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Tuesday, September 10, 2019
Source: Bloomberg and Voya Investment Management

Friday’s modest employment report should keep the Federal Open Market Committee on track for a Fed Funds interest rate cut next week. The headline print showed that 130,000 jobs were added, versus an expected 160,000; unemployment remained unchanged at 3.7%, while underemployment and labor force participation were each higher by 0.2%. Also, average weekly earnings of 3.2% came in above an expected 3%. The main story is the beginning of Census hiring, so the miss on private employment was actually a considerably larger 96,000 versus the 150,000 expected. Manufacturing returned to the recent average, adding 5,000 jobs. This, after the July report was revised all the way down to 4,000. While still above trend overall, the manufacturing report is nonetheless soft and adds to the continuing trend lower, matching recent ISM reports.

There could be a fly in the ointment, however. RDQ Economics notes that August notoriously gets revised higher: “There is a strong tendency for August payrolls to be initially under-reported. The first estimate of August payroll growth has come in below the prior three-month trend in each of the last 8 years and in 8 of the last ten years that the first release of August payrolls was revised higher with the September and October jobs reports.” Given that, the report is not so weak as to stampede the Fed into a 50 basis point cut in September.

Source: Bloomberg and Voya Investment Management

Thursday, September 5, 2019

U.S. markets are nearing all-time records, with today’s ADP August blockbuster report of 195,000 and non-manufacturing services surging to three-month highs. Yes, the action is predictable: investors are piling into the market and retreating from safe-haven assets. The “R” word — aka recession — which prevailed in the summer has been erased from the financial media’s lexicon, coincident with the “back to school” euphoria. We expect to hear more good news, and believe it may be a good time for investors to review their defensive postures.

Please review the July Global Perspectives Mid-Year Update for our bullish forecasts made back in December and updated in July.

Tuesday, September 3, 2019

My take on 2Q19 GDP: consumers continued strongly, investment lagged, profits rebounded and inflation ticked a bit higher. I’m not surprised by the strong consumption (C); permanent income expectations clearly are positive, that is, consumer confidence is high given the strength in the labor market and net worth improvements. By contrast, capital spending (I) continues to be sluggish and remains a key for the medium-term outlook. Interestingly, the Congressional Budget Office has raised its measure of trend growth to 2.1% on the back of improving productivity.

Positively, final private sales to domestic producers (essentially, C+I) was driven by a strong 4.7% YoY reading of personal consumption expenditures (PCE), up from 1.1% in 1Q19. The weakness in the second quarter was business fixed investment. On the inflation front, the PCE deflator continues to edge higher. I estimate the trend component of the PCE deflator is now 1.9% YoY, up from 1.5% two years ago and below 1% in 2016. Monetary policy is working to raise inflation towards the Federal Reserve’s 2% target.

Nothing in this report especially calls for a 50 basis point (bp) rate cut in September, though I do expect the Fed will deliver a 25 bp cut. Little wonder that the Conference Board’s measure of consumer confidence remains near 20-year highs. Employment is a coincident indicator and consumer spending is heavily influenced by labor market conditions. What that means is that the consumer can help support growth and even add to it, though a downturn could see consumers turn defensive quickly.

Please follow PCE on page 12 of the Global Perspectives Book.

Thursday, August 29, 2019

GDP is the standard measure of economic growth across the globe. U.S. 2Q19 GDP was marginally downgraded to 2% in this second release (from an initially reported 2.1%) and the Congressional Budget Office’s new estimate of trend U.S. GDP is 2.1%. This should give nervous investors comfort that the U.S. economy is not sliding into recession. Here’s the bottom line: consumers continue strong, investment is lagging, profits rebounded and inflation ticked a bit higher. Consumer confidence is high given the strength in the labor market and net worth improvements. However, capital spending continues to be sluggish given the trade uncertainties.

As of August 29, stocks and bonds across the board were awash in a field of green, the S&P 500 was up nearly 16% year-to-date and corporate earnings stood at all-time highs. Investors may need some perspective on the markets and the economy: sure, there are a few acorns falling but the sky is not. Global diversification can help calm the Chicken Little in all of us.

Please follow the components of GDP on page 70 of the Global Perspectives Book and watch Paul Zemsky’s latest comments on the market.

Tuesday, August 27, 2019

Special Guest Blogger: Tim Kearney

The Congressional Budget Office (CBO) has revised upwards its estimate of trend GDP growth for the 2019–2023 period to 2.1% from 1.6% over 2008–2018. Given the sluggish expected labor force growth, the increase comes from 1.6% expected productivity growth, up from 1%. The good news here is that productivity has edged higher than 1.6% already, underscoring how important the investment outlook is to the longer-term growth rate.

Segue to Federal Reserve Chairman Powell’s Jackson Hole speech, which was dovish but really provided little news. He injected a reality check on the Fed’s limited ability to counteract trade restrictions, saying “monetary policy… cannot provide a settled rulebook for international trade.” The takeaway appears to be that September likely will see a rate cut (the question being how large) and that the Fed will be “recalibrating” its policies/tools at every meeting.

A disconnect has developed between the CBO’s upward move for potential GDP and the Fed’s collective rhetoric about lower equilibrium interest rates, which had shadowed one another since before the global financial crisis. This divergence is creating a disequilibrium situation, which I would expect to be resolved by the equilibrium interest rate moving higher — except for the pernicious effect of the trade situation. Trade issues attack this theoretical equilibrium from two sides: they force the Fed to keep rates too low, while at the same time they put unwanted downward pressure on the natural rise of potential GDP.

Please follow real GDP on page 69 of the Voya Global Perspectives book.

Thursday, August 22, 2019

The Wall Street Journal reports “ECB Minutes Back up Signals of Broad Stimulus Package” and “European Central Bank officials gave a further signal that they would launch a big stimulus package in September.” These stories, along with the likelihood that the U.S. Federal Reserve will cut interest rates by 25 basis points at its September meeting, make us believe the central banks are going to show us they still have some tools to affect the economy. September’s “back to school” stimulus may have parents celebrating both a rising market and little Tanner “out of the house.”

Please see “Monetary Policy Outlook,” on page 39 of the Voya Global Perspectives book.

Tuesday, August 20, 2019

Special Guest Blogger: Tim Kearney

Unsurprisingly, consumer confidence remains buoyant: wage growth is positive and labor markets are solid, as shown by another 50-year-low reading of initial claims. Hence, retail sales are good — July outperformed expectations. Early estimates for third-quarter personal consumption expenditures (PCE) remain strong: the so-called “control groups,” which are part of the GDP-PCE report, are up by 5% over the past year and by an annualized 10% over the past three months. While trade concerns have hit large business confidence, the confidence components of the New York and Philadelphia Federal Reserve business surveys outperformed expectations in July — and that was before the improvement in the trade mood later in the month.

Net/net, the economy continues to grow a bit more slowly but appears to be above trend. Manufacturing production in July was off but June was revised up and the three-month change is a solid 1.3%. Durables production is up 3.1% in the past three months, with business equipment up 3.3%. This implies both investment and manufacturing are stabilizing. While there are reasons for concern with the rest of the world in a slowdown and trade tensions remaining, a recession does not seem likely in 2019 or even early 2020.

Please follow manufacturing and industrial production on page 10 of the Global Perspectives book.

Thursday, August 15, 2019

Is it acorns falling or is the sky truly falling? Acorns abound with the on-again, off-again China–United states “trade war.” Wait, was that another “no-deal” Brexit threatened by yet another U.K. prime minister? And Argentina’s S&P Merval index, which plummeted 48% in U.S.-dollar terms due to a major loss in a primary election by President Mauricio Macri – the actual election is in October. There are other “crises” brewing of course, not least Germany’s 2Q19 GDP contraction and a Eurosceptic frontrunner in the Italian election, which are rattling Europe’s financial markets.

These storms belie the structurally sound economy in the U.S. and abroad – no pervasive risk factor such as rising interest rates. Remember that volatility is normal and world events are always in disarray somewhere. In our view, the global economy is the strongest it has ever been; U.S. GDP is at record highs, as are corporate earnings. If it seems like the sky is falling it may just be a lot of acorns.

Please see page 5 of the Global Perspectives book for record high World GDP.

Tuesday, August 13, 2019

Special Guest Blogger: Daniel Wang

The recent slew of incoming global economic data has been disappointing, with the gap between the U.S. manufacturing and services PMIs at a five-year wide point. U.S. trade policy is negatively affecting the manufacturing sector, as we muddle through this weaker than expected capital expenditure cycle and see U.S. manufacturing PMIs slip below the 50 threshold, which indicates contraction. Global trade tensions and political uncertainty also have weakened corporate confidence, and continue to present downside risks to future capex plans and hiring decisions. The service sector is showing some signs of positive momentum while small business optimism has continued to strengthen in five of the last six months. The improvements across service and small businesses suggest continued strength within the tight labor market, which is a positive tailwind for consumption and the U.S. economy as a whole.

The key issue moving forward continues to be whether trade tensions escalate or de-escalate, and how any potential deterioration in trade relationships will impact domestic small businesses and the service sector, which together make up around 90% of the economy.

Please follow capital expenditures on page 11 of the Global Perspectives book.

Thursday, August 8, 2019

Some investors argue further rate cuts are needed. They contend that the global economy is slowing, global manufacturing is in a recession, $15 trillion in global sovereign debt is yielding negative rates, inflation is nowhere to be seen and the U.S. dollar is too strong. On the other hand, the U.S. service-driven economy is still on sound footing; employment is robust, with the latest initial jobless claims dropping 8,000 to 209,000 and consumer confidence in July surging to levels near last fall’s record highs. It is unclear if interest-rate cuts effectively will address any of the global economic woes. After all, won’t other countries just to continue to lower their rates in a race to the bottom? And if necessary can’t the tariff war be resolved quickly with executive action?

As worried investors pile into bonds, driving prices up and yields down, it actually make stocks more attractive because dividends and earnings are now discounted at lower rates. For example, as of June 28, 2019, the 2.00% yield on the ten-year U.S. Treasury note equated to an S&P 500 price-earnings (PE) multiple of 50, i.e., 50 times reported next twelve months’ earnings divided by the S&P 500’s market capitalization.[1] At that same juncture, the S&P 500’s forward twelve-month earnings yield (EP),[2] which is the inverse of the PE multiple, stood at 5.97%, equivalent to a PE of 16.7 without even considering dividends. In our view, this difference between equivalent PEs — 50.0 vs. 16.7 — may point to a potentially attractive opportunity.

Earnings estimates have been cut but they are still hanging in there, and we expect to see higher levels in 2019 than the blockbuster 2018. Advancing earnings and continuing low interest rates may bolster the case for stocks. With global rates so low, you may have heard the acronym TINA — there is no alternative. We believe there is an alternative: global diversification of both stocks and bonds to help cushion the ride of volatility.

Please see page 20 of the Global Perspectives book for a comparison of the earnings yield between U.S. Treasurys and S&P 500 stocks, and watch Matt Tom’s latest comments about the trade wars.


[1]Source: Standard & Poor’s, First Call, Reuters, Bloomberg, FactSet.
[1]Earnings yield is the inverse of the price to earnings (P/E) ratio and is calculated as the sum of the reported next 12 months’ earnings estimates divided by market capitalization. The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. Past performance is no guarantee of future results. An investment cannot be made in an index.

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