“There’s a difference between a good time and a lifetime”
I think that quote was originally conceived in the dating and “spouse selection” context.
But at 85 days without a move <-1%, that’s the durational sensitivity Trump traders, common sense mongerers and data dependence junkies continue to wrestle with in real-time.
Back to the Global Macro Grind…
Q: Did the post-election narrative bias favor pro-growth implications and backseat rates hike, protectionism and policy uncertainty risks? And did reflexive behavior amplify the repricing associated with the phase transition in that narrative shift?
A: If you passed that query through your binary (Yes/No), common sense filter, the output would be “Yes”.
From there, the logic chain then extends to some version of the following:
Trump Trades should unwind and the market should correct in the progressive abandonment of that narrative as investors rationalize that over-exuberance and reprice the reality of geopolitical risk and uncertain, lagged and slower-to-materialize stimulative policy. Moreover, Peak Complacency prevailing currently in the face of conspicuously elevated uncertainty must represent a build of latent risk that will invariably manifest in an acute increase in volatility.
That is not an irrational line of thinking and, for the most part, the empirical supports it as multi-year lows in cross-equity correlations and VIX <11 is typically followed by VIX >11 and rising equity correlations.
That’s the “common sense” anchor on one side of the complacency tug-o-war. Anchoring the opposing side is the fundamental data, that both domestically and globally, doesn’t support narrative abandonment.
Indeed, while “Trump Trade unwind” has increasingly garnered headlines, most haven’t, in fact, unwound. While performance spreads are generally past peak, relative performance across reflation and Trump policy levered assets remain almost universally positive.
Consider the latest, 1Q17 Senior Loan officer survey released this week. In microcosm, it represents a good reflection of the larger tug-o-war:
The latest survey was, on net, not growth positive: Banks tightened standards for C&I loans for a 6th consecutive quarter, tightened CRE standards for a 7th consecutive quarter, tightened auto loan standards for a 3rd straight quarter and tightened standards for credit cards for the 1st time in over 6 years.
The implications of consumer credit tightening are fairly straightforward: as banks make it more difficult for Main Street to get credit, economic activity slows, and that self-propagates lower loan activity as demand for credit suffers. In a financialized and credit driven economy like the U.S. credit trends and growth are intimately linked in self-reinforcing cycles.
This magnitude and duration of credit tightening is generally only observed during or preceding recessions.
The bullish rejoinder is this:
- Industrial Production: Industrial production generally only goes negative for a protracted period during recessions also. Industrial production growth – which until the most recent instance carried the distinction of issuing no false positive signals vis-à-vis recession signaling – was negative for 15-consecutive months until December, marking the longest non-recession streak of negative growth ever. IP growth went positive in December and with easy comps and improving ISM’s, the outlook for sustained improvement is favorable, on the margin.
- Capex: Capital goods orders only usually go negative for 13 consecutive months (& for 22 of 23 straight months) during recessions also. Growth in core capital goods also went positive in December and with profit margins improving, labor tight and productivity still underwhelming, capex prospects are also improving on the margin.
- Growth/Earnings: Earnings recessions and profit growth only usually go negative for over a year in peri-recessionary periods also.
The simple point is that credit trends in the latest survey were not good. But a credible argument could be made that, in this instance, they are, at least in part, a lagged reflection of “this time was different” dynamics – all of which are now demonstrating fledgling, positive inflections which may, again, subsequently flow through to credit trends on a lag.
On the last point, here’s the update on the 4Q Earnings Scorecard and domestic and global revision trends:
- From So-so to Momo: With 2/3’s of SPX constituents having reported, sales and earnings are up +4.3% and +4.9% YoY, respectively – marking the fastest pace of growth since 2014.
- From an operating momentum perspective, 53% and 52% of companies have recorded sequential accelerations in sales and earnings growth, respectively.
- Comping the Comp: The comp tailwind should continue to be supportive of aggregate earnings growth well into 2017 and “Reflation’s Peak” will continue to backstop an improving growth profile across Energy and Materials is in 1Q17 (reported in Apr/May).
- 2017 GDP Revision Trends: U.S. growth estimates are +10bps and +20bps over the last 1Mo. and 3Mos., respectively. European estimates are up the same amount and G10 growth estimates are +8bps and +18bps on the same durations.
- 2017 CPI Revision Trends: U.S. inflation estimates are +10 bps over the last 3 months and Global CPI estimates for 2017 are +20 bps over the last month
- Global PMI: The Global Manufacturing PMI held at a 36-month high in January while the World Composite PMI (manufacturing + Services) rose for a 5th consecutive month to a 23-month high (and the Feb data will likely be higher when its officially released).
Yes, valuation is rich but that’s not a catalyst over shorter, investible durations.
Policy uncertainty is elevated and VIX is suppressed but the preponderance of domestic and global data is 2nd derivative positive and the rate-of-change facts can’t be simply Febrezed away with the wafting specter of complacency risk.
And that, amigos, is the current state of market tug-of-war affairs in a slow fundamental data week domestically.
Sometimes there’s no sensational or dramatic conclusion, just context and the simple reminder that if you get the trending rate-of-change in growth and inflation right you’re likely to be on the right side of asset and sector exposures as well.
But don’t fully discount evolving context. After all, if you stay ready, you never have to get ready!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.33-2.55%
SPX 2
VIX 10.37-12.48
EUR/USD 1.05-1.08
Oil (WTI) 51.78-54.20
Gold 1185-1251
Christian B. Drake
U.S. Macro Analyst
