“And, for your information, you Lorax, I’m figgering …. on biggering and Biggering and BIGGERING and BIGGERING.”
- The Once-ler, from The Lorax by Dr. Seuss
“Look”, said the Ease-ler, “There’s no cause for alarm
I bought just one bond. I am doing no harm
I’m being quite useful. This thing is called Easing.
An Easing’s a Fine-Something-The-1%-Finds-Pleasing.
It’s a Bill. It’s a Bond. It drives global flows.
But it has other uses. Yes, far beyond those.
It can boost inequality and the suppression of risk
Or financial repression and bear markets in VIX ….
… I meant no harm. I most truly did not
But it had to grow bigger. So bigger it got.
I biggered my balance sheet, I biggered my ZIRP
I biggered my QE, I biggered my NIRP.
I biggered the yield chase, I biggered the need
To bigger the #BeliefSystem on which it all feeds.”
I’m quite enjoying macro remixing this Dr. Seuss classic this morning but I’ll leave it there.
Indeed, while I switched out the nouns, I left the spirit of the Once-ler’s original message fully intact.
After all, it’s really only once(-ler) that one gets the chance to take yields from 20% to sub-zero – alongside peak demographics, peak growth in labor participation and peak leverage – in a 30 year run of consumption pull-forward’ing.
Then, my poor Bar-ba-loots, as the multi-decade policy to inflate reaches its terminal end:
economies start getting the crummies
because they have deflation, and no growth, in their tummies!
Back to the Global Macro Grind …
Q: The currency of a country with a balance-of-trade surplus and relative deflation should do what?
A: Appreciate.
That’s Fx 101 but the dynamics around it are part and parcel of the #BeliefSystem Central Bank’s helped cultivate and are now hostage to.
Policy makers can bend economic gravity only to the extent the investing populous believes policy prowess is enough to overcome the gravity embedded in the underlying fundamental drivers.
As the Chart of the Day below illustrates, with swap rates, inflation expectations and growth estimates falling, currencies appreciating and European and Asian equities still in crash mode off their respective highs in the face of the latest quantitative and qualitative easing announcements, investors are believing that conditions are as bad as policy makers suggest but are in increasing disbelief of their ability to do anything about it.
Moving on ….
Not too many people know this but I can #PredictThePresent.
That’s right, I can NowCast the Cycle. It’s both gift and curse. Let me Illustrate:
In about 45 minutes from now we will get a continuation of the Trend acceleration in inflation.
Core CPI inflation accelerated for a 5th consecutive month in February, making a new 4-year high at +2.3% YoY. With easier comps and the negative impacts of Strong-Dollar on core goods pricing slowly burning off, Headline CPI has shown a similar trajectory.
Core Inflation may be +2.4% or +2.2% on the actual print this morning, it doesn’t really matter for contextualizing the prevailing reality which = Inflation is Rising.
Pocket that positive slope on inflation for moment, we’ll come back to it.
Yesterday we got Retail Sales data to cap-off 1Q. It was conspicuously underwhelming.
While we knew the headline would be soft given the steep -5.6% MoM drop in unit auto sales (we get that figure at the beginning of the month) the balance of the sub-aggregates were similarly uninspiring.
Indeed, Retail Sales ex-Autos, ex-Autos & Gas and the “Control Group” all decelerated on both a year-over-year and 2Y average growth basis.
The Control Group (Retail Sales less Food, Auto’s, Gas & Building Materials), which feeds the GDP calculation, decelerated -60bps sequentially to +2.7% YoY. Moreover, growth on a quarter-over-quarter annualized basis – which comports with how GDP is calculated/reported - was only +1.9%.
Layer on the fact that Retail Sales are reported in nominal dollars (i.e. not adjusted for inflation) and that +1.9% deflates to something even less impressive in real terms.
Sure, Retail Sales only represents spending on Goods (~1/3 of total Household Spending) and Services consumption (~2/3 of total household spending) has captured a growing share of consumer spending in recent years but the two are strongly correlated and total consumption in Jan/Feb has matched the softness observed in Retail Sales.
So to put this week’s data in context, we have: Inflation Rising + Growth Slowing
I won’t say what that equals but it rhymes with “Magflation” …. Not a policy or equity multiple friendly environment if it persists.
Elsewhere in domestic data flow, we got inventory data for February yesterday which showed Business Inventories declining -0.1% sequentially with January revised to -0.1% (from +0.1%).
It was really a lose-lose setup.
In terms of GDP accounting, rising inventories adds to Investment so, superficially, it’s a positive for reported growth. The converse obviously holds as well.
On the other hand, inventories have been growing at a premium to sales across the supply chain for over a year now and, in the absence of accelerating demand, that cumulating inventory = lower future profitability for businesses as they have to carry/management that burgeoning supply and discount to move it.
Add the inventory drag on investment spending to the aforementioned growth and inflation realities and you get 1Q growth that is flirting with contraction …. And comps that only get tougher in 2Q.
I guess the larger takeaway here is this: Central Bank omnipotence and late-cycle equity markets can go out like Kobe.
60-point grand finale heroics are great but it doesn’t negate the fact that it is, indeed, the finale (and 20-years of greatness finished with a 17-win season).
To Trades, Trends and the wisdom to know the difference. #MambaOut
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.68-1.81%
SPX 2035-2087
VIX 13.01-19.25
USD 93.94-95.42
YEN 106.94-111.07
Oil (WTI) 38.56-44.03
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst
