“The enemy would be confused: that would produce unpredictable openings.”
-Tim Harford
In Chapter 5 of Messy – The Power of Disorder To Transform Our Lives, Tim Harford discusses the unconventional strategy of German Field Marshall Erwin Rommel:
“He believed that opportunities arose from confusion on the battlefield, and tried to generate more opportunities by creating more confusion. His rapid movement and bold independent action created a feedback loop… this was a messy approach because the rapid, relentless, and unpredictable movements that so baffled the enemy would also confuse his own side.” (pg 119)
In the short-term, confusing everyone can be effective. In the end, that strategy didn’t work for Rommel. Thank God for that.
Back to the Global Macro Grind…
On the heels of more US #GrowthAccelerating data (Durable Goods Ex-Defense & Aircraft accelerated from its 2016 #recession to +3.6% year-over-year growth and GDP accelerated to +1.9% year-over-year), the Nasdaq closed at another all-time high on Friday.
While the year-over-year growth rate in US GDP missed our forecast by 30 basis points (we were at +2.2% year-over-year), +1.9% is still an acceleration vs. the 2016 low of +1.3% year-over-year growth in Q2.
We had the always important Consumption part of the GDP equation right. The swing factor on our GDP forecast being off was the -1.7% drag from “net exports.” You have to go back to 2010, to find a drag that was that impactful to the final print.
Net, net, net though…
- Growth accelerated in Q4 (particularly in NOV-DEC)
- Inflation accelerated in Q4 (the GDP Deflator accelerated from 1.4% to 2.1%)
- And that’s what we call Quad2 (when growth and inflation are accelerating, at the same time)
In Q1, we have a modest deceleration in growth, but an acceleration of the acceleration in inflation. We call that Quad3. That, though, is subject to revision (like our GDP forecast always is) as we roll 30 data points per month into our model.
After we get the US Income and Consumption #s for DEC (this morning), we’ll get a nice batch of initial Q1 data:
- TUE – US Consumer Confidence (JAN)
- WED – ISM (JAN)
- FRI – Jobs Report (JAN) and ISM Services (JAN)
If the headline Durable Goods data confused consensus last week (Old Wall’s media called it a “miss”), that’s cool – we like to capitalize on confusion! The US Equity market didn’t look confused whatsoever on owning high beta Style Factors:
- High Beta was +2.0% last week (vs. Low Beta -0.1%)
- Higher Beta Basic Materials (XLB) were +3.4% on the week
- Lower Beta Utilities (XLU) were -0.5% on the week
Bond Yields weren’t confused about growth and inflation accelerating either:
- UST 10yr Yield was up for the 2nd straight week, +2bps to 2.48%
- Financials (XLF) were +2.2% on the week
- Gold was -1.4% vs. Copper +2.5% week-over-week
Doubleline’s Jeff Gundlach recently explained why he’s watching the relationship between Gold and Copper. That’s one way to measure and map inflation expectations. I agree with him, 100% on that.
If you have to hang your hat on 1 of our 2 major US economic factors (Growth or Inflation), I think it will be a lot easier to see #InflationAccelerating throughout Q1.
As you can see from our proprietary commodity price sample (Chart of The Day), its year-over-year growth rate has been a good predictor of CPI (Consumer Price Inflation). So it’s a good bet that the grey line in that chart catches up to the black line again.
While I’m not a fan of chasing markets after they do what I thought they’d do, I’ll be looking for buying opportunities in Higher Beta Inflation Sectors if/when we see a correction from last week’s overbought US stock market highs.
Sell some high, so that you can buy some back lower. I don’t think I’ll confuse anyone with that strategy.
Our immediate-term Global Macro Risk Ranges (with TREND Research Views in brackets) are now:
UST 10yr Yield 2.35-2.58% (bullish)
SPX 2 (bullish)
NASDAQ 5 (bullish)
Nikkei 19040-19530 (bullish)
DAX 119 (bullish)
VIX 10.01-12.83 (bearish)
USD 99.71-102.18 (bullish)
EUR/USD 1.05-1.07 (bearish)
YEN 112.25-116.00 (bearish)
Oil (WTI) 51.88-54.12 (bullish)
Nat Gas 3.18-3.50 (bullish)
Gold 1180-1214 (bearish)
Copper 2.58-2.74 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
