"May you live in interesting times."
- Sir Austen Chamberlain
In the business of investment research and risk management, interesting times are typically beneficial. These “interesting” times can drive curiosity, questions, and demand for innovative research. But like most things in life, interesting times are best served in moderation.
A global pandemic followed by a major military conflict involving one of the world's superpowers might be pushing things a bit. As always, I'm reminded in times like this of the Persian adage:
"This too shall pass."
There is no doubt it will pass, but there is also no doubt there is some serious upheaval that is happening (and will continue to happen). Consider some of these recent asset class moves:
- Russia raised interest rates from 9.5% to 20%:
- Oil is up close to 40% in the YTD to $110 per barrel;
- 5-year CDS on Russia's most critical bank has blown out to 2,800 basis points;
- Russian Ruble -30% YTD to an all-time low:
- VIX up +108% YTD; and
- European natural gas is +45% in the last month.
The list could go on, but the point really is that risk is trending. This is what happens in #Quad4 ... volatility spikes are no longer episodic and bad news has a tendency to build on itself.
Back to the Global Macro Grind…
We certainly didn’t come into the year expecting Russia to invade the Ukraine (to be fair we didn’t have a view), but we did expect U.S. economic growth to slow. This has played out in spades. A significant recent driver in our GDP nowcast model was Real Disposable Income, which fell by almost -10% Y/Y! This was good for a greater than 3 standard deviation move in that data set. As a result, our Q1 2022 GDP growth number is now at +0.68%.
This deceleration will get sharper as we head into Q2. They key reason for this is highlighted in the Chart of the Day and relates to the extremely challenging stimulus comparisons. This stimulus obviously drove up household income in Q1 and Q2 of 2021 and then subsequent consumer spending into Q2 and Q3. (Editorial note: consumer spending is some 70% of U.S. GDP!)
Coming into the year, our models were suggesting that we may start to see some rate of change slowdown in inflation. While there is some evidence of this happening, it hasn’t occurred to the extent we originally expected. They key reason for that is likely related to Russia and Ukraine. Not only has that conflict driven oil up meaningfully, but other commodities as well. You may not have known this, but Ukraine is responsible for roughly 16% of the world’s corn exports and 12% of global wheat exports. But it gets better . . . Russia is the world’s largest exporter of both wheat and fertilizer!
As of this morning, 26 of the 31 commodities we actively track are up in the YTD. To the extent inflation continues to accelerate, that will obviously dent consumer spending. And like clockwork in the Eurozone this morning Flash CPI accelerated to +5.8% Y/Y in February, which is a massive acceleration from January’s reading of +5.1% Y/Y. It is also another all-time high.
One area of the economy where we may start to see some slowing of inflation is housing. This morning’s MBA mortgage purchase apps came in at -1.8% W/W and -8.7% Y/Y and the index dropped to its lowest level since May 2020. The combination of higher rates and low inventory has started to become a headwind for demand. Now home prices aren’t going to fall off a cliff, but a slowing in price appreciation is increasingly likely.
It’s not just Hedgeye that sees slowing growth. The yield curve is sniffing it out as well. Not only has the expectation of rate hikes this year declined from 6.5 to 5.0 in the last week or so, but the 10Y – 2Y OIS 1-Year Forward is pricing in an inverted yield curve a year from now.
So, what to do with all this information? Currently these are our top Macro ETF Longs: UUP, SHY, XLP, IDX, BNDD, GLD, THD, TLT, EPHE, PBJ, EZA, XLE.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.08-2.26% (bearish)
UST 10yr Yield 1.71-1.95% (neutral)
UST 2yr Yield 1.30-1.52% (bullish)
High Yield (HYG) 81.92-83.61 (bearish)
SPX 4 (bearish)
NASDAQ 13,004-13,968 (bearish)
RUT 1 (bearish)
Tech (XLK) 145-156 (bearish)
Consumer Staples (XLP) 73.52-76.67 (bullish)
Energy (XLE) 67.22-72.40 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 25,890-27,258 (bearish)
VIX 25.61-35.86 (bullish)
USD 96.02-97.82 (bullish)
EUR/USD 1.110-1.131 (bearish)
Oil (WTI) 91.46-109.23 (bullish)
Nat Gas 4.10-4.86 (bullish)
Gold 1 (bullish)
Copper 4.43-4.69 (bullish)
Bitcoin 35,107-45,276 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
