Weekly (distribution list)
This week’s data includes a look at consumer prices and industrial production on Tuesday. Each is relevant given recent below trend growth in fundamental data. MACRO VIEW Headline consumer prices (CPI) in the last year were pressured by a sharp decline in the energy component of the index. Stripping out energy (and food), core underlying inflation trends appears stronger (second chart, below). The core inflation numbers tend to be the ones emphasized most by policy makers, however. The rise in current core inflation trends stand at odds with overall inflation and future expectations for falling headline inflation (bottom chart, below)….
Productivity growth averaged 3% through the 1950s and 1960s, declined to 2% from the mid-1970s through 2007, slid to just over 1% since the 2008-2009 recession, and fell to under 0.5% last year. We are at serious risk of stagnating growth, should this trend continue. In such an environment, tactical approaches will be required as long-run returns would tend to diminish with real growth rates. Currently, we see recession risk above historic averages, given generally weakening global data. This slippage in fundamentals that became more evident in late 2015 contributed to our elevated focus on quality in equity portfolios and…
Light economic data from the United States expected this week, and the European Central Bank (ECB) is expected to deliver additional monetary stimulus. China releases February’s Merchandise Trade Balance, Consumer Price Index, and Producer Price Index while Japan and the EU both release their latest GDP prints. MACRO VIEW We are looking for signs of an upturn in the data when we update our WCA Fundamental Conditions barometer and forecasts next week. For now, we view the recent stabilization in commodities and better tone in the stock market as providing some reason for optimism, but we need further evidence that…
The Federal Open Market Committee (FOMC) convenes for the first time in 2016 on Tuesday and Wednesday amid the worst start to the year ever for the equity markets. Market uncertainty and low oil prices have tempered expectations for how quickly the Federal Reserve (Fed) will raise interest rates this year. Unlike the previous FOMC meeting in December 2015, Janet Yellen will not hold a press conference at the conclusion of this meeting. The earnings season is underway and expectations are for a 6% decline in earnings, which would mark the third consecutive quarter of earnings declines. The S&P 500…
China dominates the discussion as we begin a new year. Sharp drops in Chinese stock markets forced closure of mainland exchanges last week. Indications are increasing that China is seeking to further devalue its currency in the face of weak export demand and declines in manufacturing. We think such a move represents a step backward on the path toward rebalancing and internationalization, which ultimately leads to a healthier outcome for China and the world. Devaluation perpetuates dependency on a broken model of export-driven growth and delays a necessary shift toward a greater role of the private sector and domestic consumer…
This morning’s equity market sell-off follows a 7% decline in China’s Shanghai Stock Exchange Composite Index. The decline tripped circuit breakers and led to a closure of China’s exchanges. A weak read on China’s official Purchasing Manager’s Index (PMI) and increased tension between Saudi Arabia and Iran are contributing to the negative tone. China’s PMI remained below 50 for a fifth month and points to continued weakness in China’s manufacturing sector. Protests and an attack on Saudi Arabia’s embassy in Tehran, precipitated by Saturday’s announcement of Saudi Arabia’s execution of 47 prisoners, including a well-known Shiite cleric, adds to investor…
Our macro outlook is for slow growth and stubbornly low inflation. The start of policy normalization following years of zero interest rate policy in the United States comes at a time of weakening global growth and mixed signals from the domestic economy. We continue to view the United States economy as best positioned to weather the overall weak global environment that resurfaced in 2015. In this report, we take a long-term view and address expectations for markets over the long run. Full Report Click Here
Markets will digest data from the real estate market, as Tuesday sees the release of the S&P Case-Shiller Report from October and Pending Home Sales from November is released on Wednesday. Markets are closed on Friday for New Year’s Day. The economy is closing 2015 with a whimper. This week we will get the Chicago Purchasing Managers index for December. Lately, this Index has been weak, reflecting a build of inventories and weak export markets. Chicago is just a regional survey but does a reasonably good job in predicting movements in the national survey which, in turn, is a reasonably…
The United States appears to be generating better growth these days when compared to estimates of its potential. The graph below shows how the United States’ output has risen by more than the potential growth estimated by the Congressional Budget Office. For seven quarters in a row, the economy has produced a higher growth rate than potential, which is absorbing excess capacity. As this happened, the unemployment rate fell to near 5% from 10% back in 2009. The total number of hours worked has expanded by 10% over that period as more jobs were added than lost. Capital investment has…
This week, data on industrial production, housing starts, and consumer prices are expected. Industrial production has recently been weak, and consumer prices are advancing below the Federal Reserve’s (Fed) 2% target. Macro View The WCA Fundamental Conditions Barometer indicates a softening of growth through the last three months. Following August’s volatility spike, the forecasted path for our barometer was ratcheted down incrementally. Currently, we see the barometer trending toward the 30-40 range in the months ahead (graph below). Not surprisingly, equity markets and most economic forecasters are adjusting to a lower expected global growth rate. The August and…
This Friday’s employment report took on some additional importance last week as the Fed reminded markets that they remained focused on incoming data for guiding their decision regarding a rate hike in December. Last week’s policy statement was interpreted as more hawkish, since it referred to monitoring data for determining a rate hike “at its next meeting.” Some interpreted the mention of the specific calendar date as an indication of greater hawkishness, after several weeks of increasing speculation that a rate hike would be pushed further out into 2016. The Fed’s posture seems to lean in the opposite direction of…
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