US GROWTH: WHEN DOVES CRY

Takeaway: Our GDP estimates are coming down and consensus macro remains out to lunch with theirs. Stick w/ our YTD game plan RE: investment strategy.

UNLEASH YOUR INNER DOVE

The other day at lunch, I was describing the recent progression of my wardrobe to Hedgeye Health Care Sector Head Tom Tobin. In hearing this, Tom went on to compare my latest fashion exploits to that of Prince in the 80s. Having been born in the 80s, I don’t remember much, if anything, of Prince or his music. So I did what most fashion-forward millennials do when they don’t know something – I Googled it!

 

Needless to say, his music is legendary. “When Doves Cry” is a personal fav…

 

US GROWTH: WHEN DOVES CRY - Prince

Source: Google Image

 

As it relates to actual macroeconomic analysis, the doves are definitely starting to cry at the Fed. In a fantastic article today, Reuters journalist Howard Schneider walks though the current debate being held amongst members of the Federal Reserve and its regional banks. Specifically, the Yellen-led institution is openly debating pushing out their forecasts for labor market tightness, citing both new and old analyses in the process.

 

The key takeaway is that the FOMC is setting up to surprise both buy-side and sell-side consensus to the downside with respect to tightening monetary policy. A less-tight labor market in the interim means the Fed can remain “accommodative” for longer – which is exactly what is being priced into the interest rate markets. Expectations for a 2015 Fed Funds Rate hike are down -27% on average, across the curve, from when we correctly introduced this bold prediction back in JAN.

 

US GROWTH: WHEN DOVES CRY - Fed Funds Implied Rate

 

With respect to 2014, we still think the Fed will continue to surprise investors by incrementally easing as the year progresses. An example of this is last week’s rhetorical easing via extending rate hike guidance. A cessation of tapering at the SEP 16-17 FOMC meeting is not out of the question (then the Fed will likely have to cut their 2014 growth forecasts – again).

 

If there’s one thing we’ve learned in the post-crisis era, it’s that the Fed – which continues to use outdated, linear forecasting models – is always wrong on growth.

 

US GROWTH: WHEN DOVES CRY - FOMC Growth Forecasts

 

Preferring to opt for differential calculus and Bayesian modeling techniques, we remain the “bears” on 2014 growth and the “bulls” on 2014 inflation and both the Fed and the investment community will have to continue to chase our growth estimates lower. In doing so, we think the Fed’s marginal dovishness is likely to weigh on the USD and propel our inflation estimates higher – hurting household consumption (i.e. ~70% of GDP) in the process.

 

REFRESHING THE MODEL

With this morning’s bomb of a 1Q GDP print, our predictive tracking algorithm is now -41% below both the Street and the Fed for 2014 GDP growth; recall that we were at +2.2% to start the year:

 

US GROWTH: WHEN DOVES CRY - UNITED STATES

 

US GROWTH: WHEN DOVES CRY - GDP Summary 062514

 

US GROWTH: WHEN DOVES CRY - Consensus Macro Estimates

 

Both the Fed and the Street have been cutting their growth forecasts of late and we expect them to keep cutting:

 

US GROWTH: WHEN DOVES CRY - GROWTH

 

Tough comps paint a dour outlook for 2H14:

 

US GROWTH: WHEN DOVES CRY - GDP COMPS

 

After pushing back hard in 1Q, the investment community is finally starting to catch up to our hawkish inflation outlook:

 

US GROWTH: WHEN DOVES CRY - INFLATION

 

Easy comps are supportive of this view:

 

US GROWTH: WHEN DOVES CRY - CPI COMPS

 

As is annualized currency weakness – which should only accelerate if the Fed continues to get easier, at the margins:

 

US GROWTH: WHEN DOVES CRY - FX

 

BUT, BUT WASN’T IT ALL JUST THE WEATHER?

Notwithstanding the fact that both CapEx and employment growth are late-cycle in nature (we are 60 months into an economic expansion – the average length in the post-war era) AND the fact that a sustained boom in either has never occurred without concomitant structural appreciation of the dollar and higher interest rates, we do cede the view that the weather played a material role in crushing 1Q GDP.

 

US GROWTH: WHEN DOVES CRY - CapEx

 

That said, however, we think the bounce “off the lows” in domestic high-frequency economic data is both long in the tooth and poised to roll over starting in JUL.

 

US GROWTH: WHEN DOVES CRY - Eco Table 062514

 

US GROWTH: WHEN DOVES CRY - Bloomberg ECO Surprise Index

 

CONCLUSION

All told, we reiterate our still-active 2014 macro themes and their associated investment implications (i.e. LONG slow-growth yield-chasing, late-cycle industrial pricing power and M&A; SHORT early-cycle sectors like the consumer, housing and financials – especially regional banks):

 

  • #InflationAccelerating (1Q14)
  • #GrowthDivergences (1Q14)
  • #ConsumerSlowing (2Q14)
  • #StructuralInflation (2Q14)
  • #HousingSlowing (2Q14)

 

We will host our 3Q14 macro themes call on JUL 11 at 11am EDT; email if you need the details.

 

Keep an eye on those doves!

 

DD

 

Darius Dale

Associate: Macro Team


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