Via @ConnectedWealth The Launch Pad: FOMC announcement today, GDPNow still holding up at 2.8%, Polls are all the rage, higher open
Wednesday, June 15th, 2016
Charlie Munger: Invert And Use “Disconfirming Evidence”
Markets woke up this morning in a bit better of a mood relative to the last few days. Mid last week the S&P 500 was about 15 points shy of it’s all time high set in 2015, but after four down days in a row the new high is again just out of reach. TSX’s five day drop was a little more dramatic and we certainly weren’t even close to a new high. For the TSX that was back in September of 2014, coming up on 2 years ago. And it is about 2,000 points higher from current levels….sigh.
As the markets have earnings season, we are currently living in poll season. We have polls that put Clinton 12 points ahead of Trump. Or even more noteworthy in a Bloomberg poll 55% said they could never vote for Trump. Brexit polls are all the rage too given the big vote is just over a week away.
Ok, PPI came in hotter than expected at 1.2%, Empire Manufacturing is back positive, the GDPNow forecast from the Atlanta Fed is pointing to a 2.8% print for Q2 yet ten year bond yields are at 1.62. I get it, Brexit, risk-off, German yields at 0.01%, etc. Something is gonna give somewhere soon. Anyhow, the Atlanta Fed GDPNow forecast has gained in popularity of late as a more timely gauge of the economy. Of course the official print is more accurate but we don’t get to see that until a month after the quarter ends and then it gets revised over the following few months and then can be revised even years later. As Cesar Millan says, you have to live in the now, just like the GDPNow.
Chart of the Day: GDPNow provides a more timely reading on the current quarters economic growth. Interestingly, there has been a recurring pattern over the past year. Essentially GDP expectations have remained high but when the quarter is almost over (Sept 15, Dec 15, Mar 16) this measure drops like a rock. So the question is at 2.8% and the end of June approaching, will we see this repeat or is the growth for real this time?
It’s Fed day, and while the markets are not expecting a rate hike announcement today, investors will be over analyzing the statement, press conference and the always popular dot plot. Bloomberg wants you to know that you should be paying attention anything concerning the labour market, inflation, Brexit and inflation. Here is their Fed Decision-Day Guide. Also, just because nobody is expecting a hike today, it’s still too soon to give up on two 2016 rate hikes.
Uh-oh the machines are winning. Well the equity rally off of the bottom was impressive, many hedge funds missed out on the big gains, as many hedge fund managers failed to increase their stock holdings in 2016. Maybe it was our behavioural misgivings. Rules based systems were the only group to materially buy additional stock in 2016, based on data from Credit Suisse. Thankfully, we have our own rules based fund available to Richardson GMP clients. The Connected Wealth Tactical ETF fund was positioned very defensively during the markets bottom, but managed to quickly build its equity position. If you are interested, ask your advisor for more information.
According to Wood Mackenzie, a well-known energy consultancy, the fall in oil prices has forced oil and gas companies to reduce spending by $1 trillion in between 2015 and 2020. Less investment means less future output. Oversupply in the market is expected to fall as the slowdown in investment reduces oil and gas production by ~4% next year.
Most of the decrease in investment is attributable to North American companies. Majors such as Exxon and Chevron have greatly reduced their CapEx. Small and midsized companies have also lowered their investment as a result of financial constraints. More from the FT here.
Diversion: The biggest mistakes in tech history. via The Telegraph.
Watch this inflatable T-Rex kill it on the American Ninja course.
Cenovus Energy is discussing a renewable energy investment. They see solar being an important part of their business mix moving into the future. Shifting their focus to emissions around both production and consumption of energy. After Manitoba Tel was taken out last month by BCE Inc. the Saskatchewan premier has come out and said that we prefers to sell SaskTel rather than monetize it in a public offering. Apple announced several new artificial intelligence features at this week’s app developer conference. Highlights area new automated emoji creator and a program to organize and sort photos. There new search capabilities are a direct shot to limit Alphabet’s search capabilities.
Oil prices are lower again this morning heading for the fifth straight day of losses as data came out showing that inventories in the U.S. continue to expand and production in Canada begins to come back online. Nigerian production remains at the lowest level in nearly 30 years but there are rumors that militants are willing to negotiate. Investors are continuing to buy gold backed ETFs, which have seen positive inflows every day this week as a pending Brexit vote nears. Gold priced in British Pounds is the most expensive it has been since 2013. The U.S. and Japan central bank meetings this week will also be a catalyst for gold prices.
FIXED INCOME AND ECONOMICS
The FOMC decision at 2PM is front and centre today but we do have a couple other data points worth diving into (despite their result having little impact on the former’s decision). The cost of producing goods in the U.S. rose by +0.4% in May, twice as fast as the prior month and besting the estimate for a +0.3% increase. Core wholesale prices actually fell by -0.1% at the same time that underscores the rapidly rising cost of oil and energy-associated products. Annually, headline PPI was slower by -0.1% which is no surprise as WTI was trading above $60 per barrel last June. Today’s release is the second of the “big 3” economic gauges of price acceleration/deceleration that the Fed likes to watch, with the others being import prices (released yesterday and climbing to a four year high of +1.4% in May) and CPI (out tomorrow with the core annualized number projected to rise at a +2.2% clip). Focusing on sentiment, the Empire State Manufacturing Index rose to +6.01 this month to beat the -4.90% consensus reading and rebound from the -9.02 print prior. General business conditions in the New York area have improved according to a poll of manufacturers with companies noting that prices paid, new orders, shipments, and work hours all increased in June. Future expectations for improved business conditions also rose.
Treasury markets are taking a breather from all the frenzied buying the past few days to trade slightly lower from yesterday’s close. Ten year yields have drifted back above 1.60% which was buoyed from the trail blazed earlier in the sovereign trading action of Gilts, Bunds, Aussie and Swedish bonds. Expect little volatility here until the 2PM meeting. We’ll instead be shifting our focus on corporate credit, specifically those in the energy patch. WTI is down for a fifth straight day and this has pared back bids in high yield names as well as widened investment grade issuer spreads by a couple basis points. We caution that the trading direction for credit has been mostly one-way this past month with many of the popular domestic names (causing a liquidity crunch as supply for paper becomes scarce). This has started to unwind this week as oil drifts lower and we could see a swift leg lower as profit takers come out of the weeds. A more surprising observation has come from our loonie that currently sits at 1.2870 against the greenback. It is only 1.50 pennies weaker from last week in lieu of the oil retreat and is perhaps correlating moreso (albeit marginally) to interest rate differentials between the Canada and U.S. government yield curves.
CHART OF THE DAY
QUOTE OF THE DAY
The beginning is perhaps more difficult than anything else, but keep heart, it will turn out all right.
– Vincent Van Gogh