ETF Pro Plus: September Update (Q3 2023)

Long: GLD, AAAU, PINK, EWJ, SCJ, EWJV, INDA, JPXN, URA, NLR, INDY, TBIL, UUP, UGA, XLV, SLV

Short: HYG, JNK, IWM, XRT, XLI, XLRE, KRE, EFNL, EWH, CHIR, EWG, EWQ, SPY, XTL, XLU, JETS, EWO

Quick updates:

• Even if you flipped your macro awareness toggle over to "passive summer" mode, it would be challenging to be wholly unaware of the US economy's deceleratory onslaught:  

  • Fed Regional Surveys (Mfg & Services) for August-to-date worsened (also accompanied by a liberal side of stagflationary price increase).
  • MBA Purchase Apps notched a fresh 28-year low.
  • The S&P (Markit) Services Surveys for August saw the MFG PMI fall -2 pts to 49, the Services PMI fall -1.3 pts to 51 with the Composite PMI now flirting with contraction at 50.4.
  • The BLS released its preliminary benchmark revision for the 12 months ending in March. It was meaningfully (but not alarmingly) negative at -306K (Total) and -358K (Private).

  In other words, all’s well that ends well … where "well" effectively means ubiquitous deterioration in the high-frequency data such that bonds catch a bid and "higher forever" (structurally higher r*) and/or (over) Jerome Powell's hawkish tone at Jackson Hole can be plausibly decremented.

• The start of 3Q was the beneficiary of the confluence of peak AI euphoria, "Barbenheimer," concerts (Taylor Swift et al), sub-7% mortgage rates and an inflection in homebuilder activity, a local trough in gas prices, a local peak in equity prices … and a notable drawdown in the savings rate.

  Each of those are either "non-recurring" or now going the other way.

  • (real) Spending = +0.57% M/M = accelerating +60bps to +3.01% Y/Y. The increase was broad based with Services/Durables/Nondurables all accelerating sequentially on a year-over-year basis.
  • Aggregate Private Sector Wage Growth (i.e. "organic consumption capacity") = decelerated -130bps to +4.6% Y/Y. Personal Income and Disposable Personal Income growth decelerated similarly.
  • Savings Rate = -80bps M/M (flat Y/Y) to 3.5% … so, a material support to sequential spending growth and largely equivocal on a 12-month basis.   
  • Luxury Consumption: Still no mojo across the luxury/high end discretionary consumption proxy = -8.3% Y/Y  and negative for a 10^th consecutive month despite progressively easier comps

  It’s probably worth a quick re-reminder here that outside of the most severe recessions, consumption growth rarely actually ever goes negative – it’s business investment, inventories and the Trade balance that are the principal drivers of the slowdown in headline GDP. 

  The consumer squeeze and flow through of tighter credit conditions will continue to intensify as will the lagged impact of rates as maturities hit and debt needs to get rolled into slowing topline and sticky input cost conditions.

• A ridiculous MSM story last week argued that $1 trillion of U.S. consumer credit card debt is a positive sign for U.S. consumers. Common sense would indicate people paying off their credit cards is a good thing – not taking on more and more debt, particularly when interest rates are as high as they are. 

  “The interest rate on a credit card is above 20%. Going back to the 1990s, the peak was 16%, not 21-23%. U.S. consumers are tapped out,” Keith McCullough says. 

  For the first time in over a decade, people didn’t pay off credit card debt going from 4Q 2022 to 1Q 2023. Things didn’t get any better in 2Q. 30+ day delinquency rates for Capital One, Synchrony and Discover all increased from June 2022 to May 2023. 

  “Wait until we get the June, July and August numbers. It’s going to be terrible,” McCullough adds.

Below is the summary of theme #1 from our 3Q23 Quarterly Macro Themes:

We’re now slouching into month 20 of global/local macro deceleration, and the slope of the macro lines that matter remains negative. The Manufacturing economy is contractionary, Services is in discrete deceleration, credit availability is in conspicuous contraction, commodities & industrial metals are making lower lows, Europe is back to recessionary prints and the failed China re-opening catalyst has already pivoted to outright cuts & incremental stimulus.

We continue to think Quad 4 credit risk will simmer and have detailed the consumer, labor & profit cycle implications associated with the cycle progressively transitioning from tethering to income/savings towards a more conventional tether to policy/credit at the same time that residual excess savings face exhaustion, income/discretionary consumption shocks (student loan repayments) lurk in queue and further fed tightening reflexively amplifies the macro deceleration.

Quick updates:

• Monday’s September Eurozone Sentix Economic Index slowed to -21.5, versus -18.9 in August
• Current Situation score falls to the lowest level since September 2022
• German was particularly weak in this survey coming in at -33.1, with Current Situation at the lowest level since July 2020 (depths of the pandemic)
• Similar to recent Manufacturing PMIs, August European Services PMIs basically slowed sequentially across the board. The key takeaway here is that ALL Services PMIs in Europe were contractionary (sub-50) in August.
• Spain Services PMI slowed to 49.3, from 52.8
• Italy Services PMI slowed to 49.8, from 51.5
• France Services PMI slowed to 46.0, from 47.1
• Germany Services PMI was flat at 47.3
• Eurozone aggregate Services PMI slowed to 47.9, from 48.3
• Big deceleration in Eurozone July PPI, which came in at -7.6% Y/Y, versus the prior reading at -3.4%
• Lowest level in roughly 15 years, BUT this compares to +35% from a year ago ... so on a two-year basis PPI is still up some +~27%...
• Taken in aggregate, it wouldn’t surprise us to see increased dovish commentary out of the ECB after today’s data ...
• Finally, we had a fairly big deceleration in August China Caixin Services PMI coming in at 51.8, versus 54.1 in July 

Below is the summary of theme #2 from our 3Q23 Quarterly Macro Themes:

This time is different – the Chinese economic engine won’t be bailing out global growth as it did in the Post-GFC period. The promise of a great Chinese reopening has underdelivered, and the developed market consumption shift from goods to services has additionally weighed on Chinese manufacturing activity. Nowhere is this story told better than in the steady YTD downtrend across industrial metals, with recent easing in Chinese monetary policy further confirming this dynamic.

Meanwhile, the European continent, having been spared from an energy crisis this past winter, is increasingly under the weight of elevated inflation, torpid manufacturing activity, tightening credit conditions, and renewed central bank hawkishness. More broadly, the confluence of weakening global demand concentrated, for now, within the goods economy and the new cost-of-capital reality terrorizing Capex plans worldwide; the #Quad4 industrial recession remains a persisting reality.

Quick updates:

• Japan (Nikkei) was up another +0.6% overnight (now up +3% for the month and +17% the past 6 months). Compare that to our broad basket US Stocks Short (Russell) -2.1% yesterday and the SPY (82% of stocks DOWN with an AVG decline of -1.62% on the day).

Below is the summary of theme #3 from our 3Q23 Quarterly Macro Themes:

With growth expected to land in the top-half of the Quad Matrix (accelerating) over the next two quarters for each of these three geographies and with the signal incrementally confirming this trajectory, we are favoring foreign equity exposures in Japan, India, and South Korea.

Japan is enjoying comparatively moderate and decelerating inflation while monetary policy remains accommodative and domestic spending is expected to increase in the post-pandemic yolo fashion of other developed economies that had relaxed Covid era restrictions much earlier. India also enjoys a comparatively superior fundamental setup with buoyant domestic demand fueled by government spending, moderating commodity prices, and strong credit growth.