Despite record high stock prices, soaring consumer sentiment measures, and the constant Fed-spun narrative that incomes will rise amid "full-employment", the latest survey of Americans by The New York Fed signals hope is collapsing for a spending renaissance...
Median household spending growth expectations tumbled from 3.29% in March to 2.58% in April, lowest level in data going back to June 2013..
Still, as long as NFLX, AAPL, AMZN, and GOOG are rallying, this is nothing to worry about, right?
Thanks Bloomberg, for another useless piece of regurgitated info we"ve known for years; fake news drives the fake markets which are artificially inflated. Actually thanks to the Fed for doing the academic research on this topic to confirm what we"ve known for years - the markets are rigged and one way they are manipulated is by the mainstream news. As we explain in our book Splitting Pennies - the markets are artifically inflated and manipulated by remote control (yes - that remote control. It"s a metaphor!) TV watchers have a "remote control" and so does the CIA. They press "play" and markets move as they want. Just as TV viewers change the channel the CIA changes the "mood" of the country with a few clicks of the remote. They even have a pause button! From Bloomberg:
Buy the news and sell the soft data. That’s the conclusion drawn from a paper by the Federal Reserve Bank of San Francisco, which suggests that financial news holds predictive power when it comes to a slew of economic data. Stories about the U.S. economy can even outperform more traditional measures such as surveys of consumer sentiment when it comes to gauging ‘‘animal spirits’’ and forecasting future activity, it found. While trust in news sources among the general American population has fallen to historic lows amid accusations of fake news lobbed during the U.S. presidential elections, the Fed research throws cold water on the notion that the mainstream media is far removed from Main Street, if headline economic indicators are anything to go by.
“Specifically, we have shown that sentiment extracted from newspaper articles correlates with both contemporaneous and future key business cycle indicators,” economists Adam Hale Shapiro and Daniel Wilson of the San Francisco Fed concluded in a report co-written last month with Moritz Sudhof, of data analytics firm Kanjoya. “In a head-to-head comparison, these news sentiment measures perform better than both the University of Michigan and Conference board measures of consumer sentiment.”
You can read the Study here "Measuring News Sentiment" at Global Intel Hub"s library.
The paper is very well documented, an A+. Great job. We by no means mean to detract from the great work accomplished here by paraphrasing the paper as "fake news drives fake markets" - it simply serves as a great example of yet another proof how markets are manipulated, even if as the paper suggests - indirectly.
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After a couple of months of animal-spirit-inducing exuberance in soft-survey-hope-data, UMich consumer sentiment printed a disappointing 95.7 in Feb (versus 98.0 exp and down from 98.5 in Jan). The biggest driver was a notable drop in "hope" as Democrats Expectations plunged near record lows.
The Democrat’s Expectations Index is close to its historic low (indicating recession) and the Republican’s Expectations Index is near its historic high (indicating expansion). While currently distorted by partisanship, the best bet is that the gap will narrow to match a more moderate pace of growth. Nonetheless, it has been long known that negative rather than positive expectations are more influential in determining spending, so forecasts of consumer expenditures must take into account a higher likelihood of asymmetric downside risks.
Inflation expectations were mixed - rising in the short-term and dropping in the longer-term - which matches the markets inflation breakeven collapse...
Finally we note University of Michigan"s comments that when asked to describe any recent news that they had heard about the economy, 30% spontaneously mentioned some favorable aspect of Trump’s policies, and 29% unfavorably referred to Trump’s economic policies.
Thus a total of nearly six-in-ten consumers made a positive or negative mention of government policies. In the long history of the surveys, this total had never reached even half that amount, except for five surveys in 2013 and 2014 that were solely dominated by negative references to the debt and fiscal cliff crises.
Moreover, never before have these spontaneous references to economic policies had such a large impact on the Sentiment Index: a difference of 37 Index points between those that reported news of favorable and unfavorable policies. When the Sentiment Index was calculated by party affiliation, a nearly identical difference of 40 Index points was found between Democrats and Republicans. These differences are troublesome.
It seems the "soft" data surge is starting to fade...
RBC"s head of US cross-asset strategy Charlie McElligott asks "Is US economic data beginning to ‘mean-revert’ lower?"
It’s an inherent property of economic surprise indices, as they reflect relative to expectations, which are in a constant state of “true up” to actuals.
Yesterday’s and today’s US data from the headline level has sent various “economic surprise indices” for US lower, with Bloomberg’s index nearing YTD lows. In fact, Citi"s index suffered its worst week since October...
The US data has been running at such a clip as a matter of fact it’s an increasingly (and massively rhetorical) popular question asked by clients: when do analyst / strategist expectations begin to overshoot?
Tied-into this, the Bloomberg “econ surprise” series gives an interesting breakout of the drivers of the directional data surprises, and it crystalizes one ‘area’ that Mark Orlsey and I have been paying a lot of attention to with regards to where the largest ‘beats’ are coming from.
The economic surveys and “animal spirits” indicators have been ‘en fuego’ (see Friday’s U Mich Confidence printing highs since 2003!), and the chart below captures just how much of the “surprise index” upside that surveys have been dictating - it’s visually stunning, and reiterates that “rubber needs to meet road” in coming-months.
“ANIMAL SPIRITS” ARE DRIVING MUCH OF THE U.S. DATA SURPRISES: Per the Bloomberg Economic Surprise Monitor.
Indeed, as the following chart shows, it has been a one-way street of hope in the surveys - a very different picture to the economic view painted by "real" data...
In fact, the spike in "soft" survey data is second only in history to the exuberance experienced in early 2011...
That did not end well for stocks...
And so, as RBC"s McElligott explains, "the rubber needs to hit the road" shortly as "soft" macro data mean-reverts and needs to be covered by a resurgence in real "hard" data.
With Bitcoin at 3 year highs, China’s renewed efforts to curb declines in its currency are doing little to stop yuan bears who have sent forward devaluation expectations to record highs and options positioning to six-month lows. And judging by Goldman Sachs" outlook - a potential resurgence in Chinese growth fears early next year, but more broadly, a continued bumpy deceleration - things are not getting better anytime soon.
As Bloomberg notes, traders have turned increasingly negative amid tighter liquidity, sending bets for further losses soaring. The gap between forward contracts wagering on the offshore yuan a year from now versus its current level is heading for a record monthly jump...
Just as the extra cost for options to sell the currency against the dollar hit a six-month high relative to prices for contracts to buy.
The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets as liquidity tightens. Strategists say its weakening, set to be the biggest this year in more than two decades, may accelerate as the government restores the annual quota for citizens to convert yuan holdings into foreign exchange. And Goldman Sachs warns, China remains a key risk to watch...
Where we stand now:
Broader concerns about China risk derailing global growth and markets proved somewhat short-lived. After the S&P 500 hit its low for the year on February 11, two days after we published, better economic data and a sense that the Fed would react to global concerns—confirmed by the dovish March FOMC meeting—helped improve market sentiment. Political events in the western hemisphere have since broadly taken center stage in global markets, leaving China concerns in the background. But the reality is that growth—on some level—did take a hit; for example, US GDP growth came in at an anemic 1.1% annualized in 1H2016, owing in part to weakness in the industrial sector and energy-related activity but largely due to tighter financial conditions primarily in the wake of China concerns. China growth itself also remained relatively weak in 1H as measured by the GS China Current Activity Indicator, which declined towards 4% in 1Q and began to climb slowly thereafter.
Stabilizing growth in China has helped push China to the background of investor concerns. In order to stabilize growth and meet official GDP targets, China’s policymakers continued to pursue an ambitious stimulus plan begun in early 2015 that entailed pausing fiscal reforms, sharply cutting interest rates, loosening housing policies, and increasing credit growth. The result: GDP growth looks set to meet the target of 6.5%-7% for 2016, and producer prices are rising after years of deflation.
But policies that re-ignited growth in the short-term just increase concern about the future, especially in terms of credit. We estimate that total credit growth adjusted for muni bond issuance accelerated from 13% yoy in 1Q15 to 17% yoy as of 2Q16, and to 20% yoy when including shadow lending not captured in official statistics. In short, the potential credit problems in China have not receded, and indeed have likely grown given the very fast pace of credit expansion.
Policymakers have taken note of these potentially destabilizing dynamics and have refocused on risk management; indeed, China’s recent Central Economic Work Conference to plan for next year’s economic policy included strong statements on controlling financial risks. Risk management measures employed in recent months include increasing short-term repo rates, reining in off-balance sheet exposures such as wealth management products, and rolling out measures to try to curb home price appreciation. Fiscal policy also seems likely to tighten at least slightly in coming months. But any tightening will likely prove short-lived given that meeting growth targets will remain critical in 2017—a year of leadership transition.
Our RMB view has also become more negative, presenting risk to the US dollar and S&P 500. When we published at the height of market anxiety around China, we were relatively constructive on the RMB, arguing that a large, one-off devaluation was unlikely and envisioning only a “mild” trade-weighted depreciation (against the CFETS basket, the CNY has depreciated 4.5% since then). But capital outflow pressures have remained, particularly in the context of US dollar strength. Despite the government’s official focus on a trade-weighted currency basket, higher $/CNY fixings are still a powerful signal that can easily re-ignite capital flight, as households and firms anticipate a faster pace of depreciation.
Indeed, the PBOC’s FX reserves fell US$69bn to US$3,052bn in November, the largest decline since January. The US election has reinforced these dynamics given the strengthening dollar and potential for trade frictions, motivating tighter restrictions on capital flows. Global markets have so far taken these developments in stride, but the risk of a repeat of related equity market volatility remains, which could impact the pace of Fed tightening and dollar strength.
What to look for in 2017 (and beyond):
A potential resurgence in Chinese growth fears early next year, but more broadly, a continued bumpy deceleration. We expect sequential GDP growth to decelerate into 1Q17 to c.5.5% annualized on recent tightening measures. But we expect a rapid pivot back to stimulus should the growth target look at risk, especially given next year’s leadership transition.
Continued concerns about China credit growth. Although policymakers have introduced tightening measures to reduce the risk of asset price bubbles, China’s reliance on credit growth, which undermines financial stability, remains a key risk.
RMB downside, posing potential risk to the stronger US dollar and global stock markets. We forecast a $/CNY fix of 7.00, 7.15 and 7.30 in 3, 6 and 12 months, respectively, and long $/CNY is one of our 2016 Top Trades. The pace of capital outflows and the evolution of the fix warrant monitoring; in our view, as long as the fix simply offsets dollar strength and capital outflows are contained, global risk appetite should hold up.
China remains a key risk to watch.
