World equity markets have been strong since the beginning of October, bouncing off their lows as the Fed held back its plan to raise interest rates. Tonight, investors may be on the lookout for the ECB rates announcement, where expectations is for them to expand their stimulus package.
 
Macquarie Equities Research (MER) issued a report on 15 October, highlighting their confidence in the strength of the US economy. Read on for more excerpts from the report.
 
Several commentators continue to focus on risks and overhangs to growth. In contrast, MER remains confident in the strength of the US economic expansion and believe its resilience is broadly underappreciated. As highlighted in Opportunity Knocks – Time to Buy MER sees recent market volatility as a buying opportunity. MER’s preferred approach is to emphasize stocks with exposure to the US economy as outlined in MER’s latest Marquee Ideas. Here MER highlights their top ten barometers of underlying activity that don’t seem to be getting the attention they deserve.
 
1) Private sector nonfinancial credit growth. This reflects credit growth from households and nonfinancial businesses. It has been steadily rising over the past five years. Its pace of growth exceeds the pace of nominal GDP growth for the first time in the current expansion.
 
2) Atlanta Fed GDP now (domestic demand). The headline estimate of the third quarter GDP growth suggests a number slightly below 1%, but is misleading as this reflects drags from the change in inventories and net exports. Real final domestic demand likely grew at a pace of over 3.5% in the third quarter.
 
3) Vehicle miles travelled. A broad indicator of economic activity, this has risen 3.2% over the past twelve months, its fastest pace in nearly 15 years.
 
4) Household formation growth. After being subdued for nearly eight years, this has accelerated, tripling over 2014 levels. This is an important and highly cyclical indicator supportive of further gains in residential construction.
 
5) Mortgage credit growth. After being a drag for several years, mortgage credit is turning positive. The second quarter of 2015 showed the largest quarterly gain since 2008. The pipeline for this also remains strong. The four-week average in mortgage purchase application volumes is up nearly 25% year over year, its strongest pace of growth in over a decade.
 
6) Non-residential private construction. This also remains robust, with several categories showing steep gains over the past year, particularly manufacturing, lodgings, and office construction.
 
7) Underlying inflation. While headline inflation indicators may be subdued, underlying measures such as core CPI, median CPI, and the trimmed mean PCE are all much firmer. Moreover, should the oil price stabilize in coming months, headline CPI will likely reach 2% in the first quarter of 2016.
 
8) Atlanta Fed median individual wage growth. Aggregate headline wage growth has remained subdued, driven by retirements. Median individual wage growth, however, has accelerated, indicative of labour market tightening.
 
9) Small business compensation plans. After slowing through the first six months of the year, small business compensation plans have sharply rebounded in the third quarter, a positive signal for further wage gains in coming months.
 
10) Small business difficulties finding quality labour. The share of small businesses citing quality of labour as the single most important problem facing their business has nearly doubled over the past year. This provides another indication of a tight labour market and dwindling slack.
 

Source: Macquarie Research - 22 Oct 2015