Five bullet points, no more! (#12)

… a series to track the global macro cycle and asset allocation

Yesterday’s trade figures raised some suspicions, as imports were well below expectations: Q2 growth reverses some of the Q1 front-loading. But more importantly, domestic demand—consumption plus fixed investment—is decelerating further (see graph below). Retail sales over the last few months have been weak, as we previously noted (see Five Bullet Points… #10). The surprise came from fixed investment, with a contribution to growth close to zero. In Europe, GDP surprised on the upside due to the easing of rates and good transmission to the credit cycle (see Five Bullet Points… #11)... and budget deficits above targets in many countries, particularly France.

Sources: BEA, Fred, SARIM

Important data publications continue this week. Home prices in the US fell in May, more than expected. In April, prices were contracting in a third of US cities, and now it's in half of them. This affects the wealth effect (recall the graph in Five Bullet Points… #6 from the end of June). All eyes are on the labor market report. Beyond the headline, attention must be paid to hours worked and salaries—in other words, how much more American households can spend. Finally, there's little change in the big picture concerning the IMF growth forecasts, which were revised slightly upward yesterday, mostly thanks to emerging markets.

VIX at 15 means no risk? Rather, it's time to start thinking about buying it! From time to time, I like to remind clients of this chart. Each bar represents the percentage of time the VIX spent between y% and z%. Since 1990, the VIX has spent 52% of the time above 15. The bar of 80% is reached at a VIX level of 14. Given the current environment, buying some VIX options makes great sense. And if volatility spikes, we will all watch how the USD reacts. At the beginning of July, our monthly review, "The Cycle and the Spreads," called for a possible tactical rebound of the greenback.

Sources: LSEG, SARIM

Last week, the UK and India signed a Free Trade Agreement, eliminating tariffs on almost all products, ranging from alcohol to cars, including whisky and textiles, plus access to non-strategic public tenders for British companies. The goal is to double bilateral trade by 2030 from a level currently close to $65 billion—and a deficit for the UK of around $12 billion. It took three years of negotiations. India is currently also negotiating with the EU, with an agreement expected by the end of the year. The EU-US trade deal? In one word, (incredibly) asymmetric!

Industrial profits in China continue to contract (-1.8% in June year-on-year). Industry is a small share of equity indexes, so it doesn't prevent most Chinese indexes from hovering around three-year highs. Interesting is the decomposition by type of corporate. State-owned firms recorded a 7.6% decline in profits in the first half of the year. Private-sector companies reported a rise of 1.7%, while foreign firms logged a 2.5% gain, the data showed. The data reflects the three different economies interacting in China: the public system, with a growing number of zombie entities that do not necessarily pursue purely capitalistic goals; the foreign-invested sphere, which has privileged access to external demand; and the local private sector, under oversupply and deflationary pressure, in a context of anemic local demand.