Month: December 2019

While the period after Thanksgiving is traditionally when trading desks wind down for the year as most PMs and algos head for the hills of Aspen and Chamonix, there is still economic data to digest with this first week of December hosting a number of critical events that will set the agenda for markets running up to Christmas.

As DB’s Jim Reid notes, data releases include global PMIs (today and Wednesday), the US jobs report (Friday) and the US ISM figures (today and Wednesday). We’ll hear from ECB President Lagarde (today), and get policy decisions from central banks in Canada (Wednesday), Australia (Tuesday) and India (Thursday), while there’ll be another UK election debate between the two main party leaders (Friday) and a NATO leaders summit in London (Tuesday-Wednesday). With only just over a week to the U.K. election all eyes on whether Trump’s visit to London (starting today ahead of NATO) creates political capital for the opposition parties keen to link Mr Trump to Mr Johnson. Finally the German SPD 3-day party conference starting on Friday is now a must watch given the shock leadership results over the weekend.

Today is global manufacturing PMI day before the services and composite PMIs come out on Wednesday. China has given the world a boost by seeing the official manufacturing gauge at 50.2 (49.5 expected), the first 50+ print since April and up from 49.3 in October. Non-manufacturing rose to 54.4 (consensus 53.1) from 52.8 last month. There is some chatter about strong seasonal helping but overall this will be seen as positive news. Meanwhile, China’s November Caixin manufacturing PMI also came in higher than consensus at 51.8 (vs. 51.5 expected).

Moving forward and as for the rest of the global PMIs, the flash numbers mean we do have some initial indications of how the global economy performed into November but if momentum is improving this can be picked up between the flash and final numbers. The flash Euro Area services PMI fell to 51.5 while the manufacturing reading rose to 46.6, and the consensus is expecting the final Euro Area PMI readings to remain in line with the flash ones. A breakdown of European PMIs is shown below courtesy of Swiss Life:

In the US, we’ve also got the ISM releases, with the manufacturing report today before the non-manufacturing index comes out on Wednesday. The manufacturing reading has been below 50 since August (49.2 expected, 48.3 last month), although the non-manufacturing index has held up better, at 54.7 last month.

The other big highlight of the week comes with the US jobs report on Friday. In October, the +128k increase in nonfarm payrolls was the slowest pace of job growth since May but was better than expected with upward revisions to earlier months. The consensus is looking for a rebound to +190k in November. Meanwhile the unemployment rate and average hourly earnings yoy growth are expected to remain at 3.6% and +3.0% respectively. Other US data on factory orders, the trade balance and durable goods orders on Thursday will also help set the tone through December.

In Europe, slightly less is happening in terms of data aside from the PMIs, but we will see German factory orders and industrial production figures released for October on Thursday and Friday respectively. With the German economy having avoided a technical recession in Q3 with +0.1% qoq growth, attention will focus on whether the data heading into Q4 has shown further signs of stabilization. Finally, for the Euro Area as a whole, Thursday sees the October retail sales figures coming out, along with the final reading for Q3 employment and GDP.

Turning to central banks, with the Fed in their blackout period, the main event this week is likely to be ECB President Lagarde’s appearance before the Economic and Monetary Affairs Committee of the European Parliament today. This is the first Monetary Dialogue with the committee since Lagarde became ECB President, and it’ll be worth keeping an eye on whether she talks about the upcoming strategic review of monetary policy.

Other political events to watch out for include the annual UN climate change conference in Madrid from today, which will be taking place over the next two weeks. Then here in London we have a summit of NATO leaders on Tuesday and Wednesday. And finally, ahead of the UK general election on December 12, there’ll be the second head-to-head debate between Prime Minister Johnson and Labour leader Corbyn on Friday.

Courtesy of DB here is a day-by-day calendar of events:

Monday

• Data: November manufacturing PMIs from South Korea, Indonesia, Japan, China, India, Russia, Turkey, Italy, France, Germany, Euro Area, South Africa, UK, Brazil, Canada, US and Mexico, Japan November vehicle sales, US November ISM manufacturing, October construction spending, South Korea final Q3 GDP, Japan November monetary base
• Central Banks: ECB’s Lagarde, Rehn, Holzmann speak
• Politics: UN Climate Change conference begins

Tuesday

Data: UK November construction PMI, Euro Area October PPI, Australia final November services and composite PMIs

• Central Banks: Reserve Bank of Australia decision, ECB Executive Board nominees Panetta and Schnabel speak
• Politics: NATO summit begins

Wednesday

• Data: November services and composite PMIs in Japan, China, India, Russia, Italy, France, Germany, Euro Area, UK, Brazil and US, Australia Q3 GDP, US weekly MBA mortgage applications, November ADP employment change, ISM non-manufacturing index
• Central Banks: Bank of Canada decision, Fed’s Quarles speaks

Thursday

• Data: Germany October factory orders, November construction PMI, Euro Area October retail sales, final Q3 employment, GDP, US November Challenger job cuts, weekly initial jobless claims, October trade balance, factory orders, final October durable goods orders, nondefense capital goods orders, Canada October international merchandise trade, Japan October labour cash earnings, household spending
• Central Banks: Reserve Bank of India decision, BoJ’s Harada, Fed’s Quarles speak

Friday

• Data: Germany October industrial production, France October trade balance, Italy October retail sales, Canada November unemployment rate, net change in employment, US November nonfarm payrolls, unemployment rate, average hourly earnings, final October wholesale inventories, preliminary December University of Michigan sentiment, October consumer credit
• Politics: German SPD party conference begins, UK TV debate between Prime Minister Johnson and Labour leader Corbyn.

* * *

Finally, looking at just the US, Goldman writes that the key economic data releases this week are the ISM manufacturing index on Monday, the ISM non-manufacturing index on Wednesday, and the November employment report on Friday. There no speaking engagements from Fed officials this week, reflecting the December FOMC blackout period.

Monday, December 2

• 10:00 AM ISM manufacturing index, November (GS 50.1, consensus 49.5, last 48.3); Our manufacturing survey tracker edged up by 0.2pt to 51.2 in November, following stronger regional manufacturing surveys on net. After its first increase following six straight declines in October, we expect the ISM manufacturing index to rise 1.8pt further to 50.1 in November.
• 10:00 AM Construction spending, October (GS +0.6%, consensus +0.4%, last +0.5%): We estimate a 0.6% increase in construction spending in October, with scope for increases in both private and public construction spending growth.

Tuesday, December 3

• There are no major economic data releases scheduled.

Wednesday, December 4

• 08:15 AM ADP employment report, November (GS +135k, consensus +155k, last +125k); We expect a 135k gain in ADP payroll employment, reflecting some drag from increased jobless claims and lower October payrolls. While we believe the ADP employment report holds limited value for forecasting the BLS nonfarm payrolls report, we find that large ADP surprises vs. consensus forecasts are directionally correlated with nonfarm payroll surprises.
• 10:00 AM ISM non-manufacturing index, November (GS 54.9, consensus 54.5, last 54.7); We expect the ISM non-manufacturing index to edge up by 0.2pt to 54.9 in the November report, partly reflecting further improvement in our non-manufacturing survey tracker (+1.1pt to 54.5).

Thursday, December 5

• 08:30 AM Initial jobless claims, week ended November 30 (GS 215k, last 213k); Continuing jobless claims, week ended November 23 (last 1,640k): We estimate jobless claims increased by 2k to 215k in the week ended November 30, following a 15k decline in the prior week.
• 08:30 AM Trade balance, October (GS -$48.5bn, consensus -$48.9bn, last -$52.5bn): We estimate the trade deficit decreased by $4.0bn in October, reflecting a decline in the goods trade deficit.
• 10:00 AM Factory Orders, October (GS flat, consensus -0.5%, last -0.6%); Durable goods orders, October final (last +0.6%); Durable goods orders ex-transportation, October final (last +0.6%); Core capital goods orders, October final (last +1.2%); Core capital goods shipments, October final (last +0.8%): we estimate factory orders were flat in October following a 0.6% decrease in September. Durable goods orders moved up in the October advance report, driven in part by an increase in aircraft orders.

Friday, December 6

• 08:30 AM Nonfarm payroll employment, November (GS +195k, consensus +190k, last +128k); Private payroll employment, November (GS +195k, consensus +190k, last +131k); Average hourly earnings (mom), November (GS +0.3%, consensus +0.3%, last +0.2%); Average hourly earnings (yoy), November (GS +3.1%, consensus +3.1%, last +3.0%); Unemployment rate, November (GS 3.6%, consensus 3.6%, last 3.6%): We estimate nonfarm payrolls increased 195k in November, reflecting a 46k rebound from the end of the General Motors strike and a modest rebound in employer surveys following the de-escalation of the trade war. We also note that November payroll growth tends to accelerate in tight labor markets, as labor supply constraints may incentivize firms to pull forward hiring or reduce end-of-year layoffs. On the negative side, the late Thanksgiving holiday this year (the 28th) may reduce the number of retail workers included in the November payroll figures. We also expect a 5k drag in Census employment following the completion of this year’s address canvassing. We estimate an unchanged unemployment rate at 3.6%, as the household survey may be due for a pause after 407k average gains over the prior three months. Finally, we estimate average hourly earnings increased 0.3% month-over-month and 3.1% year-over-year, reflecting favorable calendar effects, scope for a rebound in supervisory earnings, and continued wage pressures.
• 10:00 AM University of Michigan consumer sentiment, November preliminary (GS 98.0, consensus 97.0, last 96.8); We expect the University of Michigan consumer sentiment index increased by 1.2pt to 98.0 in the preliminary December reading, following firm readings in other confidence measures.
• 10:00 AM Wholesale inventories, October final (last +0.2%)

Source: Deutsche Bank, Goldman

As the Federal Reserve remains unable to stoke inflation and refuses to factor in asset price inflation, it has now considered launching a new rule that would let inflation run above its 2% target to make up for lost inflation, reported the Financial Times.

Though the Fed’s policies are to protect big Wall Street banks and keep liquidity ample in the financial system, their policies have overwhelmingly created deflation through supporting zombie companies and blowing financial bubbles.

To make up for lost inflation, the Fed will temporarily increase the target range above 2%. The policy would require “making it clear that it’s acceptable that to average 2 percent, you can’t have only observations that are below 2 percent,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, who recently spoke with FT.

Fed members have expressed concerns that reverting the federal funds rate to the zero lower bound will drive inflation expectations lower, a real risk of Japanification.

Officials have remarked that the fed funds rate is so low compared to historical standards, that any given recession could make monetary policy ineffective, though there’s a real threat negative interest could be seen.

Fed members have been experimenting with new monetary tools ahead of the next downturn.

Janet Yellen, former chair of the Fed, said the new rule could be like “forward guidance,” which enabled the Fed to pressure short-term interest rates lower. This eventually allowed longer-term rates to fall as well.

Rosengren said, “future committees might not be as comfortable with that formulaic approach. This is why I prefer something that is a little bit more flexible, maybe not as constraining, but makes it a little clearer that we should be having [some inflation readings] over 2 percent.”

Fed governor Lael Brainard, spoke with reporters last week, said the new rule is to complex to elaborate on with the public. She said if inflation drops, the Fed should allow inflation to run hot, perhaps in a range of 2 to 2.5%.

In plain English, the Fed is afraid that its policies are Japanifying the US economy and are willing to let inflation run above target. The strategy clearly shows the Fed is making up policy as it goes ahead of the next recession, where monetary policy will be less effective than ever before.

Authored by Michael Snyder via TheMostImportantNews.com,

If you have a good paying job, you should probably try to hold on to it as hard as you can, because those types of jobs are steadily becoming rarer. Since 1990, the U.S. economy has produced millions of jobs, but as you will see below nearly two-thirds of them have been low wage jobs. Of course this is one of the biggest factors causing the systematic erosion of the American middle class. Today, half of all U.S. workers make less than $33,000 a year, but meanwhile the cost of living has been steadily increasing. Housing costs, health insurance and other basic necessities have been rising much faster than our paychecks have, and this has put an enormous amount of financial stress on hard working American families.

A job making making chicken sandwiches at Popeye’s is not equivalent to a structural engineering job. In other words, the quality of the jobs that we create is perhaps even more important than the number of jobs that we create.

Yes, the U.S. has been creating a lot of jobs in recent years, but meanwhile the overall quality of our jobs has degraded rapidly…

Although the U.S. is on a record streak for job creation, many Americans still feel like they can’t get ahead. It’s not their imagination. The past three decades have seen the economy churn out more and more jobs that offer inadequate pay, a group of researchers found.

“The history of private-sector employment in the U.S. over the past three decades is one of overall degradation in the ability of many American jobs to support households — even those with multiple jobholders,” they wrote.

In fact, if you go back to 1990 about half of all jobs in the U.S. were good jobs.

But since that time, a whopping 63 percent of the jobs that have been created have been “low-wage, low-hour jobs”…

“In 1990, the jobs were pretty much evenly divided,” said Daniel Alpert, a founder of Westwood Capital and one of the creators of the index. In the process of running the numbers, he said, “We discovered that 63% of all jobs that were created since 1990 were low-wage, low-hour jobs. That was a pretty stunning statistic.”

So what is the answer?

In the past, you could make good money in America even if you just had a high school education. There were millions upon millions of high paying manufacturing jobs in this country, but at this point most of those high paying jobs have been shipped to other nations where wages are far, far lower.

Today, our young people are being greatly encouraged to get a college education so that they can compete for the dwindling number of good paying jobs. Of course there aren’t enough good paying jobs for all of our college graduates, but at least with a college degree you have a better chance of landing one.

Unfortunately, getting a college education has become oppressively expensive, and our young people have been taking on enormous amounts of debt as a result.

In fact, Time Magazine says that the total amount of student loan debt in the United States is now over 1.5 trillion dollars…

Today more than 44 million Americans have outstanding student loan debt, which has become the one of the biggest consumer debt categories. All told, student debt in the U.S. now totals more than $1.5 trillion.

Sadly, that number has almost doubled over the past decade. We have never seen a student loan debt bubble of this magnitude in the entire history of this country, and student loan debt delinquency rates are soaring.

And even though there has been a national uproar about this, the cost of a college education continues to rise much faster than the overall rate of inflation…

As the issue of college affordability continues to be a prominent talking point on the campaign trail ahead of the 2020 presidential election, a new study shows that the cost of a college education is still increasing at a rate that far outpaces inflation.

The study, put out by the financial technology company Self, found that on average, college costs have risen $2,835 since 2015, increasing 112 percent more than the rate of inflation during the same period.

At this point, you are probably asking one very important question.

Where in the world is all of that money going?

Well, one recent study discovered that “administrative bloat” is the biggest factor that is driving up costs…

“Administrative bloat contributes enormously to the high and rising cost of tuition. In recent years, non-teaching personnel in higher education have exploded,” Pulliam said. “At some colleges bureaucrats outnumber faculty. The ‘diversity bureaucracy’ has proliferated at many schools. UT employs nearly 100 people in its diversity department, some of whom are paid in the six figures. Unnecessary and overpaid administrators are responsible for much of the increased overhead borne by students in the form of tuition increases.”

So as you pay off your student loan debt for decades to come, you can be comforted by the fact that the associate provost for diversity and inclusion at your college is bringing home more than $100,000 a year.

And perhaps that is the solution for the U.S. economy as a whole. If we just create enough “diversity” and “inclusion” administrative jobs, then we can all make six figures a year and the U.S. middle class will be restored.

Of course I am being facetious. The truth is that if we ever want to restore the U.S. economy to greatness, we need to start making things in this country again. We need jobs that add real value to our society, and we need an economic environment that respects and encourages innovation.

Unfortunately, what we have today is just the opposite. We are consuming far more wealth than we are producing, many of our “good paying jobs” are administrative or government jobs that add very little value to our society, and our small businesses are being strangled to death by rules, regulations and oppressive levels of taxation.

The only way that we have been able to maintain our debt-fueled standard of living is by piling up the biggest mountain of debt in the history of the world, and if we continue on the path that we are on there is no way that our story is going to end well.

We desperately need a return to common sense economics, but unfortunately common sense appears to be in short supply in America today.

One week after the Fed’s first 42-day term repo which for the first time allowed dealers to lock in funding into the new year and which was 2x oversubscribed, confirming a growing scramble for year-end funding, traders were keenly looking ahead to the result from today’s second 42-day repo which matured on January 13. And, as we noted last week, year-end liquidity fears remain front and center as the $25 billion operation proved to be roughly 40% below the required size to satisfy all liquidity demands.

Dealers submitted $42.550BN in bids for the 42-day op ($29.750BN in Treasurys, $1BN in Agency, $11.8BN in MBS paper), resulting in an oversubscription of the $25BN in available repo.

This was modestly below the $49.050 billion submitted in the first 42-day repo operation conducted on November 25:

It remains a key question for funding markets why, even with QE4 in place and now daily overnight and short-term repo operations in place, banks continue to rush to lock in year-end liquidity, where some fear a similar explosion in overnight repo rates as was observed on Dec 31, 2018 when General Collateral soared amid a widespread liquidity shortage. Indeed, as Bloomberg put it, “even with the Fed’s commitment to continue providing liquidity to the financial system around year-end, the market is still showing concerns. This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.”

The clearest indication that despite the massive liquidity injections that have taken place since mid-September liquidity remains scarce was today’s initial print in the overnight General Collateral rate, which rose from 1.60% to 1.68%, the highest since the Fed cut rates on Oct 31.

So what is it about quarter and year-end that is forcing banks to shore up their balance sheets with liquidity? As a reminder, while most US bank have a GSIB surcharge of around 2%-3%, JPMorgan remains an outlier – and is perceived as the “riskiest” bank – with its 4.0% surcharge. It’s also the reason why the bank has been quietly pulling liquidity away from funding markets ahead of quarter-end periods.

For those curious how the Fed calculates the GSIB surcharge, Bank of America provided the following handy schematic:

Two weeks ago, when commenting on why it expects to see sharp year-end liquidity pressures, BofA said that funding markets are currently very stable but the bank sees risks of repo pressure into year-end, as the Fed faces two funding issues into Y/E:

1. a low level of reserves requiring ongoing large Fed repo injections
2. dealer repo intermediation constraints stemming from the GSIB surcharge.

The way these issues are linked is through the Fed’s short-term repos; Fed repos pressure dealer balance sheets larger while GSIB constraints encourage dealers to shrink the overall size of their market making activities.

Last week we reported how China First Capital Group, an investment holding company, saw its equity trading on the Hong Kong exchange crash in minutes.

The epic implosion continued into the new week, shares are down -23% on Monday as a new report from Bloomberg specifies the chairman of the company unloaded half his stake.

Exchange filing published Saturday show Wealth Max Holdings Ltd. dumped 326.57 million shares of China First Capital on Nov. 28, one day after the stock plummeted 78%.

Wealth Max is controlled by chairman Wilson Sea, who held a 16.1% stake in China First Capital as of last December.

We noted that the abrupt stock slump, wiping out billions of dollars in shareholder value, has once again put the spotlight on corporate governance of Hong Kong stocks.

The forced selling by the chairman was likely due to a margin call on a loan that had collateral as stock. This dangerous business practice can act as a domino effect when companies are connected by investors or business lines.

The next significant risk for investors in Hong Kong and or Chinese stocks are sliding prices because of a decelerating regional economy. As a result, this would lead to additional margin calls and force a vicious circle of panic selling.

 

Authored by Lance Roberts via RealInvestmentAdvice.com,

Every month, and quarter, economists, analysts, the media, and investors pour over a variety of mainstream economic indicators from GDP, to employment, to inflation to determine what the markets are likely to do next.

While economic numbers like GDP, or the monthly non-farm payroll report, typically garner the headlines, the most useful statistic, in my opinion, is the Chicago Fed National Activity Index (CFNAI). It often goes ignored by investors and the press, but the CFNAI is a composite index made up of 85 sub-components which gives a broad overview of overall economic activity in the U.S.

The markets have run up sharply over the last couple of months due to the Federal Reserve once again intervening into the markets. However, the hopes are that US economic growth is going to accelerate going into 2020 which should translate into a resurgence of corporate earnings. However,  if recent CFNAI readings are any indication, investors may want to alter their growth assumptions heading into next year.

While most economic data points are backward-looking statistics, like GDP, the CFNAI is a forward-looking metric that gives some indication of how the economy is likely to look in the coming months.

Importantly, understanding the message that the index is designed to deliver is critical. From the Chicago Fed website:

“The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.“

The overall index is broken down into four major sub-categories which cover:

• Production & Income

• Employment, Unemployment & Hours

• Personal Consumption & Housing

• Sales, Orders & Inventories

To get a better grasp of these four major sub-components, and their predictive capability, I have constructed a 4-panel chart showing each of the four CFNAI sub-components compared to the four most common economic reports of Industrial Production, Employment, Housing Starts and Personal Consumption Expenditures. To provide a more comparative base to the construction of the CFNAI, I have used an annual percentage change for these four components.

The correlation between the CFNAI sub-components and the underlying major economic reports do show some very high correlations. This is why, even though this indicator gets very little attention, it is very representative of the broader economy. Currently, the CFNAI is not confirming the mainstream view of an “economic soft patch” that will give way to a stronger recovery by next year.

The CFNAI is also a component of our RIA Economic Output Composite Index (EOCI) which is even a broader composition of data points including Federal Reserve regional activity indices, the Chicago PMI, ISM, National Federation of Independent Business Surveys, and the Leading Economic Index. Currently, the EOCI further confirms that “hopes” of an immediate rebound in economic activity is unlikely. To wit:

“The problem is there is not a ‘major shift’ coming for the economy, at least not yet, as shown by the readings from our Economic Output Composite Index (EOCI).”

“There are a couple of important points to note in this very long-term chart.

1. Economic contractions tend to reverse fairly frequently from high peaks and those contractions tend to revert towards the 30-reading on the chart. Recessions are always present with sustained readings below the 30-level.

2. The financial markets generally correct in price as weaker economic data weighs on market outlooks. 

Currently, the EOCI index suggests there is more contraction to come in the coming months, which will likely weigh on asset prices as earnings estimates and outlooks are ratcheted down heading into 2020.”

It’s In The Diffusion

The Chicago Fed also provides a breakdown of the change in the underlying 85-components in a “diffusion” index. As opposed to just the index itself, the “diffusion” of the components give us a better understanding of the broader changes inside the index itself.

There two important points of consideration:

1. When the diffusion index dips below zero have coincided with weak economic growth and outright recessions. 

2. The S&P 500 has a history of corrections, and outright bear markets, which correspond with negative reading in the diffusion index.

The second point should not be surprising since the stock market is ultimately a reflection of economic growth. The chart below simply compares the annual rate of change in the S&P 500 and the CFNAI index. Again, the correlation should not be surprising.

Investors should also be concerned about the high level of consumer confidence readings. There have been numerous headlines touting the “strength of consumer” as support for the ongoing “bull market.”

Overly Confident In Confidence

As we discussed just recently. 

“The chart below shows our composite confidence index, which combines both the University of Michigan and Conference Board measures. The chart compares the composite index to the S&P 500 index with the shaded areas representing when the composite index was above a reading of 100.

On the surface, this is bullish for investors. High levels of consumer confidence (above 100) have correlated with positive returns from the S&P 500.”

The issue is the divergence between “consumer” confidence and that of “CEO’s.” 

“Is it the consumer cranking out work hours, raising a family, and trying to make ends meet? Or the CEO of a company who is watching sales, prices, managing inventory, dealing with collections, paying bills, and managing changes to the economic landscape on a daily basis?”

Notice that CEO confidence leads consumer confidence by a wide margin. This lures bullish investors, and the media, into believing that CEO’s really don’t know what they are doing. Unfortunately, consumer confidence tends to crash as it catches up with what CEO’s were already telling them.

What were CEO’s telling consumers that crushed their confidence?

“I’m sorry, we think you are really great, but I have to let you go.”

The CFNAI also tells the same story with large divergences in consumer confidence eventually “catching down” to the underlying index.

This chart suggests that we will begin seeing weaker employment number and rising layoffs in the months ahead if history is any guide to the future.

This last statement is key to our ongoing premise of weaker than anticipated economic growth despite the Federal Reserve’s ongoing liquidity operations. The current trend of the various economic data points on a broad scale are not showing indications of stronger economic growth but rather a continuation of a sub-par “muddle through” scenario of the last decade.

While this is not the end of the world, economically speaking, such weak levels of economic growth do not support stronger employment, higher wages, or justify the markets rapidly rising valuations. The weaker level of economic growth will continue to weigh on corporate earnings which, like the economic data, appear to have reached their peak for this current cycle.

The CFNAI, if it is indeed predicting weaker economic growth over the next couple of quarters, also doesn’t support the recent rotation out of defensive positions into cyclical stocks that are more closely tied to the economic cycle. The current rotation is based on the premise that economic recovery is here, however, the data hasn’t confirmed it as of yet.

Either the economic data is about to take a sharp turn higher, or the market is set up for a rather large disappointment when the expected earnings growth in the coming quarters doesn’t appear. From all of the research we have done lately, the latter point seems most likely as a driver for the former seems lacking.

Maybe the real question is why we aren’t paying closer attention to what this indicator has to tell us?