Essentially Quad 1

“The wisdom of life consists in the elimination of non-essentials.”
-Lin Yutang

 That’s the opening volley from a new book I started reading this weekend by Greg Mckeown titled Essentialism. While I’m not sure if it’s the wisdom of life, eliminating the noise of Macro Tourists is essential to getting your asset allocation and sub-sector exposures right!

Essentially, the NASDAQ (+4.2% on the week to +9.5% YTD) rocked another all-time closing high on Friday because that’s the #1 major Global Equity Index you should be long of when the US economy is in what we call Quad 1.

What is Quad 1? That’s when reflation rolls over, sequentially, and real growth accelerates. On a year-over-year basis, don’t forget that US GDP is at its current highs for the cycle. That’s always good for jobs growth. The year-over-year growth rate in NFP accelerated on Friday too. 

Back to the Global Macro Grind… 

Got some Goldilocks in that Macro Monday oatmeal breakfast? Just a sprinkle of toned down wage growth and we have ourselves a beautiful rear-view mirror to look back into as we consider last week’s macro moves within the context of @Hedgeye TRENDs. 

First let’s look at the week-over-week moves in FICC (Fixed Income, Currencies, Commodities):

1. US Dollar Index +0.2% on the week was its 3^rd consecutive “up” week but remains Bearish TREND @Hedgeye (barely)
2. EUR/USD was down -0.1% last week on Dovish Draghi commentary and is now signaling Neutral TREND @Hedgeye
3. Yen (vs. USD) was down -1.0% last week and the Nikkei enjoyed that, bouncing off its YTD lows from the week prior
4. CRB Commodities Index was +0.5% last week, under-performing most things Equities, but remains Bullish TREND @Hedgeye
5. Oil (WTI) bounced +1.3% to lower-highs last week and remains Bullish TREND @Hedgeye
6. Gold didn’t like Dollar Up, Rates Up last week and it closed flat week-over-week at +0.8% YTD = Bullish TREND @Hedgeye
7. Copper only bounced +0.4% last week and remains Bearish TREND @Hedgeye at -5.4% YTD
8. Corn reflated another +1.4% last week and remains Bullish TREND @Hedgeye at +8.8% YTD
9. UST 2yr Yield was up +2 basis points last week to 2.26% and remains Bullish TREND @Hedgeye
10. UST 10yr Yield was up +3 basis points last week to +2.89% and remains Bullish TREND @Hedgeye

Dollar Up, Rates Up, Stocks Up. 

Yep, that all made sense. So does the UST 10yr Yield signaling lower-highs within that Bullish @Hedgeye TREND. Why?

A) We should be getting our 1^st Reflation Rollover data point via headline inflation (US CPI) tomorrow
B) The biggest net SHORT position in all of macro (CFTC futures & options contracts) remains 10yr Treasuries 

I wouldn’t be surprised if the US Dollar corrects again on inflation expectations correcting. Essentially, what made rates rip higher was the SEP17-JAN18 reflations in big macro factors like Oil and base metals don’t forget. They’re all signaling lower-highs in my process now. 

How about that US stock market move last week!

1. SP500 was up +3.5% last week to +4.2% YTD and remains Bullish TREND @Hedgeye (despite signaling lower-highs as well)
2. NASDAQ was +4.2% last week to +9.5% YTD and remains Bullish TREND @Hedgeye
3. Russell 2000 was +4.2% last week to +4.0% YTD moving back to Bullish TREND @Hedgeye

Underneath the hood, here’s how US Equity Sector Styles did last week: 

1. Tech (XLK) led the charge, closing +4.2% on the week to +10.3% YTD = Bullish TREND @Hedgeye
2. Consumer Discretionary (XLY) was up another +3.1% last week to +7.7% YTD = Bullish TREND @Hedgeye
3. Utilities (XLU) lagged again, only +0.9% last week to -6.2% YTD = Bearish TREND @Hedgeye

Ex-Tech, my problem right now is that everything I like on the long-side is signaling lower-highs within their respective Bullish @Hedgeye TRENDs. At the same time, everything I haven’t liked (Slow-Growth Bond Proxy Sectors) are signaling higher-lows within Bearish TRENDs. 

Those equity market signals rhyme with both my bond yield signals and research process. Reflation’s Rollover Part Deux should be an immediate-term headwind for Treasury Yields even though they remain Bullish TREND @Hedgeye across the curve. 

Interestingly, but not surprisingly given headline inflation reports continue to slow on a year-over-year basis, European Bond Yields look nothing like US ones. Here’s what happened in some key 10yr Yield barometers last week:

A) Spain’s 10yr government yield dropped another -11 basis points last week to 1.44% = Bearish TREND @Hedgeye
B) Greece’s 10yr government yield fell another -17 basis points last week to 4.18% = Bearish TREND @Hedgeye

In the case of inflation expectations falling in Europe, that was an easy call for the ECB’s Mario Draghi to call out. The data doesn’t lie; people shorting European bonds on “relative value” to the US cycle sometimes do!

On that score, US Growth Bulls aren’t just crushing it in Sector and Style Factor terms (Top 25% of SP500 SALES growers were up another +4.4% last week to +6.5% YTD). They’re crushing both European and Asian Equity indexes YTD as well.

Here’s how some key EM Asia Equity markets diverged vs. US Growth styles last week:

1. India was down -2.4% to -4.3% YTD
2. Indonesia was down -2.3% to +1.2% YTD
3. Philippines was down -1.0% to -2.2% YTD

Essentially, that’s part of our new “Underweight EM” Macro Theme @Hedgeye right now as well. Since our call is for China to continue to slow as the USA enters its later cycle consumption phase, we wanted to make that Quad 1 US Growth call both relative and absolute.

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

UST 10yr Yield 2.82-2.93% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Biotech (IBB) 109-115 (bullish)
VIX 14.29-22.65 (bullish)
USD 89.40-90.75 (neutral)
EUR/USD 1.21-1.24 (neutral)
YEN 105.30-107.49 (bullish)
Oil (WTI) 59.90-63.36 (bullish)
Copper 3.07-3.18 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer