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DEMAND DROPS BACK BELOW 180

Takeaway: As expected, the post-holiday bounce was followed by the post-post-holiday slump. Mortgage demand drops sharply on the latest week.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

DEMAND DROPS BACK BELOW 180 - Compendium 061814

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended June 13. 

 

Mortgage purchase application volume fell -4.7% week-over-week, retracing much of the post-holiday week gain of +9.3% and returning the index to a sub-180 level (178.6, to be precise). On a year-over-year basis, purchase application volume in the latest week is tracking down -15.1% YoY vs -13.6% YoY in the week prior. The QoQ is currently running at +3.4%.

 

Recall that last week we saw a big bounce in both purchase and refi activity, but we speculated at the time it was at least partially driven by the post-Memorial Day week bounce. As such, this week's activity level is the better gauge. 

 

Activity dropped off on the refi side as well as the index saw its largest sequential decline since November. Though rates only backed up 2 bps to 4.36% from 4.34%, refi application volume fell +12.7% W/W, more than reversing the +11.0% print in the prior week. 

 

As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.

 

Our expectation remains that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.

 

DEMAND DROPS BACK BELOW 180 - Purchase   Refi YoY

 

DEMAND DROPS BACK BELOW 180 - Purchase Apps LT w Summary Stats

 

DEMAND DROPS BACK BELOW 180 - Purchase Apps qtrly

 

DEMAND DROPS BACK BELOW 180 - Composite Index Qtrly

 

DEMAND DROPS BACK BELOW 180 - Composite Index LT w Summary Stats

 

DEMAND DROPS BACK BELOW 180 - 30Y Rate

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

Joshua Steiner, CFA

 

Christian B. Drake


June 18, 2014

June 18, 2014 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

 

June 18, 2014 - Slide8

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June 18, 2014 - Slide13


No Fear

This note was originally published at 8am on June 04, 2014 for Hedgeye subscribers.

“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.”

-Sun Tzu

 

Last week I took the pen on the Early Look from Keith and talked about complacency in global markets.  In that note, I highlighted both volatility (VIX) and the level of certain European peripheral yields on government debt, specifically in Spain and Italy.  The simple takeaway was that there was not a lot of fear baked into market prices.

 

No Fear - 88

 

Yesterday I was forwarded a chart from the always thoughtful research firm Nautilus Capital Research.  The chart looked at the trend and duration of rallies of SP500 from 1900 – Present without a 10% correction.  According to their analysis, the current rally from October 2011 is greater than 97% of prior rallies over the last 114 years in duration without a correction.  This is, of course, another way to say that investors are currently not very fearful.

 

The area of foreign policy may be one key area in which the amount of concern or fear is lower than reality warrants.  From the Taliban in Pakistan, to the potential for an Iranian nuclear arsenal, to the ongoing conflict in the Ukraine, foreign policy risks remain.  Certainly these global hot spots create buying opportunities more often than global calamity, but at a VIX of sub 12, not a lot of calamity is priced in.

 

This Friday at 10:30am EST.  we will once again be joined by Yale Professor Charles Hill for a briefing on foreign affairs.  Professor Hill is former Chief of Staff at the State Department, aid to U.S. Secretary of State George Schultz, and special consultant to U.N. Secretary Boutros Boutros-Ghali.  He currently teaches the renowned seminar Grand Strategies at Yale. 

 

In the briefing on Friday, Professor Hill will give us his view of the top three foreign policy risks facing both the United States and the World.  The dial-in instructions will be sent to all Hedgeye Macro institutional subscribers.  If you are not a subscriber, email sales@hedgeye.com for details.

 

Back to the Global Macro Grind . . .

 

We made a key move on the macro front on our Best Idea List as we removed the Brazilian Real (BRL) from our Best Ideas List.  Since making it a key research call, the BRL posted a total return of ~+4.7% versus the U.S. dollar, which compares to a mean return of +2.7%, and is good for the sixth largest gain amongst the 24 EM Currencies tracked by Bloomberg over that time frame.

 

As our Asia and Latin America Analyst Darius Dale wrote late yesterday:

 

“Brazilian growth data is flat-out awful; as you can see in the Chart of the Day, there is a hardly a meaningful economic indicator in Brazil that isn’t rapidly decelerating on both a sequential and trending basis. That this is coming amid accelerating headline inflation means Brazilian policymakers are now forced to choose between promoting growth or combating inflation – the latter of which we still view as the country’s key political issue.

 

Unfortunately for investors, the Rousseff administration is resorting to the tired Keynesian playbook of fiscal stimulus ahead of the election, choosing to ramp up deficit spending ahead of what is likely to be Brazil’s most contested presidential race since 1989. Recent policy initiatives include:

 

A +4.5% increase in income tax exemptions starting next year;

 

A +10% increase in Bolsa Familia cash transfers starting next year worth R$9B… this latest increase takes Bolsa Familia transfers – which benefit ~25% of the Brazilian population – up +64% in real term since the Rousseff administration took office on JAN 1st, 2011; and

 

Extending a $9.7B payroll tax cut for various manufacturing industries.

These promises of fiscal sweetness come amid heighted pressure to raise the minimum wage, which has increased +42.2% in real terms since 2007. Both Rousseff and her runner-up in the latest polls, Aecio Neves, are on board with another hike.”

 

The combination of flat out bad Brazilian economic data combined with murky policy outlook makes us cautious on Brazil, but not on all emerging markets.  In fact two that we like, in lieu of Brazil, are Taiwan and India.  Although we aren’t quite ready to pound the table and add them to our Best Ideas list, both countries screen positively on our Growth, Inflation and Policy model.

 

Stepping back from the emerging markets, the most interesting domestic data point that our internal research team picked up yesterday was related to Treasuries.   Specifically it was that J.P. Morgan’s institutional clients haven’t been this net short of Treasuries since 2006, which occurred shortly before a major crash in yields.

 

I’ve been emphasizing the risk of being complacent, but there is also another key risk to consider, which is the risk of being consensus.  In the Treasury market, the consensus view is that yields must go higher.   Unfortunately, markets normally don’t do what the crowds want them to do.

 

Certainly on a reversion to the mean basis the following trades make sense:

  • Long VIX;
  • Long Treasury Yields;
  • Short Utilities;
  • Long Interest rates broadly; and
  • Short European peripheral sovereign debt;

The list could go on to be sure, but if there is one truism in managing global macro risk it is simply that markets can stay irrational longer than investors can stay solvent.   So if you aren’t going to wait on the Hedgeye quantitative signal on these reversion to the mean plays, at least keep some fire power dry.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.42-2.61%

SPX 1894-1937 

RUT 1094-1152 

USD 80.03-80.77 

WTIC Oil 102.09-104.88 

Gold 1235-1292

 

Go Rangers!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

No Fear - Chart of the Day


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 18, 2014


As we look at today's setup for the S&P 500, the range is 41 points or 1.44% downside to 1914 and 0.67% upside to 1955.                                                     

                                                                          

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.17 from 2.17
  • VIX closed at 12.06 1 day percent change of -4.66%

 

MACRO DATA POINTS (Bloomberg Estimates):           

  • 7am: MBA Mortgage Applications, June 13 (prior 10.3%)
  • 8:30am: Current Account Balance, 1Q, est. -$97b (pr -$81.1b)
  • 10:30am: DOE Energy Inventories
  • 2pm: Fed seen lowering QE purchases by $10b to $35b, maintaining benchmark interest rate target in 0%-0.25% range
  • 2:30pm: Fed’s Yellen holds news conf.

 

GOVERNMENT:

    • Senate Energy Cmte votes on Keystone pipeline authorization
    • Treasury Sec. Jack Lew on trip to Abu Dhabi, UAE, Saudi Arabia, Jerusalem and Berlin
    • 7am: Quinnipiac Univ. releases poll of Iowa voters on Senate race between Republican state Sen. Joni Ernst, Rep. Bruce Braley, D-Iowa
    • 10am: GM CEO Mary Barra to testify at House Energy and Commerce subcmte hearing on recalls
    • 10am: Senate Appropriations panel hears from Defense Sec. Chuck Hagel, Joint Chiefs Chairman Martin Dempsey on Defense Dept budget
    • 10am: House Financial Services Cmte hears from CFPB’s Cordray
    • 10am: Senate Banking panel meets on high-frequency trading
    • 10:45am: President Obama hosts “Maker Faire” event
    • 2:30pm: Senate Judiciary panel votes on constitutional amendment to allow Congress to regulate campaign financing
    • 2:30pm: Senate Commerce Cmte hearing on e-cigarette marketing

               

WHAT TO WATCH:

  • Fed to taper, may reduce jobless rate forecast: Economists
  • Amazon smartphone potential based on price: BI
  • GE set to make new offer for Alstom on June 20: Le Figaro
  • Bouygues wants to keep its 29% Alstom stake: Le Parisien
  • Boeing said to be in talks with ICBC for 747-8 jumbo order
  • Iraq PM fires commanders as Obama holds off airstrikes
  • Putin, Poroshenko in talks over possible cease-fire
  • GM’s Barra faces Congress irked by small fine, strong sales
  • EU must rely on antitrust, privacy rules vs Google: Germany
  • BlackRock CEO sees regulators shifting to products vs firms
  • Oracle’s Ellison renews talk of Micros takeout 6 yrs later
  • Apollo, Cerberus LBOs have highest default rates: Moody’s
  • California cmte. rejects bill on soda, drink labeling: AP
  • Viacom ends partnerships with 60 rural U.S. cable cos.: WSJ
  • T-Mobile offers to buy spectrum from smaller rivals: NYPost
  • BOE says 2014 rate increase more likely than investors bet
  • CIC investment losses from mismanagement; may widen: Auditor

 

EARNINGS:

    • Actuant (ATU) 8am, $0.63
    • FedEx (FDX) 7:30am, $2.36 - Preview
    • Jabil Circuit (JBL) 4:02pm, $(0.10)
    • Red Hat (RHT) 4:04pm, $0.33

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Industry to Discuss Changes to Century-Old Fixing Benchmark
  • Gold Miners Seek Jackpot Hidden Among Nevada Hills: Commodities
  • Brent Pares Gains as North Iraq Fighting Spreads; WTI Rises
  • Oil-Gold Tie Breaks 1st Time in 5 Years as Economy Grows: Energy
  • World Economy Faces Threat From Old Enemy as Oil Approaches $120
  • Nickel Drops as Inventories Surge Most in Five Years to Record
  • Gold Trades Below Three-Week High Before Fed Concludes Meeting
  • Alumina Refineries in Indonesia Delayed by Legal Challenge
  • White Sugar Advances to Highest in Four Weeks; Coffee Slips
  • Kurd Oil Supply Seen Growing as Region Grabs More Territory
  • Platinum Strike Settlement Said to Be Delayed on Union Demands
  • Natixis Says Hiring Commodity Financing Bankers for Asia-Pacific
  • Sinopec May Shut Qingdao Refinery for Maintenance in May 2015
  • Kogas May Buy Winter Spot LNG Cargoes and Reschedule Deliveries
  • Natural Gas Siphoning Seen Unlikely in Ukraine Seeking EU Ties

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


In Case You Were Still Worried About Deflation...

Takeaway: Inflation has just about doubled. Now what?

This is an excerpt from a research note published earlier today by U.S. macro analyst Christian Drake. For more information on our services click here.

Our 1Q14 Macro Investment theme #InflationAccelerating called for ~100 bps increase in reported CPI into the easiest inflation comps in 3Q14.  With inflation running just above 1% into 2013 year-end, a +100 bps increase was effectively a call for a doubling in the rate of price growth.   

 

In Case You Were Still Worried About Deflation... - inflation 1811026b

 

With the May reading of +2.13% YoY that doubling of inflation growth has largely manifest.  What hasn’t accelerated, unfortunately, is earnings growth (more on that below).   

 

Headline CPI accelerated for a 3rd consecutive month in May, hitting its highest rate of growth since October 2012,  while Core CPI accelerated 20bps to +2.0% YoY.

 

Shelter inflation (~31% weight), which almost singularly supported the headline number most of the last year, accelerated +10bps to +2.9% YoY while protein (meat, poulty, fish, eggs) price growth accelerated another +130 bps sequentially to +7.7% YoY.  

 

In Case You Were Still Worried About Deflation... - drake1

 

Notably, while shelter inflation has buttressed the headline number over the TTM and food/energy inflation have been the outliers YTD, the rise in prices has been increasingly broader based the last several months.  

 

Indeed, the percentage of components registering sequential acceleration made a new multi-year high in May and is looking similar to the commodity price cycle catalyzed acceleration in 2011. 

 

In Case You Were Still Worried About Deflation... - CPI breadth 061714

 

In Case You Were Still Worried About Deflation... - CPI all items ex shelter

 

 

Christian B. Drake

cdrake@hedgeye.com

@HedgeyeUSA


DOUBLE, DOUBLE, TOIL & TROUBLE: MAY INFLATION

Our 1Q14 Macro Investment theme #InflationAccelerating called for ~100 bps increase in reported CPI into the easiest inflation comps in 3Q14.  With inflation running just above 1% into 2013 year-end, a +100 bps increase was effectively a call for a doubling in the rate of price growth.   

 

With the May reading of +2.13% YoY that doubling of inflation growth has largely manifest.  What hasn’t accelerated, unfortunately, is earnings growth (more on that below).   

 

Headline CPI accelerated for a 3rd consecutive month in May, hitting its highest rate of growth since October 2012,  while Core CPI accelerated 20bps to +2.0% YoY.

 

Shelter inflation (~31% weight), which almost singularly supported the headline number most of the last year, accelerated +10bps to +2.9% YoY while protein (meat, poulty, fish, eggs) price growth accelerated another +130 bps sequentially to +7.7% YoY.  

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - Food Energy Shelter 061714

 

Notably, while shelter inflation has buttressed the headline number over the TTM and food/energy inflation have been the outliers YTD, the rise in prices has been increasingly broader based the last several months.  

 

Indeed, the percentage of components registering sequential acceleration made a new multi-year high in May and is looking similar to the commodity price cycle catalyzed acceleration in 2011. 

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - CPI breadth 061714

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - CPI all items ex shelter

 

So, where to from here?

 

Interestingly, the slope of price growth need not continue increasing for inflation to hold the 2% line or accelerate further over the balance of 2014.  

 

To illustrate, we show two simple scenario’s in the chart below: 

  • Scenario 1:  if the current CPI Index level  doesn’t change at all for the balance of the year, CPI growth will finish 2014  >2% as base effects predominate.
  • Scenario 2:  If the CPI Index compounds at +0.1% MoM (for reference: 6M ave = +0.3%/mo, TTM ave=+0.2%/mo) for the balance of the year, CPI inflation will be north of 2.80% at year end.

Simply, inflation comps continue to ease through October and we don’t need much in the way of incremental price growth to drive a further acceleration in reported CPI growth.  

 

With oil prices jumping alongside heightened geopolitical risk, the $USD still broken, and the potential for the Fed to get rhetorically easier alongside a slowdown in both housing and the consumer, we continue to think the risk to inflation estimates is to the upside – at least through the third quarter.  

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - CPI Scenario Analysis

 

 

 

REAL WAGE GROWTH:  Back to Negative Growth in May

 

Flat Nominal Wage growth + Accelerating Inflation = Lower Real Wage growth

 

It’s been our contention that the conflation of dollar depreciation and rising inflation serves to slow real growth as food/energy/rent costs take down a rising share of the consumer’s wallet. 

 

The identity above is trivial, but the gravity associated with that reality in terms of household capacity for accelerating real, discretionary consumption is not insignificant – particularly with consensus 2014 growth estimates still aggressive despite the iterative haircutting of expectations over the last few months. 

 

To the point, this morning BLS reported real weekly earnings grew -0.1% YoY in May while real average hourly earnings declined -0.2% YoY.   

 

Sure there are some signs of wage inflation pressures building under the hood, but overtly strong labor and income dynamics propelling resurgent consumerism isn’t the reality of the moment.  Negative real earnings growth in May appears in harmony with the  middling consumer spending data in April/May and the conspicuous rise in revolving credit.     

 

DOUBLE, DOUBLE, TOIL & TROUBLE:  MAY INFLATION - Real Earnings

 

 

Christian B. Drake

@HedgeyeUSA

 

    

 


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