“A fit body, a calm mind, a house full of love. These things cannot be bought—they must be earned.”
-Naval Ravikant
And a cycle/macro regime agnostic, volatility agnostic, go anywhere global risk management process isn’t analytical manna from Fintwit heaven … it must be earned.
There’s not enough “different cloth” for everyone to be cut from it.
“Calls” come & go. Earned #Process they can’t take from you!
Onto the Global Macro Grind ….
So, yesterday offered up a majestic fundamental trinity in the supplicant service of Goldilocks and an immaculate soft-landing!
Right?
In a world of information abundance and a structurally lower signal-to-noise ratio, the relative scarcity of effective curation & contextualization rises.
LFG …..
GDP: Inclusive of the sequential solidity, both real growth and inflation continue to decelerate on a year-over-year basis which is, of course, Quad 4, by definition. And under the hood 70% of the Headline gain was attributable to inventories and foreign trade. Both are scored positive from a GDP accounting perspective even though they are conspicuously negative fundamental developments. An increase in inventories because demand is soft and a rise in Net Exports (both are slowing but imports slowing faster than exports = GDP (+)) is some sandy loam on which to build a durable inflection thesis.
Durable Goods: Headline Durable Goods jumped +5.6% M/M on the back of positively revised November estimates. But … the Headline juicing was exclusively a function of the +115% M/M (+121% Y/Y) increase in Aircraft Orders while Durables Ex-Transport were -0.1% (decelerating -110bps to +2.1% Y/Y), Durables Ex-Defense & Aircraft decelerated -140bps to +4.9% Y/Y and Core Capex was negative for a 2nd month at -0.2%.
Money Supply: Tuesday’s M2 Data for December showed domestic money supply contracting to a new all-time RoC Low at -1.31%. In the simplest terms possible, there is just less money. If real income growth is negative, savings rates are at multi-decade lows, nominal debt obligations are rising and the amount of money (both real economy and financial system $’s) available to pay those obligations is contracting, is other discretionary consumption and everything else priced in (excess) liquidity (profits, asset prices, etc) really set to durably inflect and summit new ‘soft-landing’ peaks?
But … Broader Liquidity: Global M2 growth has roughly stabilized, the Aggregate Central Bank Balance Sheet has bounced thanks to the BOJ’s YCC and interventionist heroics. Domestically, “net liquidity” which is generally conceptualized as the Fed Balance sheet – (Treasury General Account + Reverse Repos) has also bounced as the Treasury has drawn down its cash balance by ~$600B and will draw down the balance of the ~$400B alongside the debt ceiling. The 2nd half of that liquidity equation has mostly offset QT in recent months and supported financial system liquidity.
PMI: The high-frequency domestic industrial-manufacturing mosaic remains bathed in angstful hues of rouge. The U.S. Services PMI printed below consensus at a contractionary 45, U.S. Mfg PMI printed 46.8, Mfg Employment went sub-50 for the first time since 2020 while the Richmond Fed Regional Mfg Index also hit its lowest level since 2020.
Input Costs > Output Prices: Under the hood, the Regional Fed Survey’s showed input costs accelerating while output prices continued to fade. Much of that input cost increases stems from labor. Accelerating costs and decelerating revenue will keep the contractionary vice grip on margins/profits.
Meanwhile, the funhouse mirror that is the domestic labor market remains front and center at the macro-policy nexus and the scourge of both policy makers and pivot maxi’s …
Jobless Claims: Initial Claims printed at the lowest level since April of last year. Progressive disinflation alongside rising labor supply and with a spike in employment is the soft-landing aspiration. And there’s a reasonable argument that some version of that has been realized, thus far. The flip side of the rose colored labor narrative is that the labor data is the most lagging of indicators and payroll capitulation is the middle/last part of that lagging dynamic. And in the context of a protracted, post-pandemic demand-supply imbalance defined by acute difficulty in hiring qualified labor it should be wholly unsurprising that employers are reluctant to mass fire workers they struggled for 2 years to onboard. What we are seeing is a discrete increase in layoffs at unprofitable, rate/growth sensitive businesses, a reduction in hours worked, a contraction in temp staffing, and a persistent decline in full-time employment … pretty much the textbook cadence of progressive labor market deterioration.
Wage Inflation: Despite burgeoning deterioration in labor demand, the jobs market remains extraordinarily tight by any conventional measure. Wage growth remains near multi-decade highs and the spread in wage growth between job switchers and job stayers remains historically wide. Indeed, Walmart … which employs something like 1.2% of the entire labor force … raised wages +17% in order to attract and retain workers.
What if? …. Is a scenario where ~5%+ wage growth, +8% COLA increases and a modest shift in fiscal support define the broader contours of 2023 consumption/inflation unreasonable? In other words, what’s the policy calculus in a scenario in which we turbo disinflate to 5% CPI but then hold some higher, uncomfortable equilibrium with wages and underlying inflation still running >2X target?
And Like That … They (1.1M Jobs) Were Gone! The BLS confirmed the Philly Feds negative revision to the NFP data and the historic divergence between the Household and Establishment surveys we’ve been highlighting for almost 3 quarters now. This week’s BLS release indicated that a review of the more comprehensive QCEW data showed that instead of increasing by 1.1M jobs in 2Q22, employment actually decline by -287K!
Main Street Liquidity: Alongside negative real income growth, negative real retail sales growth, multi-decade lows in the savings rate and multi-decade highs in credit card balance growth, those reporting difficulty in paying usual household expenses sits at cycle highs, the share of households reporting expenses > income is at cycle highs and delinquency rates (on autos/etc) are now in Viagra formation. Collectively, this cultivates the potential for trap door conditions.
Think about it this way ….
A simple (squeeze) story …. I’m spending more than I make. Now my capacity to do that progressively diminishes as my savings/consumption buffer gets depleted. At the same time, my variable rate mortgage or credit card or HELOC or whatever benchmarks off the Prime Rate keeps going up, thus so does my debt service cost. And not only is the rate going up, my nominal (& real) obligation is going up even more because it’s a higher rate on a larger balance due to the fact that I’ve been tapping revolving credit b/c my income < expenses. Now, if you’re a CT resident, 2023 will also see you onboard a 100% increase in energy costs and housing re-assessments that will push property taxes up +25-30%.
There is nothing complicated or profound in that squeeze sequence. The fulcrum factor is simply time.
So long as the dynamics underpinning that squeeze persist, the prospect of an avalanche kind of scenario remains more than a tail risk.
Catalyst Calendar: Looking just beyond the effervescence of the 0DTE horizon, the first two days of February will feature the FOMC, the ECB, GOOGL/AMZN/AAPL earnings and then top shelf macro from ISM/NFP.
And for Powell …. gas prices are now +9.2% M/M, Financial Conditions have eased to the same level as when rates were zero, the China reopening/demand inflation mojo is moving into overdrive, Japanese inflation accelerated to the fastest pace in what we’ll just call ‘ever’ and YCC abandonment is set to rage reverberate through global fx/rates markets.
VIX is sub-19, but don’t get it twisted, these are quintessential chop markets and lazy short of (cycle) gravity is not an alpha strat.
In 2023 your macro risk management stripes will need to be earned, again.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.52-3.72% (bearish)
UST 10yr Yield 3.37-3.62% (bearish)
UST 2yr Yield 4.07-4.31% (bullish)
High Yield (HYG) 74.91-76.75 (bearish)
SPX 3 (bearish)
Tech (XLK) 125-137 (bearish)
VIX 18.09-22.78 (bullish)
USD 101.29-105.08 (bullish)
Oil (WTI) 77.63-82.90 (neutral)
Nat Gas 2.74-3.66 (bearish)
Gold 1 (bullish)
Copper 4.03-4.30 (bullish)
Silver 23.31-24.55 (bullish)
Bitcoin 18,195-24,191 (bearish)
Have a great weekend,
Christian B. Drake
