A few catalysts to keep an eye on:
- The Fed (Yellen went dovish yesterday and equities turned red on that into the close)
- Brexit (what if they do exit?)
- Mean Reversion and performance chasing
For those of you keeping score, this year the Fed has shocked markets pivoting from hawkish to dovish a dizzying number of times. Here's the rundown:
Investors are justifiably frazzled and have scrambled to keep up with all the flip-flopping. When Yellen went hawkish in May, during a speech at Harvard University, she remarked that investors should "probably" expect a rate hike in the coming months.
Taking the Fed chair at her word, investors thought there was a greater than 50% chance the Fed would hike rates in July (see below).
Today, markets think that possibility is essentially zero.
Click image to enlarge
Well, the Fed revised its dot plot (which shows each participant's expectations for future rate hikes). Interestingly, six Fed officials now see just one rate hike in 2016 versus just one participant suggesting as much in March.
It was quite the about-face for most FOMC members. As we noted earlier this week, San Francisco Fed head John Williams was publically calling for up to five rate hikes at the outset of this year.
Then reality set in.
(To name a few...)
And yet, here's the lead in yesterday's FOMC statement:
"Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up."
That's simply not true which is why we'll reiterate once again...
Takeaway: USAF changes to its TACAIR portfolio will result in a 20% reduction in annual F35 deliveries in the 2020s.
Like a mighty elk pursued by wolves, the world’s largest defense program, the Joint Strike Fighter, is being stalked by a series of programs that individually are not threatening but as a pack can mortally wound the program.
Tomorrow, Friday, June 17th at 11:00 EDT, Hedgeye’s LtGen “Emo” Gardner will provide investors the context for the first ever appearance of the F-35 at the world’s most important aerospace show, the Farnborough International Airshow, July 11-17.
He will cover the current US TacAir landscape, changes in requirements being made by the F35's largest customer and the impacts on the $1.4T F35 program and its contractors.
Participating Dialing Instructions
Confirmation Number: 13639094
Materials: CLICK HERE
In this excerpt from The Macro Show, Hedgeye Senior Macro analyst Christian Drake gives subscribers a brief tutorial on one of our top three Macro Themes.
Hedgeye Potomac is hosting a call with one of Washington’s top political strategists, Scott Reed, to share his insights on the presidential election, the upcoming Democratic and Republican conventions, and outlook on the Senate and House races this fall.
The call will take place on Tuesday, June 21st at 11am ET with prepared remarks from Reed followed by Q&A.
ABOUT SCOTT REED
Scott Reed is the senior political strategist at the U.S. Chamber of Commerce. He is responsible for overseeing the Chamber’s federal voter education program. Reed created and implemented the blueprint for that strategy to help recruit business-friendly candidates, overseeing traditional and digital advertising campaigns, and identifying credible messengers to showcase the importance of the free enterprise system.
Reed was campaign manager for Bob Dole’s 1996 presidential campaign. He oversaw the national campaign, which included political strategy, policy development, communications, and advertising during the GOP primary and the general election. In addition, he directed preparations for the 1996 Republican National Convention in San Diego and the vice presidential selection process of Jack Kemp. In 1993, Reed was appointed executive director of the Republican National Committee. He served as chief operating officer of the GOP during the historic elections in 1993 and 1994 when the Republicans gained control of both the House and the Senate for the first time in more than 40 years. During the Bush administration, Reed served as chief of staff to Secretary Jack Kemp at the Department of Housing and Urban Development. He directed personnel, political, and policy matters, employing a long-term empowerment and privatization program.
Confirmation Number: 13638941
Takeaway: The dollar is strengthening & U.S. equities are selling off after Yellen & Co went dovish yesterday. The #BeliefSystem is breaking down.
Make no mistake. The #BeliefSystem that central planners can arrest economic gravity is breaking down. That's what we said in our 80-slide 2Q Macro Themes deck, released in April, and that's precisely what's playing out in macro markets today.
Despite dovish Fed rhetoric yesterday, the U.S. dollar is strengthening and equity markets are selling off, in direct opposition to Yellen & Co's intent.
Meanwhile, policymakers at the Bank of Japan have watched the Yen strengthen today too, with the JPYUSD cross hitting year-to-date highs, and the Nikkei self-destructing (it lost 3% today alone).
Keep in mind that Yen strength came after the BOJ announced today that it will continue to conduct open market operations at an annual pace of 80 trillion yen ($760 billion) and is maintaining its negative interest rate policy.
Here's additional analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:
"They’re really out on the central banking #BeliefSystem in Japan – on the heels of reiterating 80T (T = Trillion Yen), the Yen ramped +1.7% (vs USD) to yet another YTD high, and the Nikkei continued to crash, -3.1% overnight (-7.2% on the week) and -26.1% from last year’s cycle peak in Global Equities (July)"
Here's the full description from our 2Q Macro Themes deck:
Click to enlarge
We'll leave you with this brief message from CEO Keith McCullough:
More to come.
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