"Powell is full of sh*t. He sees the data and now you’re not going to raise? Come on, man."

- Keith McCullough, The Macro Show, 9/14/23

Market Edges: How to Play a Fed Pause - thumbnail 09.15.2023 inflation King Kong cartoon

As Jerome Powell has made clear, the economy can turn on a dime.

When the Fed Chair announced the latest rate hike in July, it was widely believed another hike would be coming in September. Not long ago, it was still considered a coin toss. But last week, markets were pricing in a measly 3% chance of a hike. Now, consensus is firmly set on the Fed pausing this week. In other words, they see a 0.8% chance of hike.

"There’s the state, there’s the elites, then there’s the rest of us," says Keith McCullough. "Elites said they don’t want hikes, and that’s why he’s not doing it.” 

The FOMC's announcement on Wednesday may be all but certain at this point. What it means for the economy, families and businesses is far less clear. Having data is one thing. As Powell has shown, understanding how to use it is another.

“The data from (Powell’s address three weeks ago at) Jackson Hole to now has literally all gotten more hawkish, especially inflation,” Hedgeye Director of Research Daryl Jones points out. “PPI doubled, jobless claims are at their lowest level in seven months and Retail is better than expected.” 

“Ridiculous, ridiculous, ridiculous," McCullough adds. "Powell, if you’re data dependent, you’ll raise rates even though you know that’ll shock the market.”

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With housing and PMI data also being released this week, it's a great time to get some clarity entering the final weeks of the third quarter.

To help on that front, Hedgeye has three webcasts available for your viewing this week:

  • McCullough walked through our deep-dive macro slide deck in a Macro Themes Coaching Session earlier today. This hourlong video outlined the big market trends that will drive portfolio returns over the coming months. Click here to watch the replay.
  • Mike Taylor 1-on-1 with Keith McCullough: Fan-favorite Mike Taylor joins Hedgeye's CEO at 11am ET Tuesday for a new Real Conversation. The two will discuss implications of inflation's reacceleration, what to buy and sell right now, and share valuable investing insight as we head into the final quarter of 2023. (Add to Calendar)
  • 'Deep Dive' With Danielle DiMartino Booth: Join Quill Intelligence CEO & Chief Strategist Danielle DiMartino Booth as she welcomes renowned economist and monetary policy expert Lacy Hunt in a new deep-dive discussion only on HedgeyeTV at noon ET Thursday. (Add to Calendar)

Tune into the broadcast that applies most to you, or watch all three for a full macro education. As you can see, there's a lot going on this week. Read on to prepare yourself further.

Here's what's inside this edition of Market Edges:

  • Client Talking Points: The chance of a rate hike is so slim at this point that even the stocks-only investors on CNBC have caught on.
  • Chart of the Week: A trio of deceleratory August data points suggest July was the peak in the CounterTrend.
  • Sector Spotlight: Financials analyst Josh Steiner breaks down H8 data revealing increasingly strict bank lending.
  • What the Media Missed: McCullough observes a similar set you won't read about in the papers, and how he's handling it in his portfolio.
  • Around the World: Daryl Jones says to keep an eye on China following the country's first acceleratory data in three-plus months.

Good luck out there!


Below is our 'GIP Model Risk Management Overlay' to better guide your asset allocation decisions. Watch a brief video about our GIP model.

Click to enlarge

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Market Edges: How to Play a Fed Pause - quads




  • Our Long Oil Asset Allocation is finally a consensus one (after being up +28.4% in 3 months)
  • With our USD Long position up for 4 straight weeks, AUD is the most consensus Net Short
  • FACTORS: High Short Int, Small Cap, High Beta all hammered for the last month

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While Wall Street priced in “no hike,” the Bond Market just priced Fed Policy Expectations (i.e., the Short-End of The Curve) at NEW CYCLE HIGHS = 5.05% on the 2yr Yield. Long-end (10yr) up to 4.34% with the TOP-end of my Risk Range still at 4.39% so a Hawkish Powell may be “priced in” to both our Long USD and Bearish Duration (TLT) views before he speaks Wednesday!


While it was “priced in” to FX, Commodities, and Bond Markets (3 more #BHLs in USD, Oil, and UST 10yr this morning by the way), it took the uniquely American “Stocks” only peeps on CNBC a little while to catch up – now the beloved NASDAQ (we have no position currently) is back below @Hedgeye TREND support on the NASDAQ Comp Index and AAPL remains Bearish TREND.



Below is an excerpt from Real-Time Macro by analyst Christian Drake:

Retail Sales slowed in August. It was moderately hot relative to expectations, but in unemotional RoC space …

  • Headline = -10bps deceleration to +2.5% Y/Y
  • Ex-Autos & Gas = -90bps decel and back to cycle RoC lows at +3.6% Y/Y
  • Control Group = -80bps decel to +3.6% Y/Y (also back to RoC cycle lows)

Rather than wax analytically on the return to Trend decel in August, I’ll simply refer you to the contextualization trinity below, which detail the peak in the CounterTrend bounce in July, it’s subsequent reversal and impending (& imminent) confluence of mini-shock dynamics in queue.

Elsewhere … and it’s rare indeed that PPI steals the limelight from anything, let alone a top shelf series like Retail Sales … but PPI printed +0.7% on the sequential, almost 2X’ing estimates for +0.4%, while accelerating +80bps to +1.6% Y/Y. Notably, Ex-Food, Energy & Trade, wholesale pricing accelerated +30bps to +3.0% Y/Y.   

Beyond being notable on an absolute/standalone basis, the reacceleration in wholesale prices is meaningfully in that it accords with July/August survey data (ISM, NFIB, S&P PMI) both globally and locally, which showed input costs rising alongside weakening demand. In other words, a stagflationary margin-negative combo defined as (labor and now commodity) input costs increase while both demand and pricing power deteriorate.    

In combination with CPI acceleration and an Initial Claims series, which remains catatonic in its no-payroll-capitulation coma, the latest PPI data represents an (un)holy, high-frequency trinity in support of HFL and the BHL (Big Higher lows in the Quad3 trinity of Oil/Rates/USD) we’re seeing across the ‘flation tethered side of macro.  

The MTD macro and market data do not suggest we see a relent in those Quad 3 dynamics in September.

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From commercial and industrial to credit card and auto loans, banks are getting more restrictive about lending. The economic fallout won’t be pretty.  

“Generally, across most if not all categories, we’ve been seeing a rate of change slowdown,” explains Financials analyst Josh Steiner. “This is a trend that’s been in place for some time, a trend that clearly persists. This rate backdrop that we’re in is almost assuredly going to keep that trend going. So, I think we’re finally hitting that wall.”  

In a recent interview, Citadel CEO Ken Griffin gave investors his thoughts on lending data, also forecasting a slowdown, but his analysis was vague.

“What we’re doing is NOT sitting there giving you a feeling about that,” adds McCullough. “What we’re doing every week, for those of you that are new to this today, is giving you an explicit mathematical update. It’s not [Ken Griffin’s] job to be in the weeds on it, but it is ours.”



Below is an excerpt from the Early Look written by Keith McCullough:

If you’re a US banker or levered borrower, the Hat Trick of Big Higher Lows we saw last week in Oil, UST 2yr and 10yr rates and the US Dollar is #NotGood.

While I think I read more books than most of my competitors, I don’t need to read anything “in the papers” (that’s what Jay Powell says he does at this hour of his “process”) about anything this morning. Those 3 #BHLs matter more than anything anyone can say back.

Why? What do they mean?

  1. Higher-highs and higher-lows for Oil (the #1 input in our US INFLATION Nowcast) means no Fed Cuts anytime soon
  2. Higher-highs and higher-lows for UST Rates, across The Curve, is what it is – more of the same to Rate Sensitivity
  3. Higher-highs and higher-lows for USD remains widely misunderstood, and we remain Long of USD against the crowd

Change 1 or all 3 of those #VASP (Volatility Adjusted Signaling Process) Signals and I’ll not only change my positioning, but I’ll change what I’m writing and ranting about. In fractal math, these are called Similar Sets. They are causal to one another.

Instead of chasing what the Old Wall Bankers are selling (ARM’s IPO), what do we do with these 3 #BHLs?

  1. EQUITY: Short Utilities (XLU) at the TOP end of my Risk Ranges (I’ve added that back to the RISK RANGES product)
  2. CREDIT: Reload on the Short Side of High Yield (HYG) and Junk Bonds (JNK)
  3. COMMODITIES: Keep buying the damn dips in Energy Stocks (XOP, XLE, PSCE), Oil, Gasoline, Uranium, etc.

 Market Edges: How to Play a Fed Pause - 9.14.23



Below is an excerpt from a Macro Pro research note written by Director of Research Daryl Jones.

  • Generally, we had an acceleration in China economic data Friday morning:
    • August Industrial Production accelerated to +4.5% Y/Y, from +3.7% Y/Y
    • August Retail Sales accelerated to +4.6% Y/Y, from +2.5% Y/Y
    • Fixed Asset Investment slowed slightly to +3.2% Y/Y
    • This is definitely data to monitor as it is a rate of change improvement in two big economic categories for the first time in three months in China
  • Just a day after the ECB signals they may be done hiking, we get inflation data that remains high and/or accelerating from Europe:
    • August France CPI increased by 0.1% to +4.9% Y/Y
    • August Italy CPI declined by -0.1% to +5.4% Y/Y

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