Is This A ‘Reflation’ Day Or A ‘Growth Scare’ Day?

With earnings season all set to kick off stateside, market participants will have something other than the oscillation between “reflation” days and “growth scare” days to focus on.

The macro narrative is now bifurcated. Late last month, we were squarely in “growth scare” mode, as DM bond yields plunged in a ferocious move that pushed 10-year yields in the US to their lowest levels since late 2017, drove German bund yields below zero lending further credence to the “Japanification” narrative and sent yields in New Zealand and Australia tumbling to record lows.

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When Bond Markets ‘Go Mad’

That was exacerbated by convexity flows and the FOMC’s dovish encore (i.e., the Fed again delivering a dovish surprise, defying skeptics who thought January was as dovish as they could get without actually cutting rates). If you were going by bonds, you would have thought a recession was right around the corner.

Fast forward to last week and things turned on a dime, as the “false optic”/Fata Morgana from the positioning squeeze faded and upbeat China PMIs conspired with a better-than-expected ISM print and a solid jobs report in the US to catalyze a repricing back higher of growth expectations.

Now, we’re at a crossroads headed into a US earnings season that’s expected to show corporate profits falling for the first time in years, a development which, for the pessimists, presages a possible earnings recession and for the optimists, will eventually “correct” itself later this year, with the full year figures getting a “stick save” from an expected hockey stick inflection in Q4.

Read more on the earnings recession story

But even as all eyes will be on earnings, the bifurcated narrative described above will continue to dominate the macro discussion, especially in the event guidance from corporate management teams either supports or dispels the global slowdown story.

Unsurprisingly, SocGen’s Albert Edwards wasn’t particularly enamored with last week’s interpretation of the incoming data (i.e., the repricing back higher of growth expectations mentioned above).

“Fears of a global hard landing receded at the start of last week in the wake of the bounce in the official NBS Chinese PMI back above 50.0 in March”, he wrote Thursday, before cautioning that the employment subindexes for both the manufacturing and services sector remain in contraction territory. That’s nothing new, especially for the manufacturing employment subindex, but if you really want to ring the “social unrest” alarm, you might say something like this, from Edwards:

At the end of the day, what matters to the Chinese Government far more than the GDP growth numbers most commentators focus on, is employment growth. For it is job losses, rather than whether GDP grows at 6% or 5%, that might be a prelude to social unrest.

Albert also notes that the latest read on the US Conference Board survey of CEO confidence rose slightly in Q1 to 43 (from 42 in Q4), but remains very depressed. “The recent readings are consistent with an economy on the verge of recession and the manufacturing ISM at 45 rather than the current 55”, he chides, adding that the chart below is a two quarter moving average, to strip out volatility in the series.

(SocGen, Datastream) 

Meanwhile, Nomura’s Charlie McElligott – who does a better job than almost anyone when it comes to delivering daily, near-real-time documentation of whether the market is feeling “reflation-ish” or “growth-scare-ish” at any given time – writes that there are some new notables out of China which point to possible continued momentum for any nascent “feel-good” growth vibes still lingering around from last week.

“As part of our view on things that would be necessary to make this tactical ‘reflation’/’pro-cyclical’ trade into something more structural, we have spoken about the need for Chinese easing within the property sector which could then drive further building and consumption spree (impacting broad growth, inflation proxies / commodities / value vs growth etc)”, McElligott reminds you. In that context, he says it was “big news earlier in the week when the NDRC did in-fact ‘ease’ (or even outright ‘drop’) ownership limits across many Chinese cities to boost urbanization efforts.” He then cites a series of additional positives (all quotes in one way or another from BBG, including this article) as follows:

Further “green-shoots” in China property, as project sales of major home builders rebounded in March after contracting in Jan and Feb, as easier financing from banks, looser restrictions on buying and lower mortgage rates boosted the property market stabilization

Home builders are more active in land purchasing, and land prices in bigger cities have surged

Developers also received faster cash proceeds from banks in January and February, according to Bloomberg calculation based on official data

Home sales in tier-1 cities jumped by 48 percent in March from a year earlier, after a 35 percent increase in February and 20 percent in January, according to China Real Estate Information Corp.

Interest rates for new-home mortgages have declined for a third straight month in February, down 3 basis points from January

Finally, in case you needed something more granular/esoteric, McElligott breaks out a chart of Komatsu hydraulic excavator sales and operating hours in China. The slight inflection higher observable on the right-hand side below, is “separate-but-bullish for the ‘re-pricing HIGHER of growth’ theme” Charlie contends.

(Nomura)

So, there’s a bit more in the way of color/data/visuals for you to chew on as you ponder the relative merits of a renewed “cyclical reflation” trade, with the main question being whether this not-even-two-week-old U-turn (coming on the heels of the late-March/post-Fed “growth scare”) is only good from a tactical perspective, or whether it’s got some staying power thanks to a real inflection in China and a reasonably imminent change to the Fed’s inflation framework.

Try to keep all of that in mind as earnings start to roll in stateside – especially as you parse company guidance for macro clues.