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Dear Janet – Stop Ignoring Economic Reality

Dear Janet – Stop Ignoring Economic Reality - Jackson Hole cartoon 08.26.2016

 

The bond market is sending Fed officials a clear signal: Hike now at your own peril.

 

It's the same message Fed officials have selectively chosen to ignore all year. If you’re still keeping score, the Fed pivoted hawkish in December, dovish in March, hawkish in May, dovish in June, and hawkish in August. That’s right, 5 policy pivots in 7 months.

 

Here's the much discussed passage from Fed head Janet Yellen's prepared remarks in Jackson Hole:

 

"Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook."

 

Investors clearly believe Yellen's hawkish rhetoric. Fed Funds futures on September and December hike probabilities just popped back up to 42% and 64%, respectively. Note: Before hawkish comments from Fischer and Yellen, those probabilities were 32% and 57%, respectively on Thursday.

 

Dear Janet – Stop Ignoring Economic Reality - rate hike expectations 8 29

What's next?

 

All eyes are on Friday's Jobs report. As Yellen's speech clearly indicates, the Fed is closely watching for strength in non-farm payrolls to justify future rate rises ("in light of the continued solid performance of the labor market... the case for an increase in the federal funds rate has strengthened in recent months.").

 

And though largely ignored by the media last week, remember, second quarter GDP was revised down to 1.1% from 1.2%, on Friday, Consumer Confidence hit a four-month low and 90% of the Housing market (see Existing Home Sales) slowed to -1.6% year-over-year. So clearly, one of the few things the Fed has left to trumpet is relative strength in the labor market.

 

Even that premise is faulty. As we've shown many times before (see chart below), non-farm payrolls put in their year-over-year rate of change peak in February 2015 and have been declining ever since. As Hedgeye CEO Keith McCullough points out in today's Early Look, "it’s now mathematically impossible for labor to accelerate in Q3." 

 

Dear Janet – Stop Ignoring Economic Reality - nfp 8 5

Why does this matter?

 

 

Oh right.

 

The 10s/2s yield spread continues its crash to year-to-date lows this morning as the market fears Fed tightening into an economic slowdown.

 

Dear Janet – Stop Ignoring Economic Reality - yield spread 8 29

 

In other words, U.S. #GrowthSlowing. This is the call that's driven asset prices all year. So, whether or not the Fed hikes rates into a slowdown or turns dovish on a Jobs Report bomb and the stock market pops doesn't really matter (outside of risk managing any short-term investor hyperventilation). Our favorite macro positions continue to crush the performance of the S&P 500 year-to-date (see below) as investors continue to price in economic reality.

 

Dear Janet – Stop Ignoring Economic Reality - yeartodate macro

What it all means...

 

Investors have become disillusioned by supposed Fed omnipotence. That's being price into markets daily.


PREMIUM INSIGHT

[UNLOCKED] Keith's Daily Trading Ranges

[UNLOCKED] Keith's Daily Trading Ranges - Bull and bear extra cartoon

We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.


Daily Market Data Dump: Monday

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 8 29

 

Daily Market Data Dump: Monday - sector performance 8 29

 

Daily Market Data Dump: Monday - volume 8 29

 

Daily Market Data Dump: Monday - rates and spreads 8 29

 

Daily Market Data Dump: Monday - currencies 8 29

 

Daily Market Data Dump: Monday - commodities 8 29


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

'I Hate To Remind Long Bond Bears About This But...'

Takeaway: Does Wall Street need the data to worsen, from here, to really get paid?

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 -1.6% 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?

 

The 10yr Treasury yield ramped right back to the top-end of my immediate-term 1.50-1.62% risk range, but now what? I hate to remind Long Bond Bears about this, but the last hike into a slow-down (the hawkish pivot in DEC) was THE catalyst for both Deflation’s Dominoes and rates to crash (and the Fed to go back to dovish again)

 

 

Editor's Note: The snippet above is from a note written by Hedgeye CEO Keith McCullough and sent to subscribers this morning. Click here to learn more. 


CHART OF THE DAY: Fed-Induced Hawkish Hyperventilation

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.

 

"... 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?"

 

CHART OF THE DAY: Fed-Induced Hawkish Hyperventilation - 08.29.16 chart


REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

 

1. McCullough: How I Built My Wealth Without Huge Drawdowns (8/26/2016)

 

 

In this candid excerpt from The Macro Show, Hedgeye CEO Keith McCullough walks through his own process and history of how he approaches risk managing volatile global markets. “I’m not trying to wax philosophically,” says McCullough. “I’m just telling you there’s a huge difference in volatility adjusted returns, and building your wealth without huge drawdowns.” He’s joined by Senior Macro Analyst Darius Dale who offers additional perspective on the subject. 

 

2. Taylor: Heat Rising In ‘Historic’ Trump vs. Clinton Slugfest (8/26/2016)

 

 

Hedgeye Chief Political Strategist JT Taylor walks through some of the key factors and developments in the fiery 2016 Election battle between Hillary Clinton and Donald Trump.

 

3. The Big Joke: Animated Cartoon Nails Squirrely Fed (8/25/2016)

 

 

In this excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains why Fed policy is a joke (with a little help from our incomparable cartoonist Bob Rich). 

 

4. McCullough: Here's What Happens If The Fed Raises Rates (8/25/2016)

 

 

In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough explains what will happen to bond, stock and commodity markets if the Fed raises interest rates. 

 

5. McCullough: ‘Don’t Short Balls Underwater’ (8/24/2016)

 

 

In this brief excerpt from The Macro Show today, Hedgeye CEO Keith McCullough shares some practical investing advice he learned early in his career.

 

6. REPLAY: About Everything | Q&A with Neil Howe - Credit Cards Lose Their Charge (8/24/2016)

 

 

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the future of the credit card industry. Howe breaks down the key takeaways and explains the broader implications for investors.

 

Click here to access the associated About Everything slides.

Click here to read Howe’s associated About Everything piece.

 

7. McMonigle: Sell the OPEC Oil Production Freeze Nonsense (8/24/16) 

 

 

Does the OPEC rumormongering have you confused? Hedgeye Energy Policy analyst Joe McMonigle sifts through the rumors and speculation on The Macro Show today. He provides clarity on what's really going on and what likely lies ahead for oil prices.

 

8. McCullough: The Yield Spread Doesn't Lie - People Do (8/23/2016)

 

 

In this excerpt from the Macro Show earlier today, Hedgeye CEO Keith McCullough explains why the coming quarter will be "the best time to short the Financials." 

 

9. Does Stock Market Volume Still Matter? (8/22/2016)

 

 

In this brief excerpt from The Macro Show today, Hedgeye CEO Keith McCullough responds to a subscriber's question about whether trading volume is still relevant. 

 

Click here to subscribe for free to our YouTube channel.


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