As Keith highlighted in today’s Early Look, we’ve been wrong on our forecast for USD debasement and commensurate commodity price inflation for 1-2M now. Moreover, the quantitative signals embedded therein are now at/near critical thresholds that would cause us to materially alter our fundamental views.
The US Dollar Index is flirting with a bearish-to-bullish reversal on our intermediate-term TREND and long-term TAIL durations. It’s super early, so we don’t want to get horned up chasing a potential head fake, but to the extent this signal is confirmed, it would represent a seismic shift in global monetary policy expectations and the direction of international capital flows:
In conjunction with the aforementioned developing bullish TREND signal on the DXY, our TACRM system is signaling the US Dollar Index (UUP) as a “BUY” and is also calling for investors to reduce their allocation to Foreign Exchange as a primary asset class, at the margins:
In the context of the quant signals highlighted above, the CRB Commodity Index is now literally dancing on its TREND line of support. Like with the DXY, we need to see price, volume and volatility all confirm any subsequent breakdown in the coming weeks:
For now, stick with the process and don’t get whipped around in the emotion of it all!
What Just Happened:
- Domestic Economic Growth Ripped in 2Q: GDP growth accelerated to +4% QoQ SAAR in 2Q14. The 1Q14 figure was revised up to -2.1% QoQ SAAR from -2.9% prior. The GDP deflator accelerated to +2% QoQ SAAR from +1.3% prior, making the headline growth figure even more robust. “C”, “I” and “G” all accelerated on a QoQ SAAR and YoY basis in the second quarter. “I” was the primary contributor to the massive acceleration in 2Q GDP, contributing a full 257bps to the headline figure. Some pundits are whining about inventories contributing 166bps, but we can literally go either way at this point (i.e. channel-stuffing or purchasing managers anticipating an economic cycle?).
- Consumer Confidence Ripped in JUL: The Conference Board Consumer Confidence Index ripped +4.5pts MoM to a new post-crisis high of 90.9, which is the highest reading since OCT ’07. Moreover, the trend in confidence continues to accelerate on a 3M, 6M and 12M basis. Lastly, the present situation component accelerated to 88.3, which is the highest reading since MAR ’08. We’d attribute this meaningful acceleration in consumer confidence to two things:
Today’s FOMC Statement Was Hawkish, On the Margin: While continuing to paint both sides of the fence with their assessment of the path for prospective monetary policy, today’s FOMC statement is decidedly hawkish, on the margin, with respect to the committee’s assessment of economic conditions. Refer to the red H’s for “hawkish” and green D’s for “dovish” in the side-by-side statement below for more details. Remember, one month does not constitute a trend in official guidance, so we’ll need to closely monitor the Fed going forward to see if a discernible trend develops. Key Upcoming Monetary Policy Events Include:
- The Consumer Is Getting Un-Squeezed, At the Margins: Looking to our proprietary Consumer Squeeze Index, which is easily the most sophisticated model we’ve built to track market-based cost-push inflation, we’re now wrapping up our third consecutive month of sequential deflation. Per this metric, we need to see incremental cost-push inflation to support having anything more than a mildly bearish outlook for consumption growth. The consumer squeeze we’ve seen in the YTD is nowhere near the levels of inflation or duration that we saw in 2008 and 2011.
- Job Growth Is Begetting More Confident Consumers: The trending improvement in domestic labor market conditions is not new-news, so we’ll refer you to our latest analysis of initial jobless claims trends and our detailed review of the JUN Employment Report for more details.
- Mid-to-late AUG: Janet Yellen participates in well-publicized discussions at the Fed’s annual conference in Jackson Hole, WY
- 8/20: minutes released from the JUL 29-30 FOMC meeting;
- 9/3: the Fed’s Beige Book is released;
- 9/16: FOMC policy announcement;
- 9/22: Bill Dudley speaks in NY;
- 10/8: minutes released from the SEP 16-17 FOMC meeting;
- 10/15: the Fed’s Beige Book is released; and
- 10/29: FOMC policy announcement.
What Is Likely To Happen Next:
- Growth Will Slow… Duh: We maintain our view that domestic economic growth will slow in the third quarter and potentially well into the fourth quarter.
The Fed Will Get Easier, At the Margins: Until the preponderance of our quantitative signals across the fixed income, currency, equity, commodity and volatility markets signal something different than what they’ve been signaling in the YTD, we will maintain our view that the Fed will get easier, at the margins, as the year progresses. The only question is will the ECB and BoJ beat them to it – in both timing and magnitude of easing. Remember, one or perhaps two months of decelerating economic data does not a trend make, so we might have to wait all the way until late-OCT before the Fed gets meaningfully dovish – if at all. This is especially true after a four-handle GDP print (i.e. of course growth will slow… but to what absolute levels?).
- From a QoQ SAAR Perspective: The +4% figure seen in 2Q14 will represent a material challenge to growth accelerating from here. With a +3.1% forecast for 3Q14, consensus is well aware of that. The question is whether they are aware their forecast is 2-3x our current 3Q14 figure of around +1%?
- From a YoY Perspective: Toughening GDP compares through year-end should cause real GDP growth to slow in 2H14 if economic activity does not accelerate on a sequential basis, which is the likely scenario – at least through 3Q14. This is especially true with the GDP deflator – which accelerated to +1.6% YoY from +1.4% prior – set to continue accelerating on materially easing CPI compares.
All told, we don’t tell the market(s) what “valuation” and “survey data” would suggest it should be doing like a lot of our competitors; rather, we react to what markets are doing, backfill the storytelling with a heavy dose of economic and financial market history and make probability-weighted investment recommendations based on where said markets are likely to go next.
It sounds simple because it is. After six years of being as right as anyone on macro, this collection of football and hockey players is still not smarter than the market.
Thanks for continuing to pay attention to our dynamic process,
Associate: Macro Team