11/16/18 10:17 AM EST
REAL-TIME MACRO: QUICK TAKEAWAYS ON #GROWTHSLOWING & INDUSTRIAL PRODUCTION PEAK
|Below is analysis from our Macro team dissecting today’s Industrial Production data.|
With ISM’s moderating, the Fed Regional Surveys pointing to similar backslide across New Orders and Capex Plans and global exports in retreat alongside slowing growth and tariff-related overhangs, the peak may be in for domestic industrial production growth as well…
- Industrial Production = +0.1% M/M and decelerating to +4.1% Y/Y as Manufacturing activity decelerates alongside a marked slowdown in auto production
- Capacity Utilization = ticks down a tenth to 78.4 inside a broader trend higher as hereto accelerating growth has pushed industrial activity towards productive capacity.
11/09/18 10:07 AM EST
REAL-TIME MACRO: AN UPDATE ON INFLATION (PRODUCER PRICE INDEX)
|Below is analysis from our Macro team dissecting today’s Producer Price Index data for the month of October.|
|Sequential strength amidst trending deceleration as Headline PPI accelerates +30bps to +2.9% year-over-year with Core PPI price growth accelerating +10bps to +2.6% year-over-year to start 4Q.||There’s some put-take action under the hood.||The rise in Goods pricing is probably transient. Nearly three-fourths of the October increase can be traced to prices for Final Demand Energy, which moved up 2.7%. Meanwhile, Wholesale Services pricing may or may not prove more sticky. Nearly three-fourths of the broad-based October rise can be traced to margins for Final Demand Trade Services, which moved up 1.6% (trade indexes measure changes in margins received by wholesalers and retailers).
THIS CAN BASICALLY EVOLVE IN 3 WAYS:
BOTTOM LINE: OUR CALL
The specter of stagflationary dynamics is percolating but, for now, we remain in the 1st camp.
Solid late-cycle labor report as both the Headline Jobs Growth and Average Hourly Earningsbenefit from weather-related comp dynamics (as we previewed in yesterday’s Hedgeye Risk Manager research note). We’ll see how hawked up they can get…
HERE’S THE JOBS REPORT BREAKDOWN
- Headline = +250K
- Nonfarm Payroll Growth = modest -2bps deceleration to +1.71% Y/Y
- Average Hourly Earnings = +3.1% Y/Y (vs. +3.1% est) = +30bps acceleration and fastest pace of cycle
- U3 = Unemployment Rate = flat at +3.7% but with positive internals as HH survey employment rose (a cartoonish +600K) and LFPR was up +20bps to 62.9%. Looks like improved wage growth is pulling people into the labor force …. So employment growth above increases in working age population resulting in a flat’ish U3 rate but a rising participation and employment-to-population ratio
- U6 = ticks back lower to 7.4%
- Aggregate Hours Growth = Flat payroll growth and a small increase in weekly hours = modest acceleration in aggregate hours growth. In isolation = positive for real output growth.
- Implied Aggregate Income Growth = a small acceleration in aggregate hours + accelerating AHE = moderate acceleration in implied Aggregate Income Growth. As we’ve highlighted recurrently, baseline view for consumption growth remains stable nearer-term.
- Implied Industrial Production = aggregate hours growth in the mfg space suggest flat sequential growth in Industrial production for October
“This morning’s Jobs data for October should show sequential strength as we comp last month’s hurricane distortion and as weather distortions from last year provide favorable base effects for earnings growth ….. which should see an acceleration to a new cycle high, confirming the higher cycle high in ECI Salary and Wage growth for 3Q18 reported on Wednesday.
The call remains Wage Growth up, Broader Inflation down over the nearer-term. If late-cycle WageAcceleration is hawkish enough this morning, that may get yields to the top end of the 3.03-3.24% risk range and an attractive re-entry point for a quintessential Quad 4 exposure, fixed income.”
THAT’S OUR CALL AND THE PROCESS SAYS TO STICK TO IT.
The state of U.S. economic data has become increasingly characterized by the phrase “past peak” – which is fine for absolutist investors who, inherently prefer to buy high (read: “things are good”) and sell low (read: “things are bad”).
It is, however, not fine for those among us who were schooled in the rate-of-change camp – a school of thought that views catalysts like rolling off the cycle-peaks in growth and inflation amid accelerating monetary tightening as a negative catalyst for risk assets.
- Specifically, Real PCE growth decelerated -20bps to 3.0% YoY
- Real Disposable Personal Income growth decelerated -10bps to 2.9% YoY
- Aggregate Private Sector Income decelerates -30bps to +5% Y/Y
- Revisions: Both Income and Spending for August revised higher
- Savings Rate fell -20bps M/M sequentially and -40bps Y/Y (a support to both sequential and Y/Y Consumption growth).
- Luxury Goods Consumption flat sequentially at +6.3% Y/Y but the trend is clearly towards slowing alongside tough comps and asset price disinflation
- Headline PCE Deflator decelerated -20bps to 2.0% YoY.
- Complicating matters was the +1bps acceleration to 1.97% YoY for Core PCE.
The minor acceleration in Core PCE should keep the absolutists at the Federal Reserve patting themselves on the back for effectively achieving their inflation mandate, which implies a low likelihood of a near-term pause in their policy normalization drive.
Last week was a perfect example of how Mr. Market likes to price in central banks tightening into slowdowns: 10yr UST Yield ↓ -11bps, Junk Bond Yields ↑ +12bps, and High Beta stocks ↓ -7.3%.
OUR 4Q 2018 OUTLOOK FOR THE U.S. ECONOMY
- Our GDP QoQ SAAR estimate: 1.1% versus Bloomberg Consensus estimate of 2.71%
- Our GDP YoY estimate: 2.74% versus Bloomberg Consensus estimate of 3.06%
The key takeaway here is that the progression implied by our comparative base effect model is largely unchanged from what we were previously anticipating – which is nothing shy of modest, but unrelenting deceleration off the now-cemented cycle peak. Next stop: ~6 months of reported #Quad4 data with the worst of it [in rate-of-change terms] being in the current quarter.
Markets are, of course, a quintessential discounting mechanism. Fickleness and reflexiveness are features not anomalies. What high-frequency domestic macro data has the market begun to discount? … The Census Bureau is glad you asked:
Durable Goods go 0 for 3 across the key aggregates from a rate-of-change perspective:
- Headline Durable Goods = +0.8% M/M and decelerating to +7.9% Y/Y
- Durables ex-Defense & Aircraft = +0.6% M/M = decelerating to +6.9% Y/Y.
- Core Capital Goods = -0.1% M/M (negative for a 2nd straight month) = decelerating to 1.9% Y/Y = lowest print since Jan 2017
This morning’s Durable Goods data, tomorrow’s GDP report and Monday’s Personal Consumption Expenditures (detail) data represent the final trinity of 3Q 2018 Quad 2 (Growth and inflation accelerating) data and the capstone to 9 consecutive quarters of accelerating growth.
Don’t let “less good” hit you on the way out.
A tale of divergent aggregates to close out 3Q:
- Headline Retail Sales miss estimates – rising +0.1% sequentially while decelerating -180bps to +4.7% Y/Y
- Ex-Auto’s & ex-Autos & Gas registers a slowdown too
- Control Group Retail Sales (i.e. a good proxy for the GDP input) put up a strong +0.5% sequential increase while accelerating a modest +5bps to +4.93% Y/Y.
Bottom Line: From a rearview GDP accounting perspective, it remains reflective of Quad 2 (i.e. Growth and Inflation accelerating) in Q3 and a collective consumer that is generally ebullient amid continued labor market tightening, improving wage growth and rising asset prices.
But… any rate-of-change upside will be increasingly constrained against steepening base effects the next two months, at least as it relates to Goods consumption. Flat growth with a high probability for deceleration is generally not the stuff incremental hawkishness and higher highs in nominal bond yields are made of. Quad 4 in Q4 remains the call (i.e. Growth and Inflation slowing).
10/11/18 10:50 AM EDT
Lost in the Macro Tourist momo freak-out yesterday was, once again, #TheCycle data.
PM’s didn’t have to believe Quad 4 in Q4 (i.e. U.S. Growth and Inflation slowing) until it hit them in the PnL. Our comparative base effect model perfectly accounted for the variation in inflation during 3Q18. See updated forecasts below. Yesterday wasn’t a day trade. Give this another 3-6 months.
Investing implications? You know what to do. Stay calm and consult the #Quad4 column in our “GIP Model Risk Management Overlay” below.
CONSUMER PRICE INDEX
Disinflation is becoming increasingly discrete as Headline CPI slows for the 2nd month, decelerating a full -42bps sequentially to +2.28%, marking the slowest pace of consumer price growth since February.
Core Prices also decelerated for a second month, slowing (-3bps) to +2.17% Y/Y as Core Goods inflation re-accelerated to the downside (strong dollar et al) and component breadth remained negative (energy, shelter, wireless, Food, etc all slowing sequentially on a Y/Y)
This accords with the deceleration in Wholesale Prices for September observed (see PPI analysis below) yesterday and our expectation for an ebbing of the 1H18 reflationary impulse as a tangible support to further gains in rates…
Remember, it’s real yields (not inflation expectations) that have driven the latest ramp in rates. And that difference matters: Equities serve as a decent inflation hedge as nominal price growth flows through topline and to some greater/lesser extent to profits.
When its real yields that are rising, however, not only are present value calculations (& typically multiples also) under pressure but bonds become an increasingly attractive alternative – particularly when “cash” (3M TSY, 3M LIBOR, 2Y TSY) has become an increasingly viable option yielding north of 2.5%.
Real rates probably play a dictatorial role in the direction and magnitude of stock-to-rates correlations which, of course, flipped to negative again in the latest market offensive (against the risk-parity, market neutral contingent).
PRODUCER PRICE INDEX
Wholesale Price Growth #slowed another -20bps to +2.6% Y/Y, marking a 3rd month of deceleration off #ReflationsPeak of +3.4% registered in June. With comps steepening further, base effects will remain a disinflationary drag to reported growth, at least for the next 2 months. On the margin, that’s bearish for bond yields, especially at the recent high of 3.26% on the 10-year Treasury.
10/05/18 10:44 AM EDT
An expectedly noisy 97th month of positive net employment gains. Headline was underwhelming and Average Hourly Earnings (AHE) wasn’t too hot, but weather impacts did indeed appear to drag on the headline (see the “Out Due to Weather” chart below = 299K) and last month saw a big positive revision.
QUICK CONTEXTUAL HIGHLIGHTS
- We knew:
- The impact of Hurricane Florence would serve as a negative distortion to the headline. The +134K was underwhelming but not surprising. What would have probably been more surprising is if we got a big beat in the face of that drag.
- Given the comp last year (Hurricane Harvey) we only needed 15K to get an acceleration in payroll growth –> which meant a probable acceleration in aggregate income growth –> which meant a static (positive) baseline view on consumption growth nearer-term. We got that.
- We also knew Hurricane Florence would serve as a negative distortion .. but there were three primary distortions:
- 1 = could drag on the headline with hiring in effected area’s ↓ … there did appear to be a moderate impact … we’ll get the state level data in a few weeks.
- 2 = mixed distortion on AHE depending on mix ….. hourly earners are generally lower wage than salaried workers so if some of those hourly wage earners weren’t in the AHE calculation, the average would be biased upward and the converse, as well.
- 3 = The most obvious place any impact would manifest in the data is in the “out due to bad weather” series. You can see the massive spike last September alongside the (employment) fallout from Hurricane Harvey. This was up, not huge, but definitely up in this month’s reading
QUICK DATA HIGHLIGHTS
- NFP = +134k with growth accelerating to +1.73% (from +1.64%)
- Revision: Big positive revision with a +87K two-month revision with last month revised to 270K from 201K
- Out due to weather = 299K
- AHE: down a tick off the cycle high to +2.8% Y/Y
- U3: Unemployment rate ticks down to 3.7% with positive internals as the LFPR was flat at 62.7% (which means the unemployment rate went down b/c of hiring not b/c of people leaving the labor force)
- Aggregate Hours = accelerating
- Implied Income Growth = acceleration in aggregate hours growth + flattish wage growth = accelerating aggregate income growth
- Implied IP = flat sequential growth.
Is good bad again?
Markets are caught in between the prospects of local/global quad 4 and a bear steepening of the curve while trying to re-handicap the durability of the latest Quad 2 data and the Fed’s associated reaction function.
As we’ve highlighted, rates rising has recurrently served as the principal catalyst for rates falling, as too high too fast dampens the growth/inflation outlook, ultimately reversing stock-bond correlations and feeding back negatively to equities and subsequently pulling rates back lower in response.
Some version of that is what began to manifest (again) yesterday and that shorter-term “technical” dynamic is now occurring against a backdrop of more protracted slowing. Sept NFP doesn’t do much to change the prevailing dynamic heading into today.
Headline ISM Manufacturing falls -1.5pts to 59.8 close 3Q with domestic manufacturing activity remaining solid. Tariff related angst builds moderately and tight labor conditions and supply/capacity constraints remain ascendant (see commentary section from the ISM Manufacturing report below).
Under the hood…
- Current Production rose +0.60pts to 63.9
- Employment = +0.3pts to 58.8
- New Orders fell -3.3 pts to 61.8
- Prices Paid, meanwhile, retreated -5.2pts to 66.9 alongside the broad and broadening commodity backslide …. which, similar to last month, underscores the notion that 2Q/3Q was the reflationary peak and broad pricing pressure, particularly on the commodity side, will ebb as a driver of yield expectations.
We’ll simply leave it at a summary review of the data this morning as trying to over-contextualize a small retreat off a 14-year high on the Headline generally leads down a path of fabricated over-analysis. It’s also worth noting the moderate retreat in New Orders which, inclusive of the September decline, remains north of 60 and in the midst of its strongest stretch of expansion since 1973.
“Less Good” will remain the apt descriptor of 4Q high frequency macro but let the data breathe a bit … it will come to you.
ISM MANUFACTURING: SURVEY RESPONDENT COMMENTARY
The 3Q data is still in full #Quad2 mode (Growth and Inflation Accelerating) with Headline Durable Goods up somewhat cartoonish +4.5% sequentially in August, accelerating to +11.8% Y/Y as resurgent Private Aircraft orders amplify solid underlying growth in Durables Ex-Defense & Ex-Transports. None of this is all that surprising, given the Production and New Orders data in the ISM and Fed Regional Surveys for the same period.
- Durables ex-Defense & Aircraft = a little less buoyant = -0.4% sequentially, decelerating to +7.9% Y/Y.
- Core Capital Goods = not as good as the Headline = -0.5% sequentially, decelerating to +7.5% Y/Y
GDP: Nothing particularly notable with respect to the final revision on 2Q18 GDP as the Headline and Consumption remain unchanged. To the extent there were revisions, they can be seen on the far right column in the GDP Summary table below.
UPDATE: OUR GDP FORECAST
The advent of these figures (as well as the inventories data), increased our nowcast for 3Q18 GDP to 2.97% YoY/3.20% QoQ SAAR, up +2bps/+16bps, respectively, from our prior estimates.