Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation

Takeaway: We remain firmly in the #StrongDollar, #GlobalDeflation camp, but are aware of the risks to overstaying our welcome.

Going into today’s likely rate hike there’s been a great deal of chatter throughout the investment community regarding the risk that the U.S. Dollar Index (DXY) actually peaks “on the news” and subsequently trends lower in the ensuing months.

 

We even took to discussing that risk in the second half of our 12/3 note titled, “Draghi Disappoints… Is This the Beginning of the “Great Unwind” of Consensus USD Longs?”; we strongly believe that analysis is worth your time to review. The following charts are arguably the two most noteworthy examples of the many Bayesian and Frequentist overlays we applied to our handicapping of the aforementioned market risk.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - EXTREME POSITIONS MONITOR

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - DXY Historical Rate Hike Analysis

 

All factors considered, we do think it’s important to revisit why we got here. We’ve held intermediate-to-long-term bearish biases on the Japanese yen since 4Q12 and, except for a brief respite throughout 1H14, a similarly bearish TREND and TAIL outlook for the EUR since 1Q13. With the JPY down -32% over the past 3Y and the EUR down -19% over the past 18M, we would argue those have been good calls.

 

Kudos aside, our proprietary GIP Modeling process and quantitative risk management overlay leads us to conclude that it is appropriate to maintain our intermediate-to-long-term bearish biases on the EUR and JPY. Additionally, recent developments out of the PBoC and BoE support adopting similar biases on the CNY and GBP as well.

 

As such, it’s no surprise to see the DXY remain bullish from an intermediate-term TREND and long-term TAIL perspective on our quant factors.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - DXY

 

Eurozone: The preponderance of Eurozone high-frequency growth data is confirming our extremely dour NTM outlook for Eurozone economic growth. Moreover, inflation remains well below the ECB’s +2% target from the perspective of reported data, 2016 economist expectations and long-term breakeven rates. Both Draghi and ECB Chief Economist Praet were out Monday reiterating a willingness to do more if needed. If our forecasts are proven correct, they will indeed find themselves doing a lot “more” at some point in 1H16.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - Eurozone Economic Summary

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - EUROZONE

 

Japan: The preponderance of Japanese high-frequency growth data is confirming our dour near-term outlook for Japanese economic growth. While core inflation readings have been elevated relative to historic trends, they fall well shy of the BoJ’s +2% target. Moreover, we are picking up on chatter that falling inflation expectations per the 4Q Tankan Survey and long-term breakeven rates are giving BoJ board members cause for concern. While it’s unlikely they expand QQE coming out of their meeting tomorrow, we do think the timing of that catalyst has edged forward by a month or two. Specifically, we think BoJ monetary policy is most likely to get incrementally dovish at the APR 28th meeting in conjunction with a downward revision to their economic projections.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - Japan Economic Summary

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - JAPAN

 

China: We’ve been pretty vocal about our outlook for a material, but managed depreciation of the CNY in recent weeks, most recently in our 12/11 note titled, “Our #EmergingOutflows Theme Accelerates Into “Liftoff””. We consider our 11/19 note titled, “Can Beijing Maintain Exchange Rate Stability Or Is the Chinese Yuan the Next Thai Baht?” to be required reading on that front as well. Key developments on that front include the PBoC’s explicit confirmation of both our structurally bearish outlook for the Chinese economy (phony accounting aside), as well as our view that Beijing intends to ensure the devaluation of the yuan will be as orderly as possible going forward.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - China Economic Summary

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - CHINA

 

United Kingdom: Our interpretation of the state of and outlook for the U.K. economy is remarkably similar to that of the Eurozone (not surprising given the positive slope of GDP base effects in both economies) – with the noteworthy exception that long-term breakeven rates in the U.K. remain elevated from the perspective of the BoE’s +2% inflation target. Though said rates have tightened by a fair amount in recent months, the real boogeymen lending pause to Carney are historically depressed rates of both core CPI and PPI, as well as a dovish outlook for 2016 CPI among economists. We thought Carney’s commentary from this morning regarding conditions for a rate hike as being “unfulfilled” were quite telling in the context of the GBP/USD cross’ recent breakdown below its now TREND line of resistance at 1.54. The pound should continue to follow short-term GBP/USD swap spreads lower as U.K. growth data forces the BoE to back away from its hawkish guidance, at the margins.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - U.K. Economic Summary

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - UNITED KINGDOM

 

United States: Our view on the outlook for U.S. monetary policy begins and ends with the politicization of the Federal Reserve – which remains out to lunch from the perspective of its economic forecasts and associated “dot plot”. As we penned in a detailed note yesterday titled, “Quantifying Why the Fed Is Wrong On Its Outlook For Inflation”, we think the Fed is conflating what we view as a short-lived trough in reported inflation with a sustainable bottom in structural inflation trends. As a result, there exists considerable risk that the Fed tightens policy and maintains an unwarranted tightening bias until it is too late (i.e. we still think a recession commences in/around mid-2016). By then it could be too late for Janet & Co. to react appropriately dovish in terms of handicapping the risk that the U.S. election cycle is decidedly anti Big Fed.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - U.S. Economic Summary

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - UNITED STATES

 

Recall that our then-described “G3 policy divergence” theme has been the primary driver of our #StrongDollar #GlobalDeflation view – which itself is at the core of our long-held bearish biases on commodities (since AUG ’14), emerging markets (since APR ’13) and high-yield credit (since AUG ’14).

 

As such, with a TREND and TAIL bullish outlook on for the USD vis-à-vis peer currencies and the CRB Index hitting lows not seen since 2002 today, we find it appropriate to reiterate that theme, as well as key spillover effects – namely corporate profit and industrial recession globally.

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - S P 500 EPS

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - CRB vs. MSCI World EPS

 

Macro Playbook Update: Keep Betting On #StrongDollar #GlobalDeflation - CRB vs. World Gross Capital Formation

 

All told, we remain firmly in the #StrongDollar, #GlobalDeflation camp – largely because we think the ECB, BoJ, PBoC and now BoE are all likely to remain more dovish than the Fed, at the margins – but are well aware of the aforementioned Bayesian and Frequentist risks to overstaying our welcome. 

 

Our deep understanding of such risks leaves us in a good place to quickly make any eventual pivot to the #GlobalStagflation camp to the extent a macro market regime change is confirmed by our myriad of quantitative signals. That scenario remains the least probable within the band of probable outcomes, however.

 

Ex-Healthcare, which we are now decidedly bearish on as a firm, long live the #Quad4, #LateCycle playbook!

 

Best of luck out there,

 

DD

 

Darius Dale

Director


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more