"At this point, it is difficult to judge the likely implications of this volatility," said Fed Vice Chairman Stanley Fischer today. No it's not. Our Macro team has been calling U.S. #GrowthSlowing for a year and a half now.
Takeaway: There is an increasing likelihood the U.S. slides into a recession in 2016.
So... the Atlanta Fed just put out their first estimate for Q1 2016 GDP. Their call? 1.2%. As you can see below, we don't agree with that.
Let's just state for the record here that Hedgeye's Macro team has nailed the last five GDP reports.
The Atlanta Fed? Well ... not so much. In October, it was suggesting Q4 2015 GDP would be almost 3%. That was ratcheted way back. Its final estimate was 1.0% versus the advanced estimate of 0.7%.
To be fair, the Atlanta Fed has done a better job than the supposed "blue chip" consensus forecasters on Wall Street. That's the truth...
Still, the Fed is clearly missing something. Fed Vice Chairman Stanley Fischer said today at the Council on Foreign Relations:
“At this point, it is difficult to judge the likely implications of this [financial market] volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States."
It's not difficult actually. We have a lot of evidence that suggests to us that the U.S. economy is headed for a recession in Q1 or Q2 of 2016. In fact, we've got a 73-slide institutional Macro deck on it (click here, here and here for a taste).
No matter. We'll stick with our process that's nailed U.S. #GrowthSlowing for the past year and a half.
Stick with us. We'll keep you a step ahead of consensus.
Takeaway: Last Friday’s month-end markup and Japanese central-market-planning was day-trading fun. Back to reality.
"After the best month in Hedgeye history, we're off to a nice start in February."
-Hedgeye CEO Keith McCullough this morning
Most Wall Street firms can't say they called the bubble high in U.S. stocks back in July. Nor can they say that they started sounding the alarm bells *again* after the modest rebound from August lows.
Despite last week's month-end "rally," stocks have been hammered. The S&P 500 was down -5.1% in January ... the worst start to the year since 2009. We've been outspokenly bearish. We haven't changed our views. And we continue to see about 10% downside.
Dissecting last week's rally, a short-sighted Wall Street cheered the Bank of Japan's announcement it would pursue a "negative interest rate policy." Okay. Here's analysis from McCullough in a note to subscribers this morning:
"... The Yen smashed on the “negative yield” panic by the Japanese on Friday. Good for a 2-day Nikkei lift to lower-highs, but what's next with the Nikkei -7% YTD? All Japanese, European, and Chinese FX panic means is more #Deflation, in Dollars."
The BOJ's manic policy decision is rippling through global bond markets...
"... Ten-year yields around the world crushed by Japan doing more of what hasn’t worked for decades – JGB 10yr = 0.04%! German 10yr = 0.31%, Swiss 10yr -0.31% – US Long Bond (TLT) remains our favorite Macro long idea alongside USD and Utilities (XLU)."
Q: How do you play Wall Street's end-of-month exuberance?
A: Fade the storytelling.
This remains the winning risk management strategy.
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During this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why rising inventories represent significant risk for companies, equity markets and the U.S. economy.
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Takeaway: Weakening US growth coupled with Japan going NIRP caused a 1-day bad news is good news rally. We'd fade that.
Last week was on course to look like the broader YTD trend (ground and pound), at least until Friday. Friday's rally suggests that we may have re-entered the bad news is good news twilight zone, as the zero handle (0.7%) on 4Q US GDP pushed out expectations for further Fed hikes in 2016 while the BOJ's annoncement of NIRP (negative interest rate policy) suggested that global central banks are collectively hitting the gas (or at least not tapping the brakes).
Call us skeptics, but we have zero interest in buying the dip here. Numerous economic indicators are flashing recessionary signals, GDP is trajecting towards zero and the Fed is still debating whether to raise rates.
Our heatmap below is still flashing mostly red across the short and long term while mixed on intermediate-term readings.
We have added the CDOR-OIS spread to the bottom of our monitor. It is the Canadian equivalent of the Euribor-OIS spread and measures the difference between the Canadian interbank lending rate and overnight indexed swaps. In other words, it measures counterparty risk in the Canadian banking system. The measure hitting a post-crisis high of 50 bps on January 15 prompted us to start tracking it. The spread has since tightened somewhat but rose week over week to 40 bps from 38 bps.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 13 improved / 4 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 5 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS – Swaps tightened for 10 out of 27 domestic financial institutions. With 4Q15 U.S. GDP coming in lower than expectations at 0.7%, the median financial swap widened from 75 to 77. At the bottom of our U.S. CDS table below, we have added indices on investment grade and high yield CDS, which tightened last week by -2 bps to 102 and by -17 bps to 508, respectively.
Tightened the most WoW: GS, WFC, MS
Widened the most WoW: BAC, MMC, AIG
Widened the least/ tightened the most WoW: CB, AON, GNW
Widened the most MoM: AIG, AXP, BAC
2. European Financial CDS – Swaps mostly widened in Europe last week. Portugal's Banco Espirito Santo was an outlier with CDS widening by 174 bps to 1111. Meanwhile Russia's Sberbank CDS tightened by -47 bps to 398 as oil prices rose.
3. Asian Financial CDS – Swaps were mixed among Asian financials last week. The State Bank of India's CDS stood out with a -11 bps tightening to 174.
4. Sovereign CDS – Sovereign swaps were mixed last week. Spanish sovereign swaps stood out, tightening by -8 bps to 92.
5. Emerging Market Sovereign CDS – Commodity dependent emerging markets saw swaps tighten with oil and commodity prices rising over last week. Given the rise in oil, Russian swaps tightened the most, by -15 bps to 333.
6. High Yield (YTM) Monitor – High Yield rates fell 25 bps last week, ending the week at 8.73% versus 8.98% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1796.
8. TED Spread Monitor – The TED spread fell 2 basis points last week, ending the week at 30 bps this week versus last week’s print of 32 bps.
9. CRB Commodity Price Index – The CRB index rose 6.7%, ending the week at 167 versus 156 the prior week. As compared with the prior month, commodity prices have decreased -5.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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 widened by 1 bps to 14 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 4 basis points last week, ending the week at 1.99% versus last week’s print of 2.03%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China rose 0.2% last week, or 4 yuan/ton, to 2029 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 115 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 2 bps to 40 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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