Head Games
No time ever seems right, to talk about the reasons why you and I fight
It's high time to draw the line, put an end to this game, before it's too late
Head games, it's you and me, baby
Head games, and I can't take it anymore
Head games, I don't want to play the head games
--Foreigner (1979)
Bok Bok
Almost a peace offering. Thursday afternoon, news breaks. The Chinese have apparently agreed to scrap a four year old ban on U.S. poultry imports. Just a day or so earlier, U.S. equities slowed in response to a mangling of the U.S. Treasury curve as trade talks between the two nations hit a "snag." China had balked at purchasing up to $50 billion worth of U.S. agricultural products.
All good? Just a positive headline after a negative headline? Head games? China does have to feed almost a billion and a half people. People need protein. China's swine herd is currently badly depleted due to illness. Seems like small change to purchase maybe $1 billion worth of poultry that is badly needed. Okay, 2% of the way there. Huzzah.
Hello, Larry
One thing about Larry Kudlow. He seems to be a very nice man. I do not know him the way Jim Cramer does, but I have followed him (meaning that we have met in passing) on television a few times. Larry, even if he does not really know you, will always take time out to talk about anything interesting. I have never run into Larry Kudlow and not walked away smiling.
It could not be lost on leadership that the 3-month/10-year Treasury yield spread literally collapsed on itself on Wednesday. It also has not been lost on any cognizant market participant that this spread in particular has in practical terms controlled equity prices since the start of August.
Except, that is, for yesterday. The S&P 500 did rally, albeit on horrendously thin trading volume, as the chicken story made the rounds. The one day chart for the large caps:
Now, take your eyes back to the yield spread chart. You see that at the extreme right of the chart? You know what that is, right? That's the 50-day and 200-day SMAs for the 3-month yield and the 10-year yield closing at the same level. Right on the doorstep of a "golden cross". What the heck does that mean to you and I? It means, I think, that bond traders bought the 10-year too aggressively on Thursday, and they will have to lighten up on Friday. (Don't frown, that's good for the long equity crowd). Enter Larry Kudlow.
In The Mood
The news hit the tape Thursday evening across multiple media outlets. Early Friday morning, I saw the story in the South China Morning Post. The story lifted Asian stocks, European stocks, and U.S. equity index futures. The outlier, oddly was Shanghai.
"The mood music is pretty good," Kudlow was quoted as saying. About President Trump, he added, (He) "Likes what he sees, he's not ready to make a commitment, he hasn't signed off on a commitment for phase one." Although that line does not sound all that positive, Kudlow kept going, "It's not done yet, but there has been very good progress and it's also been very constructive," "We are coming down to the short strokes," and "We are in communication with them every single day right now." In other words, Larry Kudlow left a positive vibe on overnight markets.
Now, markets just need China to agree to a reduction to barriers of entry, and to load up on pork and soybeans (not to mention aircraft), so that President Trump can consider rolling back some tariffs. Uhm, yeah.
Again, Not Rocket Science
On Thursday, Federal Reserve Vice Chair Richard Clarida made a statement that troubled me just a tad. Not really his fault. Clarida said in reference to the U.S. economy that in general, the economy is "operating at or close to maximum employment and price stability." Now, on the surface, how wrong can Clarida be? Consumer level inflation has been tame. Producer level inflation has been volatile, but at the lower end of the range. Unemployment trudges along at 50-year lows. However, one must be very careful when one makes assumptions, particularly in the field of economics, which is really nothing more than the measured human response to conditions of surplus and scarcity both authentic as well as manipulated through policy.
Understand that both past Fed Chairs, Ben Bernanke and Janet Yellen, as well as a host of other Fed officials -- plenty of them trained economists -- made incorrect statements over the post-crisis years on what is "full employment." Many, perhaps arrogantly, or maybe even innocently, forget that as a discipline completely reliant upon human response, economics can never be considered a science.
There are no laws that work perfectly without fail under the same circumstances time after time. Why? Because due to changes in popular culture, population size, and demographics, there can never be any experiment in policy tried under the "same circumstances" twice. Understand? One must also understand that the term "full employment," when used to describe an entire economy, covers far more territory than when used to describe labor markets.
Just four thoughts from the back of Sarge's cranium.
1) Manufacturing still comprises 12% of the entire U.S. economy. The state of Industrial Production both at the national, as well as multiple regional levels is one of contraction. (More on that later this morning.) Therefore, the U.S. economy can not possibly be at "full employment."
2) Considering labor markets, while 3.6% unemployment is fantastic, does not wage growth of just 3.0% and underemployment of 7.0% simply deny any consideration of U.S. labor markets being in a current state of "full employment"?
3) Three straight quarters of declining corporate profitability. Does that force one to think that wages are about to take off? Next year could see wages slow more than we think.
3) One would think that if the U.S. economy were indeed at full employment, the Phillips Curve should work in practical terms as it does in economics textbooks. No? In other words, there should be an inverse relationship between the unemployment rate and consumer level inflation. Put shortly, there should be a certain amount of tension between the Fed's mandates. Maximum sustained employment should come at the expense of price stability and vice versa. The conclusion has to be that there is still slack in labor markets. You dig?
The Champion
Microsoft (MSFT) . All hail the cloud king. On Thursday, Microsoft announced a new strategic partnership with Salesforce (CRM) . Salesforce will move that firm's Marketing Cloud over to the Azure platform, while also integrating The Sales Cloud and the Service Cloud with Microsoft's communications and collaboration software.
Sound familiar? That's because earlier this week, Microsoft and Adobe (ADBE) agreed to broaden their cloud computing arrangement into customer service management. Or maybe it was last week, when Microsoft and Nokia (NOK) agreed to collaborate on enterprise solutions. Or maybe it was late October when the Pentagon selected Microsoft over Amazon (AMZN) for the JEDI contract that could be worth up to $10 billion over 10 years. By the way, Amazon is protesting that decision, but Defense Secretary Mark Esper has already said on Friday that the decision had been made fairly.
In short, Microsoft is hitting the ball out of the park on a regular basis in these "cloud wars." What does this mean for Amazon AWS, or the rising but difficult to follow Alphabet (GOOGL) Google Cloud? It means these guys are here to stay. In fact, maybe we should be watching what follows Nike's (NKE) move to carve Amazon out of that firm's direct-to-consumer program. Do other purveyors of popular consumer goods follow suit? Meanwhile, Amazon moves toward the creation of a brand new grocery business. Hmm.
FYI, I still have a $160 price target on Microsoft. For now.
Economics (All Times Eastern)
08:30 - Retail Sales (Oct): Expecting 0.2% m/m, Last -0.3% m/m.
08:30 - Core Retail Sales (Oct): Expecting 0.4% m/m , Last - 0.1% m/m.
08:30 - Empire State Manufacturing Index (Nov): Expecting 5.5, Last 4.
08:30 - Import Prices (Oct): Expecting -0.2% m/m, Last 0.2% m/m.
08:30 - Export Prices (Oct): Expecting - 0.1% m/m , Last - 0.2% m/m.
09:15 - Industrial Production (Oct): Expecting -0.4% m/m, Last -0.4% m/m.
09:15 - Capacity Utilization (Oct): Expecting 77.2% , Last 77.5%.
10:00 - Business Inventories (Sep): Expecting 0.1% m/m, Last 0.0% m/m.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 684.
The Fed (All Times Eastern)
No public events scheduled.
