GDP and Activity Archives - Page 11 of 15

September 10, 2019September 10, 2019

Time to be defensive

Bob Doll at Nuveen says he does not expect a recession (for the next few quarters) but remains neutral towards stocks:

“Although stock prices have advanced over the last couple of weeks, investors remain focused on downside economic and policy risks and are increasingly concerned about a possible recession. The latest manufacturing readings hurt economic sentiment, while trade issues, turmoil in Hong Kong, the increasing likelihood of a messy, no-deal Brexit and a downturn in European growth are increasing worries.”

The Institute for Supply Management August Report points to an economic slow-down, with the Purchasing Managers’ Index (PMI) falling to 49.1 percent, from 51.2 percent in July. The New Orders Index also declined, to 47.2 percent from 50.8 percent in July. Readings below 50 indicate contraction.

“…The 2020 U.S. elections linger in the backdrop, offering potential to produce either a dramatic shift in economic policy should the Democrats retake the White House, or continued policy uncertainty should President Trump win reelection.

Against this backdrop, investors are struggling to position their portfolios. Consensus appears to say that it is time to turn more defensive, but U.S. Treasuries and other government bond yields appear to offer little if any value. Indeed, government bond markets are pricing in a high likelihood of a recession and a prolonged period of sluggish growth. At the same time, equity markets have been range bound over the last several months (and, by some measures, since the start of 2018) and are providing unclear signals.

In our view, the preponderance of the evidence suggests that growth will remain sluggish but a recession will be avoided, at least for the next few quarters. In other words, we think the signals coming from the equity markets are more accurate than those coming from government bond markets. Nevertheless, we continue to have a broadly neutral view toward stocks, and think investors should remain selective, focusing on such themes as companies that offer compelling value and those that have the ability to put relatively high levels of free cash flow to work.”

The wild card is the impact that high levels of uncertainty may have on business investment and employment.

This is a time to be defensive.

Bonds, traditional dividend-paying blue chips, and growth stocks all appear over-priced at current levels. Small caps are high risk in the current volatile environment and we are focused on large cap stocks with strong cash flows and defensible market position in non-cyclical industries. Some cyclical sectors may present value but investors need to be selective because of vulnerability to a potential down-turn.

September 7, 2019

S&P 500 buying pressure but payrolls disappoint

August labor stats, released today, point to low real GDP growth for Q3. Growth in weekly hours worked came in at a low 1.09% and GDP is likely to follow.

Real GDP and Hours Worked

While inflation is not the primary concern at the Fed right now, rising annual hourly wage rate growth (3.46% for total private) flags an increase in underlying inflationary pressure. This may make the Fed more hesitant about cutting rates despite Donald Trump’s tweet storm.

Average Hourly Wage Rate

Most important is the continued decline in annual payroll growth. At 1.38% for August, further weakness is likely and a fall below 1.0% would warn of an economic slow-down.

Real GDP and Hours Worked

The S&P 500 is headed for another test of resistance at 3000. The Trend Index oscillating above zero for the last 9 months indicates buying pressure but I expect strong resistance at 3000. Upside is limited while downside risks are expanding.

S&P 500

Semiconductors are doing better than expected, despite the trade war, but I suspect will weaken when the surge in orders ahead of tariffs tails off.

Semiconductors

Retail has stalled since late 2018 and bearish divergence on the Trend Index suggests selling pressure.

Retail

Automobiles, in a decline since 2017, have rallied over the last 6 months. But, again, further weakness is expected.

Automobiles

On the global front, weak crude oil prices flag an anticipated slow-down in the global economy. Breach of support at $50/$51 per barrel would be a strong bear signal, warning of a decline to $40 per barrel.

Nymex Light Crude

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

September 6, 2019September 6, 2019

Australia: The elephant in the room

June quarter real GDP growth slowed to an annual 1.4%, the lowest since the 2008 global financial crisis (GFC). Major contributors to growth are household consumption, public demand and exports; while the biggest handbrake is investment.

Australia: GDP

A quick look at the RBA chart shows that consumption is slowing but at a slower rate than disposable income. Households are dipping into savings to support consumption, with the savings ratio (savings/disposable income) declining to near GFC lows.

Australia: Disposable Income, Consumption and Savings

Gerard Minack warned of the danger that households will dramatically increase savings, and cut consumption, if employment prospects grow cloudy.

That brings us back to investment. Low investment is a drag on employment growth.

Australia: Job Ads

Low interest rates, on the other hand, are a tailwind at present. They seem to have shored up housing prices,

Australia: Housing

And states are taking advantage of ultra-low interest rates to boost infrastructure spending.

But low interest rates are a double-edged sword. Bank net interest margins are under pressure.

Australia: Bank Net Interest Margins

And credit growth is plunging.

Australia: Credit Growth

The housing recovery will be short-lived if there is not a dramatic increase in loan approvals.

Australia: Housing Loans

AMP chief economist Shane Oliver believes that:

“growth will remain soft and that the RBA will have to provide more stimulus – by taking the cash rate to around 0.5% and possibly consider unconventional monetary policy like quantitative easing. Ideally the latter should be combined with fiscal stimulus which would be fairer and more effective. While Australian growth is going through a rough patch with likely further to go, recession remains unlikely barring a significant global downturn.”

But that ignores two factors:

increased pressure on bank net interest margins from lower interest rates; and
the elephant in the room: China.

China: Activity Levels

China’s economic model is built on a shaky foundation and trade war with the US is likely to expose the flaws.

Chinese leaders are growing increasingly worried about the economy. Premier Li Keqiang said at this week’s State Council meeting:

“The current external environment is increasingly complex and grim.
….Downward pressure on the domestic economy has increased.”
(Trivium)

BEIJING, Sept. 5 (Xinhua) — Chinese and U.S. chief trade negotiators agreed on Thursday to jointly take concrete actions to create favorable conditions for further consultations in October.

The agreement was reached in a phone conversation Chinese Vice Premier Liu He, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, held upon invitation with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. (Xinhua)

…Extend and pretend. Neither side wants a full-blown trade war. But they are miles away from an agreement.

September 3, 2019

A sobering assessment of the global economy

Donald Amstad from Aberdeen Standard Investments: “the developed world is verging on catastrophe…. we are facing an unprecedented bust in risk-free (bond) markets.”

Hat tip to Marcus Padley

August 31, 2019September 7, 2019

S&P 500: Donald Trump and the next recession

Treasury yields continue to fall, with the 10-Year testing long-term lows at 1.50%. A sign that investors are growing increasingly risk averse.

10-Year Treasury Yields

Crude oil prices remain weak; a bearish signal for the global economy. Breach of support at $50/$51 per barrel would warn of a decline to $40.

Nymex Light Crude

Volatility (21-Day) above 1.0% on the S&P 500 is flashing an amber warning. Breakout above 2940 is likely and would signal another test of 3000. But expect stubborn resistance at our 3000 target level.

S&P 500 Volatility

Bearish divergence (13-Trend Index) on the Nasdaq 100 warns of secondary selling pressure. Breach of 7400 would warn of a test of primary support at 7000.

Nasdaq 100

Robert Shiller maintains that Donald Trump is unlikely to survive a recession:

“So far, with his flashy lifestyle, the US president has been a resounding inspiration to many consumers and investors. But his personal narrative is unlikely to survive an economic downturn….the end of confidence in Trump’s narrative is likely to be associated with a recession.

During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations, and expensive vacations. Businesses spend less on new factories and equipment, and put off hiring. They don’t have to explain their ultimate reasons for doing this. Their gut feelings and emotions can be enough.”

I would go further and argue that Trump’s management style is likely to cause a recession.

Some of the aims the President is attempting, like addressing China’s unfair trade practices, are vitally important to long-term US interests and he should be given credit for tackling them. But his constant hyperbole, erratic behavior, with a constant mix of bouquets and brickbats, and on-again-off-again tactics, has elevated global uncertainty. Consumers are likely to increase savings and cut back on expenditure, while corporations may cut back on hiring and new investment, which could tip the economy into recession.

GDP growth contracted to 2.3% in the second quarter, while growth in hours worked contracted to 0.92% for the year ended July 2019, pointing to further falls in GDP growth for the third quarter.

Real GDP and Hours Worked

August employment figures are due for release next week and will either confirm or allay our fears.

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value.

August 31, 2019August 31, 2019

ASX: Falling approvals and construction warn of a slow-down

Australian building approvals for July 2019 show a sharply contracting economy. Housing approvals fell by 16.6% on a year-on-year basis and are approaching the 8000 level breached in earlier crashes.

ABS: Australian Building Approvals: Houses (SA)

Approvals for apartments (dwellings excluding houses) plunged by a massive 44.2% year-on-year.

ABS: Australian Building Approvals: Dwellings Excluding Houses (SA)

The massive contraction in approvals is likely to impact on construction work in the months ahead. Unless we see a similar spike in public sector spending to the 2008/2009 global financial crisis, we are likely to experience a similar contraction to 1988-1990 or 2000-2001. Cutting interest rates, as RBA governor Phil Lowe has repeatedly warned, is not enough.

ABS: Australian Construction Work Done - Chain Values (SA)

Unfortunately infrastructure spending in 2008/2009 was not particularly well-directed, increasing public debt without corresponding productive assets to show for it. The NBN has had a few teething problems but made a lot more sense than the school halls and pink batts programs: it produces income (or can be sold) to offset the impact of the debt.

Construction contributes about 15% of national GDP and a sharp downturn could bring us precariously close to negative GDP growth.

The boost from bulk commodity prices is fading, with iron ore edging downwards after a sharp fall. This is a continuation pattern and we expect the decline to continue, with a short-term target of $80/tonne.

Iron Ore

We also retain our bearish outlook for the financial sector. Banks face headwinds from falling new housing starts as well as from narrow margins as the RBA cuts interest rates in an effort to stimulate the economy. Expect another test of primary support at 5400.

Financials

The ASX 200 is testing resistance at its 2007 high of 6800. A rising Trend Index signals buying pressure but we remain cautious because of the headwinds facing the domestic and global economies.

ASX 200

We maintain a low exposure to Australian equities, at 20% of portfolio value, because of our bearish outlook.

August 24, 2019August 24, 2019

Hope is not a strategy

Bob Doll’s outlook this week at Nuveen Investments is less bearish than my own:

Trade-related risks seem to be growing. President Trump looks to be holding out hope that the U.S. economy will stay resilient in the face of escalating tariffs and rising tensions. So far, the U.S. economy has not faltered, thanks largely to continued strength in the consumer sector and labor market. But if business confidence crumbles (as it has in parts of Europe), it could lead to serious economic damage…..

The president’s recent actions to delay the implementation of some new tariffs show that he is sensitive to the market impact of his trade policies. But the erratic nature of his on-again, off-again approach adds too policy uncertainty. At this point, we can’t predict the ultimate economic impact from these issues. Our best guess is that the U.S. remains more than a year away from the next recession, but risks are rising. In addition to the solid consumer sector, we don’t see financial stress in the system. Liquidity is still broadly available, and fixed income credit spreads are generally stable outside of the energy sector.

With additional Federal Reserve rate cuts already priced into the markets and bond yields falling sharply, the only catalyst for better equity market performance could be improving global economic data. We hold out hope that the global economy will improve, and still think there is a better-than-even chance of manufacturing activity and export levels to grow. But those improvements will take some time, suggesting equities will remain volatile and vulnerable for now.

Where we seem to differ is on the inevitability of the US-China trade war escalating into full-blown disengagement. This week’s events have not helped.

China’s national English language newspaper, Global Times, under the People’s Daily, announced new tariffs.

Followed by an admission that the timing of the announcement was intended to cause maximum disruption to US stock markets.

The inevitable Twitter tantrum ensued.

The President also tweeted “Now the Fed can show their stuff!”

He is deluded if he thinks that the Fed can help him here. The best response would be announcement of a major infrastructure program (not a wall on the Mexican border). Otherwise business confidence will decline due to the increased uncertainty. Business investment will contract as a result and slow employment growth.

Retail sales have shown signs of recovery in recent months but will decline if consumer confidence erodes.

Retail Sales

Especially consumer durables such as light motor vehicles and housing.

Consumer Durables Production

The global economy is already contracting, as indicated by falling crude oil

Nymex Light Crude

…and commodity prices.

DJ-UBS Commodity Index

Volatility (21-Day) is rising as the S&P 500 tests support at 2840. Breach is likely and would test primary support at 2750.

S&P 500 Volatility

Bearish divergence (13-Week Money Flow) on both the S&P 500 and Nasdaq 100 (below) warn of selling pressure. The Nasdaq 100 is likely to test primary support at 7000.

Nasdaq 100

The Russell 2000 Small Caps ETF (IWM) is testing primary support at 146. Follow through below 145 is likely and would signal a primary down-trend.

Russell 2000 Small Caps ETF

Fedex breach of support at 150 would also warn of a primary down-trend and slowing activity in the US economy.

Fedex (FDX)

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value because of elevated risk in the global economy.

August 24, 2019August 24, 2019

ASX: Rate cuts not helping

From David Scutt at SMH:

A growing body of evidence suggests interest rate cuts from the Reserve Bank of Australia may be draining confidence in the economy rather than boosting it.

Key Purchasing Managers Index (PMI) figures released on Thursday showed a deterioration in Australian business conditions, impacted by what firms are describing as a general lack of confidence across the economy.

The Commonwealth Bank’s Australia “flash” Composite PMI produced in conjunction with IHS Markit, fell 2.6 points to 49.5 in August.

The Composite PMI surveys firms from manufacturing and services sectors, accounting for around 75 per cent of the Australian economy. Activity levels have only declined three times since the survey started in May 2016, the last time in March this year.

“Households are taking the lower cash rate as a negative sign, raising concerns about what is happening with the economy that we need interest rates to go even lower,” said Kristina Clifton, senior economist at the Commonwealth Bank.

Ms Clifton cited the ongoing trade dispute between the United States and China, the RBA’s rate cuts, and the drought as factors hurting confidence. “Businesses are feeling this pessimism,” she said.

The decline in the PMI data echoes a similar slump in consumer confidence in the wake of the RBA’s July rate cut, which took the cash rate down to 1 per cent. “That lines up with what we’ve seen in [consumer confidence] where we saw quite a sharp drop following the June and July rate cuts” Ms Clifton said.

The Westpac-Melbourne Institute consumer sentiment survey fell to its the lowest level since August 2017 that month. Confidence subsequently recovered in August following the RBA’s decision to keep the cash rate steady.

Westpac Melbourne Institute Consumer Sentiment

Consumer sentiment is trending lower but there is also a recent series of higher troughs. Breakout from the triangle will indicate future direction.

On the downside, new vehicle sales for July 2019 fell for the 16th straight month.

Vehicle Sales

New vehicle sales are a leading indicator for the economy. Automotive Holding Group (AHG) is normally a useful bellwether for the overall ASX 200 index but its latest rally is distorted by a proposed merger with rival AP Eagers (APE).

AHG/ASX 200

The consumer outlook (below) is bearish, with family finances for the next 12 months down 6.5% (YoY) and the next 5 years down 5.3%. But one factor has definitely improved with the latest rate cuts: time to buy a dwelling (YoY) is up 16.7%.

Westpac Melbourne Institute Consumer Survey

Improving sentiment towards housing and rising auction clearance rates, albeit on low volumes, has helped banks, with ASX 200 Financials index finding support at 6000.

ASX 200 Financials

But UBS warn that further interest rate cuts would squeeze bank interest margins and may force them to cut dividends.

Australia: Bank Net Interest Margins

And a major threat is the potential cutback in business investment, because of the uncertain global outlook, and its impact on employment and consumer sentiment.

Australia: Business Investment

Iron ore is edging below support at $94/tonne, suggesting another decline to test support at $80/tonne.

Iron Ore

Materials are undergoing a strong correction. Declining Money Flow peaks warn of strong selling pressure. Breach of support at 12700 is likely and would warn of a test of primary support at 10700/11000.

ASX 200 Materials

On a more positive note, REITs are enjoying strong buying pressure, signaled by Money Flow troughs above zero, as the scramble for yield intensifies. Breakout above 1700 would signal another advance.

ASX 200 REITs

With a bearish outlook in its two largest sectors, the ASX 200 is likely to follow. A harami consolidation above support at 6350/6400 is bearish and breach would warn of a strong decline.

ASX 200

With the uncertain impact of a trade war on the Chinese economy, we reduced our exposure to Australian equities to 20% of portfolio value on 19 August 2019.

August 17, 2019

Approaching stall speed

With 89.7% of companies having reported, S&P are projecting 4.4% earnings growth for June quarter 2019 compared to the second quarter in 2018. Even more interesting is their projection of 3.4% growth for the September quarter. With EPS growth boosted by a stock buyback yield of 3.5%, this warns that the economy is close to stall speed.

S&P 500 Earnings per share Forecast

The daily chart for the S&P 500 shows support at 2830/2840, while a higher trough on 21-Day Money Flow indicates (secondary) buying pressure. I expect another test of resistance at 3030; breakout above resistance at 2940 would confirm.

S&P 500

But divergence on 13-Week Money Flow, as on the Nasdaq 100 below, warns of longer-term selling pressure.

Nasdaq 100

Small-cap stocks, as depicted by the Russell 2000 ETF below, are not enjoying the same support as large caps. A sign of rising risk aversion.

Russell 2000 ETF

Bellwether transport stock Fedex is testing primary support at 150. Breach would warn of a primary decline, suggesting a slow-down in activity for the broad economy.

Fedex

We maintain a bearish outlook on the global economy and maintain less than 50% exposure to US and International equities. Our view is that probability of a US recession in the next 6 to 12 months is as high as 70% to 80%.

We expect stocks to rally for another attempt at the 3020/3030 high for the S&P 500 and will use opportunity to further reduce our exposure to equities.

August 3, 2019

S&P 500: Treasuries reflect flight to safety

10-Year Treasury yields plunged below 2.0% on Donald Trump’s announcement of further tariffs (10% on $300bn) on China. The fall reflects rising demand for Treasuries as a safe haven in these turbulent times.

10-Year Treasury Yield

The spread between 10-Year and 3-Month Treasuries recovered above zero. This is a bearish sign: recession normally follows the recovery and not the initial inversion.

10-Year 3-Month Treasury Spread

The S&P 500 retreated below 3000 on Trump’s announcement, strengthening the bearish divergence signal on Twiggs Money Flow which warns of a correction. A test of support at 2750 is likely.

S&P 500

The Russell 2000 ETF (IWM) is expected to test primary support at 145. Small cap stocks have lagged the S&P 500 this year, highlighting risk aversion.

Russell 2000 Small Caps Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is similarly headed for a test of primary support at 365. Strong bearish divergence on the Trend Index warns of a reversal.

DJ Euro Stoxx 600

Falling commodity prices reflect market concerns for the global economy. A Nymex Light Crude breach of $51/barrel would signal a primary down-trend. Declining peaks on the Trend Index warn of selling pressure.

Nymex Light Crude

The DJ-UBS Commodity Index is similarly headed for a test of support at 75. Breach would signal a primary down-trend. A peak near zero on the Trend Index warns of strong selling pressure.

DJ-UBS Commodity Index

Dr Copper, often used as a barometer of the global economy, has breached primary support at 5800, signaling a decline. Again, a Trend Index peak below zero warns of strong selling pressure.

Copper