“Bear Markets are like buttholes. Everyone has one and they all stink”
It took me four hours to commute home from work yesterday.
When I got home my basement was partially flooded and my daughter had just finished taking a #2 …. Next to the toilet.
She then proceeded to clog the toilet (a new toilet I installed just two days earlier mind you) with paper, underwear, tile spacers and sandpaper.
Oh, and the whole family is sick, again.
That about sums up the market day as well.
Back to the Global Macro Grind …
Yesterday saw the yield spread compress back inside 100 bps, New Home Sales drop -9.2% and the February Services PMI fall into contraction at 49.8.
With what do you chase that shot of domestic morosity?
With a -6.4% drop in Chinese equities, a willingness to lend Japan money for 40 years (as in Four Zero!) for less than 1%, a new negative low in 10Y JGB’s and an admission that the “global recovery has weakened further” and a call for “bold action” out of the IMF of course.
Let’s quickly contextualize the data and preview today’s durable goods figures and tomorrow’s income and spending data for January.
Dude, Don’t Be Such A Flatliner!: The yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. A yield curve flattening to inversion also carries the distinction of throwing off zero false positive vis-à-vis recession signaling over the last 7-cycles. Lower lows in the yield spread ≠ the bond market pricing in “escape velocity”.
Brick!: New Home Sales threw up a brick to start 2016, falling to -5.2% YoY and marking the slowest pace of growth and the 1st negative year-over-year print since June of 2014. The median price of New Homes declined -5.7% MoM and decelerated to -4.5% YoY – the 1st consecutive months of YoY decline since 2011. Further, sales growth was 0% or negative across all price tiers for the first time since the 2014 trough. Yes, the outsized decline in the West region (weather impact) was likely a distortion that resolves higher but I also didn’t hear anyone call out the 100% YoY gain in the Northeast (weather benefit) as a positive distortion. NHS is the most volatile housing series there is and carries a large standard error with significant subsequent revisions so we don’t take an overly convicted view of any single month in isolation but as the Chart of the Day below shows, the multi-month trend across New Home Sales and Starts has been one of slowing.
Honey, does this PMI print make me look contractionary?: Amazingly, the Markit Service Sector PMI falling into contraction for the 1st time since the recession got almost zero media coverage yesterday. Services Consumption represents ~65% of household spending and ~45% of GDP and has hereto been held out as the bullish foil for the ongoing industrial recession. The ISM Services Index has shown a similar trend – slowing in each of the last 3 months and, at the current index reading of 53.5, sits at its lowest level since the polar vortex lows of February 2014.
Today is a gift that’s why they call it the present … Unless you’re part of the domestic and global industrial complex in which case today = last month = last year and you continue to try to sit in the back of the room and hope you don’t get called on by the Brofessor of Bearish Macro Realities. Headline Durable Goods growth has been negative in 9 of the last 11 months, Durable Goods Ex-Defense & Aircraft (i.e. the stuff the average household buys) has been negative in each of the last 8 months, Core Capital Goods orders have been negative for 11 consecutive months and forward Capex Plans as measured by the Fed Regional Surveys continue to make new lows. Durable and Capital Goods will receive the gift of easy comps in the coming months and should improve sequentially but it’s hard to argue sequential improvement off the worst month-over-month print (last month was -5.0% MoM) in years as a catalyst.
Tomorrow – “It’s Friday and you ain’t got #2 to do” …. except analyze PCE data: Tomorrow’s Income and Spending data for January will serve as a nice case study in duration sensitivity. The sum of aggregate hours growth and hourly earnings growth from the January NFP data imply a sequential acceleration in aggregate income growth in the official release tomorrow morning. If the savings rate ticks down from its current multi-year high it will drive a sequential acceleration in consumption growth and all will be well as virgin Keynesian unicorns graze blissfully in fertile, manicured fields of accelerating aggregate demand. Month-to-month oscillations don’t, however, obviate the reality of the cycle. Income growth, employment growth, consumption growth, consumer confidence and corporate profits all peaked in 4Q14/1Q15. No, income and consumption growth will not go to 0% this month or next month or the following month but the slope of the Trend line will remain negative … and that is the investible point.
Monday: Monday’s are the worst, literally – incidence of heart attack and death follow a weekly pattern with the peak occurring on Monday as stress around the ensuing work week reaches its coronary crescendo. This Monday we’ll get the Pending Home Sales data for January which will provide the cleanest read on sales activity in the existing market. We are now in month 7 of decelerating sales activity and think the trend continues to slow as we traverse peak comps in April/May with very real risk of negative Y/Y growth. If the historical relationship holds we would expect to see HPI (home price growth) follow that demand trend on a lag.
2016 has been a #2 market for global equities and the internal plumbing in credit markets is getting increasingly brittle. At present, we continue to think fiduciary feasance = less chasing of low volume rallies and more pro-active Risk Managing for a potential flush.
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst