“Gratitude is not only the greatest of virtues, but the parent of all others.”
-Cicero
As we close in on Thanksgiving 2022, it is another great reminder to be thankful. From the team at Hedgeye, we wanted to take a moment to thank all of you.
We have known some of you for many, many years, while others have just started subscribing and we are still getting to know you. It is hard to believe how far we’ve come since starting the firm in 2008 and it wouldn’t have been possible without all of your support.
The stock market game is not an easy one and we appreciate the accolades for getting things right. Conversely, we also appreciate when you call us out, question us, and constructively critique us. That’s all part of the process of getting better.
In 2022, we started a series of Hedgeye Live events around the country. So, far we have held them in Los Angeles, Dallas, Stamford, and will be holding one in Miami in late January 2023 (email for details on Miami).
Personally, I am especially thankful for these events as they provide an opportunity to get to know more about many of you, your families, and your businesses. It’s been a real privilege.
We look forward to many more years of learning, improving, and evolving together.
Back to the Global Macro Grind…
It has been a relatively light week of economic data, so I thought I’d start by hitting on the current outlook in our GIP (Growth, Inflation, Policy) model. As it stands today, this is what the next four quarters look like:
- Q4 2022E-> 90.6% probability of Quad 4, 2.3% of Quad 3, 0.2% of Quad 2, and 6.9% of Quad 1
- Q1 2023E-> 61.1% probability of Quad 4, 1.6% of Quad 3, 0.9% of Quad 2, and 36.4% of Quad 1
- Q2 2023E-> 63.7% probability of Quad 4, 1.6% of Quad 3, 0.9% of Quad 2, and 33.8% of Quad 1
- Q3 2023E-> 13.5% probability of Quad 4, 11% of Quad 3, 33.8% of Quad 2, and 41.7% of Quad 1
At the moment, inclusive of this quarter, we are facing down three straight quarters of high probability Quad 4 conditions. As we get to Q3 of 2023E, things get more interesting. Currently, the combined probability of Quad 1 and Quad 2 is 75.5% for Q3 2023. So, in theory, Q3 has the potential to be a positive environment for risk and stocks.
In part, how things play out is going to be determined by what happens between now and then (obvious I know!). Specifically, how much do both inflation and growth slow by Q3?
In theory, growth slowing should accelerate the decline in inflation on a more sustainable basis, which is what will ultimately give the Fed clearance to meaningfully slow the pace of interest rate hikes and/or cut interest rates.
Coinciding with Q3 of 2023 are very challenging comparisons for energy. Specifically, the average price of WTI in June 2022 was $114 per barrel. To the extent that oil remains near its current price of $81 per barrel, that is a -29% deflationary tailwind for this important component of CPI by Q3 2023.
Conversely, we continue to have low inventories across the oil complex:
- Total U.S. oil inventory, including the SPR, is -14% Y/Y;
- Distillate Fuel oil inventory is down -15% Y/Y; and
- Motor gasoline is down -2.4% Y/Y.
Inventory is tight which will buoy prices, so lower demand via slowing GDP will likely be the key catalyst to keep oil prices low enough, for long enough to create sustainably lower CPI.
This point on demand is something that Federal Reserve Chair Powell noted in his press conference on November 2nd:
“We are taking forceful steps to moderate demand so that it comes into better alignment with supply. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.”
Sure, CPI slowed to +7.7% in October from +8.2%, but we remain a long way from the stated goal of 2%. To get there could require moderating demand for an extended time period. If not, inflation may rear its ugly head again. And again. And again. And ... well you get the picture.
Just as the Fed was stuck in the transitory mindset for too long, there is obviously also a risk that they opt to slow demand (growth) for too long. Time will tell on this one, but the Fed's ability to time cycles is certainly not in their favor.
Just as we did earlier this month, in the coming months we are likely to get more data points that suggest inflation is slowing. The risk of these data points is they could create a false dawn narrative with inflation, in which investors believe inflation is behind us. That said, with the employee cost index running at roughly 5% Y/Y, it implies a core inflation rate of some 3.5 to 4.0%, all else equal. So commodities deflating is one thing, getting core inflation down is another.
This third phase of the bear market, as Keith has coined it, is likely to be the most challenging phase to manage. We are thankful you will be on the journey with us.
It's easy to wax poetically and create the narratives about the future, but back in the here and now these are our top ranked Macro ETFs (which are updated daily to Macro Pro and Institutional subscribers):
- UUP, GLD, MSOS, CTA, AMLP, ITA, SLV, XLV, PPLT, XLE, GDX, XOP, XLP, BUL, TOKE, BTAL, TUR
And finally, below are the Top-3 Macro callouts from our team this morning:
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Turkey’s not the only thing in the “chop” bucket this week as cross-asset class CONSOLIDATION Signals crescendo ….
“I wish you [turkey] didn’t have to die, but a bunch of white people put on sweaters.” - Peter Griffin, Family Guy Thank you all for trusting in a better way. Happy Thanksgiving to you are your families. |
Happy almost Thanksgiving!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.77-4.25% (bullish)
UST 10yr Yield 3.62-4.19% (bullish)
UST 2yr Yield 4.30-4.71% (bullish)
High Yield (HYG) 71.91-74.85 (bearish)
SPX 3 (bearish)
NASDAQ 10,666-11,387 (bearish)
RUT 1 (bearish)
Tech (XLK) 122-135 (bearish)
Energy (XLE) 88.93-95.01 (bullish)
Consumer Staples (XLP) 72.11-76.30 (bullish)
Healthcare (XLV) 132-137 (bullish) `
Shanghai Comp 3020-3149 (bearish)
Nikkei 27,470-28,390 (bearish)
DAX 13,314-14,517 (bearish)
VIX 21.03-26.33 (bullish)
USD 105.51-111.45 (bullish)
EUR/USD 0.999-1.043 (bearish)
USD/YEN 137.88-146.77 (bullish)
GBP/USD 1.122-1.196 (bearish)
CAD/USD 0.731-0.757 (bearish)
Oil (WTI) 77.44-85.65 (bearish)
Nat Gas 5.75-7.71 (bullish)
Gold 1 (bullish)
Copper 3.51-3.93 (bearish)
MSFT 223-247 (bearish)
AAPL 139-153 (bearish)
AMZN 88-100 (bearish)
META 98-118 (bearish)
GOOGL 89-100 (bearish)
NFLX 270-316 (bullish)
TSLA 163-195 (bearish)
Bitcoin 14,993-17,610 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
