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Thursday, May 31, 2018
Credit spreads have declined since the 2008 crisis, yet still offer good opportunity; TED spreads are at the low end of the normal range despite debt and deficit concerns.

Consumer spending surged .6% in April, the highest in 5 months, China manufacturing and non-manufacturing PMI’s reaccelerated and moved higher than consensus, initial jobless claims and continuing claims fell by more than expected and oil is now back down in the sixties. However, trade tariff worries and Italy contagion fears are tripping up equity investors. On the other hand, fixed income investors are not too worried. The TED spread measures the rate difference between LIBOR and U.S. Treasury bills. It is a general indicator of credit conditions because the U.S. Treasuries are considered risk free while LIBOR is the interbank lending rate and reflects counterparty risk. If credit conditions deteriorate, banks will require higher lending rates to compensate them for the risk. So comparing the safe, risk-free U.S. Treasury bills to the rate that banks charge each other is an effective method of evaluating true economic and credit conditions. On September 30, 2008 the Ted spread was 315 basis points. Today it is 43. This is down from last month when it was 55. Banks aren’t too worried about the geopolitical landscape, so maybe equity investors should not be either. Please watch Voya’s Chief Market Strategist, Doug Coté, light it up on CNBC and follow the TED spread on page 37 of the Global Perspectives book.

Wednesday, May 30, 2018
Europe is a tale of two markets: the peripheral economies — Spain, Portugal, Italy and Greece — have total debt around 100% of GDP and those with much stronger economic fundamentals such as Germany

There once was a time when Italian politics led the market to a collective yawn. After all, since 1946 the Italian Republic has had more than 40 prime ministers and governments. That has changed quickly, as a populist coalition grabbing for the reins. The leftist Five Star and rightist Lega have come together over a program of tax cuts, spending increases, and Euroscepticism. Having been foiled to form a government, the risk of a strengthened mandate in a September election appears to be the leading outcome right now.

In the case of Italy, where is the growth? From 1961 to 1996, Italian Real GDP grew by an average 3.4% per annum; since then to the present, the average is just 0.5% and the country has just once beat that 3.4% prior average growth rate. Once one of Europe’s most dynamic economies, Italy has become one of the more sluggish. With the monetary lever taken from the hands of the authorities, it is no surprise that both left and right have turned to an aggressive fiscal policy (and against immigration). Here Italy again comes into conflict with the larger EU (read: Germany) opinion. The situation is quite serious, with Europe likely to try to push the Italian populists to back away from their fiscal platform. The most likely outcome at this point is a September election, effectively dragging the uncertainty out and out and out.

I expect the next few weeks will likely continue to favor safe-haven assets like the USD and Treasurys, and a fourth Fed hike to be marked down even further. In the end, I expect that there will be a solid snap back based on global growth remaining strong. However, there will be some unpleasant days in the interim. For more information on 'Eurozone Markets', please check out page 52 of the Global Perspectives book. - Special Guest Blogger: Tim Kearney, PhD

Friday, May 25, 2018

Memorial Day is a day for remembering the people who died while serving the United States of America’s armed forces. The holiday, which is currently observed every year on the last Monday of May, will be held on May 28, 2018. Yesterday’s Congressional Medal of Honor ceremony at the White House, the military’s highest honor, was awarded to Master Chief Special Warfare Operator Britt Slabinski. As reported by, “Master Chief Slabinski is credited with risking his life to lead a rescue attempt for a fellow SEAL, Petty Officer 1st Class Neil Roberts, during a snowy mission atop a 10,000-foot peak, Takur Ghar, in Afghanistan. The fight, which cost the lives of seven service members including Roberts and left 20 more wounded, would become known as the Battle of Roberts Ridge.”

Voya’s Global Perspectives team remembers our fallen heroes and honors our military. Have a great Memorial Day.

Thursday, May 24, 2018

The historic North Korean summit was always a little tenuous but now that it was canceled, investors are jittery and the market mood is risk off. Geopolitical risk is never a welcome guest but unfortunately is always part of the global landscape. Time and time again, the biggest worries often turn out to be nonevents. Meanwhile, the preliminary Manufacturing Flash PMI reading for May moved up to 56.6% the highest level since September 2014. The strong manufacturing activity is indicative of GDP growth of about 3.5%. The preliminary services flash reading also inched higher to a three month high. So economic growth is forging ahead despite geopolitical tensions. And investors who were worried about rising rates, well the 10 year U.S. Treasury has dipped below 3%. During unsettled times its helps to stick to your knitting. Earnings are the knitting. Earnings are the true barometer of the global economic landscape. Unfortunately, earnings reports for Q2 will not be reported until July. Investors will be in limbo for a while and may be tempted to overreact to day-to-day events.

Please see Karyn Cavanaugh’s latest comments regarding markets on CNBC.

Wednesday, May 23, 2018

There is an important dichotomy developing, where there is considerable dollar strength while at the same time commodity prices are rising. On this market backdrop the yield curve is widening somewhat alleviating concern of a flat to inverted yield curve – the preferred measure the 10-year UST yield minus the 2-year UST yield is wider by six basis points over the past month, small but not insignificant. This seeming anomalous result has led to an underperformance of EM risk assets over the past month. This bit of a swoon is occurring during a good period for Emerging Market country performance. Financial conditions are still helpful to growth, developed countries are expanding at above-trend rates and global trade is rebounding. The April IMF World Economic Outlook (WEO) notes, “The global economic upswing that began around mid-2016 has become broader and stronger." Importantly, the Fund noted growth in “…developing economies is projected to firm further, with continued strong growth in emerging Asia and Europe and a modest upswing in commodity exporters after three years of weak performance."

Global Growth in 2017 was 3.8%, fastest since the post-recession 2011 and with growth to tick higher to 3.9% in 2018; EM growth is expected to reach 5% in 2019 with the ability to remain elevated, despite a step back in the developed countries. Current growth trends remain positive, though the recovery is being led by developed countries in the main. Looking at manufacturing PMI’s we see that only South Korea and Hong Kong are below 50 (but still indicating expansion). Still, we see a robust global economy, which is much improved over the past 18 months. The issue is the USD, which has hit EM hard. Given the fundamentals, this appears to be a reaction to a growing expectation of a December Fed hike being priced in, (now about 55%). As such, this should prove to be a hiccup rather than the beginning of a trend. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, May 22, 2018

Amid the trade worries, interest rate surveillance and emerging market/strong dollar stress, investors may be ignoring an extremely important piece of legislation to be voted on by the House today. The Economic Growth, Regulatory Relief and Consumer Protection Act will essentially ease regulations on banks, especially smaller regional banks. When the banking system is restricted, the economy is restricted. Easing up on regulations that were arbitrarily based on asset size rather than risk parameters will unleash economic growth. Small business is undoubtedly the backbone of the U.S. economy. These businesses depend on bank loans rather than stock or bond issuance and lack of financing will keep potential startups in the doghouse. Tax reform already released the hounds of growth and optimism. Accordingly, small business activity has been on fire and this is reflected in small cap stocks with the Russell 2000 up 7% in the last three months. Now banking deregulation is another nice juicy bone to add to the pile. U.S. GDP may have been a little soft in Q1 but it was above trend. Expect higher GDP growth in 2018. The dogs are on the loose.

Please watch U.S. GDP on page 70 of the Global Perspectives book and watch Karyn Cavanaugh discuss the markets on CNBC tomorrow at 6:00 am.

Friday, May 18, 2018
Corporate earnings growth is the barometer for the health of the global economy.

The market had a lot to digest this week. There was a lot of trade talk with extra portions of uncertainty around the multitude of issues and fairness concerns. Adding to uncertainty, the dollar keeps climbing and oil prices, which are often inversely correlated to the dollar, remain strongly camped above $71/barrel. A strong dollar is a headwind to overseas sales and is causing some stress in emerging markets with high dollar denominated debt. And if oil prices get too high, consumer spending and sentiment could be adversely affected. However, the biggest chunk of mystery meat on the investor plate has been rising interest rates. The 10-year UST yield soared to 3.10% before pulling back a bit. Rising yields can be attributed to economic growth, inflation expectations and the term premium for accepting risk and uncertainty over the life of the bond. Roberto Perli of Cornerstone Macro dissects the three and finds that expectations for higher growth have only modestly contributed to the higher yields. Inflation expectations have been more instrumental but have likely peaked as the market expectation for long-term inflation is still below normal. The biggest factor in the move higher in yields is the term premium. Investors are anticipating higher issuance of government bonds to fund deficits as the same time that the Fed balance sheet and hence demand is shrinking. Despite all it has been served, markets and investors have held up relatively well this week, a testament to the strong fundamentals (corporate profits) guiding investor decisions and keeping them from detrimental knee jerk reactions. Well done, Investors. You deserve a nice cold one. Time to enjoy the weekend when bad decisions make for the best stories on Monday. Please refer to page 6 of the Global Perspectives Book, “Fundamentals Drive the Market” and watch Karyn Cavanaugh’s latest comments on the market.

Thursday, May 17, 2018
Capital expenditures are on the upswing, and the average age of equipment has climbed to the highest level in 15 years.

We are in the Q1 earnings season home stretch. 92% of the companies have reported and the overall results have been wildly successful with earnings up 25% over last year’s Q1. Every sector except real estate exceeded expectations. Energy earnings were up 90%, technology up 35% and materials up 44%. However, investors are forward looking and skeptical of the ability to keep the good profit news flowing. In particular, investors are debating the corporate tax cut and whether or not it is a one and done. The tax cuts did have a one-time profit boost for many of the large corporations. However, many of these large companies had an effective tax rate below the stated 35% before the tax reform package. They were able to lower their effective rate by moving operations overseas. Now that tax advantage has been eliminated and capital investment that would have gone to China is being re-shored to the U.S. The lack of business spending and investment over the last decade is the reason productivity has been lacking. Workers cannot be productive if you take away their tools. Spending on structures, equipment, software and intellectual property in the U.S. is now already on the rise in both the services and goods sectors. CAPEX is up 6.1% year-over-year. In addition, industrial production in April was up .7%, 3.5% YoY and capacity utilization was the highest in three years. The worker toolboxes are being restocked. This is certainly not a one and done.
Please watch CAPEX on page 11 of the Global Perspectives Book.

Wednesday, May 16, 2018

The world economy is in an interesting place, rarely seen, of low inflation/synchronized growth. The April IMF World Economic Outlook (WEO) notes, “The global economic upswing that began around mid-2016 has become broader and stronger." Importantly, the Fund expects developed countries to continue growing above trend. Growth in 2017 was 3.8%, fastest since the post-recession 2011 and with growth to tick higher to 3.9% in 2018. The Fund expects developed countries to sink back to sub-2 percentage growth, which is the leading question of our time: can we break out of a New Normal of paltry growth? Growth is picking up at a time when inflation is moving lower. The Fund believes that global inflation will remain around 3%, with Emerging Market inflation around 4%. This is a major development, which cannot be overemphasized. Current trends remain positive, though growth has ticked lower from Q4 2017. Looking at manufacturing PMI’s we see that only South Korea is below 50 (indicating expansion), though no country now is above 60 (as had been over the past four months in Australia, the U.S. and Germany). Still, we see a robust global economy, which is much improved over the past year. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, May 15, 2018
At about 70% of GDP, the U.S. consumer is the game changer in economic growth. Consumption, income and retail sales have achieved all-time highs.

Retail sales increased for the second month in a row, up .3% in April and up a revised .8% in March. In absolute terms, retail sales hit a record $497.5 billion. Sure, gas sales were higher because of higher oil prices but shoppers were also splurging on new spring wardrobes and home and garden merchandise. The latest consumer numbers bode well for 2Q GDP, which is widely expected to be north of 3%. Consumer spending is a huge piece of the GDP pie but too much spending is like too much pie. Overspending leads to high consumer debt levels and lack of savings for retirement, which impedes long-term future growth. And nobody really needs that many pairs of shoes. Speaking of retirement, if you have not saved anything it is never too late to start. If you forgo 1 fancy coffee and 1 bottle of water each day and invest that 5 dollars you can have $63,000 in 15 years (based on the last 15 years S&P annualized return of ~10%). Cutting expenses is an obvious way to save. In addition, paying down high interest rate credit card debt is a no-brainer. Working longer is another option, especially in this tight labor market where your skills may be highly valued. Moving to a lower cost area may also be necessary. Finally, become a bargain hunter. The internet makes it so easy to shop you don’t have to actually dig through store bins. Although my sister recently found this Hermes cashmere shawl at the Goodwill store for $3.99. Please follow retail sales on page 12 of the Global Perspectives Book.


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