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Real Conversations: James Grant of Grant's Interest Rate Observer

James Grant, editor of Grant's Interest Rate Observer, discusses his latest thoughts on the economy, monetary policy, market froth, gold & where hidden investing opportunities may lie with Hedgeye CEO Keith McCullough in this edition of "Real Conversations."


Cartoon of the Day: On Your Mark

"Healthcare spending was critical in supporting 1Q GDP. With the census bureau’s release of the 1Q14 QSS survey yesterday, that estimate of healthcare spending saw a sharp negative reversal," wrote Daryl Jones in today's Morning Newsletter.

 

"The net-net of this is that the final estimate of 1Q GDP (June 25th) will be (even more) dismal and GDP is likely to miss the ever bullish consensus expectations for full year 2014."

 

Cartoon of the Day: On Your Mark - On your mark GDP 6.12.2014


@Hedgeye Daily Trading Ranges, Refreshed

Note: The following proprietary buy and sell levels on major markets, commodities and currencies were originally published June 12, 2014 at 08:25. Click here to learn more about Hedgeye CEO Keith McCullough's trading ranges and how you can subscribe.

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BULLISH TRENDS

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BEARISH TRENDS

 

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COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS

Takeaway: Domestic growth estimates continue to decline as the data comes in. Retail Sales were soft. Claims were good - but are becoming an outlier.

“Here, our books are filled with numbers. We prefer the stories they tell. More plain. Less open to interpretation”

- Iron Bank of Braavos, Game of Thrones

 

 

After yesterday’s negative revision to 1Q14 GDP (see HOW LOW CAN YOU GO), this morning’s retail sales data should serve as another blow to forward growth expectations. 

 

While full year growth estimates continue to get clipped with regular frequency, the collective cognitive dissonance over the outlook for consumption - in the face of overtly middling data - remains very much entrenched.  

 

Indeed, looking across our Economic Summary table (below), the amount of sequential Worseningcontinues to belie the “accelerating recovery” narrative and sticky, 4%’ish, consensus GDP estimates. 

 

We did see a modest, expected bounce across the breadth of manufacturing/confidence/labor data into 2Q and reported growth will accelerate sequentially but, essentially, we are what the numbers suggest. 

 

Take the average of (soon to be revised lower) 1Q14 gdp and the (overly optimistic) 2Q14 estimate:   

 

(-2.0%  + 3.5%) /2 = More Muddle

 

The current domestic macro reality is that with Inflation accelerating (food, shelter, energy), housing decelerating, the labor market middling, and tougher growth/inflation comps through 3Q14, the intermediate-term trend for consumption growth is one of deceleration.   

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - CPI breadth 061214

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - Eco Table 061214

 

 

RETAIL SALES:  Ugly April figures were revised higher, but back to deceleration in May.

 

Headline retail sales, supported by the significant jump in Auto Sales (+16.7M in May vs. 16.1M April), advanced 0.3% MoM in May (est. +0.6) while April numbers saw a positive revision to +0.5% from 0.1%.

 

Figures were more sanguine under the hood as more than half of industries saw negative MoM growth and decelerating YoY growth.  Further,  MoM growth in the Control Group (which feeds GDP) was slightly negative with growth decelerating -70bps and -10bps sequentially on and YoY and 2Y basis, respectively. 

 

The broader takeaway from today’s data is largely the same as its been the last 6 weeks or so – the numbers are ‘okay’ but do not reflect a material acceleration or any significant rebound demand from deferred 1Q consumption 

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - Retail Sales Control Grp

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - Inventory Sales

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - Retail Sales Table

 

 

INITIAL CLAIMS:  The labor market continues to positively clip along, but it's becoming an outlier amid an avalanche of negative evidence.

 

This morning’s initial jobless claims data showed a moderate, sequential deceleration in the rate of improvement, but the trend remains solid.  The continued strength in the high frequency labor market data is becoming a bit of a positive outlier.

 

Our head of Financials research, Josh Steiner, aptly contextualized this morning’s data:

 

There's growing uncertainty over the macro outlook. Data seemingly in conflict includes labor data that appears to be solid, but housing and retail sales data that are showing signs of cooling off. 

 

Our choice to use initial claims data as our macro weather vane stems from its accuracy in the last cycle at pinpointing both the top and bottom of the cycles on a real time basis. For example, in the last downturn initial claims began to move higher on a seasonally-adjusted basis in late 2007. Recall that the S&P 500 reached its peak level in October, 2007. Conversely, initial claims peaked and began to roll over sharply in March, 2009, also coincident with the trough in the market.

 

With that in mind, this morning's initial jobless claims data is good, though not great. Seasonally adjusted rolling claims are at 315k, which remains in bull market territory by historical standards. Meanwhile, the year-over-year change in rolling non-seasonally adjusted claims came in at -8.8%, also a strong print (though less strong than the week prior).

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - 1 normal

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - 2 normal

 

COGNITIVE DISSONANCE: DEATH BY A THOUSAND DATA POINTS - 16 normal

 

More #InflationAccelerating data on deck for tomorrow…..

 

 

Christian B. Drake

@HedgeyeUSA



INITIAL CLAIMS: TIME TO GO GRIZZLY?

Takeaway: The labor market continues to positively clip along, but it's becoming an outlier amid an avalanche of negative evidence.

#FullGrizzly?

There's growing uncertainty over the macro outlook. Data seemingly in conflict includes labor data that appears to be solid, but housing and retail sales data that are showing signs of cooling off. 

 

Our choice to use initial claims data as our macro weather vane stems from its accuracy in the last cycle at pinpointing both the top and bottom of the cycles on a real time basis. For example, in the last downturn initial claims began to move higher on a seasonally-adjusted basis in late 2007. Recall that the S&P 500 reached its peak level in October, 2007. Conversely, initial claims peaked and began to roll over sharply in March, 2009, also coincident with the trough in the market.

 

With that in mind, this morning's initial jobless claims data is good, though not great. Seasonally adjusted rolling claims are at 315k, which remains in bull market territory by historical standards. Meanwhile, the year-over-year change in rolling non-seasonally adjusted claims came in at -8.8%, also a strong print (though less strong than the week prior).

 

To be clear, we're getting more defensive here for a number of reasons including our expectation for home prices to decelerate, and further downward pressure on rates, and it doesn't help that the overall market valuation level looks very rich to us. That said, while we are positioning more defensively on the margin, we're not yet turning #FullGrizzly as the labor data is not showing signs of deterioration. Ultimately, that's what's needed to make the short case on the credit cycle. 

 

The Data

Prior to revision, initial jobless claims rose 5k to 317k from 312k WoW, as the prior week's number was revised up by 1k to 313k.

 

The headline (unrevised) number shows claims were higher by 4k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 315.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.3%

 

INITIAL CLAIMS: TIME TO GO GRIZZLY? - 1

 

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INITIAL CLAIMS: TIME TO GO GRIZZLY? - 19

 

<chart14>

 

Yield Spreads

The 2-10 spread was unchanged at 221 bps week-over-week. 2Q14TD, the 2-10 spread is averaging 223 bps, which is lower by -16 bps relative to 1Q14.

 

INITIAL CLAIMS: TIME TO GO GRIZZLY? - 15

 

INITIAL CLAIMS: TIME TO GO GRIZZLY? - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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