“In the late 1970s, I began sending my observations about markets to clients via telex.”
-Ray Dalio
For Ray Dalio that was the beginning of what he calls Daily Observations. “Forty years and ten thousand publications later they are read, reflected on, and argued about by clients and policy makers around the world. I’m still writing them.” –Dalio, Principles pg 23
While I’m only 10 years into writing Early Looks and I have a lifetime of learning ahead of me, there’s nothing that has expedited my education about economies and markets like having to explain myself to all of you at the top of the risk management morning.
I’m humbled by how many people actually read my morning macro rants. I’m also aware that it’s a great privilege to have not only your attention but your feedback. Without both I would learn a lot slower. I’d make mistakes more often too.
Back to the Global Macro Grind…
Mistakes? Huh? What are those? No one freaked out and sold last week’s lows in the US stock market, did they? Did they have to explain their reasoning for doing so? Do they have to write thousands of you a memo on why they’re now chasing the market higher today?
Who knows what the answers are to those questions and who really cares. It’s not pertinent to the point of Early Looks – and that’s to not only make market timing calls but to explain the process behind my team’s decision making.
Since we’ve been waiting, patiently, on the last of the sequentially (month-over-month) #accelerating US inflation data, once we get this morning’s Producer Price Inflation (PPI) report for the month of January 2018, most of the headline reflation data will be in.
Rather than chasing the hottest Macro Tourist Destination of the week, here’s our call on inflation from here:
- European Inflation should continue to slow throughout Q1 of 2018 – they have no “wage inflation” to worry about
- US headline inflation should rollover from the SEP 2017 to JAN 2018 reflation in the coming months
- UST 2 and 10yr Yields should back off the top-end of their respective @Hedgeye Risk Ranges
Why?
- Spanish, German, Swiss, etc. inflation for JAN has already been reported as rate of change slow-downs
- In the USA, the inflation base effects steepen, materially, in FEB – and our commodity price sample basket is deflating
- The top-end of the @Hedgeye Risk Ranges for 2s and 10s are 2.20% and 2.93%, respectively
Within the context of our GIP (Growth, Inflation, Policy) modelling #process, this means that:
A) The US Economy was in Quad 2 (growth and inflation accelerating at the same time) from SEP17 to JAN18
B) The US Economy is entering Quad 1 in FEB of 2018 (that’s when inflation slows, sequentially, and real growth accelerates)
Since the headline JAN18 inflation growth rate was +2.1% year-over-year (vs. the same growth rate in DEC17), and US Retail Sales SLOWED to +3.6% year-over-year in JAN vs. +5.2% in DEC, our predictive tracking algo for REAL GDP fell yesterday. Here’s that update:
A) Our year-over-year US GDP nowcast fell from 2.72% year-over-year to 2.58%
B) Our quarter-over-quarter US GDP SAAR nowcast dropped from 2.02% to 1.56%
No, that +1% handle on headline US GDP is not a typo. Since that’s the headline number that Macro Tourists will be slapping all over the place when Q118 GDP is reported in April, I think dropping from Trump’s beloved +3% handle to +1% will probably matter.
In conjunction with sequentially slowing inflation reports, a “+1.56% US GDP” report will probably be seen as dovish by the bond market too. As always, as the data changes, our nowcast for GDP will. So stay tuned on that front.
Is it possible that the Atlanta Fed’s forecast for +3.25% q/q SAAR (headline) GDP is accurate? Sure. Is it probable though? No. If our process wasn’t predicting probable outcomes, I wouldn’t waste my time writing about them.
Is it possible that inflation expectations (and the market positioning embedded therein) haven’t peaked?
A: Yes.
But, again, my job as your Global Macro Risk Manager isn’t to spend my every waking moment writing about possibilities. It’s making calls on probabilities. I don’t make calls when the probability of something happening is 0 to 60%. I try to make higher probability calls.
Going all the way back to Q4 of 2016, our highest probability “call” was that real US Growth would accelerate. Our initial Reflation Rollover call from March to August of 2017 perpetuated higher REAL GDP forecasts throughout the year.
That’s right, when reflation rolls over, you get more REAL growth. When inflation reflates, you get less. That’s why, for the 1st time in 5 quarters, we have the lowest headline (q/q SAAR) forecast for US GDP on Wall Street.
Oh, and by the way, this is the first time in 15 months that the quantitative component of my risk management process is signaling lower-highs (from what we’d been calling for as fresh all-time highs) for the SP500 too.
That means that after the 5-day bounce you’ve seen in US Equity Beta, you should take down your gross exposure to some of our favorite longs (US Growth) and shorts (Slow Growth Bond Proxies) too. If my highest probability views change, I’ll write about them.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.71-2.93% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
DAX 114 (bearish)
VIX 14.09-39.24 (bullish)
EUR/USD 1.22-1.25 (bullish)
YEN 106.22-108.92 (bullish)
Oil (WTI) 57.24-65.98 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
