Q: How many sides does a sausage link have?
A: Two. An inside and an outside.
I love sausage …. Italian sausage, breakfast sausage, sausage parties …. everything.
I refuse to watch any documentary on how it’s made on the off chance it catalyzes some epiphanous anti-pork rebirth.
Want to know how the Early Look sausage is created?
You may be disappointed.
…or you may gain a deeper appreciation for how to understand & contextualize the daily content.
Much of the missive’s beauty lies in its constraints and there is a primary fundamental constraint in EL fabrication:
There is a finite production timeline of, generally, 45-90 minutes. That’s it. From conceptualization to content creation to editing to your inbox.
Our collective process is designed to curate, distill and contextualize what’s evolving on the macro margin, so time constraint shouldn’t be taken to = half-baked analytics.
It does, however, mean that:
- The focus is necessarily and purposefully narrowed. We can’t boil and re-boil the global macro ocean every morning in < 900 words.
- What’s gained in expedient, largely unfiltered content is lost in linguistic massaging. We’re careful and direct in our messaging but there’s only so much time for tone crafting and precision phraseology.
After all, undressed of all the officialism, I’m just a dude, Hans Solo, in a room at 4 am with data and an hourglass.
I bring this up because it’s a practical reality and because a large share of my post Early Look inbox flow of late has been dedicated to … "What about W, X, Y, Z and…” and “your specific adjective choice seems to suggest…” … type of commentary.
But I mostly bring it up as an elaborate pre-emptive excuse for this morning’s content in case I happen to throw up an expository brick in whatever’s below.
And because this morning’s constraints are especially acute. It seems inappropriate to call it a “bender” but with a double header of @Hedgeye holiday festivities the past two nights, we’re on the wrong side of a multiday celebratory bonanza.
Congratulations to my teammates on a great year and thank you, again, for your active participation in helping us evolve this living, real-time experiment in investment research democratization.
Anyway, doing your best work on your worst day is how your life’s belt earns its notches so let’s grind some domestic macro sausage.
Back to the Domestic Macro Grind…
Below is a summary review of this week’s fundamental data along with the associated implications.
BUILDER CONFIDENCE: Trumphoria has been pervasive in the post-election sentiment data as Consumer Confidence has breached new cycle highs and Small and Regional Business Confidence Surveys have gapped higher since October.
With the NAHB HMI jumping +7pts to a fresh cycle high of 70 in December, Builder Confidence is not proving an exception. The question going forward is whether improved confidence translates into increased volumes. The answer should be forthcoming shortly as there appears to have been a pre-election suppression of activity followed by a post-election resumption. Over the next month we should have a cleaner read on the real underlying volume dynamics.
The +7 pt increase in the headline reading marks the largest sequential increase in 4 years while the +9 pt levitation in the Expectations series was the largest since the inflection of the housing market trough in 2012. As can be seen in the chart below, historically, sequential increases of similar magnitude have typically been confined to early, post-recession bounces off of confidence troughs and are a particular rarity in late-cycle, rising rate environments.
More subdued but still large-scale gains across the Current Sales (+7pts) and Current Traffic (+6pts) series suggest a tangible pick-up in actual activity in conjunction with the more visceral surge in forward expectations.
Some measure of increase would accord with the nascent improvement evident across the broader domestic macro data but we’re content to await further confirmation as the honeymoon period of pre-inauguration politicking transitions to the less empyreal business of policy creation.
RETAIL SALES: Retail Sales which, recall, represents household spending on goods, equals ~35% of total consumption and ~25% of Total GDP. Goods consumption was the source of relative strength to start 4Q, helping buttress total Consumption growth in October. There are a few implications from this week’s November update:
- Both Headline and Control Group sales rose +0.1% MoM in November alongside a negative -20bps revision to October. On a year-over-year basis, sales growth across both aggregates in Oct/Nov is accelerating relative to 3Q16. From a GDP accounting perspective, Control Group sales in 4Q are currently tracking +3.6% QoQ annualized (compared to 1.1% realized in 3Q16).
- Goods Consumption is accelerating relative to 3Q but the net impact of the November data and negative October revision will be to shade consumption growth estimates modestly lower.
- Services consumption will have to see a positive revision to October and/or strong Nov/Dec growth in order for Consumption to maintain a similar contribution to headline growth as that observed in 3Q16. As it stands, Total PCE needs to grow ~0.3% MoM, on average, in both Nov/Dec to remain a similar support to GDP in 4Q.
TEA-LEAFING TRUMP: As can be seen in the scatter plot below, goods consumption is the most cyclical component of household spending with durables expenditures showing the largest sensitivity to macro and credit conditions. The broad surge in consumer confidence is notable in light of the fact that durables consumption has emerged as a relative support to Total Consumption growth. Further, revolving credit growth remains near cycle highs as of the latest October data and growth in durables and growth in credit card spending are strongly correlated.
The intuition is fairly straightforward and the factor flow can be sufficiently described as follows:
Confidence ↑ --> Credit Growth ↑ --> Durables/Higher-Ticket Discretionary Consumption ↑ --> Total Household Spending ↑
…. thus, durables consumption serves as a decent barometer for the collective state of domestic consumerism.
It will be interesting to watch the interplay between confidence, credit and durables expenditure in the coming months.
As we’ve highlighted, whether resurgent optimism proves a durable phenomenon or manifests in a sustained inflection in domestic consumerism or business investment (post-inauguration) remains to be seen but gross dismissal of step function changes in key indicators is rarely prudent risk management in reflexive Macroeconomies – particularly when emergent mojo in reported fundamentals is corroborating.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.64%
SPX 2
VIX 11.28-14.22
USD 100.55-103.35
EUR/USD 1.04-1.07
Oil (WTI) 49.09-53.42
Have a great weekend,
Christian B. Drake
U.S. Macro Analyst
