“By a continuing process of inflation, government can confiscate, secretly and unobserved, and important part of the wealth of their citizens.”
- John Maynard Keynes
I recently got back from vacation where I was backpacking through the mountains of Iceland. If you have never been, I highly recommend. It's one of the most surreal places I have ever seen while trekking.
We did a 50 mile hike called the Laugavegur trail over 6 days. The hike takes you from active volcano ridges, to glaciers, to deserts, and back again. The only consistent thing was that we were days away from civilization with zero cell service! Unfortunately, we also got stuck in a storm that even had the locals worried.
Rightfully so.
At the peaks of these mountains (~3,600ft) we were experiencing between 30-45mph winds which may not seem a lot, but Iceland doesn’t have trees for cover. On top of this, our ridges are smaller than most tables with steep drops on both sides. Don’t forget these are active volcanos off the trail, so some of those precarious drops lead to pools of water with sulfurous steam coming out. Then there was constant rain made our trail little muddy at times. Not ideal (or easy) for an uphill walk in the wind.
Put all this all together and you get a recipe for lifelong stories, unforgettable experiences, and critical lessons in risk management. Don’t worry, even with me as the guide for our group, everyone made it back in one piece!
However, coming back from the break, my biggest market realization was that while the tickers moved up and down one thing stayed the same: We still have 4 Quad 4s in a row.
Back to the Global Macro Grind…
With US CPI arriving today, I’ll comment on it briefly. Even though, as Keith has said many times recession > inflation at this point of the cycle. Let’s remember that the Fed’s target inflation is 2%.
Our current nowcast has inflation at 8.22% in 3Q22E, 7.56% in 4Q22E, and 4.75% in 2Q23E. These numbers will undoubtedly change, but the same models that called for the bull run in inflation last year are also showing that inflation will not be anywhere near 2% for at least one more year. That means your increasingly hawkish fed will continue to have no cover on rate hikes until we start to see the labor market get worse.
The PPI in the US is +15.5% YoY (1974 levels) with CPI at +8.5% YoY (1981 levels) putts US CPI-PPI divergence at a 3.7 Z Score, not something that fixes itself overnight.
That is the U.S. inflation front, what about globally? Germany PPI hit an ATH of +37.2% YoY with CPI at the highest level since 1973 +7.9% YoY (the first oil crisis) putting the CPI-PPI Divergence at a 6.6 Z Score. German Natural Gas is up +135% in 3 Months. It has developed a 0.652 3 month correlation to US Natural Gas.
On top of that German electricity prices are up +119% in 3 Months. This is by no means contained to just Germany or Europe, we are seeing record high inflation in Asia and other Emerging Markets as well. South Korea CPI hit +6.3% YoY and has a CPI-PPI Divergence of a 1.3 Z Score.
The chart of the day is a global map with each date listed as the last time each country had inflation as high as it is today. Averaging all these numbers gives a world average of 1999 as the last time inflation was this high globally. Doing the same exercise only for PPI yields all-time highs across the map.
We highlighted in my last Early Look and on The Macro show, but not only is inflation at levels last seen since (fill in the blank) for these countries but their currencies are also being devalued vs the dollar (+13% YTD) which only decreases purchasing power further.
I’ll quickly comment on the new narrative of Russia suddenly stopping the war. Lithuania and Poland’s five-year CDS have been making cycle highs since the invasion. Both barely moved on the news.
Then looking at the Ruble to USD cross it went up +0.6%. I’m no expert in this stuff, but watching the numbers it doesn’t look like this narrative has legs to stand on as of today.
As for today’s market data let’s get into it:
- Volume was up on the 1M average for the first time since 9/2. The beginning of this bear market bounce
- Since the last rate hike, the market has implied +1.94 more rate hikes
- The Goldman Sachs most shorted basket was up 2.69% on the day
- The current yield curve remains inverted at -22 bps and the 1yr forward curve also remains inverted at -17 bps
- IVOL Discount Callouts: South Africa $EZA, Silver $SLV, Soybean $SOYB
- IVOL Premium Callouts: Netherlands $EWN, Brazil $EWZ, Taiwan $EWT, Solar $TAN, Wind $FAN, Global Clean Energy $PBD, eSports $ESPO, Healthcare Provider $IHF, Small Cap Energy $PSCE, Sugar $CANE, Lithium $LIT
- Eurozone Economic Sentiment decelerated to -60.7, the lowest since Oct. 2008 and 3rd sequential deceleration
- Germany Economic Sentiment decelerated to -61.9, the lowest since Oct. 2008 and 3rd sequential deceleration
- Great Britain Claimont Count Change went to +6.3k from -10.5k, the first increase since Feb 2021 although it has been sequentially increasing since March
- Turkey had its 2nd sequential deceleration in retail sales
- Thailand consumer confidence hit a 7m high, 3rd sequential acceleration. Although zoomed out these levels of consumer confidence were last seen in 2000.
- 23 of 35 countries had decelerating WoW 2-10 spreads
- The UK is expected to raise rates on Thursday with a 68 bps (2.7 hikes) rate hike currently implied
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.20-3.61% (bullish)
UST 10yr Yield 3.08-3.45% (bullish)
UST 2yr Yield 3.37-3.61% (bullish)
High Yield (HYG) 73.29-76.51 (bearish)
SPX 3 (bearish)
NASDAQ 11,376-12,311 (bearish)
RUT 1 (bearish)
Tech (XLK) 129-141 (bearish)
Utilities (XLU) 73.33-78.85 (bullish)
Energy (XLE) 76.93-82.78 (bullish) `
Shanghai Comp 3165-3275 (bearish)
Nikkei 27,199-28,665 (bullish)
VIX 22.25-27.94 (bullish)
USD 107.91-110.52 (bullish)
EUR/USD 0.988-1.019 (bearish)
USD/YEN 138.84-145.33 (bullish)
Oil (WTI) 81.22-91.23 (bearish)
Gold 1 (bullish)
Copper 3.35-3.66 (bearish)
Have a great day out there,
Ryan Ricci
Macro analyst
