Fed Rate Hike Taken Behind the Barn and Shot

Takeaway: We've warned on this 3,748 times ... #GrowthSlowing.

Fed Rate Hike Taken Behind the Barn and Shot - rate hike cartoon 10.15.2015


The market is now signaling a 15% chance of a rate cut this September.


(That's no typo - rate CUT ... not hike)


Take a look at this shocking about-face in the chart below. In fairly short order, the hatchet was taken to rate hike probabilities. The market now sees a 0% chance for each of the July, September and November Fed meetings. That's down from an over 50% chance of a July hike just a few weeks ago. 


So the pendulum has swung to cuts.


Fed Rate Hike Taken Behind the Barn and Shot - fed funds futures 6 28


How did This happen?


Basically, markets are pricing in our Macro team's warnings about global #GrowthSlowing. Sure, the U.K.'s vote to leave the European Union was the catalyst but, then again, it was effectively a voter referendum on lackluster growth. Post-Brexit voter analysis shows that a preponderance of the "Leave" contingent came from lower income areas and regions that derived most of their trade from the European Union.


Essentially, the promise of growth from European bureaucrats didn't live up to reality for a majority of U.K. voters.


Go figure.


Fed Rate Hike Taken Behind the Barn and Shot - Brexit cartoon 06.20.2016


GrowthSlowing Evidence?


Look no further than the 10yr/2yr Treasury yield spread. At 84bps wide this afternoon, the 10s/2s yield spread hasn't been this compressed since the Great Recession. 


Fed Rate Hike Taken Behind the Barn and Shot - yield spread 6 28


But What about today's upwardly revised 1Q GDP report?


It's a government manufactured mirage...


As Hedgeye CEO Keith McCullough points out, the US government effectively overstated GDP (again) today by cutting its inflation measure. Here's how that works:


To calculate real GDP, the government subtracts the "GDP deflator" (a measure of inflation) from the nominal GDP number. The GDP deflator used this go-round was 0.4%, an artificially low number by our estimation. "It should be more like 1.6%," McCullough writes. "In other words, into an Election, they understated inflation (the deflator) by 75%!"


Bottom Line?


We'll say it again, U.S. #GrowthSlowing.


Takeaway: CS HPI registers a 3rd month of deceleration, while support continues to come primarily from the low end.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.



Today’s Focus: April Case-Shiller HPI 


The Data:  Case-Shiller HPI data for April released this morning – which represents average price data over the February-April period – extended the trend of flat-to-slowing price growth as the 20-City series was largely flat sequentially while the National series decelerated for a 3rd consecutive month, slowing -10bps sequentially to +5.0% YoY.  The negative 2nd derivative trend in the Nation Series – where growth is now -30bps of the Jan ’16 peak rate-of-change – accords with the FHFA HPI series for April released last week which showed price growth decelerating -30bps sequentially to +5.9% YoY.


Low End Support: Notably,  the Case Shiller Price tier data show that the low end – while slowing modestly the last few months – continues to buttress price growth in the composite.  Price growth across both the Mid and High Tiers began to slow ~3Q15 as the pace of inventory decline bottomed (see charts 5/6 below).  From here, it will be interesting to observe price action at the entry level as growth in 1st time buyer demand continues to slow at the margin.  According to the latest NAR data, transaction volume growth for first-time buyers was actually negative (-2% YoY) in May.  


HPI Tug-O-War | Advantage Demand: As we profiled in our 2Q Themes presentation and illustrate in charts 3 & 4 below, price remains in an interesting spot with the supply environment arguing for moderate price acceleration while lagged demand trends imply moderate deceleration.  Over the TTM those countervailing forces have largely produced a stalemate with demand trends culling a slight advantage.  With price performance across housing equities strongly correlated to 2nd derivative price trends historically, current HPI trends sit as a modest drag for the complex.  



















About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.


Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.



Joshua Steiner, CFA


Christian B. Drake


Fantasy Land! A Look at This “Final” GDP Report

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough rips apart the government’s latest GDP calculation. “You couldn’t make this up if you tried,” said McCullough. “And you wonder why people are getting upset with the establishment and the making up of numbers.”



Subscribe to The Macro Show today for access to this and all other episodes. 


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Capital Brief: Clinton & Warren Team Up To Trash Trump

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email


Capital Brief: Clinton & Warren Team Up To Trash Trump - JT   Potomac under 1 mb


“It doesn't matter how smart you are unless you stop and think.”

― Thomas Sowell


So far, so good for Donald Trump 3.0, who has maintained a relatively low profile while his campaign continues to improve on all fronts (except his poll numbers). His newfound path forward continues to drive donations and improve its advertising capabilities, focusing on digital media outside of his well-worn Twitter account. The Republican nominee has rolled out websites and attack ads, as he continues to pitch his agenda to supporters and reshape his demeanor.


These factors signal that the Trump campaign is finally gaining some footing and it couldn’t come at a better time - with less than three weeks until the convention Trump still hasn’t nailed down key party endorsements or even solidified speakers for the convention.


Hillary Clinton and MA Senator Elizabeth Warren teamed up to trash Trump, knocking him for his self-promotional trip to Scotland and for his celebratory musings amidst Brexit global turmoil. Clinton and Warren highlighted their blue-collar upbringings, promoted the importance of strong union values, and called for the need to rebuild the middle class.


While many progressive tongues were wagging at the prospect of the two women on the ticket, we feel Warren’s appearance is more of an affirmation of Clinton’s commitment to winning over the progressive wing of the party. Further, Clinton’s increasingly robust surrogate list continues to cast a large shadow over Trump, who seems to have very few major allies by comparison.


Freedom Partners Action Fund, a super PAC financed by the network of billionaire brothers Charles and David Koch, has pledged $2.7 million in television and digital ad buys in the OH Senate race where incumbent Senator Rob Portman faces a tough battle with former Governor Ted Strickland. News of the spending spree comes just days after the group announced it will spend $1.2 million on advertising in the NV Senate race where Senate Minority Leader Harry Reid’s open seat is up for grabs.


Republicans are stepping up their fundraising efforts ahead of what will be a dogfight for the House and Senate (perhaps at the expense of the White House) - and we expect no changes to this strategy for the foreseeable future.


A Brief History Of The US #CreditCycle From Past To Present

Takeaway: Delinquencies are rising and credit conditions are tightening as the U.S. economy heads into the 9th inning of economic expansion.

A Brief History Of The US #CreditCycle From Past To Present - The Cycle cartoon 03.04.2016


As is typical in any #LateCycle economy, U.S. companies are resorting to all manner of corporate chickanery to mask financial deterioration. In response to a Wall Street Journal article about companies inflating their financial results by obscuring generally-accepted accounting principles (GAAP), Hedgeye Senior Macro analyst Darius Dale wrote, "The U.S. #CreditCycle continues to deteriorate and no amount of non-GAAP accounting will stop it."


A key callout for our Macro team has been the rollover in the credit cycle. Essentially, the natural progression of any economy in the final stages of expansion is for a protracted breakout in corporate credit spreads. (Hence our short Junk Bonds call.)


As proof of deteriorating fundamentals in the credit cycle, Dale offered the following charts with key takeaways for investors:


Click to enlarge

A Brief History Of The US #CreditCycle From Past To Present - credit darius 2


A Brief History Of The US #CreditCycle From Past To Present - credit darius 3 

Europe's Got 99 Problems (And Brexit's Just One)

Takeaway: Despite today's pop, European equity markets like Italy and Germany are crashing.

Europe's Got 99 Problems (And Brexit's Just One) - Growthslowing europe


If you think Brexit fallout and uncertainty are the only catalysts for further European equity declines, think again.


As Hedgeye CEO Keith McCullough writes in a note sent to subscribers earlier this morning:


"As we’ve outlined since the beginning of the year, #EuropeSlowing will become more obvious when Germany, France, Italy, Spain, etc. lap peak cycle GDP comps in Q2/Q3 - #Brexit was just a preview to what Europe will look like as the causal factor (#GrowthSlowing) becomes obvious; watch out below if EUR/USD $1.05 breaks."


Here's what that damn #EuropeSlowing data looks like this morning... a sea of red:



This is what #EuropeSlowing looks like in equity market terms...


Take a look at Germany's DAX... just terrible:



And Italian equities:



And here's the European equity market drawdown map with the pop today versus the crash from 2015 highs for context:


Europe's Got 99 Problems (And Brexit's Just One) - european equities 6 28


In essence, bear markets bounce but peel back the charts a little bit further to reveal the underlying reality.


And now for a bit of math:


Using the 35% drawdown in Italian equity markets as an example...



Don't do that to your portfolio. We've told our subscribers to have a 0% allocation to International Equities for some time now. Here's why:


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