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McCullough: Shame on Lew

Takeaway: The bond market doesn't believe a single word from Treasury.

By Keith McCullough

 

President Obama and Treasury Secretary Jack Lew are completely misrepresenting the default risk for political gain. It's shameful.

 

McCullough: Shame on Lew - lewo

 

In case you somehow missed it, the Treasury Department grabbed headlines today warning the U.S. economy could fall into its deepest crisis since the Great Depression if Congress doesn't raise the debt ceiling. 

 

"A default would be unprecedented and has the potential to be catastrophic," Treasury said. "The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

 

Really? Lew should be ashamed for spewing this fear-mongering nonsense.  

 

As for the Bond Market...It doesn't believe a single word from these guys on default risk. Otherwise yields would be ripping.

 

Check out the chart below.

 

McCullough: Shame on Lew - drake1

 

Keith McCullough is the Founder & CEO of Hedgeye Risk Management.


INITIAL CLAIMS & ISM: Steady Strength vs Sequential Softness

Summary:  The Labor market strength remains ongoing as claims make another YTD and multi-year low.  ISM Services declined sequentially with all components losing MoM.  Seasonality has shifted to a data tailwind while policy (manifest in Down Dollar & Down Rates) has shifted from benign to discrete growth headwind.     

 

One down datapoint (ISM Non-mfg) does not a trend make, but all trends start as trades - and the probability for a negative macro Trade to evolve into a Trend breakdown in growth heightens considerably when the principal, causal factor in our model (policy) inflects negatively.  

 

Keep the $USD front in center here as it moves towards testing its TAIL line of support at $79.21

 

 

INITIAL CLAIMS:  STILL IMPRESSIVE

The ongoing strength in the domestic labor market remains impressive.  Inclusive of this morning’s release, the 4-week rolling average of non-seasonally adjusted Initial claims, our favored read on underlying labor trends, registered its strongest rate of improvement since July of 2010.   To quickly review the data:

 

NSA Claims: Non-seasonally adjusted claims printed 252K, down 3K WoW while coming in < 300K for the 10th consecutive week.   The 4-week rolling average was -18.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -17.5%

 

SA Claims: Headline, seasonally-adjusted initial jobless claims fell -1K to 308K vs the prior week (revised) 307K.  The 4-week rolling average fell -4K WoW to 304.75K – the lowest level since May of 2007.

 

As a reminder, in additional to the prevailing organic strength in the claims data, the series will see a building seasonal tailwind over the September to February time period.  Separately, it’s worth noting that federal workers are eligible to collect unemployment while furloughed, so that may introduce an upward (albeit transient) bias in next week’s claims data and any subsequent releases so long as the shutdown remain in effect.  

 

INITIAL CLAIMS & ISM:  Steady Strength vs Sequential Softness  - NSA Claims 100313

 

INITIAL CLAIMS & ISM:  Steady Strength vs Sequential Softness  - 1

 

ISM: Sequential Softening

The ISM Non-Manufacturing Composite Index declined -4.2 to 54.4 in September with all principal components declining sequentially.  Business Activity (-7.1) and Employment (-4.3) led component declines and while Export Orders (+7.0) and Prices (+3.8) were the lone gainers.

 

The Trend (trailing 3M/6M/12M) across the balance of sub-components remains positive at present and, notably, New Orders was down just -0.90 to 59.6 – only a modest decline in the context of last month’s ( and the cumulative 2-month) material advance and still a solid absolute reading.  

 

On the consumer side, the recent multi-month trend has been one of improving consumption of Goods while spending growth on Services has been flat to decelerating on both a YoY and 2Y average growth basis (2nd Table below).  Coupled with the fiscal policy constraints to an acceleration in disposable income growth over the near-term, today’s ISM data presages another middling growth number for Consumer Spending on Services with the September release.     

 

One marginal negative datapoint does not a trend make, but all trends start as trades - and the probability for a negative macro Trade to evolve into a Trend breakdown in growth heightens considerably when the principal, causal factor in our model (policy) inflects negatively.  

 

Keep the $USD front in center here as it test its TAIL line of support at $79.21. 

 

 

INITIAL CLAIMS & ISM:  Steady Strength vs Sequential Softness  - ISM Non mfg table 

 

INITIAL CLAIMS & ISM:  Steady Strength vs Sequential Softness  - Income   Spending 092613

 

INITIAL CLAIMS & ISM:  Steady Strength vs Sequential Softness  - ISM Services vs Service Spending

 

Christian B. Drake

Senior Analyst


INITIAL CLAIMS: MORE GOOD NEWS

Takeaway: Another week, another solid jobless claims print.

Prior to revision, initial jobless claims fell 2,000 to 308,000 from 305,000 week-over-week (WoW), as the prior week's number was revised up by 2,000 to 307,000.

 

The headline (unrevised) number shows claims were lower by 1,000 WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4,000 WoW to 304,750.

 

The 4-week rolling average of non-seasonally adjusted (NSA) claims (which we consider a more accurate representation of the underlying labor market trend) was -18.3% lower year-over-year, which is a sequential improvement versus the previous week's YoY change of -17.5%. In fact, it is the fastest rate of improvement seen year-to-date and is actually the fastest rate of improvement seen since the first half of 2010.

 

INITIAL CLAIMS: MORE GOOD NEWS - jobless

 

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Euro PMIs Grind Higher; Italy’s Govt Intact…For Now

Final readings of Manufacturing and Services PMIs for September show the Eurozone economy grinding higher.  Yesterday, Draghi reminded participants on the ECB’s conference call that the economic recovery in the Eurozone is “weak, fragile, and uneven”, but improving off low levels. We largely agree with that sentiment and given this unevenness we will note our bullish bias on German and UK equities. Looking out over the next three months we wouldn’t expect to see great gains in aggregate Eurozone PMI readings, rather slight ups and downs month-over-month on a slightly positive slope.

 

Euro PMIs Grind Higher; Italy’s Govt Intact…For Now - zz. pmi

 

Our call remains anchored on changes in the slope of the data we track. Especially given what’s becoming a royal political mess in Washington, D.C., we think that actions of Obama and Bernanke to burn the USD and talk down growth will translate to EUR strength. As the chart below suggests, what’s good for the EUR/USD is also good for the DAX.  

 

Euro PMIs Grind Higher; Italy’s Govt Intact…For Now - zz. dax

 

Berlusconi’s Capitulates?

 

Surprisingly, Berlusconi decided to support PM Letta’s coalition government in a confidence vote yesterday, despite strong threats leading into the vote that his party would pull its support and split the fragile coalition. It’s now unclear how/if Berlusconi will have any influence on his PdL party while servicing a one-year sentence for tax fraud.  

 

What’s clear is that while this decision will give the market a breather, we think there’s plenty of room for Italy to underperform on its fiscal consolidation targets and growth outlook over the next three months.   The country’s budgetary issues should press into year-end – its decision to postpone/scrap a plan to increase the VAT and property taxes equates to ~ €3B in savings that the government must come up with in order to hit its deficit reduction target of 3% for this year.  Further, Letta, needs to gain approval for the 2014 budget, which may prove challenging given continued pushback on austerity.  On growth, the government last week revised down its 2013 GDP estimate to 1.3% from 1.7%. Given the coalition’s conflicts on budget reform and inability to issue the “tough” structural reforms, we think there’s more downside risk to the economy over at least the next three months.  

 

Matthew Hedrick

Senior Analyst


CHART OF THE DAY: Euro PMIs Grind Higher; Italy’s Govt Intact…For Now

 

CHART OF THE DAY: Euro PMIs Grind Higher; Italy’s Govt Intact…For Now - zz. pmi


Not Good: SP500 Levels, Refreshed

Takeaway: This correction is not like the ones we bought (we shorted this one).

POSITION: 6 LONGS, 8 SHORTS @Hedgeye

 

I don’t always go net short, but when I do, I prefer Down Dollar and #GrowthSlowing.

 

This morning’s ISM Services report was the 1st of the major leading indicators (SEP #) in our model confirming what both the bond and currency markets continue to confirm – on the margin (from YTD growth accelerating highs in JUL-AUG), US growth is slowing.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1704
  2. Immediate-term TRADE support = 1671
  3. Intermediate-term TREND support = 1660

 

In other words, this correction is not like the ones we bought (we shorted this one). With Bernanke banning economic gravity on the long end of the curve and the USD getting crushed, you shouldn’t have expected me to execute any other way.

 

It’s just our process.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not Good: SP500 Levels, Refreshed - SPX


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