“If you hyperventilate, you can hold your breath underwater longer.”
I guess, provided that you’re always fading the Fed’s forecasts, you can make money as a Long Bond Bull for longer too.
If you’re still keeping score, it’s hawkish (DEC), dovish (MAR), hawkish (MAY), dovish (JUN), hawkish (AUG). That’s right. You go girl! Janet has had 5 policy pivots in 7 months – and she’s one bad jobs report away from her 6th in 8.
Totally cool. Totally manageable. As long as GDP stays around 1%, 90% of Housing doesn’t slow more than -1.2% year-over-year, and Consumer Confidence doesn’t fall much from 4 month lows, right? Or do we need the data to worsen, from here, to really get paid?
Back to the Global Macro Grind…
Yep. Memories are short on what happened last time the Federal Reserve tightened into a slow-down (DEC). That said, I’m thinking the government should just make up a nasty jobs report on Friday just to get the SEP bull market narrative (stocks and bonds) back on track.
The government, unlike the Fed, is actually elected. And since it’s an election year, why not work the numbers a little more aggressively like they did the GDP Deflator, understating inflation (and overstating US growth at 1%) in Q1? Ex-profits, no recession as a result. Phew!
As long as “stocks” are going up, this is totally manageable. The narrative, that is. If Obama needs some advisory services on things like month-end and stuff, maybe he should give my boy Bill Ackman a buzz. Did you see what he tried with Herbalife (HLF) on Friday? lol
In all seriousness. This is getting serious.
Fed Funds futures on a SEP and DEC hike probabilities just popped back up to 42% and 65%, respectively. Before the double-hawkish pivot from Fischer that was confused by Yellen, those probabilities were 32% and 57%, respectively, early last week.
I actually agree with 32% being around the right number as there’s a better than 2/3rds chance that US GDP growth continues to slow in Q3 and that the rate of change in non-farm payroll growth continues to slow in the coming months as well.
What you do with that from a macro markets perspective is pretty much the same thing we’ve been telling you to do since the US economic cycle peaked in Q2 of 2015. Buy long-term bonds, Gold, and stocks that look like bonds as you fade Fed forecasts.
That is not what macro markets did last week:
- US DOLLAR was UP +1.1% to -3.1% YTD
- COMMODITIES (CRB Index) were DOWN -1.4% to +5.7% YTD
- OIL was DOWN -3.0% to +11.1% YTD
- GOLD was DOWN -1.5% to +24.5% YTD
- COPPER was DOWN -4.3% to -3.3% YTD
- US STOCKS (SP500) were DOWN -0.7% to +6.1% YTD
- UTILITIES (XLU) were DOWN -2.2% to +13.6% YTD
- FINANCIALS (XLF) were UP +0.4% to +1.2% YTD
- 2YR TREASURY Yield was UP +10bps to -20bps YTD
- 10YR TREASURY Yield was UP +5bps to -64bps YTD
That’s right, hawkish hyperventilation fully loaded, the US 10yr Treasury Yield only moved 5 basis points (week-over-week) because it had been moving passive aggressively higher since the last “everything is awesome” US jobs report at the beginning of the month.
Up 5 or down 64. What has the real growth of the US economy looked like (in rate of change terms) in 2016? Relative to Fed expectations of “5 or 6 hikes”, I’d say the current 1.1% US GDP print looks like down 98. That was (in basis points) the YTD low for the 10yr yield.
Oh, you want to go Ex-GDP and go for another hike because “inflation is reaching the target” do you? Cool. In addition to commodity-linked inflation proxies getting deflated last week, the 5yr US Treasury Break-Even rate dropped 2 basis points on the week to 1.34%.
In other words, with:
A) GDP tracking towards 1.1% in Q3 (we’ll get that print right before the election)
B) Housing and Consumer Confidence rolling off their #LateCycle peaks
C) Inflation pressures deflating from their Down Dollar YTD highs
D) Yield Spread (UST 10yr minus 2yr) at its YTD low (down 5bps last week)
E) SP500 dead flat now vs. 1 month ago today
The Fed has “clearly seen improvements for the last 2 months?” Or were those the politically prepared remarks pre the SP500 (you-ge indicator!) going down for 5 of the last 6 trading days and US Equity Volatility (VIX) ramping +20.4% in a week?
The only thing that’s crystal clear to me at this point is that A) the US GDP growth cycle peaked in mid-2015, B) inflation has had what the Fed should call “transitory” reflation, and C) the labor cycle continues to slow from its 2015 rate of change cycle peak.
If that means that Janet Yellen wants to make you hyperventilate every other month as she pivots from hoping-to-be-hawkish back to dovish (when labor data slows), you can keep holding your breath because it’s mathematically impossible for labor to accelerate in Q3.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.50-1.63%
Oil (WTI) 44.01-49.03
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer