“Getting to the top is optional. Getting down is mandatory.”
– Ed Viesturs
It’s Fed Day which means that all the talking heads will be out in full force. Although, here at Hedgeye we have afforded ourselves the opportunity to read and react to the situation. Just look at Real-Time Alerts, it was just last week where we had 15 shorts to 1 long. Coming into today we have 4 shorts to 1 long.
Luckily for us I have a real-world example of reading and reacting while in the mountains of Iceland to make this more entertaining.
Imagine you are on your first day of a 7-day hiking trip and you get to your first ridge. On the ridge, you have 70 degree drops on both sides and the width of this path is as tall as you stand. While you are walking on this ridge you have to climb up a hill that puts you inches from the edge of the path on your right. To make this worse, it has just rained so the path is a little muddy (which means the degree’s difference between your path and the side of the mountain is non-existent). Oh, I almost forgot, there is wind that is howling at 20-25 mph in your face and at the bottom of this mountain is about a 200 to 300 foot drop into a pool that's steaming from sulfuric acid.
I was leading 3 of my friends through this, and to be frank, I was more scared walking over this than you are reading it. Plus, I am leading 3 friends that I must make sure get home. Unfortunately, one of them froze in the middle of this hill and stopped moving in the worst part of this obstacle.
As the leader my initial hope was that I could walk back down to him, then talk to him to calm him down, and then he would follow me up. This is the equivalent of taking on event risk because this hope happened before I was able to fully assess the situation.
Instead, as I walked to him, he laid down into the side of this mountain while being frozen (horrible decision)… Somehow, I laid down next to my friend, took his 30lbs bag off his back, put it on myself, then we walked across this ridge. This is the equivalent and power of affording yourself the opportunity to read and react to a situation.
In that moment my original plan would have failed due to the time and space between the thought and the event. If I didn’t adjust the plan to the situation he may very well still be on the top of that mountain. Instead, we decreased risk while operating in a very volatile environment in order to live on and tackle the next opportunity.
Back to the Global Macro Grind…
I keep hearing the question of 75 or 100 bps… it doesn’t matter. What matters is that the Fed is compounding a mistake they made in 2021 and are raising rates into four Quad 4s in a row. The only thing worse than today’s rate hike is that the market is currently expecting 7.5 MORE rate hikes by December, which will only continue to destroy the consumer.
If you don’t believe me, here is what Jerome Powell said during Jackson Hole this year:
“The current high inflation is the product of strong demand and constrained supply and the Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply, we are committed to doing that job.”
Let that sink in for a minute…
The Fed is committed to demand destruction or as Christian puts it FOBS (Fed operation break sh*t). We have known this though and it has been in our Macro Themes for some time now. But when will the Fed stop being hawkish?
Inflation is still at 1982 levels and our current nowcast has inflation at 4.83% by 2Q23E (nowhere near 2-4%). Growth is slowing although the Fed believes the labor market is still strong. Essentially the Fed is relying on the last of the Mohicans (Labor) to tell them when to stop tightening. A lagging indicator, that will only start to spike when it is too late. Remember Josh’s Early look on 08/05. Peak rates have yet to happen, which means we are still ~6 months from an NFP peak.
That all equates to a hawkish Fed. Remember we are looking at a profit recession where peak hawkishness has nothing to do with the profitability and revenues of companies.
But all this talk is about the the U.S. What about internationally when the FANG has 51% of revenue from international markets?
26 of 46 (56%) countries have an upcoming 3 Quad 4s in a row and 39 of 46 (85%) countries have at least 2 Quad 4s in the next 3 quarters.
Like the United States, internationally countries are raising rates to tackle inflation. So that has equated to 29 of 35 (83%) central banks, that I track, raising rates. Your average equity performance of all these countries since raising rates? Down -11%, and 26 of the 29 (90%) countries have negative price performance (Sweden has the worst performance -35% and Chile has had the best +17%).
The inflation in these countries is even worse than what we are experiencing, look no further than Germany having PPI +45.8% YoY and +7.9% MoM (both all time highs). On a CPI – PPI basis, 20 of 40 countries have a Z Score that is higher than the U.S. (1.9). Meaning higher for longer is a theme happening everywhere.
The only difference between the U.S. and the rest of the world is that the US Dollar is appreciating vs everyone else’s currency depreciating. Lower global purchasing power on top of paying more for local goods. For the 43 currencies that we track against the USD, the average performance YTD is down -11.2%. Imagine you live in Argentina where you get paid in Argentine Peso’s, your country has CPI of +78.5% YoY and the Argentine Peso to USD cross is down -27.8% YTD.
To summarize the international landscape, higher inflation for longer is happening across the globe. 83% of central banks are raising interest rates in reaction to this. Meanwhile, 85% of countries have at least 2 Quad 4s in the next 3 quarters, meaning your global economy is raising rates into a slowdown.
It doesn’t get much worse than that.
Today’s market Data:
- The current yield curve remains inverted at -41 bps and the 1yr forward curve also remains inverted at -42 bps
- IVOL Discount Callouts: Sweden $EWD
- IVOL Premium Callouts: Brazil $EWZ, Energy Exploration $PXE, eSports $ESPO, Internet $PNQI, Robotics $ROBO, Healthcare Provider $IHF, Healthcare Equipment $XHE, Broker-Dealers $IAI, Capital Markets $KCE, Regional Banking $KRE, Small cap health care $PSCH, Gold $GLD, Nat Gas $UNG, Rare Earth Metals $REMX, Euro $FXE, Pound $FXB, Govt Bonds ($TLT, $IEF, $TIP), Corp Bond $IGLB
- Netherlands consumer confidence hit an all time low of -59 in September
- After yesterday’s rate increase, Sweden’s 2-10 spread tied its all time low of -56 bps set in 2008.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.42-3.61% (bullish)
UST 10yr Yield 3.25-3.60% (bullish)
UST 2yr Yield 3.53-4.09% (bullish)
High Yield (HYG) 73.02-75.59 (bearish)
SPX 3 (bearish)
NASDAQ 11,149-12,103 (bearish)
RUT 1 (bearish)
Tech (XLK) 125-136 (bearish)
Utilities (XLU) 73.10-78.70 (bullish)
Energy (XLE) 76.01-82.90 (neutral) `
Shanghai Comp 3073-3218 (bearish)
Nikkei 27,107-28,661 (neutral)
DAX 12,504-13,157 (bearish)
VIX 22.60-29.33 (bullish)
USD 108.62-110.67 (bullish)
EUR/USD 0.989-1.011 (bearish)
USD/YEN 141.99-144.87 (bullish)
GBP/USD 1.132-1.165 (bearish)
Oil (WTI) 82.09-89.25 (bearish)
Nat Gas 7.19-8.81 (neutral)
Gold 1 (bearish)
Copper 3.34-3.61 (bearish)
Have a great day out there,
Ryan Ricci
Macro analyst
