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Draghi Pushes Any “Action” to March!

Takeaway: The EUR/USD remains broken (bearish) across all three of our durations: TRADE, TREND, and TAIL.

The EUR/USD is currently trading down -0.50% to $1.0838 following this morning’s interest rate decision from the ECB in which rates were left unchanged (as expected), and any action to increase the size of the Bank’s quantitative easing program or issue any other “unconventional” programs were kicked to its next meeting on March 10th. The March meeting will also include the Bank’s staff forecasts for growth and inflation, the results of which could be a catalyst for the Bank to act.

 

Call Outs: Draghi reiterated the old Song and Dance. Today’s presser showed once again Draghi’s mentality to Extend&Pretend economic gravity. He continually cited the prospect of sustained low energy prices and the economic slowdown in China as contributing factors to the Eurozone's low levels of inflation.  As we show in the first chart below on inflation, we expect CPI to remain low in 2016 (sideways at best), and far from the Bank’s pipedream of 2.0%.

 

What does today’s market action mean?  Investors remain holding a massive short position in the EUR/USD.  [See second CFTC chart below]. Within a strong dollar and weak commodity market, alongside mute growth prospects for the Eurozone, we continue to think this short position has legs in 2016, as investors become increasing aware of the inability of QE to move the needle on inflation.  

 

Our mantra remains the same.  We maintain our macro theme of #EuropeSlowing, with our proprietary GIP (growth, inflation, policy) model signaling the Eurozone in #Quad3 (growth slowing as inflation accelerates)  and #Quad4 (growth slowing as inflation decelerates) in Q1 and Q2 of this year [third chart below].  We expect the Bank’s staff revisions to its GDP and CPI projections to head lower in its March meeting. 

 

What’s our policy outlook?  We expect there will be increased pressure that the ECB has to act by expanding the size of its QE program (to €75-95B/month), which could come as soon as the March meeting. We expect the ECB to continue to place significant weight on oil prices, Chinese data, and its staff projections, all of which we expect to deteriorate into March. 

 

EUR/USD Levels: The EUR/USD is in a bearish formation meaning it is broken across TRADE (3 weeks are less), TREND (3 weeks or more) and TAIL (3 years or less) durations.

 

Draghi Pushes Any “Action” to March! - 1. CPI

 

Draghi Pushes Any “Action” to March! - cftc

 

Draghi Pushes Any “Action” to March! - GIP

 

Draghi Pushes Any “Action” to March! - EURUSD 21


[UNLOCKED] Initial Jobless Claims | 26K From the Bottom

Takeaway: The 4-wk avg of SA claims is now at 285k after steadily creeping 26k higher from the 42-year low of 259k, struck in late October 2015.

Editor's Note: Below is a complimentary excerpt from a research note written today by our Financials team. If you would like more information about subscribing to our institutional research, please contact sales@hedgeye.com.

 

[UNLOCKED] Initial Jobless Claims | 26K From the Bottom - main street

 

Seasonally adjusted initial claims rose 10k on the week to 293k, while the 4-wk moving average rose 6.5k to 285k. That's the highest level for the 4-wk rolling average since April of last year. Broadly, the trend in claims has been 2 steps backward, 1 step forward since the low of 259k were recorded on October 24th last year. 

 

Yes, initial claims are still very low by historical standards at sub-300k, but given the emergent weakness in a host of economic data series (Industrial Production, Chicago PMI as examples), the prudent question to ask is not whether labor is still good or bad in absolute terms, but whether it's getting better or worse on the margin. In that context, the trend of rising initial unemployment insurance claims that is now 3 months old is definitely disconcerting.

 

As a reminder, we are coming up on the 23rd month of a sub-330k claims environment. The last three cylces saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. The cycle is converging with the end of its historical timeline.

 

The Data

Prior to revision, initial jobless claims rose 9k to 293k from 284k WoW, as the prior week's number was revised down by -1k to 283k.

 

The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.5k WoW to 285k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%

 

[UNLOCKED] Initial Jobless Claims | 26K From the Bottom - Claims2 normal  3

 

[UNLOCKED] Initial Jobless Claims | 26K From the Bottom - Claims4 normal  3


Initial Claims | 26K From the Bottom

Takeaway: The 4-wk avg of SA claims is now at 285k after steadily creeping 26k higher from the 42-year low of 259k, struck in late October 2015.

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

Initial Claims | 26K From the Bottom - Claims1 normal  1

 

Seasonally adjusted initial claims rose 10k on the week to 293k, while the 4-wk moving average rose 6.5k to 285k. That's the highest level for the 4-wk rolling average since April of last year. Broadly, the trend in claims has been 2 steps backward, 1 step forward since the low of 259k were recorded on October 24th last year. 

 

Yes, initial claims are still very low by historical standards at sub-300k, but given the emergent weakness in a host of economic data series (Industrial Production, Chicago PMI as examples), the prudent question to ask is not whether labor is still good or bad in absolute terms, but whether it's getting better or worse on the margin. In that context, the trend of rising initial unemployment insurance claims that is now 3 months old is definitely disconcerting.

 

As a reminder, we are coming up on the 23rd month of a sub-330k claims environment. The last three cylces saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. The cycle is converging with the end of its historical timeline.

 

Meanwhile, energy states continue to feel the effects of falling commodity prices.  As we show in the 3 charts below, the labor market decoupling between energy states and non-energy states continues

 

Initial Claims | 26K From the Bottom - Claims17 normal

 

Initial Claims | 26K From the Bottom - Claims20 normal

 

Initial Claims | 26K From the Bottom - Claims18 normal  2

 

The Data

Prior to revision, initial jobless claims rose 9k to 293k from 284k WoW, as the prior week's number was revised down by -1k to 283k.

 

The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.5k WoW to 285k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%

 

Initial Claims | 26K From the Bottom - Claims2 normal  3

 

Initial Claims | 26K From the Bottom - Claims3 normal  3

 

Initial Claims | 26K From the Bottom - Claims4 normal  3

 

Initial Claims | 26K From the Bottom - Claims5 normal  3

 

Initial Claims | 26K From the Bottom - Claims6 normal  3

 

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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Rising Recession And Deflation Risk: How To Play It

Takeaway: It’s getting uglier -- faster -- as consensus grapples with #Deflation and #Recession risks.

Rising Recession And Deflation Risk: How To Play It - bloomberg tril

 

Here's the latest from Bloomberg last night:

 

"At least 40 stock markets around the world with a total value of $27 trillion are in bear territory, as investors witness the worst start to a year on record."

 

No worries. Just buy the dip, right? Oh wait, that was Old Wall's pitch three weeks ago. Now that equities have plunged -9% year-to-date, today, the mantra is "sell everything."

 

That's great.

 

 

To be clear, the Hedgeye Macro team got this right before the selloff. And no, we're not getting bullish. Not yet anyway. We're still waiting for the market to fully price in our U.S. #Recession call.

 

#Patience...

 

watch this video for more on our recession call. 

 

Upon further reflection, our proprietary asset allocation model has been largely devoid of U.S. equities and Emerging market exposure for some time. Critically, we warned subscribers to bail on U.S. equities before the July/August crash when market fundamentals were breaking down.

 

Macro markets aren't looking up. Going forward, investors should be wary of the Fed rate hike ramifications. Remember, Yellen & Co. are implicitly tightening into a U.S. economic slowdown.

 

And that's perpetuating massive market volatility, as Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning:

 

"In prior US economic slowdowns, the Fed would A) devalue the Dollar and B) try to smash equity market volatility but that's impossible to do when tightening into a slowdown. This perpetuates the liquidity trap and with the VIX's current risk range 22-31 that’s why equity bulls are selling every bounce – they need to take down exposure to being wrong."

 

In other words, the Fed is trying to arrest economic gravity by calling #Deflation and the preponderance of #GrowthSlowing data "transitory" while the macro market clearly disagrees.

 

A prime example? Take a look at Financials. Here's more analysis from McCullough:

 

"On the margin we said the US Financials (XLF) were one of the best non-consensus shorts in 2016 as consensus was long them on the “rate hike." Well, now the 10yr is at 1.98% and the XLF led losers again yesterday -2% to -11.9% YTD. It won’t be long before consensus is begging for no more hikes, and then a rate cut."

 

Rising Recession And Deflation Risk: How To Play It - xlf crash

 

This slow moving train wreck is bound to get more interesting.


8 Cartoons and Videos Distilling Our Contrarian Macro Calls

Takeaway: It pays to listen to Hedgeye.

Here's a quick look at where we've been and where we're going.  As you can see, our contrarian macro team continues to make some pretty epic (and accurate) calls.

 

1. July's stock market top? We called it. You know what happened after that.

8 Cartoons and Videos Distilling Our Contrarian Macro Calls - The market is going to rip cartoon 10.06.2015 large

 

2.  Right now we're warning about the increasing likelihood of a full-blown U.S. recession this year.

 

3. We also made the call on commodity-price #Deflation about 18 months ago... well before it was ravaging investor portfolios.

 

4. Our #SlowerForLonger (growth) call still holds true, even though the Fed went ahead and raised rates.

8 Cartoons and Videos Distilling Our Contrarian Macro Calls - Growth cartoon 06.03.2015 large  1

 

5. And, while equities have fallen (which we warned about), our favorite position, the Long Bond (TLT), is outperforming. TLT up over 5% YTD versus down -11.6% for the Russell 2000 and -8.5% for the S&P 500.

8 Cartoons and Videos Distilling Our Contrarian Macro Calls - Super TLT 10.1.14 large

 

6. We've also been questioning the Fed's nonsensical rate hike in the face of an economic slowdown. 

 

7. Then there's China... still having serious issues telling the truth.

 

8. But have no fear, Super Mario Draghi is here! 

 


Initial Claims | Twenty Six Thousand From the Bottom

Takeaway: The 4-wk avg of SA claims is now at 285k after steadily creeping 26k higher from the 42-year low of 259k, struck in late October 2015.

Initial Claims | Twenty Six Thousand From the Bottom - Claims1

 

Seasonally adjusted initial claims rose 10k on the week to 293k, while the 4-wk moving average rose 6.5k to 285k. That's the highest level for the 4-wk rolling average since April of last year. Broadly, the trend in claims has been 2 steps backward, 1 step forward since the low of 259k were recorded on October 24th last year. 

 

Yes, initial claims are still very low by historical standards at sub-300k, but given the emergent weakness in a host of economic data series (Industrial Production, Chicago PMI as examples), the prudent question to ask is not whether labor is still good or bad in absolute terms, but whether it's getting better or worse on the margin. In that context, the trend of rising initial unemployment insurance claims that is now 3 months old is definitely disconcerting.

 

As a reminder, we are coming up on the 23rd month of a sub-330k claims environment. The last three cylces saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. The cycle is converging with the end of its historical timeline.

 

Meanwhile, energy states continue to feel the effects of falling commodity prices.  As we show in the 3 charts below, the labor market decoupling between energy states and non-energy states continues.

 

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims17

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims20

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims18

The Data

Prior to revision, initial jobless claims rose 9k to 293k from 284k WoW, as the prior week's number was revised down by -1k to 283k.

 

The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.5k WoW to 285k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims2

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims3

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims4

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims5

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims6

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims8

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims9

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims11

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims19

Yield Spreads

The 2-10 spread fell -3 basis points WoW to 115 bps. 1Q16TD, the 2-10 spread is averaging 120 bps, which is lower by -17 bps relative to 4Q15.

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims15

 

Initial Claims | Twenty Six Thousand From the Bottom - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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