Fed Watch: Next Rate Hike In April 2018???

Editor's Note: In an institutional research note, entitled "Reflation Reversal Risk Part II," Hedgeye Senior Macro analyst Darius Dale shows in granular detail how investors have priced-in a shockingly dovish Fed.


In other words, a look at the Fed Funds futures curve suggests "the next rate hike isn't being fully priced into the curve until April of 2018!" Below is an excerpt and chart from that note. (To access our institutional research email


Fed Watch: Next Rate Hike In April 2018??? - Fed cartoon 06.17.2015 dove


"... That in conjunction with a dramatically compressed Fed Funds futures curve (2nd chart below) leads us to believe the Fed’s dovish pivot has been largely priced into the most affected markets and it’s likely that nothing shy of outright monetary easing will compress the forward rates expectations any further. Specifically, the next rate hike isn't being fully priced into the curve until April of 2018 (out from October 2016 at the start of the year)!”


Fed Watch: Next Rate Hike In April 2018??? - Implied Yields on Select Fed Funds Futures Contracts

Click image to enlarge 

Daily Market Data Dump: Thursday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Thursday - equity markets 5 12


Daily Market Data Dump: Thursday - sector performance 5 12


Daily Market Data Dump: Thursday - volume 5 12


Daily Market Data Dump: Thursday - rates and spreads 5 12

CHART OF THE DAY: A Sneak Peek At Our Big Macro Themes Calls

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... Not that we like to #timestamp and hold ourselves to account on our big macro themes calls or anything, but in our Macro Themes Deck (see Chart of The Day) we make our best ideas, across durations, very clear. Here are our Best TREND Shorts:

  1. Financials (XLF)
  2. Retail (XRT)
  3. Russell 2000 (IWM)
  4. SP500 (SPY)
  5. Spain (EWP)"


CHART OF THE DAY: A Sneak Peek At Our Big Macro Themes Calls - 05.12.16 EL Chart

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Downward GDP Dog

“We have what it takes to take what you have.”

-Suggested Federal Reserve Motto


Recently promoted to Senior Hedgeye Partner, Kevin Kaiser (MLP analyst who called the Linn Energy bankruptcy which was filed last night), and I spoke at one of the world’s largest investment bank’s High Net Worth division’s dinner last night in NYC…


So I’m running a little late this morning. But I do want to thank everyone who has supported us since starting the firm in 2008. Our audiences continue to grow. And, instead of getting complacent, we need to work harder than we ever have to earn your respect.


While I do not like to make a habit of being late, fortuitously that is working in the favor of our #ConsumerSlowing call this morning as one of our favorite non-MLP-ponzi shorts, Kohl’s (KSS), is imploding. There’s always a bear market somewhere.


Downward GDP Dog - weak consumer cartoon 10.16.20141


Back to the Global Macro Grind


While it should surprise no one who has been on the right side of the US economic, profit, and credit cycle call that the #LateCycle Sectors of the US Economy (Financials, Consumer Discretionary, Tech, Healthcare) are the biggest dogs for the YTD, the pace of the decline in the US Retail (XRT) sub-sector of consumer has caught many off-side this week.


Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:


  1. US Employment Growth (NFP) was putting in a cycle peak
  2. US Consumer Confidence was putting in a cycle peak
  3. US Consumption Growth was putting in a cycle peak


Peak. Peak. #Peak!


And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle.


Not to pick on Kohl’s (KSS), but now that LINE is a bagel, I have to pick on something with market cap. KSS missed the top-line (same store sales were DOWN -4% year-over-year) and EPS came in at $0.31 vs. an Old Wall “expectation” of $0.37/share.


Ah, but “it’s cheap.” Yep. Getting cheaper. And no they can’t turn themselves into a “REIT.”


What happened?


  1. Was it fantastic East Coast weather that kept people from buying Spring inventory?
  2. Was it the competition “taking share” when Macy’s (M) and Gap (GPS) comped down -6-7%?
  3. Or was it that “Ex-Energy”, rising gas prices didn’t stimulate the consumer?


I know Ed, it’s getting real tough to follow the narrative drift that “falling gas prices” were going to be a US consumption panacea in the 2H of 2015… and now rising gas prices are going to keep the stock market up.


Not that we like to #timestamp and hold ourselves to account on our big macro themes calls or anything, but in our Macro Themes Deck (see Chart of The Day) we make our best ideas, across durations, very clear. Here are our Best TREND Shorts:


  1. Financials (XLF)
  2. Retail (XRT)
  3. Russell 2000 (IWM)
  4. SP500 (SPY)
  5. Spain (EWP)


You won’t hear this from many guys/gals who were trying to push these US Retailers as “value” and/or “real-estate plays”, but reality is that US Retail (XRT) is on the precipice of #crash mode at -18.4% since we went bearish on Consumer and SPY in July of 2015.


Nope. Instead, I’ll hear a lot of whining. But why? Why is it so hard for everyone at SALT and SOHN to just belly up to the bar and short “cheap”? Mr. Market is telling you these stocks aren’t “cheap”, if you have the analysts who can price the stocks on the right #ConsumerSlowing Cycle numbers.


I spent a whole day in NYC yesterday hearing about why Utilities (XLU) are “too expensive.” That’s code for “I missed it and I’m not long it.” But why? Why is it so hard for so many smart people to understand that expensive Low Beta Slow Growth exposures get even more “expensive” during the #GrowthSlowing surprise part of the cycle?


Does consensus realize how #GrowthSlowing => Down Dollar => Up Oil => Down Consumer flows to our Street low US GDP forecast?


It puts downward dog bias to our forecast as there’s currently an upward bias to what is called the GDP Deflator. In Q1, the US government got away with using 0.7% as the Deflator (you subtract that from nominal GDP to get Real GDP).


The Fed’s own preferred calculation of inflation = +1.6%. If the BEA used that in the official calculation, Q1 GDP wouldn’t have been as negative as Kohl’s or Costco’s traffic, but it would have been negative. And #Recession would be knocking on The Big O’s door.


Like any other tax, devaluing the purchasing power of The People (US Dollars) is an obvious tax on consumption. The un-elected Fed and their Old Wall cheerleaders have whatever it takes to take away whatever savings consumers have left.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.79%

SPX 2040-2088
RUT 1096-1141
USD 92.52-94.99
YEN 105.39-109.33
Oil (WTI) 42.59-46.93

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Downward GDP Dog - 05.12.16 EL Chart

Devalued Dollar

Client Talking Points


Reiterating a good spot to own what consensus macro funds do not and that’s Yen in the 109-110 range vs. USD – short Japanese Equities on the other side of that as they remain in crash mode (-20% since July) for good fundamental reason.


Oil ramps back up to the top-end of our immediate-term risk range = $42.59-46.93/barrel, but the “reflation” beta associated with that appears to be losing its appeal – don’t confuse reflation with real GDP growth (via a higher GDP Deflator it’s actually a downward pressure on our Street low Q2 GDP forecast).


Not surprisingly, the U.S. Consumer gets that they get the bill when U.S. Growth Slows (Down Dollar = Tax on Real Consumption) and now the U.S. Retail Sector (XRT) which has been a Best Idea short in our Macro Themes since Q3 of 2015 is moving toward #crash mode at -18.3% since July 2015.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:

  • QUAD3: Growth Slowing, Inflation Accelerating
  • QUAD4: Growth Slowing, Inflation Decelerating


The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back.


McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.


The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.


McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.


#GrowthSlowing remains our call here in Q2. How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?


We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."


Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.

Three for the Road


A Brief Update On Earnings Season & Sector Performance… via @hedgeye



In the dust of defeat as well as the laurels of victory there is a glory to be found if one has done his best.

Eric Liddell


Together, the 25 best-paid hedge fund managers took home $13 billion in 2015, 10% more than the previous year.

The Macro Show with Keith McCullough Replay | May 12, 2016

CLICK HERE to access the associated slides.


 An audio-only replay is available here.

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