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Friday, November 9, 2018

Wholesale inflation (PPI) surged in October, the fastest pace in six years. The headline was 2.9% and the core-PPI ex-food and energy was 2.6%, both beating expectations. This effectively eliminates any prospect that the FOMC may pause in December. The market does not like it. Meanwhile, Crude Oil WTI is in a Bear Market, having crashed briefly hitting $59 from $75 a month ago. No one is talking about this unusual event but the last time oil prices crashed was due to China’s growth markedly slowing. Is it happening again? – yes and no. It is hard to tell since I do not trust China’s government statistics – for obvious reasons. Back to inflation. The market may be concerned about inflation but with a determined Fed, slowing global growth and one of our Global Perspectives Big Three in trouble, I believe inflation risk is highly overstated – as it has been for the past decade.

Please see page 62 of the Global Perspectives book.

Thursday, November 8, 2018

The elections are over and the market did indeed breathe a big sigh of relief. The outcome resulted in a split Congress which is thought to be good for markets because major legislation, with the potential to upend business plans, seems more unlikely while pro-business initiatives already is place will remain intact. Additional tax cuts are also less probable and that may slow the deficit’s climb. And policy gridlock may also impede legislative growth initiatives, which could curb the strong dollar and rising yields. This would be good for emerging markets. However, there are plenty of uncertainties to keep volatility heightened. The trade war with China is still front and center. The latest China exports number surprised on the upside, soaring 18 percent in October, with demand from other emerging markets particularly strong, an indication of healthy global demand. Keep your eye on China exports and imports on page 49 of the Global Perspectives book.

Wednesday, November 7, 2018
Source: Bloomberg and Voya Investment Management, 6/11/2018

Special Guest Blogger: Tim Kearney

The October employment report was solid up and down the line. The 250,000 headline number outperformed expectations by 50,000 – better than the -16,000 revision to September. Manufacturing payrolls outperformed by 16,000. Labor force participation was up 0.2%, holding above the 2016 lows – a long downdraft arrested. The most important data from last week was average hourly earnings (above 3% for the first time since 2009) and non-farm productivity (2.2% in the third quarter SAAR, 1.3% year-over-year). It is clear that there is a Phillips Curve, but it does not work in the way that many analysts think, from unemployment to inflation. Rather, the Phillips Curve relationship works thusly: tight labor markets drive wages with productivity growth as a constraint. How should we understand rising wages, then? It is the nexus of wage growth, inflation and productivity growth that explains if wages are expanding to such a degree that it can affect markets and the economy. Assuming that CPI growth held at 2.3% in October, the 3.1% average hourly earnings translate into a real wage increase of about 1%. However, the 4-quarter growth of productivity has lifted to 1.3% from zero in 2016. That is modest progress, but implies that unit labor cost growth should not be pressuring profit margins at this point.

Tuesday, November 6, 2018

The winner is…social media. Wow, staggering early voting numbers and expected record turnout is getting close to what we usually see in a presidential election. The stakes are high and all attention is on the House of Representatives. This looks like a coin toss for Republican and Democrats. A positive in all of this is that the election will be over. The results will be certain – whatever party wins. I believe this will be a market positive since the uncertainty will be removed. There may be an initial spike in volatility that will ultimately calm down. Savvy investors will once again turn their attention back to the economic boom focusing on yesterday’s strong October ISM Non-Manufacturing Services index with a reading of 60.3, near a 21-year record high. This result bolsters last week’s strong employment report and ISM Manufacturing report. Meanwhile, Eurozone services PMI was unexpectedly revised up and German September manufacturing orders exceeded expectations. Let us get back to fundamentals and remember the British adage “Be Calm and Carry On.”

Please review the ISM Services chart in the Voya Global Perspectives book.

Friday, November 2, 2018

A blockbuster payrolls report was simply astounding. The headline, 250,000 jobs in October, blows away expectations but the better news is in the details. Let us start with the participation rate jumping to 62.9%, keeping the unemployment rate at 3.7%. This is my favorite measure because it defies gravity and means people are coming “out of the woodwork” to gain meaningful employment. Then let us review a new development where wages finally increased with a 3-handle (+3.1%) for the first time in over a decade. Rising wages are good for consumers and businesses when offset with rising productivity, that is, the real cost to business is wage increases – productivity increases for a low real wage increase. Finally, this was broad based with an October increase across manufacturing, construction, transportation, healthcare, professional services and leisure. This was a blockbuster indeed and a sure sign of an economic boom.

Please see our latest quarterly outlook “The Economic Boom 10 Years After the 2008 Credit Crisis”.

Wednesday, October 31, 2018

Special Guest Blogger: Tim Kearney

The U.S. economy continues to chug along. Third-quarter GDP printed at 3.5%, above expectations, taking the year-over-year (YoY) growth rate to 3%. (It was 1.3% in 2Q18.) Looming trade concerns might have prompted a 9% rise in real imports with trade subtracting 1.8% from growth. Business fixed investment was softer, at a 0.8% seasonally adjusted annual rate, though the YoY rate was up a solid 6.4%. With the PCE deflator rising by 1.7%, the economy printed another 5% nominal growth rate; the 2010–16 average was below 4%.

The September income/spending reports showed strong consumer positioning. Personal income was up 4.4% YoY, with real disposable income up 2.9%. Real personal consumption expenditures (PCE) rose 3% YoY, spurred by a 6.4% rise in durable real spending. Core PCE (which excludes food and energy prices) and the PCE deflator rose 2% YoY, but in 3Q18 were below 2% for both the deflator (1.5%) and the core (1.4%). Good stuff.

Durable goods continued to rise sharply: on a YoY basis, September showed total orders up 7.9%, ex-defense up 6.2% and ex-transportation up 5.9%. As I have previously noted, the tax cut → investment → productivity → trend growth firing sequence will determine the investment outlook for years.

In a speech/interview last week, Federal Reserve Vice Chairman Richard Clarida made a strong statement, noting that the economy is “very, very solid.” Music to his ears, he said, that “trend growth in the economy may well be faster and the structural rate of unemployment lower” than previously assessed. Importantly, while he endorsed the idea that the Fed is likely to give us some further, gradual rate hikes, he took down the temperature on the idea that we are far from neutral. I would rate Clarida’s comments not so much “dovish” as “realistic,” a risk management approach without a pause in the short term; net/net, a positive speech.

Tuesday, October 30, 2018

We all know candy corn is mostly sugar. Investors may be worried about the robust economy running on a sugar high of tax cuts; after all, a sugar high usually ends with a crash. The latest GDP report of 3.5% growth in 3Q18 was better than expected, however, and was the fastest back-to-back quarterly growth in four years. We believe growth for full-year 2018 is firmly on track to reach 3%. Consumers were particularly sturdy during the quarter. Businesses struggled with the heightened risks in the trade tariff landscape; as a result, business investment (capex) faltered a little but was up a solid 6.4% year-over-year. Capex is important because it must increase in order to boost productivity and future growth.

Inflation moderated despite the strong GDP numbers. The PCE Index — an important inflation gauge for the Federal Reserve — moved back to 1.6%, below the Fed target of 2% and down from 2% last quarter. The economy is not at risk of overheating.

GDP details from Cornerstone Macro:

1. Capex was weak, but is likely to reaccelerate into 2019, i.e., 3Q18 was more noise than signal. Within capex, information processing investment was soft, as were structures, but industrial equipment and intellectual property investment were strong
2. Consumer spending was strong across the board. There might be a slight shift down in 4Q18, but the first half of 2019 could be supported by a significant shift up in tax refunds
3. Trade was a drag but inventories were an offsetting boost. Looking ahead, trade likely will continue to be a drag, but probably not as much as it was in 3Q18; inventories will stop being a boost
4. Housing was weak, but we believe it should pick up somewhat
5. Government spending will continue to support growth, reflecting the stimulus from April’s budget deal

Please follow GDP on page 71 of the Global perspectives Book.

Friday, October 26, 2018

The market is not done yet. Here are a few stats about corrections courtesy of The Motley Fool:

  • Corrections occur on average of every 357 days.
  • Between 1945 and 2013 the average correction was 13.3% and lasted 71.6 trading days (14 calendar weeks).
  • Predicting when corrections will occur regularly is impossible.
  • Corrections do not matter unless you are a short term trader.
  • Corrections are an opportunity to buy high quality stocks at a bargain.
  • Corrections are a reminder to reassess your holdings, rebalance your schedule and your overall plan for navigating volatile markets.

Corrections usually do not result in bear markets – an economic pullback which results in a hit to growth in company earnings. Recession is the primary cause of bear markets. Meanwhile GDP for the third quarter came in stronger than expected at 3.5%.

Please see the October 11 Global Perspectives blog, Stick to the Plan and Don't Fight the Fed.

Thursday, October 25, 2018

Housing starts were down, existing home sales were down, and new home sales were down. Housing and automobiles are two areas in particular that have been under stress. Automakers are facing tariff headwinds and their earnings are under pressure. Homebuilder earnings, on the other hand, are very strong. Nonetheless, the housing market has been showing cracks all year, even before interest rates jumped. Supply has not been able to keep up with demand. As a result, choices are scant and prices consistently have pushed upward, and are now on average higher than the previous high in 2006.

Housing starts have been hovering around 1.2 million, compared to 2.3 million new homes built in 2006. The S&P Case Shiller index has shown an average price appreciation of 6.5% this year, on the heels of 5.9% appreciation in 2017. Potential buyers have been increasingly reluctant to jump in and now that interest rates are rising, the paltry, overpriced inventory looks even less appetizing.

Housing is not poised for a crash, but it is not spurring GDP growth either. The malaise in housing may pressure the Federal Reserve to reconsider its continual upward path of interest rates. Unrelated to White House comments, the lack of a credible inflation threat and the deterioration in housing are valid reasons for the Fed to pause.

Please watch housing statistics on page 66 and 67 of the Global Perspectives Book.

Wednesday, October 24, 2018

Special Guest Blogger: Tim Kearney

The 3Q18 GDP report is due out this Friday (10/26) and consensus expectations are for a 3.4% growth rate, which would be good enough for a greater than 3% year-over-year growth rate. The Atlanta Fed NowCast calls for 3.9% growth in 3Q18, though the New York Federal Reserve sees just 2.1% growth. The Bloomberg Consensus of 76 economists sets the probability of a recession 12 months out at 15%, while the NY Fed’s yield curve only model has moved up to 14.5% over the past year, about the same as Voya’s recession model.

There will be those on the Federal Open Market Committee (FOMC) and elsewhere who will cling to the idea that this is a loose fiscal policy “sugar high,” which shifts GDP up over a couple of years and then sputters back to the “New Normal” growth rate. That is not my scenario, provided we continue to see renewed investment and productivity growth. Note that the World Economic Forum rated the United States the most competitive economy for the first time in a decade. As CNBC reported, “The U.S. was given a competitiveness score of 85.6 out of 100, with its strengths including business dynamism, its labor market, and the financial system.”

As I have been saying for some time now, the key is the evolution of investment spending to raise productivity. The FOMC minutes may reflect the first cracks developing in the New Normal edifice. The minutes noted “A couple of participants commented that recent strong growth in GDP may also be due in part to increases in the growth rate of the economy’s productive capacity…Participants noted that business fixed investment had grown strongly so far this year. A few commented that recent changes in federal tax policy had likely bolstered investment spending.” It appears we are set for some smooth sailing, though along with higher growth come higher interest rates – but for the right reasons.


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