“The old in the new is what claims the attention.”
-William James
You see, I don’t have a confirmation bias. Once in a while, Harvard grads have come up with some good ideas too. William James died in 1910 but is rightly revered as one of the most important psychologists and thought leaders in American history.
I wonder how he’d psycho-analyze Janet Yellen…
Oh, you didn’t hear? She’s “data dependent.” Lol. On the heels of a recessionary ISM report last week, the latest US jobs report was yet another new confirmation of what’s becoming an older TREND. Since peaking in 2015, the US labor market continues to slow.
Back to the Global Macro Grind…
Slow. You know – in rate of change terms. While the Fed continues to cling to old “indicators” (like the Phillips Curve), my generation of economists and strategists have evolved the predicting process to just letting the old cycle data instruct the new.
That’s right. Most long-cycle macro data is glacial in terms of how it trends. Peaks and troughs are processes. They take time to manifest. But when something big and super #LateCycle like the rate of change in Non-farm Payrolls (NFP) puts in a cycle-peak, it slows to flat (year-over-year), then negative (year-over-year), 100% of the time.
Yellen’s Fed is much shorter-term than that. If she does what the market is telling her to do right now (Fed Fund Futures dropped to 32% on a SEP hike), this will be her 6th pivot (hawkish-dovish-hawkish-dovish-hawkish-dovish), in 9 months.
#NiceJob
But, Keith, Keith – “what if she still hikes?”… what if she makes her 2nd policy mistake in 9 months and just does it anyway? A: she can do whatever she wants and the precedent of going against both the market and the data is established.
*See DEC rate hike for details
On a very short-term basis (2 week duration), there isn’t anything big in the USD Correlation Risk matrix that would like a Dollar Up, Rates Up surprise in September from Yellen:
- USD vs. SP500 inverse correlation -0.46
- USD vs. Oil inverse correlation -0.70
- USD vs. CRB Index inverse correlation -0.90
And being a steadfast Gold Bond Bull, I most certainly wouldn’t enjoy it either (Gold’s 2-week inverse correlation with USD is -0.78). So how about from a positioning and sentiment perspective? Who’d be up for a rate hike (CFTC futures & options data)?
- SP500 (Index + Emini) net LONG position ramped another +22,325 contracts last week to +227,291
- Russell 2000 (mini) net LONG position built to a YTD high of +22,075 (that’s 2.89x on a 1yr z-score!)
- 10YR Treasury net LONG position doubled by +61,722 contracts (week-over-week) to +120,196
- Crude Oil net LONG position came down -10,612 week-over-week to +373,618
- Gold net LONG position came in -26,802 week-over-week to +238,152 (that’s +1.07x on a 1yr z-score)
In other words, Janet, from a net positioning perspective everyone is NET LONG everything!
I get that. Ex some Financials shorts (gotta ex-out when I don’t like being wrong, eh?), that’s why I was positioned as long as I’ve been all year (net and absolute) in our Real-Time Alerts and Asset Allocation products last week.
But also understand that if we move back to the top-end of my immediate-term risk ranges in some of these asset classes, I’m a seller, not a buyer of green. Lots of macro market signals are currently implying range bound markets so buy/cover red, sell/short green.
Financials (XLF) were +1.9% last week to +3.1% YTD, I assume, because more than a few of you are thinking there’s still a better than 32% chance that she raises rates. I hear you. Same old song on “it’s only 25 beeps.” Nothing new vs. what I heard in DEC there.
That’s probably why the 2yr and 10yr US Treasury Yields were only down -3 and -6 basis points, respectively, week-over-week. Pre the August ISM print of 49.4 the 2yr Yield tapped 0.85%. Now it’s back down to 0.79%. The 10s/2s Yield Spread remains at +81bps.
But Utilities (XLU) and REITS (MSCI Index) were +1.0% and +1.5% week-over-week to +14.7% and +12.0% YTD, respectively, too. So what is it – hike or no hike?
Maybe there’s nothing new to see here at all as the 1-year old #GrowthSlowing TREND @Hedgeye remains firmly intact.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.52-1.62%
SPX 2165-2187
VIX 11.21-14.32
USD 94.39-96.50
Oil (WTI) 42.99-46.18
Gold 1
Best of luck out there this week,
KM
