“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!
Back to the Global Macro Grind…
First, let’s review the “incoming-data” that changed Janet Yellen’s Fed forecasts, on delay:
- GROWTH – the Fed revised its 2017 US GDP forecast UP by 20 basis points from 2.2% to 2.4%
- 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?
- INFLATION: from a headline perspective should bounce again in SEP like it did in AUG, then rollover again in Q4
- 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?
- Fed Fund Futures on the probability of a DEC 2017 rate hike have ramped to +61%
- UST 2YR Yield broke out to new YTD highs yesterday of 1.45%
- 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:
- Gold came off, hard, from the YTD highs established at 2.02% on the 10yr
- Bond Proxies (Utes and Staples) got crushed (in alpha space) vs. something rate sensitive like Bank Stocks (KRE)
- 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