“Causal thinking helps us make sense of a world that is far less predictable than we think.”
- Daniel Kahneman
Before we all get back to being epidemiologists for the rest of the trading day, let’s take a breather and ask ourselves if we really know what’s going to happen next?
As Kahneman went on to remind me in Noise, “in the valley of the normal, there are no surprises and no inconsistencies. And the future seems as predictable as the past.” (pg 158)
Obviously there’s been nothing normal about living through A) a pandemic and B) 5 out of the last 6 quarters being #Quad2 economic accelerations. With the probability of a Narrow #Quad4 rising in Q1, markets continue to signal non-linearity.
Back to the Global Macro Grind…
Welcome to a doozy of a Macro Monday @Hedgeye where US Equity Futures have been down 50-80 handles. Panic about what plenty think they can predict is palatable.
While there isn’t any OCT/NOV (i.e. Q4) US economic data to support a rising probability of #Quad4, my #VASP (Volatility Adjusted Signaling Process) is hinting at front-running another ROC (rate of change) sequential slowdown in Q1.
Since I’m comfortable with being uncomfortable with changing signals, I will change as my signals do.
In order to contextualize every shorter-term @Hedgeye TRADE move, we measure and map all of Global Macro markets week-over-week within the context of intermediate-term @Hedgeye TREND signals.
Starting with the Global Currency market:
- US Dollar Index was up +0.5% last week and reiterated being Bullish on both my TRADE and TREND durations
- EUR/USD was down another -0.7% last week and remains Bearish TRADE and TREND
- Japanese Yen was -0.3% vs. USD last week and remains Bearish TRADE and TREND
- GBP/USD was down another -0.2% last week and remains Bearish TRADE and TREND
- Norway’s Krone was down another -1.2% vs. USD and remains Bearish TRADE and TREND
- CAD/USD was down another -1.3% last week and remains Bearish TRADE and TREND alongside Oil
In other words, Commodity Currencies (Norway, Russia, Canada, etc.) continue to break-down alongside Commodities and the FX (and rates) market told the BOE (Bank of England) that raising rates into a slow-down was a Policy Mistake.
Our call for both Cycle Peaks (INFLATON and Commodities) is an easier one to see as of last week’s market moves:
- CRB Commodities Index is down -4.7% in the last month as it broke bad to Bearish TRADE and TREND
- Oil (WTIC) was down another -1.1% last week to -8.6% in the last month, signaling Bearish TRADE and TREND
- Copper broke @Hedgeye TREND support last week and is down another -1.1% this morning
- Natural Gas continued to #crash last week, down another -6.0% to -24.9% in the last month
- Wheat disinflated -1.3% last week, diverging from Corn, and signaling Bearish TRADE and TREND as well
- Lumber inflated another +1.9% last week to +53.0% in the last month and remains Bullish TRADE and TREND
No, you won’t hear all of the pundits who missed being long of Commodities and INFLATION #accelerating for 17 months highlight Lumber’s recent reflation or the 11-month highs in US Mortgage Demand.
Instead, you’ll hear them “be right” like broken clocks on The Cycle coming their way on deflation as Commodities, broadly disinflate from Cycle Highs. That’s what puts the US economy in either Narrow #Quad1 or #Quad4 in Q1, regardless.
That’s also why the easiest “call” for me to make this morning is reiterating that Peak Hawkishness at the Fed is priced-in alongside the Cycle Peaks in Commodities and INFLATION:
A) UST 2yr Yield’s peak is probably in with a sharp move down to +0.60% this morning
B) UST 10yr Yield was down another -8 basis points last week and is now testing a TREND breakdown
While it’s never “just one thing” that signals a Quad Shift, if the UST 10yr Yield were to break @Hedgeye TREND support of 1.35%, that would be a big #VASP Signal. So would a SP500 breakdown through 4519 TREND. Write those numbers down!
In the meantime, inside of SPY (last week) were US Equity Sector Style moves that are very consistent with what you’d see in a #Quad4:
A) Utilities (XLU) and REITS (XLRE) were up +1.2% and +0.9%, respectively, in a down tape (SPY was -1.9%)
B) Tech (XLK) and Consumer Discretionary (XLY) were down -4.7% and -4.0% respectively
Tech and Consumer Discretionary are the Top 2 Sector Styles in Quads 1 & 2, not in #Quad4. With TRENDING 3-month Returns of +6-8% those Sectors either break-down, hard, from here or they recover.
Rather than tell you I can predict the weather or your health in January, I’ll let the market tell me what to do from here.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.35-1.53% (neutral)
UST 2yr Yield 0.55-0.70% (neutral)
SPX 4 (bullish)
NASDAQ 14,905-15,906 (bullish)
RUT 2121-2275 (neutral)
Tech (XLK) 165.13-176.94 (bullish)
Consumer Discretionary (XLY) 192-209 (neutral)
Housing (ITB) 76.98-83.95 (bullish)
VIX 16.41-28.86 (bearish)
USD 95.75-96.78 (bullish)
EUR/USD 1.121-1.136 (bearish)
USD/YEN 112.71-114.22 (bullish)
GBP/USD 1.313-1.333 (bearish)
CAD/USD 0.771-0.791 (bearish)
Oil (WTI) 66.09-72.75 (bearish)
Nat Gas 3.51-3.95 (bearish)
Gold 1 (bullish)
Copper 4.16-4.37 (bearish)
Bitcoin 42,953-50,995 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
