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Wednesday, July 18, 2018

Mid-point in the year and the U.S. continues to look strong and rocking better than the rest of the world. The consensus for Q2 (published 7/27) is 4%, up from the 2% recorded in Q1. GDP has not printed 4% since mid-2014, and that was following a -1% Q1. The Bloomberg consensus for 2018 as a whole is 2.9%. The National Association of Business Economists (NABE) has an interesting, but I believe a mainstream, look at the economy. While the economy has solid momentum they do not believe that the economy has yet to feel the effects from tax cuts which they forecast will add +0.3% in 2018 and +0.4% in 2019 followed by a 2020 recession. Why? Many forecasters believe that the economic ventilation since January 2017 will deliver just a step rise in the level of GDP before returning to the prior “New Normal” sub-2% trend growth. To be fair, it is a theoretically sound viewpoint – it is tough to call a new trend until there is some evidence of a new trend.

Still, I believe that the generic view underestimates the impact of an investment rebound and there are nascent signs one is developing. Productivity growth is back above 1%; a modest improvement but as the aphorism notes a 1,000 mile journey starts with a couple of steps. The Bloomberg Consensus sees private investment having risen by 7.5% QoQ in Q2, after the strong 7.5% of Q1. It was the outright fall in the capital stock from Q3 2015 to end-2016, which is the key culprit in the U.S. economic malaise. To wit: even slow labor force growth needs a rising capital base. ISM New Orders remain well above 60 and are further good signs for 2018 investment. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, July 17, 2018

Well I’ll be darned, Fed Chair Powell stated with clarity that wages and productivity and not inflation are linked. This is big news in Washington apparently whereas in the hinterland of capitalism we might be inclined to accuse him of being Captain Obvious. When a government punishes capital formation through excessive taxation, you get less of it. Lo and behold, on the promise of cutting business taxes, capital expenditure (CAPEX) surged in 2017 and is gathering steam in 2018. Yes, less taxes more capital formation. Since the pro-business tax cuts we have seen a boom in trade (imports + exports), CAPEX growing at double digits, and today’s industrial production bounce for June at 0.6% topping off a 6.0% quarter is leading to a second quarter GDP growth we expect to have a 4-handle. Yes, four percent GDP growth, that seemed to come out of nowhere, let’s call it a “stealth economic boom.” The bottom-line is, more capital formation equals more tools for workers, which increases productivity and raises real wages. Please read Voya Global Perspectives Mid-Year Outlook describing in more detail the “stealth economic boom” and how it can raise wages without raising inflation.

Friday, July 13, 2018

Nothing says bummer like an economy that is slowing down, a currency that is getting weaker and a stock market in bear market territory. No, not the U.S., it’s the situation in China. Hence, it is not really a surprise that China has yet to announce any retaliatory tariffs on the latest U.S. proposed tariffs on $200 billion dollars of Chinese goods. That is not to say that China is blinking, but they do want to be cautious in escalating an already high temperature situation. China has plenty of other tools at their disposal to counter tariffs such as hindering and impeding the operations of U.S. businesses already operating in China. Selling U.S. Treasuries is not one of the likely potential weapons. Doing so would be like shooting themselves in the knee; it would weaken the Chinese Yuan further and spur capital outflows. Investors are realizing that this will be a bumpy and lengthy negotiation. Bummer. In the next few weeks, stellar earnings and the accelerating U.S. economy will offer some shade from the trade heat. At the end of the day, one thing is certain – China is not engaging in fair trade practices and every country in the world knows it and has been complaining about it for years. Most economists agree that tariffs are bad for consumers and economic growth, yet few have outlined a plausible road map for a more level global playing field. As always, it is much easier to point out the problems rather than offer solutions. Have a good weekend and check out the Global Perspectives Mid-Year Outlook.

Thursday, July 12, 2018
Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

Inflation as measured by the CPI, increased to 2.9% year-over-year, the highest pace since June 2012. Excluding food and energy, consumer prices increased 2.3% year-over-year. The increases were in-line with expectations. The market seems relatively unconcerned about higher inflation for now. After all, there has been speculation for years of runaway price increases, which never came to fruition. In addition, the latest payroll report indicated that there is still some slack in the labor market, the initial unemployment claims for last week dropped back to near a 49 year low and earnings seasons begins this week with expectations for another quarter of another +20% growth in profits. So today economic optimism is overriding trade concerns. The new trade tariffs have not yet significantly impacted the macro economic backdrop. The trade worries are far from over but investors are having a hard time denying the positive fundamentals. The widely followed S&P 500 may only be up 5% but that is certainly not too shabby. And small cap stock returns are well into double digits, illustrating the value of diversification. Yes, trade tensions are a market lemon but there will always be opportunities to make lemonade. Please follow inflation on page 60 of the Global Perspectives Book.

Wednesday, July 11, 2018

An almost picture-perfect employment report for June, a drop the mike sort of report. It will not force a change in Fed policy by itself (other issues are in the mix, like trade). Headline outperformed by 18k with the two-month revision +37k. Private payrolls outperformed by 12k with the prior month revised up 11k. Manufacturing was up 36k and positive revisions. How does this sink with The Fed’s model? The unemployment rate up to 4% (was 3.8%) thanks to a rise in labor force participation of 0.2% while hourly earnings tick lower to 2.7%. The likelihood of a December hike continues to be priced in (up now to 59%), but nothing in the data gave running room to an acceleration beyond that, at least thus far. Consensus is tracking a 3+% Q2, followed by about 3% for Q3 and Q4. The Atlanta Fed NowCast in Q3 shows a 3.8% run rate, the NY Fed is at 2.7% while the St. Louis Fed clocks in at 3.3%. May factory orders outperformed (including upward revisions) while durable goods orders also performed well. Things are going well in manufacturing.

An interesting tidbit from Yahoo on the world’s game (soccer): “UK economy boost. England’s unexpected success has delighted fans - leading to a boost for the economy as fans stock up on food, drink and TVs to watch matches on. The match will add £555 million (c. $730mn) of consumer spending to the economy as people stock up on food, drink and memorabilia before Wednesday night’s match, according to The Centre for Retail Research (CRR). If England beats Croatia and makes it into the final, CRR predicts that the World Cup will have boosted spending in the UK by £2.7 billion (c. $3.5bn).” - Special Guest Blogger: Tim Kearney, PhD

Friday, July 6, 2018

Once upon a time, there was a jobs market that was not too hot and not too cold. It was just right. The U.S. economy added an above-expected 213,000 jobs in June. Oh no, this is the 93rd straight month of job gains -the Fed may want to raise rates faster and risk inverting the yield curve. Not so fast. The employment rate ticked up from 3.8% to 4% as 600,000 people entered or re-entered the labor force. Good job opportunities are luring workers back to the market. The biggest gains in jobs added were in professional services, manufacturing and healthcare. The lower paying retail sector lost jobs last month. In addition to a little slack in work force, wage growth was a slight miss. Wages increased .2% or 2.7% year over year. This is below the 3-4% target the Fed would like to see. So, inflation is not huffing and puffing at the door yet. (Oops, wrong fairy tale.) The Fed will be looking at wage growth and the labor participation rate, which inched up to 62.9% as more stable indicators of the employment market. Investors should keep an eye out for the Q2 productivity measures due out in August. If workers can become more productive, the economy can continue to grow rapidly even with the below trend labor participation rate. The surge in private non-residual spending in Q1 (CAPEX) bodes well for a boost in productivity. Please watch Karyn Cavanaugh comment about the labor market and read the Global Perspectives: 2018 Mid-year Outlook – Confident Economy, Cautious Markets .

Tuesday, July 3, 2018
Wide variations in sector returns have generally been the norm; this year information technology and healthcare are the leaders; energy and telecommunications are the laggards.

The first half of 2018 was the best for initial public offerings (IPOs) since 2012 and the second quarter was the busiest since 2015 with no signs of slowing in sight. All of these deals are telling us that the economy is robust, business confidence is high and companies have money to expand. Indeed, the latest PMI Index reading soared to 60.2%, the second highest since the recession, the NFIB small business survey indicates near record level confidence and companies have begun to repatriate the $2 trillion in cash held overseas, returning $217 billion in Q1 alone. The explosive pace of IPO activity provides companies with access to liquid and relatively low cost capital, which will allow them to grow their operations, raise their profile and attract more talented workers and management. IPO’s are positive for investors too. Sure, some IPO’s are duds but the WSJ reported (7/3/2018) that the average stock price of the companies going public in 2018 is trading at 23% above its initial offer price. That’s fireworks compared to the S&P 500 YTD (as of 7/3/2018) return of 3% including dividends. Please review the returns of all the major U.S. stock indices on page 18 of the Global Perspectives Book and have a happy and safe Independence Day.

Friday, June 29, 2018

The first half of 2018 is coming to a close on a note of optimism. Markets are rallying today despite continued trade tensions. Trade is not the only issue dogging investors in 1H 2018. A flat yield curve coupled with anticipated Fed rate hikes, a stronger dollar, rising oil prices and a slowdown in European growth are weighing on investment optimism. On the other hand, tax cuts and deregulation are resulting in a surge in GDP, CAPEX, repatriation of profits, business optimism and record high corporate profits. Meanwhile, North Korea has faded into the background. The negatives make headlines while the positives draw yawns. The trade issues with China run deep and will not be resolved anytime soon. Despite the headlines, U.S. allies agree with the U.S. when it comes to China’s blatantly unfair trade practices. Expect the tug of war between trade and robust fundamentals to play out in the markets during the second half of the year. However, news flash, the fundamentals will eventually prevail. If the trade woes start to significantly impede business, it will show up in the earnings. So far, the stealth economic expansion has been revising earnings up, not down. In 2H 2018, investors should 1. Stop trying to front run the ever-changing potential trade outcomes and let the earnings do the worrying for them and 2. Understand that volatility creates opportunities.

Thursday, June 28, 2018
Crude oil prices have rebounded to over $50/barrel, and gasoline prices have followed suit. Nevertheless, oil consumed per unit of GDP in the U.S. (oil intensity) has declined for many years.

Let’s take a break from trade and address some other investor concerns. Oil prices are the highest since 2014, just in time for summer driving season. Groan. Prices have surged despite OPEC agreeing to ramp up production last week. U.S. sanctions on Iran are the biggest factor in the higher prices but dwindling supplies from Venezuela, concerns about Libya exports and a Canadian supply outage are also applying upward pressure. The demand side of the equation is also favoring higher prices, as economic growth has pushed global consumption to record high levels of more than 99 million barrels a day. The U.S. has certainly ramped up drilling but there are still bottlenecks in the pipeline and refinery logistics chain. Low inventories, supply disruption and robust demand will keep prices high for the short term and through the summer, which is peak driving time as everyone hits the road for vacation. On the other hand, this does have positive implications for equities in the energy sector. Soaring energy company profits have encouraged investors and the energy sector is up more than 14% on the last three months, the best of any S&P 500 sector. Please watch oil prices on page 62 of the Global Perspectives Book and note that the long term average price of oil is about $43/barrel.

Wednesday, June 27, 2018

Rumors of trade wars are always problematic since they slow growth and capital flows and exacerbate problems. So it is important to see how the world economy is faring as the situation develops. Early PMI prints for the US, France and Germany were below expectations though the Eurozone was spot on. It is important to note that PMIs are still at high levels, well off the lows of 2016. US data have been very strong, but uncertainty generated by trade could hit the rebound’s “animal spirits” channel. The economy seemingly is going from strength to strength: claims edged to near 50-year lows; new home sales were up 6.7% in May and beat the consensus; the LEI rose 6.1% YoY. The upside risk of a 3+% Q2 continues to be mooted with Atlanta Fed GDPNow holding at 4.7%, though the St. Louis Fed is at 3.4% with the New York Fed at a more modest 2.9%. Much on the print will depend on net exports (C + I + G +(X –M)); either way it’s a strong quarter and 4% is not out of the question.

It’s a solid outlook but the direct effects of trade war uncertainty are drag enough. Fed Chair Powell is warning that trade uncertainty is a risk for investment and powerful enough for the Fed to “cause us to question the outlook.” The ECB chief Draghi echoed concern over higher uncertainty hitting the economy. Most straight forward was RBA chief Lowe who warned, “while the tariffs themselves might not derail the global economic recovery, the fallout could be magnified through financial markets,” and “I believe this is happening and is incredibly worrying.” H/T to Dr. Thierry Wizman of Macquarie, who notes that the global auto trade is especially at risk. - Special Guest Blogger: Tim Kearney, PhD


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