In this excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses the recent reflation rally and provides critical context about why we remain bearish.
Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email email@example.com.
We never said the Democratic primary and corresponding debates were going to be a picnic in the park, but we never thought it would get this ugly. From opening salvos on qualifications/judgement to be president, Wall St. banks and the minimum wage to the Iraqi war, guns and Israel, Hillary Clinton and Bernie Sanders came out swinging and the punches continued throughout night.
On debate points, the edge may go to Sanders, but he was unable to land the knockout blow he desperately needs to overtake her lead in the delegate race - and the trajectory of the race continues in her favor only to be cemented by a win in NY next week. Clinton and Sanders clearly don't like each other and their contest hasn't reached the level of vitriol that we've seen on the Republican side - but the recent downturn in tenor may make unity harder to attain in Philly this summer.
Senator Marco Rubio won 172 bound delegates before suspending his campaign in March, but with the growing possibility of an open convention, he's making to bid to hold onto them for at least the first ballot, in an attempt to go to Cleveland with some leverage in tow.
It appears most of these delegates will be bound to him, but at least 34 are up for grabs - setting the stage for another behind-the-scenes battle for them. Will Donald Trump be ready this time around?
The week concludes with a made-up data dump out of everyone’s favorite communist economy. Chinese GDP growth allegedly ticked down -10bps to 6.7% YoY in Q1 and the quarter allegedly ended on a positive note with Retail Sales, Industrial Production, Fixed Assets Investment, Money Supply and Total Social Financing growth all accelerating sequentially in March. Here's a brief summary:
- March industrial production in China was +6.8%, which was better than consensus and a sequential increase from February.
- March retail sales were also better than expected at +10.7% year-over-year.
- The truly blow out number was on government spending. For the month, fiscal spending was up 20.1% year-over-year!
While we’ve been right on our call for both the Chinese economy and Chinese yuan to avoid falling off a cliff over the intermediate-to-long term, a lot of the reprieve in Chinese capital outflows and slowing growth on the mainland has been perpetuated by a reversal of the trend of depreciation in the PBoC’s yuan fixing.
But now that the U.S. dollar appears to making a series of higher-lows vs. peer currencies, we expect a meaningful increase in pressure on the CNY and CNH from here. That should propagate another bout of global deflation fears over the next 3-6 months.
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Takeaway: While oil prices bounce back and forth on oil production "freeze" talks, we think the dollar will strengthen pushing Oil prices lower.
Since the February lows, oil has rallied massively. Why? Look at the U.S. dollar. The CRB index of commodities has a 30-day inverse correlation of -0.88 vs. the US Dollar.
So where do we go from here?
Our Macro team elaborates on this point in a note sent to subscribers earlier this morning:
"Whether it’s output cut rumors into this weekend’s meeting or declining U.S. production, the “bottom is in” headlines are at the top of commodities feeds from every major news source with WTI +40% in the last 3 months.
However, looking at contract positioning shorts, a crowded consensus short positioning has been washed out (crude, nat. gas, gold, silver positioning all registering z-scores >1x on a TTM basis) with money betting on a continued decline in the U.S. dollar.
A supply side floor argument is a fundamental story, but not a catalyst, and we would reiterate that the credit risk priced into commodity leveraged fixed income is considered all but gone in market-price terms."
In other words, look for dollar strength pushing crude prices lower.
While we're at it, a quick note on commodity-leveraged credit risk...
On The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale points out that U.S. high-yield bond issuance is down -53% year-over-year in 2016.
Yikes! Certainly not a vote of confidence.
Meanwhile, as Hedgeye Macro analyst Ben Ryan pointed out in "The Unintended Consequences Of ZIRP On Commodities" earlier this year:
"Using a sample of 34 different producers in 4 different sub-sectors, commodity producer debt as a % of corporate credit outstanding has multiplied ~2.5x in 10 years. This group’s aggregate debt level is up ~5x in 10 years. The chart below shows the jump in commodity producer debt as a share of aggregate corporate debt levels."
The critical question to ask yourself... How much longer can it last?
Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.
"... The notable “positive” economic news that came out overnight was that Chinese growth was inline at +6.7% year-over-year. This is a sequential slowdown from the 4th quarter of 2015, which grew at +6.8% y-o-y. And as we show in the Chart of the Day, this continues the ongoing trend of slowing growth in China and is the slowest quarterly growth rate in seven years."
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