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Co-Starring Demand and Supply: Global Week Ahead

John Blank

After the Presidential vote, green lights flashed ON in the U.S. stock market. Tied to stellar returns, positive business cycle dynamics lifted the markets.

This Global Week Ahead pleads for 2 concepts as the business cycle continues to underpin the week’s stock trading dynamics. 

The first concept: bet on pro-cyclical activity.

With this 1st idea, investors place bets based on the amount of aggregate demand visible in the economy.

If it is ‘early in the cycle,’ you invest in consumer stocks: spending surely rises from a trough. If it is ‘late in the cycle’ -- like the U.S. economy now -- that means inflation, and then interest rates rise, as the Fed tries to slow the growth of aggregate demand. Invest in banks, as their profits surge.

As this Global Week Ahead unfolds, late-stage activity gets attention. Several FOMC members give speeches. With U.S. wages presently climbing +2.9% y/y — the fastest pace since DEC 2009 — pay close attention to these details.

  • On Monday, the Fed’s Rosengren speaks in Connecticut, Lockhart speaks in Atlanta, and Evans speaks in Chicago.
     
  • On Thursday, Fed Chair Yellen speaks in DC, Harker speaks in Pennsylvania, Bullard in NYC, and Evans in Naples.
     
  • On Friday, Fed Chair Yellen addresses a Town Hall of Educators in DC.

On Wednesday, President-elect Trump holds a press conference in NYC, his first post-election show. The Trump trade is a refresh on another old cyclical idea. It is called the ‘political business cycle.’ In this, politicians influence the level of overall demand thru taxes and spending. Lower taxes & higher spending -- up go stocks.

On Friday, we see direct pro-cyclical stock trading. The Bank of America, JPMorgan JPM & Wells Fargo WFC report EPS results. Financials ETFs have managed their greatest annual returns in four years in 2016 -- gratis rising short-term and long-term rates after the election. These Q4 results will be closely followed.

The second concept -- bet on structural change. 

With this 2nd idea, investors note major internal change inside the aggregate supply structure of the economy. They place bets on the faster-growing hands. For example, they bought the FANG stocks (Facebook, Amazon, Netflix and Google) in this cycle.

On Monday, the structural crowd should chime in again. The J.P. Morgan Healthcare Conference kicks off. In the past 16 years, the NYSE Arca Biotech index (FBT), which measures the performance of 30 biotech firms, has outperformed the S&P 500 index by nearly +3% during the conference, research by the firm shows.

In sum, this Global Week Ahead calls for cyclical demand actors — the Fed & rates, rising consumer inflation and Donald Trump — to play a co-starring role. Structural actors — biotech advancements, and the Internet beating brick and mortar at retail — play as their supply co-stars.

That fills out the market’s cast.

Top Zacks #1 (STRONG BUY) Large Cap Stocks

Bank of America BAC: Bank of America Corp. is one of the world's leading financial services companies. Bank of America provides individuals, small businesses and commercial, corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives.

Lockheed Martin LMT: Lockheed Martin Corp. is a global enterprise principally engaged in the research, design, development, manufacture and integration of advanced-technology systems, products and services. The corporation's core businesses are systems integration, space, aeronautics, and technology services.

International Consolidated Airlines Group ICAGY: International Consolidated Airlines Group, S.A. acts as the holding company for British Airways and Iberia providing scheduled passenger and cargo Airline services with its principal place of business being London.

Key Global/Macro—

On the data front, equity traders get updated on the overall U.S. consumer front. These latest U.S. retail numbers arrive after major department stores reported downbeat Xmas sales. Amazon ate their lunch, once again.

On Friday, Jan. 13th, expect U.S. retail sales to rise +0.7% in DEC. So-called ‘control’ retail sales —which strip out volatile items like automobiles, gasoline-at-the-pump and construction materials — should rise +0.4%. These data averaged +0.36% m/m over the last 15 years.

In other words, nothing new is in the offing for U.S. consumer demand. For retail supply, big structural change is ramping up.

I am going to closely watch global CPI figures this week. Annual CPI figures will range from +44.8% in Buenos Aires, +6.4% in Brazil, +3.42% in Mexico, +2.3% in Mainland China, +1.5% in the Czech Republic, and a paltry +0.6% in France.

Go ahead. Think harder about that price action!

On Monday, Mexico’s bi-weekly CPI comes out. Look for +3.42%.

The Fed’s Rosengren speaks in CT, Lockhart speaks in Atlanta and Evans speaks in Chicago.

On Tuesday, the City of Buenos Aires y/y CPI comes out. The last reading was +44.8%!

After the latest update, formal job creation may have fallen by -300K in Mexico.

Mainland China’s CPI should be +2.3% y/y and the PPI +3.3% y/y.

Norway’s CPI, in comparison, should be up to +3.8% y/y from +3.5%.

The Czech Republic’s CPI should be +1.5%.

Retail sales in Brazil should be -7% y/y, better than the prior -8.2%, but still contracting.

On Wednesday, Brazil’s monetary policy SELIC rate should be cut 50 bps from 13.75% to 13.25%.

Brazil’s IBGE inflation rate in y/y terms should fall to 6.39% from 6.99%. Lower inflation (but still too high!) is helping get the long-term rates down there.

On Thursday, France’s final CPI should be +0.6% y/y.

The unemployment rate in Turkey should be 11.3%.

The Eurozone’s industrial production should get to +0.6% y/y this time around.

The Fed’s Yellen speaks in DC, Harker speaks in Pennsylvania, Bullard in NYC and Evans in Naples.

U.S. initial claims should be very low at 265K.

On Friday, the Bank of Korea (BoK) base rate should be 1.25%. It’s worth noting the South Korea political turmoil here, of late.

Yellen addresses a Town Hall with Educators.

Brazil’s proxy GDP should be -4% y/y, better than the prior -5.28%.

University of Michigan sentiment should be comparable to the prior 98.2.