“When you focus on you, you grow. When you focus on shit, shit grows.”
- Dwayne The Rock Johnson
You will try.
It will have been a commendable and stoic stand but In the end, against the torrid onslaught of inevitability, you will fail.
Today marks that special part of the cycle where MSM, fintwit, financial journo’s, market observooors & Macro larps the world over lock co-dependent arms in the ritualistic raping of analytical propriety and hard won cycle awareness.
Despite the internal conflict and protestations, you will submit to the ineluctable and dutifully play your part in contributing to the irritating cacophony of macro noise.
The immediate relief of having given voice & life to the proclamation will quickly give way to regret. Your lack of restraint left to echo in the halls of eternal self-loathing.
The risks and temptations are all known in advance but it won’t matter. Your pride and better judgement will reluctantly bend the knee to carnal impulse.
You will invariably, at some point today, either verbally or within the muted confines of your inner dialogue, utter …. “hawkish pause”.
It’s okay. You are proactively and unconditionally forgiven. The capacity for both craven weakness and majestic chivalry is a duality that defines us all.
Shit will be focused on. And shit will grow.
Cast not a dismissive or condescending eye amigos.
Delight in the shitshow. Revel in it with detached amusement.
Others shit remains the fertilizer for your counter-trading opportunity.
Back to the Global Macro Grind ….
Just high-frequency curation & contextualization this morning. A quick selection of notables across the domestic macro-verse….
- Inflation → Labor and associated wage-price dynamic are helping keep core price growth sticky-high. Core CPI decelerated just -20bps to +5.3% Y/Y and has been sitting at +/- the same RoC level for the last 6-months. Core Services CPI Ex-Shelter decelerated -54bps to +4.58% Y/Y and, on a 2Y basis (normalizing for comp effects), Headline CPI has only just begun to decelerate and remains north of +6%.
- The moderation in inflation is largely positive but in combination with the higher for longer policy tilt and sticky nominal yields, it means real yields are rising and now back to cycle peak levels.
- Again, for policy makers, wages remain a source of consternation as sticky nominal wage growth hasn’t produced what anyone would really characterize as the dreaded wage-price spiral … but it can be characterized as a quasi-unanchored wage-price stasis that has/could drive inflation to hold at a multiple of target. It’s a time dependent path that, to some variable extent, self-reinforces the longer it persists.
- Quad 4 → Plodding disinflation driven by comps & supply renormalization have now (partially) ceded the drivers seat to demand conditions/deterioration. The profit cycle remains negative, the mfg/goods economy is contractionary, Services is decelerating and following the trajectory of the Goods economy on a lag, credit availability is in conspicuous contraction alongside more sloth-ian deceleration in capex & consumer trends, commodities & industrial metals are making lower lows, the failed China re-opening narrative/catalyst has already pivoted to outright cuts & stimulus.
- Cycle Cadence → a duo of “transition” dynamics have been core to our 2023 conceptual framework. They are independent but not mutually exclusive. The first is the idea that we have transitioned from rate tightening to credit tightening. Given the record pace of policy tightening, the former is still being “passed through” and will serve to amplify the latter to some extent. The second is the notion that the cycle is progressively transitioning from tethering to income/savings towards a more conventional tether to policy/credit as residual excess savings converge to exhaustion & income/discretionary consumption shocks (student loan repayments) lurk in queue. The 2nd dynamic (progressive re-tethering of the cycle to policy/credit) implies an increasing sensitivity to the evolution of the first (transition from rate tightening to credit tightening).
- This is a basic but fundamental point that we re-highlight occasionally because many fail to really internalize it for whatever reason: With Avg Weekly Earnings Growth holding negative for a record 26th consecutive month its worth another quick redux …. To the extent income grows at a discount to inflation growth, then the spread between the rate of change of inflation and wages represents a loss of purchasing power. While the rate of change of inflation may moderate and prove transitory, the loss of purchasing power is permanent for many.
- Red Book SS Sales → Red Book Same Store (retail) sales slowed to +0.40% Y/Y, marking a 4th consecutive week of deceleration and the lowest RoC print of the cycle. In the context of cycle/multi-decade high growth in revolving credit and the fact that this series is reported nominally and the retail fubar’ness comes into even starker reality.
- NFIB: Small Business Sentiment and operating trends remain mired in a potent dose of ‘meh’. The Headline Sentiment Reading bounced modestly but the General Business Conditions, Forward Outlook, Actual earnings and Expectations for Earnings & Sales all declined sequentially and sit at or near cycle/multi-decade lows. And with Wage Increases growing at a premium to Price Increases for a 6th straight month, the Survey is not signaling Profit Cycle upside.
Housing: Don’t Overthink It, Yet.
Last week we hosted our 2Q23 Housing Outlook call. The presentation was dense & I’d encourage you to listen to it in its entirety, but I’d also encourage you not to overthink it, yet.
Housing’s larger fundamental arc remains relatively straightforward and mostly unchanged in recent month(s). The below satisfices with respect to capturing the prevailing setup:
- You can’t buy what’s not for sale and the chicken-egg phenomenon – ‘no one is going to list/move if there is no supply and how do you get more supply if no one is willing to move’ & a reluctance to move and give up 30Y FRM rates locked in at ATLs – will continue to cultivate inventory tightness, especially in the existing market.
- The combination of higher prices and the fastest policy tightening ever has cultivated the biggest affordability shock in decades. Affordability challenges and acute supply conditions have and will continue constrain upside in transaction volumes. #Purgatory
- Affordability and rates-catalyzed demand destruction has been (almost) offset by a similar magnitude decline in supply, helping buttress against a more meaningful decline in Home Prices.
- New Home Construction remains the relative & primary beneficiary of prevailing conditions because of ATL resale inventory levels and because the top slant of the economic K (ie high income households, the people who own a disproportionate share of ‘excess liquidity’ & get paid on it via higher rates and the target New Construction demographic) have remained comparatively resilient, thus far.
- If/until we get a trap door move lower in employment and macro activity, the dynamics above are likely to persist.
The hord of tourists at the gate is thick today. Stand diligent out there macro shield bros/maidens.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.81-3.98% (neutral)
UST 10yr Yield 3.59-3.85% (neutral)
UST 2yr Yield 4.37-4.71% (bullish)
High Yield (HYG) 73.83-75.00 (bearish)
SPX 4133-4383 (bearish)
NASDAQ 12,867-13,691 (bullish)
RUT 1 (bearish)
Tech (XLK) 162-172 (bullish)
Nikkei 31,092-33,601 (bullish)
DAX 15,801-16,318 (bullish)
VIX 13.85-20.19 (bullish)
USD 103.01-104.39 (bullish)
USD/YEN 138.40-140.50 (bullish)
Oil (WTI) 67.19-72.62 (bearish)
Copper 3.55-3.86 (bearish)
Bitcoin 25,554-27,301 (bearish)
Skol,
Christian B. Drake
