FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
* U.S. Tax Receipts fell -1.1% Y/Y in 2018, but would have been down -3.3% without tariffs.
* U.S. ISM Services Index slowed, and backlogs are weak, but New Orders increased.
* European Retail Sales turned higher in November, but remain sluggish Y/Y.
U.S. TAX RECEIPTS DOWN -3.5% Y/Y IN DECEMBER, BUT EXCISE TAXES WERE UP +27.2% Y/Y:
According to the U.S. Treasury, tax receipts declined -3.5% Y/Y in December. Furthermore, overall tax receipts were down -1.1% in 2018 Calendar YTD Y/Y (versus -0.9% at the end of November). In the month, Corporate Income Taxes declined -21.7% Y/Y and -26.3% in 2018 Calendar Y/Y (versus -27.5% Y/Y at the end of December). The decline in Corporate Taxes are to be expected, thanks to the Trump Tax cuts. Also, Excise & Other Taxes declined -2.1% Y/Y and slowed to +27.2% Calendar Y/Y in December (+28.9% Y/Y at the end of November) – these are the tariffs flowing through by the way. Conversely, Income and Employment Withholdings Taxes increased +1.6% Y/Y and improved to -0.6% Calendar Y/Y (-0.9% Y/Y at the end of November).
Here’s the thing, the surge in tariff income and overall excise tax revenue is making the U.S. Treasury look a lot more solvent than it would be otherwise, given the tax cut. Few investors seem to understand that the Trump Administration may like the current tax construct. Lower taxes are boosting consumer spending (raising excise taxes) and the tariffs are bringing in much-needed revenues to the Federal government. Trump has mentioned how much he likes these tariffs on several occasions. With that in mind, we don’t expect much from trade talks this week.
U.S. ISM SERVICES SLOWED BUT NEW ORDERS AND EXPORTS IMPROVED IN DECEMBER:
The ISM Services Index declined -3.1 points to 57.6 in December. This is the lowest level since July; however, it still marks the 108th consecutive month of growth. In the month, New Orders increased +0.2 points to 62.7 and New Export Orders increased +2.0 points to 59.5; however, there were declines in most of the remaining sub-categories: Business Activity (-5.3 points to 59.9), Employment (-2.1 points to 56.3), Inventories (-6.0 points to 51.5), Backlogs (-5.0 points to 50.5), and New Imports (-1.0 point to 53.5). Also, it should be noted that Prices fell -6.7 points to 57.6.
EURO AREA RETAIL SALES UP ONCE AGAIN IN NOVEMBER, BUT Y/Y STILL SLUGGISH:
Today, Eurostat reported that Euro Area retail sales volume increased +0.6% M/M in November (also +0.6% M/M prior). However, Euro Area retail sales slowed to +1.1% Y/Y (versus +2.3% Y/Y previously). In the EA19, Automotive fuel sales increased +1.2% M/M and Non-food products sales increased +1.2% M/M (textile sales up +2.7% M/M, electronic sales up +1.5% M/M, and pharma sales up +1.3% M/M). However, Food, Drinks, & tobacco sales declined -0.9% M/M. Lastly, EU28 sales increased +0.7% M/M but slowed slightly to +2.1% Y/Y (+2.4% Y/Y prior).
GERMAN RETAIL SALES UP +1.4% M/M IN NOVEMBER:
The German Statistical Office Destatis reported today that retail sales increased +1.41% M/M in November. Also, note that the prior month was revised higher to +0.09% M/M versus -0.28% previously reported. Nonetheless, on a year over year basis, retail sales slowed to +1.07% Y/Y (versus +5.23% Y/Y prior). In nominal terms, sales increased +1.53% M/M and +2.45% Y/Y (+2.87% Y/Y prior).
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. 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.
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 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: 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, 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, PMI’s are showing very modest improvement at 52-ish levels, 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, Retail Sales slowing, 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. Industrial Production is negative. GDP is slowing. The U.K. has officially botched this. We’ll need to get BREXIT clarity at this point or the economy will deteriorate further.
European Union: Although Unemployment continues to trend lower, Industrial Production is up just +1.2% Y/Y, and Retail Sales are up just +1.1% Y/Y (as mentioned above), 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 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 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.
ASIA / PACIFIC:
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 +20% Y/Y, Wages are up +2.3% Y/Y, Retail Sales are up +3.6% Y/Y, PMI’s have improved, 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: 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 in December. We are watching India for reasons to upgrade as inflation is moderating, industrial production is up +8.1% Y/Y, the consumer is strong, Commercial Credit is roaring at +15.1% Y/Y, and M3 money growth has been steady at 10%. With inflation cooling a little, India can let growth occur and we are considering an upgrade.
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 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 Korea: 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, the Unemployment Rate improved to 3.8% in November, and Retail Sales accelerated to +7.4% Y/Y.
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