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.
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:
Source: Bloomberg L.P.
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.
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!
Step 3: As the dollar strengthens, commodity prices continue their deflationary descent.
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.
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.
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,
Associate: Macro Team
Takeaway: First lock-up doesn't matter. The next one (3/2015) is larger than its current float, owned mostly by institutional investors
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
BABA: What the Street is Missing
11/26/14 08:03 AM EST
BABA: Leaning Short, But...
10/21/14 07:02 AM EDT
Let us know if you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
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.
3 big things happened in Europe this morning:
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.
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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