“Degree-of-difficulty doesn’t count.”
-Warren Buffett
Shhh, listen. Hear that?
It sounds like soft rain.
Now look a little closer.
If you stare more intently at the soft patter as it slowly cumulates on your arm you’ll curiously note the lack of moisture, then you’ll notice the brown hue.
It’s not rain ….. it’s caterpillar crap. Seriously.
If you live in eastern or central CT, you know exactly what I’m talking about.
The 2015/2016 drought left the ground too dry for the fungus that controls the caterpillar population to spread, leaving the 2017 population free to grow exponentially & unconstrained.
There are so many caterpillars that they are defoliating entire trees in a matter of days. And you can literally hear the collective crapping – which also happens to be staining and ruining my deck and patio.
How many caterpillars need to be in a tree to produce that effect … 100K? 10Mn?
Unexpected nonlinear events. Good times.
Back to the Global Macro Grind…
Where to start after a long holiday weekend … Poop-related lead commentary is pretty much obligatory but then what?
If you were busy not looking at small ticking numbers and over-sensational headlines the last 5 days: North Korea is still nuts, rich people are still conspicuously rich, Housing is still en fuego, Auto sales are still anti-en fuego, negative dollar sentiment is increasingly consensus, Europe is still Europe (Growth & inflation ↓), domestic manufacturing activity is still surprising to the upside and payroll growth will slow on Friday.
Let’s review.
Passive-Aggressive, month 2: Last month was pretty much the easiest payroll comp of the expansion from a rate-of-change perspective as we only needed +44K to realize a sequential acceleration in year-over-year growth. We printed +138K, good enough to support a positive 2nd derivative but disappointing relative to both expectations and the recent trend. Let’s call it a passive-aggressive acceleration.
June should be similarly passive aggressive, but inversely so. The +297K gain and year-over-year acceleration in June of last year sits as one of the hardest comps of the cycle. Indeed, we need a NFP print of +300K to avoid a deceleration in Y/Y payroll growth. Unlikely.
But the number should be higher sequentially as seasonal hiring (which failed to get captured in the early May Survey period) gets captured in June and net payroll adds continue to run at a premium to labor force growth, and the labor market shows further incremental tightening – all of which should allay fears around a negative employment inflection and continue to support conditions conducive to wage inflation. Remember, if payroll growth is decelerating, wage growth needs to accelerate to maintain growth in aggregate income (and, by extension, the baseline expectation around consumption).
Long the Rich: That the relationship between and S&P500 and high-ticket discretionary consumption is both direct and strong should surprise pretty much no one. If you own assets, you like asset price inflation and all-time highs in equities.
Our “Luxury Goods” composite tracks spending on jewelry, watches, pleasure boats and aircraft and serves as a proxy for the state of higher end consumerism. We got the latest update alongside the May PCE data on Friday and luxury spending was up +10.7% year-over-year, marking the fastest pace of growth since 2005 with 2017 YTD growth tracking at a cycle high of +6.9% Y/Y.
Rich Reverberations: As we’ve highlighted, confidence and consumption trends at the high end are more than a cutesy talking point as the top quintile of households (by income) account for ~40% of consumer spending.
Looking beyond the luxury goods basket to housing provides further confirmation of a resurgent high end demand. New Home sales >$500K were up 57% Y/Y in the latest May data while Existing Home Sales >$1M were +29% Y/Y in the same period.
Kindergarten Macro: PCE inflation slowed to +1.4% Y/Y from 1.7% Y/Y in May while Core PCE Inflation (the Feds preferred read) slipped -10bps to +1.4% Y/Y, marking a 4th month of slowing off January’s high of +1.78% Y/Y. With price growth across shelter, medical, food, energy and wireless service all decelerating, cost pressures across key consumer expense buckets is ebbing at the margin. The Chart of the Day below captures the simple implication. It’s from our 3Q Macro themes presentation and was designed to provide some cerebral relief amidst the analytical drudgery surrounding. But unsophisticated ≠ untrue (see Headline quote above)
Don’t Call It A Comeback: June be full of boon bros! … at least according to Monday’s ISM manufacturing data.
The Headline rose +2.9pts to a new 35-month high at 57.8 while New Orders re-breached the 60-handle, up +4pts to 63.5. Employment, Backlogs and Export Orders all gained while the disinflationary impulse (#Reflation’sRollover) continued with the Prices Paid component falling -5.5pts sequentially.
Pro-tip of the Day: If you want to sound smart just add “meta-“ to whatever it is you’re talking about.
“Meta” is a pre-fix that basically means “higher level”. For example a meta-analysis is an analysis of a bunch of other, previous analysis around a particular subject.
Anyway, here’s your meta’ish review of the data review above:
June employment growth will slow, but also kind of accelerate in a way. Aggregate income growth will probably slow modestly but a lower deflator and increased spending at the higher end will serve as an offset to drive flat to rising consumption growth. Manufacturing activity hit a 3-year high in June according to the ISM survey or a 6-month low according to the Markit PMI series.
Growth, accelerating or decelerating? Pick a side, it’s July …. fence sitting and mixed-signal mongering is so 1H17.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.10-2.36% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6085-6300 (bullish)
Nikkei 197 (bullish)
DAX 127 (bullish)
VIX 9.58-11.89 (bearish)
EUR/USD 1.11-1.14 (bearish)
Annoyance and admiration are often the two sides of life’s coin. To brown rain, both literal and metaphorical,
Christian B. Drake
U.S. Macro Analyst
