Economics | Weekly Economic Report Macro Note

Global Stimulus Already In Full Swing, Likely To Continue To Unfold.

September 03, 2019Sean Zhang, CFAsean.zhang@evercoreisi.com

Ed Hymaned.hyman@evercoreisi.com

Dick Rippedick.rippe@evercoreisi.com

Francesca Ponzianifrancesca.ponziani@evercoreisi.comJaewoo Nakajima

jaewoo.nakajima@evercoreisi.comStan Shipleystan.shipley@evercoreisi.com Morgan Smith

morgan.smith@evercoreisi.com

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Global Stimulus Already In Full Swing, Likely To Continue To Unfold.Already rates are being cut around the world, from the US to China to Botswana. And soon, ECB, BoJ, and Fed balance sheets will start to increase a cumulative +$63b per month (p 6-8). On top of this, fiscal stimulus is starting up, eg, China (p 9). Inflation around the world is largely MIA, eg, Eurozone core CPI just +0.9% y/y in Aug (p 10-16). So policymakers have green lights to stimulate, particularly with a number of downside risks, eg, the trade war, German recession, Brexit, Hong Kong protests, and the Japan VAT hike coming up. These policy responses give asset prices a positive bias.

U.S. Economy: Mfg Weakening, But Overall Still Doing Well.EVRISI truckers survey slipped to just 49.2 last week while restaurants increased to a strong 63.3, and the surveys overall increased, led by retailers. Unemployment claims held at a five-decade low, bank loans increased +5.1% y/y, and junk bond yields declined again.(p 17-22)

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Foreign Economies Not Doing WellEVRISI survey of China cos sales declined to 42.9 last week, a new low for this down leg.EVRISI survey of Europe cos sales declined to 40.8, also a new low for this down leg.(p 23-25)

Recession Risk Continues To IncreaseEven if the odds are 80% that’s “it’s different this time”, given “low probability but high impact” thinking, it’s troubling to see fed funds close the week at 2.25% with bond yields at 1.50%. History suggests that it takes about four more months to get a recession signal from the 10yr-ff inverted yield curve. (p 26)

Thanks for your time.

Hope this SUMMARY helps.

Very best regards,

212-446-5617646-287-7242Ed.Hyman@evercoreisi.com

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SUMMARY

Consensus UpdateJudging by the group investors we surveyed last week, 70% do not expect a trade deal this year, and 40% do not expect a deal next year!Trump getting re-elected is basically 50/50.The consensus for the S&P is to close next year at 2900.

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Core ViewsBecause Trump wants to get re-elected, he’ll probably work out something on trade, even if Xi is less interested.The Fed will focus on extending the expansion, whatever it seems to them they need to do.

Global Stimulus Already In Full Swing, Likely To Continue To Unfold.To be sure, there’s a significant package of negatives that policymakers are responding to, including:

1. Slowing global growth.2. Slowing US growth.3. Trade war/Currency war.4. German recession.5. Brexit risks.6. Hong Kong protests.7. Inverted US yield curve.8. Bond yields declining.9. Japan VAT hike.10. Inflation below target.

And if we do have a recession, political uncertainty about a new president increases significantly.

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Global Stimulus Already In Full Swing, Likely To Continue To Unfold. ContdGlobal Short Rates have already declined significantly and are set to continue.At the same time, the sum of ECB, BoJ, and Fed balance sheets is set to increase +$63b per month:ECB +$34b, BoJ +$20b, and Fed +$9b. Th

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Global Stimulus Already In Full Swing, Likely To Continue To Unfold. ContdKrishna Guha:Fed to cut fed funds -25bp in Sep and -25bp in Oct.ECB to cut rates in Sep and announce new QE program of roughly +$34b per month.

Over the past month, this unusual collection of EM central banks cuts has been cutting rates. None are particularly large, but as a package they show the path of least resistance.

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Global Stimulus Already In Full Swing, Likely To Continue To Unfold. ContdThe US economy is growing faster than most foreign economies, but still, foreign policy rates, along with US bond yields at 1.50%, suggest fed funds are too high.

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Global Stimulus Already In Full Swing, Likely To Continue To Unfold. ContdIn addition to monetary stimulus, there’s fiscal stimulus. Here are announcements from last week: China mulls 20 measures to boost consumption, eg, ease restrictions

on car purchases. China likely to announce tax cuts and other fiscal stimulus pre-Oct 1st

70th anniversary PRC celebration. EU to rewrite budget rules to boost growth. Korea to implement a bigger and more aggressive fiscal policy in

2020, raising spending by 9%. Reserve Bank of India’s record $24b payout to the Indian govt

provides more fiscal stimulus. Indonesia boosts sending and provides tax relief. Thailand to provide more fiscal support.

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With Inflation Generally MIA, Central Bankers See Green Lights.The US core PCE deflator accelerated in July, but to just +1.6% y/y.The Eurozone core CPI increased just +0.9% y/y in Aug.

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With Inflation Generally MIA, Central Bankers See Green Lights. ContdUS retail gasoline peaked in early Oct of last year at $2.92. Judging by gasoline futures on Friday, retail prices will be down to $2.40 in early Oct of this year, an -18% y/y decline.

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With Inflation Generally MIA, Central Bankers See Green Lights. ContdIn addition to lower gasoline prices, DXY made an upside breakout last week, which all else equal, puts downward pressure on US inflation and will partially offset the tariffs.

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With Inflation Generally MIA, Central Bankers See Green Lights. ContdOf course, dollar strength in part reflects yuan weakness.Over the past 6 months, the yuan has weakened by -7%.Over the past 18 months, the yuan has weakened by -12%.This will partially offset the tariffs.Th

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With Inflation Generally MIA, Central Bankers See Green Lights. ContdAgain last week there were examples of oversupply/weak demand. DeBeers diamonds in a rough patch as oversupply

and artificial gems hit sales. Lithium knocked by oversupply and cut in electric-

vehicle subsidy. As competition intensifies, hemp oil prices slide from

over $6,000 per kg to under $2,000. Iron ore prices slide to five-month low. U.S. farmland prices continue to fall.

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With Inflation Generally MIA, Central Bankers See Green Lights. ContdIn addition, inflation is probably overstated.The latest American Economic Review has a paper which concludes that US inflation is overstated by 0.5% per year. This is the gist of the paper:

The systematic replacement of inferior products and services through innovation leads official statistics to overstate true inflation by 0.5% per year, five times larger than previous findings. This suggests that the core PCE deflator is closer to +1% y/y than +1.5% and nowhere near the Fed’s +2% target. What is also implied here is that real fed funds are 50bp higher. Another implication is that real GDP growth is understated by 0.5% per year, which means productivity is understated by 0.5%. In addition, consumer incomes are stronger by +0.5%.

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With Inflation Generally MIA, Central Bankers See Green Lights. Contd

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U.S. Economy: Mfg Weakening, But Overall Still Doing Well.EVRISI cap goods survey plunged -3.0 last week to 51.1.EVRISI truckers survey declined to just 49.2.

Adding to evidence of US mfg weakening, railcar loadings declined again last week, EVRISI air cargo survey declined to a new low of just 46.5, and the rig count declined again.

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U.S. Economy: Mfg Weakening, But Overall Still Doing Well. ContdBut overall, the US economy is still doing well.EVRISI surveys of US companies increased +0.6 to an elevated 53.3, consistent with over +2.5% real GDP growth. The increase last week was led by retailers, suggesting that consumer spending was solid in Aug on top of July’s big increase. All this, along with the better trade reading for July, suggests a solid increase for GDP in 3Q.

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U.S. Economy: Mfg Weakening, But Overall Still Doing Well. ContdJudging by unemployment claims, EVRISI temp & perm cos employment surveys, and EVRISI’s tally of layoff announcements, businesses are not deferring hiring or accelerating layoffs. The employment report for Aug, out this Fri, is likely to be OK.Th

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U.S. Economy: Mfg Weakening, But Overall Still Doing Well. ContdAnother sign of overall strength and confidence, bank loans increased +$16.9b last week and +5.1% y/y.

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U.S. Economy: Mfg Weakening, But Overall Still Doing Well. ContdA bit of old news but still important, corporate profits for 2Q were reported last week with an increase to a record high. And with the data cited above for 3Q, it’s likely that corporate profits increased again in 3Q (see below). After corporate profits peaked in 2006, the recession started 1½ years later. So even if profits peak in 3Q, that would suggest that the next recession won’t start until early 2021. The peak in profits in 1997 led the 2001 recession by 3½ years.

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U.S. Economy: Mfg Weakening, But Overall Still Doing Well. ContdUS Consumer Net Worth probably increased again in 3Q.

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Foreign Economies Not Doing WellIn addition to the weakness in EVRISI surveys for China sales and Europe sales, there were these weak readings last week for foreign economies.

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Foreign Economies Not Doing Well Contd

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Foreign Economies Not Doing Well Contd

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Recession Risk Continues To IncreaseWhen the yield curve was inverted in 2006-2007, almost everything seemed fine. Real GDP growth was around +2.5%, the S&P was making new highs, and consumer confidence was making new highs. Generally speaking, because the economy seems fine as inversions unfold, there’s a tendency to think “it’s different this time”, ie, that the inversion is giving a false signal.

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Third Mini-RecessionThe global economy, including the US, is in its third mini-recession of this expansion. The first was related to the Europe crisis.The second was related to the China slowdown.The third has been related to Fed tightening and the trade war.The first two were reversed by global central banks easing. That’s likely for the third, although a problem is that the US yield curve is inverted this time.

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Going With The AverageThe average of

U of Mich Consumer Sentiment (which plunged in Aug), Conf Bd Consumer Confidence, Bloomberg Consumer Comfort

is the best way to track US consumer confidence.The average is OK.

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Fact Is Stranger Than FictionWe believe that foreign economies are weakening.However, there’s been a package of stronger data that’s worth noting.

Eurozone M3 has accelerated. Eurozone bank loans have accelerated. The Eurozone composite PMI has improved. France nominal GDP has accelerated. China’s Synthetic Growth Index has improved. OECD’s China LEI has improved.

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Another Problem for XiIn addition to a slowing economy, the trade war, and Hong Kong protests, President Xi also has to worry about surging pork prices, which are almost certain to continue higher. Speculation is that they will move to 35 yuan per kilo.

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2018 2019 f 2020 fReal GDP 2.5% 2.2% 1.8%GDP Price Deflator 2.3% 1.4% 1.7%Nominal GDP 4.9% 3.6% 3.5%

Evercore ISI U.S. Outlook

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Consensus Evercore ISI

Tuesday, Sep 3

UNITED STATES July Aug1. ISM Mfg PMI 51.2 51.2 50.5

June July2. Construction Spending -1.3% +0.3% +0.3%

Wednesday, Sep 4

UNITED STATES Aug July3. Trade Gap -$55.2 -$55.3 -$53.5

July Aug4. Vehicle Sales 16.8 16.9 16.8

Thursday, Sep 5

UNITED STATES Aug 24 Aug 315. Unemployment Claims 215 215 215

4 Wk. Avg 215 216 216

July Aug6. ADP Employment +156 +140 +160

Friday, Sep 6

UNITED STATES July Aug7. Payroll Employment +164 +165 +150

Unemployment Rate 3.7% 3.7% 3.5%

Average Hourly Earnings +0.3% +0.3% +0.3%

CANADA July Aug8. Employment -24.2 +10.0 +12.0

GERMANY June July9. Industrial Production -1.5% +0.3% +0.3%

Employment, PMIs, and Vehicle Sales Are Key This Week.

Although Friday’s payroll employment report is very important, many othereconomic indicators will also capture the markets’ attention. We estimate payrollemployment rose +150k in Aug and the unemployment rate fell to 3.5%.Historically, payroll gains in Aug are less than the average of the other 11months. The mfg PMI likely dropped to 50.5 in Aug from 51.2 in July. Vehiclesales were likely stuck in neutral at around 16.8m.

Overseas, Canadian employment and German industrial production arecritical for capital markets.

Stan Shipley 09/03/19

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TueSep 03

Economic Estimates1 of 1Stan Shipley 212 446 9474

917 463-6773stan.shipley@evercoreisi.com

Sep 03 Sep 04 Sep 05 Sep 06

LABOR DAY MFG PMI 10:00 MORTGAGE APPS UNEMP CLAIMS 8:30 PAYROLL EMP 8:30 U.S. MARKETS CLOSED July 51.2 Aug 24 215 July +164

Aug 50.5 E 51.2 C TRADE GAP 8:30 Aug 31 215 E 215 C Aug +150 E +165 C June -$55.2 WORK WEEK

CONST SPENDING 10:00 July -$53.5 E -$55.3 C CONSUMER COMFORT July 34.3 June -1.3% Aug 34.5 E 34.4 C July +0.3% E +0.3% C VEHICLE SALES p.m. ADP PRIVATE EMP 8:15 UNEMP RATE

July 16.8 July +156 July 3.7% CONSTRUCTION SPENDING Aug 16.8 E 16.9 C Aug +160 E +140 C Aug 3.5% E 3.7% C REVISIONS AVERAGE HOURLY

BEIGE BOOK MFG ORDERS 10:00 July +0.3% June +0.6% Aug +0.3% E +0.3% C July +1.0% E +0.6% C

NONMFG PMI 10:00 July 53.7 Aug 52.5 E 53.8 C

UNIT LABOR COSTS CHALLENGER SURVEY

Sep 10 Sep 11 Sep 12 Sep 13

OECD BROAD LEI a.m. NFIB 6:00 MORTGAGE APPS UNEMP CLAIMS 8:30 RETAIL SALES 8:30 June 0.0% July 104.7 Aug 31 215 E '215 C July +0.5% July +0.1% E Aug 104.0 PPI 8:30 Sep 7 215 E Aug +0.1% +0.3% C

July +0.2% EX AUTO JOLTS - OPENINGS 10:00 Aug +0.1% E +0.1% C CONSUMER COMFORT July +0.5% June 7.348 EX FOOD AND ENERGY Aug +0.4% +0.5% C July 7.400 E July -0.1% CPI 8:30 CONTROL GROUP

Aug +0.3% E +0.2% C July +0.3% July +1.0% EX FOOD, TRADE AND ENERGY Aug +0.1% +0.1% C Aug +0.3% +0.4% July -0.3% CPI CORE Aug +0.3% E July +0.3% IMPORT PRICES 8:30

Aug +0.3% E +0.2% C July +0.1% WHOLESALE INV Aug +0.3% +0.3% C

BUDGET GAP CORE IMPORT PRICES July +0.1% Aug +0.2% E +0.2% C

MFG & TRADE INV 10:00 June +0.0% July +0.4% E

Monday Sep 02

Monday Sep 09

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