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Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast?

Takeaway: Is the Fed fibbing about being 'data dependent' or is it just delusional?

Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - Yellen data dependent cartoon 11.18.2015


The Fed continues to say that they are “data dependent.” We just don’t believe them.


In case you missed it, Atlanta Fed president Dennis Lockhart said there was a “compelling” case for a December rate hike earlier today. Maybe we’re missing something here, but didn’t the Atlanta Fed just cut its GDP forecast yesterday? And didn't they ratchet down their GDP forecast the prior week as well?


Apparently cutting your GDP estimate is the new bullish case for liftoff…


Does this make sense?


We’re still scratching our heads. But let’s take a closer look at Lockhart’s speech. We think there are a few revealing insights for investors heading into the Fed’s December policy meeting.


A few excerpts for your consideration:

  • “Absent information that drastically changes the economic picture and outlook, the case for liftoff is compelling.”
  • “The economy is growing at a solid pace in spite of ongoing headwinds coming from global conditions and the strong dollar.”
  • “To circle back to growth drivers, solid job gains and rising household incomes should contribute to a favorable spending outlook.”


Perhaps most important was this story Lockhart told to conclude his remarks:


“To wrap up, I've given you just the highlights of what I can assure you is a comprehensive review of the economic data that my staff and I perform before any FOMC meeting. Policy considerations at the upcoming meeting call for an especially deliberate process. There are two weeks to go, with additional data still to arrive. That said, absent information that drastically changes the economic picture and outlook, I feel the case for liftoff is compelling.”


Wait. Did Lockhart’s “comprehensive review” include his own GDP forecast?


Just yesterday, Lockhart’s Atlanta Fed cut its fourth quarter U.S. GDP estimate to 1.4%. This was down from 1.8% last Wednesday and lower than its 2.2% forecast from less than two weeks ago. Quick rhetorical question:


Q: What did Lockhart et al cite for taking a hatchet to their estimates?

A: Yesterday’s data


Here’s the Atlanta Fed’s explanation accompanying the GDP downgrade:


"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.4 percent on December 1, down from 1.8 percent on November 25. The decline occurred this morning after the Manufacturing ISM Report On Business from the Institute of Supply Management and the construction spending release from the U.S. Census Bureau."




Interestingly, that cut now puts the Atlanta Fed estimate in-line with Hedgeye’s Q4 GDP forecast. 


Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - atlanta fed


To be clear, our recent market commentary is nowhere near Lockhart's (illusionary) outlook. In fact, we've been very vocal about the rising probability of a recession in the next 6 to 12 months. 


Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - 50 percent consensus


So forgive us for thinking Lockhart is being a bit disingenuous when he says that after his “comprehensive review” of the data he still sees a favorable outlook for U.S. growth. (Editor’s Note: In his speech, the Atlanta Fed head didn’t even mention that his team of economists decided to cut their GDP forecast yesterday.)


But we digress...


Lockhart also called the December 15th and 16th Fed policy meeting “historic.”


Finally, something we can agree on...


As Hedgeye CEO Keith McCullough has reiterated in the past few days, a December rate hike would be the first time the Fed raised rates into an economic slowdown. 


So to piece together the reality that Lockhart won't tell you:


Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - tweet data 

On Fox Business: What Does A Fed Rate Hike Mean For U.S. Banks?

On Fox Business' Mornings With Maria today, Hedgeye CEO Keith McCullough discussed the implications a December rate hike and how to play the banking sector with SkyBridge Capital’s Anthony Scaramucci and Anton Schutz of Mendon Capital Advisors, 


Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch

Takeaway: W sees big Cyber 5 results, but spending big to penetrate overestimated TAM. Hedgeye Recession Watch. We give TGT open house A for effort.

W - Wayfair Cyber Five Sales Results


Our Take: These Holiday sales numbers for Wayfair are big with direct sales up 130% this year and up 103% on a 2yr basis. Management called out the fact that it would up the ante during this holiday season in areas like seasonal décor, housewares, etc. as it realized last year that could play the Black Friday game in areas less tied to furniture and more directly competitive with retailers like Bed Bath, Target, Walmart, Kohl’s, etc. While the press release came 6 weeks ahead of last year's, there was no comment this year on the number or percent of orders that were placed by repeat customers which is an interesting omission in its own right.

Also, let’s not forget two things 1) most people did not know what Wayfair was last Black Friday, and 2) people don’t use Black Friday as an excuse to buy higher-ticket/margin furniture.

The bottom line on Wayfair is that this company is spending – and it’s spending big – around penetrating what management believes to be the company’s TAM. Unfortunately, we think they are overestimating it by a country mile, and are building an infrastructure for growth that will not materialize – at least profitably.


Recession Watch - Macro Comments from Hedgeye CEO Keith McCullough

ISM bomb of 48.6, but no worries – if you back out company selling prices alongside strong dollar/weak demand deflation, and don’t look at US Retail Sales and/or consumption growth slowing from Q1 cycle peak – all good.

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart2


TGT - Target's Connected Open House


Our Take: This might be the coolest thing that Target has done since exiting Canada. This is a store in San Francisco we visited last night that is basically a prototype for TGT to embrace IoT. They’re selling the ‘connected home’ experience with everything from smart thermostats, door locks, baby scales, light bulbs (for $199 3-pack) to dog collars (think doggie Fitbit).

This is in no way scalable, bc you could buy half of this stuff in Home Depot. But the reality is that we give Target an A for effort on this one.

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart3

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart4B

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart5B

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart6B

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart7


AdiBok - Adidas looking to sell-off hockey brand CCM, along with Taylormade



WMT, AMZN - Amazon Received 12 Times as many Twitter mentions than Walmart on Cyber Monday



GIII - 3Q16 Earnings

Retail Callouts (12/2): W Cyber Five, TGT Open House, Hedgeye Recession Watch - 12 2 2015 chart8


OXM - Michelle McQuality Kelly to Succeed Scott A. Beaumont and James B. Bradbeer, Jr. as Group CEO of Lilly Pulitzer



CAB - Cabela’s Inc. to Explore Strategic Alternatives



SVU - SUPERVALU Names Eric Claus New Chief Executive Officer of Save-A-Lot



Purchase Apps | New Highs ... & Salt Grains

Takeaway: Purchase activity in November = highest YTD. Seasonal factors and rate considerations are both probably impacting reported demand.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


Purchase Apps | New Highs ... & Salt Grains - Compendium 12.2.15


Today’s Focus: MBA Purchase Applications


Purchase Applications rose +7.7% WoW and accelerated to +30% YoY, taking the demand index up to its strongest level since 2010 at 228.1.  


This morning’s data marks a third consecutive week of elevated demand and takes activity in November to the highest monthly average YTD.  The strong November also reversed the underwhelming demand trend observed in October, bringing sequential growth in 4Q up to +1.4% QoQ and +22.9% YoY.


The Caveats:  Two the last three weeks of data have included holidays (Veteran’s Day, Thanksgiving) and holiday associated statistical adjustments are notoriously imperfect and capable of pushing the data in either direction in any given week. 


However, the non-holiday week was also strong and the seasonal factor applied to both of the holiday weeks was not out of line with recent year adjustments – in fact, the adjustment factor applied in 2015 was marginally less supportive of the seasonally-adjusted headline number than what we’ve seen the last couple years. 


Also, as we’ve highlighted in recent weeks, its more probable than not that we’re seeing some measure of demand pull-forward with prospective buyers pulling the purchase trigger in fear of further financing based affordability declines.   


The Conclusion:  The new November highs are noisy and perhaps overstate the underlying demand trend but, on balance, the data suggests some measure of uptick in purchase activity in recent weeks aptly characterizes the underlying reality.  Seasonal noise will remain a factor for most of the next 6-weeks - ready your grains of salt.   


Purchase Apps | New Highs ... & Salt Grains - Purchase 2015 Monthly


Purchase Apps | New Highs ... & Salt Grains - Purchase 2013v14v15


Purchase Apps | New Highs ... & Salt Grains - Purchase YoY


Purchase Apps | New Highs ... & Salt Grains - Purchase THanksgiving Seasonal Adjustment


Purchase Apps | New Highs ... & Salt Grains - Purchase Index   YoY Qtrly


Purchase Apps | New Highs ... & Salt Grains - Purchase LT


Purchase Apps | New Highs ... & Salt Grains - 30Y FRM




About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake



CHART OF THE DAY: This Recession Signal Is Now Flashing Red

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to subscribe. 


"... As the Chart of the Day shows, sub-50 ISM prints have generated some false positives vis-à-vis recession signaling but contraction in the industrial-manufacturing sector has accompanied pretty much every downturn over the last century."  


CHART OF THE DAY: This Recession Signal Is Now Flashing Red - ISM CoD




Checking It Twice

“I never believed in Santa Claus because I knew no white dude would come into my neighborhood after dark”

-Dick Gregory


I made two lists last night.  I had to check the second one twice.


The first was my son’s Christmas List - which included a “space station”.  He doesn’t even know what that is but some other kid wrote it down so he needed it too. #GroupThink starts early.


Checking It Twice - fed rainbows


Back to the Global Macro Grind …


The second was a quick refresh of global Industrial data post the U.S. ISM’s sojourn to sub-50 for the first time in 3-years. 


Headfake or Harbinger?


Here’s a quick look at some of the current members of the PMI #ContractionClub


  • U.S.:  48.9
  • China: 49.6 (official) or 48.6 (Caixin)
  • Brazil: 43.8
  • Canada: 48.6
  • Russia: 37.1
  • South Africa: 47.5
  • South Korea: 49.1


How about 3Q Earnings Growth across the lead indices according to Bloomberg data:


  • U.S. (SPX) = -4.6%
  • Japan (Nikkei) = -9.5%
  • U.K. (FTSE 100) = -30.5%
  • China (Shanghai Comp) = -18.9%
  • Brazil (Bovespa) = -42.7%
  • Canada (TSX) = -32.4%
  • Russia (MICEX) = -5.6%


Contractions (& Stagflations) can happen slowly, then a lot at once … Ask Brazil.   


This isn’t USA circa 1960 so maybe recessionary Industrial and global earnings data doesn’t matter – domestic auto sales are en fuego (Nov marked a new YTD high at 18.2 MM units and 2015 is on pace for a record year), construction activity remains strong (+13% YoY, latest Oct data), consumer credit is expanding, income growth remains solid and consumption growth is decelerating but still running ~3%.      


Or maybe it does. 


  1. ISM: As the Chart of the Day shows, sub-50 ISM prints have generated some false positives vis-à-vis recession signaling but contraction in the industrial-manufacturing sector has accompanied pretty much every downturn over the last century. 
  2. Goods vs Services: Goods Consumption is more cyclical than consumption of services and, historically, weakness has manifest in cyclical demand ahead of the peak in demand for more inelastic consumption. Employment growth in the goods producing sector tends to presage the trend in services and aggregate employment and employment growth in goods-producing sectors has decelerated from +3.0% at the start of the year to +1% in October – and comps only get tougher the next few months. In energy states - where the trend in job separations has again begun to negatively diverge from the broader trend, the declines have been more pronounced. In Texas, for example, goods employment is currently running -2.6% YoY. We expect further concentrated weakness across energy levered economies as hedges roll off and if domestic policy drives further price deflation in dollar settled commodities (which is pretty much all of them, all the time). 


The risk posed by the contraction in industrial output would also be easier to look past if it was isolated and if the Fed wasn’t set to perpetuate further disinflationary pressure. But it’s not and they are. 


In many ways, the global Currency Wars and the current global production slump are outcroppings of the same secular malady – overleverage, oversupply and stagnant demand. 


Policy, of course, attempts to manipulate “price” both in response to and in the hopes of influencing prevailing supply and demand conditions. 


Recall, conventional policy easing is believed to act through two basic channels:

  1. Lower rates = higher domestic investment demand and higher demand for interest rate sensitive consumption = ↑ Growth
  2. Lower rates = less demand/more supply of dollars = depreciating Currency = ↑ Exports = ↑ Growth


Individual economies and central banks operate independently and conventional policy and currency devaluation can work sufficiently well when economic cycles across the globe are, to some extent, out-of-phase and traveling along different points of the macro sine curve.


But the world as a whole is a closed system. If no one is producing and/or exporting (see list above), global demand is flagging – it’s not just an isolated strong dollar = lower domestic exports and industrial profitability phenomenon. 


Granted, Euro-zone PMI’s are comparably better, in the mid-50’s, but EU “exports” are a bit of a misnomer as most of what is counted as exports is actually intra-Eurozone Trade (think Massachusetts “exporting” to New York).   


Is positive but decelerating late-cycle U.S. growth and modest growth in the Eurozone against trough comps enough to float the global equity boat until the world comps out of its current malaise? 


Perhaps but, broadly, it feels hard to get incrementally bullish at the highs and/or ramp gross/net long exposure to levered balance sheets and high beta illiquidity based on prevailing global fundamentals and their likely trajectory. 


I feel like I’ve expressed that same sentiment a number of times this year but with the S&P500 up just 2% YTD, the Dow up just +0.36% and many EM and developing Asia equity markets deep in the red, reality has supported that boring consistency.  


What said the market to yesterday’s ISM data:

  1. Bond Yields tanked: the 10Y fell -6.3 bps to 2.14, the 2Y fell -2.4 bps and the yield spread fell to a 52-week low at 124 bps. 
  2. The Dollar retreated: The $USD declined -40bps, re-breaching the 100-level on the index to the downside
  3. Stocks barely blinked: All 9-sectors closed higher with the S&P500 finishing up for just the 6th day in the last 19. 


Random walks and single-session reflations ≠ trend accelerations in real growth and Down Dollar + Down Rates is not a growth accelerating signal. 


Janet’s naughty and nice (indicator) list will be prodded and checked twice as she delivers speeches to both Congress and the economics club over the next two days. 


Whether the BLS elves filled Janet’s data sack with inside edge on what the November NFP stocking holds, I do not know. 


I do know that, on balance, the recent data has been underwhelming and the nearer-term forward outlook promises further deceleration.


Remember (again) we’re talking slope of the line, not absolute. Much of the data will remain “okay” on an absolute basis in the nearer-term, but the slope of the growth line is and will remain negative. 


As uber-dove Evans made headlines with yesterday … “I’m a little nervous”.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.15-2.23%

SPX 2045-2109

VIX 14.11-18.25 
EUR/USD 1.05-1.07

Gold 1050-1080 


Good luck out there today. 


Christian B. Drake

U.S. Macro Analyst


Checking It Twice - ISM CoD

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