Distinguishing The Vital Few

“Instead of making choices reactively, the essentialist deliberately distinguishes the vital few from the trivial many.”
-Greg McKeown

Essentially, that is Essentialism, in a sentence. 

That’s the book I cited last week and am in the midst of finishing. Internally @Hedgeye, this is a timely/topical book as I’m trying to re-focus my Research Team on being deliberate and disciplined in the deep work they are doing on what we call “New Ideas.”

On the macro research front, we wake up to potentially new ideas every day. What we’re really looking for are reversals in rates of change. When something goes from bearish to bullish (or bullish to bearish) TREND @Hedgeye, our job is to make you aware. 

Back to the Global Macro Grind… 

It’s Macro Monday! Yep, we’re in the thralls of March and we’re still banging out the same, deliberate, rate of change mapping and measuring #process. On Monday’s we recap last week’s macro market moves within the context of @Hedgeye TRENDs. 

First, let’s do FICC (Fixed Income, Currencies, Commodities): 

1. US Dollar Index was up for the 4^th week in a row, +0.1% and remains a neutral @Hedgeye TREND
2. EUR/USD was down -0.1% last week and remains a neutral @Hedgeye TREND as well
3. Yen (vs. USD) was up another +0.8% last week and remains Bullish TREND @Hedgeye
4. Pound (vs. USD) was +0.7% last week and remains Bullish TREND @Hedgeye
5. Canadian Dollar (vs. USD) was down -2.2% last week and remains Bearish TREND @Hedgeye
6. Aussie Dollar (vs. USD) was down another -1.7% last week and remains Bearish TREND @Hedgeye
7. CRB Index (Commodities) rolled over another -0.4% last week and remains Bullish TREND @Hedgeye
8. Oil (WTI) bounced +0.3% last week (to +3.1% YTD) and remains Bullish TREND @Hedgeye
9. Copper rolled over another -0.8% last week (to -6.2% YTD) and remains Bearish TREND @Hedgeye
10. Aluminum deflated another -1.9% (to -9.1% YTD) and remains Bearish TREND @Hedgeye
11. UST 2 year yield was up +3 basis points to 2.29% and remains Bullish TREND @Hedgeye
12. UST 10 year yield was down -5 basis points to 2.84% and remains Bullish TREND @Hedgeye 

The short-end of the US Treasury curve is clearly staring at a pending rate hike this week whereas the long-end of the curve is seeing inflation expectations roll over from their YTD highs. 

That combination of short and long-term rates gave us -8 basis points of compression in the Yield Spread (10yr minus the 2yr) to +55 basis points (bps) wide at +3bps for 2018 YTD. If the Fed gets any more hawkish (beyond 4 hikes), it will risk inverting the curve. 

Why would the Federal Reserve get more hawkish, on the margin, from here if Global Inflation Expectations go the opposite way of consensus US ones? Take a look at what some major Global Bond Yields (10 year) did last week: 

1. Germany’s 10yr Yield dropped another -8 basis points (week-over-week) to 0.57%
2. France’s 10yr Yield dropped another -7 basis points to 0.82%
3. Canada’s 10yr Yield dropped another -13 basis points to 2.14%
4. Hong Kong’s 10yr Yield dropped another -14 basis points to 1.95% 

With the US Dollar NOT DOWN + Global Bond Yields falling, Global Equity markets (particularly those with 80-90% TRENDING inverse correlations to USD) have not enjoyed the last month – neither has Gold. In the last month alone, here’s the score on that front: 

A) US Dollar Index up +1.2%
B) Gold down -3.1% 

That’s not exactly your world-wide “breakout in inflation” signal, fyi. 

On both an absolute and relative basis, “Long Europe” is only working if you’re long their long-term (10yr) Sovereign Bonds! Bonds Up, Stocks down is what country #divergences do when both growth and inflation are slowing at the same time. 

While the NASDAQ already has a +1,250 YTD basis point performance gap over something big in European Equities like Germany’s DAX, High Beta and Growth (2 USA Equity Style Factors that have led that out-performance) corrected as well last week: 

A) HIGH BETA stocks were -1.9% to +4.8% YTD
B) Top 25% SALES growers were -1.2% last week to +5.4% YTD

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies 

That selloff in higher beta (vs. lower beta) US stocks was largely due to what we were looking for on a rollover in inflation expectations … and that’s the Financials (XLF) correcting a big -2.8% last week alongside the UST 10yr Yield as Utilities (XLU) bounced +1.7%.

At 2.95% on the UST 10yr in FEB, the yield signaled immediate-term overbought and at 2.80% last week it signaled immediate-term oversold. 

Get the immediate-term TRADEs within intermediate-term TRENDs in USD and RATES right and you tend to get a lot of asset allocations and sub-sector moves right. Distinguishing the vital few within the complex always matters in macro. 

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 7 (bullish)
DAX 12052-12495 (bearish)
VIX 14.35-20.67 (bullish)
USD 89.41-90.75 (neutral)
EUR/USD 1.22-1.24 (neutral)
YEN 105.40-107.08 (bullish)
GBP/USD 1.38-1.40 (bullish)
Oil (WTI) 59.76-62.95 (bullish)
Gold 1 (bullish)
Copper 3.04-3.15 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer