The Economic Data calendar for the week of the 9th of February through the 13th of February is full of critical releases and events. Attached below is a snapshot of some of the headline numbers that we will be focused on.
Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Morning Macro Call Replay: If USD Goes Up, Gold Will Go Up
Please enjoy this complimentary look at our Morning Macro Call, a daily conference call for institutional investors. On Thursday’s Morning Macro Call, Hedgeye CEO Keith McCullough explains why inverse correlations matter, talks about the recent moves in oil, and debates Macro Analyst Darius Dale about which moving average is best.
Keith's Macro Notebook 2/3: USD | Oil | Europe
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook Tuesday morning.
Investors aren't exactly digging the fourth quarter earnings season, which has been a disappointment so far.
GROUNDHOG DAY FOR THE FED
Expect more of the same from the world’s unelected central planners including America’s own Fed chief Janet Yellen.
PATIENCE + TIME (U.S. DOLLAR CORRELATIONS)
This is a brief excerpt from Thursday's Morning Newsletter written by Hedgeye CEO Keith McCullough.
To review this most recent 3-day counter-TREND move in macro markets:
HOW LOW CAN IT GO? (10-Year Treasury Yield Edition)
We wanted to know what you think? Will the 10-year U.S. Treasury go below 1.50% this year? Cast your vote and let us know!
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
Employment data re-hashing is pretty much ubiquitous across the financial media and there’s little value-add in dog-piling on the data reporting so we’ll keep it tight here.
Immediately below is our summary review of the data followed by a few data points and trends we think are worth highlighting.
January Employment | Summary Review: Net Payrolls adds were strong on an absolute basis and accelerating on YoY basis, wage growth accelerated back up to +2.2%, hours worked held above trend, the positive balance of hiring at the sector/industry level continued, slack measure extended their slow march southward, revisions were unanimously positive and unemployment rose for the right reasons as participation bounced off multi-decade lows. Manufacturing and Energy employment showed little evidence of ROW demand and Oil-price pressures, respectively.
HOUSING: Residential Construction employment rose +13K MoM, marking the largest sequential rise since November of 2005. On a year-over-year basis, growth accelerated to +8.7% with the trend remaining one of ongoing improvement. After having been bearish on housing in 2014 through October, we continue to think housing outperforms over the intermediate term in 2015. (*Note: if you do not currently receive our housing sector research but would like access please let us know.)
Consumption/Income Growth: Today’s report augurs strength for the Consumption and Income/Spending data for January.
The math is straightforward: Accelerating employment base + an acceleration in wage growth will = accelerating aggregate income growth.
Even if a further increase in the savings rate mutes the translation to actual consumption growth (as it did in December), it’s hard to characterize accelerating income growth and rising savings as fundamentally negative.
Whether increased savings and rising corporate confidence actually translates into an acceleration in business investment – and a support to flagging productivity growth – remains a pretty big “if”, particularly as we traverse the late-cycle period of the current expansion.
Energy Related Employment: The BLS classifies oil & gas related employment within four major subsectors: Oil and Gas Extraction, Oil & Gas Pipeline Construction, Support Activities for Oil & Gas Operation and Mining/Oil/Gas field Machinery. The data is reported on a one month lag so the January release this morning provided December data for the respective industries.
In short, payroll employment directly tied to Oil & Gas extraction, while slowing, has yet to show a conspicuous decline.
We’ll be interest to see if that changes in the February report as the (more leading) initial jobless claims data continues to show a moderate negative divergence in energy state job separations.
Cycle Accounting | Best Before the Crest: It’s our view that we’re currently late-cycle in the current expansion. Employment and wage growth always look best before the crest and handicapping where we are on the slope of the cycle line remains the game.
With the incremental acceleration in employment growth in January, and inclusive of the 2014 revisions, we have now eclipsed the peak rate of payroll growth observed in the last cycle. Whether January represented the trough in Initial Claims (3-mo rolling ave basis) remains to be seen but historical cycle precedents suggest the clock tick starts to get louder following a negative inflection off peak improvement in initial claims
“Patience”: The “tough March decision for the Fed” headlines are in full crescendo this morning. For the sake of taking the other side of the strength in the employment report, the charts below are probably the ripest fodder for the “push out the dots” folks.
Is an acceleration in wage inflation imminent as slack continues its slow march southward, minimum wage changes take effect and net payroll add mix shifts modestly in favor of higher paying jobs? Perhaps, but that’s been the perennial panglossian talking point for at least the last 18 months. Elsewhere, the employment-to- population ratio, while improving, continues to signal ongoing slack while labor’s share of income remains decidedly depressed as the transmission of policy from financial asset inflation (wall street) to the real Main St. economy remains doggedly slow.
SLACK: The painstakingly sluggish trend towards labor market tautness remains ongoing. Below are the updated charts
Christian B. Drake
Takeaway: In today's Macro Playbook, we detail our bullish-to-bearish fundamental reversal on Chinese equities. This is both new and worth your time.
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
***Please note we are dropping the DXY from our top-5 long ideas for the time being. Refer to our scenario analysis for the next 4-6 weeks in yesterday’s Macro Playbook for more details. In lieu of the dollar, we are “upgrading” our bullish bias on Utes in light of our bearish outlook for Treasury bond yields from here.***
QUANT SIGNALS & RESEARCH CONTEXT
“We Will Sell China”: Today we are removing our bullish bias on Chinese equities and view this asset class as one to “short on strength” rather than a “buy on weakness”. Since we outlined our bullish bias in our 1/13 edition of the Macro Playbook, the Morgan Stanley China-A Share Fund (CAF) has declined -245bps.
Our decision to not let a small loss turn into a larger one is threefold:
Regarding point #1:
Source: Bloomberg L.P.
Source: Bloomberg L.P.
Regarding point #2:
Regarding point #3:
All told, we now anticipate that Chinese shares have considerable downside risk over the intermediate term – so long as the aforementioned policy stance remains in place. And until that changes, our bias on Chinese equity ETFs – namely the CAF and FXI – will remain bearish.
Chinese stocks are now overvalued vis-à-vis other international equity markets and have been overbid with massive margin leverage (a record 778B CNY on the Shanghai Stock Exchange) relative to what now looks like a rapidly declining probability of meaningful enough monetary stimulus to combat the obvious downside to Chinese growth over the intermediate-to-long term.
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.
#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
EARLY LOOK: Anchorman (2/5)
Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.
Black Box reported January results that were the strongest in over six years. While the majority of this strength is being attributed to a mild winter compared to a year ago, the underlying trends suggest a marked improvement across the industry. Easy comparisons through February should keep restaurant stocks, particularly fast casual concepts, afloat barring any dismal earnings results. But, with the data this strong, we expect management teams to have a very upbeat outlook for 2015 – despite some inflationary pressures on their cost of sales and labor lines. All told, expectations for the year will be high, which means the opportunity to create alpha will widen when sales trends reverse (tough comparisons in 2H15).
Restaurant same-store sales increased +6.1% as traffic increased +2.4% during the month. These numbers were up 300 bps and 180 bps, respectively, on an absolute sequential basis and up 210 bps each on a two-year average sequential basis.
A number of things (stronger traffic, lower gas prices, higher consumer confidence) has given management teams the confidence to take pricing recently and consumers the ability to increase their spend. To that extent, average weekly sales per restaurant increased +2.5% per restaurant over December 2014. This is important, considering the aforementioned pressures managers will face in 2015. Beef prices are expected to be the largest headwind on the commodity front, while ACA and pressure on staffing (accelerating wage and salary growth) will be headwinds on the labor front.
The extent to which restaurant sales remain strong will determine whether or not restaurants will be able to offset these pressures but, currently, there’s no denying the favorable outlook. We expect sales to continue to remain robust throughout February given the easy comparisons.
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