Takeaway: Consumer revolving credit accelerated to +3.2% YoY in July, marking a 5th consecutive month of positive growth.
FIVE-FECTA: REVOLVING CREDIT GROWTH ACCELERATES FURTHER IN JULY AS THE BREAKOUT IN CONSUMER CREDIT HITS 5-MONTHS
Consumer Revolving Credit rose at a 7.3% annualized rate in july, the 2nd largest increase in 6.5 years behind the 13.2% rise reported for April.
Inclusive of July, this marks the 5th consecutive month of positive MoM loan growth – the longest such streak since April of 2008.
The monthly revolving consumer credit data continues to accord with the broader cross-category trends in the weekly Fed H.8 release where the slope of growth across total loans, C&I, CRE, and residential real estate all remain positive.
SO, WHERE’S THE SPENDING?
Aggregate personal and disposable income growth is currently accelerating alongside an emergent breakout in salary and wage income growth.
Indeed, aggregate private sector salary and wages grew +6% in July, the fastest rate of growth in over 3 years excluding the peri-fiscal cliff period (although wage income growth will likely slow in august given flat growth in hourly earnings and a modest deceleration in growth in the employment base).
However, while capacity for consumption is rising, actual consumption is not. Real consumer spending declined -0.2% MoM in July and decelerated on both a 1Y and 2Y basis as the savings rate hit an 18-month high at 5.7%.
The collective motivation underpinning the concomitant acceleration in both savings and revolving credit isn’t completely clear – it may be some combination of liquidity preference and income distributional effects, but we don’t have a clean explanation (yet).
Irrespective of the somewhat incongruous income-credit-saving dynamics, the reality of a modern, consumption economy, is that it's total spending that matters and accelerating credit growth + accelerating income growth is certainly supportive of consumption growth.
Whether the conflation of positive labor and credit market trends, the fledgling breakout in the dollar and the fledgling breakdown in commodity inflation can drive a sustainable, late-cycle acceleration in domestic consumerism in the face of negative real wage growth, a slowdown in housing, a discrete EU/Japan/ROW growth deceleration, and a nascent proclivity for saving remains to be seen, however.
We continue to like defensive yield and late-cycle exposure vs. consumer/housing/early-cycle leverage.
Christian B. Drake
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email
European Financial CDS - Swaps were mixed, though, on average, tighter across Europe's banking complex. Apparently, much of the QE-lite move was already priced in. Sberbank widened on the week by 12 bps to 321 bps.
Sovereign CDS – Sovereign swaps mostly tightened over last week. The US was the exception, widening by 1 bp to 17 bps. European sovereign swaps were tighter across the board on the heels of the ECB's QE-Lite. Portuguese swaps tightened 17 bps to 145 bps while Spanish sovereign swaps tightened by -10.7% (-7 bps to 57 ).
Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 17 bps.
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Takeaway: We think that people are missing the boat on Restoration Hardware.
Editor's note: This is an excerpt from our retail sector team led by Brian McGough.
Takeaway: We think that people are missing the magnitude of earnings growth at RH, the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders.
The question is not whether the stock will go to $90 vs $100 (where we see most price targets), but whether it will get to $200 vs $300.
Even the best stories, however, are not linear. There will be bumps along the road. But this print should not be one of them. We’re well above the Street in Sales, Margins and EPS, and we flush out in this note where we could be wrong.
Takeaway: We expect EM assets to continue outperforming their DM counterparts over the intermediate term.
Not much has changed with respect to our thematic views on emerging market assets. After having been the bears throughout 2013 and into 2014, we’ve been extremely bullish on the EM space since MAR of this year and see no reason to alter that stance.
Specifically, both our top-down quantitative signals and bottom-up GIP fundamentals augur for continued outperformance of EM assets over the intermediate term.
TACRM Quant Signals (CLICK HERE to download the expository white paper):
GIP Fundamentals: Core to our bullish bias on EM assets is an deep understanding of the role DM monetary conditions has historically played in determining valuations for EM assets. Specifically, as those conditions ease – especially US dollar liquidity – EM assets tend to benefit from a tailwind of marginal investor interest. We’ve discussed this carry trade at length over the course of our thematic work on emerging markets (CLICK HERE for the most recent example… refer to slides 17, 19 and 20).
Looking to the scoreboard, EM has certainly been the place to be since we introduced the thesis (performance since 3/26):
This outperformance makes perfect sense in the context of the outperformance of the slow-growth, yield-chasing style factor domestically. Specifically, the performance of REITs, MBS and stocks with high dividend yields have explained anywhere from 60-78% of the MSCI EM Index’s price movements across the trailing intermediate-term duration, per the table below which shows the average of trailing 1M, 3M, 6M and 1Y correlations.
All told, until the outlook for domestic and European economic growth ticks up (it won’t in our models through at least year-end), we think investors will have adequate fundamental cover to remain overweight EM. That call is certainly not without risk in the context of #VolatilityAsymmetry across every major asset class, but that remains a bridge we’re happy to cross when we get to it. Calling stock market tops on a prospective basis tends to amount to little more than a fool’s errand.
Our current best ideas across the EM space are highlighted in the table below. A couple of changes to note:
Best of luck out there and feel free to email us with any questions.
Associate: Macro Team
We did not see the Scottish Independence threat manifesting like it has. In fact, UK high frequency data has shown a strong positive divergence over continental Europe in recent weeks, which we believe is supportive to our thesis.
That said, the GBP/USD (etf FXB) has clearly been battered down: -5.8% since a high on 7/2; -2.6% month-to-date; and over -1% intraday (the weakest levels since late November 2013). It has moved in step over the last two weeks as the spread between “No” versus “”Yes” votes for Scottish independence has come in considerably to the Yes side - to a 2% advantage according to a YouGov poll released over the weekend.
Ultimately we think the myriad of economic risks presented by a "Yes" vote (listed below) will outweigh the more popular sentiment shift over recent weeks – which has been driven alongside a campaign by Scotland’s First Minister Alex Salmond to appease fears presented by secession – however be prepared for a close vote. Also note, betting markets are not buying into Scottish independence, with No = 71%; Yes = 29%.
While Salmond’s "Yes" campaign has been driven on the promise that an independent vote will allow the country to capitalize on oil wealth and enable the government to improve its system of social welfare, we size up his campaign rhetoric as over-promising and under-delivering.
The myriad of economic risks (presented above) may in fact leave the average citizen at a disadvantage as the economy grows at a slower rate with less jobs. Add on the uncertainty around the promise of “oil wealth”: while more than 80% of Britain’s oil lies in reserves with Scotland’s maritime borders, how the reserves would be divided is uncertain, with no certainty that an independent Scotland would get the long end of the stick.
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