prev

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT

Takeaway: Two More Weeks Until the Market Gets What's Going On

While today’s initial jobless claims data continued to signal steady, ongoing improvement in the domestic labor market, the balance of fundamental macro data continues to flirt with a negative inflection on a rate of change basis.  

 

As can be seen in the summary table below, on a sequential basis, “Worse” is starting to hit with higher frequency.  

 

Consternation certainly builds at the nexus of macro fundamentals and real-time allocation decisions when the slope of fundamental improvement decelerates sequentially while the data remains relatively good on both an absolute and (in many instances) TREND basis.  When listing in periods of macro purgatory like this, we tend to roll with the Price/Risk Management signal first. 

 

As Keith highlighted in today’s S&P500 levels note:

 

“For the 1st time in months the SP500 is signaling A) lower-highs vs the all-time closing high and B) a very immediate-term TRADE momentum line breakdown with C) fundamentals (#GrowthSlowing) hanging out in the background.” 

 

In other words, we’re not Buying Back the Bubble on red again today.

 

Below is the breakdown of this morning's claims data from the Hedgeye Financials team along with some sector specific insight.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

- Hedgeye Macro

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT - Eco Summary Table 012314

 

-----------------------------------------------------------------------------------------------------------------------

 

Two More Weeks Until the Market Gets What's Going On

The initial jobless claims data continues to paint a picture of a strengthening, though not overheating, recovery in the labor market. The most important takeaway that varies from consensus is that the data is sharply at odds with the very weak December NFP print that caused a rally in long bonds. We expect, based on this claims data, that dynamic to reverse when the January NFP print is released two weeks from tomorrow, on Friday, February 7th. 

 

Our preferred measure of looking at the claims data remains the year-over-year rate of change in the rolling non-seasonally adjusted initial claims. This week that measure was 469,817, which was down 7.9% from the 510,350 at the same time last year. This compares with the previous week's rate of improvement of 8.5%. On the margin, there was modest deceleration in the rate of improvement, but not enough to warrant emphasis. On a single week basis, an inherently more volatile series, the Y/Y change was 5.8% better, which was better than the previous week's 4.3% improvement. 

 

We continue to expect the 10-year treasury to re-test 3.00% on strengthening labor data that will become more apparent in ~2 weeks time. For more info on which stocks are best and worst positioned for a rise in rates, see our note from November 22 entitled "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", which can be found HERE.

 

The Numbers

Prior to revision, initial jobless claims were unchanged at 326k WoW, as the prior week's number was revised down by -1k to 325k.

 

The headline (unrevised) number shows claims were higher by 1k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 331k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.9% lower YoY, which is a modest sequential deterioration versus the previous week's YoY change of -8.5%

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT - JS 1

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT - JS 2

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT - JS 3

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT - JS 4

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Bullish UK Charts, Refreshed

Takeaway: On the currency side, we remain bullish on the British Pound versus the US Dollar.

This note was originally published January 22, 2014 at 12:31 in Macro

Bullish UK Charts, Refreshed - ukdog

 

Editor's note: This is a complimentary look at Hedgeye research. Click here to learn more about how you can begin reaping the benefits of our world-class research used by leading money managers around the globe. 

 

We received more positive economic data out of the UK this morning, in line with our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish outlook for UK equities and the British Pound.

  • The ILO Unemployment Rate ticked down to 7.1% in NOV vs 7.4% in OCT and expectations of 7.3%.
  • BOE Minutes released showed a 9-0 decision to keep the benchmark rate unchanged and the asset purchase target unchanged.

UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which we expect should provide further strength to the equity market and currency. The decline in the unemployment rate represents the largest decline in almost 5 years! Additionally we’re seeing CPI also moderated, down 10bps to 2.0% in DEC Y/Y in the last reading – we expect this cut to boost business and consumer confidence and increase purchasing power and consumption.

 

Bullish UK Charts, Refreshed - hed

 

Bullish UK Charts, Refreshed - vv. cpi

 

While the FTSE (etf EWU) is approaching immediate term TRADE overbought level, it’s trading well above its intermediate term TREND level of support.

 

Bullish UK Charts, Refreshed - vv. ftse

 

On the currency side, we remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve). This was confirmed once again by the Minutes released today, which continues to stoke the Pound. The Bank said there was no need to raise rates even if the unemployment rate hits 7% in the near future.

 

The British Pound is holding its Bullish Formation, which we expect will continue to be supported by prudent monetary policy from the BOE and strengthening economic fundamentals.

 

Bullish UK Charts, Refreshed - vv. pound 

 

Matthew Hedrick

Associate


ARGENTINE DEFAULT 2.0?

Takeaway: Argentina's options have not changed: default or burn the peso. Neither outcome is good for sentiment surrounding beleaguered EM assets.

CONCLUSIONS:

 

  1. What does Cristina Fernandez need to do to stem the tide of currency depreciation, commensurate inflation and capital flight? That’s “easy”: default on its foreign debt obligations and commit to servicing the citizens of Argentina vs. the assets of foreign creditors. A change in monetary regime (i.e. re-pegging the ARS to the USD) wouldn’t hurt either.
  2. Since we know that all of that occurring in the near term is unlikely, it is likely that Fernandez & Co. will continue to burn the peso in order to inflate FX reserve balances. That outcome continues to be priced into the forwards market; consensus has this one right – at least directionally.
  3. What investors might be missing is the eccentric Cristina Fernandez waking up one day, realizing that there is no end in sight, and deciding to pursue the default option.
  4. It’s definitely a risk worth considering heading into 2015; the country’s USD debt service obligations (principal + interest) jump to $9.5B that year (from $3.3B in 2014). After a brief respite in 2016, the maturity wall stiffens again with $11B-plus due in both 2017 and 2018.
  5. At any rate, neither outcome (default or material devaluation of the peso) is good for sentiment surrounding beleaguered EM assets.

 

I feel bad writing so negatively about Argentina’s managerial woes. Typically when our firm publishes bearish research on companies, usually the worst thing that could happen is a bunch of overpaid corporate executives lose their jobs as a result of persistently poor operational performance. For countries, however, the ramifications of persistent mismanagement are considerably more far-reaching.

 

In recent years, Argentina has been a standard bearer in this regard:

 

  • Since President Cristina Fernandez office back in DEC ‘07, the Argentine peso (ARS) has been devalued by roughly -60%; today’s -11% decline to ~8 pesos per USD represents the largest single-day drop since the country abandoned its peg to the USD back in 2002.
  • Reported inflation (+10.6% YoY in 2013) has consistently trailed actual inflation in Argentina, where private sector economists are now prosecuted for publishing estimates (+28.4% YoY in 2013) that conflict with official readings.
  • In the face of rampant inflation and punitive capital controls (including additional measures introduced today, which limit consumers to two online purchases from overseas providers per year), Argentine citizens have been increasingly dealing with blackouts and looting – eerily reminiscent of conditions on the ground post the country’s 2001 default on $95B of foreign currency debt.
  • For those Argentines brave enough risk jail time by circumventing official capital controls, they are now paying a record 12.15 pesos per USD for blue-chip currency swaps in the black market (i.e. ~50% more expensive than the official spot rate), which took off once Fernandez began restricting access to foreign currencies after her re-election in 2011.

 

ARGENTINE DEFAULT 2.0? - ARS

 

ARGENTINE DEFAULT 2.0? - CPI

 

ARGENTINE DEFAULT 2.0? - BCS

 

So why is Cristina Fernandez, who recently replaced her economy minister, cabinet chief and central bank governor back on NOV 18th (her first day back in office after surgery to remove a blot clot near her brain) – after stating emphatically back in MAY that Argentina wouldn’t devalue the peso – burning her country’s currency?

 

As we were keen to highlight in our previous work on Argentina, the Argentine sovereign’s primary issue lies in its ~$50B outstanding of restructured and un-restructured foreign currency debt and the primary source of funds it taps to service that debt – i.e. central bank FX reserves, which have declined by -44% since peaking in JAN ‘11.

 

Specifically, our long-held and accurate bearish bias on the commodity complex has slowed Argentina’s accumulation of FX reserves via the current account (commodities account for ~65% of Argentine exports) – which is now persistently in [slight] deficit territory after having averaged a healthy +3.5% current account surplus during the 2002-10 run-up in global commodity prices.

 

ARGENTINE DEFAULT 2.0? - FX Reserves

 

ARGENTINE DEFAULT 2.0? - CAB

 

It’s too bad for Argentina that commodity prices peaked and started to decline in 2011 – just as our #DeflatingTheInflationII 1Q12 Macro Theme (and subsequent macro themes throughout 2012-13) called for them to do. Either you have a process for internalizing and capitalizing on globally interconnected risks or you don’t.

 

We did. Argentine policymakers didn’t. That’s probably why the peso has declined/been devalued by a cumulative -44% since we started pounding the table on the short side of the ARS (in the NDF market, of course) back in APR ’12.

 

So what does Cristina Fernandez need to do to stem the tide of currency depreciation, commensurate inflation and capital flight? That’s “easy”: default on its foreign debt obligations and commit to servicing the citizens of Argentina vs. the assets of foreign creditors. A change in monetary regime (i.e. re-pegging the ARS to the USD) wouldn’t hurt either.

 

Since we know that all of that occurring in the near term is unlikely, it is likely that Fernandez & Co. will continue to burn the peso in order to inflate FX reserve balances. That outcome continues to be priced into the forwards market; consensus has this one right – at least directionally.

 

ARGENTINE DEFAULT 2.0? - NDF

 

What investors might be missing is the eccentric Cristina Fernandez waking up one day, realizing that there is no end in sight, and deciding to pursue the default option. It’s definitely a risk worth considering heading into 2015; the country’s USD debt service obligations (principal + interest) jump to $9.5B that year (from $3.3B in 2014). After a brief respite in 2016, the maturity wall stiffens again with $11B-plus due in both 2017 and 2018.

 

ARGENTINE DEFAULT 2.0? - DDIS

Source: Bloomberg LP

 

At any rate, neither outcome (default or material devaluation of the peso) is good for sentiment surrounding beleaguered EM assets.

 

Oh well, there’s always the OCT 2015 Argentine general election to look forward to…

 

DD

 

Darius Dale

Associate: Macro Team


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Not #BTDB Today: SP500 Levels, Refreshed

Takeaway: I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.

POSITION: 9 LONGS, 9 SHORTS @Hedgeye

 

The 3 main issues for the US stock market in our model are as follows:

 

  1. US consumption #GrowthSlowing (rate of change vs Q313’s sequential top)
  2. US stocks are down YTD (consensus chases performance)
  3. SPY just broke one of my immediate-term TRADE lines of momentum support (1837)

 

So, I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.

 

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

 

  1. Immediate-term TRADE resistance = 1848
  2. Immediate-term TRADE support = 1821
  3. Intermediate-term TREND support = 1779

 

In other words, for the 1st time in months the SP500 is signaling A) lower-highs vs the all-time closing high and B) a very immediate-term TRADE momentum line breakdown with C) fundamentals (#GrowthSlowing) hanging out in the background.

 

Sure, there are plenty of reasons to buyem. Flows in particular are tantalizing. But a stock market that goes down on Down Dollar and Down Rates (today), is a stock market that is worried about something I haven’t had to worry about for a year now = #GrowthSlowing.

 

Keep moving out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not #BTDB Today: SP500 Levels, Refreshed - SPX

 


More Bad News for $TGT

Takeaway: Another bad news item bites Target.

TGT - Target eliminates 475 jobs, most at Minneapolis HQ

  • "Target Corp. laid off 475 employees Wednesday and said it will not fill 700 open positions…"
  • "The retailer declined to make an executive available for questions or say whether more layoffs are in the works. The company also wouldn’t say how many of the 700 open positions were based in the Twin Cities."
  • "The layoffs are Target’s largest since January 2009, when the nation’s second-largest retailer said it would cut 1,100 positions from its headquarters."

More Bad News for $TGT - target55

 

Takeaway: In the grand scheme of the over 360,000 people that Target employs, this is obviously a rounding error. We get that. However, symbolically, it kind of matters. Bottom line here is the company was already on a downward slope, and the recent data breach headlines plastered across TVs, mobile devices and computer screens across America delivered additional unwanted momentum. Look, Target has not been forced into cost cutting measures since January of '09 when the stock price was in the mid-30's. Not good.

 

Editor's note: This is an excerpt from Hedgeye Retail Analyst Brian McGough's morning research. In case you didn't already know about McGough, he's really good. Learn more about becoming a Hedgeye subscriber today.



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next