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Household net worth and liquidity are higher than pre-pandemic across the wealth distribution. The housing wealth effect is more widespread than the stock market wealth effect. Rising wealth and liquidity help keep delinquency rates subdued, which is a tailwind to credit growth and the economy.
A red sweep will likely result in higher bond yields and credit outperformance. The best environment for the bond market is a split Congress. Political uncertainty may linger for days. Volatility and term premium have increased. The surprising Japanese election could prompt an increase in our Asia Pacific regional allocation.
The top-level equity allocation dropped to 72%. The PMI breadth and Baltic Dry Index trend indicators whipsawed back to bearish on equities. U.S. Large Caps, U.S. Growth, and Emerging Markets each have over 15% weightings. Cash received an allocation (almost 5%) for the first time since the end of April.
The NDR Absolute Breadth Index gave a fresh bullish reading, confirming other advance/decline indicators. The percentage of stocks at 52-weeks highs recently made a high for the current bull, but watch new lows. Volume demand and the percentage of stocks above their moving averages are also positive.
Durable goods orders decline, dragged by Boeing. Consumer sentiment improves ahead of the election. Economic activity strengthens across more states, keeping U.S. recession risk low. German business confidence points to signs of recovery. Tokyo CPI slows, but BoJ still on path to slowly tighten policy. Canadian retail sales rise, led by autos.
Weekly talking points and key visuals from NDR strategists' insights.
Paul Tudor Jones is credited with saying the most bullish thing an index can do is make a new high. So it is with great anticipation that we await a new all-time high from the NDR Tech Titans group.
Changes in the fed funds rate are only loosely related to changes in the inflation rate. The labor market is the more effective channel for changes in the policy rate. Monetary policy is a blunt instrument that impacts the labor market more than inflation.
Continue to watch for rising evidence of a secular top as well as a cyclical peak. Trump win and trade war could lead to a secular bear market. Cyclical top warnings would include dropping composite model, breadth divergences, shifting leadership, sentiment reversal, beat rate decline, and Bear Watch warning. Secular bull intact for now, as is cyclical bull.
U.S. Flash PMIs indicate robust services growth, but continued contraction in manufacturing. New home sales increase. CFNAI suggests economic growth tapered off at the end of Q3. CEO confidence fades, a downside risk to capex growth in 2025. Initial jobless claims slide, but continuing claims rise, as labor market tightness eases.
A corporate tax hike could disproportionately hurt the capital-intensive sectors that saw the most benefit in 2018. Trump's proposal to reduce the corporate tax rate to 15% for companies that produce products in the U.S could reduce the tax bills for Utilities, Communication Services, and Real Estate the most. Another trade war would challenge growth and cyclical leadership.
Harris' corporate tax rate hike proposal could decrease S&P 500 after-tax EPS by 9%, while Trump's tax cut could increase EPS by 5%. S&P 500 returns have been below average after capital gains tax hikes, but the 1% buyback tax had little impact on big net repurchasers. With little detail and Congressional approval needed, any final tax changes will likely be far different from current ideas.
Hard landers have underestimated the wealth effect. The increase in net worth, helped by homeownership, is supporting consumption. Consumption is more vulnerable to changes in market valuations, which could lead to policies that protect asset prices. A large intergenerational wealth transfer could further support equities at the expense of bonds.
Past real estate stimulus has just resulted in some stabilization in the sector, albeit at anemic levels. September's stimulus provides more hope, but just expect gradual progress. Given the real estate sector's connectivity to broader parts of the economy, this argues against an out-sized boost to overall growth.
Conviction in betting markets for a Trump victory is also reflected in our Trump Trade Index which has surged 23% since September 6. We highlight the 'Trump trade' influence as a driver for certain themes/industries but we are not likely to chase those returns because we still see the election as too close to call.
Broad-based decline brings existing home sales to lowest level since 2010. Architecture billings point to ongoing weakness in the CRE space. Richmond factory activity continues to contract, albeit at a slower pace. Services revenues barely up.
Both Crowd Sentiment and the Daily Trading Sentiment Composite are now in the excessive optimism mode. The Daily Bond Sentiment Composite is reversing from excessive optimism and high-yield spreads remain tight. Similar conditions exist across regions and asset classes with many market and investor-based measures of sentiment in neutral or optimistic modes.
LEI continues to decline. But other leading indexes and our Economic Timing Model point to continued economic expansion in the near-term.
Spreads remain tight particularly between high yield and Baa. IG OAS continues to converge to IG CDS. Major credit indexes continue to outperform the U.S. Aggregate. CCCs are also outperforming. Favorable credit fundamentals and plenty of liquidity suggest no recession on the horizon.
Global breadth currently confirming bull market. Divergences tend to lead market peaks. With the global bull now longer than the median, worsening global breadth would be a bear market warning.
China GDP slows, but quarter ends slightly stronger, although not enough to dispel China's move toward more stimulus. Japan inflation cools, but BoJ still on track to raise rates. U.K. retail sales unexpectedly rise. U.S. housing starts and permits edge down, led by multifamily units.
As spot WTI hovers around $70/bbl, the U.S. SPR has become an opportunistic buyer. Since falling to the lowest levels since the early '80s in July 2023, the SPR has purchased over 36 million barrels of oil. Spot WTI has averaged about $79/bbl over that same July'23-October'24 period, and to replenish the reserve to levels seen at year-end 2021, the SPR would need to purchase over 210 million barrels. With the Department of Energy's aim to purchase at $79/bbl or less, combined with other sentiment, macro, and fundamental evidence, we believe this supports a floor for oil and NDR's bullish oil position.
Despite mixed inflation reports for September, inflation trends remain benign. The current inflation backdrop is positive for equities. But there are some upside risks to inflation in the near term that could drive up bond yields and weigh on stocks - a risk to watch for in Q4.
Retail sales surprise to the upside, boosting Q3 real GDP estimate. Industrial production declines, due to Boeing strike and back-to-back hurricanes. Philly Fed manufacturing activity picks up. Optimism rises. Initial jobless claims partially reverse a Helene-driven spike. Builder confidence improves slightly, but election uncertainty holds it down. Eurozone inflation cools, resulting in back-to-back ECB cuts. Japan exports slump, reflecting global weakness.
After a strong first half, the global economy began to see some risk of a sustained global slowdown, a potential headwind to equities. But we have begun to see some signs of life in Q4 according to leading indicators, which reduces the risk of that adverse scenario. Broad-based global monetary easing and China stimulus positively impact the outlook.
Low recession risk, Fed easing, and political clarity post-election should favor cyclical leadership in Q4. A change in the trajectory of inflation and long-term rates, or renewed recession concerns, could derail a Q4 rally and cyclical sector leadership, but that is not our base case. Rapid earnings growth deceleration from Mag 7 components could tilt the scale in favor of Value sectors over Growth sectors within cyclicals.
Gold back at record highs and maintaining strong uptrend despite upturns in U.S. dollar and bond yields. Trend supported by negative momentum of expected real yield and TIPS yield, with yield curve at levels consistent with gold outperformance. Versus long-term trendline, gold less extended than it was at peaks in 1980 and 2011.
Any inverse correlation between real yields and U.S. Tech stocks disappeared in the latest equity bull market. Chinese Tech stocks have been more closely correlated with changes in U.S. real yields. The TIPS/Treasury ratio is, once again, at the top of its range.
Higher expected EPS growth in Q3 and Q4 may put downward pressure on the historically high beat rate. 2024's EPS acceleration may turn into modest deceleration in 2025, led by the Mag 7. A higher percentage of EPS growth may come from buybacks than sales growth.
U.S. import prices decline, led by cheaper fuel. Mortgage applications drop amid higher mortgage rates and hurricane impact. U.K. CPI slows more than expected, putting BoE on course to cut in November.
Following NDR Commodity Strategist Matt Bauer's upgrade of oil to bullish, we initiate a Long Oil trade via the US Oil Fund (USO). If we get a favorable surprise on demand via positive economic surprises or on supply via lower Middle Eastern oil, we believe USO will at least revert to its 2023 high of $83 (+15%). If USO breaks below its September 10 low near $67 (-7%), we will implement a stop-loss. We like the oil risk/reward profile and initiate our trade targeting a 15% absolute return for USO, with a six-month investment horizon.
The NDR Daily Trading Sentiment Composite returned to its optimistic zone just as the market exited a seasonally weak part of election years. When sentiment has been optimistic in mid-October, returns have been weaker into the election. If political uncertainty relieves optimism, it could set the stage for a year-end rally.
ZEW economic expectations and ECB bank lending surveys imply a likely improvement in the macro environment in the eurozone. Canada inflation undershoots, suggesting an outsized BoC cut. U.K. wage growth slows, while job market improves. In the U.S., Empire region manufacturing conditions worsen.
After a period of heightened uncertainty, we are seeing evidence of a return in risk appetite in Europe. And while implied volatility is elevated, falling spreads and recent outperformance of cyclical industries is consistent with a bullish outlook for European equities. We reiterate our overweight small-cap position, given improving risk indicators, seasonality, and fundamental factors.
The 10-year Treasury yield is an unreliable guide to the terminal rate. Estimating r-star is not any better for projecting the 10-year. A better approach is to treat the policy rate and the 10-year separately.
China's CPI and exports disappoint. Upcoming stimulus should help, but more clarity is needed. India's CPI spikes, putting near-term RBI rate cut at risk. Brazil's economic activity picks up in August.
Moving Average Model and broad cyclical sector leadership suggest the trend evidence remains bullish. But several major indices have not yet confirmed the S&P 500's record high. And the S&P 500 has gotten overextended versus its long-term trend.
PPI inflation comes in softer than expected, led by falling energy prices. Consumer sentiment down slightly. Inflation expectations remain contained.
Tech Titans are up over 9% since September 6, and we have noticed increasing volume demand for the sector. Also, the group's relative P/E has returned to its December 2022 level. The percentage of Tech companies with greater than 15% Y/Y sales growth (15.9%) looks like it might be rolling over, but that percentage is still higher than the S&P 500 (7.6%). A watchout would be if the relative gap narrows. While currently overweight Big Tech via the AIQ ETF, we could downgrade if Tech relative earnings growth slows meaningfully. We will be watching Q3 Tech earnings closely for downward earnings revisions to turn bearish.
Our flexible labor market put the economy in a relatively difficult situation during the pandemic, facing immense shortages and fueling inflation. Four years later, this has paid off as we now see greater representation of under-represented groups in the labor force and higher productivity. In the long term, a robust labor force and strong productivity growth contribute positively to potential real GDP growth and equity market performance.
This suggests a smaller 25 bp Fed rate cut at its next meeting. Jobless claims jump amid hurricane disasters.
Emerging markets have led the charge in private debt, much of it due to China, while developed economies have seen relatively larger increases in public debt. While high debt doesn't necessarily mean an impending financial crisis, elevated debt levels are typically associated with slower economic growth. Debt service ratios are better indicators of crises but will likely fall amid central bank easing.
Upgrading Energy to overweight. Persistent underperformance has left Energy extremely oversold. Fed and election cycles support the upgrade. Change is in line with NDR's bullish view on crude.
We remain bullish on U.S. stocks on an absolute basis and relative to bonds and cash, and are raising our year-end S&P 500 target to 5950 from 5725. A quick spike in interest rates could be the biggest risk to the market in Q4. The balance between economic growth and the pace of the easing cycle should determine Growth/Value and small/large relative strength.
As noted in our monthly focus, a return to risk on has led to broad thematic improvement. China stimulus and better-than-expected economic conditions in the U.S. have contributed to global shock themes outperforming. Batteries and Lithium and shorter duration themes like Natural Resources benefit from a global reflation trend.
Valuations climb higher presenting a long-term risk to stock prices. Households are highly invested in stocks, showing optimism. Consumer and CEO sentiment are more pessimistic.
Although September payrolls surprised to the upside, aggregate hours of work were little changed. Combined with real GDP growth tracking above 3.0% in Q3, this means productivity will remain strong, keeping labor costs and inflation pressures contained. This bodes well for corporate earnings and stock prices.
Shifting from bearish to neutral on the dollar and from bullish to neutral on the euro, pound and yen. With ACWI likely to keep trending higher and yields declining again, we expect to remain at maximum overweight equities, underweight bonds and cash. EM not likely to remain supported by China outperformance, with Latin America and Europe divergent from EM Asia.
Amid record uncertainty before the election next month, NFIB survey shows lack of enthusiasm about the economy. Trade deficit narrows.
A commitment by the PBoC and the Chinese politburo to increase monetary and fiscal stimulus has boosted performance of European metals and mining, and luxury stocks. However, historical precedence and structural issues suggest the China rally and its impact on these industries could be short-lived. We highlight positive developments in indicators for the metals and mining industry but remain cautious on luxury for the time being.
Our historical studies show following the first rate cut front-end yields usually fall in subsequent months and over the course of an easing cycle. Other labor market data have been softer. Peculiarities make the employment report stronger than it was.
The S&P 500 has risen for five months in a row, a rare achievement, especially including seasonally weak September. After five-month winning streaks, the S&P 500 has tended to continue to rally by more than its long-term average. Other indicators like the S&P 500 golden cross and NDR Leading Indicator Model confirm the primary trend is up.
Biggest payroll gain in six moths blows away all estimates. The dip in the unemployment rate to nearly 4.0% and the uptick in wage growth are hallmarks of a healthy labor market. This report tilts in the direction of a 25 bp Fed rate cut next month, instead of 50 bp.
Costco is now offering platinum bars, a potential win-win. A win for Costco looking to extend its success selling gold bars, and a win for platinum buyers, which have seasonality and a bullish model signal working for them. Another positive for Costco is that it has outperformed the S&P 500 in all five prior cases after a second Fed rate cut, expected next month, for both six-month and one-year periods. Costco is the second-largest holding (8.6% weight) in our overweighted Consumer ETF IEDI. While valuation and the port strike are near-term concerns, we take IEDI's large weight in Costco as positive.
The global PMIs showed weaker growth in September, a condition historically associated with less upside in global equities. Strength in the services sector is keeping the global economy safely away from recession, despite pronounced weakness in manufacturing. We do see some upside potential in the months ahead amid more accommodative policies.
NDR has been expecting a softish landing but there is a case for no landing. Cooling labor data is a symptom of weaker demand caused by something else. Conditions that have led to past recessions are largely absent today. There will be a lot of noise in the data until the election is over. But once those uncertainties lift, the economic outlook may be brighter.
ISM Services PMI climbs to highest level since early 2023. Layoffs remain subdued, pointing to continued robust labor demand. Factory orders surprise to the downside.
A larger-than-expected cut by the Fed and new stimulus measures unveiled by China helped lift the S&P 500 to record highs in September. Leadership during the month was decidedly risk-on. The sector model shifted more cyclical at its month-end update.
Consistent with past secular tops, investors extremely exposed to equities, with market cap and net worth ratios at new highs. Market overbought from long-term perspective, but cyclical bull less extended than bulls that preceded previous peaks. Peaking consumer confidence and budget balance peak would make secular top comparisons more relevant.
Most voters say the economy is the most important issue for them. Democrats have done an ineffective job of defending their record during the debates. Republicans have done better in defending Trump's first term. Five of the seven swing states have unemployment rates less than the national average. If you want to get elected, focus on employment, income, and inflation.
The S&P 500's 61% gain puts it the top third of post-war cyclical bulls that lasted at least two years. Negative catalysts have been required for a bull market to end in year three. Large-caps and Growth have tended to outperform in year three, but they are overbought versus small-caps and Value, respectively.
September was decidedly risk-on after a 50 basis point Fed rate cut and a wave of China stimulus put a charge in the market. Outperformance was broad, with 37 of 48 (77%) themes outperforming the S&P 500, the best breadth in 20 months. China Thematic, Travel, Lithium & Battery, and Uranium themes all posted double-digit returns, and all of our recommendations outperformed.
ADP private payrolls pick up, a sign of firmer labor demand. Light vehicle sales climb back, but remain range-bound longer term. Lower mortgage rates support continued pickup in purchase applications.
The Fab Five Sentiment Composite warns of risks. However, some short-term sentiment indicators are partial offsets. Longer-term, margin debt, public selling of regular mutual funds, consumer sentiment, and consumer views of stocks are showing healthy skepticism.
Stocks overcame a choppy Q3 to end at record highs amid broad-based gains. Bonds kept up with stocks. Unusual correlations unfolded, including gold soaring and the GSCI falling and Utilities outperforming in an up market. Value sectors and SMID-caps outperformed in Q3, but Growth and large-caps are still up YTD.
Upgrading our oil view to bullish. The weight of sentiment, macro, and fundamental evidence supports a short-term bullish view. We see a favorable risk to reward ratio over the short-term.
Without much precautionary inventories, a prolonged port strike could cause shortages and higher inflation. Reduced trade flows and knock-on effects across industries could weigh on Q4 GDP growth and employment. Although the strike impact is likely temporary, it could still slow down the Fed easing cycle.
The ISM Manufacturing PMI and most individual activity indexes hold in contraction territory in September. Cost pressures ease. U.S. job openings pick up in August, but falling hires and quits still show cooling labor market conditions. Eurozone inflation falls below target, setting the stage for an October ECB rate cut. Japanese business confidence rises, more BoJ tightening to come.
September PMI data indicated a contraction in eurozone economic activity, but historical analysis shows that once the PMI has fallen below 50, much bad news has already been discounted. Key for European equities is the global economy, and an up-tick in global economic sentiment is a positive development. Further, central bank easing combined with positive seasonality continues to support the bullish absolute case for European equities.
The 1989 disinversion may be the best analog. Yields rose and the economy avoided recession. The curve steepened modestly further. Stocks performed poorly when the disinversion occurred in the early stages of recession. The USD rallied in recessionary disinversions.
Chinese activity stalls, but stimulus boost ahead. Japan's production slumps, but retail sales gain. Some improvement across U.S. regions, but overall sluggish factory activity in September.
The top-level equity allocation soared to 100%. The PMI breadth and Baltic Dry Index indicators turned bullish on equities. U.S. Large Caps, U.S. Value, Emerging Markets, and International Developed each have over 19% weightings.
Our trend indicators and models are bullish on the current uptrend. Stocks have been unfazed so far by unfavorable seasonality and election worries. A strong uptrend, along with a friendly Fed are historically bullish conditions for stocks.
Favorable personal income, consumer spending, and PCE inflation data for August keeps the outlook for the economy positive into yearend. Consumer sentiment improves in September.
NDR Chief Economist Alejandra Grindal notes China's 3 Ds (demographics, deglobalization, debt) makes stimulus less impactful. Still, 9 of 16 indicators on our China Rally Watch report are bullish. We downgraded CSI China Internet ETF (KWEB) in January, but record breadth has it back on our radar. Stimulus won't solve the 3 D's, but a shorter-term "don't fight the PBOC" trade may still work.
The housing inventory shortage is easing, consistent with moderating home price growth. Falling mortgage rates should boost housing affordability and sales. The Fed easing cycle is a tailwind to housing market activity and homebuilder stocks.
Q2 real GDP unrevised at a stellar pace, profits and income revised up.Initial jobless claims decline, as labor demand remains firm.Durable goods orders come in better than expected, a positive sign for capex.
Escalation in the Middle East and a large stimulus package out of China could support the oversold Energy sector. Crude money market short positions have reversed from an extreme high, providing a buy signal for oil. Watching for confirmation from our commodity and sector models.
With secular bull in 15th year, watch for warnings of a peak. Past secular peaks have been reached around extremes in valuations, earnings growth and economic growth. Current secular bull extended but supported by declining interest rates.
Recession Probability Model picks up but is far from signaling a contraction. New home sales pull back in August, but upward trend remains intact. Mortgage applications spike amid falling mortgage rates.
We identify seven thematic ETFs based on a weekly breakout to a new multi-year or all-time high. Infrastructure, Video Games, and Wind stand out as potential upgrade candidates.
We remain overweight U.S. stocks on an absolute basis and relative to bonds and cash. EPS estimates are aggressive for 2H 2024, and the Mag 7 could lead an earnings deceleration in 2025. A backup in interest rates would remove the relative valuation argument for stocks.
After a strong start to the year, China's economy has been slowing. The lack of notable pick-up in economic growth despite significant stimulus suggests that structural factors are at play due to three main factors - demographics, deglobalization, and debt. The long-term downtrend is likely to continue, creating headwinds to China's long-term equity market performance.
We set aside the debate of Bitcoin as a legitimate asset class and look at its price trends to gauge investor sentiment. Bitcoin is first and foremost a high-risk asset making it unlike gold, which can be a safe-haven. Bitcoin can be like gold as a hedge against monetary inflation. We find Bitcoin needs unique financial conditions to thrive, but when it performs well, we expect the S&P 500 to also perform well.
The prior version had a commendable real-time record. The trend and fundamental components held up well, while the sentiment component did not. We kept the indicators that worked and substituted more relevant or modern versions of indicators that did not. We introduce the revised charts and report.
U.S. consumer confidence slides amid weakening business and labor market conditions. Existing home price growth moderates. Richmond Fed manufacturing activity continues to contract. German business confidence remains depressed.
A return in risk appetite toward the end of the year will likely see European Cyclical sectors outperform. Specifically, we see a case for European Industrial stocks given the strong fundamentals identified by our quantitative team and an outlook for accelerating equipment spend. In the very short-term, seasonality and U.S. presidential uncertainty could see continued Cyclical sector weakness.
Robust services activity drives U.S. growth this month. Manufacturing contraction deepens. Flash PMIs elsewhere suggest global growth weakened in September. CFNAI remains consistent with continued U.S. expansion in Q3.
Returns have been historically strong when the trend is positive, and the Fed is friendly. Breadth readings improved following last week's jumbo rate cut. Cycle Composite suggests volatility heading into the election, but strong technicals support the case for a year-end rally.
Fed rate cuts lead to looser financial conditions, which support aggregate demand and payrolls growth, albeit with a lag. Soft landing remains on track. Real GDP growth will likely be somewhat higher than 2.0% this year. Rate cuts create an upward risk to inflation in 2025.
Stronger U.K. retail sales in August, but sentiment suggests some weakness ahead. Japanese inflation supports further tightening by BoJ.
For the first time in two years, our six-indicator trend composite for the Clean Energy ETF group turned bullish. Additionally, the group is showing broad participation from its member ETFs. Among cap-weighted ETF groups, Clean Energy has the third-highest correlation to long-term Treasury prices. With most central banks now easing, lower yields may put a charge in the theme.
If China's economy continues to slow modestly, which is our base case, the negative effect on the U.S. economy is likely to be minimal. Trade isn't that important to the U.S. economy, while ties between the U.S. and Chinese economies have faded significantly in recent years. The flip side of this is that China is exporting cheaper goods because of domestic deflation.
Existing home sales decline in August. But Fed rate cuts and lower mortgage rates suggest a likely turnaround in the coming months. Falling jobless claims point to subdued unemployment and continued economic growth. Philly Fed factory activity improves, but conditions still mixed. Although the LEI fell again, headwinds to growth have diminished. Economic Timing Model consistent with moderate growth.
Big initial cuts absent economic stress have been rare, with 1984 the closest analog. Easing cycles into soft landings have been bullish for stocks. Small-caps should enjoy a short-term rally.
Interest rate trends support bullish gold and currency positions, bearish dollar position. Positions also supported by trend indicators. Sentiment excesses not great enough to warn of trend reversals.
The median participant sees 100 bp of rate cuts this year, or 25 bp at each of the next two meetings. But 2025 is a little less aggressive than market was expecting. The Fed needed two rate cuts to take back one in real terms. The SEP showed a slowing of economic growth and a rise in the unemployment rate with lower inflation. Policy remains restrictive and economic risks skewed to the downside.
If lower rates lead to more capital investment, Industrials should be one of the biggest beneficiaries. Capex has historically risen following first rate cuts not associated with a recession, and several leading indicators point to the possibility of a pickup in investment. Industrials will likely fare better if the economy remains resilient enough for the Fed to cut rates at a gradual pace.
Housing starts and permits jump. Set for additional boost from Fed rate cuts. Mortgage applications jump, as mortgage rates continue to fall. Architecture billings spell continued pain in the CRE space. U.K. inflation on the right path, but BoE to stay on hold this week. Japanese exports cool amid a mixed outlook.
The Video Games theme recently moved to overweight in our scorecard ranks and has been a strong performer the past seven months. The group seems to be shaking off post-pandemic blues and could see some exciting new releases thru 2025 from legendary Call of Duty, Assassin's Creed, and Grand Theft Auto gaming franchises. We are looking for signs of risk-on returning as we start an easing cycle. Video Games ETFs are certainly upgrade candidates with VanEck (ESPO) and Global X (HERO) ETFs topping our list.
With the Fed poised to begin an easing cycle on Wednesday, our measure of global central bank policy breadth should turn into a majority for the first time since February 2022. Equities tend to rally when we've hit this point, especially when not around severe recession. The risk of severe global recession remains extremely low currently.
The NDR Gold Sentiment Composite is neutral despite gold's trend strength. High and rising volatility is bullish for gold, as are interest rate and dollar downtrends. Lacking the threat of excessive optimism and a long-term overbought condition, gold's run to record highs should remain well intact.
Better-than-expected U.S. retail sales in August support continued real GDP growth in Q3. Strong rebound in industrial production, led by vehicles. But year-to-year growth still stalled. Business inventories keep broadly in line with demand. Builder sentiment up, amid falling mortgage rates. Portends a pickup in housing starts in the coming months. German investor sentiment plunges, weighing on economic outlook. Canadian CPI sets the stage for more BoC rate cuts.
The remainder of China's data dump for August showed broad-based slower growth. U.S. New York region factory activity strengthens, led by firmer demand. Cass Freight shipments rise, while costs decline.
I now lean toward a 50 bp cut on Wednesday due to persistent media reports of that possibility. Fed path will be less aggressive than the market's. 10-year Treasury yields tracking the historical pattern. Sell the news?
The second half of September has been the weakest two-week stretch of the year, on average. During election years, the weakness has extended into early October before a year-end rally. Both short-term and long-term technical indicators suggest a year-end rally and continuation of the bull is more likely than a major topping process.
Consumer sentiment climbs to a four-month high, a positive sign for near-term consumer spending and economic growth. Import prices decline, supporting Fed rate cuts next week. Eurozone industrial production supports weakening economic picture. Brazil's economic activity slows, but rate hike still on the table.
Restaurants are fighting a labor shortage, but at least food costs (Finished Consumer Foods PPI) had not grown more than 3% Y/Y since May 2023. But that changed in Q3 and restaurant prices could be headed even higher.
Once again, GDP is exceeding GDI. Payrolls are exceeding household employment. PMIs are exceeding the ISM. Recession risk looks very different depending on the data you look at. Uncertainty will reign supreme until after the election.
Upgrading U.S. from marketweight to overweight; downgrading EM from overweight to marketweight. Shifting 5% from EM to U.S. in seven-way global equity framework. Reallocation supported by Global Regional Equity Model and ACWI Scorecard. Relative strength at record high for U.S., 21-year low for EM, consistent with secular bull tendencies.
Upgrading Health Care to overweight and downgrading Communication Services to underweight. The changes are supported by the sector model, which moved more defensive in August. Assuming the economy remains on track for a soft landing, we could shift more cyclical as election uncertainty is lifted and seasonality turns more favorable later in the year.
Despite a pickup in core prices, PPI inflation trends support a start in Fed rate cuts. Jobless claims remain range-bound and low by historical norms, a sign of continued economic expansion. ECB cuts its main rate, but maintains cautious outlook. India's CPI accelerates, while growth intact, keeping the RBI on hold.
IG and HY spreads remain tight. Outperformance by CCCs is inconsistent with an economy heading toward recession. Corporate distress remains in a downtrend. The modest tightening of financial conditions has not been due to credit. As the Fed embarks on an easing cycle, credit should be supported and volumes should increase.
Some of the timelier data we follow, particularly survey-based data, is giving some early signs that downside momentum in the global economy is stabilizing. Global recession risk also remains low. But our indicators show that markets may need to see a little more evidence of macro improvement before getting bullish.
During seasonal weakness, mid-caps could offer a balance of a lack of exposure to overvalued mega-caps and being higher quality than small-caps. Mid-caps have a more balanced sector composition than large-caps. Mid-caps have lower valuations and more attractive PEG ratios than both large-caps and small-caps.
Falling energy prices bring down CPI inflation. But higher shelter costs keep core inflation sticky. Inflation trends suggest a slow Fed easing cycle. We expect a 25 bp rate cut next week. U.K. economy slows, but recession risk still low.
In this publication we review our short-list of indicators that would cause us to implement a defensive trade. Indicators include a breakout of Utilities relative strength and a breakdown of AIQ and ARKK relative strength, with the 10-year Treasury yield breaking below 3.6%.
Short-term sentiment is showing more pessimism, but more intermediate-term sentiment is still showing optimism. ETF Fund flows are also showing more pessimism. During this seasonally weak period of the year and with election uncertainty, more pessimism could indicate a potential bottom.
NFIB index retreats to range since mid-2022, amid election uncertainty and signs of weaker demand. Manpower employment outlook for Q4 rebounds, signaling firmer hiring into yearend across most U.S. regions and industries. China's exports rise more than expected in August, offsetting weak domestic demand. Brazil's CPI inflation cools, but likely not enough to appease the central bank.
The long-term outlook for economic growth favours a strategic overweight in U.S. equities relative to Europe. On a tactical basis, the picture is more mixed. Positive changes in the European/U.S. leading indicator ratio are offset by negative global economic surprises. The return of risk appetite toward the end of the year could see short-term Europe/U.S. outperformance.
ABS have been underperforming for nearly a year. Spreads have been widening relative to the Agg. Excess returns have been fading, as we approach stiff seasonal headwinds. With the Fed set to cut rates next week, further duration underperformance may be limited. Although consumer delinquencies have been rising, the rate of increase has slowed.
ETI ticks up in August, pushing off recession fears. Manheim used vehicle prices rise, an upward risk to CPI inflation. Wholesale inventories up slightly. CRE sentiment improving. China's CPI reflects weak consumer.
Consistent with September seasonality, the SHUT Index is rising and outperforming. Rising risk aversion indicated by falling Risk-On/Risk-Off Ratio and its breadth. Defensive shift also indicated by cyclical/defensive ratio, ACWI Growth/Value ratio and ACWI SHUT Index.
Nonfarm payrolls rebounded in August from weather-related weakness in the prior month. The unemployment rate edged down. But the broader trend of slower job creation and easing labor market tightness continued. We lean toward a 25 bp Fed rate cut this month, with the option to do more in November after the election. Light vehicle sales declined in August, a sign of weakening consumer demand. Eurozone data points to a September ECB rate cut.
The presidential debate is not the only highly anticipated event next week. Apple will reveal new product innovations including the iPhone 16 Pro expected to have a bigger screen, faster chip, and a longer-lasting battery.
Following a couple of months of decelerating activity, the global economy picked up momentum in August, according to the latest PMIs. Markets may need to see more than one month of rising momentum to gain confidence in the global growth picture. The good news is that leading indicators within the report show more signs of acceleration in the months ahead.
The All-Country World ex.-U.S. Total Return Index increased over 285 basis points in August. The International Equity Core model is overweight China, the U.K., Canada, and Germany, while underweighting Japan, Australia, France, and Switzerland. The Explore model favored Netherlands, Peru, Poland, Turkey, and Taiwan.
The Catastrophic Stop model entered September fully invested. The International Equity Core model is overweight China, the U.K., Canada, and Germany, while underweighting Japan, Australia, France, and Switzerland. The Explore model favored Netherlands, Peru, Poland, Turkey, and Taiwan.
During August, global stocks outperformed U.S. bonds by more than 110 ba sis points. The Global Allocation model's equity weighting remains above benchmark allocation. The model has an above benchmark weighting for Canada and the U.S., while holding below benchmark allocations for Japan, Emerging Markets, Europe ex. U.K., and the U.K.
During August, global stocks outperformed global bonds by more than 20 ba sis points. The model's equity allocation remains above benchmark weighting, with U.S. Large-Caps, U.S. Small-Caps, and U.S. Value each receiving more than 15% allocation. The largest fixed income allocations were Emerging Market bonds and U.S. High Yield, both with more than 5% weights.
The Fixed Income Risk Management model deteriorated last month but entered September with a fully invested allocation to fixed income sectors. Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, U.S. Long-Term Treasurys, and U.S. Mortgage-Backed Securities are above benchmark weight. International Investment Grade, U.S. Floating Rate Notes, and U.S. Treasury Inflation-Protected Securities are below benchmark weight.
The Bloomberg Barclays U.S. Aggregate Bond Total Return Index gained about 1.4% in August. Emerging Market bonds, U.S. High Yield, U.S. Investment Grade Corporate, U.S. Long-Term Treasurys, and U.S. Mortgage-Backed Securities are above benchmark weight. International Investment Grade, U.S. Floating Rate Notes, and U.S. Treasury Inflation-Protected Securities are below benchmark weight.
The Catastrophic Stop model deteriorated last month but entered September with a fully invested equity allocation. Health Care, Consumer Staples, Energy, and Utilities are above benchmark weight. Financials and Industrials dropped to marketweight. Real Estate, Communication Services, and Materials are below benchmark weight.
After an initial correction earlier in the month, the S&P 500 Total Return Index recovered in August, gaining about 2.4%. Breadth was strong with 9 of 11 sectors posting positive returns. Financials, Information Technology, Health Care, and Utilities are above benchmark weight, while Real Estate, Communication Services, Materials, Energy, and Consumer Staples are below benchmark weight.
Preliminary benchmark revisions to payrolls imply productivity growth last year was stronger than the data currently shows. It also means unit labor costs were likely weaker, putting profit margins on a more solid footing and suggesting that disinflation is more entrenched. It green-lights Fed rate cuts later this month - our base case scenario.
ADP payrolls growth slows. Hiring plans weaken. Layoff trends mixed. ISM Services PMI consistent with slow-to-moderate growth. Unit labor costs revised down, consistent with continued disinflation. Japan's real wages rise further, confirming BoJ tightening path. German factory orders jump, but trend remains weak.
Negative September seasonality to be followed by best three-month period. Earnings revisions and economic performance have led earnings growth, following forward estimate trends. Earnings beat rates have remained relatively high. With earnings conditions positive, weakness should provide a buying opportunity within continuing bull market.
August's volatility surge resulted in a risk-off month for sector leadership. Seasonal trends suggest defensive sectors could have the upper hand during the next two months. The sector model picked up on the defensive rotation in August, with Health Care, Consumer Staples, and Utilities finishing with the highest composite scores.
The yield curve usually bottoms around the end of the tightening cycle and steepens going into the first rate cut. The curve steepens further during an easing cycle. But non-recessionary easing cycles only show a modest steepening. Other fundamental and technical evidence support the steepener call.
September - October weakness has been more pronounced during election years. A July peak in the S&P 500 is more consistent with a correction within a bull market than the start of a bear. Large-cap Growth's inability to remain above its 2020 relative strength high comes amid slowing EPS growth.
Despite a mid-month market rebound, only nine of 48 themes outperformed in August, matching the fewest in the past six months. August was clearly risk-off but there were some one-off bright spots including Cybersecurity, Millennial Spending, and Pet Care themes.
The NDR Commodity model remains neutral but showed modest overall improvement. Breadth improvement, neutral sentiment, and lukewarm global growth also support the neutral outlook. Crude is facing a crucial test of its trading range. An OPEC flinch may be what preserves it.
JOLTS report confirms labor market conditions easing. Green-lights Fed rate cuts later this month. Aircraft lifts factory orders, but underlying trends show manufacturing weakness. Trade deficit widens and could be a drag on Q3 GDP growth. Lower mortgage rates boost mortgage purchase applications. Australia's real GDP growth slows in Q2, as the RBA remains restrictive. Brazil's GDP soars in Q2, but recent data suggests inflation weighing on growth.
The rally has pushed P/E ratios to levels only seen in the dotcom bubble, financial crisis, and pandemic. The decline in long-term rates has kept stocks from becoming expensive versus bonds. Stocks are expensive versus cash, underscoring the need for the Fed to follow through with rate cuts.
The top-level equity allocation remains at 72%. The early August volatility and subsequent rebound caused some indicators to whipsaw intra-month. U.S. Large Caps, U.S. Value, and International Developed each have over 16% weightings.
Both ISM and S&P Global U.S. Manufacturing PMIs indicate contraction. Broad-based weakness across activity indicators. Construction spending declines, led by the private sector.
Recent economic data for the eurozone has been mixed, but downside inflation surprises and central bank easing continue to underpin the bullish case. An increase in risk appetite and a broad aggregate of indicators across key data categories captured by our Europe 360 composite also supports the bullish case for European equities. Seasonal precedence suggests possible near-term weakness before equities post a positive end to the year.
With the Fed expected to start the rate cutting cycle later this month, the logic for extending duration is compelling. But compelling logic is usually not so compelling in the bond world. Several factors argue for a potential low in yields.
Macro, in terms of inflation and interest rates, still looks hopeful. Sentiment is mixed but there are still some signs of healthy skepticism. Trend evidence is still bullish with new breadth thrust signals.
PCE inflation holds near lowest level since early 2021. Consumer sentiment improves, while near-term inflation expectations decline. Chicago business barometer and other regional indexes show factory activity remains weak. Eurozone inflation slows, setting the stage for an ECB rate cut in September. Japan's end-of-month data deluge mixed.
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