“All you need in this life is confidence and ignorance, and then success is sure.” -Mark Twain
Given the quote above, you might rightfully think that this is an Early Look about the Federal Reserve. After all, the quote aptly describes many of the Fed's actions over the past few decades. At the moment, they seem to have the confidence that they will ultimately cure us of inflation. Of course, this comes after they created inflation (and then insisted it was “transitory.”)
Despite this "confidence," there is certainly a level of ignorance at play as well. The Fed, perhaps unwittingly, blew up regional banks and last year crushed almost every asset price that ticks. So far this year, we have had a recovery in many of those prices and the labor market generally remains healthy. The risk of asset price increases and economic data so far this year is that it further emboldens both the central bank's confidence and ignorance.
Later today, we will get a 25bps interest rate hike from the FOMC. We also now have a roughly 50% probability of another rate hike coming down the pike. This all comes with most government measures of inflation now at near two-year lows. But what, pray tell, happens if inflation re-accelerates?
At the moment, this is exactly what is happening with inflation. The CRB Index is now at a YTD high and up almost +8% in the last month. Meanwhile, WTI oil (one of the most important indicators in our real-time inflation model) is up over 11% in the past month. Even if we set those pesky commodities to the side, we also just had a monthly re-acceleration in U.S. home prices yesterday.
On top of all this, inflation comparisons on CPI just peaked and will start getting much easier as we head into Q4 2023. In 2022, CPI peaked at 9.1% Y/Y in June and steadily decreased to +6.4% Y/Y by year end. The combination of easier comps and the acceleration of the core drivers of inflation may mean we’ve seen the bottom in CPI, which won’t be great for confidence in the Fed’s inflation fighting abilities.
There's a widely acclaimed Canadian TV show called "Shoresy" that has a great quote summarizing this quagmire very well:
“It’s not that they don’t love to win, it’s that they don’t hate to lose.”
The Federal Reserve deciding that they truly hate to lose the fight against inflation is not a scenario that is priced into many Value at risk (VaR) models at the moment.
Back to the Global Macro Grind . . .
Since we are on the topic of confidence, let's look at yesterday’s U.S. Consumer Confidence report. The headline number came in at 117 for July, which was a big acceleration from 110.1 in June. Not only was this a two year high in confidence, but confidence increased across all age groups and incomes. This is only one data point and these surveys can be volatile, but it is positive nonetheless.
That said, this confidence report remains at odds with much of the underlying data we look at on the consumer related to credit card debt, interest expenses, the cost of buying houses, and disposable personal income. In the Chart of the Day below, we show this graphically via the credit card data (a chart you’ve seen before from us). Additionally, while a confident and employed consumer is good for America, it probably isn’t ideal for central bankers trying to impede the demand side of the inflation equation.
Over in Europe, the recent data is much less confusing. In fact, it is downright awful. On Monday, we had PMI reports from all major regions in Europe:
- Services PMIs
- France slowed to 47.4, from 48.0
- Germany slowed to 52.0, from 54.1
- Eurozone slowed to 51.1, from 52.0
- U.K. slowed to 51.5, from 53.5
- Manufacturing PMI (which were contractionary, sub-50, across the board)
- France slowed to 44.5, from 46.0
- Germany slowed to 38.8, from 40.6 -> lowest since May 2020
- Eurozone slowed to 42.7, from 43.4
- U.K. slowed to 45.0, from 46.5
Literally every PMI report in Europe slowed from June to July. Manufacturing remained an absolute disaster, including Germany coming in at COVID era level of 38.8, and Services coming close to recessionary levels (sub 50).
Confidence isn’t much better in Europe with yesterday’s German IFO Business Confidence report from yesterday falling for the third straight month and approaching near two-year lows. All of this data comes despite a surprise jump in May German Industrial Orders at +6.3% M/M.
But as we all know, and this may be a lesson to learn from this week U.S. confidence report this week, one data point does not make a trend or arrest economic gravity.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.84-3.99% (bullish)
UST 10yr Yield 3.73-3.99% (bullish)
UST 2yr Yield 4.63-4.97% (bullish)
High Yield (HYG) 74.10-75.70 (bearish)
SPX 4 (bearish)
NASDAQ 13,804-14,401 (bullish)
RUT 1 (bearish)
Tech (XLK) 173-181 (bullish)
Financials (XLF) 33.53-35.85 (bearish)
Defense (ITA) 114-118 (bullish)
Healthcare (PINK) 26.09-27.61 (bullish)
Shanghai Comp 3141-3247 (bearish)
Nikkei 31,916-33,100 (bullish)
BSE Sensex (India) 65,302-67,823 (bullish)
DAX 15,896-16,240 (neutral)
VIX 13.19-16.24 (neutral)
USD 99.61-101.90 (neutral)
Oil (WTI) 74.15-79.94 (bullish)
Nat Gas 2.45-2.87 (bullish)
Gold 1 (bullish)
Copper 3.76-3.95 (bearish)
Silver 23.99-25.98 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
