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Thursday, May 3, 2018
Average hourly wages have climbed unevenly higher, and productivity gains have been inconsistent.

Yesterday the Fed acknowledged that inflation finally reached its target level of 2% and that they were comfortable around that level. Other than that, the statement was essentially a nothing burger and the Fed held steady on their benchmark rate. The Fed will be data dependent but they have been saying that for 8 years. If anything, the statement has a slightly dovish tilt by removing the phrase “the economic outlook has strengthened." This should be a positive for equities fearing higher rates. But stocks are choosing to eat a dirt sandwich by fixating on near term geopolitical risks and earnings, which are so good, investors are worried that this is good as it gets. Meanwhile wages are running hotter and while productivity ticked up in Q1, investors are concerned it is not sufficient to sustain 3% GDP growth. Through all the speculation and angst, investors are ignoring the tax cuts, which are weaving their way through the economy. Yes, the cuts immediately boosted earnings for many large companies but the growth potential will be most impactful in the small business, which is the backbone of the U.S. economy and has added more jobs to the economy since 2010 than large companies. Please watch wages and productivity on page 65 of the Global Perspectives Book.

Wednesday, May 2, 2018
China and India are growing rapidly, and China is second only to the U.S. in total economic output, while Germany’s export-driven economy is the runaway eurozone leader.

Many headlines classified Q1 GDP growth of 2.3% as ‘slowing’, but in fact, it was stronger than expected (2%), and will the economy pick up enough before the Fed shuts it down will be the tale of the tape this year and next. The four-quarter moving average of GDP reached 2.9%, continuing to build from the anemic 1.2% average ending Q2 2016. Gross private fixed investment reached 4.6% on a four-quarter moving average basis, up from 0.1% in Q3 2016 – and that is before the tax incentives hit in 2018. Consumption was stable at 2.7% on a four-quarter basis.

Perhaps a sign of confidence in the outlook, the personal savings rate continued to ebb around 3% from 6% in 2014-16. Consumers spend from their permanent incomes and from their targeted net worth. The healthy labor market (claims at a near 50-year low) and with household net worth rising are reasons enough for consumers to relax. Household net worth as a share of household income is at new record levels. Most observers on the outlook remain confident, as do I: thus far, there has been the makings of an investment rebound in the (albeit early in the process) recent data. Durable Goods were up some 9% YoY in February, factory orders were up 7.1% in February YoY, factory orders ex-transport were up 6%. Importantly, orders have been translating into shipments, with capital goods (non-defense-ex aircraft) up 9.7% YoY in February. The consensus for Q2 is heading towards 3%, with a possibility for a 3% full-year 2018. Sad to say, the U.S. economic juggernaut has not grown by 3% in a calendar year since 2005, but we are seeing the makings of a turnaround. As a reminder, the U.S. economy averaged 3.2% annual growth over the 1985-2005 period.

For more on GDP growth in the U.S. and around the world, check out page 56 of the Global Perspectives book. You can also see the long-term U.S. growth trend on page 70. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, May 1, 2018
The U.S. manufacturing report has rebounded after a month of contraction; the latest eurozone and emerging markets reports also indicate expansion.

Investors are driving through fog. Sure, earnings are coming in better than expected and GDP is trending higher. But the 10-year yield is approaching 3% again and inflation has been ticking higher as seen in the Employment Cost Index’s first quarter jump of .8% and the April ISM price index rising to the highest level since 2011. Accordingly, the dollar has moved to its highest level in four months. Now the White House has delayed the tariffs on steel and aluminum for our allies for another month, which just prolongs the uncertainty. And to top it off, the Fed will be making a statement tomorrow possibly indicating more interest rate hikes. It’s natural for investors to want to take it slow. However, try to look through the fog. Earnings are an affirmation of a healthy economic backdrop. That latest ISM manufacturing report continues to show robust expansion and new orders at a lofty 61.2. It was recent higher steel and aluminum costs and lack of skilled workers that accounted for the slight reduction in manufacturing production to 57.2. Business is on an upswing. Small business optimism is soaring and M&A activity is surging. Higher inflation does not mean high inflation. Higher rates don’t mean high rates. Lower manufacturing does not mean low manufacturing. The fog may be dense, but the road is still there, just with less traffic. Please watch global manufacturing on page 9 of the Global Perspectives Book.

Friday, April 27, 2018

The first quarter is notoriously an economic disappointment. No one is really sure why first quarter GDP on average lags the other quarters. Maybe it is the severe weather throughout much of the country. Perhaps it is a consumer holiday spending hangover. Or maybe businesses are still prioritizing spending budgets. So amid all of the worry about trade wars, economic slowdown and rising deficits, markets were bracing for the grim reaper to deliver todays preliminary Q1 GDP report. However, Q1 surprised on the upside with growth of 2.3%. Consumer spending of 1.1% was notably weak, especially the purchases of goods which posted a decline. But the tax cuts and business investment more than took up the slack. Private domestic investment jumped 7.3%. Trade (yes trade) also contributed positively, with slower growth in imports and faster growth in exports. Meanwhile, earnings are also surprising on the upside. Q1 earnings growth is now forecasted to exceed 23%. Please see Karyn Cavanaugh’s latest comments on the markets.

Thursday, April 26, 2018

Earnings are coming in much better than expected – more than 80% beating expectations. Yet investors are unmoved. Revenues expectations, an indicator of the true quality of earnings, are guiding higher. Yet investors yawn. Durable goods orders surged 2.6% in March, the trade deficit for goods contracted for the first time in seven months and initial jobless claims fell to 209K, the lowest level in 48 years. Yet investors are indifferent. Investors and markets seem to be intently focused on the 10-year yield and if companies can continue to grow in a higher rate environment. Today the 10 year ducked below 3%. Phew! Investors have become so used to the ultra- low interest rates that may not realize that there have been plenty of times when yields and GDP were much higher and inflation did not blink let alone overheat. Today the ECB announced they are in a holding pattern. Global demand for U.S. Treasuries is still robust given much lower rates in other developed countries and global aging populations hungry for bonds. So higher rates are still facing some fundamental headwinds. And more importantly, earnings and the economy are accelerating. Investors are beginning to remind me of my teenage daughters – when the hair is wrong, nothing is right. Please take a look at GDP, Inflation, 10-Year Yields and Unemployment all the way back to 1975.

Wednesday, April 25, 2018
Over the past 20 years the average asset allocation investor has significantly underperformed stock and bond markets and barely kept pace with inflation.

With fiscal policy set, a key question facing the economy is, will there be an increase in trend growth? The Q1 real GDP report is set to come out on Friday (4/27), and the consensus is for 2% growth. Assuming that 2%, the four-Q average GDP growth of 2.8% is well above prior year’s 2% - and that is before the fiscal stimulus hits. The impact of better ‘animal spirits’ continues in 2018. NFIB small business optimism is holding 11% higher YoY than the pre-election levels; the UMich Consumer Expectations Index is up 13% YoY; the Conference Board’s Consumer Confidence is 12% higher YoY. Better consumer confidence supports consumption but the key to a sustained consumer boom will be rising real wages.
For productivity and the economy going forward, the key is a rebound in investment to raise the capital/labor ratio, drive productivity and lift real wages. The sequencing will be that investment incentives from the tax bill generates investment in 2018 with growth improved. So far so good, as we are seeing the makings of an investment rebound in the (albeit early in the process) recent data. ISM data have recorded a sharp rise in new orders, and while still above 60, it has tampered down a bit in Q1 2018. While a volatile series, it is both hopeful overall while the recent trend bears watching. Other orders data are positive, starting with US Durable Goods up some 9% YoY in February (next release 4/26 with a 1.5% MoM increase expected). Factory orders were up 7.1% in February YoY with ex-transport up 6%. Importantly, orders have been translating into shipments, with capital goods (non-defense-ex aircraft) up 9.7% YoY in February. It is early in the game, but the seeds are being planted. For more on business investment and GDP, please look at page 71 of the Global Perspectives book. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, April 24, 2018

The 10-year yield is flirting with 3.0%. The last time the 10-year yield closed above 3% was January 1, 2014. But, after leading investors on, the cad reversed direction and steadily moved downward to a low of 1.36% on July 8, 2016. The lower yields were indicative of a slowdown in global growth, which manifested itself in a five-quarter corporate earnings recession in 2015 and 2016. Now global growth is accelerating and the yield’s march higher is sincere. The Fed has been hiking rates, moving short-term yields higher. Although the 10-year has been moving up, it won’t be rushed. Hence a flattening of the curve, which is concerning to investors. Fortunately, markets have plenty of other suitors to lead them forward – namely earnings. Better than expected earnings reports have recalibrated the expected Q1 growth rate up to 20%. Economic data has also been flexing its muscles. Consumer confidence bounced back in April to near 18-year highs, home prices increased once again to notch a 6.8% YoY gain, new home sales surged to a four-month high, existing home sales rose more than expected despite lean supplies and the flash manufacturing PMI indicates the manufacturing sector is still on an upswing. Finally, the geopolitical landscape is looking less chilly with a planned U.S./North Korea summit; President Trump’s schmoozing in Europe and lawmakers aggressively pushing for a resolution on NAFTA renegotiations. The 10-year yield will continue to tease, but investors need to keep their eye on the fundamentals. Please see the latest Voya Global Perspectives commentary, The Economy and Markets Unleashed in 2018 for a complete update on the markets and fundamentals.

Thursday, April 19, 2018
The shale oil and gas revolution has made energy cheaper for U.S. manufacturers and spawned many high paying jobs. The recent drop in oil prices has caused the energy sector to cut back.

Oil prices reached $69/barrel and look poised to climb higher. Word on the street is that Saudi officials are targeting $80 or even $100 per barrel. Well, duh. Of course, they want higher prices. They have large fiscal deficits that need to be paid. However, they should be careful what they wish for. Higher prices will further stimulate supply from the U.S. shale producers who are already producing record levels and expected to double their output by 2023. Unfortunately, shale producers are currently running into a traffic jam - insufficient pipelines to move all of the oil they produce. In addition, workers are getting hard to find. However, higher prices will allow them to devote more resources to address these issues. OPEC is no longer calling all the shots. Please follow oil rig count on page 76 of the Global Perspectives Book.
Watch Karyn Cavanaugh's latest appearance on CNBC's Squawk Box as she discusses tax cuts and economic growth.

Wednesday, April 18, 2018
Despite declining import and export growth, recent GDP growth is reported at a 6.7% annual rate. China is attempting to tame excesses and sidestep a “hard landing”.

While China took a pretty remarkable step to stem the trade war risk by opening its markets by a bit, the follow-on talk that China could respond to tariff and Section 301 threats by weakening their currency has taken on a bit of water. The Treasury issued a report on Friday that recent moves in the CNY are in the right direction for US exporters. It is a fair argument, seeing how the Chinese exchange rate has appreciated by 10% over the past year. However, the OECD estimates that the Purchasing Power Parity value of the exchange rate is CNY 3.55/$ which would mean another 80% appreciation of the Yuan. Therefore, in some sense, devaluation talk is a poke at the U.S. bear – and it is a risky strategy as a sustained devaluation could lead to capital outflows and perhaps even capital controls on China.
Unfortunately, there is a misperception about China’s exchange rate (relative) fix. To wit: a fixed exchange rate is not only monetary policy, it’s the monetary policy rule. Edging away from the fix over the past 20 years is the first step to having a free-floating currency, but that is not something that can be quickly achieved. It’s not even desirous for the Chinese authorities; imagine the impact of a relentless move towards CNY 3.5/$. It will not happen quickly because it cannot happen quickly.
In its report, Treasury spread the commentary beyond the traditional swipe at China. No countries were labeled ‘manipulators’ (a slap at fixed exchange rates in general), but rather were noted for persistent and large surpluses. China was joined by India, Japan, Korea, Germany and Switzerland. Major caveat: the report only focused on trade in goods, though “the US has a surplus in services trade with…including…China, Japan, Korea…Switzerland.” For more on China’s economy, please look at page 49 of the Global Perspectives book.

Tuesday, April 17, 2018
Taxes matter. High U.S. corporate income taxes have spawned a recent wave of tax inversion deals.

Earnings season is shifting into full speed and company earnings calls are crediting the strong global economy, corporate tax cuts and higher interest rates (especially for Financials) for their robust growth in earnings. These earnings are cheering and calming investors. This will be the sixth consecutive quarter of year over year earnings growth and will set the bar high for 2019. However, the effect of the tax cuts is still in its infancy. Sure, 400 companies have announced pay raises but that is just an appetizer. Job creation and business investment to increase productivity and sustainable higher GDP growth are the main course. Monetary policy has kept interest rates low but has created big deficits and done little to juice economic growth. Now fiscal policy is at bat. Big corporations provide big headlines, but keep an eye on the small businesses; they are the backbone of the U.S. economy. Please watch corporate tax rates around the world on page 74 of the Global Perspectives Book. Don’t forget: today is the U.S. tax filing deadline – time to test your powers of deduction.


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