“The truest wisdom is resolute determination.”
-Napolean Bonaparte
Be it determination, grit, or just old-fashioned grinding, the ability to keep going is critical on the path to success. To test this, Carol Dweck, the author of “Mindset: The New Psychology of Success,” experimented on a group of approximately 400 fifth graders across varied socio-economic, racial, and ethnic backgrounds in the United States.
Participants were given a series of puzzles to assess their IQ. Following this test, participants were told their score and praised in various ways. The feedback came in two forms. Participants were either 1) praised for their intelligence and being intrinsically smart or 2) were praised for their work effort.
The students were then asked whether they would like to take an easier or harder test next. The majority of the students who were praised for their intelligence chose the easier test. Meanwhile, more than 90% who were praised for their effort chose the more difficult test.
Afterwards, the researchers gave all of the participants more difficult tests and problems. The first cohort, i.e. “the smart kids,” no longer enjoyed the problems and lost interest quickly. The second cohort, on the other hand (which was praised for their effort) enjoyed the more difficult problem sets, even if they couldn’t necessarily solve them all.
While this is of course a study on fifth graders, its implications also apply to adults. Having the mindset to think you can improve and work hard at it, whether it be in investing, your relationships, or any other aspect of your life, will give you the courage and determination to push yourself to level up. Eventually this willingness to accept and embrace new challenges and failures leads to progress and improvement.
Back to the Global Macro Grind . . .
It's been a tough start to the week for European sentiment readings.
This morning’s July Eurozone Economic Sentiment decelerated for the 5th straight month coming in at -12.2. That's the lowest level since December 2022. In this report, Germany was even worse coming in at -14.7 and at the worst level since December 2022. Germany’s current conditions absolutely collapsed in this report to -59.5!
According to the report:
“The industrial sectors in Germany are likely to bear the brunt of the anticipated economic downturn, with profit expectations for these export-oriented industries experiencing a substantial decline."
Today’s Eurozone Sentiment was closely aligned with yesterday’s Eurozone Sentix Index for July, which came in at -22.5 on the headline level. This was also the 5th straight deceleration. On this report, Germany also fared much worse than the headline number and was described in the report as “dramatically bad.”
Making matters worse for Germany, CPI accelerated in June coming in at +6.4% Y/Y versus +6.1% Y/Y in May. Most of Europe is seeing a dramatic decline in Producer oriented inflation, yesterday’s Norwegian June PPI coming in at -28.5% is a good example of this, and at least a marginal decline in consumer-oriented inflation. That isn’t so in Germany where consumer inflation is accelerating, which unsurprisingly is reflected in the future economic expectations noted above.
Speaking of inflation, we have a series of U.S. oriented inflation reports later this week:
- Wednesday July 12 – June CPI with expectations for a +0.3% M/M increase;
- Thursday July 13 – June PPI with expectations for a +0.2% M/M increase; and
- Friday July 14 - June Export and Import Prices with expectations of -0.2% M/M and -0.3% M/M, respectively.
It shouldn’t surprise anyone to see inflation continuing to decelerate in these reports. The most challenging inflation comparisons occurred exactly a year ago. Specifically, July 2022 CPI came in at +9.1% Y/Y and July 2022 PPI came in at +11.3%. Both of these were at, or right near, cycle peaks and near 45+ year highs in aggregate. The challenge for policymakers and consumers is that inflation comparisons start to ease considerably, which may lead to a reasonable probability that inflation then re-accelerates (as we are witnessing in Germany).
This reality of "higher for longer" inflation is certainly getting recognized by global policy makers. Bank of England Governor Bailey said as much in his speech yesterday where he noted that while he expects inflation to fall markedly this year, it was “largely due to lower energy prices and warned that demand pressures and labor market tightness were not aligned with the inflation target.”
This monetary policy rhetoric is consistent with what we have heard from the ECB, Bundesbank, and Fed in recent days. In fact, as it relates to the Fed, we had Vice Chair Barr, San Francisco President Daly, and Cleveland President Mester all reiterate on Monday the likely need for more interest hikes this year.
I was on vacation last week and took a brief break from the screens, but as I caught up on the global macro data over the last 7+ days one thing is clear: not a whole lot has changed. Inflation remains high and sticky. Global growth is decelerating. And central bankers remain resolute and determined on the path to higher rates.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.76-4.10% (bearish)
UST 10yr Yield 3.69-4.09% (neutral)
UST 2yr Yield 4.67-5.09% (bullish)
High Yield (HYG) 73.40-74.68 (bearish)
SPX 4 (bearish)
NASDAQ 13,425-13,869 (bullish)
RUT 1 (bearish)
Tech (XLK) 168-175 (bullish)
Healthcare (PINK) 25.76-26.66 (bullish)
Shanghai Comp 3160-3255 (bearish)
Nikkei 32,098-33,998 (bullish)
DAX 15,450-15,964 (bearish)
VIX 13.20-17.05 (neutral)
USD 101.51-103.43 (neutral)
EUR/USD 1.084-1.100 (neutral)
Oil (WTI) 67.39-74.50 (bearish)
Gold 1 (bullish)
Copper 3.66-3.86 (bearish)
Bitcoin 28,844-30,802 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
