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Editor's Note: Below is a complimentary research note written by our analyst Christian Drake for our Macro Pro subscribers. To learn more about our Macro Pro research click HERE. |
I have a secret and a confession.
Below the surface of embraced uncertainty, beyond the deep recesses of objectivity and through the event horizon of data agnosticism, there sits a sheltered pool of stealth bias.
While I often have a convicted view on the probable slope of the line for any given high-frequency domestic macro series, I occasionally harbor a desire for a specific outcome.
This morning offers a quintessential example as I was hoping Retail Sales would print pretty much exactly the way it did.
For 2 reasons:
- Expositional convenience: It offers an easy case-study in Macro modeling 101.
- 3Q/2H Trajectory: It sits as a microcosm for how the macro data is likely to evolve over the coming quarter(s)
With respect to #1:
- Isolated distortions and large-scale macro shocks muddy the comp waters. If something was down -100% last year due to some transient shock, of course it’s going to be up big in rate-of-change terms in the corresponding period the following year….
- The analytical question of consequence is: Outside of base effect impacts, is the underlying trend actually improving or deteriorating?
- The primary, lowest intensity means to normalize against transitory distortions is to use the 2Y growth comps. For example, for June 2021, you would just take the average Y/Y growth in June 2021 and June 2020.
With Respect to #2:
- What I expect to happen, particularly across the Services Sector, is for the Y/Y comps to peak and fade (that has begun) but for the 2Y comps to be flat-to-accelerating … the signal being that the underlying trend continues to improve. This is what we observe in this morning’s Retail Sales data.
*THE NUANCE:
- There also exist nested distortions (distortions within the distortions). For example, Mar-May of 2020 marked the trough COVID comps, so Mar-May 2021 were destined for RoC solidity … but we also got another round of stimulus checks that hit in March ’21 … with that income serving to amplify consumption in March and April. You then got a little bit of sequential hangover in May as that stimulus impulse came off. So what does that mean for a little ‘follow the 2Y comp’ exercise? …
- Basically, it means that while the underlying trend remains one of ongoing improvement, the 2Y comp won’t be totally linear. It should (and did) peak alongside the layered distortion in March/April …. Decelerate in May, then continue its upward trajectory. Which it did – see 1st chart below.
- Again, this temporal comp procession will be more pronounced in Services as consumption progressively renormalizes away from the pandemic amplified spending on Goods.
THE IMPLICATION:
Understanding the underlying trend will be key in traversing the chop associated with a developing macro regime shift. It will also offer explanatory power in the two-way communication loop with our Quantitative/Risk Management Signaling process.
Coming off the easiest comps in modernity, we will get a mechanical deceleration in growth/inflation with a trajectory that puts on course for Quad3/Quad 4. While some key Trend signals have already flipped in the direction of Quad 3, Quad 2 had not (fully) ceded the drivers seat with respect to performance.
This would make sense if anomalous macro conditions were driving decelerating Y/Y growth but the underlying trend (normalized for comp dynamics) was still improving. To the extent the Y/Y and 2Y growth numbers are telling divergent stories I expect elevated market consternation around the appropriate asset/sector/style factor allocation.
I suspect it will get more interesting and the breadth/strength of the signal from the Signal (so to speak) will become more pronounced should both the 1Y and 2Y growth numbers start to flag simultaneously and conspicuously.
