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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

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[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.


August 29, 2016

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  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.63 1.50 1.62
SPX
S&P 500
2,162 2,190 2,169
RUT
Russell 2000
1,220 1,249 1,238
COMPQ
NASDAQ Composite
5,175 5,260 5,218
XOP
SPDR S&P Oil & Gas Explore
35.99 37.98 37.25
RMZ
MSCI US REIT
1,207 1,240 1,215
NIKK
Nikkei 225 Index
16,360 16,759 16,360
DAX
German DAX Composite
10,403 10,691 10,587
VIX
Volatility Index
11.95 15.03 13.65
USD
U.S. Dollar Index
93.99 96.25 95.54
EURUSD
Euro
1.10 1.13 1.12
USDJPY
Japanese Yen
99.52 102.48 101.77
WTIC
Light Crude Oil Spot Price
44.01 49.03 47.64
NATGAS
Natural Gas Spot Price
2.52 2.97 2.91
GOLD
Gold Spot Price
1,311 1,365 1,325
COPPER
Copper Spot Price
2.05 2.15 2.08
AAPL
Apple Inc.
106.02 110.20 106.94
AMZN
Amazon.com Inc.
750 775 769
JPM
J.P. Morgan Chase & Co.
63.30 66.41 66.22
INTC
Intel Corp.
34.13 35.66 35.26
BAC
Bank Of America
14.82 15.99 15.79
EXPE
Expedia Inc.
110 117 111


Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

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


Hawkish-dovish-hawkish-dovish-hawkish...Get ready for another pivot?

Client Talking Points

US Dollar

USD likes the hawkish pivot (+1.1% last wk) but Yellen and Fischer were already there post the last US jobs report – so what happens to USD this week if the jobs report is bad? That’s right. Asset reflation needs a bad jobs report now… and anyone following this hawkish-dovish clown show gets that.

US 10YR

Yield ramped right back to the top-end of my immediate-term 1.50-1.62% risk range, but now what? 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).

Stocks

Dollar Up, Yen Down (Pound Down) = Nikkei and FTSE Up! Nikkei +2.3% overnight so the Japanese Gov Pension Fund loves the idea of Yellen making another policy mistake whereas the Australians (-0.8% All Ords overnight) and Russians (RTSI -1.7% this am) loathe its commodity deflation implications.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/28/16 50% 3% 5% 14% 18% 10%
8/29/16 43% 7% 7% 15% 22% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/28/16 50% 9% 15% 42% 55% 30%
8/29/16 43% 21% 21% 45% 67% 18%
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
GLD

On the other side of the USD expectation, Gold (GLD) lost -1.5% w/w. Again we still like UUP and GLD as a basket against other centrally-planned currency regimes elsewhere.

TLT

Long Bonds (TLT), which has been on Investing Ideas since August 4th, 2014, finished the week -0.25%. We continue to believe that growth is the main catalyst for the curve amidst all the central planning noise. Slower growth gets discounted in a flatter curve so even if rates are hiked into a late cycle slow-down, the yield curve pancakes (the long-end of the yield curve fall and the short-end goes up). 

UUP

Strength in the U.S. dollar, with renewed rate hike expectations back in the mix over the last few weeks, gave a good boost to U.S. Dollar (UUP) which finished +1.1% on the week. The bid-yield of December Federal funds futures has ticked 10 bps higher in August to 0.55% to close out the week.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Fed-Induced Hawkish Hyperventilation app.hedgeye.com/insights/53404… via @KeithMcCullough #Fed #Yellen

@Hedgeye

QUOTE OF THE DAY

Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength. 
-Arnold Schwarzenegger

STAT OF THE DAY

Otis Nixon batted .270 over his 17 year career.


'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. 


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