prev

QE Conundrums – Draghi’s Misguided Intervention?

Key Takeaways:

  • Eurozone equities are Bullish TRADE and TREND (see levels below). Tactically we are recommending shorting France’s underperformance via the etf EWQ.  (See France GIP model below)
  • Draghi’s latest comments (last Friday) have accelerated the prospect of sovereign QE  – Draghi said the ECB must drive inflation higher “as fast as possible,” and the Bank will broaden its asset-purchase program if needed to achieve that
  • The market’s expectations on timing of potential sovereign QE have also accelerated – the Bank has targeted the Q1 2015 horizon, and we do not think the ECB will be ready to act at its next meeting on DEC 4th. In addition, we would caution that legal and political (German in particular) hurdles are still plainly apparent. QE may in fact NOT be a snap of the fingers
  •  On balance over the shorter term, we expect EUR/USD (etf FXE) weakness (broken on its TREND and TAIL durations – chart directly below),  and equity strength
  • We do not expect that the ECB can will growth through financial engineering, and the rate of change of the quarterly “comp” will remain difficult for at least the next 3 quarters (see Eurozone GIP chart below)
  • Our intermediate-term bearish bias on the economic region remains grounded in our Q4 2014 Macro theme #EuropeSlowing

QE Conundrums – Draghi’s Misguided Intervention? - vv. eur usd broken

 

Economies are not financial markets – this point is not to be confused.

The Hedgeye macro team continues to tout that central planning will not fix the economies across the globe; the interventions have everything to do with trying to resuscitate drowning inflation expectations, and in the short run may inflate stock markets.

 

Specifically, ECB President Mario Draghi’s speech in Frankfurt last Friday once again tilted expectations. He said the ECB must drive inflation higher “as fast as possible,” and the Bank will broaden its asset-purchase program if needed to achieve that.

 

Read: Open the sovereign QE buying flood gates!

 

QE Conundrums – Draghi’s Misguided Intervention? - z. EL 11.24 Mid pic

 

But, but, if expectations are the root of all heartache, massive amounts of hospital beds will be needed given the indecision of both the ability and impact of issuing QE. Here’s select commentary over recent days:

  • Victor Constancio (ECB VP) said that the ECB will consider buying government bonds in the secondary market if the current measures prove insufficient. He went on to say that the ECB would wait until Q1 2015 to gauge the impact of current programs.
  • Jens Weidmann (Bundesbank President) said there are high legal hurdles for ECB to buy government bonds and that monetary policy alone cannot lead to growth.
  • Ewald Nowotny (Austria Central Bank President) said that Q1 2015 was too early for taking further measures to boost the Eurozone economy and does not see a point of time where that could happen. He pointed out that the ECB has taken a series of measures and should observe the impact of these.
  • Benoit Coeure (Member of the Executive Board of the ECB) said the ECB won't make a hasty decision to add more stimulus and will hinge any measures on incoming economic data. He added that there is unanimous agreement on the Governing Council that situations may arise where it has to do more.
  • Victor Constancio (ECB VP) said that Europe is not at risk of sliding into full deflation but the current rate of inflation is dangerously low. He said that living with inflation so close to zero is dangerous because it makes it harder to repay public and private debt, and impedes economic growth.
  • Klaas Knot (Dutch Central Bank President) said that the ECB could move to take additional easing steps, including purchases of government bonds, but it is uncertain whether this would be effective to fight low inflation. He was skeptical on a sovereign debt-targeted QE program because many governments were already borrowing at historically low rates. In addition, he said that the prior measures would take time to feed through.

Despite heightened expectations that the Bank may act when it next meets on December 4th, we doubt that the council will be ready to act. Specifically, it only just started to purchase ABS (November 21) and the 2nd tranche of the TLTROs will only be allocated a few days following the ECB meeting. Further, we do think VP Constancio’s reiteration of Draghi’s dovish remarks and Q1 2015 timetable offer clear evidence that the bank will wait until 2015 to act. 

 

 

Q) What’s Fallen?  A) the Data


Growth & Expectations Down – while a classic lagging indicator, the OECD in its latest Economic Outlook warned that the biggest worry for the global economy is the Eurozone falling into a persistent stagnation trap. The OECD’s downward growth revision brings it close to Hedgeye’s forecast (see GIP model below), however we are not of the camp that a sovereign QE program (like the ABS, covered bond, or TLTROs) will in and of itself lift growth. Here’s a look at the revised forecasts:

  • Eurozone GDP Forecast:
    • 2014: +0.8% vs prior +1.2%
    • 2015:  +1.1% vs prior +1.7%
    • 2016:  +1.7%

QE Conundrums – Draghi’s Misguided Intervention? - vv. EUROZONE

 

Inflation Expectations Down – 2014 is the year that Draghi has attempted to resuscitate drowning inflation expectations, but so far, he continues to fail miserably. Even with the prospect of QE, we don’t see much of a shift upwards (the ECB target is below but close to 2%). As our GIP chart shows, we expect CPI for 2015 at 0.7% versus Bloomberg consensus at 0.8% and its current level of 0.4%.

QE Conundrums – Draghi’s Misguided Intervention? - vv. cpi draghi

 

Sovereign Bond Yields Down – with growth and inflation expectations lowered and the heightened prospect for the ECB to buy sovereign bonds, it comes as no surprise that sovereign bond yields are approaching all-time lows. Below we want to flash a chart that shows in particular the periphery dramatic declines in the cost of capital and interestingly, that at 1.98% and 2.16% for Spain and Italy respectively, their 10-year yields are both lower than the 10-year for the United States at 2.24%. 

 

QE Conundrums – Draghi’s Misguided Intervention? - vv. sov yields

 

 

Short France (EWQ)


On 11/24 Keith added short France (via the etf EWQ) in our Real-Time Alerts. We presented this investment idea in our Q4 2014 theme of #EuropeSlowing, expressed as short “Socialism”.  As we show in the GIP chart directly below, there’s a giant delta between our growth expectations and those of consensus.  We therefore expect the economy and its equity market to underperform the region and fortuitously shorted EWQ at the top of its immediate-term risk range.  The CAC remains broken TREND @ 4388 as we show in the second chart below.

 

QE Conundrums – Draghi’s Misguided Intervention? - vv. FRANCE

QE Conundrums – Draghi’s Misguided Intervention? - vv.  cac

 

Long European equities as long as TRADE and TREND hold (etf EZU as potential investment vehicle).

 

As we show in the chart below, the STOXX Europe 600 is bullish TRADE and TREND. We’ll be managing this position closely, as again, we see little prospect of Draghi’s QE halting a continuation of decelerating inflation and growth, which we expect to be reflected in the equity market over the intermediate term.

QE Conundrums – Draghi’s Misguided Intervention? - vv. stoxx600

 

A wonderful Thanksgiving to you and yours!

 

Matthew Hedrick

Associate


Between "ROC's" & Hard Places

Takeaway: In light of the holiday and the crush of data we've decided to keep the format on today's housing note short & sweet.

“After all is said and done, more is said than done.”

-   Aesop

 

 

Aesop probably wasn't referring to analyzing new home starts and purchase activity in 2014, but that quote pretty well characterizes the monthly deluge of commentary and conjecture around dead flat TTM volume trends.  

 

Anyhow, we’ll can the verbosity ahead of the holiday and summarily review today’s trifecta of housing data below.   

 

In short:  The balance of recent data has come in slightly north of middling on an absolute basis but housing remains in a tough spot and industry escape velocity remains very much a phantasm.  However, from a Rate of Change perspective - given the comp dynamics - most of the data is inflecting positively, a trend which should extend as we traverse volume compares that continue to ease into 2H15. 

 

Purchase Apps:  Purchase Demand declined -4.8% sequentially after last week’s notable 11.7% rise (the largest weekly increase in 20 months) but held above the 170 level on the index for a second week.  From here, compares ease further into the last weeks of the year and take a second dive into the end of 1Q15

 

Pending Home Sales:  Pending home sales declined -1.1% but, to our point above, accelerated on a YoY basis to +2.2% - the second month of positive YoY growth after an eleven month run of negative sales growth.  The soft’ish PHS data the last couple months has diverged from the strength reported in EHS.  The two series are invariably tethered so we expect to see a re-coupling in favor of one or the other in the next few months. 

 

New Home Sales:  New Home Sales increased for a 3rd month, rising +0.7% sequentially and +2% YoY.   Sales were up +14% in 3Q against trough comps but are up just 1.4% YoY for the Jan-to-Oct period.  Both Sales and SF starts have been virtually flat over the last year but with NHS above the TTM trend for each of the last 3 months, the slope has shifted from slightly negative to slightly positive.   

 

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.

 

Between "ROC's" & Hard Places - Compendium 112614

 

Between "ROC's" & Hard Places - EHS vs PHS

 

Between "ROC's" & Hard Places - NHS Existing to New Ratio

 

Between "ROC's" & Hard Places - NHS LT w Summary Stats

 

Between "ROC's" & Hard Places - NHS Total   YoY

 

Between "ROC's" & Hard Places - PHS Index   YoY TTM

 

Between "ROC's" & Hard Places - NHS Sales vs SF Starts TTM

 

Between "ROC's" & Hard Places - NHS Regional

 

Between "ROC's" & Hard Places - NHS Mean   Median Price

 

Between "ROC's" & Hard Places - PHS LT w Summary Stats

 

Between "ROC's" & Hard Places - PHS Regional

 

Between "ROC's" & Hard Places - PHS Regional YoY

 

Between "ROC's" & Hard Places - Purchase 2013 v 2014

 

Between "ROC's" & Hard Places - Purchase   Refi YoY

 

Between "ROC's" & Hard Places - Purchase LT w Summary Stats

 

Between "ROC's" & Hard Places - Composite LT w Summary Stats

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Cartoon of the Day: Gobble, Gobble!

Cartoon of the Day: Gobble, Gobble! - Yen turkey cartoon 11.27.2014

Happy Thanksgiving from Hedgeye. Be sure to count your blessings.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Morning Macro Call with Keith McCullough: This Ziploc Bag Market Has 1000 lbs of Nasty In a 1-lb Bag

Hedgeye CEO Keith McCullough walks through the latest market and economic developments in this complimentary peek behind-the-macro-scenes of today's morning macro call for institutional subscribers.


CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY

Takeaway: The labor market cools off vs its recent performance, but that's not surprising given how strong the data has been.

Labor Conditions Take a Small Step Backward

Rolling claims remain below the key 300,000 level.  However, the one-week SA data shows the first peek above that level in 11 weeks. The rate of improvement slowed further this week to -12.5% y/y.  The labor market remains healthy and is still improving, but at slowing pace.

 

 


CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 9

 

The Data

Prior to revision, initial jobless claims rose 22k to 313k from 291k WoW, as the prior week's number was revised up by 1k to 292k.

 

The headline (unrevised) number shows claims were higher by 21k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.25k WoW to 294k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -15.9%

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 2

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 3

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 4

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 5

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 6

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 7

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 8

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 10

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 11

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 19

 

Yield Spreads

The 2-10 spread fell -8 basis points WoW to 173 bps. 4Q14TD, the 2-10 spread is averaging 184 bps, which is lower by -15 bps relative to 3Q14.

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 15

 

CLAIMS REMAIN BELOW 300K BUT COOL OFF SLIGHTLY - 16

 

Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


We Think a Coming Fed #FreakOut Sends Yields Lower

Editor's note: This is a brief excerpt from Hedgeye morning research. To learn more about becoming a subscriber click here.

 

* * * * * * * 

Right now, the market is still positioned net SHORT -128,000 contracts (net futures and options positions) in the 10YR treasury bond market. In other words, bond bears are getting royally creamed as the 10YR crashes alongside growth and inflation expectations.

 

<chart3>

 

As of this morning, the 10YR yield is down -26% year-to-date to 2.25%. That’s called a #Crash. Our immediate-term level of short-term support is 2.22%.

 

On a related note, the Yield Spread has compressed to 173bps. That’s the lowest of 2014. And yes, it is a bearish growth signal.

 

For the record, we still think yields go lower as the Fed freaks about #deflation in Q1 of 2015.

 

We Think a Coming Fed #FreakOut Sends Yields Lower - 111


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next