Since January, I’ve been discussing the fact that markets are pricing in a slowing of US economic growth.
On Wednesday, the Commerce Department reported a first snapshot of the US’ Q1 GDP at 0.1%. Before going any further, it's important to remember that this number will be revised several more times before being finalized. That said, the final number won’t look so different as to cause a reassessment of growth in the first quarter.
AT THE MARGIN
Regular readers of TWR know that numbers in a vacuum don’t mean much to me, when it comes to the fundamentals of an economy, I’m interested in whats happening at the margin. This 0.1% quarter-over-quarter growth rate is the slowest quarter-over-quarter growth rate since the first quarter of 2011.
At that time we were just a little over 2 years removed from the crisis and now we'refive years removed. Is the US fundamentally better off?
After economic growth ripped higher sequentially last year we’ve seen economic growth slow at the margin for 2 consecutive quarters. Economic growth peaked in Q3 last year posting a 4.1% growth rate then went on to decline to a 2.6% growth rate in Q4 and finally last week’s initial look at Q1 2014 which grew at 0.1%.
It's not surprising that there are a lot of other numbers slowing from the Q3 2013 peak until the end of March. Retail sales have slipped from a 2.45% Q3 2013 growth rate to 0.68% in Q1 2014.
Fixed Investment and exports both declined from positive growth in Q3 to negative territory in Q1 2014. At the margin, the numbers are starting to confirm what markets have been telling us for months, US growth is slowing and its not the bad weather.
THE CRINGING CONSUMER
Personal consumption (PC) is the biggest component of GDP and the engine of the expansion. PC has risen by at least 1.5% for 17 straight quarters and Q1 2014 was no exception: PC posted a 2.0% growth rate.
But is this sustainable?
Spending increased 0.9% in March, the largest increase since 2009. However, personal income only increased 0.5%, so where did the rest of the money come from? Savings.
The personal savings rate of 3.8%, down from 4.2% in February, is the second lowest savings rate since Lehman’s bankruptcy. I’ve discussed the “tax” on consumers in the way of inflationary pressures in several issues of TWR this year.
The inflation portion of the GDP calculation was kept constant from Q4 2013 at 1.3%. I find this interesting considering the year-to-date price movement in commodities that consumers buy everyday like: coffee 84%, corn 19%, wheat 18%, soybeans 14%, sugar 6%. My own proprietary food index is up 17.8% so far this year.
So, as long as you don’t eat then I suppose inflation is close to 1.3%, but that’s not most US consumers' reality. US GDP would very quickly become negative if a legitimate inflation rate was utilized in the calculation.
Bottom line: The US consumer has been driving the growth in GDP for the last 4 years, mainly through the spending down of their savings, which is at Lehman bankruptcy lows and falling. They're being forced to pay more today for just about every food item they buy than they were just four short months ago.
I’m not sure how much longer we can expect the consumer to keep on buying in order to keep the US afloat.
The consuer’s largest asset continues to deteriorate in value. Case Shiller’s latest numbers showed the fourth consecutive month of sequential declines in housing prices. This is the longest streak of declining housing prices since early 2012. The latest pending homes sales numbers painted a similar picture, posting the sixth month in a row of negative year-over-year growth. Not to mention that mortgage applications fell another 6% this past week.
Don’t forget all of this housing data is occurring at a time when 30-year Treasury yields just fell below 3.4% for the first time since last June and have experienced the largest year-to-date drop since 2000!
Talk about the margin, it's been 14 years since we’ve seen rates drop like this. And for that matter, the entire interest rate complex is trading around 2014 lows.
I know I did a summary of market action a couple of weeks ago but after this past week, it bears repeating. I’ve been alerting readers of TWR since January that US growth is slowing and you should be invested accordingly.
The Focus Market biases have also reflected this realization. For the better part of the year, when I have taken a directional bias on a particular market, I have been LONG bonds, gold and the Euro.
I have been SHORT China and the US Dollar and I was LONG US equities for just 5 weeks in March and early April. Otherwise, I have had a NEUTRAL weighting for US equities dating back to November 4, 2013.
Yields got whacked last week despite the upbeat jobs data. The interest rate on 10-year Treasuries broke below my ABYSS line of 2.570% briefly intraday and managed to close just above that line at 2.591%. This was accompanied by both LQD and TLT breaking out above critical lines of resistance.
I’m going to watch the 10-year closely in the week ahead because further weakness could lead to close below the ABYSS line. This line also has been the floor for the 10-year all year long.
A decisive close below that line will have many other markets moving quickly to reprice accordingly. I’ve mention on several occasions that I have two proprietary indices that monitor both assets that perform well when US growth is slowing and a separate index of assets that perform well when US growth is accelerating.
Last week, the US Slow Growth index broke out and closed above its ALPINE line of 353.00 gaining 0.5% on the week. Friday’s closing price was the highest for this index since last June.
Likewise, the US High Growth index also gained 0.5% last week. I wouldn’t have expected this to be the case but it was. This particular index will be critical to watch over the next couple of weeks as a leading indicator to where US growth may be going from here.
On April 25, the US High Growth index closed below an uptrend line that began in November of 2012, a significant development. The index spent all of last week clawing its way back above the same trendline and managed to close right on it.
While this index is still technically in an uptrend that began over a year ago, it's been making a series of lower highs since it peaked on March 7. It made another lower high last week despite getting back above its trendline.
THE ONE TO WATCH
I like to try and keep things simple, so if you can only watch one market this week, watch 10-year yields, the ticker on most platforms is TNX.
TNX has been trading between 2.821% and 2.570% all year long. Last Friday was only the second attempt at breaking down below that floor and it was unsuccessful. TNX’s price movement over the next couple of weeks could have a profound impact on a number of markets across the globe. Be alert!