That's Not A Knife!

"If I lose a tooth on Christmas Eve, who will come?"
-Lila Drake 

My daughter floated that gem last night.

Implicit in the question was an uncertainty around whether the prospect of multiple supernatural benefactors is an either-or proposition.

She weighed the desirability of the two potential outcomes  … broke for a quick nose picking intermission … and concluded: “So, I think, sometimes good things could be bad.  I won’t lose a tooth on Christmas Eve.”

Sometimes bad is good and vice versa … Ahhh, the market metaphors start early these days.

Everything I need to know (about market psychology and asset price-monetary policy dynamics) I learned in pre-school!

Back to the Global Macro Grind…

I don’t know what to write about exactly this morning so let’s run the data gauntlet and see if we can patchwork ourselves a nice Friday morning macro mosaic ….

1. Everything I need to know …. was created in the last two years:  Big Data is now ubiquitous.  In fact, by some estimates, almost 90% of all the data in the world was created/collected in the last two years.  Are you daunted or excited by that reality?  Delighted or Distressed, it will be an increasingly inevitable element of the analytical future state.  And a primary bottleneck to industry evolution and firm-level metamorphosis will be in simply knowing what data is available, having enough imagination to ask the right question, possessing the technical skill to get, manipulate and analyze it and enough experience to provide the right contextualization. 
2. First Time, Long-Time:  Equities (dividends) are now rich to bonds (yields) for the 1^st time this cycle.  Is that a hyperbullish dynamic for equities with the “there is no other alternative to stocks” defense not quite true anymore?  No.  But it’s not a catalyst either.  Pocket that sirenically bearish quotable and trot it out to fill out the narrative when growth begins to slow.
3. If in doubt, always hire the person who doesn’t skip Leg Day.
4. That’s Not A Knife, This Is A Knife:  In two weeks, the current domestic expansion will be in its 104^th month = 2-months shy of the 2^nd longest expansion in history and 16-months shy of the longest ever.  Australia hasn’t had a recession in 26-years.  That’s 312 months.  Now That's A Knife!  Is the U.S. going to have a 26 year expansion?  No, but there have been a fair number of This Time Is, In fact, Different dynamics in the present expansion.  Just an anecdote to help anchor your psyche as “cycle angst” builds palpably with each successive month. 
5. Never is a long-time …. As it relates to cycle accounting, Initial Jobless Claims have been one of the best pace keepers of the economic cycle with the rolling trend in claims serving as one of the most consistent lead indicators for the labor market and broader macro cycle over the last 7 cycles.  Initial Claims printed +225K yesterday, returning to 4-decade lows with the rolling 3-month trend continuing to plumb lower lows.  Labor market and consumer credit dislocations don’t really propagate until job loss accelerates and a cycle has never ended with separations improving.
6. Black November!  You know how anyone under ~35 years old doesn’t know why there are like a million AA automotive garages (for the age deficient => it’s because back when people used to actually look up merchants in the phone book, you would be listed first if you were A … but then someone realized they could jump to the top if they were AA …. then AAA and so on).  Anyway, Black “Friday” is the new “AAA automotive” as e-commerce and ultra-fast delivery increasingly diffuse purchase activity.  Retail Sales went full E-tard in November with headline sales rising +5.8% Y/Y (fastest since March 2012) and control group sales accelerating to +4.8% Y/Y.  Those same dynamics – coupled with decade highs in consumer confidence and 2-month reacceleration in revolving credit growth -  probably buttress December spending as well. 
7. Any hard consensus on White Chocolate in the Tax Reform package?
8. Does this provision make me look dearthy? …. In presentations over the last month we’ve highlighted the elevated risk to (already tight) supply conditions in the housing market stemming from provisions in the tax reform legislation. One of the lesser talked about proposals is the “exclusion of sale” provision which mandates a seller, in order to qualify for exclusion of capital gains on sale of a home, would now have to live in the property as a primary residence for 5 of the last 8 years (currently 2 of the last 5 years) and could only take that exemption every 5 years (currently every 2 years).  The National Association of Realtors provided some confirmatory research this week stating that roughly 22% of recent owner-occupied home sellers owned their residence between 2 to 5 years.  Legislation that further disincentivizes (a potentially large) supply will negatively impact volume and housing turnover.
9. Let’s Add Some Stuff! ….The combination of a 2^nd month of acceleration in payroll growth and uptick in weekly hours drove aggregate hours growth to +2.3% Y/Y in November, the fastest pace of growth in 28-months.   Recall, this matters for two straightforward reasons.  If productivity is roughly static, but you are working more hours, then output goes up.  That is why aggregate hours growth and real GDP track so closely.  Second, the sum of aggregate hours growth and earnings growth gets you implied aggregate income growth and, by extension, your baseline expectation for the path of consumption growth.  The November NFP data imply a moderate sequential acceleration in income growth in November.  A further acceleration in revolving credit growth would provide a kicker to consumption spending. 
10. Let’s Subtract Some Stuff …but end up with more stuff! …. If nominal growth is flat-to-up but inflation is lower, any guesses on real growth (nominal growth – deflator = real growth)?  The +3.1% Y/Y headline PPI print for November was probably the capstone to the latest (Sept to Nov) reflationary thrust and CPI comps get markedly steeper through February 2018.  Accelerating growth and a deflation of the recent reflation are the backbone to our Quad 1 expectation for 1Q18 and why we’re probably going to be fading the reflation trade from here.
11. Let’s Predict Some Stuff! …. We’ll get the November Industrial Production data later this morning.  Aggregate hours in the manufacturing space released in conjunction with the NFP data provides a good sequential read on Industrial Production and the November NFP data are pointing to a +0.25% M/M gain.  By the math, sequential growth could be 0% and we’d still get further sequential acceleration in Y/Y growth given the comp setup.  Positive asymmetry is always great.  And recall, further acceleration will come on the back of the 3Y high (+2.9% Y/Y) print in October.   Looking to next week, Existing Home Sales for November will continue to underwhelm (hugging the 0% growth line) as supply remains an acute volume constraint, Housing Starts will remain rate-of-change solid against an easy comp and continued improvement in new single-family construction, Household Income Growth will be solid (see above), the rich will still be rich (i.e. asset price inflation will continue to show up in high ticket discretionary consumption) and core Durable/Capital Goods may backslide modestly off of multi-year highs.   

And Lastly ….

12. EM-pty Promises?  We’ll be hosing our Emerging Market Macro Themes presentation today at 12:30pm.   Alongside a full review of the setup in China we’ll detail the fundamental outlook and key risks across the investible cross section of EM economies and how investors should be exposed to EM assets.

13. It doesn’t cost anything to say thank you or I love you. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.32-2.42% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
XOP 34.02-36.40 (neutral)
VIX 8.93-12.00 (bearish)
USD 92.75-94.30 (neutral)
Oil (WTI) 55.72-58.60 (bullish)

Have a great weekend,

Christian B. Drake
U.S. Macro Analyst