“To win the game is great. To play the game is greater. To love the game is greatest of all.”
- Bob O’Connor, former USA Hockey coach-in-chief
Hockey season wrapped up this weekend for the 8 and under all-girls hockey team that I coach. It was an inauspicious ending as we went 1 and 5 in our last tournament in scenic Clifton Park, NY. Despite the record over our last weekend, the season was a raging success.
These young ladies went from hardly being able to make a complete pass or pivot backwards at the start of the season to eventually playing something that mostly resembled hockey by the end of the year. Most importantly, they grew together as a team and developed a passion for the game.
Passion is probably the most critical aspect of anything in life, whether it is a relationship, hobby, or pastime. Afterall, if you aren’t passionate about what you are doing and don’t ultimately love the day-to-day grind, you are unlikely to get much better.
One thing I’ve observed from being in this business for 25 some years is that the best investors always love the game. They are literal stock junkies that get up every morning hungry and excited to find their next great idea.
Many of them started investing early, continue to work crazy hours as professionals in the business, and live, breath and sleep the stock market game. The benefit of this over time is the development of mental short cuts that enable better and more effective decision making. This ingrained pattern recognition that ultimately develops likely helps investors that are dedicated to their craft avoid the typical shortfalls of less seasoned (and dedicated) investors.
As Warren Buffett famously said:
“Start early. I started building this little snowball at the top of a very long hill. The trick to have a very long hill is either starting very young or living to be very old.”
Indeed.
Back to the Global Macro Grind . . .
Despite the end of the week risk on rally last week, the economic data released last week didn’t give the bulls a whole lot to get excited about in my opinion. For starters, on the inflation front most of the reports remained high and inflationary. Take for example Eurozone February Flash CPI, which came in at +8.5% Y/Y. While this was a slight deceleration from the prior month and has come well off its highs, Eurozone CPI remains at levels that we have not seen in more than four decades.
This level of inflation is particularly noteworthy considering that the ECB’s primary rate on its deposit facility is 2.50%. So, yes, at the moment inflation is running are more than 4x that level. Given this divergence it is likely no surprise that the ECB has gotten incrementally hawkish since its last interest rate announcement in early February.
In an interview on the ECB’s website this weekend, ECB President Lagarde was explicit on the road forward in the short term. Specifically, she said:
“I cannot tell you how high rates will go. I know that they will be higher than they are now and we still have more work to do because we cannot declare victory.”
She also said in the interview that she expects to avoid a recession in the fight against inflation, although perhaps the ECB hasn’t been watching the economic data as closely as we have lately. This morning Eurozone Retail Sales for February were down -2.3% Y/Y, Eurozone Construction PMI was 47.6 (recessionary), and Shipping Rates from China to Europe were down -25% M/M.
Now to be fair, that is just this morning’s data and not all of the recent data from Europe has been so bad. Nonetheless, the Eurozone economy is already in a recession in many segments and further interest rate increases are unlikely to change that trajectory and, obviously, more likely to accelerate economic slowing.
Changing gears to China this morning, Chinese leaders set a lower-than-expected economic growth goal of 5%. The immediate takeaway in the short term by investors is that this means that China won’t be implementing any large scale stimulus programs. That notwithstanding, the reality remains that China’s economy is accelerating. This was evident in the PMI data last week that accelerated to 56.3 on the Services side and to 52.6 in Manufacturing.
This aligns with our GIP model quite closely. Currently, China is the only major economy that we have in #Quad1 for Q2 2023. The implication is that growth is accelerating and inflation is decelerating, which is a positive environment for equity risk. Conversely, of course, the rest of the world remains mired in the slow growth environment of #Quad4.
Back in the U.S. this morning, Fed Chair Powell will be testifying before Congress on Tuesday and Wednesday. He is likely to be incrementally hawkish given recent strong growth and inflation data, but to some extent that is also built into expectations. On that front, just consider this morning’s Bloomberg headline on the topic, “Powell Set to Lay Groundwork for Higher Rates on Capitol Hill.”
More important than the expectations around Powell’s testimony in Congress this week is Friday’s Non-Farm Payroll. This is a notoriously difficult number to predict from month-to-month, but the hard data (non-farm payrolls as an example) remains supportive of a strong NFP print though expectations are for +207.5K job additions, which is less than half of the 517K printed in January. The last NFP report was on February 3rd, which was basically when the stock market peaked for 2023 . . .
Needless to say, it is going to be another interesting week for those of us that love the game!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.84-4.05% (bullish)
UST 10yr Yield 3.81-4.09% (bullish)
UST 2yr Yield 4.59-4.98% (bullish)
High Yield (HYG) 72.91-74.95 (bearish)
SPX 3 (bearish)
NASDAQ 11,232-11,725 (bearish)
RUT 1 (bearish)
Tech (XLK) 133-141 (bearish)
Defense (ITA) 115-119 (bullish)
Utilities (XLU) 63.66-67.34 (bearish)
Shanghai Comp 3 (bullish)
DAX 15,165-15,654 (bullish)
VIX 18.21-23.53 (bullish)
USD 103.64-105.51 (bullish)
EUR/USD 1.052-1.069 (bearish)
Oil (WTI) 73.44-79.71 (bearish)
Nat Gas 2.10-3.18 (bearish)
Gold 1 (bullish)
Copper 3.90-4.24 (bullish)
Silver 20.41-22.00 (neutral)
TSLA 183-210 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
