CONCLUSIONS (United states)
- While we’re likely to see post-winter optical strength in the March/April timeframe, we continue to believe that the trend in domestic economic growth is decelerating and will continue to decelerate over the intermediate term. An acceleration in reported inflation coupled with a slowdown in both house price appreciation and housing sector activity remain our primary catalysts for the aforementioned deceleration in the consumption-heavy US economy.
- This is especially true in the context of consensus expectations that continue to bake in our team’s 2013 bull case as the base case scenario for 2014 and beyond.
- The likelihood that US economic growth continues to slow relative to those expectations should perpetuate what we have been appropriately signaling as a regime change in market leadership that is likely to be supported by the introduction of easier monetary policy (both on an absolute basis and relative to existing expectations) over the intermediate term.
- As such, we continue to favor high-yielding assets (i.e. Treasuries, REITs, Utes), carry trading strategies (i.e. emerging markets) and inflation hedges (i.e. TIPS and commodities) in lieu of consumer exposure and high-growth/high-beta names, at the margins.
- The biggest near-term risk to our view is that likely sequential strength in reported economic data over the next 1-2 months is extrapolated as confirming evidence of a consensus bias towards favoring the growth style factor in domestic capital markets. The biggest long-term risk to our view is a Federal Reserve that openly supports a #StrongDollar = #StrongAmerica economic policy. For now, neither risk appears particularly probable.
- Chinese real GDP growth slowed in 1Q14, coming in roughly in line with our and the Street’s expectations. There were some bright spots in the higher-frequency data, but the general trend in Chinese economic growth remains negative.
- That being said, we are of the ilk to side with the now-consistent rhetoric of Chinese policymakers in anticipating that Chinese economic growth is at/near a cyclical bottom from a rate-of-change perspective.
- Specifically, either said policymakers have visibility into the Chinese economy that we lack as investors/analysts or they are effectively signing off on a plan to provide meaningful stimulus if growth continues to slow from here.
- Our favorite leading indicator for the slope of Chinese economic growth (i.e. the slope of the average year-over-year percent change in rebar, iron ore and coal prices) is supportive of the former outcome; the dramatic easing of Chinese monetary conditions and sharp tightening of credit spreads in recent months is supportive of the latter outcome.
- We are currently doing the work to re-quantify the risks embedded in the Chinese financial sector in order to appropriately handicap the probability of a severe and prolonged crisis (conference call date TBD). To the extent we find those risks are priced in, consensus expectations for Chinese economic growth are depressed enough to warrant bargain hunting on the long side of CNY/CNH-denominated capital markets.
US GROWTH CHARTS
CHINESE GROWTH CHARTS
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Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on April 16, 2014 by Hedgeye Macro Analyst Darius Dale. Follow Darius on Twitter @HedgeyeDDale.