CHART OF THE DAY: Fed September Rate Hike Expectations Too Low

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.


"... Looking at the implied market probability of another hike, across durations:

  1. JUL meeting = 8%
  2. SEP meeting = 21%
  3. DEC meeting = 43%

For now, I think those SEP expectations are too low. If I’m right on that, rates will keep making a series of higher-lows and Fed funds futures will continue higher until we get another jobs report bomb (PS. don’t rule that out)."


CHART OF THE DAY: Fed September Rate Hike Expectations Too Low - 07.20.16 image

Long Bond Bug

“We must consider how some bugs are not detrimental but fundamental to life.”

-Dr. David Perlmutter


I’ve learned more in the last week than I’ve learned all year and it had nothing to do with markets. It had everything to do with my growing gut.


“Meet Your Microbiome” is how neurologist (and gut doctor), David Perlmutter introduced me to reality in what has been nothing short of a fantastic book everyone should read called Brain Maker.


“The Greek physician and father of modern medicine, Hippocrates, first said in the 3rd century BC that all disease begins in the gut.” Same thing goes for Long Bond Bulls. All corrections begin with this thing called #GrowthAccelerating.


Back to the Global Macro Grind


Talk about Recency Bias… I’m in my hotel in Chicago this morning… and for breakfast, instead of my usual, I ordered “The Fitness Trainer!” Berry parfait yogurt, eggs, mixed bell peppers, baby spinach, scallions…


But my gut isn’t deflating. Weird.


With a sequential (i.e. quarter-over-quarter) surprise to the upside in Q2 GDP, the former Perma Bull narrative (“Reflation”) is. With the US Dollar at a 4-month high, Commodities (and Oil) don’t like that inasmuch as Long Bond Bulls shouldn’t.


Long Bond Bug - currency wars


The way this macro pivot works is pretty straightforward:


  1. Q2 US GDP accelerates vs. Q1 as both European and Japanese growth continues to slow
  2. US Dollar becomes the relative winner in the Currency War
  3. Rates rise off their all-time lows
  4. Reflation (Oil down -7% in the last month) deflates
  5. The Fed corroborates USD strength with hawkish commentary that they nailed it all along


Again, and I want to be crystal clear on this… so let me write again, again…


A sequential acceleration is what we call a TRADE. And TRADES are not TRENDS (3 months or more, multiple quarters). All a Q2 GDP acceleration ensures is a Q3 sequential deceleration back to bearish TREND.


If that’s too “short-term” for you, stop reading and start pounding some empty carbs. As the authors of #GrowthSlowing, “all-time-lows in bond yields”, etc., I think my research team and I should have a pretty good handle on how to trade this.


Bought a bond, sold a bond…


That’s right. If you don’t like “short-term trading”, tell your boss you are risk managing. That’s what I signaled when I told subscribers to “sell-some” Zeroes (ZROZ) in Real-Time Alerts yesterday. We call it risk managing the range.


For something like the 10yr US Treasury Yield, here’s what I mean by that:


  1. The low-end of the immediate-term TRADE risk range = 1.35%
  2. The top-end of the immediate-term TRADE risk range = 1.65%
  3. Intermediate-term TREND resistance for the 10yr yield = 2.03%


In other words, if you want to actively risk manage the range of consensus finally being LONG what’s been our Best Idea on the long side of macro for a year now, you sell bonds on rallies and patiently buy them back on selloffs.


Patience has been (and will continue to be) the key to profiting from both cyclical and secular #GrowthSlowing.


Another way to “play” the short-term higher-low that my model is signaling in the 10yr Yield is via Fed Fund Futures. Those are the macro market’s expectations of when (and if) the Fed actually has the spine to “raise rates.”


Looking at the implied market probability of another hike, across durations:


  1. JUL meeting = 8%
  2. SEP meeting = 21%
  3. DEC meeting = 43%


For now, I think those SEP expectations are too low. If I’m right on that, rates will keep making a series of higher-lows and Fed funds futures will continue higher until we get another jobs report bomb (PS. don’t rule that out).


The other thing that should keep happening on that is a continuation of what I absolutely love in life – the value of my hard earned currency appreciating = #StrongDollar.


And all of that “reflation” hope, fully loaded with consensus being long things that have been tethered to a rising Oil price (think ISMs, PMIs, Industrial Stocks) should deflate at a faster pace than my gut seems to be, despite feeling smarter about it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.35-1.65%

SPX 2115-2188


VIX 11.50-17.04
USD 96.11-97.51
EUR/USD 1.09-1.11
Oil (WTI) 43.91-46.65


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Long Bond Bug - 07.20.16 image

Technology Equity Research Veteran Ami Joseph Joins Hedgeye

Takeaway: Veteran analyst will provide best ideas on both the long and short side of Technology stocks.



STAMFORD, Conn., July 20, 2016 -- Hedgeye Risk Management, a leading independent provider of investment research and online financial media firm, announced today that industry veteran Ami Joseph has joined the company as a Managing Director to lead its Technology equity research platform. He joins Hedgeye from Joseph Capital Partners, a Boston-based research boutique that he founded which provided long and short ideas to institutional investors.


In his new role at Hedgeye, he will continue to provide his best ideas on both the long and short side of Technology stocks.


Technology Equity Research Veteran Ami Joseph Joins Hedgeye - Ami 7.19.16   Output 1 .mov.13 54 44 02.Still001


"Our rapidly growing team here is very excited to welcome Ami aboard during this important phase of our firm’s growth," said CEO Keith McCullough. “His insight and experience in the tech sector will be a key component of our strategy and success in this evolving space in the years to come."


Joseph comes to Hedgeye with almost two decades of buy-side and sell-side experience covering the technology sector. Before founding and managing Joseph Capital Partners, he was an equity research analyst at Putnam Investments where he led international equity research for technology stocks. Prior to that, he was a technology analyst at Fidelity Management & Research.


“Hedgeye is a truly unique research firm heading in a very positive direction,” said Joseph. “I’m thrilled to join such a talented team of analysts. In addition, having the advantage of being part of a growing media platform with greater resources will enable me to serve my clients that much more effectively going forward.”


Joseph graduated Magna Cum Laude from the University of Pennsylvania where he was a Benjamin Franklin Scholar and member of the Phi Alpha Theta Honors Society.




Hedgeye Risk Management is an independent investment research and online financial media firm. Focused exclusively on generating and delivering investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing.


The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Consumer Staples, Internet & Media, Housing, Materials, Technology and Washington policy analysis.



Dan Holland


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Discover (DFS) reiterated our late cycle #ConsumerCredit theme last night – to be continued…

Client Talking Points


#StrongDollarmove continues as consensus remains A) bearish on USD (see net positioning in CFTC futures & options data) and B) finally too dovish on what the Fed might do in SEP – what slows this down if we’re right on the Q2 sequential GDP acceleration as European and Japanese economic data continues to slow? Still bearish on Euros.


Continues to break-down as the USD continues to threaten a breakout – WTI down -1.4% yesterday takes it -7.1% in the last month as the inverse USD correlation there remains as real as it is for the CRB Index (down -1.1% yesterday to 186 and signaling bearish TREND @Hedgeye); WTI immediate-term risk range now = $43.91-46.65.


We signaled sell some on Zeroes (ZROZ) in Real-Time Alerts yesterday and I’ll keep taking down our asset allocation to Fixed Income (booking gains) on rallies until I see this US Q2 GDP print – consensus is very much long the Long Bond now (after being bearish on it for the last 6-12 months) and I don’t like being levered long consensus after an epic move in rates.

Asset Allocation

7/19/16 50% 0% 0% 13% 30% 7%
7/20/16 53% 0% 2% 13% 24% 8%

Asset Allocation as a % of Max Preferred Exposure

7/19/16 50% 0% 0% 39% 91% 21%
7/20/16 53% 0% 6% 39% 73% 24%
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

Gold (GLD) = Protection from global currency devaluation and inflation/down USD – You can travel anywhere on earth and get a quote in local currency.


Long Bonds (TLT) = #GrowthSlowing, yield curve compression.


Treasury Inflation-Protected Securities (TIP) = Combination of the above exposures.

Three for the Road


Cartoon of the Day: Going Nowhere… cc @KeithMcCullough #HelicopterMoney #BOJ



“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”  

–Stephen Hawking           


Derek Lowe had a career W/L record of 176-157.

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


“Ideas control the world.”

- James A. Garfield


CONVENTION CORRECTION: With the fallout from the RNC’s first day still lingering, Donald Trump’s historic day two moved to right the ship, with key members of the Republican leadership, Trump’s family and inner circle moving into the spotlight. Speeches by Senate Majority Leader Mitch McConnell and Speaker Paul Ryan offered up lukewarm support of the party’s nominee (better than cold, huh?) and largely focused on their agendas for Congress as well as unity without tipping their hats too far in Trump’s direction. And, in a preview of what to expect this fall, Governor Chris Christie delivered a blistering assault on Hillary Clinton and her record dusting off his prosecutor’s badge. If Trump and Co. execute the next two days flawlessly, a largely unified party could be within reach by the end of the week, but don’t hold your breath. Trump’s formal nomination drew mixed reactions with some delegates chanting enthusiastically, while others shouted in protest - but most left confused due to the lack of focus on the theme of the day - Make America Work Again.


PARTY OF ONE: Going into it’s sixteenth month, Trump’s campaign has been unscripted, unpredictable and undermanned from the start - and the bizarre rollout of Governor Mike Pence and the early missteps of the convention - especially Melania’s speech and ill-conceived response - were bound to happen. Stepping all over her big moment without holding anyone accountable illustrates the level of disorder ingrained in Trump’s world. The campaign’s lack of organization, infrastructure, and skeletal staff are all symptoms of a much larger problem augmented by Trump’s continued focus on himself. 


BACK TO THE BATTLEGROUND: The late addition of former IA Governor and current Ag Secretary Thomas Vilsack to the top of Clinton’s veep short list along with VA Senator Tim Kaine shows that she may be moving in the direction of one of two battleground states. But if you take a step back from electoral college strategy for a moment you can see that Clinton may be making a play for Independents and Republicans angered by their party’s choice (as well as white, college educated, middle-aged men), but risking the support of the progressive wing of her own party. We don’t expect progressives to sit on their hands and stay quiet though - picking one of these two could make some noise within the party, but opposition to the Trump/Pence ticket should be enough to get them fired up on November 8.


A BOLT FROM THE BLUE: In a surprise move, Republicans threw a wrench in the works of the financial services community by including a call to reinstate the Glass-Steagall Act in their convention platform – a law repealed by President Bill Clinton in 1999. Our view is that the passage is Trump’s attempt to generate populist appeal as well as woo voters who view Clinton is too close to Wall Street and too timid on financial reform. We would typically discount a platform move of this sort, but with some Republicans hopping on board a Democratic ideal - it’s worth keeping on the radar for 2017.


CALL INVITE | BREXIT IMPLICATIONS – A 360° ANALYSIS: Please join us this Friday, July 22nd at 11:00 AM EST as we begin a series of calls on post-Brexit implications. Our first call, in conjunction with the international law firm of Squire Patton Boggs, will examine Brexit’s legal and procedural implications. You can find call details here.


COPYRIGHT PROBLEMS FORCING RE-THINK OF FCC SET-TOP PROPOSAL: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on why lawmakers and a key FCC Commissioner worry the FCC set-top proposal would violate copyright law, moderating threats to cable operators and Arris. You can read his piece here.


IRAN NUCLEAR DEAL EMERGING AS A POTENTIAL ELECTION RISK FOR ENERGY MARKETS: Our Senior Energy Policy Analyst Joe McMonigle shared his insight on Trump’s pledge to undo the nuclear deal with Iran, and why reimposing US sanctions will put Iran's 750K barrels per day of new crude exports to the world markets at risk. You can read his piece here.


CMS PANEL VOTES TO RECONSIDER DEFINITIVE DRUG TESTING LAB FEES: Our Healthcare Policy Analyst Emily Evans shared her insight on the CMS panel’s reconsideration of Medicare definitive drug codes. You can read her piece here.

The Macro Show with Keith McCullough Replay | July 20, 2016

CLICK HERE to access the associated slides. 



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

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