This note was originally published
at 8am on April 20, 2015 for Hedgeye subscribers.
“Character is inspired; it is not imparted.”
-Laura & Malcolm Gauld
While I didn’t subject my son to a “character breakfast” with Cinderella @Disney last week, I think he built some in realizing that his little sister was less scared than he was on Space Mountain.
After a neck wrenching week of family fun on the rides, it’s good to be back in my un-buckled seat this morning! I hope you’ve had some quality time away from the screens with your family this Spring break too.
The aforementioned quote comes from a good parenting book I read last week called The Biggest Job We’ll Ever Have. It’s an especially relevant book for those of you who are into self-reflection and improvement – we can all build character by doing, every day.
Back to the Global Macro Grind…
I don’t unplug from markets very often, but when I do… I like it when they don’t do a whole heck of a lot that surprises me. I left you suggesting that I think the Fed gets easier at their April meeting. I’ll come back to you this morning reiterating the same thing.
Amongst other things, a more dovish Fed does a few big things to macro markets – and they are not the same things:
- Down Dollar – that’s a counter-TREND move for Commodities and their linked-securities
- Down Rates – that’s a continuation of a bullish TREND for Bonds
Breaking that down in week-over-week, in rate of change terms:
- US Dollar Index dropped -1.9% last wk to +7.9% YTD
- UST 10yr Yield dropped another -3 basis points last wk to 1.87% (-31 basis pts YTD)
In Correlation Risk terms, what that translated into was:
- Euro (EUR/USD) counter-TREND bounce of +1.9% wk-over-wk (but still -10.7% YTD)
- CRB Commodities Index and Oil (WTI) +3.1% and +8.6%, respectively, on the week
US and European Equities did not enjoy inflation expectations bouncing:
- SP500 and Dow Jones Industrial Index were both -1.3% on the week to +1.1% and 0.0% YTD, respectively
- EuroStoxx600 and the DAX corrected -2.2% and -5.5% to +17.9% and +19.2% YTD, respectively
Net, net, net, both the TREND move in super-sized asset allocations to US Fixed Income continued to beat US Equities YTD, while a big league counter-TREND move in USD driven Correlation Risks frustrated #Deflation bears who didn’t dynamically reset esposures.
If you look at the Correlation Risk (USD vs. everything Commodities) on a 1-month basis, it’s been significant, even though the USD hasn’t corrected much on a percentage basis. Here are the 1-month moves:
- US Dollar Index -2.2%
- EUR/USD +2.0%
- CRB Commodities Index +7.1%
- Gold +4.8%
- Copper +6.1%
- Oil (WTI) +24.1%
Yep, that’s right. You can tell yourself all the stories you want about supply/demand in Oil related markets, but the reality is that the #1 driver of macro inflation expectations remains an easier Fed. Those expectations turned on a dime on that last lousy US jobs report.
What’s next? The point I was trying to make before I left for vacation was pretty simple: “Some of my very short-term views are at odds with my longer-term ones – and others (rates) are aligned.” (apologies for quoting myself)
In other words, you’re one better jobs report away from both the USD and rates bouncing again. But, there’s this thing called the Fed meeting (April 29th) and a weak headline Q1 GDP report (reported on the same day), before the April jobs report (May 8th).
Yeah, inflation expectations bounce when the Dollar goes down and dovish central planning expectations go up. You already know that. So sending me a chart of something like break-evens bouncing reflects that people who manage risk in real-time get that too.
US 5-year break-evens bounced (just like everything Commodities did) +9 basis points last week to 1.7% and look a lot like Oil does on a 1-month basis (+32 bps is a big bounce!). But if you look at the TREND, they’re still down -25 basis points year-over-year.
My sense is that not everyone nailed all of these moves. If success was imparted on your portfolios, well done. This hasn’t been easy. Trying to risk manage all of these calendar catalysts, inflation/deflation expectations, etc. (across multiple durations) builds character.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.85-1.95%
Oil (WTI) 49.05-57.69
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer