FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
* The U.K. has no idea what it wants to do with BREXIT, and that’s bad for business.
* U.S. Job Openings jump back above 7 million, while Consumer Credit surges.
* Japan Q3 GDP is revised lower.
* China trade surplus improves due to drop in imports – not a good sign.
* Aussie New Home loans rebounded, but remain negative Y/Y.
* Canada Housing Starts improved while Permits fell in October.
U.K. CAN’T DECIDE ON BREXIT, WHICH IS THE WORST POSSIBLE OUTCOME:
We watched U.K. Prime Minister Teresa May’s speech to the House of Commons and believe that the delay in the vote is the worst possible outcome for the U.K. As best we can tell, Mrs. May got about as good a deal as she could get from the EU. She won’t be paying them any longer, has wrestled control of her borders and laws, and still gets to trade freely with Europe. We’re not sure what the Commons can possibly be expecting, but we think a ‘hard border’ with Ireland would create unnecessary economic damage to the U.K.
But regardless of the specifics of the deal, the worst case scenario is limbo, and that’s exactly where the U.K. appears to be headed. Businesses cannot make investments and decisions when politicians can’t get their act together. We now expect that U.K. economic conditions will worsen from here. On that note, U.K. Industrial Production is now negative….
U.K. INDUSTRIAL PRODUCTION DOWN FOR 2ND MONTH IN A ROW:
According to the U.K. Office for National Statistics, the Index of Production declined for the second consecutive month, down -0.58% M/M in October. Moreover, U.K. industrial output is now down -0.78% Y/Y (versus flat Y/Y prior), which is the slowest pace since August 2013. In the month, Energy output increased +0.40% M/M, Mining output increased +1.77% M/M, and Durable Goods output increased +1.25% M/M. Conversely, Manufacturing output fell -0.96% M/M, Water & Sewage output fell -0.29% M/M, and Non-Durable Goods output fell -1.59% M/M.
JOB OPENINGS BACK ABOVE 7 MILLION IN OCTOBER:
According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), there were 7.079 million job openings on the last business day of October. This is an increase of +119k M/M from the downwardly revised prior month (6.96 million vs. 7.009 million previously reported) and job openings are now up +16.8% Y/Y (versus +11.7% Y/Y prior). In fact, there are more job openings than unemployed persons in the U.S. for the eighth month in a row. Also, total hires rebounded +196k to 5.892 million, whereas total separations fell -85k to 5.556 million. Thus, net turnover increased +281k M/M to +336k.
Furthermore, the Job Openings rate increased to 4.5% (4.5% prior), the Hires rate increased to 3.9% (3.8% prior), and the Separations rate fell to 3.7% (3.8% prior). Lastly, it should be noted that Quits fell -51k M/M to 3.34 million (SA) and non-seasonally adjusted quits fell -147k to 3.458 million. The slowdown in quits may be due to the fact that employers are now paying their employees higher wages in order to retain talent.
CONSUMER CREDIT UP +$25 BILLION M/M IN OCTOBER:
Late Friday, the Federal Reserve released its report on consumer credit for the month of October, showing overall consumer credit increased a seasonally-adjusted +$25.384 billion to a record $3.964 trillion. This is the 34th consecutive monthly gain and total credit increased +4.7% Y/Y (+4.5% Y/Y prior). The increase in the month was led by Non-revolving credit, which increased +$16.175 billion to $2.926 trillion (+5.9% Y/Y vs. +5.4% prior). Also, Revolving credit rebounded +$9.209 billion M/M to a record high $1.037 trillion (+3.4% Y/Y versus +3.0% prior).
Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$22.15 billion in October to a record high $3.885 trillion. In the month, government loans (student loans) increased for the 80th consecutive month (+$2.58 billion to a record $1.262 trillion). Also, non-government loans increased for the seventh consecutive month (+$19.57 billion), led by significant increases in loans from Depository Institutions and Credit Unions; however, Nonfinancial loans fell -$0.063 billion.
JAPAN Q3 2018 GDP REVISED LOWER TO -0.6% Q/Q:
According to the Japan Cabinet Office, Q3 2018 Real GDP in Japan was revised lower to -0.63% Q/Q (versus -0.29% previously reported). Furthermore, Q3 GDP declined at an annualized rate of -2.53%, versus +2.73% in Q2. In the quarter, there were downward revisions to Private Consumption (-0.18% Q/Q vs. -0.11% previously reported) and Private Non-Resident Investment (-2.75% Q/Q vs. -0.23%). Conversely, Government Expenditures were revised slightly higher to +0.23% Q/Q (+0.18% Q/Q previously reported).
CHINA TRADE SURPLUS IMPROVED AS IMPORTS SLOWED IN NOVEMBER:
In U.S. Dollar terms, China’s National Bureau of Statistics reported that China’s trade balance increased +$9.99 billion to +$44.75 billion in November. In the month, China’s exports increased +$10.32 billion M/M to $227.42 billion. Nonetheless, exports slowed to +5.4% Y/Y (versus +15.5% Y/Y prior). Meanwhile, China imports increased just +$0.33 billion M/M to $182.67 billion; therefore, imports slowed to +3.0% Y/Y (versus +20.8% prior). It is important to note that Cumulative trade in 2018 up +14.8% Y/Y to $4.244 trillion (+16.0% Y/Y prior). Moreover, in Chinese Renminbi terms, China’s trade balance improved once again M/M and exports were up +10.2% Y/Y (versus +20.0% Y/Y prior).
Note, exports to the U.S. slowed to +9.8% Y/Y (+13.2% Y/Y prior), exports to the EU slowed to +6.0% Y/Y (+14.6% Y/Y prior), exports to the Hong Kong slowed to +2.7% Y/Y (+23.6% Y/Y prior), exports to Japan slowed to +4.8% Y/Y (+7.9% prior), and exports to Russia slowed to +2.9% Y/Y (+16.0% Y/Y prior). Furthermore, Crude Oil imports increased to 42.87 million metric tons (+15.7% Y/Y versus +25.3% Y/Y prior) but Copper Ore imports fell -4.6% Y/Y (+14.6% Y/Y prior) in November.
CHINA CPI SLOWED TO +2.2% Y/Y IN NOVEMBER:
According to the China Bureau of Statistics, the Consumer Price Index declined for the first time in five months, down -0.3% M/M in November. Furthermore, on a Y/Y basis, China CPI slowed to +2.2% Y/Y (versus +2.5% Y/Y prior), which is the slowest pace since July. In the month, Food prices slowed to +2.5% Y/Y (+3.3% prior) and Non-food prices slowed to +2.1% Y/Y (versus +2.4% Y/Y prior). Lastly, China PPI declined for the first time in seven months, down -0.2% and slowed to +2.7% Y/Y (+3.3% Y/Y prior).
AUSTRALIAN NEW HOME LOANS REBOUNDED IN OCTOBER:
According to the Australian Bureau of Statistics, the number of Australian Home Loans rebounded +2.20% M/M to 52,654 in October (-1.00% M/M prior). Therefore, Aussie loans are now down -4.78% Y/Y, which is an improvement versus -8.44% Y/Y prior. Moreover, in Aussie Dollar terms, total loans outstanding rebounded +2.56% M/M and improved to -8.61% Y/Y to $30.03 billion (versus -10.76% Y/Y prior). As for the composition in A$ terms, Owner Occupied Housing loans increased +3.54% M/M to 20.15 billion and Investment Housing increased +0.60% M/M to 9.88 billion.
GERMAN TRADE DATA BALANCE LITTLE CHANGED IN OCTOBER:
In the month of October, the German foreign trade balance fell -€0.4 billion to +€17.3 billion (seasonally adjusted), according to Destatis. In the month, Exports increased +0.7% M/M to €110.8 billion, whereas imports increased +1.3% M/M to €93.5 billion. Furthermore, on an unadjusted basis, Germany’s trade surplus was unchanged at +€18.3 billion. On a Y/Y basis, exports increased +8.5% Y/Y to €117.2 billion (-1.0% prior) and imports increased +11.2% Y/Y to €98.9 billion (+5.6% Y/Y prior). Note, the EUR/USD exchange fell -2.5% M/M and -2.9% Y/Y to 1.131 at the end of October.
ITALIAN INDUSTRIAL PRODUCTION UP SLIGHTLY IN OCTOBER:
According to iStat, Italian Industrial Production increased +0.09% M/M in the month of October (-0.09% prior). Nonetheless, total output slowed to +1.05% Y/Y when adjusted for working days (+1.44% Y/Y prior). In the month, Consumer Goods output increased +1.34% M/M; however, Intermediate Goods output declined -0.28% M/M, Investment Goods output declined -0.09% M/M, and Energy output declined -2.95% M/M.
CANADA HOUSING STARTS DOWN -13.7% Y/Y DESPITE MONTHLY INCREASE IN NOVEMBER:
According to the Canada Mortgage and Housing Corporation, housing starts increased +4.44% M/M to 215,941 SAAR in November. In fact, this is the second consecutive monthly increase (+8.39% M/M prior); however, housing starts are now down -13.74% Y/Y (versus -6.81% Y/Y prior). The increase in the month was led by Urban Single-Family housing starts, which increased +7.79% M/M and to a lesser extent, Urban Single-Family starts (+3.91% M/M). Conversely, Rural starts declined -1.13% M/M.
In a related note, Canadian Building Permits increased +4.05% M/M and +7.39% Y/Y to 20,017 in October (+10.34% Y/Y prior). In the month, Single-Family permits increased +2.18% M/M and Multi-Family permits increased +4.70% M/M. However, it should be noted that the value of permits fell -0.15% M/M and -4.04% Y/Y (-0.40% Y/Y prior)
U.S. GDP: Our GDP model sees 3%+ Real GDP growth through Q1 2019, but slower growth thereafter (downshifting to 2%). 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 signs that both inflation and growth are moderating a touch, we think there is increasing odds that we are approaching a ‘Fed Pause’ in 2019.
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%. We would expect that rates will only drift higher once the Fed pauses, as that ultimately would lead to a weakening in the U.S. Dollar.
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 (but it’s getting harder to reach 3.50% as inflation and growth slow).
U.S. Equities and Earnings: S&P 500 operating earnings are still rising, but the market seems to be repricing forward earnings. Our SPX target was for an 18.5x P/E on 2019 forward earnings of $165, bringing our 2018 SPX target to 3,050. With the China trade war heating up, we are not setting a target for 2020 at this time.
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 45%, Industrial Production is down -6.8% Y/Y, Consumer Confidence has deteriorated since January, imports are declining, 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% Y/Y, Industrial Production is down -2.0% Y/Y, Retail Sales slowed to +0.1% 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 October (-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, But retail sales accelerated to a 4.1% Y/Y rate, Confidence is strong, and GDP is up 2.5% Y/Y. Note that Unemployment improved to 3.2% in October, which had been trending up slightly since May.
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 +0.9% Y/Y, and Retail Sales are now up +0.8% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs, 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.
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 ticking lower (to +5.0% in October), Real GDP accelerated to +3.4% Y/Y in Q2, Exports are up +15.9% Y/Y, Wages are up +2.1% Y/Y, Retail Sales accelerated to +3.7% Y/Y in September, 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, China’s economic data continue to deteriorate, as PMI’s are now bouncing around the ‘50’ level (although services PMI bounced back last week). We don’t think 6% growth is still in the cards for China … maybe note 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 50.5 in October, Industrial Production rebounded +9.0% Y/Y. However, Retail Sales slowed slightly to +3.9% Y/Y and Exports slowed to +3.6%.
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 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, and the Unemployment Rate improved to 3.9% in October. Conversely, Retail Sales slowed to +3.0% Y/Y.
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