Behind the Curtain

Awareness [ uh-wair-nis ]: the state or condition of having knowledge; consciousness

Analysts aren’t big on divulging process details. 

I get it.

Mystery supports mythology and ‘legend’ building.

Once the veil is lifted and you’ve analytically dox’ed yourself, the secret sauce ceases to be secret and any reputational mystique gets diluted.   

The risk is that the underlying reality is underwhelmingly pedestrian or that the emperor (process) has no real clothes at all.

Allow me to pull back the curtain.

Ready?…..

Generally, my best analysis is mostly just paying attention …. macro hyper-awareness made shiny with a thin veneer of punchy contextualization, real-world metaphorical’s and/or meme game slick talk. 

Underwhelmed?

Back to the Global Macro Grind…

I’m a loyal disciple of Socratic dialogues and rhetorical analysis. 

That means that I just show you a bunch of stuff without any framed or leading commentary and the conclusion(s) should be largely self-evident, obviating the need for any overwrought or fabricated attempt at pushing a particularly narrative.  

Anyway, let’s take our rhetorical analytical process for a test drive here this morning:

Manufacturing:

• Empire Mfg: Headline = -36.2 pts M/M
• Philly Fed: Headline = -20.2 pts M/M  
• Dallas Fed Mfg:  Headline = -8.4 pts M/M
• Richmond Fed Mfg: Headline = -23 pts M/M
• Kansas City Fed Mfg: Headline = 23 = -2 pts M/M
• S&P (formerly Markit) Mfg PMI = -2.2 pts M/M

in recent months we’ve recurrently espoused the idea that mean reversion is, indeed, in motion across the ISM indices and the gravity associated with the broader macro deceleration in combination with the renormalization in pandemic era consumption would continue to pull both the series lower on a Trending basis. 

No change to that view.   

Housing:

• Mortgage Purchase Applications = -0.6% W/W to 224.1 on the Index = 24 month low with May tracking at the lowest monthly level since October 2018
• New Home Sales = -16.6% M/M and -27% Y/Y to 591K = 25-month low
• PHS = -3.9 % M/M (-9.2% Y/Y) to 99.3 on the Index = 25-month low & 6^th consecutive month of decline.  Recall, Pending Home Sales represent contract signings and lead Existing Home Sales (closed transactions) by 4-8 weeks.
• EHS = -2.4% M/M to 5.61M = 3^rd consecutive month of decline and lowest level since the heart of the pandemic.
• HMI (Builder Confidence) = -8 pts to 69 on the Index = 2Y low and 5^th consecutive month of decline.
• Share of Listing With a Price drop = highest in 2.5 years over last few weeks (redfin data)
• Median Mortgage Payment (mortgage payment based on current 30Y FRM rates and median seller asking price) = +42% Y/Y

In short, you (still) need a hard hat to weather the fundamental bricks being thrown up by housing.   

On the policy side, it remains an attempt at a controlled demolition via rate-sensitive demand destruction.  But in combination with sector-specific fundamentals (ATH supply tightness) and idiosyncratic pandemic conditions (WFH, Commodity & labor supply, etc) the result has been a dramatic implosion in affordability.  Those affordability dynamics are now careening into burgeoning Quad 4 conditions and industry activity is sputtering.

And as the macro hard landing scenario moves further towards the heart of the probability curve, rates markets will begin pricing in a policy pivot (something we’ve seen over the last two weeks with long-end rates in retreat and equity-bonds correlation moving back to negative).  

In combination, those dynamics will ultimately help stabilize, then buoy activity.  That inflection will be reflected in equities almost immediately and then fundamentals on a variable lag.  

Watch for a re-steepening of the curve (mkt increasingly pricing in recession and policy reversal) and the TREND breakdown the 10Y yield.  That will remain our primary trigger for entry on the long-side of housing.  

Labor:

• JOLTS (April data):  Job Openings = -455K M/M to 11.4M
• ISM Employment = -1.3 pts to 49.6 = 18-month low first contractionary print since November of 2020.
• Conference Board: Jobs Plentiful = -3 pts to a new 12M low.  Labor Differential (Jobs Plentiful less Jobs Hard to Get) = -5.4 pts, also a 1Y low.  

A few contextual points:

• Openings, Hires & Quits:  Job Openings fell but so did Hires and workers continued to Quit, by the millions (4.4M specifically, just short of another record high), so ….

• … some marginal deterioration but the demand-supply imbalance in the labor market remains acute with the Openings-to-Unemployed ratio holding near record highs.   

• This imbalance continues to flow through to prices (wage acceleration) and remains a fulcrum factor in the Feds policy calculus.

Recall, the most basic temporal/cyclical procession in the labor market is essentially this:  Activity slows → Job Openings/Hiring Slows → Job Loss/Firings accelerate.

• The Feds ‘soft-landing’ aspiration hinges on calibrating demand destruction such that the 2^nd second step is realized (giving the imbalance scope to renormalize) while minimizing any spill-over to the 3^rd step.
• The Fed can’t fully pivot on its hawkish posture until they see tangible traction of demand destruction feeding through to the labor imbalance and its protagonist role in the inflation story. Meanwhile, ….  
• ADP small business payroll growth is negative (-123K in April, -92K again in the morning’s May data) and the NFIB logged its worst Forward Outlook print ever in April
• Small business capacity to absorb margin pressure (both commodity input cost and surging labor costs) is minimal on an absolute basis and terrible on a relative basis (relative to large corporations).
• The dystopian irony for households is that even as wage inflation is soaring, real income growth is still negative and purchasing power – inclusive of the wage increases – remains negative and falling. Simultaneous record wage growth and record purchasing power loss!

Purchasing power is hostage to the rate of change and cyclical pressures evolves into secular overhangs. This is obvious but somehow still broadly underappreciated.

To the extent income grows at a discount to inflation growth, then the spread between the rate of change of “transitory” inflation and wages represents a loss of purchasing power.  While the rate of change of inflation may moderate and prove transitory, the loss of purchasing power is permanent.  

Compounded over multiple cycles and you have yourself a tinderbox of inequality, social unrest and generational frictions.

Lastly, with respect to risk managing right now, here’s the Top 3 things from KM this morning:

1. USD – unlike Bitcoin, which got blatantly marked-up into May’s month-end… then fell, hard, yesterday… USD had a great #Quad4 day (+0.8% UUP), signaling immediate-term TRADE #overbought vs. both the Euro and Pound (see my Real-Time Alert on that). USD’s Risk Range continues to narrow – that’s what happens during consolidations of prior Cycle Highs
2. GOLD – has been signaling BIG-higher-lows for the past week and we finally got a BIG break-down in Gold Vol (GVZ) yesterday with front-month Gold Volatility closing at 16. Would you rather own Gold with 15-20 Vol or NASDAQ with 30-40 Vol? The Machine buys things with falling TRENDING volatility and this is a big one as UST 10s and 30yr yields continue to signal lower-highs
3. RATES – while long-term US Yields continue to signal lower-highs in their daily Risk Ranges, both German Bund and UK 10yr Yields just popped to new Cycle Highs in the last 2 days with European Inflation freaking out Super Late to The Game ECB Econs – that’s giving us a buying opportunity in BNDX and IGOV which are ETFs with European Sovereign Bonds

Macro dynamics are defined by rates, spreads and deltas.  

Nothing profound.  Just diligence applied within a uniquely conceived conceptual framework. 

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:

UST 2yr Yield 2.39-2.73% (bullish)
High Yield (HYG) 74.96-80.05 (bearish)            
SPX 3 (bearish)
NASDAQ 11,003-12,295 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-142 (bearish)
Utilities (XLU) 70.61-76.11 (bullish)                                                
Shanghai Comp 3060-3215 (neutral)
Nikkei 26,327-27,607 (neutral)
DAX 13,708-14,594 (bearish)
VIX 24.71-31.78 (bullish)
USD 101.20-104.16 (bullish)
EUR/USD 1.045-1.081 (bearish)
Oil (WTI) 109.03-116.97 (bullish)
Nat Gas 7.95-9.29 (bullish)
Gold 1 (bullish)
Copper 4.15-4.46 (bearish)

Best of luck out there today,

Christian B. Drake
Macro & Housing