Investment Committee Update 02.08.2017

Global Macro


Today’s themes: US data likely to rebound, but still mediocre and off the highs. NZ employment cycle has likely peaked, with key implications for activity, NZD and the RBNZ. Recently the NZ credit cycle peaked, as did the housing cycle. Today the NZ jobs cycle peaked.


(Macro theme – All looks well for the NZ economy, but at the peak of the cycle everything does. What is key is what happens after the cycle peak though, and our sense is we are seeing data deceleration across a range of macro areas that warn of data deceleration. This should imply an on hold RBNZ and NZD lower on cross rates).


Macro – US – More softer data, but that doesn’t preclude a rebound relative to expectations.  

(Macro theme – The LT secular forces we outlined previously continue to limit the upside to US – and global – growth, inflation, and thus real interest rates. There are many data points that outline that the 18mth long short cycle period of strength in the US is over. However after a recent 6mth period of weakness, data should rebound in Q3 as should inflation, which is the Fed’s main concern). 


Well, after last night’s daily, on Stan Fischer of the Fed’s comments around the natural real Fed Funds rate, last night saw further evidence in an array of data that the cycle upswing from last Jan ‘16’s lowpoint is well and truly done and dusted. Personal spending continues to mirror consumption patterns, running at a subdued 2.5% or so pace, despite the recent lift in consumer sentiment post Trump. 

The sentiment boost clearly did not feed through into consumers spending more, and the risk remains that consumer sentiment continues to retrace back to where it was in late ’16. 


Fed’s Fischer argued that demographic decay in particular explained low consumer spending, and last night’s data didn’t argue with him. He also spoke about weak investment impeding GDP growth, and the weakness in the ISM Man survey (admittedly only 12-15% of US activity, services are far greater at near 80%) last night at headline level and then at production, new orders and employment again don’t show a capex boom underway. If it was, then production and new orders and employment would be skyrocketing, but they are not. Indeed, here also we see the 18mth cycle  from the Jan ’16 low as peaking, right where it did in ’14 (between 60-65 readings) and before that in ’10.  


Finally, total vehicle sales continue to slow, again from the 18mio unit level seen in recent years, and again back in the ’06 and ’86 high. If consumers were spending, they’d also be buying cars, but they ain’t!


In summary, last night’s data tell us three things. Firstly, they tell a picture of activity data in the US coming off their 18mth cycle peaks,
or indeed ending the 8yr cycle from the GFC low. 


The data is not yet weak enough to get worried about the US economy, but it is decelerating. As we also know though, analysts had got
very confident about US data in Jan, and now are more negative, so some retracement higher in US activity data is likely in Q3, our central scenario. 


This should be enough for the Fed to contract their balance sheet and keep hiking, especially if Oil lifts inflation during the quarter, or by quarter end.
Secondly, while bond markets worry about activity data, the Fed worries about inflation moreso, and unemployment rates. If we correctly forecast inflation,
we will know where bond yields and the USD go, and our central view is that Oil lifts inflation back towards 2% by year end. We saw an inkling of that with a
lift in the Core PCE data last night (from 1.4 to 1.5%). Thirdly, while the data last night have kept the USD and US yields down, our sense is that even if
both soften further, they should then rise thereafter, if our second point on Oil and inflation is correct. We need to be correct on that second point though!


EUR positioning is an obstacle to the ongoing pace of appreciation. With CFTC data now showing the speculative accounts’ EUR balance at the highest level since 2014 and EURUSD risk reversal skews now bid for calls over puts for the first time in almost a decade, we think the bar for further EUR strength from current levels is likely to be considerably higher. We remain of the view that the underlying picture remains supportive for the reasons we highlighted last week, in line with our 12m forecast of 1.22. This said, we think the rapid emergence of a consensus long EURUSD position argues in favour, if anything, of a slowdown in the pace of the upward move.


Chart – EURUSD riskies are now bid for EUR calls for the first time since 2009 Strategy


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