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“The more you do QE, the more it works. It is like love.”

-Olivier Blanchard


As the former chief economist at the IMF was busy romantically lauding how the QE cup runneth over with increasing returns, the Japanese Yen was busy making a new 17-month high against the dollar. 


Draghi’s Bazooka?


Euro = +0.8% against the Dollar yesterday to +4.2% YTD


How about a fresh rate cut to new record lows in Norway?


Norwegian Krone = +1.6% against the Dollar


In the Big (Macro) Dance:


#12 Seed = Economic Gravity

#5 Seed = Central Bank Omnipotence


We’ve dubbed the diminishing-turned-negative returns to QE a breakdown in the central banking #BeliefSystem.


You can’t spell believe without a ‘lie’ in the middle.


Be-lie-ve - draghbo


Back to the Global Macro Grind …..


Let’s do a brief thought experiment.


First, let’s allow our analytical cup to runneth over with willful blindness for a moment and ignore:


  1. Past Peak: That the corporate profit, labor, income, consumption, confidence and credit cycles are all in their expansionary twilight.    
  2. Industrial production accelerated to the downside (-1.0% YoY) in Feb.
  3. HMI & Housing Starts: Builder Confidence held at a 9-month low in March and Housing Starts, despite sequential improvement, have been flat for 10-months. (& Spoiler: Existing Home Sales should be negative on Monday)
  4. Retail Sales: Headline retail sales were negative MoM for a second month in February
  5. Inventories: As the Chart of the Day below illustrates, inventories again grew at a premium to sales in the latest January data, sending inventory-to-sales ratios across the supply chain to new highs. Note: Unless companies are successfully foreshadowing accelerating demand, excess inventory = lower future profitability at the corporate level (discounting to move supply) and lower growth at the aggregate level (lower inventory build drags on Investment growth)


That’s not to go all scorched earth. I could certainly highlight some positive data (remember that balmy Thursday morning, 20 hours ago when everyone got levered long equities because the Philly Fed beat? … good times) …. it’s just to highlight the broader reality that we don’t have rising global central bank interventionism, $7T in negative yielding debt and an incrementally dovish Fed …. because everything is awesome and the global populous is drowning in a wave of escape velocity growth. 


Instead, let’s narrow the focus to policy’s dual mandate:

  1. Employment: The unemployment rate is 4.9%, labor force participation is showing some multi-month mojo and labor slack continues to diminish.
  2. Inflation: Core CPI Inflation accelerated for a 9th straight month, making a new 45-month high at +2.3% YoY in February. And while Shelter inflation (33% weighting in the Index) made a new high at +3.28% YoY and continues to backstop headline growth, Services ex-shelter accelerated to a 13-month high. Meanwhile, Core Goods (i.e. commodities less food & energy) inflation - which depends more on short-run inflation expectations, currency impacts and import prices – went positive (+0.1% YoY) for the first time in 3 years and will be broadly interpreted as strong dollar impacts burning off. Moreover, the pickup in core and ex-shelter price growth – and in Medical Care specifically (which carries a significantly higher weighting in the PCE price index than the CPI index), suggests inflation in the Fed’s preferred Core PCE inflation reading will continue its path higher.


Of course, not all inflation is created equal and excess inflation in key consumer cost centers (rent/housing & healthcare) steals share of wallet from discretionary consumption. 


But that underlying dynamic aside, if I told you that employment growth is past peak but still good and inflation (for the sake of our argument here) is non-transiently accelerating, what part of the cycle would you think we’re in?   


Indeed, inflation is the most lagging of indicators and cresting employment + rising inflation classically characterizes the last part of the cycle. 


With year-over-year GDP growth slowing in each of the last three quarters (and facing its hardest comp of the cycle in 2Q16), we are in the middle of cyclical deceleration. And if the Fed gets the inflation it’s looking for it will simply serve as further confirmation of our current late-cycle reality. 


As Keith highlighted yesterday: ↓ growth + ↑ Inflation ≠ Multiple Expansion … and the worst pro-cyclical allocations are made at the best of times.


Next week we’ll probably see Existing Home Sales decline, Home Prices decelerate and Durable Goods remain recessionary. We’ll also get the Services PMI for March which, recall, fell into contraction in February for the first time since the recession. 


Yesterday was kind of like a T-ball game. With rates down and financials outperforming and long bonds bid with high beta illiquidity leading, everyone got a trophy just for showing up.


Daily moves can be random walks but get the Trend/Cycle right and you’ll get your net wealth right. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.79-1.98%


Nikkei 168

VIX 14.08-20.81
USD 95.51-97.42
Oil (WTI) 34.59-41.52


Best of luck out there today, 


Christian B. Drake

U.S. Macro Analyst


Be-lie-ve - IS Ratio CoD

The Macro Show Replay | March 18, 2016

CLICK HERE to access the associated slides.

An audio-only replay is available here. 


Cartoon of the Day: Cuckoo Markets

Cartoon of the Day: Cuckoo Markets - Dovish Fed cartoon 03.17.2016


Markets remain at the mercy of a mercurial Fed.

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INSIGHT | Another Trump Victory (And Why California Could Decide GOP Nomination)

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.



INSIGHT | Another Trump Victory (And Why California Could Decide GOP Nomination) - trumplican


In an impeccably timed announcement ensuring any fallout was overshadowed by the SCOTUS press conference, Trump declared that he is going to speak at the AIPAC conference instead of appearing at the now-canceled Fox debate on Monday. This is another victory for Trump -- it denies his rivals and the media a chance to gang up on him and exploit his vulnerabilities -- while flexing new muscle as the frontrunner. At this point, the only thing that seems to have a chance of derailing Donald Trump is...Donald Trump. 



INSIGHT | Another Trump Victory (And Why California Could Decide GOP Nomination) - cruz picture


After crunching the Republican delegate numbers, we think the race may very well come down to CA. If Trump wins the Golden State, we think he will likely exceed the magic number of delegates he needs for the nomination. There has been scant polling in CA to date, but what we've seen shows a narrow Trump lead, with Cruz breathing down his neck. CA often votes too late to be a determining factor in the nomination, and as a solid blue state rarely receives presidential election love -- however, this year it is in a position to be a determining factor in whether there will be a contested Republican convention.



For months, the Democratic Senate Campaign Committee (DSCC) has been preparing for a Republican ticket with Trump or Ted Cruz on top. With Trump as the presumptive nominee, they're now putting their playbook in motion, tying vulnerable Republican Senators up for re-election to Trump's controversial policies and personality. Some strategists are predicting up to an eight percent drop across the polls for Republican Senators in the general election if Trump is on the ballot. Looking to capitalize on the 13 Senators who pledged to back the eventual nominee, the DSCC has dubbed them "reTRUMPlicans," faithful only to the "Party of Trump."

Q: Is This A Generational Buying Opportunity In Emerging Markets?

Takeaway: Emerging Market stocks are down -19% since we turned bearish. We still don't like them.

Q: Is This A Generational Buying Opportunity In Emerging Markets? - brazil

A: No.


With Emerging Markets (EEM) down -19% since we turned bearish in April 2013, Hedgeye Senior Macro Darius Dale presented a 105-page slide deck to institutional subscribers this week to update his thinking. (To read Dale's entire slide deck or additional Macro research ping sales@hedgeye.com.)


The takeaway?


"We see further downside at the primary asset class level, as well as elevated risk of material bankruptcy cycles in a number of key emerging market economies," Dales writes. 


Here are a couple key charts from the presentation (click images below to enlarge):


Our proprietary emerging market "Crisis Risk Index."

Q: Is This A Generational Buying Opportunity In Emerging Markets? - dale crisis index


... Our Crisis Risk Index versus Equity Market Performance.

Q: Is This A Generational Buying Opportunity In Emerging Markets? - dale bubbles



Initial Claims | Steady

Takeaway: This morning's initial jobless claims report showed no trend change from what we've been seeing YTD on the labor front.

Initial Claims | Steady - Hawkish cartoon 03.14.2016



In short, this morning's claims number appears consistent with YTD trends. In other words, the US Labor market has remained resilient in spite of myriad other signs of slowing. As labor has historically been coincident/lagging we continue to expect to see weakness in the non-services side of the economy bleed through to the economy at large. To date, however, we continue to wait, as we view the setup as still asymmetrically negative.


On the energy side of the house, conditions remain challenging as the basket of 8 energy states we track show an ongoing decoupling from the broader US.



Initial Claims | Steady - Claims12


Initial Claims | Steady - Claims13


Initial Claims | Steady - Claims14

The Data

Prior to revision, initial jobless claims rose 6k to 265k from 259k WoW, as the prior week's number was revised down by -1k to 258k.


The headline (unrevised) number shows claims were higher by 7k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.75k WoW to 268k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -11.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.4%


Initial Claims | Steady - Claims2


Initial Claims | Steady - Claims3


Initial Claims | Steady - Claims4


Initial Claims | Steady - Claims5


Initial Claims | Steady - Claims6


Initial Claims | Steady - Claims7


Initial Claims | Steady - Claims8


Initial Claims | Steady - Claims9


Initial Claims | Steady - Claims10


Initial Claims | Steady - Claims11


Initial Claims | Steady - Claims19

Yield Spreads

The 2-10 spread rose 6 basis points WoW to 105 bps. 1Q16TD, the 2-10 spread is averaging 109 bps, which is lower by -27 bps relative to 4Q15.


Initial Claims | Steady - Claims15


Initial Claims | Steady - Claims16



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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