The Economic Data calendar for the week of the 3rd of March through the 7th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: Our price signals were spot on regarding #GrowthSlowing.
So...U.S. Q4 GDP was revised sharply down this morning from 3.2% to 2.4% in the latest sign of slowing economic growth. For the record, we were virtually alone in our #GrowthSlowing macro call made back a couple weeks before Christmas.
Here's an excerpt:
Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”
As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.
In short, this is how we have managed and communicated our non-consensus macro call over the last 3 months:
Now here we are.
Hedgeye CEO Keith McCullough goes no holds-barred on the Fed's serial dollar debauchery and how this "Burning Buck" policy is creating major risks and opportunities.
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Takeaway: KSS '14 guidance is still too aggressive. $800mm in revenue is at risk for JCP, and eroding dot.com weakens a pillar of support.
Conclusion: We already stated our belief that KSS 2014 guidance is too aggressive – in fact, we don’t even think it will comp positive. While the crux of our argument rests in $800mm in revenue that we think is at risk to JCP, we found the company’s e-commerce trends to be troubling as well. E-commerce sales have protected KSS' comp for the past 9 quarters. With dot.com growth slowing, we seriously question the company’s 2014 comp guidance. If we estimate a (4%) brick and mortar comp with a 15% .com growth rate, we are looking at a (3%) blended comp in FY14 -- representing about half of what is at risk for the year.
While not outwardly clear given dot.com and store comps are blended into one number, it’s pretty troubling that brick and mortar comps have been negative for nine straight quarters. Growth in the dot.com channel has protected the company's reported comp over that time period to some degree, as outlined in the chart below.
KSS definitely recognized the importance of dot.com and have grown that side of the business at a 37% CAGR over the last 5 years into a $1.7bn business. Unfortunately, the growth rate of KSS’ dot.com is clearly slowing – both on a one and two-year basis. We still dot.com growth of 15% in '14 - but it won't continue to grow fast enough off of a much bigger base to offset weakness in KSS' 1100+ doors.
Summary: We’ve been vocal in our expectation for a deceleration in the slope of domestic growth over the last couple months and while this morning’s downward revision to 4Q13 wasn’t particularly surprising, it does offer some positive confirmation to that view.
With the dollar breaking down, #InflationAccelerating, earnings growth still sub-trend, wealth effect (equities/housing) momentum decelerating and little incremental upside for consumption growth via a reduction in savings, we continue to think the growth decelerating trend extends through 1H14.
GIP MODEL REFRESH: The net impact to our GIP (Growth/Inflation/Policy) model from this morning’s data is another incremental shift in trajectory towards quadrant #3 – Slowing Growth and Rising Inflation.
To the extent that the market continues to discount slowing growth and subsequent, incremental easing in policy – which ironically/unfortunately only perpetuates the move into Quad #3 – we think slow growth exposure (gold/bonds/commodities/utilities) continues to outperform pro-growth leverage.
GDP DATA SUMMARY: Below we highlight the notables in this mornings, 1st revision to the 4Q13 GDP estimate.
Real GDP: revised lower by 80bps to 2.4% from 3.2%. Decelerating 170bps QoQ to 2.4%.
Nominal GDP: decelerating 200bps QoQ from +6% in 3Q13 to +4% in 4Q14.
Inflation: Inflation estimates marked higher with the GDP Price index and Core PCE measures revised up 30bps and 20bps, respectively.
C+I+G+E Revision: Investment revised up small, everything else revised lower.
C: Consumption saw the largest downward revision from a contribution perspective at -.53% with QoQ growth revised from +3.3% to +2.6%. Durable/NonDurables/Services were all revised lower but Durables (as the latest PCE data has reflected) saw the largest decline.
Whether the emergent deceleration in durables, and luxury and higher-end durables particularly, represents a pull-back in spending across the top income quintiles as equity and home value gains slow remains to be seen. We’ll get the updated PCE detail data on Monday.
I: Investment: Private Nonresidential Investment, which was revised higher by +0.4 from a contribution perspective and +3.5% from a growth perspective, was one of the lone bright spots in the report.
Inventories were revised lower and with inventory-to-sales ratios continuing to creep higher through year end, its unlikely inventories provide another outsized boost to reported growth in the coming quarters.
G + NE: Government was revised down modestly while the revision to the trade balance was the second biggest contributor to the headline decline with export growth revised -2.0% against a +.60% revision for imports.
Real Final Sales growth (GDP less Inventory Change): decelerating 20bps QoQ to 2.3%…revised lower by 50bps
Gross Domestic Purchases (GDP less exports, including imports): Very Weak sequentially - Decelerating 250bps QoQ to +1.4%..revised lower by 40bps
Real Final Sales to Domestic Purchasers (GDP less exports less inventory change): (Perhaps) The cleanest read on aggregate domestic demand was also weak, decelerating 100bps to +1.2%, revised lower by 20bps.
Christian B. Drake
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