“It’s easy to stand in the crowd but it takes courage to stand alone.”
– Mahatma Gandhi
It’s an ungodly hour in the morning right now (as I write this) and I have been doing a lot of thinking about this whole thing we call the Federal Reserve.
How many people in the U.S. actually listened to what Powell said yesterday?
Or more importantly, how many will understand the impact his words will have on them? I will argue what he said has way more impact on the American people; more than any other presidential speech or comments you can listen to right now.
Powell literally told the people that the Federal Reserve needs to raise the unemployment rate while also taking more money out of the people’s pockets. The best part is, why is he raising rates so aggressively? Because his own models that he relied on last year told him inflation was “transitory”.
Now I'm thinking about all the people internationally and how many of them actually listened to the speech? I’m not talking about those in the investing community. I’m talking about the ~9.2% of the world that lives on less than $1.90 a day.
Hiking into a #Quad4 slowdown creates a bullish dollar, a bullish dollar lowers the purchasing power of anyone that is not paid in dollars. What happens when people are struggling to pay for things like food?
Here is a list of world conflicts (there are 27 in total but I’ll just name a few): Russia is invading Ukraine, Myanmar’s civil war has become more violent, Yemen is in a civil war, armed conflict and famine continues in Afghanistan, Iran is in the middle of a revolution, North Korea is firing rockets over Japan more than ever, and Saudi Arabia and Iran are in a Middle Eastern Cold war. Before people get triggered, this is just a statement that these conflicts exist all around us. Nothing else.
Back to the Global Macro Grind…
Now that my rant is over, let’s look at how yesterday’s event fit within the Hedgeye process.
The day to act is not today. The time to act was all week leading up to yesterday. But, if you missed all of last week, intraday yesterday: the Dollar got within 0.9% of the low end of the risk range, the VIX got within 3.7%, the 10Y got within 7 bps, the SPX got within 1% of the top end of the risk range, XLK was within 1.4%, and the DAX was within 0.6%. So what were you doing this week? Reading narratives or executing on a process?
The reason today is not the day to act:
- Asia is down being led by Hong Kong (-3.1%), Malaysia $EWM (-2.2%), and Shanghai (-1.3%)
- Europe is down and being led by Ireland $EIRL (-1.4%), Spain $EWP (-1.3%), and Poland (-1.1%)
- Yields are up 23 bps in Poland, 14 bps in Italy $EWI, 11 bps in Netherlands $EWN, and 11 bps in both Germany $EWG and France $EWQ
- Metals are down Copper (-1.6%), Silver (-1.4%), and Platinum (-0.7%)
- Agriculture is softening with cheese (-4.0%), coffee (-2.7%), and Oats (-2.8%)
- Electricity in Europe: Germany (+43% DoD), Spain (+14%), and UK (+9.3%)
- The VIX based on yesterday’s risk range has upside of 23% vs downside of 7%
The Chart of the Day is showing implied rate hikes until 2024. The key notes are: the market is implying a 50 bps hike in December with continued hikes until March 2023. Then the rate will stay flat until November 2023 where the market is implying the first rate cut.
How does this compare to before the fed meeting?
IT’S THE EXACT SAME!
What changes does this do to the US Profit Recession? Nothing, no matter what the Fed did yesterday the damage is done here. Josh mentioned it on The Call yesterday after talking about $CACC.
What changes does this have for the Global Recession? It continues the path we are already on since countries will also continue their tightening. I’m going to maintain using this quote from the RBA “if the cash rate rises to 3.6% (expected by April 2023) the share of borrowers facing a minimum debt-services ratio to income of +30% will increase to 25% of borrowers by the end of 2023.” Let it sink in, that doesn’t include taxes (~23.2% of income), it also doesn’t include food, energy costs, or anything else required to live.
Also related to this, anyone else notice the quad map for Europe? We are starting to see a couple Quad 3s pop up. We will see if these stand but that means inflation has yet to decelerate in European countries. Which will only require more tightening and what is most likely more Quad 4s in the back half of 2023.
This doesn’t change the signal in Europe, it is just another part of the fractal to keep in mind.
Lastly on inflation, we will have to update the model but the number that I’m watching is on slide 15. Where we are currently projecting CPI of 4.83% in 2Q23 which remains no where near the 2% that the fed wants to see. Link this back to the chart of the day where we don’t have a rate cut until Nov 2023. These are all things we continue to track every day as part of the process.
Data that came out while you were sleeping:
- 12 of 12 sectors were down yesterday
- The 2y-10y spread is at a cycle low of -52 bps. The 1yr forward curve is at a -44 bps
- Saudi Arabia, UAE, and Hong Kong raise interest rates by 75 bps as their currency are pegged to the dollar
- Norway Raises interest rates by 25 bps and guided to another raise in December. They also said “signs that some areas of the economy were cooling down, while prospects for lower-than-expected freight and energy prices might curb inflation ahead, which suggested a more gradual approach.”
- But before everyone goes all fed dovish on me. The economy in Norway is hurting a lot more than in the US. For example, retail sales has been negative for 14 of the last 15 months.
- China’s Caixin Services decelerates to 48.4 from 49.3, the second sequential contractionary number. Also the third straight month of an increase in backlogs of work
- Turkey CPI (+85.5% YoY) the highest since June 1998 and PPI (+157.7% YoY) all time high. The lira hit an all time low and the central bank is lowering rates.
- UK Services PMI came in at 48.8, the first contraction since Feb 2021 and 4th sequential deceleration
- New business volume and new work from abroad fell. Job creation, slowest since March 2021
- The BoE is expected to raise rates by 75 bps at 8a
- 2-10 spreads are inverted in: U.S., Canada $EWC, South Korea $EWY, Mexico $EWW, Sweden $EWD, Poland $EPOL, Philippines $EPHE, New Zealand $ENZL
- IVOL Discount Callouts: Spain $EWP, Colombia $GXG, Hong Kong $EWH, Turkey $TUR, South Africa $EZA, Gold Miners $GDX, Silver Miners $SIL, Cannabis $YOLO, Broker Dealers $IAI, Insurance $KIE, Reginal Banking $KRE, Gold $GLD, Silver $SLV, Pound $FXB, BBG Muni $TFI
- IVOL Premium Callouts: Argentina $ARGT, New Zealand $ENZL, Leisure $PEJ, eSports $ESPO, Private Equity $PSP
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.93-4.31% (bullish)
UST 2yr Yield 4.32-4.75% (bullish)
High Yield (HYG) 70.89-74.30 (bearish)
SPX 3 (bearish)
NASDAQ 10,337-10,998 (bearish)
RUT 1 (bearish)
Tech (XLK) 119-129 (bearish)
Energy (XLE) 83.92-91.25 (bullish)
Consumer Staples (XLP) 68.90-73.99 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 26,705-27,784 (bearish)
DAX 12,617-13,411 (bearish)
VIX 24.58-31.98 (bullish)
USD 109.70-113.75 (bullish)
Oil (WTI) 83.50-90.90 (bearish)
Nat Gas 5.06-6.36 (bearish)
Gold 1 (bearish)
META 73-108 (bearish)
GOOGL 83-95 (bearish)
Have a great day out there,
Ryan Ricci
Macro analyst
