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This Economic Indicator Slips For First Time Since Great Recession

Takeaway: Recent data releases bolster our call. U.S. growth is slowing.

This Economic Indicator Slips For First Time Since Great Recession - fed rainbows

 

The chorus of market prognosticators loudly proclaiming "all is good" in the U.S. economy seems to swell almost daily. (Overly optimistic Fed presidents are often the loudest in the bunch.) But the data continues to confirm otherwise.

 

It's interesting. Four or five months ago, virtually no one was talking about the prospect of recession. Now, at a bare minimum, it's at least a highly-clickable headline for the media to question growth slowing deniers about. 

 

This Economic Indicator Slips For First Time Since Great Recession - recession media

 

Each day the economic data continues to bolster our U.S. #GrowthSlowing call. (In January, we signaled that the likelihood of a U.S. #Recession sometime in the next one to three quarters is rising.) Here's the latest growth slowing indicator and analysis from our Macro team sent to subscribers this morning:

 

"Amazingly, the Markit Service Sector PMI falling into contraction for the 1st time since the Great 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."

 

It's yet more evidence of our Macro team's gloomy economic outlook and perhaps the clearest indication yet that the biggest financial risk is believing Wall Street/Fed perma-bull consensus. 

 

Keep your head on a swivel out there.


Eurozone, #GrowthSlowing and #Gold

Client Talking Points

EUROZONE

Got inflation? Eurozone CPI fell 10 basis points to 0.30% year-over-year in a final January reading. The ECB meets next on March 10th – this print taken alongside recent rhetoric from ECB heads suggests the increased likelihood the Bank acts to increase its QE program. Remember, its goal is to stoke inflation anyway it can, even if QE can’t accomplish this, or spur growth.  #EuropeSlowing  

#GROWTHSLOWING

Amazingly, the Markit Service Sector PMI falling into contraction for the 1st time since the Great 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.

#GOLD

Gold loves nothing more than down dollar and interest rates. With consensus positioned for a stronger USD and a series of rate hikes into 2016, gold has sniffed out growth slowing data and market turmoil. In consequence, Gold and Silver are leading CRB divergences YTD at +16.6% and +10.3% YTD against a weaker USD (-1.3% YTD) and a 10-Year Yield that continues to price in slower growth, backing off -51bps on the year, at 1.74% this morning. While the Fed continues to play hardball on the direction of policy in 2016, the market trades skeptical.  

 

*Tune into The Macro Show with Darius Dale and Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 25% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
xlu

Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.

 

With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).

gis

General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.

 

On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.

TLT

With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.

 

The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.  

Three for the Road

TWEET OF THE DAY

Is the $MD roll-up over? *LIVE* q/a12:15PM today @Hedgeye @HedgeyeHIT https://app.hedgeye.com/insights/49375-healthcare-updates-you-can-t-afford-to-miss-plus-live-q-a-md-holx-md

@HedgeyeHC

QUOTE OF THE DAY

The most difficult thing is the decision to act, the rest is merely tenacity.

Amelia Earhart

STAT OF THE DAY

American drivers put a record number of miles on their vehicles last year roughly 3.15 trillion miles, or enough to make roughly 337 round trips to Pluto (The Washington Post).


ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns

Takeaway: Investors made the first contribution to taxable bonds in 15 weeks, although only a modest +$107 million.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 17th, taxable bond funds saw their first inflow in 15 weeks, although only a modest +$107 million. Also within bonds, fixed income ETFs took in +$2.9 billion. That amount included +$448 million in contributions to the long duration Treasury TLT fund, which has now increased year-to-date assets by an astounding +$3.0 billion or +44%. Meanwhile, investors continue to exit equity mutual funds and ETFs, drawing down another -$4.1 billion from the category, even during a week with declining volatility. International equity funds, however, were the exception within total equity products, taking in +$1.0 billion, as the category continues to experience stable inflows. Finally, investors seeking safety shored up +$8 billion in money market funds as the move to build cash is accelerating.


ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI1

 

In the most recent 5-day period ending February 17th, total equity mutual funds put up net outflows of -$1.2 billion, trailing the year-to-date weekly average outflow of -$1.0 billion but outpacing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$1.0 billion and domestic stock fund withdrawals of -$2.3 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 5 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$964 million, outpacing the year-to-date weekly average outflow of -$873 million and the 2015 average outflow of -$475 million. The inflow was composed of tax-free or municipal bond funds contributions of +$857 million and taxable bond funds contributions of +$107 million.

 

Equity ETFs had net redemptions of -$2.9 billion, slightly better than the year-to-date weekly average outflow of -$4.4 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.9 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI2 2

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI3

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI4

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI5

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI12

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI13

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI14

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI15

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI7

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: With Treasury inflows trending, the long duration Treasury TLT ETF took in another +$448 million or +5% last week. Also, the utilities XLU fund took in +$469 million or +6%.

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI17

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.0 billion spread for the week (-$4.1 billion of total equity outflow net of the +$3.9 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$475 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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CHART OF THE DAY: New Home Sales Throw Up A Brick

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... 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."

 

CHART OF THE DAY: New Home Sales Throw Up A Brick - 2 25  New Home Sales   Starts Wave


Number 2

“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.  

 

Number 2 - Earnings cartoon 11.03.2015

 

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

 

Number 2 - 2 25  New Home Sales   Starts Wave


The Macro Show Replay | February 25, 2016

 


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