Noble Apex eNewsletter Issue 790- What is late cycle and how long can it last more?

2019-01-07 06:10
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7 January 2019 Issue 790

Global Market Commentary


  • US: Powell, the President of Federal Reserve, tends to be dovish, the data of the US’s employment report is unexpectedly good, and the trade negotiations between China and the United States have reopened, which are beneficial to the stock market. Over the week, the Dow rose by 1.61% to 23,433.16. The S&P 500 index rose by 1.86% to close at 2,531.94. The Nasdaq rose by 2.34% to 6,738.86.
  • Europe: European stock markets generally performed well as the US Federal Reserve Board Chairman Powell hinted that he would no longer decide to raise interest rates. For the whole week, the UK’s FTSE 100 index rose by 1.54%, the German DAX index rose by 1.98%, and the French CAC40 index rose by 1.25%. The STOXX 600 index rose by 2.13% to 343.38 points.
  • Asia: Apple lowered its performance expectation, which shocked the market and technology stocks generally fell. For the whole week, the Nikkei 225 index fell by 2.26% to 19,561.96 points. The MSCI Asia Pacific Index fell by 0.27% to 145.64 points.


  • US: US Treasury bond prices have risen, and the Supply Management Association’s manufacturing purchasing index is far worse than expected. The market worried about the US economic prospect, resulting from capital outflow to bond market. For the whole week, the yield on the US 10-year government bond fell by 5 basis points to 2.668%.
  • Europe: Global stock markets fell, causing the market switch the capital to the risk-averse assets, bond prices rose while the bond yields fell. For the whole week, the German 10-year bond yield fell by 3 basis points to 0.206%.


  • Oil: China and the United States restarted the trade negotiations, alleviating market worries about the global economic slowdown and supporting the oil price performance. Over the week, New York oil futures rose by 5.80% to close at $47.96 a barrel.


  • US dollar: The US dollar index was weakened due to the dovish speech of Federal Reserve Chairman Powell. For the whole week, the Dollar Index fell by 0.231% to 96.179.
  • China: The People’s Bank of China stated in its 2019 Annual Central Economic Work Conference that the monetary policy in 2019 will remain flexible in order to keep the RMB exchange rate basically stable. For the whole week, the yuan rose by 0.082% against the US dollar to 6.668.


Economic-related News

  • U.S: US President Trump claimed that he will consider to use emergency powers to re-appropriate funds to build a border wall. He also said that the government shutdown could last for months or years.
  • U.S: US non-farm payrolls employment increased by 312,000 in December, which is the largest increase rate since last 10 months. The average hourly wage increased by 3.2% year-on-year, which is the fastest growth rate since 2009.
  • U.S: Federal Reserve Chairman Powell said that he will prepare to adjust policies quickly and flexibly in a bid to support the economy. He claimed that there is not any fixed policy. Goldman Sachs believes that Powell’s speech raises the chances of the Fed’s suspension of interest rate hikes.
  • U.S: The White House economic adviser Kudlow said that both parties hope that Trump will meet with Powell to discuss their views on the central bank’s interest rate hike. Powell said that he will not resign even if Trump asks.
  • Euro-zone: According to Eurostat’s data, the Eurozone’s Consumer Price Harmonization Index (HICP) in December dropped sharply from 1.9% to 1.6%, which is the lowest inflation rate within the past eight months, and is lowered than the market expectation, 1.7%.
  • Euro-zone: According to the data from Bank of England, the number of mortgage licenses that have been accepted in the UK dropped by 4.5% month-on-month to 63.728 million in November, which is the the lowest level within the past seven months, far below the market expectations of 66,000.
  • Italy: The Italian Statistical Office announced that Italy’s consumer price index (CPI) slowed to 1.1% year-on-year in December, lower than the market expectation of 1.5%.
  • Japan: According to data from the Bank of Japan, Japan’s base currency’s year-on-year growth dropped from 6.1% to 4.8% in December, which reached the five-year low.
  • Japan: Due to the bad weather and weak sales in Japan, Japan’s service industry purchasing managers’ index (PMI) fell from 52.3 to 51 in December, which is a three-month low.
  • Singapore: According to Nikkei/Markit data, Singapore’s Purchasing Managers’ Index (PMI) fell from 53.8 to  52.7 in December.


China Market Commentary
Economic-related news
• The representatives of China and the United States will conduct a two-day economic and trade negotiation in Beijing on 7th January, 2109. It is reported that the topics will include non-tariff measures, intellectual property rights, and procurement of agricultural and industrial products.
• The People’s Bank of China held a 2019 Central Economic Work Conference from January 3 to 4, claiming that the monetary policy will be more targeted and anticipatory in 2019, despite the overall theme of stability remaining unchanged.


What is late cycle and how long can it last more?

Throughout 2018, we have been spoiled with market commentaries that U.S. economy is in the late stage of cycle and a recession could be just around the corner. On average, economic cycles in the U.S. last around 34 months, but the current economic expansion is now 115 months-long, which is more than three times that length. In fact, the current cycle is the second longest since 1854 when record-keeping began, and it is now 5 months shy of the record only. The unusual length of the current cycle has aroused anxiety that it will come to an end. However, a sole focus on the length of the cycle is misplaced as economic cycles don’t simply die of old age.


Typically, an economic cycle can be separated into four phases, namely Expansion, Peak, Contraction and Trough (see figure 1). A late-cycle is defined by a slowdown in growth, rising inflation, tightening labour market and a contractionary monetary environment. On the corporate side, most companies in late cycle will see falling sales growth, rising inventories, margin squeeze on higher input and labour cost together with rising pressures on earnings.

Figure 1. Characteristic of Four phases of U.S. economic cycle

Source: iFund/Noble Apex, Fidelity

Looking into current economic indicators, the U.S. economy exhibits some late-cycle characteristic as U.S. GDP growth is moderating from Q3 2018, while labour market is tight and wage increase is accelerating. The interest rate cycle is almost finished as the Fed Fund rate is close to the “neutral rate” and only 25bps below the long-term rate as targeted. Besides, some corporates start to see falling sales growth and earnings are under pressure as rising interest rate weighs on borrowing expenses as well as end-demand.

On the other hand, there are some indicators that are not exactly match with the late cycle characteristics. First, inflation in U.S. remain benign (i.e. PCE core inflation should remain at around 2.1% in 2019F) and rising wages is unlikely to push up inflation rate considerably given other costs such as crude oil and commodities prices are much lower than previous cycle and it is unlikely to surge drastically this year. In addition, inventory is not a problem for most industries for the time being, while the ISM Manufacturing Index, a key leading barometer in identifying phases of the business cycle, remains robust and it is still early to say it will come off drastically.


Figure 2. Yield Spread of High Yield Corporate Bonds start to widen recently despite robust PMI

Source: iFund/Noble Apex, Bloomberg

To sum up, despite all economic expansions ultimately come to an end, the current U.S. economy could have stayed in this late cycle much longer than most people expected or the recession could be much shallow than the previous one. We say this because unlike in the last few cycles, investors have been relatively thrifty, house prices do not look excessive and the corporate sector has not over-expanded. Besides, the potential slowdown of GDP growth in 2019 was actually come off from a high base in 2018, which was more of a result of the tax cut impact by the Trump administration. And if we compare the average U.S. GDP growth over the past 10 years (excluding 2018) at 2.2% to the forecasted GDP growth of 2.3% in 2019F and 2.0% in 2020F, the slowdown of growth is actually not severe at all. Last but not least, the previous inverted yield curve of the front-end (i.e., 2s-5s and 3s-5s) in early December have actually reverted to positives, meaning that recession is not as imminent as some investors worry.

Knowing where we are in the business cycle is important as markets are forward looking. Bond investors have already increased their position in Treasury Bonds as indicated by recent widening yield spread of High Yields. Equity investors have added their positions in defensive sectors such as healthcare and consumers staples. Interests for gold is rising too as gold prices increased over the last few months. However, as we mentioned that investors in the current cycle seems to act more forward-looking than ever, therefore for those that are waiting for boom-and-bust market may be disappointed. Investors should be more diversified and be nimble for opportunities thrown up by today’s more volatile market.

Figure 3. Total Return % during the last three bear market

Source: iFund/Noble Apex, Bloomberg





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