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Who Do You Believe? Consensus GDP Estimates or Hedgeye?

Takeaway: Wall Street consensus has been consistently out to lunch on U.S. growth slowing, as our bearish expectations continue to play out.

Who Do You Believe? Consensus GDP Estimates or Hedgeye? - growth  cartoon 04.05.2016

 

The Hedgeye Macro team has been predicting dour U.S. economic growth for over a year. Our contrarian economic call has been pretty close to spot on. Meanwhile, this #GrowthSlowing reality has consistently confounded Wall Street consensus.

 

As you can see in the chart below, Wall Street economists were predicting almost 3% growth for Q1 2016 last April. 

 

To be clear, Old Wall consensus was forced to ratchet back its inflated estimate to 2.5% in February 2016 ... all the way down to 1.1% most recently. Of course, the initial Q1 GDP reading today came in at 0.5%. That surprised even us to the downside, as we have been predicting 1%. 

 

Who Do You Believe? Consensus GDP Estimates or Hedgeye? - Q1 Wall Street GDP

 

Will this slowdown persist?

 

Wall Street doesn't think so. The consensus estimate for Q2 2016 is a (drum roll please)...

2.3% 

 

Meanwhile, here at Hedgeye we're predicting 0.3%

 

Who do you believe?

 

Watch Hedgeye Senior Macro analyst Darius Dale explain why we're so bearish in the video below:

 


We Called U.S. Growth Slowdown (And Believe The Worst Is Yet To Come)

Takeaway: We warned our subscribers about #GrowthSlowing well before the rest of the street. We think it gets worse from here.

0.5%

 

We Called U.S. Growth Slowdown (And Believe The Worst Is Yet To Come) - GDP cartoon 04.26.2016

 

You've heard and read all the Wall Street hand-wringing and Fed jawboning that U.S. growth is just fine...nothing to worry about... maybe even accelerating?!... well it's not, and we've been consistently warning subscribers otherwise. Today's GDP report coming in at 0.5% for Q1 2016 confirms our Macro team's call. 

 

Hang on, though. We're sticking with it. In fact, we believe the most difficult quarters for U.S. growth are yet to come. For more insight, check out the three videos below featuring Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale.  

 

1. U.S. Economy Enters Most Difficult Part of Cycle (4/20/16)

 

 

In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses how the U.S. economy has entered the toughest part of the cycle and why our growth estimate remains so bearish.

 

2. Barron’s: ‘3% Growth, No Recession’ … LOL (2/22/16)

 

 

In this animated excerpt of The Macro Show, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss why Barron’s is wrong on U.S. economic growth and why Q1 2016 GDP report will have a “0” in front of it.

 

3. The U.S. Economic Outlook In 2016? Not Good (12/28/15)

 

 

In this brief excerpt from The Macro Show last week, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss U.S. third quarter GDP and why our non-consensus 2016 growth outlook is looking grim.


ICI Fund Flow Survey | Not The Longest But The Fastest

Takeaway: Domestic equity mutual funds continue on the sharpest draw down in history averaging losses of $-3.7 billion a week.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

All stock products lost funds in the 5-day period ending April 20th, totaling -$4.0 billion in withdrawals from equity mutual funds, and -$1.9 billion in redemptions from equity ETFs. The following table puts historical context around the current losing streak within domestic equity funds which is now the second longest at 60 weeks and continues to be the fastest on record with investors pulling -$3.7 billion per week.

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI20

 

In the most recent 5-day period ending April 20th, total equity mutual funds put up net outflows of -$4.0 billion, trailing the year-to-date weekly average outflow of -$1.6 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.3 billion, outpacing the year-to-date weekly average inflow of +$1.8 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$1.9 billion, trailing the year-to-date weekly average outflow of -$1.0 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.5 billion, trailing the year-to-date weekly average inflow of +$1.8 billion but outpacing the 2015 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI1

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI2

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI3

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI4

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI5

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI12

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI13

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI14

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI15

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI7

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the industrials XLI ETF gained +$399 million or +6% last week.

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI17

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.7 billion spread for the week (-$5.9 billion of total equity outflow net of the +$5.7 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$977 million (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Not The Longest But The Fastest - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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CHART OF THE DAY: A Review Of Crowded 'Dovish Fed' Positioning

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Senior Macro analyst Darius Dale. Click here to learn more. 

 

"... We strongly believe that investor sentiment is overwhelmingly skewed towards a dovish Fed and, as a result, positioning has become rather crowded on the bearish side of the USD and on the bullish side of reflation, in relative terms. Said differently, in one way or another, most investors have already positioned their portfolios for a dovish Fed.

 

So who is the marginal buyer of risk assets from here?" 

 

CHART OF THE DAY: A Review Of Crowded 'Dovish Fed' Positioning - 4 28 Chart of the Day


Positioning and Sentiment

“Long before I came into the markets I knew that a lot of conventional finance theory didn’t work, but it took me a while to realize that markets didn’t necessarily react in the most rational way to a piece of macro news. What’s more important is positioning and sentiment.”

-Dr. Sushil Wadhwani

 

The aforementioned quite is sourced from a 2006 interview between Dr. Wadhwani and Stephen Drobny, author of one of my favorite books: Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets.

 

The book itself – which I’ve read cover-to-cover three times and review frequently – is a series of interviews between Drobny and a diverse array of macro-focused investors, including Dr. Wadhwani, who himself is a former DoR, head of systems trading and partner at the Tudor Group, as well as one of the four initial “outside” members added to the policymaking board of the Bank of England in 1999. He is currently head of Wadhwani Asset Management and was there at the time of the aforementioned interview.

 

The reason I’ve chosen to highlight Dr. Wadhwani’s interview this morning is because of his unique perspective on the market impact of central bank decisions. Having spent a fair amount of time on both sides of the fence, he is in a distinguished position to opine and his thoughts on the interplay between financial markets and central banking are equally – if not more – relevant today, some 10 years later.

 

In the interview, he goes on to make the following very important point:

 

“Within a central bank you realize that the effect of individual pieces of information is often much smaller than the markets think, especially when you get a big outlier which causes a market reaction.”

 

Positioning and Sentiment - central banker cartoon 02.02.2016

 

Back to the Global Macro Grind

 

In yesterday’s FOMC statement the Fed finally acknowledged the ongoing slowdown in domestic economic growth, as well as the fact that said deceleration is now being led lower by the continued deterioration across #LateCycle sectors such as services and consumer spending.

 

Meanwhile, the same statement omitted reference to downside risks stemming from global economic and financial market developments.

 

Did the Fed’s pivot from being dovish on the global economy and hawkish on the domestic economy to more sanguine on the former and notably concerned about that latter cause a market reaction?

 

You bet it did:

 

  • The 10Y Treasury Bond Yield dropped from 1.91% at 2:00pm (when the statement was released) to 1.85% by the 4:00pm equity market close. All in, the 10Y declined -8bps on the day.
  • The S&P 500 Index rallied 15 points from 2085 at 2:00pm to 2100 by 3:45pm and ultimately closed at 2095. All in, the SPX appreciated +0.2% on the day.
  • Brent Crude Oil rallied from ~$46.50 per barrel at 2:00pm to $47.18 by the 4:00pm equity market close. That delta does not include the rally from $45.63 at 10:45am to ~$46.50 by 2:00pm. All in, crude oil appreciated +3.1% on the day.

 

Clearly bonds, stocks and commodities continue to benefit from the Fed’s ongoing pivot from being explicitly hawkish (in December and January) to rhetorically dovish (in March and April). Is this the right interpretation on a go-forward basis, however?

 

No. At least we do not think it is. Consider the following:

 

  • The EUR/USD appreciated from a pre-statement trough of 1.1272 to a post-statement high of 1.1362 before ultimately settling at 1.1312 by the 4:00pm equity market close – a mere +13bps higher on the day.
  • The USD/JPY declined from a pre-statement peak of 111.75 to a post-statement trough of 111.07 before ultimately settling at 111.56 by the 4:00pm equity market close – which means the USD actually finished +21bps higher vs. the JPY on the day.

 

In Bayes factor speak, this new information would seem to suggest the Fed is losing its ability to burn the USD further with dovish rhetoric alone. This is a risk we discussed in great detail in our 4/22 note titled, “Reflation Reversal Risk”. Moreover, we continue to see elevated risk that the U.S. follows Europe and Japan in the ongoing breakdown of the central planning #BeliefSystem.

 

Speaking of #BeliefSystem breakdown, how about the -5.2% intraday reversal in Japan’s Nikkei 225 Index overnight following the BoJ’s disappointing decision to leave its monetary policy unchanged? This came alongside a four big-figure plunge in the dollar-yen rate from 111.88 to this morning’s low of 107.92; the multi-year closing price low of 107.94 may be taken out as we progress through trading today. Inclusive of today’s wild price action, the Nikkei and JPY are now down -12.4% and up +11.2%, respectively, for the YTD.

 

That, in conjunction with economic growth slowing on a trending basis across every key category of high frequency economic data, reported inflation trending lower and long-term inflation expectations collapsing in Japan, as well as Japan’s ongoing corporate profit recession would seem to suggest that even if Kuroda did agree to allow the JPY to strengthen vs. the USD at the late-February G20 Summit, his patience with any such “Shanghai Accord” is wearing ridiculously thin after today’s reminder of the dire consequences of policy coordination. Expect him to pull an about-face and ease policy in a material manner at the BoJ’s June 15-16 meeting.

 

Oh and by the way, the same negative developments are occurring across both economic data and financial markets in the Eurozone (CHART #1, CHART #2). How thin has Draghi’s patience become with any such accord in light of these consequences? After all, monetary easing is effectively a zero-sum game whereby growth and inflation are either being imported or exported via relative currency fluctuations…

 

So what if the Fed can’t burn the USD any further from here? Simply put, we think that would be bad for risk assets. Consider the following trailing three-month cross-asset correlations vs. the U.S. Dollar Index (DXY):

 

  • S&P 500: -0.88
  • VIX: +0.82
  • MSCI Emerging Markets Index: -0.87
  • CNY/USD: -0.89

 

The latter market is very important to keep an eye on to the extent that China maintains its policy of keeping the yuan “basically stable versus a basket of peer currencies”. Specifically, higher-lows in the USD are likely to equate to lower-highs in the PBoC’s CNY/USD reference rate. The latter should reignite capital outflow pressures on the mainland, as well as a resurgence in bearish headline risk surrounding the Chinese economy.

 

Consider the following cross-asset correlations between the 1Y CNH (offshore yuan) non-deliverable forward spread versus the CNH spot price (a proxy for CNY tail risk) and the following reflation assets since the aforementioned spread troughed on January 18th:

 

  • Brent Crude Oil: +0.84
  • USD High Yield OAS: -0.83
  • S&P 500 Energy Index: +0.85
  • S&P 500 Industrials Index: +0.93
  • MSCI Emerging Markets Index: +0.91
  • JPMorgan EM FX Index: +0.91

 

Ipso facto: yuan down (from here) = reflation down (from here). That’s fairly straightforward.

 

Moving along, you may ask what gives us conviction that the Fed may lose its ability to fight off gravity with further U.S. dollar debasement. We offer the following three very simple research conclusions in support of this view:

 

  1. Contrary to general intuition, the USD tends to appreciate meaningfully in #Quad4 (CHART);
  2. The Fed has yet to surmount economic gravity with monetary easing as the economy traverses the depths of the cycle as we expect it to over the next 3-6 months (CHART); and
  3. The Fed is not going to opt for QE4 with the SPX in striking distance of ~2100 and five-year forward breakeven rates now a mere 7bps shy of where they were when the Fed hiked rates in December. Recall that the 5Y5Y had collapsed 39bps from December 16th to its February 19th low of 1.34% (CHART).

 

Regarding #3 specifically, it is our view that for the Fed to get even more dovish from here, we need to see another collapse in both growth and inflation expectations that weighs heavily upon asset prices.

 

We recognize that this is the most risky view to take because the Fed can do whatever it damn well pleases. It’s a board of unelected, unaccountable bureaucrats and, for all we know, President Obama gave Janet Yellen (a known Democrat) marching orders to keep the stock market inflated into the general election.

 

Who knows? Anything can happen. But fading what is already priced in is where the money will be made from here.

 

Re-engaging the quote of the day, we strongly believe that investor sentiment is overwhelmingly skewed towards a dovish Fed and, as a result, positioning has become rather crowded on the bearish side of the USD and on the bullish side of reflation, in relative terms. Said differently, in one way or another, most investors have already positioned their portfolios for a dovish Fed.

 

So who is the marginal buyer of risk assets from here? Those implicitly or explicitly long of both growth and reflation factor exposures risk overstaying their respective welcomes on a tired “dovish Fed” catalyst as fundamental data likely deteriorates at an accelerating pace over the next 3-6 months.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.90% (bearish)

SPX 2060-2104 (bearish)

EUR/USD 1.12-1.14 (neutral)
YEN 107.02-112.04 (bullish)

Nikkei 16101-17602 (bearish)

Oil (WTI) 40.98-45.84 (bearish)

Gold 1225--1265 (bullish)

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Director

 

Positioning and Sentiment - 4 28 Chart of the Day


The Macro Show with Darius Dale Replay | April 28, 2016

CLICK HERE to access the associated slides.

 

An audio-only replay of today's show is available here. 


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