"Constant repetition carries conviction."
- Robert Collier
Sentiment can be a tough thing to measure in markets. There are many types of measures that can tell us when a stock is oversold or overbought. Depending on the environment, some can be decent gauges for short term mean reversion. In the last few days, most of these measures have been marched out on social and mainstream media.
Within the Hedgeye process, we tend to focus on our proprietary VASP signals, which take into account price, volume, and volatility. A security is then bullish or bearish on various durations: Trade (3 weeks or less); Trend (3 months or more); and Tail (3 years or less).
We also take into consideration positioning in the futures and options markets. These tend to be contrarian indicators that signify when longs or shorts may be complacent or overextended in their positioning.
The Hedgeye process also obviously includes considering the macro environment, which lends itself to focusing on the assets that may perform the best (or worst) depending on what is occurring with growth, inflation, and policy.
That's a long way of saying global markets are chaotic systems that require different lenses of consideration. As most of you know, we are currently bearish on most risk assets due to being in (or heading to) #Quad4 and most of them being bearish TRADE and TREND within our volatility adjusted signaling process. A couple of days of a "risk on" rally due to positive foreign policy developments doesn't really change our thesis or views.
Back to the Global Macro Grind…
There has been some noteworthy economic data in the last few days. At the top of that list was Germany's Zew Economic Sentiment Sentiment for March. It fell by -93.6 points month/month to -39.3. To be clear, that was the largest drop in the history of that data set.
Back in the good old U.S. of A, we received the Empire State Manufacturing Index yesterday which dropped to -11.8 in March. This was below estimates and suggests factory activity contracted in New York State for the first time since the lows of the pandemic in June 2020.
Finally, late last week Michigan Consumer Sentiment dropped to 59.7. That is the lowest reading in almost eleven years and consistent with deceleration in sentiment readings that noticeably began in February. Within this Michigan report, inflation expectations hit their highest level in the history of the data set. Also noteworthy, and likely not surprising, was that 24% of respondents noted the Russian invasion of Ukraine as a concern.
So if peace is really on the way between Russia and Ukraine, maybe we do get a bit of a "relief" rally. It has been weighing on investors' minds, of course. But it doesn't change the reality that growth and sentiment were already slowing and we face a fairly sharp monetary tightening on the horizon.
On that last point, the expectation for hikes in interest rates for 2022 according to Fed Funds Futures has hit a new cycle high this morning. As the Chart of the Day shows, the expectation for interest rate hikes this year is now at seven. Seven! Should that happen, that's a seriously different monetary environment than we've been in for the previous two years.
Meanwhile the 10 and 2-year OIS 1-year forward spread is currently at -0.14, which implies an inverted yield curve in a year from now. This is a new cycle low. So... with the expectation of short-term rates increasing, further out on the curve the expectation is that they will fall. One interpretation of this is that future growth and inflation may decelerate meaningfully.
There is no doubt on days like yesterday and today, we will all question our #Quad4 thesis. But this thesis was never predicated on Russia's invasion of Ukraine. A peaceful resolution won't change the economic and monetary reality at hand. This is not to say we are so resolute in our views that we won't change our mind. As John Maynard Keynes famously said:
"When the facts change, I change my mind. What do you do, sir?"
That said, a two-day relief rally isn't enough in the way of facts for us to change our mind. But if it does, we will let you know.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.14-2.54% (bullish)
UST 10yr Yield 1.68-2.21% (bullish)
UST 2yr Yield 1.40-1.94% (bullish)
High Yield (HYG) 79.23-82.24 (bearish)
SPX 4111-4337 (bearish)
NASDAQ 12,424-13,416 (bearish)
RUT 1 (bearish)
Tech (XLK) 139-151 (bearish)
Energy (XLE) 71.04-78.95 (bullish)
Gold Miners (GDX) 35.32-39.65 (bullish)
Utilities (XLU) 68.32-72.30 (bullish)
Shanghai Comp 3070-3315 (bearish)
Nikkei 24,307-26,264 (bearish)
DAX 12,603-14,306 (bearish)
VIX 27.73-36.91 (bullish)
USD 97.48-99.70 (bullish)
Oil (WTI) 94.06-124.85 (bullish)
Nat Gas 4.35-5.05 (bullish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
