Falling Dollar as Trump Trade Tumbles into Investor “Meh”

Falling Dollar as Trump Trade Tumbles into Investor “Meh”

The U.S. dollar got hit hard again today as the Trump Trade continues to reverse and investor sentiment becomes more neutral – a big “Meh.”

The U.S. dollar is continuing its steep decline today as the AMEX U.S. Dollar Index makes new lows for 2017 and is nearing the lowest point over the past year, pushing down towards 94.

^DXY Chart

This represents not only an unwinding of the so-called Trump Trade, but speaks to how weak economic data has been coming in relative to expectations, (we’ve talked about this extensively which you can read about most recently here and here) AND relative to what we are seeing outside of the country. This decline has been driven primarily by the euro, the Mexican peso and the Japanese yen.

The dollar fell as the European Central Bank President, Mario Draghi, delivered a talk conveying more optimism for the European Union, citing growing political tailwinds, and the emergence of reflationary pressures. This came as Monday’s Durable Goods report showed the American economy is treading water, with Shipments and New Orders both dropping 0.2 percent month-over-month versus expectations for 0.4 percent gains. Core Capex has basically stagnated since February and despite all the euphoria in tech stocks, booking for new computers and electronics also declined 0.2 percent month-over-month and has now declined in 3 out of the past 4 months, which translates into a 6.5% decline on an annual basis: a long way from the 10 percent annual growth rate we saw at the start of 2017.

The Chicago Fed National Activity Index declined in May, the second decline in the past 3 months with the 3-month moving average essentially flatlining.

Looking over at France, with the recent win by Macron the economy there is looking much more upbeat as single-family housing permits rose 17 percent year-over-year versus 6 percent in the U.S. Single-family housing starts rose 19.4 percent in France and 8.5 percent in the U.S. In addition, mortgage purchase applications in the U.S. have fallen in 6 out of the past 7 weeks.

In Germany, the lfo business sentiment index recently hit a record high and across the Eurozone a collective sigh of relief can be heard as Italy is addressing its NPL (non-performing loan) problems. The latest was with a mix of state bailout, to the tune of €17b, on Banca Popolare di Vicenza and Veneto Banca that has equity and junior bondholders wiped out, protecting only senior note holders and depositors. More is likely to follow.

Looking at yesterday’s Consumer Confidence Survey, while the overall index rose from 117.9 to 118.9, it didn’t make up for the decline of 7.3 during April and May. That’s not terribly concerning, but this other bit in the details is. While the index for the Present Situation rose from 140.6 to 146.3 and is at the highest level since June 2001, Expectations fell again for the third consecutive month and are now at the lowest level since January. This type of divergence typically precedes a recession and if we look at these moves over the years, a recession typically hits 9 months after Expectations peak. That peak, so far, looks to have been in March.

Yes, but those Fed guys sound oh so confident despite tightening into an economy with slowing growth, declining inflation, weakening credit growth and a flattening yield curve.

  • Since World War II, the Fed has engaged in 13 tightening cycles
  • During 10 of those cycles, the economy slid into a recession
  • In the 3 where a recession did not occur, GDP growth fell by 2 to 4 percent. With current GDP growth struggling to get above 2 percent, that’s worth noting.

Meanwhile, the equity market is mostly yawning.

The VIX has now dropped below 10 eight times in 2017. To put that into perspective, in the 22 years from 1994 through the end of 2016, the VIX saw that level all of 7 times!

VIX Chart

In the past month, short position contracts on the VIX have doubled to now sit at a record level.

Over in the bond market, the view of the economy isn’t all that rosy. As of June 20th, the net longs on the 10-year Treasury hit a level we haven’t seen since December 2007.

Today’s AAII Investor Sentiment report showed that neutral sentiment is at its highest level since last August at 43.4 percent while bullish sentiment declined from 32.7 percent to 29.7 percent. This market is seriously astounding with a record 130 consecutive weeks where half the investors surveyed were not bullish, while we’ve had such a smooth melt up in the first half of 2017. Only one other year have we seen even less of a pullback during the first half! Meanwhile, the Bears are also scratching their heads with bearish sentiment falling from 28.9 percent to 26.9 percent, the lowest level since the first week of the year.

With economic data coming in well below expectations while the market has continued its melt up (today notwithstanding) despite bonds telling a worrisome tale with falling long-term rates and a flattening yield curve, it is no wonder investor sentiment is increasingly a neutral “meh..” or perhaps more of an “Eh…?”


Markets Narrowing as Trump Trade Fades

Markets Narrowing as Trump Trade Fades

We are seeing the beginnings of de-risking as for the first time since the election as the S&P 500 has broken below its 50-day trendline, but is still just 3 percent shy of its all-time high, so let’s not get overly carried away here. Volatility, in the form of the CBOE’s volatility index (VIX), rose every day last week and has jumped 24 percent to be at its highest level since November. Meanwhile, those talking heads on mainstream financial media keep focusing on the same thing the herd does – which rarely results in successful investing.

Ten big stocks are exerting an unusually large influence on the S&P 500 in 2017, the latest sign that the herd instinct is alive and well on Wall Street. Those 10 large stocks have powered nearly 53% of the S&P 500’s 4.7% advance this year, according to Fundstrat Global Advisors’ data through the middle of last week. During an average year, the 10 stocks with the greatest impact typically account for only 45% of the market’s price moves, according to analysis of data from AQR Capital Management.


Looking at what has happened with core CPI and PPI rolling over as well as current GDP estimates for Q1, we think it is quite likely that non-financial corporate profits may have contracted in Q1 on a quarter-over-quarter basis while rising on a year-over-year basis thanks to the weakness in Q1 2016. Those CPI and PPI numbers tell us that corporate pricing power just isn’t there, a reality that does not support the narrative of “animal spirits” igniting post-election. Nor is the reality of declining productivity in the face of rising unit labor costs, which serve to squeeze margins.

As for that accelerating economy narrative, it is wholly inconsistent with the data coming out of bank earnings reports with commercial loan balances at J.P. Morgan Chase (JPM) and Wells Fargo (WFC) unchanged over Q1 while new auto loans fell 17 percent at JPM and 29 percent at Wells on a year-over-year basis. Citigroup’s (C) profit from consumer banking in North America dropped 25 percent thanks to credit losses on some credit cards while JPM and WFM consumer banking profits dropped 20 percent and 9 percent, respectively.

Treasury bonds benefited from Trump’s talk last week on preferring low-interest rates, despite his criticism of Fed Chair Yellen during his campaign, with the 10-year Treasury falling to levels last seen in November. We suspect there is more room for rates to fall here as all those sentiment surveys sync up with the much weaker hard data.

Rates aren’t just falling here though as the 10-year Japanese sovereign bond yield is now below zero again for the first time since November, with the German 10-year falling below 0.2 percent. With all the talk about the U.S. needing a weaker dollar, gold is moving up, well on its way to cracking $1,300.

The risk-off move is likely driven in large part by the geopolitical tensions ranging from the recent MOAB drop in Afghanistan to North Korea getting cranky again to the upcoming elections in France where a Marie Le Pen victory has become more of a possibility. If however, Macron wins in the second round, we wouldn’t be surprised to see a bit of a rally in those battered French bank stocks.

As the first 100 days of the Trump administration nears its end, we’ve gone from campaign of isolationism to a more aggressive military; the failed healthcare reform plan is returning to center stage while tax reform, deregulation, and infrastructure spending are pushed further back. Those who follow our analysis ought to be unsurprised that the Trump Trade is fading fast.


Source: Investors Follow the Herd as 10 Big Stocks Power Market’s Gains – WSJ

Bond market dancing to a different tune than equities

Bond market dancing to a different tune than equities

Whenever we see trends in the market we immediately look for confirming data points. With the impressive rise in equity markets since the election, we look at the bond market to see if there is agreement on all this bullishness. There isn’t.

“The bond market is taking a totally different view from the equity market. Blowing raspberries is a good way to put it,” says Jim McCaughan, chief executive of Principal Global Investors. “There’s no belief that the growth agenda will be dramatic.”

After having thrown everything possible at the bond market, from a hawkish Fed to pro-growth promises from President Trump to ebullient sentiment surveys and a record-smashing equity rally, the best the 10-year Treasury can muster is to butt its head against 2.5 percent?

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

The 10-year, 10-year forward rate is 3.6 percent, which is well below the long-run norm of 5.5 percent and implies a real neutral interest rate of around 1.6 percent. This at a time when the Federal Reserve is claiming that we are near full employment?

The yield curve — the relationship derived from the various maturities of Treasury bonds — also signals a subdued outlook. The difference between two- and 30-year Treasury yields stands at just 176 basis points, not far from the nine-year low of 140bp touched last August.

Yes, but what about all that glorious survey data?

According to David Rosenberg of Gluskin Sheff, going back to 2000 there was one other period in which Bloomberg’s economic surprise index for surveys and business cycle indicators was as unambiguously euphoric relative to market expectations. That was back at the beginning of 2011, which ultimately saw GDP for the year at a painful 1.6 percent with a macro backdrop so painful that the headlines were full of prognostications for a double-dip recession. Recall that at the start of 2011 the ISM manufacturing index started out at 59.6 but ended the year at 52.9.

Back to today and we see that the NAHB housing index looks to have peaked in December at 69, having fallen to 67 in January and then again down to 65 in February. AIA Architectural Billings confirmed this move, dropping to a four-month low of 49.5 in January after sitting at 55.6 in December.

We’d also like to point out that the recent NFIB index, while having made a new cycle high, also saw plans for capital investments drop to 27 from 29 while hiring plans fell to a 3-month low in February at 15 from 19 in January. Hot labor market? Atlanta Fed’s wage tracker hit a cycle high of 3.9 percent (yoy) in October and November, but dropped to 3.5 percent in December and then again to 3.2 percent in January, the weakest since January 2016 – not so hot!

An economy in need of cooling? Loans and leases tell a different story.


Headlines rarely give the whole story and the vast majority of investors buy at the top and sell at the bottom. That being said, we still do not believe this is a market that is safe to short, but valuations in light of the fundamentals have us wary of those lofty prices to say the least.

Source: Bond investors send warning for record high equity market

Earnings not boosting Trump Trade, yet markets continue to rise

Just a little over two weeks ago Donald Trump took the oath of office. Since then, nary a day goes by without President Trump dominating the pages of most every major publication. Love him or hate him, the man certainly knows how to command attention.

Yesterday both the Dow and the Nasdaq hit new interday highs, but on valuations that remain stretched as earnings reported so far have been beating less than normal and caution over policial volatility holds the “C” suite back.

Fourth-quarter results have so far eclipsed Wall Street expectations, with 65 per cent of companies beating earnings projections and 52 per cent topping forecasts for sales — both below the five-year average. Corporate America’s guidance for the current year is already coming up light, with BofA noting that twice as many companies have forecast earnings below projections than above.


“[Companies] are clearly excited about lower taxes, a lower regulatory environment and more pro-growth policies, but that is offset by the trade policy and immigration,” says Grant Bowers, a portfolio manager with Franklin Templeton. “There was some built-up hype after the election but we have seen a lot of conservative guidance as companies face an uncertain outlook.”


At Tematica we suspect that investor expectations, which translate into higher share prices, are getting way ahead of themselves. According to a recent Gallup poll, 53% of American’s disapprove of the job he is doing with only 42% approving. That is the lowest level of any president in history after two weeks in office. So whether you love or hate the job he is doing, he is likely to face significant headwinds pushing through legislation, which means these changes that investors are so optimistic about are likely to come later rather than sooner and may not deliver quite the level of change anticipated.

What has us even more concerned are all the global events that would otherwise be receiving front-page treatment that are relegated to lining hamster cages, without much attention. Greece… still a potentially big problem. Italian banks … still seriously troubled. French elections… one of the front runners is hell bent on exiting the European Union. Were that to happen, the Eurozone would collapse and its currency with it – a very big deal.

We will have a lot more on this in the coming days and weeks, so stay tuned!

Source: Corporate America fails to add gas to Trump rally

America First? When it comes to GDP we get the bronze!

America First? When it comes to GDP we get the bronze!

Yesterday we talked about how the American economy, despite all the euphoric headlines since the election, didn’t deliver much of a performance in the fourth quarter and in fact we saw the weakest full-year GDP growth rate since 2011 which was well below the U.K.’s 2016 growth rate of 2 percent. Today we learned that the Eurozone as well kicked our economic tuckus in 2016.

GDP grows 0.6% in final quarter of 2016, beating expectations and taking annual figure to 1.8%

Yep, that hurt. So much for America being the “cleanest shirt in the economic laundry.” Despite headwinds ranging from the accelerating Greek drama to the mountain of Italian non-performing loans that led to the nationalisation of Banca Monte dei Paschi di Siena, Brexit, failed Constitutional reforms leading to the resignation of Prime Minister Renzi in Italy …. the list goes on, they beat us.


Last week talks between the U.S. and Mexico hit a serious bump after a President Trump Tweet led Mexico’s President Peña Nieto to cancel their upcoming meeting, while the administration has been threatening a 20 percent tax on imports from Mexico, which would put serious upward price pressure on, (among other things) fruits, vegetables and auto parts. Today Peter Navarro, Trump’s top trade advisor, accused Germany of currency exploitation. According to the FT, “In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”

While last week’s meeting with the British Prime Minister Theresa May ended with some serious hand-holding, over the weekend the President’s sudden implementation of an immigration ban left, “our closest ally flailing after the UK government was openly contradicted by US diplomats over which British nationals were covered by the measure.”

After Trump’s election victory, the Bank of Japan was initially more optimistic about more favourable economic conditions amid expectations for stronger American growth. That enthusiasm has been fading as yesterday, ahead of a two-day policy meeting, officials are less optimistic about the impact on Japan’s economy. According to the Wall Street Journal, “We now realise that we know very little about him.”

Trump’s team has been poking our allies in some uncomfortable ways, making many around the globe nervous, and yet the VIX (a measure of implied volatility) is pretty much yawning.

The 90 percent of the America economy that is not represented by either inventory build or state and local government spending managed to grow at a whopping 0.6 percent annual rate in the fourth quarter.

Amidst all this, the Fed keeps talking about further rate hikes

Under Armour (UA) just released its fourth quarter and full year results and was yet one more citing currency headwinds.

Upon the announcement of Trump’s immigration ban on Friday, the markets started to fall. Monday the S&P 500 fell 60 basis points and is now down 0.76 percent from its most recent closing high last Wednesday. Bespoke compiled headlines over the past few days that reveal concerns the Trump hope trade is starting to fade.

Is this an inflection point? Too soon to tell, but we can say that having an administration with no political history who has pretty much tossed out the rule book is likely to cause heightened volatility, which is not reflected in market pricing. Erecting trade barriers and surprising the market, let alone allies, is likely to induce more caution in the C suite.

This morning we also saw that compensation costs in 2016 rose 2.2 percent, significantly faster than GDP of 1.6 percent, which makes another Fed hike more likely. We’ll be hearing from the Federal Reserve on Wednesday and will be looking to see if the tone from the FOMC meeting is more dovish than we heard in Fed Chair Janet Yellen’s testimony on January 19th. We will also hear from over 100 companies this week on their earnings, putting the relative complacency in the markets to a test.

Source: Eurozone’s economic recovery picks up speed

Dow hits 20k – Hope Trumps Uncertainty

Dow hits 20k – Hope Trumps Uncertainty


For anyone whose has spent time listening to Wall Street types, the mantra, “The markets hate uncertainty,” is a familiar one. So with the political upheaval here in the U.S., (an election that defied the pundits and an administration unlike anything we’ve seen before) combined with the upcoming volatile elections across much of Europe, convention wisdom would expect investors and businesses alike to run for safety, but instead, we just saw the Dow Jones Industrial Average hit 20,000 for the first time ever at the Trump Trade is reignited.


The conventional wisdom among economists is that people don’t like uncertainty and the unknowable. Faced with the prospect of upheaval and change with unpredictable outcomes, they become less confident about their prospects and more cautious about making big decisions on spending.


Consumers and businesses in the U.S. and Europe appear undaunted by the prospect of profound political change on both sides of the Atlantic and may even be encouraged by it.

Let’s face it, the problem isn’t uncertainty but the absence of hope. What investors and businesses alike needed was a reason to believe that something was going to kick the economy into gear and get us out of the economic doldrums we’ve been experiencing since the financial crisis.

What we needed was hope that things could change for the better. Today the U.S. appears to be bubbling over with hope. The markets have pretty much fully priced in successful new policies as if they are a fait accompli, but the reality is that President Trump is facing an unprecedented level of antagonism, while history shows that at best, presidents are lucky to see around 60% of their agendas come to fruition. The danger here is that after having priced in all the pro-growth rhetoric, the market may become impatient with the time table.

Just a few days ahead of his election, Trump had a 37% approval rating versus a 55% disapproval rating. For a historical perspective, going back to the same point in the cycle with other newly elected presidents, approval ratings were more optimistic with Ford at 90%, JFK and LBJ at 80%, Obama, George W., Bill Clinton and Reagan all at 70%, and finally Bush Sr. and Nixon at 60%. JFK, Carter, Clinton and George W., with majorities in both the House and Senate, struggled to get through much of what they promised.

To get any significant legislation passed through the Senate, Trump needs 60 votes to avoid a filibuster, which means getting eight Democrats on board. The nomination hearings are giving us quite the preview of just how cantankerous the legislative process is likely to be. On top of that we are already seeing division within Trump’s own party on what corporate tax reform will look like and there is considerable debate over how personal income tax deductions will be affected.


Surveys of sentiment point to a strengthening of confidence in both the U.S. and the U.K. over recent months, while a similar rise in optimism is under way in Europe, which faces a number of elections in 2017 that could lead to big changes in policy.

We love to see enthusiasm, but the reality is that while over 80% of the survey data over the past two months has beaten expectations, over 50% of the actual hard data has come in below expectations. As the indices continue to tick higher, so does downside risk if all that positive sentiment isn’t met by reality before the ever-fickle markets lose patience.

Source: Global Uncertainty Gets Brushed Off in the U.S. and Europe – WSJ