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“I never believed in Santa Claus because I knew no white dude would come into my neighborhood after dark”

-Dick Gregory

I made two lists last night.  I had to check the second one twice.

The first was my son’s Christmas List - which included a “space station”.  He doesn’t even know what that is but some other kid wrote it down so he needed it too. #GroupThink starts early.

Checking It Twice - fed rainbows

Back to the Global Macro Grind …

The second was a quick refresh of global Industrial data post the U.S. ISM’s sojourn to sub-50 for the first time in 3-years. 

Headfake or Harbinger?

Here’s a quick look at some of the current members of the PMI #ContractionClub

  • U.S.:  48.9
  • China: 49.6 (official) or 48.6 (Caixin)
  • Brazil: 43.8
  • Canada: 48.6
  • Russia: 37.1
  • South Africa: 47.5
  • South Korea: 49.1

How about 3Q Earnings Growth across the lead indices according to Bloomberg data:

  • U.S. (SPX) = -4.6%
  • Japan (Nikkei) = -9.5%
  • U.K. (FTSE 100) = -30.5%
  • China (Shanghai Comp) = -18.9%
  • Brazil (Bovespa) = -42.7%
  • Canada (TSX) = -32.4%
  • Russia (MICEX) = -5.6%

Contractions (& Stagflations) can happen slowly, then a lot at once … Ask Brazil.   

This isn’t USA circa 1960 so maybe recessionary Industrial and global earnings data doesn’t matter – domestic auto sales are en fuego (Nov marked a new YTD high at 18.2 MM units and 2015 is on pace for a record year), construction activity remains strong (+13% YoY, latest Oct data), consumer credit is expanding, income growth remains solid and consumption growth is decelerating but still running ~3%.      

Or maybe it does. 

  1. ISM: As the Chart of the Day shows, sub-50 ISM prints have generated some false positives vis-à-vis recession signaling but contraction in the industrial-manufacturing sector has accompanied pretty much every downturn over the last century. 
  2. Goods vs Services: Goods Consumption is more cyclical than consumption of services and, historically, weakness has manifest in cyclical demand ahead of the peak in demand for more inelastic consumption. Employment growth in the goods producing sector tends to presage the trend in services and aggregate employment and employment growth in goods-producing sectors has decelerated from +3.0% at the start of the year to +1% in October – and comps only get tougher the next few months. In energy states - where the trend in job separations has again begun to negatively diverge from the broader trend, the declines have been more pronounced. In Texas, for example, goods employment is currently running -2.6% YoY. We expect further concentrated weakness across energy levered economies as hedges roll off and if domestic policy drives further price deflation in dollar settled commodities (which is pretty much all of them, all the time). 

The risk posed by the contraction in industrial output would also be easier to look past if it was isolated and if the Fed wasn’t set to perpetuate further disinflationary pressure. But it’s not and they are. 

In many ways, the global Currency Wars and the current global production slump are outcroppings of the same secular malady – overleverage, oversupply and stagnant demand. 

Policy, of course, attempts to manipulate “price” both in response to and in the hopes of influencing prevailing supply and demand conditions. 

Recall, conventional policy easing is believed to act through two basic channels:

  1. Lower rates = higher domestic investment demand and higher demand for interest rate sensitive consumption = ↑ Growth
  2. Lower rates = less demand/more supply of dollars = depreciating Currency = ↑ Exports = ↑ Growth

Individual economies and central banks operate independently and conventional policy and currency devaluation can work sufficiently well when economic cycles across the globe are, to some extent, out-of-phase and traveling along different points of the macro sine curve.

But the world as a whole is a closed system. If no one is producing and/or exporting (see list above), global demand is flagging – it’s not just an isolated strong dollar = lower domestic exports and industrial profitability phenomenon. 

Granted, Euro-zone PMI’s are comparably better, in the mid-50’s, but EU “exports” are a bit of a misnomer as most of what is counted as exports is actually intra-Eurozone Trade (think Massachusetts “exporting” to New York).   

Is positive but decelerating late-cycle U.S. growth and modest growth in the Eurozone against trough comps enough to float the global equity boat until the world comps out of its current malaise? 

Perhaps but, broadly, it feels hard to get incrementally bullish at the highs and/or ramp gross/net long exposure to levered balance sheets and high beta illiquidity based on prevailing global fundamentals and their likely trajectory. 

I feel like I’ve expressed that same sentiment a number of times this year but with the S&P500 up just 2% YTD, the Dow up just +0.36% and many EM and developing Asia equity markets deep in the red, reality has supported that boring consistency.  

What said the market to yesterday’s ISM data:

  1. Bond Yields tanked: the 10Y fell -6.3 bps to 2.14, the 2Y fell -2.4 bps and the yield spread fell to a 52-week low at 124 bps. 
  2. The Dollar retreated: The $USD declined -40bps, re-breaching the 100-level on the index to the downside
  3. Stocks barely blinked: All 9-sectors closed higher with the S&P500 finishing up for just the 6th day in the last 19. 

Random walks and single-session reflations ≠ trend accelerations in real growth and Down Dollar + Down Rates is not a growth accelerating signal. 

Janet’s naughty and nice (indicator) list will be prodded and checked twice as she delivers speeches to both Congress and the economics club over the next two days. 

Whether the BLS elves filled Janet’s data sack with inside edge on what the November NFP stocking holds, I do not know. 

I do know that, on balance, the recent data has been underwhelming and the nearer-term forward outlook promises further deceleration.

Remember (again) we’re talking slope of the line, not absolute. Much of the data will remain “okay” on an absolute basis in the nearer-term, but the slope of the growth line is and will remain negative. 

As uber-dove Evans made headlines with yesterday … “I’m a little nervous”.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.15-2.23%

SPX 2045-2109

VIX 14.11-18.25 
EUR/USD 1.05-1.07

Gold 1050-1080 

Good luck out there today. 

Christian B. Drake

U.S. Macro Analyst

Checking It Twice - ISM CoD