Why? Because the U.S. labor market is even later cycle than we thought.
With the advent of today’s gangbusters jobs report – specifically the sharp accelerations in the growth rates of nonfarm payrolls and wages (see: summary table below) – this U.S. economic expansion is now closer than ever to its termination.
- The balance of the seven proprietary indicators we track to pinpoint our location in the domestic economic cycle suggests a recession has the highest probability of commencing in 10 months-time (i.e. in 3Q16).
- With a slight majority of those indicators signaling a recession perhaps sooner than that, we continue to point out the risk to the economy and the financial markets that underpin it that are the Fed’s forecasts.
- The FOMC dot plot and recent hawkish guidance from various Fed heads suggests policymakers are in line with macro consensus that the domestic earnings and industrial recessions are transitory and not a harbinger of a broader economic downturn. We remain on the other side of this view.
Click on the following link to download the presentation (13 slides): http://docs3.hedgeye.com/macroria/Hedgeye_U.S._Economic_Cycle_Indicators.pdf
From an asset allocation perspective:
- We continue to raise cash.
- We are buyers of Treasury bonds Muni bonds, Utilities and REITS on weakness. From a style factor perspective, we anticipate large-cap liquidity will continue to outperform over the intermediate-term.
- We remain short sellers of Financials, Retailers and High-Yield Credit on strength. From a style factor perspective, we anticipate small-cap illiquidity and highly leveraged companies will continue to underperform over the intermediate-term.
- Our ongoing G4 policy divergence theme lends us the confidence to remain bullish on the U.S. dollar in spite of our dour outlook for the U.S. economy – especially given that the Fed appears set to embark on a grave policy error by tightening monetary policy into the teeth of a #LateCycle Slowdown.
- As a result, we remain the bears on reflation assets broadly – including commodities, commodity-linked equities, commodity currencies and EM.
Deflation’s Dominoes are coming home to roost.
Have a great weekend,