“Remember, if you get lost in the woods.. stay where you are.”
Worried about the Fed hiking into a slow-down again? No worries. Of all the data driven dovish catalysts in 2016, a rate hike now would be the most dovish of all. So stay the course with your #GrowthSlowing positioning.
Dovish? Uh, yeah. Did you see what stocks, bonds, and commodities did on a Fed voter (Rosengren) ramping his rate hike rhetoric on Friday? How about eviscerating all the no-volume “gains” of the SPY’s summer on a +46.5% volatility (VIX) spike?
Notwithstanding that Eric Rosengren has been crushing it at the Fed since 1985, remember that he has little to no credibility on forecasting. If his “data dependent” path is really SP500 dependent, boy did he go dovish over the weekend!
Back to the Global Macro Grind…
Interestingly, but not surprisingly, post the pop in Fed Fund Futures from 20% to 34% (on the probability of a SEP hike), that probability has actually dropped back down to 30% this morning. That’s why I’m staying where I am, long Gold and Bonds.
Heck, even my friends at Cornerstone have realized that “the composite PMIs suggest global growth is now clearly slowing” at this stage of what’s clearly been super #LateCycle. If you have friends who’ve missed being long bonds, here’s their last chance.
That’s right. Don’t forget where the performance in 2016 has really been:
- Long Bond Proxy (TLT) +12.4% YTD vs. SP500 +4.1%
- Gold up +0.6% in a sea of stock/bond red last week to +25.4% YTD
- Utilities (XLU) +11.97% vs. Financials (XLF) +0.88% YTD
I know it’s a little unnerving to think about buying bonds (and safe-yield stocks that look like bonds) into a potential policy mistake. But that’s precisely what you should have done on the day that Yellen raised rates in December.
So why wouldn’t you stay where you are ahead of more US #GrowthSlowing data this week?
- Producer Prices (PPI) will be released on THUR alongside slowing Retail Sales and recessionary Industrial Production
- Consumer Prices (CPI) will be released on FRI alongside consumer confidence which recently hit a 4 month low
Doesn’t this set up nicely for another positive “surprise” by Janet to pivot back to dovish, right before the election? As you can see in the Chart of The Day (her former “favorite” indicator – the Change In Labor Market Conditions Index), it’s very red.
And, again, on Friday so was what’s become her new fav indicator – the stock market. Very very, you-gely, red.
As we’d been highlighting throughout the thralls of the summer, positioning into this recent Fed pivot to “hawkish” (their 6th hawkish/dovish pivot in 8 months) was that everyone was pretty much long everything.
Into this correction, both stocks and bonds have seen their net LONG positions correct:
- SP500 (Index + Emini) net LONG position down to +193,281 contracts last week = 1.79x (1yr z-score)
- 10YR Treasuries net LONG position = +128,954 contracts = 1.75x (1yr z-score)
- Oil’s net LONG position down -47,733 contracts last week = +0.27x (1yr z-score)
- Gold’s net LONG position up +40,842 contracts last week = +1.40x (1yr z-score)
- US Dollar’s net LONG position up small last week to +16,834 = -0.69x (1yr z-score)
In other words, most of Wall Street was positioned with the #GrowthSlowing data for a Dollar Down, Rates Down, Stocks Up scenario… and Rosengren messed things up, momentarily, on Friday. So now Yellen needs to come to the rhetorical rescue.
I’m not saying it’s up, up, and away for everything in the #GrowthSlowing Bubble (everyone’s long everything already). I’m just reminding you that any time you’ve been lost on this ‘hike or no hike’ expedition, staying where we’ve been has paid.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.51-1.70%
Oil (WTI) 42.79-48.01
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer