GDP, Corporate Spending & Policy

The breakdown in stocks on 5/17 was not the beginning of a larger sell-off and now we are back to making new all-time highs in the S&P 500 and NASDAQ. The DOW and Russell 2000 (small caps) have yet to show a turnaround so we may be starting a new upturn but I would like to see all four indices align to the upside before pounding the table on stocks. See more in Chart Time! below.

The good news we saw this week was that the Q1 GDP estimate released on Friday was revised higher – a positive surprise. The details were better as there is evidence of U.S. corporations spending more on investment and research & development which is what we need to drive growth and jobs in the coming years. Q2 GDP is running around 3% according to most economists so the question in my mind is if the Q2 activity is a bounce-back from a weak Q1 or an acceleration that will carry us through to the end of the year. Corporate investment in 2016 was horrid and implied a recession was looming so this bit of data is a tangible positive for 2017.

A short week coming up but we have the end of month on Wednesday (usually bullish) and then the jobs numbers on Friday. A good jobs number could frame out the next few months for the financial markets as stocks will want confirmation on a healthy corporate america if we are continue a string of all-time highs into the summer months. We are fast approaching mid-year and we are still riddled with what policy changes can be implemented or passed by this Fall. We will have to wait and see on Washington but there needs to be something tangible by the August recess for a 2017 policy change.

Happy Memorial Day and a big thank you to all the veterans out there!

 

Economic & Central Banking Snippets

• U.S. GDP grew at a 1.2% annual rate in Q1 according to a second reading by the Bureau of Economic Analysis (BEA). That is a substantial boost from the initial reading of 0.7% released last month, and comfortably above the 0.9% predicted by analysts surveyed by Bloomberg. The details of the report showed overall business investment was boosted to 11.4% from 9.4% – the highest in five years after a full year decline in 2016 (one of the worst non-recession years ever). The upward revision and change in business investment may be an early indicator that corporate America is changing its behavior that may lead to higher growth down the road. (Bloomberg)

 

• Mexico’s economy grew more than initially thought in the first three months of the year as data on Monday showed that GDP increased 0.7%. That compared to an expansion of 2.3% in Q4 2016.

 

• Japanese manufacturing growth slipped to a six-month low in May as output and job creation fell to multi-month lows. The preliminary headline reading for the Nikkei-Markit purchasing managers’ index dipped to 52 from 52.7 in April, but remained above the 50-point threshold separating expansion from contraction.

 

 

• Britain’s GDP reading came in lower than expected for Q1 with growth decelerating to a quarterly pace of just 0.2%. Brexit concerns will weigh on this economy for the next 12-24 months.

 

• New home sales were much softer than expected in April, falling 11.4% to a 569,000 unit annual rate. However, there were upward revisions to the March data by +21,000 and for February +20,000.

 

• Mortgage purchase applications rose to a seven-year high for April and the homebuilders’ survey rose to just below a twelve-year high.
• Sales of existing homes fell 2.3% (5.57mm) in April from the previous month when they rose 4.2% according to the National Association of Realtors (NAR). Low supply likely weighed on sales during the key spring selling season, even as the number of days a home was on the market fell to its lowest reading since NAR began tracking this data in 2011.

 

Politics! Politics! Politics!

• Treasury Secretary Steven Mnuchin is urging members of Congress to increase the U.S. debt ceiling before taking their August recess. He would prefer a “clean” debt ceiling increase, which would not include partisan provisions, as the Trump administration warned that tax receipts were coming in slower than expected. (FT)
• China, the world’s biggest sugar importer, said on Monday it will impose hefty penalties on imports to protect its domestic producers, in the first ruling to come out of a months-long probe. China’s ministry of commerce said it will raise the duty on out-of-quota sugar imports for this fiscal year from 50% to 95% after its domestic industry was “seriously damaged” by a tide of imports since 2011. The raised tariffs were widely expected after Beijing launched its probe into sugar imports last year. Those expectations were “one of the factors behind the rise in Chinese sugar prices at the end of 2016,” according to the US department of agriculture. (FT)
• China’s imports of North Korean goods fell below $100mm to fresh multiyear lows in April, accelerating a decline after Beijing halted coal shipments from its isolated neighbor. “We urge North Korea to not do anything to again violate U.N. Security Council resolutions,” Chinese Foreign Minister Wang Yi declared. “At the same time, we hope all parties can maintain restraint.” (FT)
• The fiduciary rule is due to take effect in just over two weeks after Labor Secretary Alexander Acosta warned there was little he could do legally to halt it – at least for the time being. Lobbyists for the U.S. retirement savings industry have vowed to continue to fight the rule, which requires retirement advisers to put clients’ interests ahead of their own. (Seeking Alpha)

Chart Time!

 

 

 

 

 

Market Snippets

• Target has agreed to pay $18.5mm as part of a settlement related to a massive data breach that compromised the retailer’s customers. It ends a years long investigation into how hackers obtained names, credit card numbers and other information about tens of millions of people in 2013. (Seeking Alpha)
• Uber, the ride-sharing giant has admitted to underpaying its New York City drivers for the past two-and-a-half years. UBER said it had been calculating its commission based on the gross fare rather than the net fare, the latter of which is its national policy. The back pay could run at least $45mm, based on an estimate of 50,000 drivers.
• Exxon Mobil’s outlook has been revised to negative from stable at S&P, signaling it may downgrade the company’s AA+ rating over the next two years. “Although ExxonMobil significantly reduced capital spending in 2015 and 2016, it continued to grow dividends, leading to large discretionary cash flow deficits, and an uptick in debt,” said analyst Carin Dehne-Kiley. (Seeking Alpha)
• The U.S. Defense Advanced Research Projects Agency is collaborating with Boeing to develop a reusable hypersonic jet that can carry and deploy small satellites into low earth orbit on short notice. “The XS-1 would be neither a traditional airplane nor a conventional launch vehicle but rather a combination of the two,” DARPA’s Jess Sponable explained in a press release. (FT)
• “This is absolutely not about taking jobs out of the U.S.,” said Marc McAllister, a managing director at Harley-Davidson based in Singapore. Harley added that its new Thailand plant will let it avoid a 60% tariff on imported motorcycles and help it get tax breaks when exporting to ASEAN members. Still, unions representing its U.S. workers aren’t happy. (Seeking Alpha)
• BNP Paribas has been slapped with a $350mm fine by New York’s Department of Financial Services, which found a long pattern of “nearly unfettered misconduct” in the bank’s foreign exchange business. Traders at BNP colluded with rivals in online chat rooms, executed fake trades and improperly shared confidential customer information with other banks. (FT)
• General Motors is accused of using emissions testing defeat devices in some trucks. A class action lawsuit against GM was filed on the behalf of 705,000 GM Duramax owners, claiming the company installed defeat devices in two models of heavy-duty trucks from 2011 to 2016. General Motors’ cheating allowed its trucks to pass U.S. inspections, even while they spewed emissions two to five times the legal limit under regular driving conditions, according to the complaint filed in Detroit federal court. GM becomes the fifth carmaker scrutinized since the Volkswagen scandal erupted in 2015.
• A U.S. federal judge yesterday ordered United Parcel Service to pay ~ $247mm in damages and penalties for “illegally shipping” hundreds of thousands of cartons of untaxed cigarettes in New York state and City. The court said it believed a more modest penalty would not make a “sufficient corporate impact” on UPS, citing the company’s “consistent unwillingness to acknowledge its errors.” UPS calls the court’s decision “excessive” and plans to appeal the decision. (FT)

International Snippets

• Greece’s creditors failed to reach a deal on debt relief during seven hours of talks on Monday night, leaving the eurozone locked in a race to finish negotiations before Athens faces crippling debt repayments in July. Talks in the Eurogroup broke down as Germany, Greece and the International Monetary sparred over the next stages of Greece’s €86B bailout, and notably over how to ease the country’s debts once its rescue program expires in 2018.

 

• Sovereign wealth funds (SWFs) are feeling the strain from lower oil prices and government raids on rainy-day funds, with the amount of money managed by state-backed investment vehicles falling slightly to $7.4T. Between March 2015 and March 2017, the collective assets overseen by SWFs — which often owe their origins to money generated from a country’s excess oil revenues — decreased 0.5%. That compares with the 14% increase in the two years to March 2015, according to the Sovereign Wealth Fund Institute, a research organization. The fall in assets has raised concerns that state funds will withdraw more money from external investment managers, which have already suffered several years of redemptions from these large investors. (FT)
• S&P Global Ratings has placed the ratings of 38 Brazilian financial institutions on negative watch amid a political scandal that rocked the country’s markets. S&P said it was placing the watch on the firms — meaning that their ratings are at risk of being lowered — because “the greater likelihood of an economic recovery delay, stemming from recent political developments, increases the risk for the credit fundamentals of the financial institutions operating in Brazil.” (FT)

 

• Moody’s has lowered the nation’s credit rating to A1 from Aa3, citing Beijing’s waning financial strength and rising liabilities. It marks the first time a major ratings agency has downgraded the country in more than 25 years. The move also received a backlash from China’s finance ministry, which said the decision was “absolutely groundless” and was based on an “inappropriate calculation method.” The cut to China’s long-term local currency rating to A1 from Aa3 puts the country on par with Czech Republic, Estonia, Israel, Japan and Saudi Arabia. (Seeking Alpha)
• German police have raided a number of Daimler’s offices as part of a probe into possible diesel-emissions fraud, as the automaker confirmed that an investigation is ongoing. Yesterday, the DOJ filed an emissions lawsuit against Fiat and said it could face a fine of more than $45,000 on over 100,000 vehicles it sold before 2015. (Seeking Alpha)