‘We are never going to let you do to us what you did to Japan.’
-Xi, China, etc.
For those of you who aren’t bouncing around from headline to headline (Macro Tourist style) this morning, you’ll recall that in currency “manipulation” terms, the Chinese are very good at this. When he devalued the US Dollar to a 40 year low, so was Ben Bernanke!
The aforementioned quote came from David Loevinger “who arrived in Beijing in 2005 as the first Treasury officer to be posted to the US Embassy in China, carrying a brief to pressure the Chinese to revalue their currency…”
“He found The Plaza Accord constantly being played back to him. The Chinese viewed the agreement as something Washington had forced on Tokyo…” (Asia’s Reckoning, pg 119). Unlike Tourists on Old Wall TV today, the Chinese are very well aware of both economic and currency history too.
Back to the Global Macro Grind…
Not to divert Macro Tourist attention away from China this morning (competitively, we want consensus constantly distracted by the next newsy thing), but back here in the USA, TWO big things in The Cycle just happened:
- ISM Services just #slowed to a 35-month low… and
- US Earnings just #slowed to their slowest growth rate of the season
Yeah, I know. If there’s ONE complacent and mathematically irrelevant qualitative comment that your non-rate-of-change USA only PM will make it’s that the “US Consumer is in great shape.”
In ROC (rate of change) terms, that statement means nothing to me other than opportunity. What matters isn’t whether US Consumption Growth is “good” or “bad”, it’s whether it’s getting better or worse.
In ISM Non-Manufacturing terms (i.e. the US Services economy):
- JUL #slowed to 53.7 vs. 55.1 in JUN = 35 month low… and
- The Cycle HIGH was 60.8 back in… wait for it… SEP of 2018
That’s right sine-curve fans, this key monthly measurement of US Consumer Spending momentum peaked, right on the screws, when The US Cycle peaked at the end of Q3 of 2018. In the next 2-3 months we’re going to have to CYCLE against those peak US Consumption comps.
No worries? How about US Consumer Discretionary Earnings #Slowing to -1.34% year-over-year as of last night? As you can see in today’s Chart of The Day, this Sector Style didn’t have NEGATIVE year-over-year Earnings during the 2016 US GDP cyclical slow-down. In @Hedgeye TREND speak, this is new.
Putting that newness in the broader context of Earnings #Slowing Season to-date, here’s your real-time update:
- 399 of the SP500’s companies have reported aggregate year-over-year (y/y) growth of +1.2%
- Materials (25 of 27 have reported an aggregate y/y DECLINE of -29.4%)
- Tech (47 of 67 have reported an aggregate y/y DECLINE of -6.9%)
- Consumer Discretionary (37 of 61 have reported an aggregate y/y DECLINE of -1.3%)
And that’s with some of the slowest Non “Secular Growers” (i.e. share losers to AMZN) not having reported their quarters, yet…
Then you have the US Earnings Manipulators (Bankers) where the 66 of 68 Financials have reported pro-cyclical “earnings” of +2.55% year-over-year because many CFOs didn’t take up loan loss provisions and/or adjust for the recent re-widening of credit spreads (or crashing bond yields).
What could possibly go wrong for the Financials when they have to compare against the Q318 Peak Cycle growth rate of +30.6%?
Right, that’s Q3 (and we still have to grind out the last 20% of companies that have yet to report Q2)… and the 35-month low reading in ISM Services report will also be part of Q3 earnings inasmuch as our call for Quad 4 in Q3 still is. Shall we go back to panicking about the Chinese Yuan?
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.71-1.98% (bearish)
UST 2yr Yield 1.57-1.81% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 58.99-60.58 (bullish)
Financials (XLF) 26.20-27.86 (bearish)
Shanghai Comp 2 (bearish)
VIX 15.45-27.34 (bullish)
USD 96.95-98.40 (bullish)
EUR/USD 1.10-1.12 (bearish)
USD/YEN 106.00-108.11 (bearish)
Oil (WTI) 53.24-57.62 (bearish)
Gold 1 (bullish)
AMZN 1 (bearish)
Bitcoin 105 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
