MorningWord 3/17/16: Don’t piss down my back and tell me it’s raining

by Dan March 17, 2016 9:35 am • Commentary

The U.S. Federal Reserve threw a curveball at market participants yesterday, and if you’re like me you’re a bit confused. Heading into yesterday’s meeting, expectations were that the Fed would raise rates four times in 2016 above its 25 to 50 basis point current rate for Fed Funds.  The Fed now suggests that despite domestic economic data near its prior targets (unemployment below 5% and inflation quickly approaching their 2% bound) they will likely only raise two times for the balance of the year. Yet April “is still a live meeting”. Clear as mud.  The Fed seems more and more worried about the health of global growth, and are backing off of rate increases, yet they’re not willing to come right out and say how worried they are, and why. It reminds me of the classic line from The Outlaw Josey Wales:

Don’t piss down my back and tell me it’s raining

It seems like The Fed high wire act is resting on the U.S. economy, and thus the U.S. consumer (as 70% of our GDP derives from consumption) reflating global growth. But just last week the WSJ warned the U.S. is already doing most of the heavy lifting:

  The U.S. May Not Be an Engine of the World Economy For Long:

Data provided by the World Bank show that the U.S. accounted for an estimated 0.6 percentage points of the world’s 2.4% growth rate in 2015, or roughly 23%. That’s the largest U.S. contribution since the recession.

As China has seen its growth rate halved from its post crisis highs, the U.S. and China combined will likely still account for nearly half of the World Bank’s 3% expected global growth:


A slowing China, uncertain emerging markets, and a shaky Eurozone means the global economy, for now, is reliant on the U.S.. But U.S. corporate earnings in just the last 16 hours demonstrate how choppy the reliance on the a relatively strong U.S. economy can be.  Last night FedEx (FDX) beat expectations for their fiscal Q3 and raised the low end of their 2016 full year guidance (on an adjusted basis, per GAAP they are down year over year):


FDX management offered up the following slide in their earnings presentation to give a snapshot on how they see the U.S. economy:


Their reliance on the U.S. consumer growth and the uncertainty of growth outside the U.S. seem about inline with that of the views of the U.S. Federal Reserve.  And it’s working for now.

But if your company is relying on emerging markets for growth, like China and Brazil, the way Caterpillar (CAT) is, then you are still in a world of hurt. After guiding down Q1 in January, this morning CAT issued the following warning:

Sales will be $9.3 billion to $9.4 billion and adjusted earnings per share will be 65 cents to 70 cents, the Peoria, Illinois-based company said in a regulatory filing Thursday. That’s below the averages of $10.2 billion and 95 cents, respectively

Yeah, FDX relies on international sales, and the feels the burn of the strong dollar globally, and weak em, but right now secular trends in e-commerce and a strong U.S. consumer are keeping the ship afloat (that said prior to this morning’s 5% bounce, the stock was down about 20% from its all time highs made last year). But if you continue to expect future growth to come from China and other emerging markets, your visibility is less clear, which on a macro level was what the Fed’s message was yesterday.