"In my great & unmatched wisdom…..”
-President Trump, 10/7/19
Reduxing that beauty from yesterday is about as touristy as it gets but dude, ha!
Generalized FOMO anxiety disorder finally proving debilitating? ED (Earnings Decline) got you “down”? Partisan pathogenesis and necrotic political surreality have your IBS (Irritable Biden Syndrome) flaring up again? Geopolitical Inflammation and GEW (Good & Easy to Win) Trade psychosis again suffering from acute, rapid-onset collective reality realization syndrome?
In case last week’s was domestic, contractionary data onslaught wasn’t enough to cement the differential cyclical Quad 4 diagnosis, this week’s macro data excretion has the global colostomy bag of high-frequency deceleration brimming further.
On to the Global Macro Grind …..
In no particular order, here’s a quick recap of the latest global macro data of consequence:
- Eurozone: Sentix Investor Confidence = -16.8 = lowest since December 2012. Sentix leads the German ZEW Outlook reading which leads the broader outlook for the German economy.
- German Factory Orders decelerated another -110bps, tanking to -6.7% Y/Y
- German Industrial Production remained mired in contraction at -4.0% Y/Y
- Irish Industrial Production decelerated -560bps, falling to -6.3% Y/Y
- U.K. same store Retail Sales decelerated another -120bps to -1.74% Y/Y
- Italian Retail Sales = decelerated -190bps to 0.7% Y/Y
- Japan Leading Indicators fell -2pts to 91.7
- Japan Eco Watcher Survey Outlook = -2.8 pts to 36.9 = lowest since 2H14
- Taiwan exports = decelerated -600bps to -4.6% Y/Y
- China Services PMI = fell to 51.3
- Mexico Business Investment = -7.6% Y/Y
- U.S. Small Business Confidence = -1.3pts to 101.8 = back to the January lows while fully retracing all of the post-election ebullience.
The above all represent multi-year or cycle lows and should serves as a kind of rhetorical contextualization of the prevailing state of global cyclical conditions, obviating any need for further fabricated overanalysis.
This morning I wanted to quickly touch on a selection of questions we’ve received in the wake of our 4Q19 Macro themes call and provide some quick clarifying context:
Q: If you are expecting Quad 2/3 why are you still largely allocated to Quad 4 assets?
A: Quad 2 represents the base-effect defined projection. It’s still only a projection and requires (redundant) confirmation for us to take a convicted view in the setup. Recall, our risk management process effectively anchors on our A|B test which includes A. mapping the evolution of the economic data and B. evaluating the market signal which defines what environment the market is currently pricing in.
At present, neither the macro data nor the market signals have confirmed an inflection out of Quad 4 so, simply, we’ve continued to stick with the same sector/factor exposures that have worked for the past year. We still have another month of Quad 4 in Q3 data to be reported (see above) and we’ll have to traverse peak profit cycle comps in 3Q. When the A|B test begins to confirm the rotation, you’ll see that reflected in our commentary and positioning, in real-time.
Q: Why do you keep (& “all of a sudden”) quoting returns in Y/Y terms?
A: While many are hostage to short-term performance bogeys and arbitrary return measurement timelines, we continue to think the appropriate measure of performance embeds a #FullCycle Investing view. YTD returns are expositionally convenient but are largely arbitrary and nonsensical.
We think you should measure performance based on when large-scale phase-transitions/inflections in the cycle occurred. The U.S. cycle peaked in 3Q18 (and when we made the pivot from Quad 1/2 allocations to Quad 4 allocations), which is why you’ve seen us quote returns in Y/Y more frequently of late.
Q: With the $USD still strong and growth decelerating, how does inflation accelerate?
A: Maybe it doesn’t … but a number of factors support that expectations:
- Comps: Headline CPI comps peaked in July/Aug and get progressively easier from here and into 1H20..
- Related to the first point, annualizing the Quad4 deflation of 4Q18 should see a notable rebound in both Food and Energy price growth.
- Late-cycle wage inflation is occurring domestically. It is also occurring across the Eurozone where wage and salary growth continues to make higher cycle highs.
- Idiosyncracies: Specifically, pork prices in china, the consumption tax hike in Japan and Tariff related pass-through to U.S. consumers
- It’s already occurring …. Inclusive of growth slowing and the $USD strengthening, Core and Median CPI have broken to new highs over the last 3 months. The trend there is plotted in the Chart of the Day below.
Q: How will the GM worker strike (which looks like it’s going to extend further with the UAW rejecting the latest offer) impact headline NFP and Industrial Production?
A: Total workers effected is ~46K. To the extent the strike lasts another week+, it will impact the Headline NFP for October. It will also impact September Industrial Production via the manufacturing sector. Recall Manufacturing Production is a heavyweight component in total Industrial Production and shuttered auto plants are certainly going to drag on reported growth …. particularly given the (very) difficult RoC comp for September. We’ll get the Sept Industrial Production data next Thursday.
Q: How do you explain the AHE print in September?
A: The short answer is, you don’t. Average hourly earnings in the private sector decelerated -30bps to +2.9% Y/Y, but …. average hourly earning for NonSupervisory and Production Workers, which BLS estimates to be ~80% of the labor force, was largely flat at +3.46% Y/Y. If average hourly earnings for 80% of the workforce was 3.46% Y/Y, it implies less than 1% growth for the remaining 20%, which doesn’t make sense.
And while were in IDK mode, the record divergence between employment in the Household Survey (which yields the Unemployment Rate) and the Establishment Survey (NFP) is not particularly explainable, nor is the burgeoning divergence currently existing between the Philly Fed and ISM readings.
Retrenchment Risk: Lastly, we got the latest update on the collective appetite of domestic consumerism with yesterday’s Consumer Credit data from the Fed. With the U.S. Consumer representing almost 1/5 of global GDP and currently sitting as the remaining bastion of strength within a deteriorating domestic growth mosaic, the trend in household spending certainly matters.
Total Consumption Capacity can be broadly defined as wage income growth + credit growth … and, more specifically, growth in revolving credit (credit cards) as credit cards represent the primary means by which households pull forward consumption.
Recall, revolving credit went vertical in July, rising +10.5% M/M Annualized … a positive distortion owing almost exclusively to the effect of Amazon Prime Day. We saw the same phenomenon last year where revolving credit grew +11.5% in July and was further chased by a +5.8% gain in August.
This year, on the heels of the July gain, August credit card spending fell -2.2% on the same basis.
Now, the Consumer Credit data is noisy from month-to-month and subject to significant revision but in combination with the ongoing deceleration in aggregate income growth (the other part of the Consumption Capacity equation), the ongoing backslide in Consumer Confidence, Consumer Sentiment around large-ticket durables consumption at cycle lows, and the tariff-impacted consumer basket set to broader, retrenchment risk appears to be rising and certainly bears attentive monitoring.
I’ve said it before, but it’s worth repeating when traversing the chop associated with prospective cycle inflections: The early bird catches the worm, but the 2nd mouse gets the cheese.
In the event we get a (A|B test) confirmable inflection out of Quad 4, there will be plenty of 2nd mouse opportunity.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.47-1.67% (bearish)
SPX 2 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 63.35-65.30 (bullish)
REITS (VNQ) 91.78-93.97 (bullish)
Energy (XLE) 55.49-59.87 (neutral)
USD 97.99-99.41 (bullish)
Oil (WTI) 50.90-57.22 (bearish)
Nat Gas 2.20-2.41 (bearish)
Gold 1 (bullish)
Copper 2.51-2.62 (bearish)
To process and patience,
Christian B. Drake
Macro Analyst
