“History never repeats itself, but it does often rhyme.”
-Mark Twain
Things looked dire for the New York Rangers last night. Down 3 - 1 with just over half of the third period to go is not a great situation in playoff hockey.
Then Chris Kreider, from Rowayton, CT, scored three goals in less than 10 minutes. In hockey, we call this a natural hat trick. They don't happen often and have rarely occurred in the third period of a playoff game.
In some ways, this was a miracle for the Rangers faithful. The last time a Ranger scored a 3rd period natural hat trick was Mark Messier in 1994 ... that ended up being a pretty good postseason for the Rangers. As they say, history does rhyme . . .
Earlier this week, in the world of economic data, we had a CPI report that slowed versus the prior month. The deflation camp likely believed, based on that data point, that despite all of the real-world data suggesting otherwise . . . the miracle of disinflation had arrived.
Well, maybe not really a miracle. Headline CPI only decelerated by 10bps from the prior month to +3.4% Y/Y.
The CPI report was followed yesterday with a less focused on, but still important gauge of inflation, import and export prices. On a Y/Y basis, both of these measures are still below CPI, so that is good. But, on a M/M basis, we had the highest increase in almost two years.
In fact, import prices were up +0.9% from the prior month. If we annualize that increase, it amounts to 10.8% . . .
Back to the Global Macro Grind...
In today's Chart of the Day we look at inflation in the U.S. going back to the 1960s. The key period to look at is the 1970s and 1980s.
Inflation had massive peaks, then decelerations, and then re-accelerations to higher highs. The cumulative effect of this inflation was obviously punitive on the average consumer. This cycle eventually required a Fed Chair by the name of Paul Volcker to raise rates to a peak of +20% in 1981.
This is not to say that we will enter another period like that. On a very basic level, CPI is actually calculated very differently now. In fact, if we used the 1980s calculation reported inflation would actually be 6 to 8% points higher!
To their credit, at the moment the Fed seems to get that inflation is not yet under control. Yesterday, we had three separate members of the Fed deliver a similar message. As Cleveland Fed President Loretta Mester said:
“Incoming economic information indicates that it will take longer to gain that confidence. Holding our restrictive stance for longer is prudent at this point as we gain clarity about the path of inflation.”
While there are always puts and takes in economic data, the continuing rally in inflation assets is a tailwind to inflation. Even though it is off its YTD highs, the CRB index is up +17% Y/Y. When even natural gas is rallying, you know the inflation pressure from commodities is real!
The challenge with high inflation and higher-for-longer interest rates is that they do impede economic growth. Typically, the housing market is the best real-time gauge for the impact of these twin dynamics.
In fact, and just on cue, this week’s May NAHB Housing Market Index came in at 45. This was a 6-point, or -12% decline, from the prior month. The traffic of prospective buyers fell from 34 to 30.
Yesterday, Keith gave the Mid-Quarter Macro Themes update (ping for access). At the moment, our models suggest that through the course of the next twelve months, we will get five monthly Quad 2s, five monthly Quad 3s, one monthly Quad 1, and one monthly Quad 4.
Luckily, the monthly Quad 4 was in April, which doesn’t become final until all the data is in. As you can no doubt see from the price and risk action in April, the biggest challenge to our outlook, and really the markets, is that we shift to both growth and inflation slowing at the same time. Currently, we are not forecasting this.
At the moment, our asset allocation remains heavily weighted to inflation and international equities. In our Portfolio Solutions product, these were the top Macro ETFs By Size Rank:
FDRXX, TFLO, BUXX, TBIL, UUP, AMLP, IVOL, XOP, XLB, EWG, KBA, CORN, GLD, KBWP, CTA, NIKL, AAAU, IAK, CPER, GDX, GSG, XLI, NLR, XLE, EWP, CRIT, INDA, URA, EWN, BDRY, SMIN, COPX, MSOS, DRLL, SLV
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.48-4.71% (bullish)
UST 10yr Yield 4.34-4.58% (bullish)
UST 2yr Yield 4.75-4.93% (bullish)
High Yield (HYG) 76.76-77.55 (bullish)
SPX 5135-5324 (bullish)
NASDAQ 16,177-16,790 (bullish)
RUT 2035-2106 (bullish)
Tech (XLK) 202-214 (bullish)
Insurance (IAK) 114.01-117.40 (bullish)
Energy (XLE) 92.39-95.63 (bullish)
Basic Materials (XLB) 89.97-93.04 (bullish)
VIX 12.08-14.48 (bearish)
USD 104.20-105.81 (bullish)
EUR/USD 1.070-1.089 (neutral)
USD/YEN 153.92-157.00 (bullish)
Oil (WTI) 78.07-80.52 (bullish)
Nat Gas 2.09-2.54 (bullish)
Gold 2311-2408 (bullish)
Copper 4.55-5.04 (bullish)
Silver (SLV) 27.25-30.32 (bullish)
Bitcoin 58,990-67,479 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
