Adapting To Change

“Intelligence is the ability to adapt to change.”
-Stephen Hawking 

This morning’s Early Look title is dedicated to the memory and inspiration of British physicist and cosmologist, Stephen Hawking. He passed away this morning at the age of 76.

Back to the Global Macro Grind…

There are those who are constantly evolving and looking for better ways to do what it is that they have a passion to do, then there are those who don’t. Some can take constructive criticism; some can’t. Some will adapt to change; some won’t.

On a personal level, everything around me is constantly changing. My family and four children don’t get younger every day. Neither do I. As the clock ticks, we’re like any other family. We’re living and learning as we grow.

Growing a firm, my experience hasn’t been dissimilar. The clock ticks with the same cadence. Some grow up faster than others. Some prove to become leaders along the way. Others remind you that principles like empathy and selflessness aren’t for everyone.

God willing, very few things that matter to me change at the same pace that data and markets do. That makes getting better at this very challenging. I love that. Analytically I always have plenty of room to improve.

As it does every day, yesterday’s inflation data mattered. So did the market’s reaction to it:

1. Headline inflation surprised me (a little bit) to the upside as the Energy component actually ticked up instead of down
2. But a non-breakout in inflation expectations surprised the bond market more; UST bond yields closed down on the day
3. This morning’s global inflation report that matters most was another #InflationSlowing print out of Germany

So, what does it all mean?

1. In rate of change terms, falling inflation expectations (locally and globally) have equated to falling bond yields
2. UST 10yr Yield is down to 2.84% and now down 6 basis points month over month
3. German 10yr Yield is down to 0.61% and now down 14 basis points month over month

It’s easy to see that USA’s headline inflation peaked at +2.74% in FEB of last year. It’s also easy to see that Germany’s headline inflation (CPI) has slowed to +1.4% in FEB of this year.

Does the differential in inflation expectations explain the differential in interest rates? Or is it less about the “level” of inflation and more about the TRENDING rates of change?

The ECB’s Mario Draghi said this morning that there’s a “clear path” to his next pivot in monetary policy. Put simply, if you’re looking for the ECB to taper and tighten, you better be looking for inflation to #accelerate towards his “target.”

Since European inflation is moving away from his target, the European Bond market is nailing it using real-time data as its guide.

But how many people wake up in the morning with a repeatable process to measure and map both the rates of change in the data and Mr. Market’s read-through on that data?

I don’t know.

All I know is that there’s still a lot of money to be made doing that because neither consensus economists nor Macro Tourists themselves have had the ability to adapt and change on this major macro front.

Where does a rollover in inflation expectations go from here?

1. Remember that our call was that UST 10yr Yield wouldn’t breakout if those expectations rolled over
2. We didn’t make a call that UST 10yr Yields would break-down through @Hedgeye TREND support
3. I was looking for UST 10yr Yield to correct back to the low-end of my @Hedgeye Risk Range

Since the refreshed @Hedgeye Risk Range is now 2.80-2.91%, we have an interesting setup that suggests:

1. The YTD 2.95% high for the UST 10yr Yield isn’t likely to be breached to the upside anytime soon
2. There’s modest downside within a narrowing range for bond yields, for now
3. Intermediate-term @Hedgeye TREND support for the UST 10yr remains 2.65%

In other words, the most probable outcome (given both my research and market timing processes), for now, is that the UST 10yr trades in an intermediate-term range of 2.65% to 2.95%. That view is subject to change, daily, and I’ll adapt accordingly.

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

UST 10yr Yield 2.80-2.91% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7146-7658 (bullish)
Nikkei 201 (bearish)
DAX 116 (bearish)
VIX 13.39-22.32 (bullish)
USD 89.42-90.39 (neutral)
EUR/USD 1.21-1.24 (neutral)
Oil (WTI) 59.75-63.01 (bullish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer