices are rising in both China’s Mfg. and Svcs PMI’s.   Is inflation turning up in China?

* U.S. ISM Manufacturing Index slowed from 14-year high.

* U.S. Constructing Spending ticked up in August.


We are going to continue harping on the issue of ‘fake data’ in China because we feel that it is incredibly important for investors to digest and understand how such data may be used against them.  The obvious reason is that it may impact investment conclusions and interest rates.  But there are other serious impacts that investors need to consider as China has the ability to not only mislead, but to also be an investment adversary.  Some considerations are as follows:  1) China has control over lending practices at its major banks.  2) China’s central bank is not truly independent, so therefore monetary policy can be used for political needs.  3) China controls the deployment of capital from its sovereign wealth fund.   4) China has the power and willingness to manipulate its currency.  5) China currently employs capital controls.  6) China censors information.  7) China utilizes a social credit score as a means of punishment and to hurt individuals’ ability to obtain credit financing.

Think about that a while and ask yourself if your portfolio exposures to China puts you at a strategic disadvantage, particularly during a drawn out trade war.  How might fake data, and the controls mentioned above, be used against your investment interests?   Would you invest in a company that notoriously mislead?  If not, what is the rationale for investing in an entire economy that maintains a policy to mislead and control?

Anyway, back to the data.  The ‘official’ China Manufacturing PMI fell -0.5 points to 50.8 from 51.3, in September.  The decline in the month was driven lower by Export Orders, which fell -1.4 points to 48.0.  The decline to “48” is interesting because it’s the lowest level since Feb 2016, when China was covering up recessionary conditions with fake data from some of its industrial provinces.  See here:

Other components in the data weakened as well as Output fell -0.3 points to 53.0), Backlogs fell -1.5 points to 45.2, and Employment fell -1.1 points to 48.3.  In fact, the only metric to show any meaningful increase was Input Prices, which increased +1.1 points to 59.80.   We remind you that there is concern that the PBOC is currently masking inflationary data within China: 


We like to compare the ‘official’ government PMI data against the independent Caixin/Markit PMI data.  Note that the Caixin Manufacturing PMI survey slowed slightly more than the government survey and continues to trend at levels notably below the official data.  In September, the Caixin Manufacturing PMI fell -0.6 points to an even “50”.   Recall, that anything below 50 is deemed contractionary.   According to Caixin, “Chinese manufacturers signalled stagnant operating conditions at the end of the third quarter.”  STALLED!

Caixin goes on to say, “New export business fell at the quickest rate since early 2016. At the same time, companies continued to reduce their headcounts, while subdued demand conditions led to more cautious approaches to inventories and buying activity.”  Other key highlights from the Caixin report is that business confidence fell to a 9-month low, and “firms expressed the weakest level of optimism towards the 12-month business outlook in 2018 so far.”

Note that the official PMI release tends to rise in lockstep with the Caixin survey when it going up, but tends to lag when falling …





Note that data from China’s National Bureau of Statistics shows that China Industrial Profits are in a slowing trend.   In August, profits slowed to +9.2% Y/Y from +16.2% Y/Y in July.   Note that this time last year, Profits were growing at a 27.7% Y/Y pace.   So that’s a notable slowing.





Remarkably, the ‘official’ China Services PMI increased +0.7 points to 54.9 in September.  Note that New Orders increased 7.1 points to 51.0, and were above the critical “50” level for the first time since August 2017.  However, Services Business Expectations fell -1.3 points to 60.1.  Again, prices were a concern for the service sector as Intermediate Input Prices jumped +9.1 points to 55.6, which was the highest level since December 2016.

Our thoughts?   We’re going to wait a week to see what Caixin has to say about the service sector.   The last reading from Caixin painted a substantially different picture than the “official” release”.





The ISM Manufacturing Index declined -1.5 points to 59.8 in September However, it should be noted that the prior month was the highest level since May 2004 and the index indicates the 25th consecutive month of growth in the manufacturing sector.  In the month, there were notable declines in New Orders (-3.3 points to 61.8), Inventories (-2.1 points to 53.3), and Backlogs (-1.8 points to 55.7).  Conversely, there were improvements in Production (+0.6 points to 63.9), Employment (+0.3 points to 58.8), and Exports (+0.8 points to 56.0).  Note that Prices Paid slowed for the fourth consecutive month, down -5.2 points to 66.9. 





According to the Census Bureau, U.S. Construction Spending increased +0.1% M/M in August to a total value of $1,318.49 billion SAAR Note that the prior month was revised higher to +0.2% M/M versus +0.1% M/M previously reported.  On a Y/Y basis, construction spending accelerated to +6.5% Y/Y (versus +6.0% prior).  In the month, Nonresidential Construction increased +0.7% and +8.4% Y/Y (+6.5% Y/Y prior) but Residential Construction declined -0.7% M/M and slowed to +4.1% Y/Y (+5.3% Y/Y prior) Lastly, Public Construction increased +2.0% M/M and +14.0% Y/Y (+10.4% Y/Y previously) but Private Construction declined for the third consecutive month, down -0.5% M/M and slowed to +4.4% Y/Y (+4.7% Y/Y prior).





According to Eurostat, the unemployment rate in the Euro Area (EA-19) fell to 8.1% in August (versus 8.2% prior).  In fact, this is the lowest level since November 2008 Also, the Eurozone unemployment rate was unchanged at 6.8% (lowest level since April 2008).  Note that total unemployment fell -114k to 16.857 million (Euro Area fell -102k to 13.220 million).  Lastly, Youth Unemployment (25 and under) in the Euro Area improved to 16.6% (16.7% prior) and Eurozone youth unemployment improved to 14.8% (14.9% prior).


The German Statistical Office Destatis reported today that retail sales declined -0.09% M/M in August.  Furthermore, the prior month was revised lower to -1.12% M/M versus -0.38% previously reported.  Nonetheless, on a year over year basis, retail sales accelerated to +1.56% Y/Y (versus +0.87% Y/Y prior).  In nominal terms, sales increased +0.27% M/M and +2.99% Y/Y (versus +2.33% Y/Y prior).


South Korea’s trade surplus slipped -$18.6 million to +$6.853 billion in August, according to the Ministry of Trade, Industry, and Energy.  In the month, exports fell for the first time in four months, down -1.2% M/M and to $51.2 billion.  However, exports are still up +8.7% Y/Y (versus +6.1% Y/Y prior).  Also, Imports declined -1.3% M/M and slowed to +9.4% Y/Y to $44.35 billion (versus +16.4% Y/Y prior).  Note that exports to China slowed to +20.8% Y/Y to $14.39 billion, exports to the US slowed to +1.5% Y/Y to $6.05 billion, and exports to the EU declined -3.6% Y/Y to $4.49 billion.





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:  The Fed is signaling that rates will be 100 bps higher by the end of 2019, and right now, there’s little reason to dispute that claim.  We believe the U.S. Dollar will continue to strengthen given interest rate parity and overall relative economic strength in the U.S.   At some point that will be a headwind for inflation and may cause the Fed to pause.   Just not yet.

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 (12.1% in August, 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).  But hey, NAFTA has been replaced with USMCA!  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: 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.  We have the under on 20 years, but the over on 1 year as China isn’t even interested in meeting with the Trump Administration at this time.

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 (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 slower growth (as mentioned above) and now China may have an inflation problem.  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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