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“Their waiting blurred the calendar.”

-Wallace Stegner

Life, like economies, can be cyclical. Then there’s the secular stuff that just won’t go away. As Stegner wrote in The Angle of Repose, we can be “imprisoned” by our circumstances, “vacillating between hope and disappointment.” (pg 437)

Yep. That’s kind of a depressing note to kick off another week in a world that continues to be dominated by both #LateCycle growth slowing and #Deflation. But it is what it is. Hope is not a risk management process.

Post Friday’s US jobs report, I still think the Federal Reserve risks being THE catalyst for a curve flattening (recession). If they’re hostage to a political calendar and raise rates during a cyclical and secular slowdown, that is.

Hostage To A Hike? - Fed cartoon 01.28.2015

Back to the Global Macro Grind

Cyclically, both non-farm and private payrolls slowed sequentially and in year-over-year rate of change terms in July. I still think the cycle peak for US employment was in Q1. It’s now Q3, and counting. Given July’s #Deflations, Q3 is shaping up slower than Q2.

On the jobs data, rates were down (10yr UST Yield 2.16% = Long-term Treasuries + Utilities (XLU) up). I guess some (especially Long Bond Bears) were surprised by that move. No one should be – the Bernanke/Yellen Fed has never tightened during a slowdown.

That certainly doesn’t mean Yellen can’t pull a 2011-style Trichet (former ECB czar) and just “do it, because it’s time.” That would sadden me as I was genuinely starting to think that she and her colleagues are “data dependent.”

For those of you who still pay attention to both the data and how macro markets are interpreting it, here’s what happened in FICC (Fixed Income, Currencies, Commodities) last week, within the context of the last 3 months:

  1. FX (wk-over-wk): Canadian Dollar -0.4%, Brazil’s Real -2.5%, Russia’s Ruble -3.6%
  2. FX (in the last 3 months): Canadian Dollar -7.7%, Brazil’s Real -13.8%, Russia’s Ruble -21.5%
  3. Commodities (CRB Index) down another -2.1% wk-over-wk, deflating -12.6% in the last 3 months
  4. Oil (WTI) #deflated another -6.7% wk-over-wk, crashing -27.8% in the last 3 months
  5. Copper dropped another -1.3% wk-over-wk, moving into crash mode, -20.1% in the last 3 months
  6. Break-evens (5yr UST) down another 11 basis pts wk-over-wk and -39bps in the last 3 months to 1.29%

And sure, the Fed can start to ignore all of the deflationary expectations and data inasmuch as they want to hope for magical wage inflations and capex cycles, but that’s precisely THE risk. They haven’t communicated changing that data dependent mandate, yet.

Mr. Macro Market’s read-through to Global Equity markets was as plainly obvious as it was to the US Equity market:

  1. Energy Stocks (XLE) led losers, closing down another -3.4% on the week, taking 3-month deflation to -16.7%
  2. Basic Material Stocks (XLB) dropped another -1.6% on the week, taking 3-month deflation to -10.9%
  3. Emerging Market Stocks (MSCI) fell another -1.8% on the week, taking 3-month deflation to -13.6%
  4. EM Latin American Stocks (MSCI) lost another -4.2% on the week, taking 3-month deflation to -18.0%
  5. Brazil’s Stock market (Bovespa) dropped another -4.5% on the week, taking 3-month deflation to -14.7%
  6. Utilities (XLU) appreciated +0.9% on the week, taking the 3-month gain to +1.5%

All the while, our favorite Global Equity market (see Q3 Macro Themes deck - Japan’s Nikkei) added another +0.7% of absolute weekly performance, taking its 3-month appreciation to +7.4%. There’s always a bull market somewhere!

The thing about Japan is that central-planners there have vacillated “between hope and disappointment” (for 20 years) before finally accepting that they have nothing sustainable that would deliver their people the threat of a “hike.”

Well, to be fair, even though some of the un-elected at the Fed might like to think so, we aren’t “their people.” We are simply The People who will be hostage to a hike. Best of luck to all my friends in Texas and in the Dakotas on that front.

US stocks obviously get this. Signaling immediate-term TRADE oversold on Friday, they’ve been down for 11 of the last 14 days and the Russell 2000 is in the midst of a -6.9% correction (vs. SP500 -2.5% from its YTD high and the Dow now -2.5% for 2015 YTD).

As we all await the blurring September “rate hike” calendar, the question remains, however: does the Fed get it?

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.14-2.25%

SPX 2067-2096
RUT 1199-1227
Nikkei 209
EUR/USD 1.08-1.10
Oil (WTI) 42.89-46.41

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Hostage To A Hike? - Chart of the Day