Client Talking Points
The Yen was up small +0.2% vs USD, which was enough to keep the Nikkei from bouncing overnight. The Nikkei 225 closed down another -0.3% taking its crash from the July 2015 high to -22.8% and -15.4% year-to-date (China and Hong Kong closed today).
Post a dreadful producer price report of -4.2% year-over-year for the Eurozone this morning the ECB’s Peter Praet is saying they’ll “continue to act forcefully” (to try to tone down Euro Up vs Yellen’s Dollar Down move) so let’s see how European stocks react to this as they were down (again) last week with Italy’s MIB Index -2.1% week-over-week to -17.0% year-to-date.
With the SPY back in the black for the year-to-date (QQQ and Russell still down), we don’t see many stories about how well the Long Bond and Utilities (+15.1% year-to-date) are doing (absolute). The UST 10YR Yield is 1.76% this morning and the Yield Spread remains a big headwind for bank earnings as U.S. Cycle #GrowthSlowing continues (hosting our Q2 Macro Themes Call on Thursday 11AM).
*Tune into The Macro Show with Ben Ryan and Financials analyst Jonathan Casteleyn at 9:00AM ET - CLICK HERE.
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Top Long Ideas
CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.
The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.
Joining McDonald's, General Mills (GIS) also hit an all-time high last week. We continue to like GIS as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without some noise around the numbers. Just look at the Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising to name a few things that muddied the waters.
But after filtering out the noise, this is a business that is truly turning a corner. When fiscal year 2016 began last June, we knew this was not going to be an easy ship to turn towards success.
Now, many key product platforms are turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success and expect GIS to realize sustained top line growth in the low single digit range.
Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.
We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.
Here's the Q1 2016 Scorecard (data through 3/31):
Three for the Road
TWEET OF THE DAY
$WYNN All ears on Investor Day Wednesday. Will $wynn print a preliminary 1Q # high enough?
QUOTE OF THE DAY
Remember no one can make you feel inferior without your consent.
STAT OF THE DAY
The record for the highest jump cleared by horse and rider according to the official Fédération Equestre Internationale is 2.47 m (8 ft 1.25 in) by Huaso ex-Faithful, ridden by Capt. Alberto Larraguibel Morales (Chile) at Viña del Mar, Santiago, Chile on 5 February 1949. The committee stated that in order for it to be beaten, 2.49 m must be cleared.