Before we get to the “food for thought” behind this week’s briefing title, let’s take a look at the a few data points since our last post. In our previous briefing, we hypothesized that the Fed’s Hawkish commentary for a June rate hike may be more posturing to manage market expectations rather than actual intent. Given this week’s mixed economic data and recent “slow and steady” remarks from Chair Yellen, it would appear as though the market is assuming the same. Expectations for a July hike have shot up well past the probability for a June hike (and are as high as they were at the beginning of the year when June and September were the anticipated months). July’s probability is shown below by the yellow line:
(Sources: Matthew Boesler, Bloomberg)
As far as weak data are concerned, it remains the regular cast of characters. Capital expenditures remain weak, falling a seasonally adjusted 0.8% in April — and off nearly 12% since a postrecession peak in 2012. Low business investment is surprising given corporate cash flows and the availability of cheap debt. However, as we’ve pointed out before, debt and cash have been deployed to fund dividends and share buy-backs, effectively skipping over investments for future growth and increased productivity. This decline in capital goods spending coincides with lower productivity gains since mid-2014.
(Source: St. Louis Fed)
Corporate profits — the dead horse we continue to beat — came in at an unchanged -3.6% year-over-year level. Q1 2016 performance was the same as Q4 2015, and FactSet reports that Q2 2016 earnings estimates have been dialed back across the sectors since the end of March (see second chart).
(Source: Econoday, Bloomberg)
(Source: FactSet)
If the labor market continues to tighten, we’ll keep seeing upward pressure on wages. Unfortunately, this movement of capital from the corporate bottom line to employees is typical of the latter stages of the business cycle. Some — like Goldman Sachs — have already pointed out the relationship between the downturn in corporate margins, the upturn in wages, and the soon-to-follow recessionary red flags:
(Source: Valuewalk)
The other side of the data coin is certainly brighter, with pending home sales rising to a decade high. With interest rates remaining so low and rent experiencing an inflationary surge, it’s certainly no surprise that home buyers are interested in taking the ownership plunge.
(Source: The Daily Shot)
Like we mentioned before, however, credit continues to tighten relative to its recent levels last year, but mortgages continue to be available… especially relative to the previous 5 years. A decreasing value in the chart below indicates that lending standards are tightening:
(Source: Mortgage Bankers Association)
As we cross the Atlantic, the U.K. came in with disappointing Q1 GDP growth:
(Source: The Daily Shot)
Much like here in the U.S., the U.K. consumer contributes the lion’s share to GDP:
(Source: The Daily Shot)
However, U.K. household savings continue to dwindle, leaving us to wonder how long consumers can continue their strong contributions to GDP:
(Source: Economics Help)
Crossing the Pacific, China’s loan-for-bond program continues to heat up. This program creates bonds backed by nonperforming loans, which are loans that are in default or close to being in default. The idea is to help heavily indebted municipalities extend the terms of their loans by packaging them into longer-dated bonds.
(Source: @fastFT)
Finally, the source of this week’s title. I recall listening to an older fighter pilot (who flew the F-15C) recount the days of his entire squadron day-trading up-and-coming tech companies in the late 90s. He tells the story better that I can, but the ending is pretty memorable — that was the point at which he exited his positions, closed his brokerage account, and wondered when it was all going to go sideways for his squadron mates. As I read the Wall Street Journal this week, I stumbled upon an analogous story:
I’ll leave you with the link to the WSJ article if you’d like to read more, but it seems that despite the low levels of bullish sentiment, some retail investors are piling in to the day-trading space.
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