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 5^th 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?

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 1^st 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