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5 Charts: How Last Week's #JobsBomb Is Impacting Global Markets

Takeaway: Fed head Janet Yellen could crush markets this afternoon if she doesn't pivot back to dovish in her speech at 12:30pm.

5 Charts: How Last Week's #JobsBomb Is Impacting Global Markets - rate hike cartoon 11.17.2015

 

The latest macro market read through on Friday's #JobsBomb goes like this:

Dovish Fed = Down Dollar = Reflation Up

 

In short, imagine what would have happened to the reflation trade if the jobs report wasn’t a bomb…

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning: 

 

"They eviscerated the Dollar on the jobs bomb (and ISM Services slowing print of 52.9 for May) taking USD down -1.6% on the day (massive 1-day move) and ramping up everything that is inversely correlated to it (which, at this point, from Gold to Russian and Australian stocks, are a lot of things) – can they do this daily?"

 

 

To sum up the post #JobsBomb market reaction...

 

 

Take a look at the ramp in gold...

 

 

Meanwhile, in commodity-driven markets abroad...

 

Australian equities popped.

 

 

Australian equities are just one example of the many markets tethered to reflation that are up this morning. Similarly, Oil jumped another +1.1% on the latest thinking that Dovish Fed = Down Dollar. On that, Russian stocks are up +1.7%.

 

Over in Japan, central planners can't stop the bleeding.

 

In the past week, Down Dollar = Up Yen = You guessed it... Down Nikkei (it's still crashing).

 

 

Speaking of crashing... 

 

The same story rippling through Japan is handicapping Italian equities. (Down Dollar = Up Euro = Down FTSE MIB)

 

So where do we go from here?

 

For those of you keeping score, here's the past seven months of frenetic Fed pivots:

 

  1. HAWKISH (December) raising rates in front of a horrible Q1 slow-down (economic and profit cycle)
  2. DOVISH (March/April) trying to undo the hikes with rhetoric, devaluing Dollars to reflate asset prices
  3. HAWKISH (May) post the stock market bounce and Atlanta Fed GDP Tracker rising

 

Now the market is expecting the Fed to go dovish but what if Yellen & Co. don't deliver? A final note on Fed policy from Hedgeye CEO Keith McCullough in this morning's Early Look:

 

"For those of you who get the game we are in, the only thing that matters to macro markets right now is which way the Federal Reserve pivots from here. Post Friday’s Jobs Bomb, not going back to dovish during Yellen’s 12:30PM speech could crush markets."

 

In other words, heads up. It could get ugly.


Daily Market Data Dump: Monday

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

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 6 6

 

Daily Market Data Dump: Monday - sector 6 6

 

Daily Market Data Dump: Monday - volume 6 6

 

Daily Market Data Dump: Monday - rates and spreads 6 6

 

Daily Market Data Dump: Monday - currencies 6 6


Jobs Report Bomb

Client Talking Points

USD

They eviscerated the Dollar on the jobs bomb (and ISM Services slowing print of 52.9 for May) taking USD down -1.6% on the day (massive 1-day move) and ramping up everything that is inversely correlated to it (which, at this point, from Gold to Russian and Australian stocks, are a lot of things) – can they do this daily?

UST 10 YR

Yield crashed on the news (that was in line with the change in Janet’s favorite labor market indicator index, btw) to 1.71%, which implies that A) the data is beating the Fed’s forecasters, big time, YTD and B) if she hikes into this, she’s going to implode all of the illusions of real growth (i.e. the aforementioned reflation trades).

Sectors

Get #TheCycle right and you’ve had your sector styles right – Utilities up huge on Friday +1.6% to +15.7% YTD – Financials down huge -1.4% to -1.3% YTD. Getting whipped around trying to day trade this is as easy as staying with the fundamental #GrowthSlowing TREND.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/5/16 80% 0% 0% 4% 8% 8%
6/6/16 76% 0% 0% 6% 12% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/5/16 80% 0% 0% 12% 24% 24%
6/6/16 76% 0% 0% 18% 36% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.

 

The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.

 

Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.

TLT

Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!

GLD

That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.

 

We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

  • Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle

Three for the Road

TWEET OF THE DAY

That explained the entire market move on Friday Jobs Bomb = Dollar Down -1.6% --> Rates crashed, Utilities and Gold ripped, Financials fell

@KeithMcCullough

QUOTE OF THE DAY

You have to learn the rules of the game.  And then you have to play better than anyone else.

   -Albert Einstein

STAT OF THE DAY

Greg Maddux had a ERA of 1.56 in 1994 while pitching 202 innings for the Atlanta Braves.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

The Macro Show Replay | June 6, 2016

 

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


CHART OF THE DAY: Yikes! A Look At How Consensus Is Positioned

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.

 

"... Look at last week’s CFTC futures and options net positioning:

  1. SP500 (Index + E-mini) +56,081 net LONG contracts = +2.16x (leaning bullish on a 1yr z-score)
  2. 10YR Treasury -159,930 net SHORT contracts = -2.66x (leaning bearish on a 1yr z-score)

Really? It’s one thing for The Bull on bonds to book some gains when Janet tells him she’s gonna hike (until she sees the data she hasn’t forecasted)… but to buy SPY and short TLT on that? I guess that’s why performance out there is not good."

 

CHART OF THE DAY: Yikes! A Look At How Consensus Is Positioned - 06.06.16 EL Chart


Janet's Jobs Beliefs

“For superforecasters, beliefs are hypotheses to be tested, not treasures to be guarded.”

-Phil Tetlock

 

After this morning’s Change In Labor Market Conditions report (i.e. Janet Yellen’s favorite labor market leading indicator, which is set to slow for the 5th straight month), will Janet be dovish or hawkish? Is she really “data dependent”?

 

For those of you who get the game we are in, the only thing that matters to macro markets right now is which way the Federal Reserve pivots from here. Post Friday’s Jobs Bomb, not going back to dovish during Yellen’s 12:30PM speech could crush markets.

 

Crush? How about confuse? Imagine the jobs report wasn’t a bomb on Friday? What would the things that held the “market” together (Commodities, Gold, Utilities, etc.) have done then? What if Yellen raises rates, for the 2nd time in 6 months into the slowdown?

 

Janet's Jobs Beliefs - Hawk or dove cartoon 05.31.2016

 

Back to the Global Macro Grind

 

We all have problems in life, but I guess my main one is that I actually believed Janet when she said she’d “probably raise rates” in June or July. So did macro markets. But she’ll be the one with a much bigger equity market problems if she doesn’t pivot again.

 

Remember the sequencing of both #TheCycle and the Fed’s response to it:

 

  1. HAWKISH (December) raising rates in front of a horrible Q1 slow-down (economic and profit cycle)
  2. DOVISH (March/April) trying to undo the hikes with rhetoric, devaluing Dollars to reflate asset prices
  3. HAWKISH (May) post the stock market bounce and Atlanta Fed GDP Tracker rising

 

Now DOVISH (June) post the “belief” that labor market conditions should be improving? Oh boy is this getting to be a lot of fun.

 

If you live in the land of the “but the market was flat” last week,  you missed another major move within the market. Yes, for those of you who want to earn premium fees and take market share, you have to beat the market.

 

With the SP500 rallying into Friday’s close to 0.0% on the week, here’s what really moved last week:

 

  1. US DOLLAR hammered -1.6% on Friday to close down for the 1st week in 5 (but -4.7% YTD)
  2. COMMODITIY REFLATION (CRB Index) +1.4% on the week to +7.1% YTD
  3. GOLD ripped on Friday to close up another +2.4% on the week to a league leading +17.3% YTD
  4. UTILITIES ramped another +1.4% on the jobs print, closing the week up another +2.6% = +15.7% YTD
  5. FINANCIALS got pounded by the data, closing -1.4% on Friday (-1.3% on the wk) to -1.3% YTD

 

No, this is not a “growth investor’s” market. This is a #LateCycle consumption and employment slowing market that is paying people who are long LOW BETA (up another +1.6% on the week to +9.1% YTD) and safe yields.

 

KM, did you mention consumption slowing? Am I going to be the only one who writes about the YTD low ISM Services print of 52.9 (MAY) vs. 55.7 (APR) this morning? Or should I just hush it and keep shorting US Retailers that are still in crash mode?

 

Back to the only other economist/strategist I know who has written daily about late cycle consumer and jobs data slowing for the last 6 months – his (or her) name is Mr/Mrs Bond Market:

 

  1. US 2YR Treasury Yield smoked for a -14 basis point drop last week to -28 basis points YTD (0.77%)
  2. US 10YR Treasury Yield spanked for a -15 basis point drop last week to -57 bps YTD (1.71%)
  3. YIELD SPREAD (10yr minus 2yr) down another beep to YTD lows of 93 basis points wide

 

So, I agree, you have to be long stocks – but mainly the ones that aren’t showing sales/revenues slowing and/or the ones that look like bonds. Because this raging bull market in the Long Bond is very much intact, no matter what Janet’s beliefs about jobs are.

 

What’s awesome about being The Long Bond Bull (interrupted every other month by Federal Reserve short-term pivots to hawkish), is that every time people get a whiff of Bond Yields going higher, they dog-pile the short-side of my long book!

 

Look at last week’s CFTC futures and options net positioning:

 

  1. SP500 (Index + E-mini) +56,081 net LONG contracts = +2.16x (leaning bullish on a 1yr z-score)
  2. 10YR Treasury -159,930 net SHORT contracts = -2.66x (leaning bearish on a 1yr z-score)

 

Really? It’s one thing for The Bull on bonds to book some gains when Janet tells him she’s gonna hike (until she sees the data she hasn’t forecasted)… but to buy SPY and short TLT on that? I guess that’s why performance out there is not good.

 

No matter what your beliefs about where we’ve been or where we are going during #TheCycle, it’s crystal clear at this point that US economic growth peaked in Q2 of 2015.

 

Hedgeye’s hypothesis on that has been tested and tried, in real P&L terms, many times since July of last year. It’s not a position I’ve treasured. It’s an analytical position I’m proud to say we stuck with in the face of establishment economics adversity.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.81%

SPX 2055-2120
RUT 1110-1181

NASDAQ 4

VIX 12.62-16.89
USD 93.25-96.01

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Janet's Jobs Beliefs - 06.06.16 EL Chart


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