There are always a host of ways to spin the Macro #Storytelling and this week’s data offers an illustrative case study.
Consider the Retail Sales numbers earlier this week:
Headline Retail Sales growth decelerated on a MoM basis in December, but was flat on a YoY and accelerated on a 2Y. Further, the Control Group (which feeds into GDP) accelerated on a MoM, YoY and 2Y, but the complexion of that strength from an industry level perspective wasn’t particularly inspiring and middling wage growth is unlikely to support equivalent gains going forward. So, good on balance, but not the stuff incremental, levered allocations are made of.
From a TREND perspective, the preponderance of fundamental data remains favorable. The labor market continues to improve, credit growth is accelerating, capacity utilization and productivity are up alongside strength in the manufacturing base, confidence is rising and the bipartisan accord on the federal budget is consumption friendly on the margin.
On the flip side, capex spending and wage growth have yet to really accelerate and housing market activity is set to slow into 1H14 with home price growth decelerating from the low-teens to the mid-single digits over the next few quarters (our expectation).
The Economic Indicator table below provides some summary context for the latest macro data with respect to Trend averages.
STRATEGY: This weeks data has been consistent with our current view on the direction of sequential growth domestically and serves as a solid microcosm for the broader macro data. Reported growth isn’t really accelerating sequentially, but its not getting materially worse either and, from a GDP accounting perspective, we’ll go from ‘very good’ to just ‘good’ in 4Q.
Certainly, the currently prevailing sentiment and price/growth dynamics make it a tougher call here in 1Q14 than in 1Q of last year when our macro models were explicitly signaling a positive inflection in growth while strategists and economists were taking down estimates alongside a 0% 4Q12 GDP print.
But with decent macro fundamentals, positive fund flow support, favorable seasonality through 1Q14 and the lack of a discrete negative catalyst in the immediate term, we still like U.S. equities – just not as much as we did over the TTM.
Summarily, Stocks Up, Dollar Up, Rates Up remains the price factor constellation we’d like to see trend to drive a convictional (re-) increase in our exposure to domestic, pro-growth equities.
Please see our 1Q14 Macro Investment Themes presentation for a detailed view of our current thinking on global macro asset allocation >> 1Q14 Macro Investment Themes
INITIAL JOBLESS CLAIMS: Steady as the Distortions Ebb
Successive distortions (technology upgrades, Sandy comps, calendar/holiday shifts) in the initial claims series over the last two months of 2013 made garnering a clean read on the direction of the domestic labor market increasingly difficult.
Despite the volatility, we’ve held that the positive improvement that characterized most of 2013 has largely persisted as divergences from trend, stemming from the aforementioned distortions, have repeatedly been followed by a subsequent re-convergence to the high-single digit, Trend rate of improvement.
While year-end/holiday seasonality will persist in the data for a couple more weeks, the last two weeks of relatively clean data are signaling a return to trend with both the 2-wk and 4-wk rolling averages in YoY non-seasonally adjusted claims reflecting a ~8.5% rate of year-over-year improvement.
We continue to expect ongoing improvement in the reported labor market data as seasonality builds as a tailwind into March before again reversing to a tailwind over the March to August period.
CPI INFLATION: (STILL) WATCHING THE $USD
Headline CPI accelerated on both a MoM and YoY basis with the month-over-month increase driven primarily by the jump in energy prices. Core Inflation decelerated 10bps MoM and was flat at +1.7% YoY while price inflation for services decelerated modestly on both a YoY and 2Y.
As we highlighted in our 1Q14 Macro themes call last week, the dollar has driven commodity inflation over the last 10 years and headline CPI follows the slope of food and energy inflation.
With the dollar currently in no man’s land from a quantitative perspective - below TREND resistance ( 81.12) and above TAIL support (80.72) - a breakdown or breakout for the dollar will be critical input in determining how we manage our asset/geographical exposures from here.
CONFIDENCE: NFIB small business confidence improved in December making unanimous the post-government shutdown resurgence observed across the primary survey’s to close the year (see December data in Table Below).
Meanwhile, Bloomberg’s weekly read on consumer comfort deteriorated sequentially in the second print for 2014. Notably, most of the weakness was concentrated in the higher income brackets while the lowest income bucket posted its best reading since June of 2008 and the penultimate bucket improved for a fifth consecutive month.
With Consumer Confidence and the USD moving in lockstep over the last year, it makes sense to continuing ball-hawking the price signal in the dollar.
Christian B. Drake