Global Markets
The Global PMI (purchasing managers index), a proxy for economic growth has rebounded to multi-year highs. This can be seen in expansion of both manufacturing and services.
The Emerging Market and Developed Market PMI expanding together. Is it possible we have entered a coordinated growth cycle after years of uncoordinated growth?
CEO’s sentiment towards the macroeconomic environment reflects this improvement.
The ECRI Weekly Leading Index is at a multi-year high while the ratio of coincident to lagging index is trending higher. All these measures suggest a moderate but coordinated expansion.
Inflation and Interest Rates
Inflation indicators across the OECD has increased as has the prices paid and received diffusion index published by the Philadelphia Federal Reserve.
The real rate of interest is trending higher but is still negative indicating a loose monetary policy. The yield curve remains steep suggesting little chance of a recession in 2017.
Indicators
I believe hotels are a good indicator on consumer and business sentiment. For Q1/2017 U.S. hotel industry reported occupancy increased 0.9%, ADR (average daily rate) rose 2.5 and RevPAR (revenue per available room) increased 3.4%.
The Port of Los Angeles reported in early May that cargo increases almost 17 percent year over year after reporting the best Q1 ever. Trade is stronger than being reported.
Year to date, cargo has increased 10 percent compared to 2016.
Truck Sales are still trending higher but are testing its upward trend line. I would be concerned should this indicator break through the trend line. Few people buy trucks for fun. They are bought for work. That is the reason I like the indicator.
During the first week of May, US domestic steel production was 1,737,000 net tons and the capability utilization rate was 74.5 percent. The current week production represents a 0.3 percent increase from the previous year but down 0.7 percent from the previous week.
Year to date production was 31,196,000 net tons with capability utilization rate of 74.3 percent, up 3.4 percent from the same period last year, when the capability utilization rate was 72.1 percent.
The Chemical Activity Barometer (CAB) was up 5.6 percent year-over-year gain. This indicator tends to lead industrial production.
Miles driven on rural and urban highways continue to trend higher than 2016 and 2015.
Federal Highway Administration
The Cass Freight Index continues to expand supporting the Port data, however, the linehaul index is slight below previous.
Wild Card
I believe the big wild card is the US Dollar. A too strong dollar will pull money from the Emerging Markets and pressure commodities. Stratfor published an article wondering about the possibility of a new Plaza Accord (which as an agreement to lower the price of the USD in the mid 1980’s). The Trump Administration does not want a strong dollar regardless of what the “official policy” is claimed to be. Is this still a bull market?
Another wild card is war, both with North Korea or Iran or a trade war. These issues are harder to predict but it could derail the coordinated moderate expansion that seems to be happening.
Conclusion
We are late in the credit cycle. Should credit contract I would expect to see the market contact. I have begun to see articles about “bubbles” and the age of this bull market. There is more upside and the expansion should continue but we are edging ever closer to the next recession. I will address these market cycle stage and a future recession on the blog and in a report later this year. Until then enjoy the global expansion but be aware of news and indicators that could suggest a change.
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