* Trump had a call with Xi.   And then tweeted 10 times about the Wall.

* China Manufacturing PMI moves below “50”.   We have the under.

* China Services PMI improved in December, according to China’s National Bureau of Stats.

* Dallas Fed Index turned negative.   We can no longer view the Richmond Fed index as an outlier.


Over the past 48 hours, President Donald Trump has tweeted 20 times (and counting).  Here’s a breakdown of those tweets:

10 Tweets were on the Shutdown/Wall/Democrats

4 Tweets were on Getting out of Syria/Fake News

2 Tweets on Mueller/Witch Hunt

1 Tweet about the fact that the Obamas have built a wall

1 Tweet on Hillary

1 Tweet on the Economy

1 Tweet about a Call with President Xi of China

Let’s focus on 1/20th of the President’s focus…the call with Xi.



The President made the point to say “if made” the deal will be comprehensive.  We highly doubt a comprehensive deal can be achieved with China that would cover espionage, intellectual property, foreign ownership of Chinese entities, a drop in trade barriers, recognition of Taiwan, China’s maneuvers in the South China Sea, hacking, technological transfer, etc.   But yeah sure, China will buy some soybeans and maybe we’ll call some of the dogs off.

The far bigger macro issue is the deterioration in China data.   Which is what we care to focus on.  This will not be fixed by a trade deal, either way.


Note that the ‘official’ China Manufacturing PMI fell -0.6 points to 49.4 in December.  This is the first below average print since July 2016 and the lowest level since February 2016.  The decline in the month was led by New Orders (-0.7 points to 49.7), Output (-1.1 points to 50.8), Exports (-0.4 points to 46.6), Imports (-1.2 points to 45.9), Backlogs (-0.2 points to 44.1), Input Prices (-5.5 points to 44.8), and Employment (-0.3 points to 48.0).  Meanwhile, the ‘official’ China Services PMI increased +0.4 points to 53.8 in December Note that New Orders increased +0.3 points to 50.4, Services Business Expectations slipped -0.1 points but remain very healthy at 60.8, and Prices fell -1.8 points to 47.6.

The decline in Manufacturing PMI now confirms a slowdown in China.  Remember that last week we noted that China Industrial Profits are down -1.8% Y/Y (first decline since 2015) and most countries are now reporting sharp declines in exports to China.  With U.S. exports to China down -30% Y/Y, we have the under on the relative benign China PMI data.




Today, the Dallas Federal Reserve reported that the Current General Business Activity Index plunged -22.7 points to -5.1 in December.  In fact, the index is down -34.5 points over the last two months and it is at the lowest level since June 2016.  In the month, there were notable declines in many categories, led by: Current Unfilled Orders (-6.8 points to -2.3), Production (-1.1 points to +7.3), Capacity Utilization (-1.8 points to +7.6), Shipments (-1.6 points to +6.1), Number of Employees (-4.9 points to +11.0), and Outlook Change (-17.1 points to -3.4).   Speaking of outlook, manufacturers had a significantly less positive business outlook, as the Forecast plunged -22.5 points to +3.2.   




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.   

U.S. Federal Reserve:  With inflation and GDP slowing, The Fed shouldn’t have hiked.  Period.

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 would expect that rates will only drift higher once the Fed actually pauses, as that ultimately would lead to a weakening in the U.S. Dollar.

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 erroneous rate hike, and also the damage that may occur from further declines in energy prices.

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 47%, Industrial Production is down -6.8% Y/Y, Consumer Confidence has deteriorated since January, imports are down -18% Y/Y, 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 1.3% Y/Y, Industrial Production is up just +1.1% Y/Y, Retail Sales are up +1.9% Y/Y, and Unemployment continues to be elevated (11.7% in October, which is an improvement).

Canada: Canada’s housing market has been weak and Permits fell in October.  Note that monthly GDP turned negative in September (-0.1% M/M).  We have concerns for Canada’s outlook given declining oil prices and we wonder how long Canada’s employment market can remain so resilient.  

Mexico: Mexico’s macro data is mixed.  Manufacturing PMI’s are hovering at or below the “50” level and Industrial Production slowed to +1.0% Y/Y; however, retail sales accelerated to a 4.1% Y/Y rate, Confidence is strong, and GDP is up 2.5% Y/Y.  Note that Unemployment increased slightly to 3.26% in November.

Venezuela: Remains uninvestable.


United Kingdom:  BREXIT is a mess.  Industrial Production is negative.  GDP is slowing.   The U.K. has officially botched this.

European Union:  Although Unemployment continues to trend lower, Industrial Production is now up +1.2% Y/Y, and Retail Sales are now up +1.7% Y/Y, Economic Sentiment is turning lower, and PMI’s are now at multi-year lows, 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 Africa We remain negative on South Africa, but we have noticed recent efforts by the ANF to walk back some of the rhetoric and GDP recently rebounded.   The ANF is now trying to reengage with foreign capital and wants to liberalize some of the rules around mining investment.   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 ticking lower (to +5.0% in October), Real GDP increased +2.8% Y/Y in Q3, Exports are up +20% Y/Y, Wages are up +2.3% Y/Y, Retail Sales are up +3.6% Y/Y, 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:   Now that the market has digested the Fake Truce, we now have to digest the Fake Data.   Earlier this month, we mentioned how China has actually stopped reporting bad news.  In fact, they are censoring their news media and not allowing the news to report layoffs.   Given the censorship, assume the worst.

As for the fake data, China’s economic data continue to deteriorate, as Retail Sales slowed to +8.1% Y/Y, Industrial Production slowed to +5.4% Y/Y, and PMI’s are now bouncing around the ‘50’ level.   We don’t think 6% growth is still in the cards for China … maybe not even 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 improved in November.

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 +3.4% Y/Y.  However, Exports are now down -3.3%.

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, but recent data haven’t given us enough rationale.

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 KoreaThe 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, the Unemployment Rate improved to 3.8% in November, and Retail Sales accelerated to +7.4% Y/Y.





























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