“Monster is a relative term. To a canary, a cat is a monster. We're just used to being the cat.”
-Dr. Henry Wu, Jurassic World
The spread between those supporting and those against legalizing marijuana has gone from -30 to +20 over the last decade.
“Acceptable” is a time relative term and conventionalism is used to being the cat.
Apolitically, has consensus detachedly canvassed the opportunities inherent in creative destruction?
Hedgeye was, after all, birthed from the creative destruction of the financial crisis and the implosion of institutionalized, levered conventions of an antiquated model.
Back to the Global Macro Grind…
Friday Early Looks are kind of like the proverbial butt-piece of the weekly missive loaf, particularly in the summer or when there’s a relative dearth of domestic macro data.
But that’s cool. I get more editorial latitude.
Conventionally, we have a single Chart of the Day. It’s self-imposed and it’s more of a guideline than a rule.
However, since it’s #ButtPieceFriday, the econ flow has been fast & furious in the past week and I have a soft spot for (hedg)eye-candy, we’ll go chart-centric this morning:
Data Dependent or Frexit Front-running? Dude, not another March Rate Hike probability reference, please …. Powell added to the unified chorus of hawkishness from FOMC officials yesterday, helping send March Rate Hike odds above 90%. Remember, it was the Fed who explicitly requested a handoff to fiscal policy and it would make strategic sense to coordinate policy to act alongside developments on the fiscal side. And up until the last week+, it appeared they were, indeed, adjusting the policy course with the rate of progress on fiscal initiatives.
Why the apparent audible?
Outside of the simple fact that the data supports it, the most accessible answer is probably the global catalyst calendar. If you’ve talked up 3 hikes for 2017 and delivered 0 with 25% of year gone and the data accelerating, your runway is shortening and last vestige of credibility evaporating. Moreover, European markets are pricing more event risk around the French elections in April/May than are domestic markets. If the Fed doesn’t move now –with global conditions relatively benign and trough comps + organic improvement supporting accelerating growth & inflation – it may be stuck until 3Q in the (not unlikely) event global macro risk percolates.
Growths Trinity: Dollar Up, Rates up, Stocks up is the Reflation Trinity and is unequivocally a growth accelerating signal. Positive Dollar-Equity and Equity-Rates correlations predominated out of the election as equity cross correlations fell and return dispersion got a lift as reflation and policy levered exposures caught a relative bid. Those correlations were beginning to flag over the last month before Fed commentary and the Trump address catalyzed their resurgence. Notably, unlike the wholesale repricings that characterized growth and inflation expectations immediately post-election, markets have become increasingly discriminant in their expectations. For example (see Inflation bullet below)…
Inflation Discrimination: The yield spread (10Y-2Y) has flattened as rate hike and reflation expectations have coalesced around the short-end. Indeed the TIPS curve has inverted with 2Y Breakevens (i.e. inflation expectations) now running at a positive spread to 5Y and 10Y.
Flows: Domestic equity flows turned positive for the first time in 2017 last week, measuring +$807 million and breaking a streak of 11 consecutive weeks of outflows according to our Financials team fund flow tracker. Equity ETFs had net subscriptions of +$5.8 billion, trailing the year-to-date weekly average inflow of +$6.7 billion but outpacing the 2016 average inflow of +$2.5 billion. The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.4 billion spread for the week (+$8.2 billion of total equity inflow net of the +$6.8 billion inflow to fixed income). Can ‘extreme overbullishness’ aptly characterize market conditions when domestic (mutual fund) equities are seeing net outflows?
LaborLottery: Initial Jobless claims measured +223K in the latest week, marking the lowest level since March 31st, 1973. Prior to the week of the Trump election in November, claims had not reached levels below 240k since November 1973; however, we have now not only witnessed six separate instances of weekly claims falling below 240k in the last 16 weeks, but three of those instances have occurred in the last month. Not firing someone is a fundamentally different decision than ramping headcount but the monthly employment figures are a net number and decade low counts on the separations side augur positively for headline NFP. At current levels, you almost have a better chance of winning $50K in Powerball than you do of getting fired.
Long the Rich: While Total Consumption growth decelerated modestly in January, luxury goods consumption accelerated +510bps to +4.3% YoY in JAN, which marks the fastest pace of growth in 14 months. Will resurgent asset price inflation support reacceleration in high-ticket discretionary consumption?
Income Growth: While Spending growth was mildly disappointing in January, aggregate income growth accelerated. The deceleration in consumption is a net negative from a GDP accounting perspective but it’s the trend in income growth that drives the capacity for consumption growth and defines the trend in household spending. Notably, aggregate wage and income growth diverged from that implied by the January NFP data, suggesting the slowdown in reported wage growth may have been overstated.
Millennial mojo? Total Household formation growth slowed to +0.85% YoY or approximately 1.07M households in January. Broadly, this represents a 10th month of slowdown off the +1.36% YoY or 1.56M pace recorded in Mar/April of last year.
Notably, gains over the last year have become increasingly concentrated within the prime, young buyer cohorts of 18-34YOA and 35-44YOA. This had not been the case in the early years of the housing recovery with net household formation disproportionately occurring in the >55YOA demographic. The most recent January, 2017 CPS survey showed +352,973 more Households were formed by 18-34 year olds than in January 2016. This represents a year-over-year increase of +1.3%, which is more than 2x the growth rate observed in each of the two previous years. The 35-44 year old age cohort, meanwhile, realized their first net gain in 3 years with an annual increase of +208,692 households (+1% YoY) in January.
Capex: With ISM New Orders making a 39-month high, Backlogs rising the most in 49-monhts and inventory-to-sales ratios declining the backdrop for further strength in manufacturing/industrial activity over the nearer-term is good. The conspicuous inflection in capital expenditure plans should also support investment and production should those “soft” plans flow through to “hard” new orders.
There’s a fetish for everything. Mine, apparently, is a proclivity for anti-conventionalist butt-piece macro data mosaics. Who knew?
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.54%
SPX 2
VIX 10.88-12.86
EUR/USD 1.04-1.06
Gold 1
Enjoy the weekend,
Christian B. Drake
U.S. Macro analyst
