“Change is the law of life, and those who look only to the past and present are certain to miss the future.”
- John F. Kennedy

For my dad’s birthday, I got him a first edition copy of the 1924 Pulitzer Prize winning autobiography “From Immigrant to Inventor” by Serbian-American physicist Mihaljo (Michael) Pupin.

Growing up Serbian, Mihajlo Pupin, like Nikola Tesla, was a household name.

Hailing from the small village of Idvor, then located in the Military Frontier of the Austrian Empire, Pupin moved to the United States in 1874 all alone at the age of sixteen with a mere five cents in his pocket.

He spent his first five years in America working as a manual laborer prior to beginning his physics studies at Columbia University, where he would go on to become a professor and play a key role in establishing the department of electrical engineering. The Pupin Physics Laboratory, a national historic landmark, still houses the university’s physics and astronomy departments today.

Among his numerous patents, Pupin is best known for developing the “Pupin Coil”, a device used to greatly extend the range of long-distance telephones, as well as his methods for rapid x-ray photography. Pupin was also a founding member of the National Advisory Committee for Aeronautics (NACA), the predecessor to NASA.

In his book, Pupin, refers to his struggles and efforts during his early days in America to control his “temperamental and sentimental Slavic nature” while extolling the influence of American enthusiasm and directness in his life. I laughed out loud when I read those parts because, well, it’s a real thing and like most things, it exists on a spectrum. When I first noticed it in myself at an early age, I became determined to rise above this seemingly innate programming.

Markets, like the emotional creatures behind them, also have a distinct programming, a manic variety swinging from fear to greed with varying amplitudes and wavelengths. After more than a decade of Pavlovian conditioning where central bankers rewarded risk-taking behavior like no other time in history, the market increasingly finds itself trying to battle back its own exuberant and sensational inclinations, despite the striking speed and magnitude of the phase transition we have undergone.

Deprogramming - 01.26.2023 bull case unicorn cartoon

Back to the Global Macro Grind

Extrapolating the early pace of disinflation while holding the strength in employment constant, investors neatly arrived at, and Old Wall media happily amplified, the rising prospects of a Goldilocks scenario which together with an epic January effect had produced a meaningful year-to-date rally.

In reviewing this week’s domestic macro data, the message suggested anything other than that.  

NFIB Small Business Optimism: Small businesses continue to struggle with labor costs as inventory levels rise in the face of lower output prices and weaker demand.

CPI & Real Earnings: Headline and core inflation both ticked down -10 bps sequentially to 6.4% and 5.6%, respectively. Corroborating the small business account of rising inventories and falling output prices, core goods-based inflation led the charge lower, falling to 1.4% from a local peak of 6.8% in March. Meanwhile, core services inflation accelerated +20 bps to 7.2%, powered by accelerating shelter (+7.9%), utilities (+5.0%), and sticky double-digit inflation in transportation services (+14.6%). Nine quarters of double-digit food inflation and a reacceleration in energy inflation, both on the goods and services side, gave additional pause to any disinflationary excitement.

Meanwhile, real earnings declined -1.8% y/y in January, the 22nd consecutive negative monthly print. Recall, disinflation is not deflation and does nothing to lower the household burden of higher equilibrium price levels – as we like to say, initial conditions matter.

The implications of the CPI print were clear: higher for longer.

Credit Card DQ Data: Looking at the consumer through the lens of unsecured credit, the pace of credit normalization in the card lending space continued to accelerate notwithstanding the suppressive effects of still red hot loan growth. Delinquencies at Capital One and Discover, card lenders with higher exposure to lower-income borrowers, have nearly reached or exceeded pre-pandemic levels. Granted, credit card debt as a share of total economic output is well below historic levels; however, the concern lies within the blistering rate-of-change combined with increasing role of such borrowing in bridging the gap created by negative real earnings.   

Retail Sales: Although the headline print accelerated +40 bps m/m to +6.38% y/y in January on unseasonably warm January weather and the lapping of Omicron, the retail sales control group (ex. Food service, gas, building materials, and auto) decelerated -190 bps to 4.4% y/y. In either case, real retail sales were effectively unchanged.

Industrial Production & Capacity Utilization: Industrial production decelerated for the fourth consecutive month to +0.79% y/y and capacity utilization fell for a fifth consecutive month to 78.3 in response to falling demand and output prices for goods amid troubling labor costs and a rapid rise in the cost of capital.  

Have a great day everyone!

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets 

UST 30yr Yield 3.58-3.90% (bullish)
UST 10yr Yield 3.50-3.86% (bullish)
UST 2yr Yield 4.29-4.70% (bullish)
High Yield (HYG) 74.21-76.73 (bearish)            
SPX 3 (bearish)
NASDAQ 11,290-12,175 (bearish)
RUT 1 (bearish)
Tech (XLK) 133-145 (bearish)
Defense (ITA) 114-119 (bullish)
Gold Miners (GDX) 28.52-31.70 (bullish)                                              
Shanghai Comp 3 (bullish)
Nikkei 27,258-27,780 (neutral)
VIX 17.71-21.41 (bullish)
USD 102.02-104.61 (bullish)
Oil (WTI) 73.05-80.71 (bearish)
Nat Gas 2.31-2.71 (bearish)
Gold 1 (bullish)
Copper 3.98-4.16 (bullish)
Silver 21.35-22.97 (bullish)
Bitcoin 21,205-24,783 (bearish)

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