* U.S. tax receipts start out 2019 in the red, and it can’t all be shutdown related.

* Chicago and Dallas Fed indices improved.


According to the U.S. Treasury, tax receipts are down -10.3% Y/Y through January 24th.  Furthermore, overall tax receipts are down -2.9% Fiscal YTD Y/Y (versus -0.7% at the end of December).  The decline in the month was led by Income and Employment Withholdings Taxes, which declined -13.7% Y/Y and -3.2% Fiscal YTD Y/Y (+0.1% Y/Y at the end of December).   It is important to note that we are in the second year of the Trump tax cut, so we can no longer claim that taxes are down on a Y/Y basis due to tax law changes.  So something else appears to be up in early January, and taxes are down far more than would be expected due to the shutdown.   We’ll want to monitor this data. 

Note that Corporate Income Taxes also declined -7.4% Y/Y and -20.7% Fiscal YTD Y/Y (versus -22.2% Y/Y at the end of December).  On the other hand, Excise & Other Taxes increased +20.5% Y/Y and +28.5% Fiscal YTD Y/Y (+33.1% Y/Y at the end of December).  This is a sign that transaction-based taxes are up significantly, which in part can be explained due to higher tariffs.




According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) improved +0.06 points to +0.27 in December.  In fact, this is the seventh consecutive positive month and the highest level since August Thus, the three-month average increased +0.04 points to +0.16.  The improvement in the month was led by Production & Income (+0.20 points to +0.22) and Employment (+0.01 points to +0.11).  Conversely, there were declines in Sales (-0.12 points to 0.0) and Personal Consumption and Housing (-0.03 points to -0.06).




Today, the Dallas Federal Reserve reported that the Current General Business Activity Index rebounded +6.1 points to +1.0 in January Thus, the index returned to growth, albeit marginally.   The increase in the month was led by Production (+7.2 points to +14.5), Capacity Utilization (+7.2 points to +14.8), Shipments (+5.3 points to +11.4), Unfilled Orders (+2.5 points to +0.2), and Inventories (+3.5 points to +5.4).  However, it should be noted that there were declines in New Orders (-2.8 points to +11.6), Growth of New Orders (-4.6 points to +0.2), Number of Employees (-4.4 points to +6.6), and Average Workweek (-1.4 points to +3.6).   Lastly, manufacturers had a significantly more positive business outlook, as the Forecast increased +8.5 points to +11.7, with double-digit gains in Forecasts for Production, Capacity Utilization, New Orders, and Employment.




U.S. GDP:  Our GDP model sees GDP growth downshifting back to 2% in 2019.  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 inflation and GDP slowing, the FOMC shouldn’t have hiked.  Period.  We think the Fed is out of the way for most of 2019, unless the jobs market stays hot.   And if the jobs market stays hot, then we won’t mind a couple more hikes.

U.S. Treasuries:  The trade war and recent movement toward a Fed Pause have pushed longer-term rates lower.   But we still believe economic fundamentals support a 10-year yield of approximately 3%, particularly if the Fed pauses.   We expect that rates will slowly drift higher again, as a Fed pause will ultimately lead to a weakening in the U.S. Dollar (which may have already begun).

U.S. Equities and Earnings:  S&P 500 operating earnings are still rising, but the market seems to be repricing forward earnings.  Our 2019 SPX operating earnings estimate is currently below the street at $165.  We have concerns about the flattening yield curve, the Fed’s current tightening cycle, and also the damage that may occur from further declines in energy prices.

Argentina:  The macro looks abysmal in Argentina, and recession was confirmed in Q3.  Note that things have worsened as November data showed that Industrial Production was down -13.3% Y/Y and Construction was down -15.9% Y/Y.  Argentina should be thankful that the IMF is involved because inflation is at a lofty 45.5%, Consumer Confidence has been deteriorating for a year, imports are down -27.1% Y/Y, and Unemployment is still a lofty 9%.

Brazil:  We are monitoring Brazil for a possible upgrade  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 at record highs, we need to see more follow-through with macro data.  Currently, Retail Sales are up +4.4% Y/Y and PMI’s are showing very modest improvement at 52-ish levels; however, GDP is up just 1.3% Y/Y, Industrial Production is down -0.9% Y/Y, and Unemployment continues to be elevated (11.6% in November, which confirms further slow improvement).

Canada: Canada’s housing market continues to weaken, but so far monthly GDP continues to trend at 2% Y/Y.  We have concerns for Canada’s outlook given declining oil prices (and slowly weakening PMI) and we wonder how long Canada’s employment market can remain so resilient.  

Mexico: Mexico’s macro data is mixed, but PMI’s are beginning to slip (both PMI’s broke below “50” in December).  Recall that Mexico was hiking rates alongside the U.S. to keep the currency stable.  With PMI’s breaking down, Unemployment rising, Industrial Production down -1.3% Y/Y, and consumer confidence starting to show some small signs of deterioration, we’ll want to keep an eye on Mexico for downside risk.

Venezuela: Remains uninvestable.


United Kingdom:  BREXIT is a mess and until that is solved the U.K. is uninvestible.  We have reached the point where persistent uncertainty will have negative impacts on business decisions and economic growth. The macro data remains mixed.   Unemployment Rate improved to 4.0% and PMI’s improved in December, but Industrial Production fell -1.5% Y/Y in November.  GDP is growing at just 1.5% Y/Y and there are some concerns building about the housing market.

European Union:  Economic Sentiment is turning lower, PMI’s are now at multi-year lows, Industrial Production is down -3.3% Y/Y, and the political situation is worsening 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 but Mario Draghi hasn’t given a timeline for raising rates.  The recent decline in CPI gives the ECB little reason to hike in 2019

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 AfricaReal GDP was growing at just +1.1% in Q3 and recent data suggest South Africa is heading lower once again.  PMI’s are wavering around the critical “50” level, electricity use and production is worsening (production is now negative), inflation is slowly turning up, unemployment is an abomination at 27.5%.  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 China exposures and weakness in housing markets.  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 stable around 5.0%, Real GDP increased +2.8% Y/Y in Q3, Exports are up +21% Y/Y, Wages are up +2.3% Y/Y, PMI’s have improved, and Consumer Sentiment has ticked slightly higher recently.  However, Retail Sales slowed to +2.8% Y/Y, 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:   The manufacturing sector looks to be in recession, yet services have shown signs of improvement.  China is certainly stimulating lending and has lowered reserve requirements, but more debt generally isn’t a good prescription for having too much debt.   We are watching China for signs of spillover into the consumer, which we do indeed will come to fruition.

India:  Indian economic activity appears strong, GDP finished 2018 at +6.7% Y/Y and the initial estimate for 2019 is an acceleration to 7.2%.  That being said, recent PMI’s slowed slightly in December.   We are watching India for reasons to upgrade as inflation is moderating, the consumer is strong, Commercial Credit is roaring at +14.5% Y/Y, and M3 money growth has been steady at 10%.  However, industrial production slowed to +0.5% Y/Y, exports slowed to +0.3% Y/Y and imports are down -2.4% Y/Y.

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 50.4 in October, Industrial Production rebounded +9.0% Y/Y, and Retail Sales are up +7.7% Y/Y.  However, Exports are now down -4.6%.

Japan:  Although we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation, recent data has weakened (PMI’s, Leading Indicators, Consumer Confidence).

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

South KoreaWhile the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China.   Note that overall S.K. exports were up +22.7% Y/Y in October but are now down -1.2% Y/Y (December).   Bad trade data isn’t good for South Korea because GDP was already just +2.0% Y/Y in Q3, Mfg PMI is already below “50”, and Industrial Production is only up +0.1% Y/Y, the Unemployment Rate improved to 3.8%.   Note that Retail Sales slowed to +2.8% Y/Y in November (versus +7.5% Y/Y prior).





























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