"I took a walk in the woods and came out taller than the trees."
-Henry David Thoreau
One of my favorite uses of an idiom is to say that someone cannot see the forest through the trees. As you all likely know, it means being too focused on the details and missing the big picture. I'm sure we've all encountered these people in our work or social lives.
According to the Grammarist:
"When you use it, you are suggesting that the recipient of your ire is confused, perplexed, bewildered by information, is unable to think straight, or is unable to get something done or make a decision."
The stock market game is over indexed to these types of people. This lack of being able to see the forest through the trees is in part due to the massive flow of information and data that comes our way daily ... especially on social media.
Given the growth in information we receive every day, it has become even more important to step back and assess the big picture. At the moment, most stock market operators are laser focused on Thursday's CPI report. But if it is a couple points higher than consensus or a couple points lower, does it really matter in the larger scheme of where the economy is going? Maybe ... but probably not.
Frankly, if we take the Fed's consistent messaging of "higher for longer", Thursday's CPI report is also likely to have little impact on Fed policy in the intermediate term. In the Chart of the Day from our Q1 Themes deck, we highlight inflation under the late Fed Chair Arthur Burns. In our view, this is exactly what Powell et al want to avoid with their "higher for longer" mantra, which is a sharp re-acceleration of inflation.
Back to the Global Macro Grind…
Even if you don't believe us, perhaps you should believe Powell (who by the way also cites Volker's memoirs as one of his favorite books) when he said in Jackson Hole this Summer:
"That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years."
Part of my job every morning is to put together a note called The Morning Shift. (Not to be confused with an evening Shift, which involves having a few too many adult beverages with your buds.) In that note I try to highlight the most important global economic data points in the last 24 hours, their rate of change, and relevance to our thesis (i.e. at the moment the fact that we are in global #Quad4).
Since the start of the year, these are the major data points that have jumped out at me:
- U.S. ISM Services for December - This number came in at 49.6, which decelerated from the prior month by -6.9 points. On this data series, anything below 50 is considered contractionary. More interesting from this report was the even bigger decline in New Orders, which declined to 45.2 and is obviously an ominous signal for future demand. This is the first time both the composite number and new order number were below 50 since May 2020.
- Credit Card Debt - According to Bankrate, as of December approximately 46% of credit card holders are not paying off their credit cards every month. This is up about 18% versus last year. The implication of this is that consumers are getting increasingly strapped for cash, so they're having to hold more debt at a higher interest rate. Obviously, not good for future spending plans!
- NFIB Small Business Survey - This survey declined -2.1 points from November to 89.8 in December. In the history of the date series this report came in at the 7th percentile, which means that small business sentiment about the future is very weak on a relative historical basis. In fact, the only other time this report has been lower in the last 40 years was during the depths of the Great Financial Crisis and every other time it has hit these levels it was coincident with a recession.
- U.S. ISM Manufacturing for December - Similar to the Services report, ISM Manufacturing also slowed in December to 48.5, so this is also in contractionary territory. New Orders hit a new cycle low post the pandemic at a contractionary 45.2. This slowdown comes despite the fact that the Prices Paid component decelerated for the 3rd straight month. So, as much as many hope slowing prices are a panacea for growth re-acceleration, it hasn't been the case in this data series.
- Redbook Weekly Retail Sales - In the week ending January 7th, Redbook Retail Sales were up +5.30% Y/Y. This is a massive deceleration from the prior week at +10.2% Y/Y and the lowest number in a year and a half. It also includes price increases, so this implies down volume Y/Y in retail land.
Now to be fair, there has been more data released in 2023 than just those five points and not of all of it is bad. In particular, employment has generally been decent (for now). But the fact remains, if we step back and look at the forest of data to date ... it implies a U.S. economy that is slowing, and in some cases, very quickly.
As a side note on employment data, while it has generally been solid ... even here we are seeing a deterioration. Take Continuing Unemployment Claims as an example. This series is up some 30% from its trough in May 2020. This type of increase from the lows has historically presaged a recession.
Now perhaps the CPI report on Thursday will surprise meaningfully to the downside and we will be off to the risk-taking races once again! Or perhaps not and we will remain stuck in this stagflationary environment with declining demand and slowing, though high, sticky prices. That later view is more so what the forest of data is telling us!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.45-3.99% (bullish)
UST 2yr Yield 4.15-4.50% (bullish)
High Yield (HYG) 72.23-75.99 (bearish)
SPX 3 (bearish)
NASDAQ 10,146-10,799 (bearish)
RUT 1 (bearish)
Tech (XLK) 119-128 (bearish)
Defense (ITA) 110-114 (bullish)
Utilities (XLU) 69.57-71.99 (bullish)
VIX 20.44-24.82 (bullish)
USD 102.66-106.44 (bullish)
Oil (WTI) 71.01-78.12 (bearish)
Nat Gas 3.30-4.54 (bearish)
Gold 1 (bullish)
Copper 3.68-4.13 (bullish)
Silver 23.27-24.75 (bullish)
MSFT 217-236 (bearish)
Bitcoin 16,290-17,486 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research and Head of Sales
