Chart of The Week: Rate Rotation

We have 3 Macro Themes that we work with quarterly. From an investment process perspective, these investment themes are generally born out of one another (for example, in Q1 we had Breaking The Buck and come Q3 that morphed into Burning the Buck).

 

Our views of the deflation/inflation cycle have been expressed via our Q3 Theme of Reflation’s Rotation (reflating prices from their lows of y/y deflation) and now what we are calling for in Q4, a Rate Rotation (born out of accelerating y/y growth and price data).

 

Politicization of the US Federal Reserve aside (which you shouldn’t set aside), the two things that the Fed should care about in setting rate policy are:

  1. Growth
  2. Inflation

On the Growth front, at this point a monkey can tell you that Q4 GDP will be positive. On the Inflation front, the monkeys still need to be fed more data.

 

Altogether, GDP and CPI are lagging indicators, so we need to have a proactive forecast that bats at a higher average than the dismal forecasting one held by Bernanke’s stint  at the helm of the US Federal Reserve.

 

In terms of reported y/y deflation, the July 2009 CPI report of -2.1% is going to be the low for this part of the cycle. The October and November CPI reports are going to continue to be less deflationary, sequentially, and the bond market is already figuring this out.

 

Recently, TIPs and Gold have already traded at their YTD highs, discounting that reported deflation is a rear-view concern. As a result, now we see interest rates starting to discount the Fed hike that we have been calling for. Yesterday, the Fed futures had an 86% probability baked into the cake for a hike to 0.50% by the April 2010 meeting.

 

Only a month ago, probabilities weren’t betting on a hike until Q3 of 2010. Goldman still has NO hike for 2010 as their call. We’re on the other side them.

 

The question now is how right are the moves in both the 2-year and 10-year yields that Andrew Barber and I have outlined in the chart below? The two lines that matter most in our Macro model on this front are the TAIL lines. The TAIL, in our language, is the longest term duration that we use to manage risk (3 years or less).

 

The TAIL breakout line for the long end of the curve has held up since the US stock market started reminding the Depressionistas that this isn’t a Great Depression in April/May. On the short end (2-year yield) is where you see fits and starts of breakdowns and breakouts –this is called the politicization of the short end of US policy making.

 

When Bernanke finally signals that ZERO isn’t a perpetual policy, expect 2-year yields to blast off from this 0.98% level. A Q4 Rate Rotation is finally underway.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Chart of The Week: Rate Rotation - a1

 


SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more