Headaches

“I’ve had a perfectly wonderful evening. But this wasn’t it.”

-Groucho Marx

I’ve never had a headache.  Not one. 

It’s probably some recessive trait resulting in reduced gene expression and enzymatic/receptor activity along the CNS pain conduction pathway.  Or, perhaps I’ll prove to be an X-Man progenitor …. that seems cooler.

Headaches - z ty

The #MacroFates, however, have endowed Global Central Bankers with less luck as the growth and inflation headache remains both persistent and acute. Japan’s economic maladies continue to get chronic-er, China begrudgingly upgraded to prescription strength, EM & Commodity markets remain in strong-dollar hospice, and Europe is trying to change the locks while Draghi is away on holiday. 

Back to the Global Macro Grind...

Welcome to (what are supposed to be) the dog days of domestic macro.  Mid-August, Post-Jobs Friday hangover, a relative scarcity of macro data releases and a soft FOMC speech calendar – perhaps the slowest, non-holiday week of the year.      

Despite the dearth in high frequency domestic data, there’s always some macro hay to bale.  Here’s a quad-fecta of choice highlights: 

China Syndrome:  With China devaluing and choosing to support export growth at the risk of capital flight and IMF indignation, they were, in effect, explicitly acknowledging the growth problem.  Canada, New Zealand and Australia – the canonical “commodity currencies”  – got tagged on the news and capital flowed into treasuries, taking 10Y yields down -9 bps to 2.14% with the yield curve flattening toward 52-wk lows. 

The growth data (china housing starts down -21% YoY, Industrial production down to +6.0% YoY from +6.8% prior) and allocation rotation is seeing follow through this morning with the German 2Y trading back down to -0.29% (2015 lows)  and the U.S. 10Y down another -8 bps and flirting with a 3-month low at 2.05%. 

We’ve been strumming the slower (growth) and lower (rates) for longer tune for a while now and view these high-entropy events as crescendo’s in the larger, secular Macro symphony.   

Who Likes lower rates – mostly stemming from OUS turmoil? 

Homebuilders for one.  Global tumult is insidious, but usually manifests on a lag domestically so, in the nearer term, ↓rates =  ↑ affordability = ↑ room for prices to rise = ↑ housing.  Housing was actually green on the day yesterday along with Utes, Reits, bonds and all things low-beta, defensive yield.   

Sticking with housing, the Starts and Permits data set for release next Tuesday may prove interesting. 

Housing Starts:   The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  Indeed, after rising a resounding +385% YoY in May, permits in NY state went vertical to +632% YoY in June.   A reversal of that pull forward sets the stage for a potential retreat in the reported July data.  For context, a decline back to the TTM average in permits in the Northeast implies a -12-13% sequential decline, taking the total back below 1.2 MM from the post-crisis high of 1.34 MM recorded last month.     

2Q Earnings Scorecard:    With ~91% of SPX constituent companies having reported earnings for 2Q, the results have been less than inspiring – particularly for a private sector economy purportedly  in position for an escape-velocity handoff from the Fed.   

  • Sales/EPS:  In the aggregate, Sales growth is running -4.3% while Earnings growth is tracking at -2.73%.  Granted, the weakness is centered on energy and the industrials complex but those sectors represent large swaths of economic activity and they don’t operate in a vacuum – and commodity price deflation remains a real and ticking risk and the hedge protection that supported 2014/2015 is a lot thinner in the coming year.
  • Beat/Miss:  Just 48% of companies have beaten topline estimates while 74% (in-line with recent qtr averages) have beaten on EPS.  Of course, as has been the case for the last 5 years, the progressive deflation of expectations ahead of the quarter remains the best means to manufacturing a “beat”.  This quarter has not been an exception as consensus estimates for 2Q15 have drifted steadily lower for SPX constituents into and through 1H15.    
  • Operating Performance:  As can be seen in the Chart of the Day below, lackluster beat-miss trends have not been buttressed by positive operating performance which has, once again, been underwhelming with just 38% and 43% of companies registering sequential acceleration in sales and earnings growth, respectively. 

U.S. Budget:  The Treasury will release the July Budget data this afternoon.  The CBO, however, releases a monthly budget review ahead of the official treasury release which is typically dead nuts.  The CBO estimates the budget deficit for July at $149B, putting the fiscal YTD total (10-months) at $463B.

With revenue’s growing at a 3% premium to outlays this year, and after adjusting for payment timing issues, this represents a -$41B decline relative to the same 10-month period last year and the lowest total in the post-crisis period.  The deficit-to-GDP ratio has improved to just 2.4% (from peak of 10.3% in 2010) alongside those favorable fiscal flows and in spite of uneven and middling growth. 

An improved and improving fiscal balance is $USD supportive although that remains a 2nd order consideration as monetary policy continues to control the speculative FX flow.  Relatedly, given the pervasive dollar strength and expectation for a divergent policy path for the U.S., it’s interesting to note that $USD performance in the peri-liftoff period across the last five cycles has been fairly distinct.   The market tends to discount the policy action with the currency  strengthening ahead of the move and subsequently weakening once rate hikes actually commence.  Whether the extraordinary conditions currently prevailing globally represent a unique dynamic will be an interesting one to risk manage. 

One for the road:   If you missed it, last week the SEC approved a rule requiring public companies to disclose the pay ratio of the CEO to that of the company’s median worker.   The disclosure is unlikely to affect material change, but the baby-stepping towards transparency is positive on the margin and, at the least, will provide headlines and fodder for the inequality debate.  

Yesterday (& today) proved to be a massive headache for global policy makers, EM and commodity markets and “reflation” portfolio’s.  The timing of high-entropy macro events can be surprising, but their manifestation is not.  If you’ve been following the Macro Playbook of the last month with growth/inflation slowing (TLT) and defensive yield (bond proxies, XLU) anchoring your starting line-up,  you’ve had a perfectly wonderful evening.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.11-2.24%

SPX 2064-2098 

VIX 11.88-15.18
USD 96.35-98.46
Oil (WTI) 41.82-46.09

Gold 1079-1121

Christian B. Drake

U.S. Macro Analyst

Headaches - z CoD 2