Lezdam Amicis Meis Epularer.



Claude Monet (French, Paris 1840–1926 Giverny), 1869, oil on canvas. 


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1:30 pm 

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              3:30 pm 

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               4:00 pm -ish

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In European Equity Markets 
The pan-European STOXX 600 fell 1.26 percent by the close, with every sector posting sharp losses. During the course of the session, European stocks hit a two-week low, as the volatility seen during February showed signs of seeping into March.


The German DAX fell 1.97 percent by the close, while France’s CAC 40 slipped 1.09 percent and the U.K.’s FTSE 100 declined 0.78 percent.



Media stocks were some of the top losers, off over 2 percent as a sector following earnings news. Shares of WPP fell as much as 14 percent in trade before closing down 8.2 percent. This comes after the advertising giant announced lower net sales in 2018 and a cautious outlook for 2018. Other sectors to post sharp losses included basic resources, chemicals, and technology.
In Currency Markets 
The US dollar rose to a six-week high on Thursday after a set of solid U.S. economic data further stoked expectations that the Federal Reserve could raise interest rates as many as four times this year. The greenback has gained momentum this week following the first public testimony of Federal Reserve Chairman Jerome Powell, who struck an upbeat note on the U.S. economy. A U.S. manufacturing index for February was also stronger than expected. The index was last up 0.3 percent at 90.899. It is still down 1.5 percent this year. In the eurozone, data showing the currency bloc’s manufacturing boom slowed last month added to the downbeat mood, helping send the euro as low as $1.2153, its weakest since Jan. 12.





In Commodities Markets
Oil fell more than 1 percent on Thursday, hitting two-week lows on pressure from a strong dollar and worries that surging U.S. crude output might thwart OPEC’s efforts to drain global supply. Rebounding stock prices on Wall Street helped crude futures bounce off the day’s lows, as stocks and oil futures have been more highly correlated in recent weeks. Brent crude and U.S. West Texas Intermediate (WTI) crude fell by more than $1 a barrel. Brent, the global benchmark, lost $1.22, or 1.9 percent, to $63.52 a barrel, after sliding as low as $63.19. U.S. crude was down $1, or 1.6 percent, to $60.66 a barrel, after touching a low of $60.18. The session lows for both benchmarks were the lowest prices in two weeks.



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In US Equity Markets 
Main indexes swung between gains and losses on Thursday after Federal Reserve chair Jerome Powell said the central bank does not see strong evidence of wage inflation. The S&P 500 was up 0.17 percent at 2,718.53 and the Nasdaq Composite rose marginally 0.16 percent at 7,284.88. Boeing and Caterpillar were among the biggest decliners on the Dow on fears that import tariffs could hit profits. Steel and aluminum stocks gave back some of their earlier gains Thursday after the Trump administration said President Donald Trump would likely not be issuing an announcement on tariffs, as was previously expected. Shares of U.S. Steel traded up 2.1 percent while AK Steel jumped nearly 4.3 percent. Century Aluminum and Steel Dynamics rose 3.8 percent and 1.6 percent, respectively.

S&P 500 


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In Bond Markets the spread between U.S. shorter- and longer-dated Treasury yields widened on Thursday after Federal Reserve Chairman Jerome Powell said there is no evidence the U.S. economy is currently overheating. The difference between five-year and 30-year Treasury yields was more than 1 basis point wider at 49.8 basis points.


The U.S. bond market’s gauges of inflation expectations remained near session lows on Thursday after data showed U.S. core consumer prices rose 0.3 percent in January, their steepest monthly increase in 12 months.


The 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was 2.11 percent, down 1.5 basis points from late Wednesday.

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This paper, “Fertility Is a Leading Economic Indicator” is novel in that it postulates that fertility may actually be a leading indicator of a recession.
“Many papers show that aggregate fertility is pro-cyclical over the business cycle. In this paper we do something else: using data on more than 100 million births and focusing on within-year changes in fertility, we show that for recent recessions in the United States, the growth rate for conceptions begins to fall several quarters prior to economic decline.”
This analysis is shown in the middle graphic, which has been extracted from their paper, and as the chart shows:
“The almost prescient decline in fertility at the onset of the last three recessions is evidence that people react rapidly to changing economic conditions in even their most personal choices, such as whether or not to conceive a child.”
The implication is that family planning decisions may actually be much more sensitive to more coincident economic indicators such as consumer confidence and durable orders. This flies somewhat in the face of the commonly held view that the long “production time” of creating babies makes their production less responsive to shorter-term economic fluctuations.  (Yes, that’s a very geeky way to talk about having a family!)



Federal Reserve 

Daily Overnight Funding Rate: 1.35%, Volume: $204B

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Mr. Clardia’s most recent paper Twhich highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. -NBER 
The Global Factor in Neutral Policy Rates: Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination
  • United States Initial Jobless Claims was reported at 210K in 24/Feb from 220K in the previous period. It was expected at 226K. 
  • United States Continuing Jobless Claims was reported at 1931K in 17/Feb from 1874K in the previous period. It was expected at 1930K.
  • United States Central Bank Balance Sheet was reported at 4,385,073 USD Million in 2018-02-19 from 4,379,459 in the previous period.
  • United States Markit Manufacturing PMI Final was reported at 55.3 in Feb from 55.5 in the previous period. It was expected at 55.9.
  • United States ISM Manufacturing Prices was reported at 74.2 in Feb from 72.7 in the previous period. It was expected at 70.5. 
Headline = +1.7 pts, back north of 60 and = 165-months highs
New Orders = 64.2 = 10 consecutive months >60 and having its strongest 3/6/10 month stretch in 14 years.
Employment = +5.5 pts and back to flirting with the 60-level
Export Orders = breaching 60 to the upside and logging a new 82-month high
Backlogs = +3.6pts to 59.8, also good for a new 165-month high.
Prices Paid = +1.5 pts and holding at a blistering 74.2 = 81-month highs as the reflationary mojo continues to manifest.



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ISM Euphoria Hard to Square With Just OK Hard Data
By any reckoning, today’s ISM print of 60.8 for February offers support to the notion that manufacturing is on an upward trajectory. It is hard to reconcile that with consecutive months of soft orders and production data.

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Highest Print in More than a Decade
The headline print of 60.8 in the ISM index is the highest since 2004 and the latest affirmation of broadening business confidence. Aside from a slight slowing in the orders and production components (which are both still above 60 and thus signaling continued expansion), all other components moved farther into expansion territory.
“Everybody is out of what I need”
The slight dip in customer inventories (which does not roll into the headline) can be seen as a positive for the manufacturing outlook in-as-much as it indicates supply-chain constraints. This is affirmed in some of the selected comments like this one from a representative of the computer and electronics products category: “Availability of electronic components, long lead times, allocations and constraints continue to wreak havoc in the purchasing cycle, with no end in sight at this time.” Another comment from the fabricated metals sector illustrates the point even more succinctly: “Steel market is doing rather well. Everybody is out of what I need.”

The biggest move in the components and perhaps the largest takeaway from 100 today’s report is that employment jumped 5.5 notches to 59.7.

The prices index climbed another 1.5 points to hit 74.2—that is the highest reading more than six years and the 24th consecutive month in which this category has signaled higher raw material prices. In an economic cycle that has been characterized by sub-2 percent CPI inflation, there are clues in this report that, after accounting for a lag, the manufacturing sector could be adding to inflation pressures later this year.

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Not all of that price pressure is from domestic sources either. The imports component climbed 2.1points to 60.5, the highest reading here since 2007. One manufacturer linked some of the pricing pressure to the increased demand from overseas along with changes in the value of the U.S. dollar, saying the “weakening in the U.S. dollar in relationship to the yuan is starting to impact importing cost. We are starting to see more supplier price increases.”
Hard to Reconcile with Hard Data
In short, today’s ISM report is the latest signal that positive sentiment is giving way to euphoria in the manufacturing sector, yet this comes amid a run of admittedly lousy hard data. Core capital goods orders have been in retreat for the past two months and, similarly, manufacturing production has flat-lined for two straight months. As we said in the durable goods write-up earlier this week, in times of such pronounced survey strength, the gap between hard and soft data is usually narrowed by business surveys getting reined in, rather than the hard orders data experiencing a marked acceleration.

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  • United States Construction Spending MoM was reported at 0% in Jan from 0.8% in the previous period. It was expected at 0.3%.
  • United States EIA Natural Gas Stocks Change was reported at -78Bcf in 23/Feb from -124Bcf in the previous period. It was expected at -77Bcf.



A modest deceleration in aggregate income growth and modestly underwhelming consumption growth to kickstart 2018.
In short, the savings rate ticked up off of cycle lows and with income growth largely flat and facing progressively harder comps there was a flow-through drag to reported consumption growth (-0.1% M/M and small deceleration to +2.7% Y/Y on a real basis)
“The trend in income growth will become increasingly important to consumption as the tailwind from a declining savings rate diminishes and payroll growth continues its late-cycle deceleration.  Remember, simply, how this works …. If your income is the same but you save less, consumption is higher.  The Savings Rate printed a 2-handle (2.9%) for the 1st time this cycle in November/December and the decline in the savings rate over the past year has been a notable support to consumption growth alongside flattish aggregate income growth.  The Savings Rate has been falling ~80-100 bps year-over-year and unless we continue to plumb new lows, the tailwind to consumption growth will progressively recede.”
These dynamics manifest in January and will persist over the nearer-term although wage inflation and tax reform related increases in disposable income should help support consumption capacity.


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Strong Income Growth Saved the Day in January
Spending was weak, up +0.2% in nomial terms and down -0.1 in real terms. However, income was strong, up +0.4%, while disposable personal income surged +0.9% in nominal terms, +0.6 in real terms.
Tax Reform and Social Secuirty Helped Disposable Income 
Personal income increased a strong 0.4% in January, up +$64.7billion. However, disposable personal income surged +$134.8 billion durning the month, or 0.9%, as Americans paid $70.1 billion less in taxes due to the effects of the tax reform, while social secuirty payments increased by +$23.8 billin compared to only $4.2billion n December 2017. This meant that real disposable personal income increased a strong 0.6% durning the first month of the year, which will help to close the gap between the growth in real personal consumption expenditures and real disposable personal income. This was the strongest growth in real dispoable personal income since April 2015.

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The increase in income was not only due to tax reform and social security payements. Wages and salaries increased $45.2 billion in the month at an annual rate, versus an increase of $37.3 billion in December. That is, wages and salaries remained strong, which helped catapualt disposable personal income higher due to the lower withholdings and higher social security transfers.
Since Americans did not completely spend the surge in income, this means the saving rate increased to 3.2% of disposable personal income in January from a rate of 2.5% in December, which should tend to calm those that raised conserns regarding such a low rate of saving. That is, personal saving increased $101.1 billion at an annual rate in January compared to a decline of $8.3 billion in December and a decline of $59.6 billion in Novemeber.

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Income Growth is Recovering, Consumption Should Follow
Now that income growth is on the right track, it is clear that the probablity for sonsumption growth to recover in the next several months increses. This probabilty increases further after the release of sonsumer confidencem which hit a new cycle high in February, up to 130.8. 
Personal consumption expenditures were up only $31.2 billion after a $53.1 billion increases in Decemberand a $92 billion increase in November, all at annual rates. The weakest sector of spending in January was the consumption of durable goods, which registered a decline of $23.2 billion, while nondurable goods consumption increased $28.0 billion. Futhermore, services consumption was also weak, up only $26.3 billion in the month after an increase of $55.5 billion in December.

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Although consumption started the year on a weak note compared to the rates seen durning the last quarter of 2017, the good news on the income side and the confidence side will keep Americans engaged in the economy. While consumption may be weak in the first quarter of the year we expect a recovery in the pace of consumption for the rest of the quarters.

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Hedgeye Hedgeye 

Wells Fargo Economics Group


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