Contrived Angst

“God wants us to prosper financially, to have plenty of money, to fulfill the destiny He has laid out for us.”

-Joel Osteen

A few years ago, following an amusing series of events which I still don’t quite understand, I found myself in a packed TD Garden arena listening to Joel Osteen preach to the Boston populous.

The experience was memorable … but not as a tour de evangelistic force.   

Its indelibleness was the product of perhaps the grandest instance of fabricated fervor of the 21^st century to that point.   

It was mid-sermon, amidst a palpable push to crescendo the messaging & emotion, that Osteen attempted the most contrived bout of conjured sentiment I’ve ever observed.

Mid-sentence, he pauses, makes that same fake crying face that your 4 yrs old tries to pull off, covers his face and falls to one knee in a fit of overwhelming emotional paralysis that lasts a full four minutes. 

Don’t get me wrong, I actually kind of like Osteen and I think there is some impactful and redeeming value in his work, I’m just sayin’ ….

…. And across those who were actually watching the stage at the time, a wave of expression resembling the Kevin Hart picture below circulated the arena.

Back to the Global Macro Grind…

I’ve been doing this for almost a decade now and I’ve never seen a semi-contrived bout of conjured angst quite like the recent Soft vs Hard data infatuation.  

Here’s what I think:

1. Reflation has peaked, price action has slowed, uncertainty has risen and “the market” isn’t sure what “the market narrative” should be right now.
2. The media and many investors are incorrectly conflating a wide spread between the Soft and Hard data as growth slowing. 

And when uncertainty rises or performance angst intensifies, the typically mundane get amplified.

Take credit growth and auto sales, for example.  Typically, my inbox flow around either measure – good or bad - in a given month is relatively modest. 

This month our server is drowning in inbound auto & credit related angst.

As we’ve highlighted:

1. The decline in auto sales will be a drag on March retail sales and rising inventories and flat-to-down sales is likely to feedback negatively on production growth.
2. There are definite cracks in the auto demand and credit edifice … new car sales have peaked, incentivizing has increased, used auto prices are under pressure, delinquency rates are rising, subprime auto looks increasingly suspect. 

The realities of #2 above will matter but:

1. The problems aren’t likely to really metastasize until growth slows and labor really rolls over.  Initial Jobless claims remain at their lowest level since 1973 and, as it stands, we expect growth to accelerate from here.   

In other words, the developments in the auto space are notable but you have to get the timing right. 

Some additional context as it relates to the decline in March sales specifically.  

• Peak auto sales has, historically, been more of a mid-cycle phenomenon so the cresting in vehicle demand isn’t a particularly acute concern from an expansion longevity perspective. 
• March of last year saw the same dynamic with sales dropping -4.6% MoM (before rebounding +4.4% MoM in April).  Whether that’s simply coincidence or some improperly adjusted seasonal effect is unclear.
• From a rate-of-change perspective, declining auto sales is not a new phenomenon. Year-over-year growth was negative for 7 months in 2016 with the magnitude of decline as bad or worse than that observed in the most recent March data.  

Now, Credit Trends.

But before I get into the data, take a stab at answering the following:

• Would you ramp investment or capex demand if growth is slowing, profit growth is negative and your confidence in the present and forward outlook is declining?
• Conversely, is it more likely you would step up credit demand as growth and profits are accelerating, confidence is rising and near-term growth then confirms that fledgling rise in confidence?

There you go, no fancy quant required.  The propensity for soft data to lead hard data is plainly intuitive. 

Here’s the empirical:

1. As can be seen in the Chart of the Day below, CEO confidence leads changes in C&I loan growth by 3-to-4 quarters.
2. Breakouts in consumer confidence overwhelmingly result in an acceleration in total loan growth over the subsequent 12-months.  In other words, when confidence rises and the spread between confidence and loan growth is at levels similar to those observed presently, loan growth shows a pro-cyclical acceleration of ~2.5%, on average, historically. 

Lastly, we’ll get the employment data for March this morning.

The magic rate-of-change number is 229K. Above that = employment growth accelerating, below that = Decelerating.

Honestly I don’t have a convicted view on what we’ll get. 

ADP, ISM manufacturing employment, the Conference Board employment series and Initial Claims were strong but ISM services and Markit employment were softer.   

There’s also the potential for some giveback in weather sensitive sectors following large gains accompanying unseasonably warm February weather. Moreover, an unseasonably cold March and a snow storm during the BLS employment survey week have the potential to amplify that giveback.  There’s also the Federal employment hiring freeze out there as a wild card.  And, of course, the +/-100K margin of error on the estimate.

I’d lean toward directionally lower sequentially but that’s about it. 

Thankfully, unless it’s a multi-sigma outlier print, it doesn’t really matter what we get. 

From our perspective, the larger context is this:

• After slowing steadily for 23 months off the February 2015 rate-of-change peak, employment growth accelerated at its fastest pace in 2 years in January and held those gains in February. 
• Anything close to consensus (+180K) in March will be uneventful and we can move to April & May where the real comp juice is ….
• The probability for more material acceleration is higher against (very) easy comps in April/May.  Recall, the private payroll comp from May 2016 is +17K!
• January-May will represent a 5-month stretch of flat-to-accelerating employment growth.  Faster employment growth + higher wage growth should = further acceleration in aggregate income growth and improving household spending capacity.  The acceleration won’t necessarily be blockbuster but it will be 2^nd derivative positive and a notable inflection from the discrete deceleration that characterized the prior 2 years. 

Yesterday we hosted our 2Q17 Macro Themes call.  It was another higher-high in attendance.  

We detailed our growth outlook (using all Hard data!), addressed the soft vs hard and credit growth debates, provided a road map for traversing Reflation’s Rollover and specified our favorite longs and shorts across all of global macro. 

As always, as active participants in our attempt to evolve the process of Risk Managing and Trendcasting macro and markets, we thank you for your continued engagement and trust. 

If you missed the call please contact your institutional sales person or for the replay details. 

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.30-2.45% 

SPX 2

NASDAQ 5 

Nikkei 189

DAX 12066-12398

VIX 11.01-13.09
EUR/USD 1.05-1.08

Oil (WTI) 47.90-52.65 

To growth,

Christian B. Drake

U.S. Macro Analyst