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Cartoon of the Day: Chinese Growth Hits A Wall

Cartoon of the Day: Chinese Growth Hits A Wall - China growth cartoon 11.19.2015

 

"While the 'reflation' green arrow chasers are enjoying themselves today, I must remind you that President Xi (China) was quite bearish about the Chinese economy earlier this week (and China cut rates last night as a result of that weakness)," wrote Hedgeye CEO Keith McCullough in a note to subscribers today.


INSIGHT: China, Commodities & #GrowthSlowing

INSIGHT: China, Commodities & #GrowthSlowing  - china year of the snal

 

On The Macro Show this morning, Hedgeye Macro analyst Darius Dale discussed the divergence between China's economic reality and the movement in it's equity markets. 

 

Last night, the Shanghai and Shenzhen closed up 1.4% and 3.1%, respectively, taking the handoff from a strong close in the U.S. 

 

Now consider the recent economic data out of China. In November, the country's MNI PMI slipped to 49.9 from 55.6 in October, Dale noted. That jived with recently reported crashing rail freight traffic, along with sequential slippage in industrial production, fixed assets investment, foreign direct investment, total social financing, as well as various measures of supply and demand in the Chinese property market in the month of October.

 

It's worth noting that China's President Xi Jinping was a bit too honest this week when, in a speech, he admitted the country's economy faced "considerable downward pressures."

 

No kidding.

 

INSIGHT: China, Commodities & #GrowthSlowing  - China GDP cartoon 07.16.2015

 

As Dale pointed out, that "downward pressure" on Chinese growth is also putting considerable pressure on commodities like copper and iron ore. Here's a telling excerpt from a note sent to subscribers earlier this morning:

 

"Fresh cycle lows in copper and iron ore are not a good sign for global growth… How bad is it? The China Iron & Steel Association said it expects steel output to drop -2.9% in 2016. That’s not a small inflection considering China’s mills produce half of global output. Former chief economist of Rio Tinto had this to say about continuing deflationary headwinds: “There’s about 300MM tons (~40% of Chinese production) of surplus capacity (in steel refining) that needs to not just be shut down, it needs to be bulldozed.” The deflation continues."


EDV: We Are Removing Vanguard Extended Duration ETF From Investing Ideas

Takeaway: Please note we are removing Vanguard Extended Duration ETF from Investing Ideas

Today, Hedgeye CEO Keith McCullough added PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) to the short side of Real-Time Alerts. The reasoning also lays out why we're taking EDV off Investing Ideas: 

 

"With the 10yr UST Yield pulling back to 2.23% today (you could have been plugged shorting the Long Bond like consensus did on the recent jobs report at 2.39%), I'm getting an immediate-term TRADE overbought signal (within a bullish intermediate-term TREND) in ZROZ. 

 

With the Fed hell bent on raising into a slow-down, we have to risk manage the risks associated with that. They have no idea on the economy (forecasts on growth have been wrong 70% of the time since Bernanke's un-elected reign). So the risk, is their forecast."

 

EDV: We Are Removing Vanguard Extended Duration ETF From Investing Ideas - Fed forecast cartoon 11.13.2015


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INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO

Takeaway: Claims are behaving as we expected with the year-over-year change trending towards zero and energy states worsening on the margin.

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims20

 

As we come to the end of '15, jobless claims both in aggregate and for the energy states separately, are behaving as we have modeled.  Year-over-year improvement continues to converge towards zero as the level of claims backs up off of the low but remains within its frictional floor below 330k (for 21 months now). We continue to point out that the last three cycles saw claims sit below 330k for 24, 45 and 31 months before the economy entered recession, putting us 12 months from the 33-month average.

 

Additionally, energy state claims are worsening versus the country as a whole as many energy companies are set to experience the pain of their price hedges rolling off around year-end. The spread between those two indexed series in our chart below has widened for 10 weeks in a row. That includes the most recent week, ending November 7, when the spread widened from 28 to 31. 

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims18 2

 

The Data

Initial jobless claims fell 5k to 271k from 276k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 270.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0%

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims2

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims3

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims4

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims5

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims6

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims7

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims8

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims9

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims10

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims11

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims19

 

Yield Spreads

The 2-10 spread fell -8 basis points WoW to 140 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims15

 

INITIAL JOBLESS CLAIMS | CONVERGING TO ZERO - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


What If Consensus Is ‘Dead Wrong’ on Economic Growth And We’re Right?

 

In this excerpt from The Macro Show this morning, Hedgeye Macro analyst Darius Dale responds to a subscriber’s question about the stock market hitting new highs yesterday on the possibility of a Fed rate hike. He also explains the danger in believing the Fed and Old Wall’s rosy economic forecasts.  

 

 

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.


McCullough: 'The Data Is Unequivocally Bearish'

In a spirited debate on Fox Business' Mornings With Maria today, Hedgeye CEO Keith McCullough and Recon Capital’s Kevin Kelly square off on Fed policy, McDonald’s and whether the U.S. is headed for a recession in 2016. 

 


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