Month: February 2017

While the biggest threat facing Mexico, and its unpopular president Enrique Pena Nieto, in the past month has been President Trump’s insistence on building a “Massive Wall”, which Mexico would pay for, as well as Trump’s threats of renegotiating NAFTA, today we got a fresh reminder that America’s neighbor to the south has another looming problem: a rapidly deteriorating economy coupled with surging inflation on the back of the recent 20% price hike for gasoline, which culminated in a record crash in Mexican consumer confidence.

While the whisper number was 84.9, and the survey said 83.5 the actual print came in at an unprecedented 68.5 (69.3 seasonally adjusted) the lowest print on record. Consumer confidence posted a broad based and extraordinarily large 17.9% mom decline in January (-25.7% yoy), and has now declined in 7 of the past 8 months. The aggregate consumer confidence is at the weakest level since the series began to be reported in April 2011.

Significant declines were recorded across all of the five confidence sub-indices. Furthermore, consumers become more negative about both the current and expected personal and, in particular, the overall economic picture. The index measuring the current situation of the individual household posted a 9.7% mom sa decline and the index measuring perceptions of the future situation of the household declined by an even larger 15.6% mom sa. Furthermore, the index assessing consumers’ perceptions of the current economic picture posted a large 22.6% mom sa decline and the forward-looking index assessing expectations with regards to the outlook for the economy posted a 23.6% mom sa decline. Finally, the index measuring the current capacity of households to buy durable goods compared with a year ago posted a 23.5% mom sa decline.

The sharp decline in consumer confidence reflects the surge in inflation in January driven by the very large double digit increase in gasoline and gas prices, which triggered several episodes of public social discontent, as well as ongoing concerns about Trump.  As Goldman warns, weakening consumer and business confidence is a source of growing concern about the outlook for real activity as it turns consumers/households more defensive (increases precautionary savings and reduces the appetite to buy durable goods) and through it undermines the hitherto strong buoyancy of private consumption

As Bloomberg adds Mexico’s consumers have been propping up growth for the past couple of years (and contributing to the current-account deficit). Retail spending accelerated to a seven-year high in the 12 months through November. Today’s plunge will surely impact retail and banking stocks and feed through into rate expectations, sending shopper on the “back foot.”

The number is likely to drop further: Mexico’s annual inflation shot up in early January to 4.78%, its fastest pace in over four years, stoked by a government-led increase in gasoline prices. Consumer prices are seen rising to over 5.2 percent this year, according to a central bank poll published this week, a move well above policymakers’ upper limit of 4 percent that will likely fuel further interest rate hikes.

Trump’s victory has sent shock waves through Mexico, threatening to upend years of cooperation between the neighboring countries. U.S. threats to rip up a free trade deal with Mexico cast a chill over company investment plans, while worries of slower growth and inflation could hit private spending.

“The fall in consumer confidence is directly related with Donald Trump taking office, and his threats toward Mexico, but it’s also affected by inflationary pressures,” Gabriela Siller, of Banco BASE, said in an investor note.

No matter the cause, unless the rapid plunge in public sentiment is arrested Mexico will have greater problems than just Trump to deal with in the near future, including political turbulence which could sweep the current regime from power, leading to a power vacuum at a time when Mexico is most vulnerable to pressure from its far more powerful neighbor to the north, giving Trump free reign to make even more aggressive demands, resulting in even further public anger on the ground in Mexico, until eventually something snaps.

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No Rate Hike for You

Here’s Chris Barraud’s quick analysis of the Unemployment numbers this morning. He is one of the people that MarketSlant follows closely

#US (7) | The unemployment rate, unrounded, ? to 4.780% (vs 4.716% prior) because of a ? in the participation rate (62.9% vs 62.7% prior)

— Christophe Barraud (@C_Barraud) February 3, 2017

Here are the rest of his comments on the report as tweeted:

 (1) | Nonfarm payrolls rose 227K in December (up 70K compared to December) and above estimates of 180K.
 (2) | On the manufacturing front, payrolls increased by 5K while the index of aggregate weekly hours soared 0.3% MoM…
 (3) | …which implies a ? in the January Manufacturing Production (February 15th).
 (4) | Wages growth slowed on a monthly basis, ? 0.1% (vs 0.3%e) and bringing the annual rate down to 2.5% from 2.8% in December.
 (5) | The stabilization in the workweek (34.4) combined with the ? in payrolls led aggregate hours worked (a proxy for GDP growth)…
 (6) | …to increase by 0.16% MoM (vs +0.40% prior).
 (7) | The unemployment rate, unrounded, ? to 4.780% (vs 4.716% prior) because of a ? in the participation rate (62.9% vs 62.7% prior)
 (8) | The underemployment rate rose to 9.4% (highest since Oct. 2016) as the…
 (9) | …the number of Americans working part-time for economic reasons increased by 242K.
 (10) | All in all, the report looks somehow disappointing and offers room for policy makers to wait before raising rates.

Gold Concurs

interactive chart HERE

As of this writing: April Gold is $1221.70 last, up $5.30. March Silver is $17.50 up 7 cents

About Chris: Chief Economist & Strategist at Market Securities | PhD | Bloomberg
Top Forecaster of the US Economy [2012-2016] & Eurozone [2015-2016]

• Follow on Twitter: @C_Barraud

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US Central Command has released clips from five longer videos seized in the Jan. 29 raid in Yemen – that left one Navy SEAL dead – showing a small sample of the sort of intelligence information that was obtained in the site exploitation mission against an al-Qa’eda in the Arabian Peninsula staging area, propaganda center, and logistics hub for AQAP’s terrorist network this past weekend.

The US CENTCOM Statement reads:

Post-raid analysis has determined that several of the previously announced 14 enemies killed were terrorist network leaders and facilitators. Officials now believe that Sultan al Dhahab and Abd-al-Ra’uf al-Dhahab, two longstanding AQAP operational planners and weapons experts, were among the enemy killed at the scene.  The militants were killed during the raid that also cost the life of a U.S. servicemember.
 
The videos released today are samples of a series of detailed, do-it-yourself lessons intended for aspiring terrorist bomb-makers and included an exhortation to use those techniques to attack the West. The full-length videos, from which these clips were extracted, were taken from a computer seized by U.S. special operations servicemembers during the raid.

 

The presence of terrorist leaders at the headquarters, along with several other AQAP personalities, is consistent with pre-strike assesments that the compound was used as a staging location, propaganda center, and logistics hub for AQAP’s terrorist network.

 

One of the videos demonstrates the process for making Triacetone Triperoxide, an explosive used in numerous terrorist attacks, including the attempted “shoebomber” attack in 2001 and the attacks across the London transportation system in 2005.

 

“The videos are one example of the volumes of sensitive al-Qa’eda terror-planning information recovered during the operation,” said Col. John J. Thomas, U.S. Central Command spokesman,  “What was captured from the site has already afforded insights into al-Qa’eda leadership, AQAP methods of exporting terror, and how they communicate.” 

 

“The raid was an aggressive move to bring us closer to understanding, tracking, and eradicating AQAP. The U.S. remains committed to eradicating the threats posed by these terrorists and denying them space and time to plot attacks.”

 

The remainder of the recovered information will remain classified.

AQAP has a long history of plotting, inspiring, and exporting terror to America and the West.  The “underwear bomber,” Boston Marathon attack, and the attack on the Charlie Hebdo offices in Paris are all the responsibility of AQAP.

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While there were some hopes President Trump would demilitarize US presence in the Middle East, they are quickly getting dashed with every passing day, and following Trump’s announcement last week he would implement “safe zones” in Syria which would boost US troop presence in the region, on Friday US officials announced they had moved a Navy destroyer –the USS Cole, which in 2000 was infamously attacked by terrorists while on dock in Yemen’s Aden harbor – off the coast of Yemen to protect waterways from Houthi militia aligned with Iran, according to Reuters, citing heightened tension between Washington and Tehran.

More details from Reuters: 

The USS Cole arrived in the vicinity of the Bab al-Mandab Strait off southwestern Yemen where it will carry out patrols including escorting vessels, the officials said.

 

While U.S. military vessels have carried out routine operations in the region in the past, this movement is part of an increased presence there aimed at protecting shipping from the Iran-allied Houthis, they said.

 

The Houthis are allied to Iran, which is at odds with new U.S. President Donald Trump over its recent test launch of a ballistic missiles. Trump said on Thursday that “nothing is off the table” in dealing with Iran, a day after his national security adviser, Michael Flynn said he was putting Iran “on notice.”

On Friday, tensions with Iran increased further on Friday when the U.S. Treasury Department announced sanctions on 13 people and 12 entities under U.S. Iran sanctions authority.

Earlier this week Houthi insurgents reportedly attacked a Saudi warship off the western coast of Yemen, causing an explosion that killed two crew members. That incident was part of an escalation in combat on Yemen’s western coast between the militia and the coalition backing the country’s internationally recognized government. 

An explosion is seen onboard what is believed to be a Saudi
warship, off the western coast of Yemen, earlier this week

It followed a similar escalation last October, the U.S. military launched cruise missile strikes to knock out three coastal radar sited in areas of Yemen controlled by Houthi forces, retaliating after failed missile attacks on another U.S. destroyer.   

For now, the US position on the Yemen war is to remain closely alligned with Saudi Arabia, which continues its relentless bombing campaign of the sovereign nation, in the process killing thousands of innocent civilians. The quid-pro-quo for the US remains a familiar one: selling equipment, ammunition and supplies to Riyadh, and generally not changing the course of US diplomacy in the region.

Meanwhile, as US builds up a navy presence around Yemen, here is the latest positioning of US naval forces around the globe.

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Via Dana Lyons' Tumblr,

While the Dow Industrials remain near all-time highs, the Utilities are well off of their highs; this has signaled trouble in the past.

Back in May 2015, we wrote a series of posts on divergences in the equity market. The series was partially inspired by the considerable attention being paid to the prevailing divergence between the Dow Jones Industrial Average (DJIA) and the Dow Transportation Average (DJT). Of course, the relationship between those 2 indices form the basis of the popular “Dow Theory”. And while there are multiple stipulations to the Dow Theory, its crux is based on the confirmation or divergence between the 2 indices. And the failure at that time of the DJT to confirm the new high in the DJIA was concerning some market observers.

Upon a study of the historical relationship between the 2 indices, our assessment was that the Dow Theory, or at least that part of it, was a bit overrated. It’s not that it was wholly irrelevant. Indeed there were multiple examples of divergences signaling major cyclical tops in the markets. And, in fact, that May 2015 occasion marked a significant intermediate-term top prior to the considerable market weakness over the subsequent eight months. However, we found the divergences to be just too unreliable as a market signal.

On the other hand, there were other divergences occurring at the time that we felt were more worthy of investors’ concern. One such divergence dealt with the sister index of the DJIA and DJT, i.e., the Dow Jones Utility Average (DJU) (as an aside, for all you Dow Theory disciples, we are not applying the actual Dow Theory rules to the DJU, just the divergence statistics). The DJU was also badly diverging at the time and since we had similar historical data as the DJIA and DJT, we thought we would take a look at those such divergences. As it turns out, large divergences of the Utilities historically demonstrated much more reliability as a harbinger of trouble than the Transports, according to our study.

We bring this up today because while the DJIA continues to hang up near its highs, the DJU is once again diverging, sitting well off of its 52-week highs. Thus, we revisited the 2015 post and updated the divergence study. Specifically, we looked for any time that the DJIA traded at a 52-week high while the DJU was at least 10% below its own high. Since 1943, there have been 73 days matching this criteria (many of the dates fell in clusters; though the clusters were of similar numbers of days so we included all such days).

 

We will note that at last week’s DJIA 52-week high, the DJU was 9.4% below its high so it barely missed meeting this criteria. However, there were numerous occurrences in November and December that qualified. And once again, if recent history is any guide, this might be a problem down the road because the performance of the indices following such divergences has not been good (FYI, by “recent”, we mean since 1943; such divergences prior to that were not as damaging.):

As the table shows, in the intermediate-term following these divergences, returns on both the DJIA and the DJU were exceptionally weak. After 3 months, the DJIA was lower by a median -4.1%, with 80% of the occurrences showing losses. The DJU was also down a median of -4.1% after 3 months, with 75% losers. 6 months after the events, median returns were even worse for the DJIA and DJU at -4.9% and -7.5%, respectively. And even out to 12 months, the majority of these divergences saw both indices lower.

So while the recent simultaneous, confirming highs in the Dow Industrials and Transports has Dow Theorists quite bullish at the moment, the lesser-watched relationship between the DJIA and the Utilities is not quite so positive. Will this divergence be a sign of trouble again this time? There are no guarantees. However, if the historical pattern holds true, we can expect the weakness to begin soon as it has been over a month since the November-December occurrences.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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As we have repeatedly warned, anyone who is betting on the Trump Presidency unleashing a massive $USD bull market in the near future is going to get taken to the cleaners.

This has already begun…

One of the single most dangerous traps for traders to avoid is a “False Breakout.”

False breakouts are moves in which an asset “breaks out” of a formation, leading many to believe that the move is legitimate… then suddenly KA-BLAM, the move reverses violently.

See the $USD today. This looks more and more like a false breakout, which means YES, the $USD is going to sub’90s if not lower within 12 months.

Those who believe Trump wants the $USD above 100 are not paying attention. Similarly, those who believe that the Fed can and will raise rates three times in 2017 are missing the big picture.

NEITHER OF THOSE IS GOING TO HAPPEN. And if you’re investing based on them, you’re in for a LOT of pain.

If you’re looking to profit from the REAL impact Trump’s Presidency will have on the market (and the massive opportunities this situation presents), we’ve put together a Special Investment Report outlining three investment strategies that will produce major returns as a result of Trump’s economic policies.

It’s titled How to Profit From the Trump Trade and we are giving away just 100 copies for free.

To pick up your copy, swing by

http://ift.tt/2ktrX6e

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

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Following today’s jobs report, the market’s reaction to the unexpectedly strong January payrolls visualized in the charts below, is straightforward: the disappointing wage growth is an indication that the Fed may not hike rates for quite a bit longer than expected, and will likely will be forced to reduce its rate hike expectations from 3 to 2 (in line with the market) or fewer if wage growth continue to stagnate.

Sure enough, Wall Street’s strategists agree. As the following compilation of reactions shows, the prevailing reaction to today’s report is that while January job gains beat expectations, slower wage growth and disappointing underemployment figures help temper expectations for a near-term Fed hike.

Some examples, courtesy of Bloomberg:

TD (Mark McCormick)

• Jobs number is sweet spot for risk markets; growth is holding up with little impetus to nudge the Fed into action next month
• A softer read on wages and uncertainty over the economic agenda probably keeps USD sidelined for a bit longer
• This scenario favors continued momentum in some of the growth-sensitive currencies; could see the rallies in AUD, NZD and even NOK persist near-term

BofA (Michelle Meyer)

• Investors were setting up for a higher number given upside surprise in ADP on Wednesday; however, this was offset by increase in unemployment and softness in wages
• Report suggests labor market might not be as tight as previously believed
• Likelihood of the Fed hiking in March is fairly low and jobs report consistent with that
• BofA expects one Fed rate increase this year, in September, with risk of two rate hikes

Bank of Tokyo-Mitsubishi (Chris Rupkey)

• January employment report “strikes a blow” in hopes for a faster pace of rate hikes from “slow and steady” Fed
• “‘Big jobs today, but what about tomorrow’ will be the concern from Fed officials”
• Fed will be unlikely to act before there’s more certainty in Trump policies that could boost growth, make easier monetary conditions from Fed less necessary

Societe Generale (Stephen Gallagher and Omair Sharif)

• Jobs report shows “no additional pressure on the Fed to move beyond its indications of gradual rate hikes”
• “Evidence on labor market tightness abated in January”

Goldman Sachs (led by Jan Hatzius)

• Report “appears consistent with healthy economic growth, but only moderate pressure on labor resources”
• Reduces odds of a rate hike in March to 15% from 35%
• Maintains call for 3 rate increases this year, in June, September and December

CIBC (Avery Shenfeld, note)

• Only sore spot in jobs report was avg hourly earnings
• “Although the annual rate of wage inflation was likely to decelerate a couple of ticks, the fall from the revised 2.8% to 2.5% will be seen as a counterbalance to the stronger headline payroll number”

Janus Capital (Bill Gross)

• “Schizophrenic report” doesn’t alleviate skepticism about 3-4 percent growth promised by Trump administration
• “I think we’re stuck in a 2% real GDP world”
• While slow wage growth may be good for corporate profits, for consumers, “if their money is only growing at 2.5%, that’s a slow-growth economy”

Market Securities (Christophe Barraud)

• January payrolls report “looks somehow disappointing,” will create uncertainty among policy makers that wage pressures are materializing and full employment is close
• Could damp expectations for tighter policy
• Slowing wage growth suggests both personal income and spending were weak in January
  Underemployment results disappointed, while number of people working part-time increased by 242k; numbers don’t confirm that labor slack diminished

Marketfield Asset Management (Michael Shaoul)

• January jobs report “noisy” yet kept prior trends intact
• Weaker avg hourly earnings “greeted with some relief since it reduces the pressure on the FOMC to act in early part of 2017”
• Avg hourly earnings “is a lousy data series, but we accept it is one that the FOMC will follow when setting policy”

BNY Mellon (Marvin Loh)

• Tempered Fed expectations are biggest market takeaway from report, as it signals existence of more slack in labor market than headline unemployment rate would suggest
• “Any trough and subsequent increase in the participation rate would indicate continued jobs growth with limited wage pressure, a possible holy grail for corporate America”
• After report, anyone who thought Fed might raise rates in March will likely move their forecast to June

ING (James Knightley)

• Wages were a ‘big miss’’ but this likely is a “temporary slowdown with strong employment numbers ensuring that the trend is for faster wage growth in the months ahead”
• ING reiterates forecast for March Fed rate hike; expects that to be followed by another increase in 3Q
• “GDP growth on an upward trend”
• “Inflation figures looking consistent with the Fed’s medium term aspirations” so case for March hike “remains strong”

SouthBay (Andrew Zatlin)

• January data did not capture minimum wage hikes, which will show up in February, and that helped suppress wage inflation; expect a bigger jump next month
• If assumption is correct, the current environment of a patient Fed with slower and more gradual rate hikes could flip after next month’s jobs data

Evercore (Krishna Guha)

• January NFP report creates “little need for the Fed to pull forward the next rate hike to March”
• A move by May “is slightly more likely than not,” given strength in hiring
• Combination of strong employment growth with more supply to keep Fed “at bay” for now, “is perfect for U.S. equities”

Prestige Economics (Jason Schenker)

• Continued job creation backs hawkish Fed
• “A March Fed rate hike is a lock” after supportive jobs report and slightly stronger language regarding inflation in the Fed statement this week
• “We have been expecting a March rate hike, and only a shocking turn of policy or major upheaval in financial markets would derail that expectation”
• Sees upside risks for USD before Fed’s March meeting

Source: Bloomberg

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