Sticking To The Process

“When we all think alike, no one thinks very much.”
– Albert Einstein

The FOMC meeting was yesterday, and rates were risen by 75 bps as expected. The Fed will continue to reduce its balance sheet. Overall, the Fed is committed to raising rates as long as inflation is elevated, and the unemployment rate remains low.

Yesterday is also the day that I’m reminded why I don’t read outside news articles for any research. The narratives and group think are absolutely astonishing!

Here are a couple of the most recent narratives for why the bottom is in:

1. Hikes going forward will be 50/25/25 for the next 3 meetings. Yes, group think believes that 100 bps of rate hikes by Dec. 2022 is bullish because the hikes are no longer 75 bps…
2. Stocks are up because the Fed will bring down inflation and therefore you should buy Tech
3. I’ll stop there because it is a waste of time reading any of this

This is from Keith, and is what actually matters: The Fed is tightening into a slowdown and has no impact on companies guiding down Q3 and Q4. Focusing on “how many hikes” is like anchoring on inflation. It’s profit recession risk rising that will tell the tale of the tape like it did in 2000 to 2001 (while the Fed went dovish and had no hikes).

Back to the Global Macro Grind…

Before I even start, look at the Chart of the Day. That is a picture of the 2000, 2008, and current crash only the time series is showing every crash from peak to trough. This is for everyone to have a comparison of how long we have been within the current crash (blue line). Let’s use numbers though, in terms of duration, our current crash has only lasted ~20% as long as 2000 and ~37% as long as 2008.

Next, the numbers on the chart show how large the bounces and drops were within each market cycle. For 2000 the average up move was +15% and the average down move was -18%. For 2008 the average up move was +12% and the average down move was -19%. For the current market the average up move is +9% and the average down move is -12%. The largest bear market bounce in our current market is +11%, in 2008 +23%, and in 2000 +21%. Our current max bear market bounce (+11%) is lower than the average bounces in 2000 and 2008! Can you imagine all the talking heads in this country when there is a +23% bear market bounce?

But, 2000 and 2008 are not necessarily the same market conditions that we are experiencing currently. Lets go to 1969, 1975, and 1981 where CPI was rapidly accelerating alongside the Fed Funds Rate (chart below). The Fed Funds rate during 1969 stopped accelerating in Sep 1969, the market bottomed in Jun 1970, 9 months later and a -25% drop later. During 1975 the fed funds rate stopped accelerating in Jul 1974, the market bottomed in Oct 1974, 3 months later and a -26% drop later. During 1981 the fed funds rate stopped accelerating on Jul 1981, the market bottomed in Aug 1982, 13 months later and a -21% drop later.

We are currently still expecting 4 more (25 bps) rate hikes by December 2022. So is the bottom in? We have yet to get through all the rate hikes for the year! I’ll say it one more time, the Fed is tightening into a #Quad4 slowdown.

Those are just the numbers for the historical context of our current state. But let’s try to find the alpha for the next week while everyone else searches for the next groupthink narrative.

The sector ETFs up the most yesterday are: Uranium $URA (+7.0%), Small Cap Energy $PSCE (+6.4%), Blockchain $BLOK (+6.1%), Solar $TAN (+6.1%), and Internet $PNQI (+5.6%)

The sector ETFs that are up the most in the last 5 days counter to their trend are: Palladium $PALL (+9.0%), Brazil $EWZ (+7.8%), Rare Earth Metals $REMX (+6.0%), Oil & Gas Equipment & Services $PXJ (+5.7%), Small Cap Energy $PSCE (+5.6%), Soybeans $SOYB (+5.5%), Smart Grid $GRID (+5.2%), Steel Production $SLX (+4.8%), and Argentina $ARGT (+4.7%).

The IVOL discount callouts are: Colombia $GXG, Argentina $ARGT, Taiwan $EWT, Oil and Gas Services $PXJ, Natural Gas Trust $FCG, Timber $WOOD, Copper Miners $COPX, Defense $ITA, Leisure & Entertainment $PEJ, Cybersecurity $CIBR, Internet $PNQI, Bank $KBE, Gasoline $UGA, Soybean $SOYB, Swiss Franc $FXF, Yen $FXY

The IVOL premium callouts are: Malaysia $EWM, New Zealand $ENZL, Saudi Arabia $KSA, Turkey $TUR, Private Equity $PSP, Canadian Dollar $FXC, Senior Bank Loans $BKLN

Here is the data that has come out while we were sleeping:

• France $EWQ PPI (June) decelerates to +27% YoY from +27.1% YoY
• Spain $EWP Retail Sales (June) decelerates to +1.0% YoY from +1.3% YoY
• Eurozone $IEV Economic Sentiment (July) decelerates to 99 from 104
• With the consumer facing businesses reaching an ATL (-27 vs -23.8)
• South Africa $EZA PPI (June) accelerates to +15.2% YoY from +14.7% YoY
• An ATH as South Africa has committed to rate hikes to tame inflation
• The VIX closed 5% above the low end of the risk range with 23% of potential upside to the top end of the risk range
• Volume was down yesterday -10% on a 1M average basis
• The current 2-10 spread is at -20 bps lowest since 2000
• The 1yr forward 2-10 spread is at -1 bps
• The next chart shows 2-10 spreads around the world
• Countries currently inverted: United States $VOO, Brazil, Canada $EWC, South Korea $EWY, Mexico $EWW, Sweden $EWD, Poland $EPOL, Singapore $EWS, Czech Republic
• Countries knocking on the inversion door: United Kingdom $EWU, Norway $NORW, New Zealand $ENZL

Here is the data that has come out this week:

• South Korea $EWY consumer confidence slowed to lowest level since July 2020
• Germany $EWG gfk consumer confidence slowed to an all time Low
• France consumer confidence slowed for the 7^th sequential month
• Italy $EWI consumer confidence slowed to the lowest level since May 2020
• China Industrial Profits $FXI (June) accelerated to +0.8% YoY from -6.5% YoY
• Sweden M2 YoY slowed
• Thailand $THD M2 YoY accelerated for the first month since March
• Australian $EWA Inflation accelerated
• Spain PPI decelerated for the 3^rd consecutive month
• GB distributive trades has fallen for 4 consecutive months
• GB Industrial trend orders decelerate
• Turkey $TUR business confidence decelerates

The only bullish data points are coming from China and Thailand’s M2 (which is only the first acceleration). There is also European PPI’s decelerating although CPI-PPI divergences are still at 5.5 Z Scores, so CPI will continue to be pushed higher as the Eurozone raises rates.

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

UST 10yr Yield 2.70-3.08% (neutral)
UST 2yr Yield 2.88-3.31% (bullish)
High Yield (HYG) 73.74-77.51 (bearish)            
SPX 3 (bearish)
NASDAQ 11,180-12,216 (bearish)
RUT 1 (bearish)
Tech (XLK) 128-141 (bearish)
Utilities (XLU) 68.00-71.32 (bullish)                                  `              
Shanghai Comp 3 (neutral)
Nikkei 26,502-28,200 (bullish)
DAX 12,706-13,449 (bearish)
VIX 22.01-27.43 (bullish)
USD 105.90-108.22 (bullish)
EUR/USD 0.999-1.027 (bearish)
Nat Gas 6.70-9.15 (bullish)
Gold 1 (neutral)
Copper 3.19-3.49 (bearish)

Good Luck Out There,

Ryan Ricci
Macro analyst