Weekly Market Cheat Sheet, September 11, 2017

Last Week in Review

The economic data remains remarkably consistent: Growth data remains good but not great while inflation data relentlessly disappoints. From a market standpoint, that means that the economy isn’t at imminent risk of a material loss of momentum, but at the same time there are no signs of the type of acceleration that would lead to a rising tide carrying stocks higher.

From a Fed standpoint, inflation remains lackluster, and that’s causing a reduction in expectations for a December rate hike. That’s not a medium/longer-term good thing for stocks, because it further throws into doubt the chances for reflation—and economic reflation remains the key to sustainably higher stock prices.

Looking at last week’s data, there weren’t many numbers, but the numbers we got reinforced the “slow growth/low-inflation” trend.

The ISM Non-Manufacturing PMI (or service sector PMI) rose to 55.3 from 53.9. So, there was acceleration in activity in August. But that acceleration missed estimates of 55.8, and while a number in the mid-50s is solid, it’s not the type of number that implies we’re seeing real acceleration.

The other notable number last week that was largely ignored by the media was August productivity and unit labor costs. An uptick in productivity, if it’s consistent and material, could lead to an economic acceleration.

The reason for that is simple: The economy is basically at full employment. But, if those workers get more productive, the total economic output increases, and we get a stronger economy.

August productivity rose to 1.5% vs. (E) 1.3%, so that is a good sign. It’s not nearly the acceleration we need, but it’s a step in the right direction.

However, that productivity number wasn’t the important one from this release. The important number was unit labor costs. Rising unit labor costs is a precursor to larger inflation, so it’s an important number. And, unfortunately, it once again missed expectations. Unit labor costs rose 0.2% vs. (E) 0.3%, providing even more fodder for the “doves” on the Fed to not hike rates in December.

Finally, turning to the ECB meeting last week, you know by now it was slightly hawkish. Draghi signaled the ECB will reveal the details of QE tapering at the October meeting, and he again chose not to try and “talk down” the euro, which led to the euro hitting new multi-year highs (and the dollar hitting multi-year lows).

From a market standpoint, that dollar weakness is a slight tailwind on US stocks, although not a material one. Until we get better inflation or growth data here in the US, the trend of euro strength/dollar weakness will continue.

This Week’s Preview

All the important economic reports this week come out Thursday and Friday, which is nice because that gives us a bit of time to get ourselves squared away following all the hurricane issues from last week.

The most important number this week is CPI, out Thursday. As you know, inflation remains the key issue with the economy and Fed expectations. Frankly, we need CPI to start firming because it’ll give us hope of a looming economic reflation. If, however, this number disappoints, as it has for a few months, we’ll see new lows in the dollar and new lows in Treasury yields, neither of which are a good thing for stocks beyond the very short term.

After CPI, there are three important growth numbers out this Friday: Retail Sales, Industrial Production and Empire Manufacturing Survey.

Starting with the first two, remember there remains a large gap between “hard” economic data and surveys. Put plainly, actual economic data is not rising to the level that’s being implied by the PMIs and/or consumer confidence. The longer that occurs, the more likely it is that the surveys are exaggerating economic growth.

So, the sooner hard economic data begins to accelerate, the better. If retail sales and industrial production can beat estimates, that will be an economic positive.

Turning to Empire Manufacturing, that’s the first data point from September, and that’s always anecdotally important because we don’t want to see any steep drop off that might imply a loss of momentum.

Bottom line, this week gives us more color into the state of growth and inflation in August. We need to see both begin to accelerate if we are to hold out hope that we can see an economic reflation create a “rising tide” for stocks in Q4 ’17 or Q1 ’18.

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Weekly Market Cheat Sheet, August 14, 2017

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Last Week in Review

There was more underwhelming economic data last week, especially on the inflation front, as the prospects for an economic reflation in 2017 continued to dim.

From a Fed standpoint, the disappointing CPI and PPI reports further reduce the chances of a rate hike in December, although importantly the Fed is still expected to begin to reduce its balance sheet in September.

Starting with the headline numbers, CPI and PPI, they were both disappointing. The Producer Price Index declined to -0.1% vs. (E) 0.1% while the core figure was flat vs. (E) 0.2%. Meanwhile, the CPI report was slightly less underwhelming at 0.1% vs. 0.2% on the headline, and the same for the core.

While these aren’t horrible numbers, they aren’t good either, and the bottom line is that statistical inflation
remains stubbornly low, and it is appearing to continue to lose momentum. Again, for context, that’s a problem because in this environment, with (supposedly) strong economic growth and low unemployment, inflation should not be going down. Period. And the longer it goes on, the more it sparks worries that eventual deflation or disinflation will rise, and that’s not good for an economy with still-slow growth and extended asset markets.

Bottom line, even before the uptick in North Korea jitters this was a market in need of a positive catalyst to spur further gains. Unfortunately, the economic data (ex-jobs and sentiment surveys) has been consistently underwhelming, so the chances of a rising tide driven by an economic reflation continue to dim. And while a “dovish” number may be good for a mild pop in the S&P 500, soft data and a lower dollar/bond yields aren’t going to drive the market to material new highs.

This Week’s Preview

This week is busy, with mostly anecdotal data that will give us a better overall picture of the economy and inflation—and the main risk to stocks now is that the data comes in light, and along with low inflation that spurs fears of an economic loss of momentum. If that happens, stocks will take out last week’s lows.

The most important report this week will be tomorrow’s Retail Sales report. Consumer spending has been lackluster for most of 2017, but around now we see a typical seasonal uptick. That will be welcomed by markets if that appears again this year. If the number is soft, it’s going to spur worries about the pace of economic growth (remember, hard economic data hasn’t been great all year, it’s been the PMI surveys that have been strong).

Beyond retail sales, we also get a first look at August economic data via the Empire and Philly manufacturing indices. Both numbers haven’t been highly correlated to the national PMIs lately, but it’s still our most-recent economic data and it could move markets, especially if we see any weakening in the data. Empire comes tomorrow and Philly comes Thursday.

Turning to central banks, we get the Fed minutes from the July meeting on Wednesday, and the ECB minutes from the July meeting on Thursday. The Fed minutes are important because we will be looking for clues as to how eager or committed the Fed is to September balance sheet reduction. With the ECB, the key will be seeing how committed or eager the ECB is to announce tapering of QE in September. As is usually the case, there shouldn’t be any big surprises in these minutes, but they could slightly shift expectations for those two events (balance sheet reduction/announcement of tapering), and as such also move Treasury yields and Bund yields.

Finally, July Industrial Production and Housing Starts also come this week (Thursday and Wednesday,
respectively). Again, these are an opportunity for the hard data to rise and meet strong soft data surveys, and in doing so reassure investors that the economy’s accelerating.

Bottom line, none of the numbers this week are “major,” but in aggregate they will give us a lot more insight into the pace of economic growth and the outlook for the Fed and ECB. And, this market needs some economic reassurance to help bolster sentiment after last week. Better data and steady Fed/ECB are a needed boost markets this week.

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Weekly Market Cheat Sheet, August 7, 2017

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Last Week in Review

Friday’s jobs report caused a mild reversal of the week’s long downtrend in yields and the dollar, but that was more a function of “covering shorts” on the news rather than it was a function of the jobs report being materially hawkish (it met our “Just Right” scenario).

In total, while unemployment dipped further and wages were steady, in aggregate the economic data from last week largely reinforces the “stagnation” outlook for markets (slow-but-steady growth, low inflation).

Starting with the jobs report, as mentioned, it hit the upper end of our “Just Right” scenario. The headline job adds was stronger than expected (209k vs. 178k) while the June revisions were positive (up 9k to 231k).

Meanwhile, unemployment and wages met expectations: 4.3% unemployment and 0.3% wage gains, with a 2.5% yoy increase. In all, it’s a pretty Goldilocks jobs report, as job adds remain strong and the downtrend in wage inflation appears, at least in July, to have stopped.

That’s why we saw the rally in the 10-year Treasury yield and dollar. It wasn’t that the report was hawkish, but it did stop the trend in lower inflation stats. And, with a market as stretched to the downside as the Dollar Index and 10-year yield both are, it caused a snap-back rally.

Importantly, other than potentially making a December rate hike slightly more expected, Friday’s jobs report did nothing to alter the outlook for the Fed (still balance sheet reduction in September).

Looking at the economic data the rest of last week, it was more of the same: Not particularly impressive, but not implying a slowdown, either.

The ISM Manufacturing PMI slightly beat estimates at 56.3 vs. (E) 56.2, and that remained well above the important 50 mark. So, while there was a decline from June, it remains indicative of a manufacturing sector that is seeing growth accelerate.

The one disappointing economic data point last week was the ISM Non-Manufacturing (or service sector) PMI. It declined to 53.9 vs. (E) 56.9, and was the weakest reading since August 2016. However, the private sector Markit Services PMI rose to 54.7 from 54.2, so there is a conflicting message there (ISM is one firm that produces PMIs, and Markit is a competitor. Usually, their PMIs are generally in agreement, but not this month… and it has to do with the survey questions each use and the makeup of the final indices. It’s an oddity that there was a discrepancy, but it’s not an economic red flag (at least not at this point).

Bigger picture, economic growth through June and July appears consistent with the slow-but-steady growth we’ve become accustomed to over the past several years. It’s certainly not a negative for stocks, but it’s not going to create a rising tide that propels us to new highs.

This Week’s Preview

As is usually the case for the week following the jobs report and the PMIs, this week will be quieter from an economic data standpoint, although there is a very important report coming this Friday… CPI.

As we’ve said consistently, inflation is much more important right now (because it’s declining) than economic growth (which remains steady), so inflation numbers will have the potential to move markets more than growth numbers, as we saw on Friday with the jobs report.

To that end, Friday’s CPI has the potential to send bond yields and the dollar higher, if it confirms Friday’s wage number that implies inflation steadied in July. Conversely, if the CPI report is soft we’ll see Friday’s rally in bond yields and the dollar undone, quickly.

Outside of CPI Friday (and PPI on Thursday) the next most-important data point this week will be the Productivity and Costs report Wednesday. In Friday’s Report, I listed a number of events that could push stocks higher if earnings growth has peaked near term. Increased productivity was one of those events, so a strong productivity number will be positive for markets.

Beyond those two numbers, the domestic calendar is quiet this week, and none of the reports coming (NFIB Small Business Optimism Index, jobless claims) should move markets too much.

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Weekly Market Cheat Sheet, July 17, 2017

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Last Week in Review

Hard economic data continued to disappoint last week, as both inflation and economic growth statistics were a letdown. And while in the short term the markets embraced it, as it potentially makes the Fed less hawkish, longer term this is a potential problem as we need economic acceleration and higher inflation to power stocks materially higher.

Friday’s CPI report was the focus last week, as inflation has consistently been losing momentum since early 2017, and unfortunately that trend continued in June. Core CPI, which is the important metric in the report, rose 0.1% vs. (E) 0.2%, and 1.7% yoy. That continued a now four-month slowing of inflation, and unless this changes in the next month or two, it could alter expected Fed policy.

Specifically, while Friday’s disappointing data prompted calls from analysts to say the Fed won’t hike rates or reduce the balance sheet in September, we think that is premature. I believe it would take a material slowing of economic growth to cause the Fed not to start shrinking the balance sheet, and that is not what happened last week. With regards to rate hikes, if the inflation data doesn’t get better between now and October, then yes, the Fed will probably be on hold for a while. But, there’s a lot of time between now and October (think about how much changed during this period last year, when economic growth accelerated).

Looking at the other data last week, June Retail Sales was easily the most disappointing report. The “control” group (which is the key metric in the report, and reflects Retail Sales minus gas, autos and building materials) dropped to -0.1% vs. (E) 0.4%, and that is a potentially cautious signal for consumer spending.

Finally, Industrial Production looked like the one decent number last week, as the headline beat estimates at 0.4% vs. (E) 0.1%. However, it was a bump in mining activity that caused the headline to surge, and the more important manufacturing sub component just met expectations at 0.2%. Bottom line, last week’s data was a disappointment, and further confirmed the unsustainably wide gap between “hard” economic numbers and “soft” economic surveys (like the manufacturing PMIs), and that gap must be filled one way or the other.

From a market standpoint, in the short term the data will have a dovish effect. Longer term, this middling data is a threat. With global central banks becoming less dovish, economic growth must accelerate, and in the US that isn’t happening. Long term, that’s a problem for stocks.

This Week’s Preview

There are several notable economic reports out this week, including first looks at July economic activity, as well as the ECB meeting. But unless there are major surprises, the data shouldn’t really move the debate about reflation vs. stagnation.

The headline event this week is the ECB meeting, which comes Thursday. Other than parsing Draghi’s comments for hawkish or dovish hints, there shouldn’t be any surprises at this meeting. For the ECB, the outlook is they will announce tapering of the QE program at the September meeting, and that by mid-2018, ECB QE will be over. Nothing Thursday should change that expectation.

Looking at US data, we get our first look at July activity via the Empire Manufacturing Survey (today) and the Philly Fed Survey (Thursday). While anecdotally notable, both surveys haven’t been well correlated to the national manufacturing PMIs lately, and as such they aren’t likely to elicit much of a market reaction barring a big surprise.

Bottom line, this week’s economic events will give us more anecdotal insight into the current state of the economy, but really, it’s next week’s data (flash manufacturing PMIs) that’s the next potential market mover.

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Weekly Market Cheat Sheet, May 15, 2017

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Last Week in Review:

Economic data last week was mixed in total, but from a market standpoint the takeaway was that it was neither strong enough to support a push through 2400 in the S&P 500, nor weak enough to generate any real selling. So, the net effect is that the market is left wondering whether the economic acceleration can continue, or whether we are losing momentum.

Retail Sales was the most important report last week, and while on the headline it appeared disappointing, a closer look revealed it was basically in line with expectations.

I say that, because while the headline missed estimates (0.4% vs. 0.6%) the revisions to the March data were positive, from -0.2% to 0.1%. Taken in aggregate, the two-month retail sales performance was slightly better than expected.

Looking at the more important “control” group, which is the best measure of discretionary consumer spending, it also appeared to be a disappointment, up just 0.2% vs. (E) 0.4%. But once again, the revisions were positive (from 0.5% to 0.7%), so if you take the two months together it was in line with estimates.

Bigger picture, consumer spending remains decently healthy, but activity isn’t on pace with Q3/Q4 of last year, when consumer spending powered economic growth. Without an acceleration in consumer spending, it’s hard to see the US economy accelerating materially from here.

The other notable domestic numbers last week were the April CPI and PPI. The former was much-hotter-than-expected, as the core rose 0.7% vs. 0.2% on surging service inflation (financial services costs, especially). However, core CPI was slightly underwhelming, rising just 0.1% in April, and up 1.9% year over year, below the 2.0% estimate.

Bottom line, it’s a given that inflation pressures continue to build, but all the statistical data implies they are building very slowly. And given the Fed watches the statistical data, nothing in the inflation numbers will make the Fed think about hiking more aggressively or delaying the June rate hike.

The other notable data last week came from China, and it was on balance negative. April exports, imports, M2 money supply and PPI all missed estimates, although not by wide margins. Not all the data was bad, as new yuan loans were slightly better than expected. Then, this weekend, Fixed Asset Investment, Retail Sales and Industrial Production all slightly missed expectations.

Bottom line, legitimate doubts are creeping in about the state of the Chinese economy, but it’s simply too early for anyone other than Kyle Bass to declare a problem (he’s been warning about the implosion of China for years, and I’m sure one day he will be right. In the meantime, he has plenty of capital to wait it out). Yet for us, slowing Chinese growth remains a risk, but one that just needs to be monitored for now, which we are doing.

This Week’s Preview:

The calendar is once again relatively quiet this week, although we will get the first look at May data, which will help us decide whether the March/April lull in economic growth is ending.

To that point, the two most important numbers this week are the Empire Manufacturing Survey (today) and the Philly Fed survey (Thursday). Both give us our first look at May economic activity, and while both are just regional surveys, they still matter given the seemingly precarious trend in economic data (is it the pause that refreshes, or are we losing momentum?).

Outside of those two manufacturing surveys, April Industrial Production comes Tuesday, and that will give us another hard-data look at manufacturing activity. Remember, while manufacturing PMIs soared in early 2017, actual hard data hasn’t really moved (hence the gap between soft sentiment indicators and hard data). So, it’ll be an economic positive if Industrial Production can show an acceleration in manufacturing activity.

Outside of those reports, the only other notable numbers are housing related, as we get the first look at April home sales numbers. The Housing Market Index comes today, Housing Starts come tomorrow. Sentiment towards housing is pretty buoyant right now, so it’d be unlikely (and a big surprise) if we saw a housing roll over.

Bottom line, this week will shed some incremental light on the current state of economic growth, and given the markets are starving for a catalyst (positive or negative) usually inconsequential numbers may indeed move stocks.

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