The information in this article informs my latest offering — The Passive-Aggressive Investor, which discussed ETF investing. Here’s a link to the first article. The next one will be available early next week.
International Economic Data
- Production down 0.5% rolling 3-months/up 0.1% M/M
- Manufacturing down 1.1% rolling 3-months/up 0.3% M/M
- GDP 0% on a rolling 3-month basis
UK/EU conclusion: the data continues to point towards softer growth. The drop in global trade is clearly hurting the EU while the ongoing Brexit drama is freezing major investment decisions in the UK.
Mexico/Canada conclusion: Mexico is clearly hurting as a result of the trade war; industrial production has declined on a Y/Y basis for a majority of the last 12-months. On the plus side, inflation is contained. Canada, on the other hand, has picked up over the last few quarters. Their exports have increased, probably as a result of filling the gap left by the drop in US exports. And overall growth has been positive.
Key Central Bank Actions
The ECB lowered rates and re-engaged QE at Thursday’s meeting (emphasis added):
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%.
(2) Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
As to whether or not the new stimulus is effective is anybody’s guess. But I’m not hopeful. The main problem is policy uncertainty caused by increased trade tensions. Further cutting the cost of capital won’t have much of an impact on business sentiment if they have no policy visibility.
The bank didn’t seem too concerned with current economic conditions:
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the second quarter of 2019, following a rise of 0.4% in the previous quarter. Incoming economic data and survey information continue to point to moderate but positive growth in the third quarter of this year. This slowdown in growth mainly reflects the prevailing weakness of international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector.
At the same time, the services and construction sectors show ongoing resilience and the euro area expansion is also supported by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the ongoing – albeit somewhat slower – growth in global activity.
The manufacturing/service sector split that’s occurring across the globe is also happening in the EU. I think the main issue is the possibility of future problems:
The risks surrounding the euro area growth outlook remain tilted to the downside. These risks mainly pertain to the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.
This is really a preventative move; the ECB is more concerned with the future fall-out from the trade war.
US Economic Data
This was a fairly light week of news. The BLS released the latest PPI and CPI numbers, which indicate that inflation is contained. Here’s the primary table from the PPI release:
The second column from the right shows that overall PPI number while the farthest-right column shows the number ex-food and energy. The former has mostly been in the upper 1% range over the last 12 months while the latter recently dipped below 2%.
CPI was running a little hotter (emphasis added):
The all items index increased 1.7 percent for the 12 months ending August; the 12-month increase has remained in the range of 1.5 to 2.0 percent since the period ending December 2018. The index for all items less food and energy rose 2.4 percent over the last 12 months, its largest 12-month increase since July 2018. The food index rose 1.7 percent over the last year while the energy index declined 4.4 percent.
Here are the charts of the data:
The recent increase in inflation is unlikely to alter the Fed’s thinking about interest rates as it has only occurred in the last few months. In fact, it’s likely that some Fed Presidents are cheering the spike as low inflation has been a consistent policy challenge for the Fed during this expansion.
Retail sales continue to increase (emphasis added):
Advance estimates of U.S. retail and food services sales for August 2019, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $526.1 billion, an increase of 0.4 percent (±0.5 percent)* from the previous month, and 4.1 percent (±0.7 percent) above August 2018. Total sales for the June 2019 through August 2019 period were up 3.7 percent (±0.5 percent) from the same period a year ago. The June 2019 to July 2019 percent change was revised from up 0.7 percent (±0.5percent) to up 0.8 percent (±0.1 percent)
Here’s a chart of the data:The top charts show total sales: the lower two charts show the number ex-auto. The left charts show the total number while the right charts show the Y/Y percentage increase. The total number continues to move higher, which is sending the Y/Y number higher as well. This month, the number ex-motor was flat, but that’s just one month of data.
US conclusion: there was a small amount of data this week, but what was released was positive. Inflation is under control and the US consumer continues to spend, which will help to propel 70% of the economy higher.
Let’s look at this week’s performance table:This is one of the most bullish weekly tables I’ve seen in some time. Small-caps rose solidly: micro-caps were almost 7% higher; small-caps were up 5%. Large-caps also rose, but just barely (relatively speaking). The big news is the Treasury market sell off: the long end of the curve dropped slightly more than 6% — a very big move for a more conservative market. The belly of the curve declined 2.55%.
The most important development is the Treasury market selloff, which we see in the daily charts: The IEF has dropped from an absolute high of 114.44 to 110.5 — a decline of 3.5%. Notice two key technical developments: the large drop in momentum and the huge volume spike today. The latter indicates that investors are accelerating the rate at which they’re taking profits.The long end of the curve has dropped about 9% over the last two weeks. Momentum is also dropping sharply. Volume has been heavier for the last month and a half.
And then we have the small-cap indexes, which are doing very well technically:Micro-caps have rallied strongly over the last two weeks. Prices are now above the resistance line that connects the highs from late February on. The candles are also above all the moving averages. Overall the index has gained a little below 10% over the last two weeks — one of the index’s biggest moves in quite some time. There is plenty of upside room on the MACD for this rally to continue.
Small-caps have also made great strides, gaining a little over 8%. Prices have broken key levels of resistance as well.
The markets are ending the week in great shape: small-caps are rallying and the Treasury market is selling off. In fact, this is one of the most bullish weeks we’ve had in quite some time. Has it changed my mind? After all, just last week, I argued that “It’s Hard To See Meaningful New Highs For the Rest of the Year.” No. The fundamental back-drop is still fraught with problems: weak global trade, Brexit, and US-China trade tensions. The ECB cut rates this week because they’re concerned about higher downside risk. And they’re not the only central bank to do so recently. While the US is in better shape, it’s not all roses, either. The US consumer is the primary driver of growth right now; business investment is soft and US manufacturing is weak. There’s still plenty to be concerned about. But perhaps the markets see something we don’t. If that’s the case, they’ll continue their bullish ways to give us the signal
Have a good weekend
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.