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Tuesday, November 19, 2019

Manufacturing output dropped in October by 0.6%, but the decline was driven by a 7.0% reduction of motor vehicle and parts output (MVPO) due to the GM strike. The underlying story can be seen in the ex-MVPO numbers, which are up by an annualized 2.0% over the past three months. More importantly, the high-tech sub-group (computers, semiconductors and communications equipment) is up a strong annualized 9.0% over the last three months and a solid 5.6% YoY. We think the MVPO sector should make a solid comeback, and manufacturing will see a nice rebound going into year-end. In our view, manufacturing will find a bottom, provided that the trade talks don’t dislodge it once again.

Then there were retail sales, which rose 0.3% MoM in October; good for a YoY increase of 3.1%, or about 1.2% in real terms. Autos and non-store retail — up 14.3% YoY — were notable winners while apparel was a big loser (tariffs?). Well, so was gasoline but that’s all about the price of oil, really. This is the first inkling of 4Q19 real PCE (personal consumption expenditures), which look likely to exceed 2.0% SAAR, with one caveat: 2018 seasonals seemed to be off (or consumers delayed purchases until January waiting for sales). With the labor market as strong as it has been, consumers seem satisfied and that’s good for the economy.

Please follow U.S. manufacturing and U.S. consumers on pages 9 and 10 of the Voya Global Perspectives book.

Thursday, November 14, 2019

Right from the Bureau of Labor Statistics, “The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.” We are still in a state where the market wants to see inflation at least rise to 2%, likewise for the U.S. Federal Reserve. But as market cognoscenti say “You can’t put lipstick on a pig.” The headlines say October “PPI Jumps” and “Big Gains for U.S. PPI,” but on closer inspection it is just a reversal of September’s dismal readings, with YoY readings well below 2% at 1.6% for the core PPI. Meanwhile, the market has voted accordingly, with the U.S ten year yield summarily plummeting to 1.83%.

Please follow “Fed Funds Target Rates and U.S. Treasury Yields,” on page 15 of the Voya Global Perspectives book.

Tuesday, November 12, 2019

The October run of PMI manufacturing data seems to show modest signs of stabilization. China, France, India, Brazil and Mexico are now above 50; Taiwan, the UK, Japan and South Korea are above 48, with Taiwan and the UK above 49. All countries have risen above their cyclical lows except Japan and Italy — and those two have recorded levels around 48. The signs are hopeful at this point. The Eurozone has been stable since spring, albeit at a low level; and even Germany is seemingly stabilizing. U.S. manufacturing data ticked up to 48.3 from 47.8 in September. A positive point in the report was the new orders index — up to 49.1 from 47.3. The Federal Reserve will puzzle how to deal with prices paid at 45.5 from 49.7. The ISM report noted that the transport sectors (read auto and airplane production) are the weak areas. Once again, “Global trade remains the most significant cross-industry issue” but with a hopeful caveat: exports are back above 50.

Importantly in the United States, nonfarm productivity fell at a seasonally-adjusted annual rate of 0.3% in the third quarter, following a strong, upwardly-revised 2.5% SAAR in the second quarter. The Department of Labor noted that hours from the self-employed, a more volatile category than wage and salary workers, “made an unusually large contribution” to hours worked. There is a lot of uncertainty about hours worked; this preliminary report pegged it at 2.4% while the establishment report pegged it at just 1%. There is a good chance that productivity was higher than reported and will be revised upward. Let’s consider the positive: productivity rose by 0.6% from 2013–2016, and by 1.5% from 2017–3Q19; with the current four-quarter moving average at 1.9%. A good pickup, with more potentially on the way.

Please follow manufacturing and services data on page 8 of the Voya Global Perspectives book.

Thursday, November 7, 2019

Bloomberg reports “China and the U.S. have agreed to roll back tariffs on each other’s goods in phases as they work toward a deal between the two sides,” according to a Chinese Ministry of Commerce spokesman. “In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,” said spokesman Gao Feng on Thursday.

Global markets rallied Thursday on the news, led by emerging markets, which as measured by the iShares MSCI Emerging Markets ETF, were up 8.25% for the quarter. By contrast, international bonds, as measured by the iShares International Treasury Bond ETF, were giving back recent gains at -2.10%.

Please see page 18 of the Voya Global Perspectives book to see how growth in trade has turned negative year-over-year.

Tuesday, November 5, 2019

U.S. October nonfarm payrolls increased by 128,000, almost double expectations. Oh, and the September jobs report was revised up to a 180,000 gain instead of the first reported 136,000; and August was revised up to a stellar 219,000 from an initial 168,000. Blockbuster data for sure, but even better are the thousands of workers coming off the sidelines to increase the labor participation rate to 63.3%, the best since June 2013. But you wouldn’t have expected this watching CNBC all summer and into the fall: the pessimism and calls for recession were rampant and unequivocal. Readers of Voya Global Perspectives were not surprised, however; here is what we said in our 2019 forecast, “The Storm Before the Calm,” published in December 2018:

“In 2019 we expect, and prudent investors should prepare for, “the storm before the calm” — tighter monetary conditions, uncertainty that includes a “disorderly Brexit” and increasing tensions between China and the United States on multiple fronts. We expect a storm though, nothing more. These conditions pale in comparison to what we consider the best economic backdrop in 30 years, which we believe will result in the “calm” that investors potentially can take advantage of across markets and around the globe.”

So without false modesty, we give ourselves a victory lap and invite you to reacquaint yourself with our 2019 forecast: The Storm Before the Calm. Our 2020 forecast is on the way, stay tuned.

Thursday, October 31, 2019

Guest Blogger: Drew Schectman, Head of Environmental, Social and Governance Strategy, Voya Investment Management

Is it possible that your investments may be at risk due to forest fires, and at the same time may be making those fires worse? The recent bankruptcy of Pacific Gas & Electric (PG&E), was due in part to the economic impacts of wildfires in California. Climate change may have exacerbated the drought conditions that likely worsened those fires, thus intensifying the economic impacts on PG&E. Which of your portfolio holdings might be exacerbating climate change, e.g., by contributing to global warming? More broadly, how might your investments be affected by and contribute to global challenges such as climate change, gender equality, human rights, education, nutrition, clean water, data security, labor standards, corruption, business ethics and shareholder alignment?

These examples of environmental, social and governance (ESG) factors and their effects on a company’s financial performance, and thus potentially upon your investment portfolio, are part of a rapidly growing discipline called ESG investment, which tries to quantify and assess the ESG performance of a company and its impact on investment performance. Over time, we continue to see more examples of ESG factors materially affecting the valuations of companies. Many investment managers are working to understand the impacts of ESG issues across their portfolios. There is a growing belief among investors that companies which manage ESG-related risks and opportunities better, may perform better over the long term. It may be possible to do well while doing good.

To learn more about ESG investment, please reach out to us.

Tuesday, October 29, 2019

Special Guest Blogger: Tim Kearney

The Federal Reserve is likely to cut rates by 25 basis points (bp) at this week’s Federal Open Market Committee (FOMC) meeting. The current implied probability of a cut is 94%, up from 43% a month ago. Those market probabilities show very little belief in a cut beyond that, though things can change quickly. While there was solid support for “insurance cuts,” the data are now lining up against further monetary relief. The labor market remains quite strong, with unemployment at decades-long lows. The core CPI is 2.4% YoY; while the Fed targets the PCE deflator, it does take the CPI into consideration, and it has reached a high for this cycle. The PCE deflator has reached 1.8% and is likely to be at the targeted 2% in coming months, since the three-month annualized change is 2.4%.

Given the state of the economy and inflation, some Fed members have stated they are going into this week’s meeting with an open mind. It would appear that means they are beginning to set the stage for a pause in rate cuts, given that the Fed generally does not surprise the markets. Looking ahead, it would be prudent for the Fed to finally take a pause.

Please see “Fed Funds Target Rates and U.S. Treasury Yields” on page 15 of the Global Perspectives book.

Thursday, October 24, 2019

The Federal Open Market Committee (FOMC) faces a Shakespearean dilemma: is it better to act or not to act? Next Wednesday, October 30, the FOMC must make the pivotal decision to cut the fed funds rate by 25 basis points or not. Does it really matter? Would it be better if the FOMC just did nothing and communicated with certainty that it was going to let markets clear on their own? It may be better not to act, but as of today the market is projecting the near certainty of a cut. Meanwhile, track the fundamentals of the economy and take heart in corporate earnings, GDP growth and U.S. consumer wealth at all-time highs, while U.S. unemployment is at 51-year lows. It is not the Federal Reserve but the economic fundamentals that ultimately set the direction of the markets.

Please see “record high corporate earnings” on page 6 of the Global Perspectives book.

Tuesday, October 22, 2019

Special Guest Blogger: Tim Kearney

The consumer is an important linchpin right now in the U.S. economy, given that the trade wars have taken some of the shine off investment and fiscal stimulus is at a pause. Since Q4 2016 consumer spending has averaged 2.6% YoY growth, right in line with GDP growth. Recent trends appear to be in the same line of “steady as you go,” including the September retail sales report.

The outlook for the consumer continues to be positive. The lifetime consumption hypothesis has determined (empirically as well as theoretically) that consumers consume from their lifetime incomes. In that case, consumption is a function of what is happening in the economy, a helper rather than a driver.

Currently, household prospects are positive: net worth is high, jobs are plentiful and compensation is good. It’s no surprise, then, that consumers feel positive. In fact, the University of Michigan sentiment index unexpectedly jumped to 96 in October from 93 in September, with both current conditions and future expectations up. This continues the maintenance of high confidence seen over the past three years. Net/net, it is likely that personal consumption expenditures will clock in close to prior quarters and the consumer is unlikely to affect the Federal Reserve’s interest-rate decision later this month.

Please see the “Consumer as Game Changer” on page 12 of the Global Perspectives book.

Thursday, October 17, 2019

The conclusion in our recent third quarter commentary is apt today as investors once again are focusing too much on the pessimism and too little on the actual data. It has to be hard for investors to see relentless negative headlines while the market keeps pushing toward record highs.

The September ISM manufacturing print was a disaster but the consumer is crushing it. At the end of last year, the Federal Reserve was expected to raise interest rates as many as four times, and instead has cut rates twice and likely will cut again in December — that’s a virtual seven “rate increase” swing. Housing is surging with the help of super low interest rates and consumer wealth is at all-time highs. On the corporate side, we have the lowest taxes in a century, a deregulatory frenzy and a capital-intensive oil boom that likely will get bigger. Yes, storm clouds are indeed gathering, but do not forget or discount the “the storm before the calm.”

Please see the full article on Global Perspectives “Third Quarter Update: Storm Clouds Gathering.”


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