* U.S. Tax Receipts picked up in October, but only due to a surge in excise taxes (tariffs?).

* Trump says they are looking at a further cut to income taxes?

* Chicago Fed National Activity Index slowed in October.

* Italy tries to explain its budget.

* The Bundesbank says that German growth may have stalled.


According to the U.S. Treasury, tax receipts are up +1.3% Y/Y through October 18th.  Furthermore, overall tax receipts are down -1.1% Calendar YTD (versus -1.3% at the end of September).  The increase in the month was led entirely by Excise & Other Taxes, which surged +137.0% Y/Y and +30.6% Calendar Y/Y (+26.2% Y/Y at the end of September).  This is a sign that transactions are up significantly given these are transaction-based taxes. 

Conversely, Income and Employment Withholdings Taxes fell -4.5% Y/Y and -1.1% Calendar Y/Y (-0.9% Y/Y at the end of September).  Furthermore, Corporate Income Taxes declined -35.3% Y/Y and -28.0% Calendar YTD (versus -27.7% Y/Y at the end of September).  The decline in Income and Corporate Taxes are to be expected, thanks to the Trump Tax cuts.

Over the weekend, U.S. President Trump said “We’re looking at a major tax cut for middle income people.”  We’re not sure exactly what they’re looking at, aside from saying things that will help the GOP keep the House of Representatives.   As far as we’re concerned, overall tax receipts are down -1.1% Calendar YTD, driven lower by income withholdings.




According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) declined -0.10 points to +0.17 in September However, it should be noted that the prior month was revised higher to +0.27 versus +0.18 previously reported.  Nonetheless, the three-month average fell -0.06 points to +0.21 In the month, there were improvements in Employment & Hours (+0.01 points to +0.07) and PCE & Housing (+0.01 points to -0.05).  Conversely, Production & Income fell -0.05 points to +0.11 and Sales & Inventories fell -0.05 points to +0.05.




Italy said today that they are only going to go off path of EU deficit goals for one year … just one.   They just need this one last fix and then they’ll quit the juice.  Promise!

The Italian bet is entirely placed on GDP growth expectations, which nobody believes.  Here’s the thing, you can bake in some animal spirits into growth estimates if you are incentivizing the animals.  But in Italy’s case, the politicians seem more aligned with incentivizing laziness.  It is unrealistic to assume animal spirits kick up GDP growth when more government money is being deployed to reward those who want to work less (or not at all).  

Meanwhile, the Bundesbank’s monthly economic report said that German economic growth may have stalled in Q3.   The Bundesbank notes that a new EU motor vehicle emissions certification system has caused delays in German cars getting certifications.   Once again, regulations in Europe have held back growth.


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 appears to have hit a peak two months ago and with oil prices down and the dollar index up, we believe inflation has peaked (for now).   

U.S. Federal Reserve:  The Fed is signaling that rates will be 100 bps higher by the end of 2019, and with inflation peaking, they’re wrongWe believe the U.S. Dollar will continue to strengthen given interest rate parity and overall relative economic strength in the U.S., and this has now become a headwind for inflation (and potentially growth).  We think a Fed pause is coming faster than the market currently appreciates.

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 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 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 40.5%, 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).

Brazil:  Overall, Brazil’s data has weakened in 2018, but the political situation has now moved a step toward economic liberalization, and we are encouraged.   We are watching Bolsonaro’s candidacy closely as a result.   Currently, 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, Retail Sales slipped in August, and home prices are slowing (Toronto area is now negative).  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, but inflation is also turning up.  GDP is up 2.6% Y/Y, Retail Sales accelerated to +4.2% Y/Y, PMI’s have been steady, and Consumer Confidence jumped in Q3.

Venezuela: Remains uninvestable.


United Kingdom If you look at the GBP, you’d think BREXIT is a major economic problem.  However, when you look at the macro data, you don’t see any meaningful deterioration.  Inflation has been in a slowing trend in 2018, unemployment has been declining, wages have been turning up, and PMI’s have been steady.   Even the big macro risk, housing, hasn’t shown much weakness.  In fact, home prices improved slightly in August on a Y/Y basis.

European Union:  Although Unemployment continues to trend lower and Retail Sales are now up +1.8% Y/Y, Economic Sentiment is turning lower, Industrial Production is down -0.1% Y/Y, and PMI’s have turned back from recent highs.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  

European Central Banks:  The ECB is slowly removing accommodation and claims that it 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 hasn’t given a timeline for 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 Australian data remain mixed.  So far, the Unemployment Rate appears to be ticking lower (to +5.0% in September), Real GDP accelerated to +3.8% Y/Y in August, Exports are up +15.3% Y/Y, 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 thinks 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 (although there is a token Xi/Trump meeting on the calendar).  China claims it’s going to pull out all the stops, is going to ‘encourage’ institutions to buy stocks, and there is talk of cutting taxes.   We doubt any of this will work to plug the large liability problem in China’s banking system.

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.  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.  Note that PMI’s continue to indicate slow growth, Industrial Production is slowing, and now China may have an inflation problem.  However, unemployment remains low, Retail Sales accelerated to +9.2% Y/Y in September, and Home Prices accelerated to +8.9% Y/Y in September (+8.0% 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 once again in September.

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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