“It’s the hard-to-predict behavior of other people that keeps the game interesting.”

-Nir Eyal

No, I’m not alluding to the political discourse in this country. My job isn’t to opine on politics and feelings about what “should” happen to economies. The Global Macro Game is best played by measuring and mapping what is already happening in markets.

The aforementioned quote comes from a chapter in Hooked titled “Variable Reward” where Eyal uses the behavioral examples of World of Warcraft and Farmville. You should ask your kids to play those games using linear economic theory and bell curves.

Unlike most academic textbooks, markets are non-linear and ever-changing. As Eyal reminded me “experiences with finite variability become less engaging because they eventually become predictable.” Markets don’t. That’s why I love them.

Dovish Fed Hike? - timing

Back to the Global Macro Grind

I also love that, as the Old Wall and its media was calling it a “rout”, the Dow, SP500, and Russell 2000 all closed at fresh all-time highs yesterday. If you didn’t love that, you weren’t buying the damn dip on the day prior.

Is the outcome of the 2017 game fair? Is it the right “valuation”? Have you ever in your life heard someone whine, daily, about how “overvalued” their house is? How about their kids?

Oh, right. If you’re already long them, you love them at every price, don’t you…

To be fair, I know guys who hate their houses, spouses, and kids. Their behavior is sadly predictable. Fortunately, we don’t hang out. They’re in the minority of people who don’t play the game of building successful businesses and portfolios constructively.

So let’s get on with our day and try to make some more money.

What am I thinking the Fed does today?

  1. I’m looking for a Dovish Rate Hike from the Fed today (Down Dollar, Down Rates, Up Gold)
  2. Short-rates (3 month to 2yr duration) have been rising because Fed Fund Futures are predicting the hike
  3. Long-rates have been under the obvious pressure of Reflation’s Rollover
  4. As inflation expectations fall, the Fed generally fades on being overtly hawkish
  5. Janet, don’t forget, is the Mother of All Doves and has a “central tendency” to fade as inflation does anyway

What’s a Dovish Hike? It’s when you hike (hawkish move), but then talk down your growth and inflation expectations in the presser. Since Yellen is actually “data dependent” (on a wicked lag with no accuracy looking forward), she’s predictable.

I think that’s why the debate about the Fed this year has “become less engaging.” This Federal Reserve likes it when what they are going to do next is already priced in to those Fed Fund Futures expectations.

This is not to say that as we move into Q3 that the Fed won’t be “surprised” (again) by the next move they are not forecasting (i.e. a real growth surprise in GDP to the upside in both Q2 and Q3). It’s simply to say what the market is currently saying.

When will both the Fed and consensus “blue-chip” economists pivot to a real growth narrative?

A) After that data is reported, not before

B) Give it time

Respecting that the market usually gives you time to carefully measure and map future outcomes is as critical a lesson as any I have learned in this profession. Infrequently does the slope of a trending sine curve for either growth or inflation whip around.

That said, on a sequential (shorter-term-non-trending-duration) basis, there’s plenty of whip. The non-linear nature of markets can whip you around in 8 hours of trading (see recent “Tech Rout” for details) with no change in fundamental data too.

Given that both Oil and the CRB Index continue to deflate, it’s almost too easy to predict what reported inflation data will do as we head into Q2 end and the beginning of Q3. The Hedgeye Predictive Tracking Algo on US Inflation (y/y headline CPI) says:

A) The Sine Curve for US Consumer Price Inflation (CPI) peaked in Q117 around +2.4% year-over-year (headline)

B) CPI should drop and roll by over 100 basis points intra-year to +1.8% and +1.1% by Q417 and Q118, respectively

Predictably, most of the blue-chippers who make up the Bloomberg Consensus Forecast are still anchoring on that > +2.0% inflation that already peaked. Give them and the Fed maybe another 3-6 months to catch up to what Mr. Market already thinks.

Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.12-2.29% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6160-6356 (bullish)
XOP 31.23-33.89 (bearish)
VIX 9.31-11.55 (bearish)
USD 96.30-98.75 (neutral)
Oil (WTI) 44.66-48.05 (bearish)
Nat Gas 2.85-3.08 (bearish)
Gold 1 (bullish)
AMZN 963--1025 (bullish)
GOOGL (bullish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Dovish Fed Hike? - U.S. Headline CPI Estimates YoY