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China Trade Shows Weak Growth, But Not Recession

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* China trade surplus improved as exports declined less than imports.

* China cumulative trade is still up +12.6% Y/Y.  

* China’s oil imports surged in December, which suggest China’s economy is still growing.

* In Yuan terms China’s imports are down -2.8%, not as bad as USD terms (-7.6%).

* E.U. Industrial Production down -3.3%.   How long before we can call it a recession in Europe?

* As for U.S. Gov’t Shutdown, it’s now the longest on record and will ultimately impact growth.


In U.S. Dollar terms, China’s National Bureau of Statistics reported that China’s trade balance increased +$15.2 billion to +$57.06 billion in December.   However, the reason the trade balance improved in the month was due to the fact that China imports plunged -$18.28 billion M/M to $164.19 billion; therefore, imports declined -7.6% Y/Y (versus +2.9% prior).


Moreover, China exports fell -$3.08 billion M/M to $221.25 billion and they are now down -4.4% Y/Y (versus +3.9% Y/Y prior).  Nonetheless, Cumulative trade in 2018 increased +12.6% Y/Y to $4.623 trillion, which is a slight slowdown form +14.6% Y/Y prior.


 Note that China’s imports are down -2.8% in Yuan terms, which gives us a sense of how the economy may be fairing in local terms.   Note that imports are down in local currency terms, but not nearly as bad at the -7.6% Y/Y level reported in U.S. Dollar terms.



According to Eurostat, industrial production in the Euro Area declined -1.69% M/M in November.  Note that the prior month was revised lower to +0.09% M/M versus +0.19% M/M previously reported.  On a year over year basis, industrial production in the Euro Area declined -3.3% Y/Y when adjusted for working days (versus +1.2% Y/Y prior).  In the month, Euro Area Durable goods output fell -1.7% M/M, Non-Durable goods output fell -1.0% M/M, Capital Goods output fell -2.3% M/M, Intermediate Goods output fell -1.2% M/M, and Energy output fell -0.6% M/M.  Lastly, Eurozone output declined -1.3% M/M and -2.2% Y/Y (+1.3% Y/Y prior).




U.S. GDP:  Our GDP model sees GDP growth downshifting back to 2% in 2019.  Our model doesn’t factor in the stimulus from the recent tax cut, so the growth reversal in 2019 could be more pronounced than our model appreciates (it is presumed that 2018 will be better than our model due to the tax cut, whereas the delta for 2019 would be worse than our model predicts).

U.S. Inflation:  U.S. inflation appears to have hit a peak three months ago and with oil prices down and the dollar index up, we believe inflation has peaked for now.

U.S. Federal Reserve:  With inflation and GDP slowing, The Fed shouldn’t have hiked.  Period.  We think the Fed is out of the way for most of 2019, unless the jobs market stays hot.   And if the jobs market stays hot, then we won’t mind a couple more hikes.

U.S. Treasuries:  The trade war and recent movement toward a Fed Pause have pushed longer-term rates lower.   But we still believe economic fundamentals support a 10-year yield of approximately 3%, particularly if the Fed pauses.   We expect that rates will slowly drift higher again, as a Fed pause will ultimately lead to a weakening in the U.S. Dollar (which may have already begun).

U.S. Equities and Earnings:  S&P 500 operating earnings are still rising, but the market seems to be repricing forward earnings.  Our 2019 SPX operating earnings estimate is currently below the street at $165.  We have concerns about the flattening yield curve, the Fed’s current tightening cycle, and also the damage that may occur from further declines in energy prices.

Argentina:  The macro looks abysmal in Argentina, and recession was confirmed in Q3.  Note that things have worsened as November data showed that Industrial Production was down -13.3% Y/Y and Construction was down -15.9% Y/Y.  Argentina should be thankful that the IMF is involved because inflation is at a lofty 47%, Consumer Confidence has been deteriorating for a year, imports are down -29.2% Y/Y, and Unemployment is still a lofty 9%.

Brazil:  We are monitoring Brazil for a possible upgrade.   Following Brazil’s election, Consumer Confidence has turned higher and PMI’s have indicated a return to growth.  We are encouraged by recent developments, but with the Bovespa at record highs, we need to see more follow-through with macro data.  Currently, GDP is up just 1.3% Y/Y, Industrial Production is up just +1.1% Y/Y, Retail Sales are up +1.9% Y/Y, PMI’s are showing very modest improvement at 52-ish levels, and Unemployment continues to be elevated (11.6% in November, which confirms further slow improvement).

Canada: Canada’s housing market continues to weaken, but so far monthly GDP continues to trend at 2% Y/Y.  We have concerns for Canada’s outlook given declining oil prices (and slowly weakening PMI) and we wonder how long Canada’s employment market can remain so resilient.  

Mexico: Mexico’s macro data is mixed, but PMI’s are beginning to slip (both PMI’s broke below “50” in December).  Recall that Mexico was hiking rates alongside the U.S. to keep the currency stable.  With PMI’s breaking down, Retail Sales slowing, Industrial Production negative, and consumer confidence starting to show some small signs of deterioration, we’ll want to keep an eye on Mexico for downside risk.

Venezuela: Remains uninvestable.


United Kingdom:  BREXIT is a mess and until that is solved the U.K. is uninvestible.  We have reached the point where persistent uncertainty will have negative impacts on business decisions and economic growth. The macro data remains mixed.   PMI’s improved in December, but Industrial Production was negative Y/Y in November.  GDP is growing at just 1.5% Y/Y and there are some concerns building about the housing market.

European Union:  Economic Sentiment is turning lower, PMI’s are now at multi-year lows, Industrial Production is negative and the political situation is worsening again.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  We still believe Europe is uninvestible.  

European Central Banks:  The ECB is slowly removing accommodation but Mario Draghi hasn’t given a timeline for raising rates.  The recent decline in CPI gives the ECB little reason to hike in 2019.

Eastern Europe: Ukraine situation aside, we saw earlier in the year with Italy, nations with high debt levels can rapidly become front-burner macro items.  The same can be said for Eastern Europe, given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   We also have the EU Article 7 issues against Hungary and Poland to watch as well.  The world is turning farther right, and pressure from unelected EU leaders will only push these nations further right.

South Africa:  Real GDP was growing at just 1.1% in Q3 and recent data suggest South Africa is heading south again.  PMI’s are bouncing around the critical “50” level, electricity use and production is worsening (production is now negative), inflation is slowly turning up, unemployment is an abomination at 27.5%.  In our view, the mere risk of having assets appropriated will grind foreign capital commitments and new business investment to a screeching halt, and more time is going to need to pass in order for foreign investors to feel any degree of confidence.  Our best guess is that more downside exists for South Africa’s economy and we believe the currency and equity market will suffer as a result.

Turkey:  Remains uninvestable.


Australia:  The Australian data remain mixed but we have serious concerns about China exposures and weakness in housing markets.  With that in mind, we have a short view on Australian equities.  So far, the macro remains OK as the Unemployment Rate appears to be stable around 5.0%, Real GDP increased +2.8% Y/Y in Q3, Exports are up +20% Y/Y, Wages are up +2.3% Y/Y, Retail Sales are up +3.6% Y/Y, PMI’s have improved, and Consumer Sentiment has ticked slightly higher recently.  However, consumer credit remains elevated and the value and number of home loan approvals and permits have turned negative, which is a bad sign as home prices have turned negative as well.

China:   The manufacturing sector looks to be in recession, yet services have shown signs of improvement.  China is certainly stimulating lending and has lowered reserve requirements, but more debt generally isn’t a good prescription for having too much debt.   We are watching China for signs of spillover into the consumer, which we do indeed will come to fruition.

India:  Indian economic activity appears strong, GDP finished 2018 at +6.7% Y/Y and the initial estimate for 2019 is an acceleration to 7.2%.  That being said, recent PMI’s slowed in December.   We are watching India for reasons to upgrade as inflation is moderating, industrial production is up +8.1% Y/Y, the consumer is strong, Commercial Credit is roaring at +15.1% Y/Y, and M3 money growth has been steady at 10%.  With inflation cooling a little, India can let growth occur and we are considering an upgrade.

Indonesia:  Indonesia had gone four years without raising rates, but now rates have been hiked +125bps since Mid-April.   Indonesia’s GDP and Private Consumption Expenditures are up over +5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI had been stable in the 49-51 range for a year and slowed to 50.4 in October, Industrial Production rebounded +9.0% Y/Y, and Retail Sales are up +7.7% Y/Y.  However, Exports are now down -3.3%.

Japan:  Although we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation, recent data has weakened (PMI’s, Leading Indicators, Consumer Confidence).

Russia: Russia just can’t help itself.   The sanctions and declining oil prices are having an impact on Russia and Russia is up to its antics again with Ukraine.  We find Russia uninvestible at this time.

South Korea:  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China.   Note that overall S.K. exports were up +22.7% Y/Y in October but are now down -1.2% Y/Y (December).   Bad trade data isn’t good for South Korea because GDP was already just +2.0% Y/Y in Q3, Mfg PMI is already below “50”, and Industrial Production is only up +0.1% Y/Y, the Unemployment Rate improved to 3.8% in November.   Note that Retail Sales slowed to +2.8% Y/Y in November from +7.5% Y/Y.













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