Is It Really ‘2016 All Over Again’?

Keeping track of how the data comes in is going to be key this week, given the obsession with the slowdown narrative and in the wake of last week’s insane action in US rates and across bond markets more generally.

Obviously, China’s upbeat PMIs set the tone over the weekend, and as noted early Monday, it appears folks are willing to overlook (more) weakness in the euro-area in favor of focusing on a potential inflection in the Chinese data.

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That said, market participants might not be so forgiving if data in the US comes in weak.

In that regard, things got off to a somewhat sour start as retail sales missed, falling 0.2% in February versus consensus of a 0.2% gain. The print was near the low end of the range. Of course this data has been the subject of intense scrutiny since the December debacle and in keeping with recent “noise”, January was revised up to 0.7% (from 0.2%).

Core was weak as well and while a quick read would be that this doesn’t bode particularly well, tax refund delays appear to be a factor. “We believe the delay in tax refunds likely contributed to the weak February reading, creating scope for above-trend growth later in the Spring”, Goldman muses. 

For what it’s worth, BofAML called this last week in the course of expounding on recent gyrations. To wit:

There are several explanations for the recent weakness in spending – all of which imply a temporary lull. In December, the stock market stumbled, creating a negative wealth shock and hurting confidence. This was accompanied by the government shutdown, which weighed further on confidence. Then the polar vortex created weather distortions in January, further holding back spending. Most recently in February, delays in tax refunds have crimped spending. The Census Bureau data – which will be released on April 1st – are likely to show weak spending for February as well, although the data have been much more volatile of late and prior months could be revised.

There you go.

Meanwhile, ISM bounced off a two-year low, coming in ahead of estimates at 55.3.

In any case, you’d be forgiven for having serious reservations about the blockbuster start to Q2 tipped by Asian shares. Yes, the Chinese PMI beats are obviously nice, and yes, the rest of the PMI data out of the region was generally upbeat as well. But we would reiterate that if you look at the entirety of the data that crossed the wires on Monday, it wasn’t across-the-board good news. As noted earlier, Tankan was a disaster and South Korea’s exports fell for a fourth straight month.

We’d be especially cautious about the rally in Europe following lackluster inflation data which, while underscoring the case for more ECB stimulus, also draws a bright, red line under the “Japanification” narrative. And yet thanks to China’s PMIs and “reports of possible ventures”, the Stoxx 600 Automobiles & Parts Index (i.e., one the poster children for trouble over the past year) is having one of its best days of the year – at one point, it was up over 3%.

Long story short, it seems like folks are getting that 2016 feeling – recall that the parallel between this year and the bounce off the deflationary doldrums that characterized January and February three years ago is being drawn by all manner of market participants. It probably helps that Jerome Powell himself brought it up during his January 4 remarks in Atlanta – remarks which sparked the YTD surge. We were shouting from the rooftops at the time about the extent to which Powell drawing that parallel was probably the most important takeaway. Recall this passage, for instance:

[Powell] also deftly referred everyone to the 2016 experience when Yellen took a pause, an implicit/tacit suggestion that we could see a repeat of that in 2019. That was a good move.

In any event, SocGen’s Kit Juckes is skeptical about all of this. His Monday note is called “2016 all over again?” We’ll leave you with a particularly poignant excerpt from that piece:

Which captures the improvement in risk sentiment better, the 1% rally in the South African rand after Moody’s left the country’s rating unchanged (at Baa3, stable), or the 2.6% gain we’ve seen this morning by the CSI 300 index in China, that means it’s over 6% higher than it was on Thursday? 10-year Bond yields are 5bp higher in China, 3bp higher in the US and Germany, oil prices are still trending higher and ‘2016 all over again’ probably sums up the consensus mood. The signals from the yield curve inversion can be ignored certainly for now, perhaps for ever, in the eyes of many. The economic blip, in the US and more generally, is behind us.

If only…