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COLD TURKEY: 4Q Starts With a Dud

IN SHORT: Initial Claims deteriorated for a 3rd week, Durable and Capital Goods spending softened (again), and Household Spending and Income did a whole ‘lotta not much (with a notable negative revision).  We parse each of the releases below. 


COLD TURKEY:  4Q Starts With a Dud - Eco Summary 112614png



INCOME & SPENDING (Oct.):  And like that, it was gone…..  


Spending:  Another middling month for domestic consumerism with real spending rising +0.2% sequentially against a +0.0% comp.  Total Spending growth decelerated -10bps sequentially to +2.2% YoY and accelerated +10bps on a 2Y ave growth basis.


Spending on Services was flat sequentially while NonDurables spending growth accelerated on a MoM/1Y/2Y.  Notably, spending on Durables was negative MoM for a 2nd month and decelerated further on a YoY basis. 


Revolving consumer credit growth broke out of its 3Y slumber in 2Q alongside accelerated spending on durables and the two have moved in lockstep the last 6 months.  It’s likely card spending moderates alongside the moderation in higher ticket discretionary consumption. 


COLD TURKEY:  4Q Starts With a Dud - Consumer Spending TTM YoY   2Y Oct


COLD TURKEY:  4Q Starts With a Dud - Durables vs Revolving Credit


Income:  Estimates for personal income were revised for the April-to-September period and the PCE figures were revised for the July-to-September period.   The adjustments were noteworthy as total disposable income gains were revised down significantly with the net impact being downward revisions to both wage and income growth and the savings rate. 


As can be seen in the 1st chart below, while aggregate private sector wage growth ticked up sequentially and remains near post-recession highs, the slope of wage growth in 2Q/3Q goes from one of acceleration to one of flat-to-modest deceleration after the revision.    


A holiday Salute to Simplicity:  Growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in household spending (i.e the multiple regression b/w DPI growth & the chg in the savings rate vs. Chg in PCE has an R-square of 0.95). 


 If ya ain’t got it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE). 


And in a modern, Keynesian consumption economy, it’s the “spendin it” that counts. 


Macro can be as made as nuanced and complex as one wishes and the alpha, of course, is in correctly forecasting that change in growth/income, but it’s worth re-remembering that the trajectory of an economy boils down to some simple realities.  


COLD TURKEY:  4Q Starts With a Dud - Private Wage Income Growth Revision


COLD TURKEY:  4Q Starts With a Dud - DPI Revision


COLD TURKEY:  4Q Starts With a Dud - Income   Spending Table Oct





SA:  Headline claims rose +21K sequentially to +313K, marking the first week above the +300K level in 11 weeks.  Seasonally adjusted rolling claims increased +6K WoW to +294K, marking a 3rd week of deterioration (not overly unexpected given the comp setup) and the highest level in 2 months.


NSA:  The rate of improvement in non-seasonally adjusted claims deteriorated to -3.6% YoY (vs -12.53% prior) while the 4-week rolling average, which we consider a more accurate representation of the underlying labor market trend, slowed for the 5th straight week, decelerating -330bps to -12.7% YoY.


CYCLE ACCOUNTING: As we’ve highlighted, historical cycle precedents suggest peak improvement in initial claims (3Mo rolling ave basis) consistently occurs ~7months before the peak in the economic cycle. 


It’s been our contention, from a fundamental view of the labor market data, that while an economic peak isn’t immediately imminent, the trough is currently being put in and once the inflection occurs the ticking of the clock gets increasingly louder – particularly when the ~330K level gets re-breached to the upside.   


Its also worth re-highlighting that while peak improvement in claims has been a consistently good lead indicator for the economic cycle, using it to time the market cycle has proven more dubious – particularly in recent cycles where market peaks have occurred quasi- coincident with the trough in claims.  


COLD TURKEY:  4Q Starts With a Dud - Claims SA 112614


COLD TURKEY:  4Q Starts With a Dud - Claims NSA 112614


COLD TURKEY:  4Q Starts With a Dud - Claims Cycle



DURABLE GOODS: A Second Month of Softness


The Headline was a bit more flattering than the core with total new durable goods orders rising +0.4% MoM (against a -0.9% comp) and accelerating on a YoY basis.   However, for a 2nd month, almost every sub-aggregate reported negative MoM growth with most decelerating on a year-over-year and 2Y ave basis as well.


Durables Ex Defense & Aircraft - the goods the ave household buys – declined -0.7% MoM and decelerated on both a 1Y and 2Y.  On the business demand side, Core Capital Goods declined a sizeable -1.3% MoM for a second consecutive month and has now been negative for 7 of the last 12 months. 


COLD TURKEY:  4Q Starts With a Dud - Capital Goods Orders MoM Oct


COLD TURKEY:  4Q Starts With a Dud - Druables Goods Ex Defense   Aircraft Oct


COLD TURKEY:  4Q Starts With a Dud - Durable Goods table Oct 



A Quick Look Globally:  For the last couple quarters we’ve suggested both fundamental trends and market prices were heralding slowing growth, disinflation and a move into what we refer to as Quad #4.  


Domestically, the inflation, spending and manufacturing data is slowing from a second derivative perspective into 4Q but the convergence to slower growth and transition into Quad 4 has been global. 


Below is our “Global Macro for Dummies” table which consolidates global estimate trends for growth and inflation.  One need only observe the ubiquitous red (i.e. negative growth/inflation estimate revisions) to see the Quad 4 reality manifesting in real-time. 


Until we see the slope of growth inflect and market prices confirm, we’ll remain better sellers of strength in equities and buyers of the long bond on weakness.  


COLD TURKEY:  4Q Starts With a Dud - GPL


Christian B. Drake





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


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


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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.

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.


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.





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%






















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.






Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT


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