The Economic Data calendar for the week of the 4th of April through the 8th of April is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
See today's supposedly "bullish" non-farm payroll numbers? Nothing to celebrate. "Remember, whatever the bulls want to characterize as "good" news now = #Fed rate hike," says Hedgeye CEO Keith McCullough.
On a related note, we've got big news.
Those waiting for an inflection to Trend acceleration in domestic growth have been waiting for 9-months and will be watching the economic paint dry for a long while still. Those looking for an imminent, acute collapse in activity and a Saturday recession will be similarly disappointed.
Since 1K labor review notes have already hit your inbox and because my proclivity for brevity has become an increasing function of my age, # of kids, and proximity to the weekend, let’s go with the bullet-point set of tangible takeaway:
A visual tour of the data is below. Enjoy the weekend.
Christian B. Drake
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough discussed how the Fed will interpret today’s late cycle non-farm payroll numbers and its implications for investors.
***Below is today's summary of our internal analysis of recent key economic and policy developments emanating from economies in the aforementioned regions. We thought the summary might be helpful as you ponder the sustainability of this epic short-squeeze in global reflation assets.***
In China, the latest batch of high-frequency growth data point to near-term economic stabilization. In conjunction with reduced capital outflow pressures, greater transparency and recent CNY strength, it’s safe to say the bearish yuan overhang has been lifted – for now, at least. We expect that negative catalyst to resume here in Q2, however, as the USD should start to rise amid heightened risk aversion per our #Quad4 forecast for the U.S. economy. This is all part of our expected path for Chinese economic growth and the RMB (i.e. “walking down the stairs” vs. the consensus view of an inevitable crash).
In Japan, the sour 1Q Tankan Survey, terrible MAR Manufacturing PMI report and declining stock prices all call attention to the efficacy and limits of BoJ monetary policy. This has shifted the Japanese policy debate to the fiscal arena and it would appear that Abe is readying yet another [ineffective] supplementary budget amid his call for other G7 economies to dive into the expansionary fiscal policy pool with him. The frequency with which DM policymakers are acting to spur growth is increasing as the impact of marginal stimulus wanes and demographic headwinds gather steam.
In India, quiet week in terms of economic releases but sequential downticks in both growth and inflation readings of late have perpetuated expectations of dovish monetary policy out of the RBI, which has been a boon to Indian capital markets and the INR of late. That said, however, we do not view the aforementioned market deltas as sustainable amid another bout of global risk aversion – which is something we anticipate here in Q2.
In South Korea, the preponderance of the latest batch of high-frequency growth and inflation data implies a #Quad1 outcome – as do trends across key metrics. That in conjunction with South Korea’s low score within our proprietary EM Crisis Risk Index affords us scope to remain favorably disposed to South Korean capital markets and the KRW.
In Australia, the latest batch of high-frequency growth data came in mixed, while the political situation has taken a decided turn for the worse – at least in units of investor uncertainty. We don’t have an explicit view on the outlook for Australian capital markets, but we do believe the AUD is grossly overbought in the context of what we continue to view as an unsustainable global reflation rally nearing its eventual end.
In Taiwan, economic growth appears to have stabilized per the MAR Manufacturing PMI report and trends across the preponderance of key high-frequency growth data. That in conjunction with inflation that is now accelerating on a sequential and trending basis would seem to support the TWD – if not on an absolute basis, then certainly on a relative basis to other EMEs – amid the next round of global dollar tightening, which itself should occur here in Q2.
In Indonesia, the latest batch of high-frequency growth and inflation data was generally positive, on the margin, but we strongly caution against chasing those deltas with increased allocations to Indonesian capital markets or via the IDR. Recall that Indonesia scored most poorly within our proprietary EM Crisis Risk Index, which itself underscores our bearish bias on Indonesia over the intermediate-to-long term.
In Thailand, the latest batch of high-frequency growth and inflation data came in decidedly mixed, highlighted by the contrast between decelerating BSI (FEB) and accelerating Export growth (MAR). Per Thailand’s low score in our proprietary EM Crisis Risk Index, we remain favorably disposed to the country with respect to the intermediate-to-long term.
In Brazil, the latest batch of high-frequency growth data is generally confirmatory of two of the four reasons we think Brazilian capital markets and the BRL are currently priced to perfection: 1) growth contracted at a slower rate and 2) inflation inflected from a persistent trend of acceleration. That in conjunction with 3) the removal of the bearish CNY overhang and 4) consensus speculation that a post-Rousseff administration led by Michel Temer or Aecio Neves will implement much-needed fiscal and economic reforms (which may lend scope to BCB to ease) has value investors backing up the truck here. We think such actors are setting themselves up to be largely disappointed over the intermediate-to-long term as the path and pace of reform falls well shy of investor expectations amid a looming bankruptcy cycle in Brazil. Refer to Brazil’s elevated score in our proprietary EM Crisis Risk Index for more details.
In Mexico, growth continues to slow on a trending basis. Much like in Indonesia, we find it imprudent for real money investors to chase the recent solid performance of Mexican capital markets and the MXN – the both of which benefited from what we continue to view as an unsustainable global reflation rally. Like its Latin American neighbor Brazil, Mexico scores poorly on our proprietary EM Crisis Risk Index, which underscores our intermediate-to-long-term bearish bias on the country.
In Russia, both the RUB and Russian capital markets are starting to break down amid what may be the first signs of the resurgence of global dollar tightening here in Q2. Russia screens fairly poorly on our proprietary EM Crisis Risk Index, but not nearly as poorly as its oil-producing counterparts in Latin America (namely: Brazil, Mexico and Colombia). As such, we think those looking to re-short commodity-linked EM countries would do better to avoid Russia – which has a substantial degree more political and economic risks priced into its financial markets than its peers.
In South Africa, the latest batch of high-frequency economic data is confirmatory of what we’ve previously identified as the key cyclical risk to South African capital markets – hawkish monetary policy out of the SARB (which we expect to remain ongoing). While that has been a boon to the ZAR, we don’t view its recent gains as sustainable in the context of a the aforementioned global dollar tightening scenario we’ve identified for Q2. Additionally, South Africa scores particularly poorly on our EM Crisis Risk Index, which underscores our intermediate-to-long-term bearish bias on the country.
In Turkey, the latest batch of high-frequency economic data would seem to suggest Turkish economic growth is has likely inflected from its positive run ending in 4Q15. While that is certainly not a positive catalyst, we don’t have an explicit bias on Turkish capital markets or the TRY other than our expectation that both continue to trade in line with broader EM asset class beta from here.
Remember 2H14? That is a good summary of #Quad4’s impact on reflation assets. Don't disrespect what falling nominal GDP expectations (amid heightened recession fears nonetheless) might do to the collective risk appetite of investors. The Fed likely cannot opt for QE4 unless stock market declines force their hand. Moreover, there's a lot of time and space between April 1st and the FOMC's June 15th statement (in which they update their S.E.P. and Dot Plot). The April meeting offers no such [potentially bullish] catalyst.
Best of luck out there risk managing the aforementioned pivot!
Takeaway: Enclosed is our REPLAY of our Best Ideas Short call we hosted on T. Rowe Price called Paddling Upstream.
Link to MATERIALS
We hosted a Best Ideas Short call on shares of T. Rowe Price (TROW) yesterday. While a well managed, disciplined investment manager, the secular shift to ETFs and mostly importantly to Large Cap strategies is too pervasive for the firm to meet the Street's expectations in our view. In addition, this predominately equity mutual fund manager is at the wrong part of the cycle operating at peak margins and peak profits with the growing potential for a long overdue market decline to kick off negative operating leverage. The firm has unappreciated equity leverage in its most important product, its target date fund franchise with its "through" asset allocation. Our key takeaways are:
1.) The shift from active to passive continues to accelerate and 67% of passive inflows are going to Large Cap strategies. TROW has the largest percentage of Large Cap product of any public mutual fund manager and when including SMAs, TROW's Large Cap exposure goes to over 40% of total assets-under-management:
2.) The firm's Target Date franchise is its go to source of growth, however the oldest Baby Boomers turned 65 in 2011 and now three Series of TROW target date products are in redemption. The hump gets worse in the distribution into the 2020 series which is the second biggest pool of TD assets for the manager. Target date is the only source of growth currently in the overall complex.
3.) TROW is once again at peak margins and profitability and after setting a new high water mark in 2014 at over 50% pretax margins, results are set to recede. TROW will also be bumping up against a break point in fees at over $500 billion in mutual fund AUM which won't help margins. We have earnings at $4.06 for 2017, -17% below the Street before considering that the stock's multiple should also contract against the group.
Please let us know of any questions.
Jonathan Casteleyn, CFA, CMT
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