“Rice is great if you’re really hungry and want to eat two thousand of something”
-Mitch Hedberg
Like everyone, I spend most of my day oscillating in and out of frustration over why I can’t readily eat 4 billion of something at any given time.
Until recently.
Thankfully, after pegging the innovation engine at full productive capacity, the aging hipster pseudo-science brain-trust has finally solved a problem that didn’t exist.
That answer: #Kombucha
If you’ve missed the Kombucha crescendo & proliferation of the last year, it’s a fermented tea that functions as a probiotic and piggybacks on the growing body of systems biology research pointing to gut health as a systemically important factor in maintaining full body health.
Most commercially available products are standardized to contain something like 4 billion CFU’s (‘colony forming units’ …think of it like the purported benefit of “live & active cultures” in yogurt).
I don’t know if it's helped or not, honestly. But it tastes good and it’s an asymmetrically positive health proposition so I drink it anyway.
And because the marketing playbook for all naturopathic purveyors has been passed down the paleo-hippie bloodline faithfully and unchanged since hemp was transubstantiated into an ideology, Kombucha is not “a product”, it’s “a lifestyle”.
So here’s a weekend challenge:
If you can drink 16 oz. of Kombucha and chase it with an ounce of apple cider vinegar (also gut health) before heading out to your Crossfit class … congratulations, you’ve successfully completed the elusive, organic, only-shop-the-perimeter-of-the-grocery-store, Gen-X’er Saturday trifecta!
Back to the Global Macro Grind…
Ever wish you could analyze a million things a day, Matrix style in a shower of falling green code? Maybe consider becoming a macro analyst when you grow up.
And after you've grown up or retrained you can effectively analyze why robots will have already taken all the economist and macro analyst jobs so you'll either have to re-grow up, re-retrain or settle for UBI.
Anyway, let’s get after it.
Yesterday, ISM Services – more colloquially known as “most of the economy” – rose +2.3pts to start 2Q while the New Orders component (lead indicator) ramped to a 141-month high (highest since Aug 2005).
As we highlighted intraday, this remains the other side of our Reflation Rollover theme. Staying short and/or underweight “reflation trade” sector styles and staying long sectors like Tech and Consumer Discretionary as American consumers get a real-time tax cut, in cost of living terms.
But that’s just a soft survey. And with all the popul-ism, national-ism and fasc-ism debates still raging who needs another ISM to worry about.
How about the hard data reality of the prevailing corporate profit reflation?
With ~75% of SPX constituents having reported, Sales Growth is tracking +8.2% YoY while Earnings Growth is running +15% YoY.
If we look “hard”-er, the broader underlying earnings season trends are these:
- Growth: Earnings growth in all three of the major U.S. benchmark indices (SPX, Russell 2K, Nasdaq) is up at least 15% Y/Y, marking the best rate-of-change figures since 2011
- Beat %: Across the S&P500, the magnitude of earnings surprises is at its widest since 1Q15 as is the % of companies beating topline estimates.
- Operating Momentum: 60% of companies have reported a sequential acceleration in sales growth, a multi-year high.
- Revision Trend: For a 2nd quarter in a row intra-quarter revision trends have not been negative. In other words, they start high => progressively lower estimates => beat troughed out expectations pattern has failed to manifest for a 2nd consecutive quarter.
In short, sales and profit growth are accelerating.
And the sangre vital of accelerating topline growth – both at the corporate and macro level – are employment and income trends.
Recall, aggregate private sector income growth accelerated to +5.9% YoY in both Feb and the official March data released on Monday. That put income growth at +5.5% YoY in 1Q17, the fastest pace in 6-quarters.
The ECI (employment cost index), which rose at its fastest pace since 2007 in 1Q17, provided further positive confirmation of that improving income trend.
Now, to be sure, consumption growth was underwhelming in 1Q and served as a drag from a GDP accounting perspective but don’t conflate the dip in consumption proclivity with a deterioration in consumption capacity. Collective household spending capacity improved alongside accelerating aggregate income growth in the 1st quarter. That’s a positive fundamental development.
And the positive employment and income growth trend should continue through May, at least.
As we’ve highlighted repeatedly, the April and May payroll comps are decidedly favorable.
For example, NFP needs to = +156K in April to realize an acceleration in YoY employment growth.
The May figures, of course, depend on what happens in April but if we assume 156K for April, we only need +44K in May to register another sequential acceleration in YoY growth.
That same favorable base effect dynamic and near-term outlook that characterizes payroll growth and aggregate hours growth flows through to the outlook for income growth, because math (growth in NFP and average hours = aggregate hours growth ….. & aggregate hours growth + hourly earnings growth = aggregate income growth)
Moreover, in addition to employment, aggregate hours and income growth, comps for Industrial Production, Durable Goods and Capital Goods are all favorable in May.
a-May-zing? …. Probably not quite but a solid rash of rate-of-change data for May will take us through June after which we’ll get another strong earnings season for 2Q.
There are plenty of known-knowns and known-unknowns on the risk front and the market is not the economy but that will be the probable fundamental backdrop domestically for the balance of 2Q.
To the data, soft & hard. May both flavors matter, but only if and when it fits the narrative,
Christian B. Drake
U.S. Macro Analyst
