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McCullough: Fed Raising Rates Into Slowdown Is A 'Big Risk'

McCullough: Fed Raising Rates Into Slowdown Is A 'Big Risk' - GDP cartoon 01.30.2015

 

Below is a brief excerpt from The Macro Show earlier this morning. In it, Hedgeye CEO Keith McCullough explains a key risk embedded in financial markets today following Friday’s jobs report, and what to expect if the Fed raises rates:

 

“Notwithstanding people’s visceral reaction to last week’s "Waldo" jobs number, the Federal Reserve’s potential to make a policy mistake, which is that it raises interest rates into worldwide deflation and growth slowing, is a big risk.

 

In particular, I am concerned that our forecast for GDP is right and the Fed’s forecast is wrong. Their forecast is that the jobs market is rainbows and puppy dogs and that GDP is going to be 3% to 4%.

 

We have Q4 GDP between 0.4% and 1.7% so anything in between is way slower than what the Fed thought. God help them if its 0.4%, on the lower end of the range, and they’re raising rates into that.

 

What does that mean for investors?

 

McCullough says that should the Fed tighten into a slowdown that would "blow up oil, China, Emerging Markets and anything tied to the aforementioned.”

 

In other words ... watch out. 

 


The Cyclical & Secular Slowdown Call

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough responds to a subscriber’s question about why a strengthening U.S. dollar and lower commodity prices isn’t necessarily the bullish economic harbinger many believe it to be.

 

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


Why Texas Is (Not) Going to Love A Rate Hike (In 3 Charts)

Takeaway: Everything that has been signaling #Deflation in the last year, resumed its crash on Friday.

"A Fed rate hike ensures a depression of a year for Commodity and Emerging Market bulls," wrote Hedgeye CEO Keith McCullough this morning.

Why Texas Is (Not) Going to Love A Rate Hike (In 3 Charts) - Oil cartoon 01.05.2015

Here are three charts he's highlighting.

 

"Oil: Barely bouncing this morning post another -4.9% #Deflation last week to -25% YTD. Texas is going to love a rate hike."

Why Texas Is (Not) Going to Love A Rate Hike (In 3 Charts) - WTI

 

"Strong Dollar #Deflation matters."

Why Texas Is (Not) Going to Love A Rate Hike (In 3 Charts) - USD

 

"Commodities: CRB Index -2.3% last wk to -16.9% YTD #Deflation."

Why Texas Is (Not) Going to Love A Rate Hike (In 3 Charts) - CRB


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MONDAY MORNING RISK MONITOR | RISING RATES

Takeaway: Friday's employment report poses the risk of catalyzing an ill-timed rate hike, but investors seem focused only on the positive.

 

MONDAY MORNING RISK MONITOR | RISING RATES - RM11

 

Key Takeaway:

Global risk perception eased last week. In the U.S., investors reacted positively to Friday's jobs report. In China, the rising stock market has taken focus away from the real risk of slowing economic growth. In Greece, the ECB released a stress test showing that the country's banks require a €14.4 billion recapitalization, and investors reacted positively to the upcoming capital inflow.

 

Looking ahead, the biggest risk we highlight is that of the Federal Reserve raising interest rates into slowing economic growth.

 

Our heatmap below is predominantly green on both the short and intermediate term. Long-term measures are mixed.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | RISING RATES - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 8 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | RISING RATES - RM15

 

1. U.S. Financial CDS – Swaps tightened for 20 out of 27 domestic financial institutions on Friday's jobs report, which surged to 271k.

Tightened the most WoW: CB, ALL, JPM
Widened the most/ tightened the least WoW: GNW, AIG, SLM
Tightened the most WoW: MMC, ALL, BAC
Widened the most MoM: GNW, RDN, CB

MONDAY MORNING RISK MONITOR | RISING RATES - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week, due in part to the positive U.S. jobs report. Additionally, Greek bank CDS tightened between -811 bps and -2434 bps in response to the upcoming  €14.4 billion recapitalization of the country's banks. 

MONDAY MORNING RISK MONITOR | RISING RATES - RM2

 

3. Asian Financial CDS – China's stock market surged, the government released its ban on IPOs, and financials CDS tightened modestly.

MONDAY MORNING RISK MONITOR | RISING RATES - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened the most, falling -4 bps to 99.

MONDAY MORNING RISK MONITOR | RISING RATES - RM18

 

MONDAY MORNING RISK MONITOR | RISING RATES - RM3

 

MONDAY MORNING RISK MONITOR | RISING RATES - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Brazilian swaps tightened the most, falling -35 bps to 405.

MONDAY MORNING RISK MONITOR | RISING RATES - RM16

MONDAY MORNING RISK MONITOR | RISING RATES - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 2 bps last week, ending the week at 7.42% versus 7.39% the prior week.

MONDAY MORNING RISK MONITOR | RISING RATES - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 1.0 point last week, ending at 1845.

MONDAY MORNING RISK MONITOR | RISING RATES - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 26 bps.

MONDAY MORNING RISK MONITOR | RISING RATES - RM7

9. CRB Commodity Price Index – The CRB index fell -2.1%, ending the week at 191 versus 195 the prior week. As compared with the prior month, commodity prices have decreased -5.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | RISING RATES - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 11 bps.

MONDAY MORNING RISK MONITOR | RISING RATES - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 basis point last week, ending the week at 1.79% versus last week’s print of 1.80%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | RISING RATES - RM10

12. Chinese Steel – Steel prices in China rose 0.1% last week, or 2 yuan/ton, to 2152 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | RISING RATES - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 144 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | RISING RATES - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.4% downside to TRADE support.

MONDAY MORNING RISK MONITOR | RISING RATES - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CHART OF THE DAY: #Deflation Resumes Its Crash

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

 

CHART OF THE DAY: #Deflation Resumes Its Crash - 11.09.15 EL chart

 

"... Everything that has been signaling #Deflation to you in the last year, resumed its crash on Friday and has not improved upon where it might be “reflating” in a Down Dollar scenario. It’s right back into what we call Quad4."


Fail, Improve, Grow

“You fail. You Improve. You grow.”

-Jon Gordon

 

I don’t know about you, but I fail. And when I do, I like to fail fast, so that I can get on with the next.

 

The aforementioned quote comes from a new book I cracked open this weekend called The CarpenterA Story About The Greatest Success Stories of All. It’s an easy read. And after a Friday like I had, I needed something easy.

 

Our profession isn’t easy. But I love that. While being super bullish on #GrowthSlowing (bearish on rates) was dead wrong on Friday, the prospects of the Fed raising into a local and global slow-down being bearish for inflation expectations still looks right.

 

Back to the Global Macro Grind

 

Being bearish on inflation expectations is another way of saying that you’re bullish about being positioned for the mother of all Global Macro risks, #Deflation. If you’ve failed to recognize that risk in the last 1.5 years, you need to improve and learn about it, fast. 

Fail, Improve, Grow - deflation 500 pound gorilla 

 

The way that the #Deflation Risk really kicks in are twofold:

 

  1. The US Federal Reserve raises rates into a domestic cyclical (and secular) slow-down
  2. The rest of the world responds to slowing by “easing” (devaluing currencies) and raising the value of the US Dollar

 

Post the headline “great” US jobs report on Friday (which actually saw Non-Farm Payrolls slow to 2.01% year-over-year growth vs. the US Labor Cycle peak of 2.34% growth in FEB), this is what happens in FICC (Fixed Income, Currencies, Commodities):

 

  1. US Dollar Index +2.3% week-over-week to +9.9% YTD
  2. US 10yr Yield +18 bps week-over-week to 2.33%
  3. EUR/USD -2.4% week-over-week to -11.2% YTD
  4. Canadian Dollar (vs. USD) -1.7% week-over-week to -12.7% YTD
  5. Mexican Peso (vs. USD) -1.9% week-over-week to -12.2% YTD
  6. New Zealand Dollar (vs. USD) -3.7% week-over-week to -16.3% YTD
  7. Commodities (CRB) Index -2.3% week-over-week to -16.9% YTD
  8. Oil (WTIC) -4.9% (to $44.29/barrel) week-over-week to -25.5% YTD
  9. Gold -4.7% week-over-week to -8.4% YTD
  10. Copper -3.3% week-over-week to -20.8% YTD

 

In other words, everything that has been signaling #Deflation to you in the last year, resumed its crash on Friday and has not improved upon where it might be “reflating” in a Down Dollar scenario. It’s right back into what we call Quad4.

 

While US Equity markets didn’t like the “good is bad” response to the jobs print on Friday, they did have a good week both on an absolute basis and relative to something like Emerging Market Equities (MSCI) which were only +0.5% on the week and still -10.9% YTD.

 

The Style Factors of the US Stock Market that performed best were the ones that have been the worst for the last 6 months where markets have been pricing in both a top-down Global slow-down and bottom-up “earnings” ones:

 

  1. High Short Interest Stocks were +1.9% week-over-week vs. -7.5% in the last 6 months
  2. High Beta US Stocks were +1.7% week-over-week vs. -8.5% in the last 6 months
  3. Small Cap Stocks were +1.6% week-over-week vs. -8.3% in the last 6 months

*Mean performance of the Top Quartile vs. Bottom Quartile of SP500 companies

 

And, from a Sector Style perspective, small/mid cap banks had a big week inasmuch as the Financials (XLF) did, closing +2.7% on the week getting the XLF back to 0.0% for the YTD (for people who have been bullish on Financials all year, flat is the new up).

 

Since one of my favorite US Equity Sectors on the short side (alongside US Retailers, XRT) has been the Financials, that made me very wrong last week after being right into their lows in September.

 

Yes, one can be wrong for what we call the immediate-term (TRADE) while being right on what we call the intermediate-term (TREND). Unless you’re an Old Wall strategist (or Madoff), you can’t be right all of the time.

 

But where to from here?

 

Well, since the causal factors that drove the SEP lows were:

 

  1. Worldwide #Deflation
  2. GDP #GrowthSlowing

 

I’m going to stay with both because:

 

A) US Dollar strength perpetuates both commodity and leverage-linked deflation expectations

B) We don’t have US GDP bottoming in rate of change terms until potentially Q2 or Q3 of 2016

 

If the Fed raises rates into what’s been the most accurate rate of change calls on both inflation and growth, I think they’ll be talking about cutting those rates within 1-3 months of the 1st “hike” anyway.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.04-2.36%

SPX 2033-2119
RUT 1144--1213
USD 97.55-99.46
EUR/USD 1.07-1.10
Oil (WTI) 43.03-45.96

Gold 1078-1127

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fail, Improve, Grow - 11.09.15 EL chart

 

Join Hedgeye CEO Keith McCullough live on The Macro Show at 9 am ET.


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