Q3 GDP's Character

“History teaches that character counts. Character above all.”
-David McCullough

History also reminds us “that nothing counterfeit has any staying power, an observation, incidentally, made by Cicero about 60 BC” (The American Spirit, pg 58). Someone should remind Kim Jong Un about that.

On many mornings of 2017, the US stock market has made history too. All-time, as we often remind ourselves, is a very long time. No matter what your market views this year, the all-time highs for the Dow, Nasdaq, and SP500 have been impressive.

Instead of worrying about Trump’s tweets, “valuation”, North Korea, etc., we’ve been trying to worry US Growth Bears about one very basic concept. And that is US GDP #Accelerating, throughout 2017. We’ve had 4 straight quarters of that. Will we have a 5^th?

Back to the Global Macro Grind…

Indeed, despite 2 monstrous hurricanes hitting us hard, we should have a 5^th consecutive quarter of year-over-year #acceleration in the US GDP data series. As of Friday’s real-time data, the Q3 #acceleration won’t be as big as it could have been, however.

For those that are “too bullish” on 2^nd half 2017 US Growth, that last sentence may bother their inner-confirmation-biases and/or make them “feel” something that isn’t as bullish as it felt before. 

As for me, when our GDP “nowcast” tracker ticks up or down, I don’t feel anything at all.

We strive to be data dependent to the core. We don’t try to pander to a trending direction of the data. We try to measure and map it, in real-time, and change as the data does. Here’s what changed in AUG: 

1. INFLATION: consumer price inflation ticked back up, sequentially, to +1.9% in AUG (Reflation’s Peak was 2.7% in FEB)
2. RETAIL SALES: slowed, sequentially, to +3.2% year-over-year in AUG (vs +3.5% in JUL)
3. INDUSTRIAL PRODUCTION: slowed, sequentially, to +1.5% year-over-year in AUG (vs. +2.4% in JUL)

Yes, hurricanes matter to GDP. And no, the #accelerations we saw in JUL data isn’t backed out of GDP for Q3.

So, fully loaded with big components of Industrial Production getting hammered by Harvey (Utilities Production, i.e. hurricane related electricity production dropping -7.8% year-over-year with the power out), here’s our updated US GDP view for Q317:

1. Q3 GDP ticks down to +2.42% year-over-year growth (vs. +2.2% in Q217)
2. Q3 GDP ticks down to +3.63% on a q/q SAAR basis (vs. +3.0% in Q217)

To be fair, this is where Macro Tourists can get lost. Whenever a sequential (month-over-month) move goes counter to the intermediate-term TREND (3 months or more), navigating what’s in between a human’s ears can be challenging.

But don’t get confused by your cognitive dissonance. Embrace non-linearity. Live a healthier and more objective life!

Back to Mr. Market’s latest signals, here’s how the big stuff moved in Global Macro last week:

1. US Dollar Index up +0.5% to -10.1% YTD but remains bearish TREND @Hedgeye
2. EUR/USD corrected -0.8% to +13.6% YTD, just inside its @Hedgeye TAIL Risk level of $1.194
3. Yen (vs. USD) -2.7% to +5.6%; Nikkei loved that, closing +3.3% week-over-week
4. British Pound ramped +3.0% taking its YTD gain to +10.2% after being left for dead in 2016
5. CRB Commodities Index reflated another +1.6% to -4.4% YTD and remains bearish TREND
6. OIL (WTI) bounced another +4.9% to still a bearish TREND of -12.6% YTD
7. Gold didn’t like real rates rising and corrected -2.1% on the week to +13.5% YTD (bullish TREND)
8. Copper corrected on #ChinaSlowing data, closing -3.0% on the week to +16.8% YTD
9. Corn prices deflated another -0.6% to -6.6% YTD and remain bearish TREND @Hedgeye
10. UST 2-year Yield popped +12 basis points (bps) on the week to +1.38% = +19bps YTD
11. UST 10-year Yield bounced +15 basis points (bps) on the week to +2.20% = -24bps YTD
12. SP500 ramped another +1.6% on the week to an all-time closing high of 2500 = +11.7% YTD

In summary, that was what we call a “reflation” week of market moves. Since that came on the heels of reflation bouncing in AUG, commodities sustaining these levels should have a non-reflation-rollover month in SEP, before resuming the TRENDING year-over-year #ReflationRollover in both Q417 and Q118 as the base effects (year-over-year compares) steepen, significantly.

While these counter-TREND moves should cloud the “conviction” investors have with being in what we call Quad 1 (when inflation is slowing and real growth accelerating), that’s what both markets and data do.

Sure, GDP’s #Accelerating Character is easy to see for intermediate to longer-term investors. But, in the immediate-term, I still have to call the data and market moves for what they are and help you manage their associated risks.

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

UST 10yr Yield 2.02-2.24% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Nikkei 19156-20060 (bullish)
VIX 9.61-12.57 (bearish)
USD 91.10-92.75 (bearish)
EUR/USD 1.18-1.20 (neutral)
YEN 107.75-111.68 (bearish)
GBP/USD 1.32-1.36 (bullish)
Oil (WTI) 47.21-50.52 (bearish)
Gold 1 (bullish)
Copper 2.90-3.05 (bullish)

Best of luck out there today,
KM 

Keith R. McCullough
Chief Executive Officer