Economics | Weekly Economic Report Macro Note

What A Difference A Week Makes

August 12, 2019Sean Zhang, CFAsean.zhang@evercoreisi.com

Ed Hymaned.hyman@evercoreisi.com

Dick Rippedick.rippe@evercoreisi.com

Francesca Ponzianifrancesca.ponziani@evercoreisi.comJaewoo Nakajima

jaewoo.nakajima@evercoreisi.comStan Shipleystan.shipley@evercoreisi.com Morgan Smith

morgan.smith@evercoreisi.com

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What A Difference A Week Makes The consensus of investors we surveyed week-before-last was for the S&P to end 2020 at 3095. The consensus of a different group last week was down to 2760. The consensus for real GDP growth in 2020 dropped from +2.0% to +1.4%. Odds of a China deal in 2019 went from 15% to 0%, and odds of a deal in 2020 went from 70% to 50%. Again, all this is in just one week. Over the week, the S&P declined, bond yields declined, oil declined, and the yuan broke 7. The most important fundamental to note here is that we’re in a full-blown Global Easing Cycle. One aspect of this that is not discussed much is that the sum of balance sheets for the ECB, the Fed, and BoJ is set to increase more than +$60b per month starting in Sep or Oct. In addition, Global Short Rates are now declining significantly, and 20 easing moves were announced last week, eg, Brazil and New Zealand both cut their policy rates by -50bp. To be sure, to generate a full-blown easing cycle there have to be a number of significant negatives, which of course include the trade war, inverted yield curve, Brexit, Hong Kong riots, global economic weakness, upcoming Japan VAT hike, too-low inflation, and 2020 election uncertainties.

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Last week’s eco data highlighted these themes: Global growth is slowing, led by foreign economies. Inflation around the world is still generally MIA. US growth is slowing, but is still above +2%.

One of our biggest concerns is that the US yield curve notched another week of significant inversion. Judging by history, it’s now signaling a recession. Here’s the tricky part: History suggests that the recession won’t start for a year, and during that year, the S&P will rally more than +10% before peaking. There’s quite a bit more to cover, so thanks for looking over the following SUMMARY.

Very best regards,

212-446-5617646-287-7242Ed.Hyman@evercoreisi.com

August 12, 2019

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SUMMARY

Full-Blown Global Easing CycleMaybe this is the most striking place to start:There were 20 easing moves announced last week.

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Full-Blown Global Easing Cycle ContdGlobal Short Rates, which are one of the variables in our econometric model to forecast GDP, declined again last week and are almost certain to continue to decline.

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Full-Blown Global Easing Cycle Contd The Fed’s balance sheet is likely to increase +$9b per month. BoJ’s balance sheet is set to increase +$20b per month. ECB’s balance sheet is set to increase +$34b per month.

So the sum of these three balance sheets is set to increase +$63b per month.

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Full-Blown Global Easing Cycle ContdIn the past, OECD’s global LEI has hooked up after Global Short Rates have declined. Judging by history, Global Short Rates may need to decline further before OECD’s global LEI hooks up.

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Even If It’s Likely “Different This Time” The yield curve has been inverted prior to the past seven recessions. It’s inverted again. Let’s say the odds are 70% that “it’s different this time”. Even given that view, the Fed might want to work hard now to get a positive yield curve because of “low-probability, high-impact event” reasoning. Judging by history, even if the current yield curve inversion is presaging a recession, it wouldn’t start for 12 months. And during that period, the S&P would rally +13%. And at the current yield curve inversion in 2000, EVRISI company surveys were at a strong 59.6, and in 2006 the company surveys were 53.1, about what they are today. So yield curve inversions like we have today have tended to be dismissed in the past because at those times everything looked “fine”. If the current inversion is indeed signaling a recession starting 12 months out, that would be starting a few months before the 2020 election.

This was a NYT headline last week:Trade fight raises fears of another 2008 crisis.

An inverted yield curve in this environment seems dangerous.

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Even If It’s Likely “Different This Time” ContdRegarding the current yield curve inversion, there are a number of reasons why it may be “different this time”. However, it may not be different. German bond yields of -57bp may be sending a disturbing message. And there’s the trade war, Brexit coming, Japan’s VAT hike coming, and Hong Kong riots. Commodity prices are declining. We may be in the grip of significant structural deflation. The global economy may be addicted to QE. We take our lead on policy rates from Krishna Guha. But these foreign policy rates, along with US bond yields at 1.75%, suggest fed funds at 2.25% are too high.

Real GDP growth in Hungary is +5.3% y/y, Israel is +3.2%, New Zealand is +2.6%, and Australia is +1.8%.

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Global Growth Is Slowing, Led By Foreign Economies.EVRISI company surveys for Europe sales and China sales were both unchanged last week, but both were still were well below 50.0 and still in declining trends.

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Global Growth Is Slowing, Led By Foreign Economies. ContdOther weaker foreign data last week included:

Germany IPJapan eco watchersSingapore real retail salesHong Kong PMI

“Steven Eisman says Hong Kong protests are his biggest worry, a possible ‘Black Swan’ event.”

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Global Growth Is Slowing, Led By Foreign Economies. Contd

“U.K. economy posts surprise contraction,the worst quarter since 2012.”

“Brexit Risk For Autos Is Greater Than U.S. Tariffs.”

China’s PPI declined -0.3% y/y in July. It is particularly important to watch because China nominal GDP growth moves with it.

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Inflation Around The World Still MIAIn response to a package of higher inflation data a month ago, we thought an Inflation Tone Change had occurred. We no longer believe that because inflation data since then have been in the other direction. For example, China’s core CPI increased just +1.6% y/y in July.

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Inflation Around The World Still MIA ContdThe US core PPI deflated -0.08% m/m in July and slowed to +2.08% y/y.

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Inflation Around The World Still MIA ContdCommodity prices bleed into core prices (see below).With WTI down almost -25% y/y and the GSCI down -13%, the core PCE is likely to move further away from +2.0%.

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U.S. Growth Is Slowing But Still Above +2%There was a significant package of weaker US eco data last week including the PMI, the LEI, JOLTS, and heavy truck sales. In addition, bond yields fell sharply:

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U.S. Growth Is Slowing But Still Above +2% Contd

However, there was also a package of stronger US eco data including the Atlanta Fed wage tracker, Federal outlays & receipts, consumer credit, bank loans, M2, refi, the Banks’ Willingness To Make Loans survey, and EVRISI surveys of US companies.

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U.S. Growth Is Slowing But Still Above +2%Contd

The Fed has been conducting this quarterly survey for five decades. It headed higher for 3Q to 1.2% versus recession readings around -30.0%.

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The Stock Market Drives The Economy Alan Greenspan made this point in a paper in 1959.

We still find it to be valid.In any event, consumer confidence moves pretty closely with the S&P.Bloomberg’s weekly measure of Consumer Comfort declined a significant -1.8 this week, although to a still elevated 62.9.Similarly, the S&P is down more than -100 points from its recent high, although still at an elevated 2919.

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More Of A Shift Back Than RealizedThe upward revision made two weeks ago to consumer incomes, along with some shift already, has produced a notable increase in consumer incomes’ share of GDP.Of course, this has come at the expense of profits.

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