“The more you do QE, the more it works. It is like love.”
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.
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.
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:
- Past Peak: That the corporate profit, labor, income, consumption, confidence and credit cycles are all in their expansionary twilight.
- Industrial production accelerated to the downside (-1.0% YoY) in Feb.
- 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)
- Retail Sales: Headline retail sales were negative MoM for a second month in February
- 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:
- Employment: The unemployment rate is 4.9%, labor force participation is showing some multi-month mojo and labor slack continues to diminish.
- 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%
Oil (WTI) 34.59-41.52
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst