There are a whole lot of things you can say about last week, but one of them is certainly not this: previously disappointing hard data is getting better and is starting to catch up to soft data euphoria.
Between the “surprisingly” bad auto sales data we got earlier in the week (which catalyzed a further move lower in 10Y yields, exacerbating a very un-reflationary-ish trend) and the “big league” NFP miss on Friday, the picture we’re left with is one of increasingly poor “reality” in the face of still palpable “hope.”
How long that “hope” lasts is up for debate but what’s not up for debate is the simple fact that when it comes right down to it, we haven’t seen much in the way of anything in 2017 that supports the contention the US economy is going to return to pre-crisis trend growth (as Donald Trump has promised).
Sorry, but that’s just the way it is.
Now, there are a lot of folks willing to step in with explanations (“soft data” is “timelier”, etc.) but really, the “hard/soft” disconnect is becoming harder and harder to explain away.
Below, find a quick take from BofAML who notes that “soft” may be the new reality for “hard”…
Is soft the new hard data?
This week saw some softness in hard data as auto sales and jobs growth declined sharply. While two observations do not make a trend, this occurrence nevertheless is noteworthy as on the one hand very positive sentiment indicators suggest activity should pick up (Figure 1), while on the other hand loan data suggests everybody is in wait-and-see mode pending details of fiscal stimulus (=tax reform) – which highlights the risk of softer hard economic data. For example, weekly bank asset data shows that C&I lending has not increased since September 7 last year (Figure 2), the first period of no growth for at least six months since the 2008-2011 aftermath of the financial crisis, and prior to that after the early 2000s recession (Figure 3). At the same time, consumer loan growth has slowed substantially – up just 1.4% since the US elections compared with 3.1% the same period the prior year (Figure 4).
As tax reform by House Speaker Ryan’s own account is not going to happen anytime soon, and likely will be watered down as the Border Adjustment Tax (BAT) is replaced by a Value Added Tax (VAT) and the elimination of net interest deductibility for corporations, the biggest near term risk to our bullish outlook for credit spreads we maintain is a correction in equities – most likely prompted by weak hard data.
As for stocks, don’t worry because as Goldman recently pointed out, “soft data tend to be more important drivers of equity market performance than hard data [which is] a useful reminder amid investor concerns that there is something unusual or illusory about the recent response of the equity market.”
“Buy, buy, buy.”