“Somewhere between the bottom of the climb and the summit is the answer to the mystery why we climb.”
-Greg Child
Since today is Fed Rate Hike Day, I woke up inspired to learn a little more about hiking. Somewhat like the Bernanke and Yellen Federal Reserve Board teams, I’m not much of a hiker. But I love learning about why people love what they do.
Greg Child is somewhat of a famous Aussie born hiker, author, and movie-maker. If you look up something like the Top 10 Hiking Quotes, you’ll find some serious inspiration from both he and others!
Why Rates Climb is much more of a trivial matter than why one might find their soul on a mountain top. When growth accelerates, the bond market front-runs the Fed, bidding bond yields higher. Then the Fed hikes, on a lag.
Back to the Global Macro Grind…
Somewhere between the bottom of a bond yield (and growth slowing) cycle and the summit of growth’s acceleration is the answer that both consensus growth/valuation bears and the Fed eventually find along the way.
That’s why the real risk management question this morning isn’t what do rates do today – it’s where is growth’s summit?
You can start to answer that question by simply listening to the best strategist on Wall Street – his name is Mr. Market – he doesn’t sleep, and he re-prices reality each and every day.
If you’re looking for how my teammates and I try to find the summit in expectations for the US 10yr Yield, here’s what we do:
- Measure and map US growth and inflation, daily, using a predictive tracking algo
- Register back-tested economic data points and market signals, across durations
- Consider where bond yields move, within the risk range, on every incremental data point and signal
On process point #1, here’s how we’re mapping the next 4 quarters of year-over-year US GDP growth:
- Q1 = +2.28%
- Q2 = +2.59%
- Q3 = +2.89%
- Q4 = +3.09%
Then we consider what our year-over-year views imply relative to what Old Wall focuses on (the q/q annualized GDP prints):
- Q1 = +2.34%
- Q2 = +2.60%
- Q3 = +4.67%
- Q4 = +2.62%
No, the probable scenario of +4.67% Q3 2017 GDP headline is not a typo; neither is US GDP growth accelerating from the low of the mid-cycle slow-down (Q216 = +1.3% year-over-year growth) to double that growth rate and then climb higher in 2H 2017.
So, for arguments sake…
Let’s just imagine that both our view and Mr. Market’s macro messaging is correct, from here until the end of the summer time… right before Trump gets to pound his chest on an almost +5% GDP report…
By that time, rates will have “corrected” (as they always do – and probably will today) making a series of higher-lows… and the Financials (XLF) should continue to make a series of higher-lows and higher-highs, if they trade with rates.
Sure, the data may very well change (that’s why we do process point #2, daily)…
And that’s why I reserve the unalienable right to get my butt up at 4-something AM EST, every day, to measure and map current data and market conditions. I guess I’m kind of like a Sherpa in that regard. Maybe I’m some kind of a hiker after-all.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.49-2.65% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 34.99-37.22 (bearish)
RMZ 1091-1140 (bearish)
Nikkei 196 (bullish)
DAX 112 (bullish)
VIX 10.69-12.63 (bearish)
USD 100.59-102.50 (bullish)
EUR/USD 1.04-1.07 (bearish)
YEN 113.41-115.49 (bearish)
Oil (WTI) 46.39-50.42 (bearish)
Nat Gas 2.71-3.08 (bearish)
Gold 1189-1221 (bearish)
Copper 2.55-2.70 (bullish)
AAPL 138.16-140.21 (bullish)
AMZN 845-859 (bullish)
FB 136-141 (bullish)
GOOGL 849-869 (bullish)
BAC 24.97-25.83 (bullish)
TWX 98.00-99.40 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
