- The Federal Reserve raised rates at its December meeting and projected three increases for 2017. Q3 GDP growth was good at +3.5% and Q4 GDP looks promising at +2.9% per the Atlanta branch of the Fed. December unemployment is a low 4.7% and wages grew 4% annualized over the last three months. The Fed mandate is met. However, three increases is aggressive for an uber-dove like Yellen. I feel that two hikes will be it for 2017.
- Trump policy (outside of tweeting) is very uncertain though a Republican Congress will undoubtedly find room for a tax cut or two, if nothing else. The US debt limit will be re-imposed on March 15th which will likely set off a political battle over deficit spending and the related ideas of the President-elect’s campaign – immigration control, military buildup, tax breaks and healthcare insurance revamp (AKA repeal and replace). The $68 billion Puerto Rico bailout plan will also get on the agenda – they have suspended debt payments and there is no money. In total, there are too many questions / conflicting agendas and not enough answers to say what will happen in a Trump government – though it will be very public.
- The US economy continued to muddle through the end of the year. One sign of the times is the poor results by traditional retailers such as Limited, Sears, Kohl’s, Macy’s and Barnes & Noble during the Christmas season in the face of the on-line retailing onslaught. Headlines include closing 10% of stores (Sears), shuttering completely (Limited) and laying off 10,000 workers (Macy’s). Perhaps investors should convert these old big-box stores into condominiums – it could raise foot traffic to the rest of the mall while addressing high housing prices at least.
- Much of Central/South America is stumbling with endemic shortages in Venezuela, protests in Mexico over increasing gasoline prices, worse-than-expected Argentine industrial production and the pending Puerto Rico bankruptcy (or equivalent). Brazil seems to be off the lows, at least.
- Q€ is alive and well, although there are more signs of inflation. The ECB is set to buy €780 billion of bonds in 2017 while overall annual inflation moved up to +1.1% (+0.9% core) in December in the Eurozone. France is looking to re-issue 50-year bonds to take advantage of demand for its debt.
- Italy will struggle to cope with Monte dei Paschi di Siena’s failure to raise private funds to cover its bad debts – a plan was announced on December 30th to issue €15 billion in short-term debt guaranteed by the Italian government which would cover their capital needs. Italy may have to contribute €6.6 billion in equity and compensation to retail bondholders. The exact details are still pending. Concurrently, UniCredit (Italy’s largest bank) is planning to raise €13 billion via a rights offering, selling €17.7 billion of bad debt and laying off 14,000 employees in a massive restructuring. This is the third time this bank will go to the capital markets to raise money. Will it be finally successful or just another delay of the inevitable?
- Greece shot itself in the foot again with a tone-deaf display of fiscal ineptitude. Although on the cusp of gaining over €200 million of debt relief from the ECB/EU, its socialist government decided to give €600 million in payments to 1.6 million retirees and not increase the country’s VAT on the Aegean Islands (which have been at the forefront of refugee crisis). Compounding the maneuver, Prime Minister Tsipras decided not to tell his fellow European government creditors ahead of time, giving them a nasty pre-Christmas surprise. In the end, the EU allowed the payments on Greek promises to adhere to all pending agreements (whatever that means). EU got a visit from Krampus, but Greece welcomed Santa Claus!
- Economically, the Eurozone continues to put up mixed numbers. The UK unemployment rate held steady at an 11-year low of 4.8% in the three months to October and there was an encouraging increase in wage growth. German industrial orders jumped +4.9% in October but fell -2.5% in November. Eurozone employment continued to drive towards the highs of 2008 (see graph right) as Spain created jobs at the fastest rate in a decade.
- As 2017 progresses, we face important elections in the Netherlands, France and Germany. The Dutch will kick it off on March 15th with the extreme right-wing leader of the Freedom Party, Geert Wilders, currently in pole position. On April 23rd, the French will be asked to choose their next president. If no outright winner is found in the first round, a run-off between the top two will be held on the 7th of May. Conservative leader Francois Fillon is in good position but far-right candidate Marine Le Pen is a real contender. Hollande’s Socialist party will hold their primary in January. Finally, in either September or October, German general elections will follow. It does not look like Merkel is going to cruise to a win given the recent refugee terror attacks but she is an able politician and there is a lot of time between now and then.
- China continues to bleed money as its foreign exchange reserves fell to just over $3 trillion at the end of 2016 – the high was $4 trillion hit in mid-2014 and we are now at 2011 levels. Japan is now the largest holder of US Treasuries as direct and indirect Chinese sales totaled over $100 billion in December. Assuming more social spending on otherwise-bankrupt heavy industries and troubled municipalities as well as the connected wealthy sending their money out of the country, this trend will continue. UBS states that the country is still $500 billion to $1 trillion away from financing concerns but so far there is little that is changing the direction on the horizon. Not a 2017 concern but 2018.
- In terms of economic headlines, Chinese exports to the US fell -4.7% during 2016, based on annualized data through October per Standard Chartered Bank, despite a fall of -5.9% in the renminbi. Clothing was the hardest hit category as rising wages in China pushed US retailers to other countries (e.g., Vietnam). Taiwan export growth of 12.1% in December also must be galling. If oil prices catch a bid thanks to OPEC/non-OPEC cuts that could also stress the Chinese balance of payments and corporate borrowings in foreign currency (US dollar debt is estimated per WSJ as 50% of the total $1.2 billion foreign debt). The central government spending is still at a multi-decade high of 25% of GDP and the deficit is increasing as spending rose 12.2% in November from a year earlier, while revenue rose 3.1%. Finally, in mid-December, Beijing ordered 1,200 factories to close in order to combat the choking smog. It is so bad that meteorologists have advised “quickly brush[ing] off any snow that falls on their skin” though officials have insisted that the quality improved in 2016 versus 2015 (though still at 109% of the national standard.
David Burkart, CFA
Coloma Capital Futures®, LLC
Special contributor to aiSource