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The Week Ahead

The Economic Data calendar for the week of the 22nd of December through the 26th of December is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 12.15.14 Week Ahead

 


DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”?

Takeaway: We see amplified risk of a reflexive deflationary spiral over the NTM, strengthening our non-consensus bullish bias on long-term Treasuries.

To start, please review slides 29-39 of our 12/16 presentation on Emerging Markets, which outlines a probable fundamental case for EUR parity and a re-test of the August ’98 lows on the JPY with respect to the intermediate term. Those just might be 11 of the most important ~20 charts in all over global macro by this time next year. CLICK HERE to access that presentation.

 

Moving along, let’s review where consensus is on rates:

 

  • We know the sell-side is bullish on rates (i.e. bearish on Treasury bonds). Always have been; always will be. To my knowledge, there simply aren’t enough banking and trading fees associated with being bullish on long-term Treasury bonds in lieu of other asset classes. Along those lines, it’s worth noting that since the onset of the economic recovery, the start-of-year Bloomberg consensus forecast for the 10Y Treasury note yield at the end of the corresponding year has been off by an [astounding] average absolute value of 106bps! Sell-side consensus thinks rates put on +87bps from today’s price to close out 2015 at 3.05%.
  • The buy-side is perhaps even more bullish on rates (i.e. bearish on Treasury bonds) at the current juncture. The net SHORT position of 215k 10Y Treasury note futures and options contracts is the widest net SHORT position since April of 2010. On a TTM Z-Score basis, which we use to show deviations that are typically indicative of crowded trades, the buy-side hasn’t been this net SHORT of long-term Treasuries since March 2012, October 2011 and April of 2010. The subsequent draw-downs in the 10Y Treasury note yield from those peaks in bearish sentiment are -99bps, -45bps and -160bps, respectively.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - Bloomberg Consesus 10Y Tracking Error

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - CFTC NNCCP

Source: Bloomberg L.P.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - UST 10Y Yield Draw Downs

Source: Bloomberg L.P.

 

So, is this time different? Will “the crowd” finally be right on long-term Treasuries? Having been appropriately bearish on rates (i.e. bullish on Treasury bonds) in 2014 (after having been bullish on rates in 2013), we are in an enviable position of lacking the kind of baggage that might cloud our judgment.

 

Regarding that judgment, we strongly believe the aforementioned dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

 

Here’s how that process would work:

 

Step 1: Both the BoJ and ECB accelerate their monetary base expansion, at the margins, during a time where the Fed is on hold and deliberating [out loud] the appropriate timing of their first [and subsequent] rate hikes. Looking to our proprietary G3 Monetary Policy Model, which contextualizes trends across 10 key economic and financial market indicators, the ECB is clearly facing immense pressure to ease. The Fed should maintain a neutral-to-ever-so-slightly-dovish bias, while the BoJ should maintain a slight hawkish bias. That said, the BoJ’s current composite score is roughly equivalent to its late-October score, when Kuroda pushed through a contentious expansion of the BoJ’s QQE program. That signals to us that politics, not economics, are the primary driver of the BoJ’s current easing bias.

 

Current: 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - MONETARY POLICY MODEL

 

October 30th: 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - MONETARY POLICY MODEL OCT 30

 

Step 2: As G3 monetary policy continues to diverge, the currency market responds by appropriately inflating the value of the U.S. dollar vis-à-vis peer and emerging market currencies. We think the implied ~3% appreciation of the U.S. Dollar Index through year-end 2015 as currently assumed by Bloomberg consensus is way off the mark. The DXY is up over +3% since the end of October alone!

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - EUR 1Y   2Y OIS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - JPY 1Y   2Y OIS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY 1Y   2Y OIS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY Bloomberg Consensus NTM Forecast

 

Step 3: As the dollar strengthens, commodity prices continue their deflationary descent.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY vs. CRB Index

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY vs. Brent Crude Oil

 

Step 4: As commodity prices continue to fall, both expected and reported CPI readings continue to fall. At first, breakevens and headline CPI rates will bear the brunt of the aforementioned deflationary forces. We anticipate core CPI readings are likely to follow those rates lower on a lag.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - Brent Crude Oil vs. Breakevens

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - CRB YoY vs. CPI YoY

 

Step 5: As reported inflation slows in all three of the world’s major economies, the pressure for each central bank to get marginally dovish will heighten. The central bank closest to achieving its mandate (i.e. “full employment” and “price stability” in the U.S., “price stability” in the Eurozone and “5% monetary math” in Japan) is likely to see its currency bear the brunt of global capital flows as investors anticipate relatively weaker monetary policy for longer in the other two economies. For now, that is undoubtedly the U.S. dollar.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - JOBLESS CLAIMS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - CORE CPI

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - FIVE PERCENT MONETARY MATH

 

Step 6: Repeat steps #3-5.

 

Scary stuff if you bought the dip in Russia (RSX) or domestic E&Ps (XOP)…

 

Have a great weekend,

 

DD

 

Darius Dale

Associate: Macro Team


Cartoon of the Day: Naughty or Nice?

Cartoon of the Day: Naughty or Nice?  - Naughty nice cartoon 12.19.2014

Mr. Market made his list... He checked it twice... He found out who's been naughty or nice... We're happy to report that our non-consensus, top macro call on the Long Bond via TLT made the "nice" list this year. It's been a great year at Hedgeye.


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BABA: When the Lock-Up Expiration Matters

Takeaway: First lock-up doesn't matter. The next one (3/2015) is larger than its current float, owned mostly by institutional investors

KEY POINTS

  1. FIRST LOCK-UP EXPIRATION DOESN'T MATTER: Roughly 8M additional ADS became available for trading from preferred shares (if converted) on Monday.  Note the lock-up expiration dates are tied to the date of the last prospectus (not the IPO date) so the lock-up expired Monday (not today). Those shares would only represent ~2% of BABA's current ADS float.
  2. NEXT LOCK-UP EXPIRATION IS MASSIVE: Roughly 429M ADS will become available on 3/14/2015, which is greater than the current number of ADS floated on the market today (~368M).  Note that the overwhelming majority of that lock-up (~316M) is tied to institutional investors other than Yahoo and Softbank.  Another 114M is tied to employees/equity compensation plans and independent directors.  Naturally we're not expecting this tranche to dump all their shares, but it wouldn't take much to considerably dilute BABA's ADS.

BABA: When the Lock-Up Expiration Matters - BABA   Lock Up Expiration

 

See the links below for our current thoughts on BABA.  In summary, we have a bearish long-term fundamental view on the company, but are on the sidelines looking for a better entry point on the short side.  

 

BABA: Model Facing Secular Pressure

12/04/14 09:17 AM EST

(click here)

 

BABA: What the Street is Missing

11/26/14 08:03 AM EST

(click here)

 

BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

(click here)

 

Let us know if you have any questions or would like to discuss in more detail.  

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


Europe (Still) Looks Yucky

Editor's Note: This is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can subscribe click here.

 

Europe (Still) Looks Yucky - 12.19.14 chart 

3 big things happened in Europe this morning:

  • Germany reported deflation of -0.9% year-over-year in the NOV PPI
  • Central planning talk of making QE the periphery’s burden
  • Italian, Spanish and Russian equity markets all resumed their bearish TREND declines

We do not believe that ECB President Mario Draghi can get a “Big Thing” done in January to stem this European Equity drawdown.

 

In addition, as we outlined in #EuropeSlowing (one of our three Q4 Macro Themes) our view remains that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth. 


McCullough on Fox Business: "The Most Contrarian Thing I've Ever Heard!"

Hedgeye CEO Keith McCullough appeared on Fox Business' Opening Bell with Maria Bartiromo this morning with Jeff Kleintop of Charles Schwab and Jones Trading Chief Market Strategist Mike O’Rourke. During a heated discussion on what will drive stocks in 2015, Kleintop claimed the new year will be brighter for global growth and Keith fired back that this is the most contrarian view he has ever heard.

 

Next, Keith and Mike O’Rourke sounded off on the state of the markets. Keith highlighted his view that the rest of the world is an ongoing "train wreck" and discussed risks associated with rising volatility. 

 

In this final clip, Keith and Mike O’Rourke discussed the economic implications of low oil prices. Keith reiterated his call to buy the long bond (TLT) as growth will surprise on the down side.


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