“I am but mad north-north-west: when the wind is southerly, I know a hawk from a handsaw.”
-William Shakespeare

It’s madness, utter madness. The idea that the Mother of All Doves can have the gall to be data-dependent (on delay) and swoop down on macro market tourists like a hawk? #Madness!

Mad Hawkish Dove - Hawk dove cartoon 06.06.2016

Back to the Global Macro Grind…

First, let’s review the “incoming-data” that changed Janet Yellen’s Fed forecasts, on delay:

  1. GROWTH – the Fed revised its 2017 US GDP forecast UP by 20 basis points from 2.2% to 2.4%
  2. INFLATION – the Fed revised its 2017 core PCE forecast DOWN by 20 basis points from 1.7% to 1.5%

Yep, nice and linear and tidy – 20 basis points up here, 20 basis points down there – and, voila, you generate a REAL growth surprise to the Fed’s prior REAL growth forecast.

Formally known by the Hedgeye Jedi community as Quad 1:

A) When INFLATION is falling in rate of change terms and…
B) Real GROWTH is accelerating, partly, as a result 

You can bet your Madoff (for the 2nd day in a row – those used to be super sure bets, btw), that your Federal Reserve Committee sees everything you’ve been seeing for the last 6 months, today.

So the question remains, what will they finally see (after the market prices it in) next?

  1. INFLATION: from a headline perspective should bounce again in SEP like it did in AUG, then rollover again in Q4
  2. GROWTH: GDP should surprise (again) to the upside unless our tracker’s forecast of +3.5% q/q SAAR for Q3 is wrong

The bigger alpha-generating question, of course, is in addition to a smack-down in all things “rate hikes on hold” yesterday, what else does the market currently see that this swooping-hawkish-dove will eventually see?

  1. Fed Fund Futures on the probability of a DEC 2017 rate hike have ramped to +61%
  2. UST 2YR Yield broke out to new YTD highs yesterday of 1.45%
  3. UST 10YR Yield is testing a @Hedgeye TREND breakout above 2.26%

And while #RatesRising from the thralls of that pre-Irma #hurricane low of 2.02% happened:

  1. Gold came off, hard, from the YTD highs established at 2.02% on the 10yr
  2. Bond Proxies (Utes and Staples) got crushed (in alpha space) vs. something rate sensitive like Bank Stocks (KRE)
  3. European and Japanese Stocks loved the madness of hawkishness (Dollar Up = Euro and Yen Down too)

Oh, and the “oh you just wait until rates rise” community of US stock market bears that came out of their 2017 hibernation intraday took a flying hawks beak to the eye socket yesterday too – the SP500 closed at yet another all-time high on the day!

Fun. What’s next?

As I’ve been outlining in these rants since I thought Bond Yields could have put in their YTD lows a few weeks back, the biggest “surprise factors” left in Janet Yellen’s current forecasts should be A) real GDP Growth surprises and B) Wage Inflation.

If she sees +3-4% US Wage Inflation and +3-4% GDP Growth, that Mad Hawkish Dove is going to have to pull forward rate hike expectations like Mr. Market just did.

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

UST 10yr Yield 2.08-2.32% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
RMZ 1155-1188 (neutral)
IBB 328-337 (bullish)
Nikkei 195 (bullish)
DAX 128 (bearish)
VIX 9.25-11.78 (bearish)
USD 91.20-92.80 (bearish)
EUR/USD 1.18-1.20 (neutral)
YEN 108.12-113.11 (bearish)
Oil (WTI) 47.30-51.33 (bearish)
Nat Gas 2.91-3.17 (neutral)
Gold 1 (neutral)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer

Mad Hawkish Dove - 09.21.17 EL Chart