“We believe that market movements reflect economic movements.”
-Ray Dalio
I’m not Ray Dalio. And I realize some of you may or may not like Ray Dalio. That is of no concern to me. What I like about Ray Dalio is that he has a repeatable, data-driven, #process. What I also like about Ray Dalio right now is that, like me, he’s short European stocks!
No, there aren’t many vocal European Bank Stock bears. Nope, there aren’t many European Sovereign Bond bulls either. That’s what I really like about seeing what consensus is starting to see: European #InflationSlowing.
I also liked seeing Powell’s Dovish Hike yesterday. The man appears to be data-dependent. That makes accurately now-casting the rates of change in both growth and inflation all the more valuable going forward.
Back to the Global Macro Grind…
Why are we short European Equities and long European 10yr Sovereign Bonds? This isn’t a “valuation” call.
“By studying the relationships between economic statistics and market movements, we’ve developed precise rules for identifying important shifts in the economic/market environment and in turn our positions.” (Principles, pg 42)
Dalio wrote that in 1987, btw.
You can probably read about why he’s short “cheap” European banks in his Daily Observations. Unlike many on the Old Wall, at least he writes about his process and positioning. Transparency & Accountability drives improvement in one’s #process, don’t forget.
So why are 10-year Yields falling, globally, this morning given that the Fed raised rates?
- The Fed’s new chief gave Wall Street what we call a Dovish Hike
- The world’s most consensus net SHORT position is US Treasury Bonds (futures & options positioning)
- European Economic data continues to slow this morning
Allow me to knock down those pins in reverse-order that they appear. First, on the heels of Dutch Consumer Spending #slowing to only +0.7% year-over-year growth yesterday, our Chart of the Day is this morning’s key European economic data, in rate of change terms:
That’s right, red means slowing. We color code the ACTUAL report vs. the PRIOR report:
A) Red if it slows… and
B) Green if is accelerates
Unlike Macro Tourists, I don’t care about what consensus was forecasting. I don’t characterize data as “good” or “bad” either. It’s either getting better or worse. Since #EuropeSlowing has started to manifest more obviously in the data:
- German 10yr yield is down another -3 basis points today to 0.55% (down -15 basis points in the last month alone)
- French 10yr yield is down another -4 basis points today to 0.79% (down -19 basis points in the last month alone)
Don’t think that hasn’t impacted the conviction Wall Street has in its current net SHORT US Treasury positioning. Everyone who has done well in sovereign rates space for the last decade knows that the Sword of Damocles on US rates is European ones.
Coming into Powell’s inflation outlook, here were the non-commercial (CFTC futures & options) net SHORT positions in UST’s:
- 2YR Treasuries = -115,142 net short
- 5YR Treasuries = -427,694 net short
- 10YR Treasuries = -245,081 net short
That’s why I didn’t take much more that Powell saying that he has “no sense that inflation is about to accelerate” to get the UST 10yr Yield to have pulled back almost a full 10 basis points already from yesterday’s intraday highs.
The other component of the Dovish Hike was Powell’s style. Unlike his rambling predecessors who wanted to tell reporters what the data should be doing, the man answered questions briefly about what the data is actually doing.
Tourists probably didn’t pick up on this but there’s a diametrical difference between an academic ideologue (Bernanke or Yellen) speaking at Wall Street with theories that may or may not be true vs. a lawyer talking with Wall Street about the reported facts.
Well done, Jerome Powell. Well done.
UST 10yr Yield 2.78-2.92% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
DAX 12102-12449 (bearish)
VIX 14.25-20.42 (bullish)
USD 89.20-90.37 (neutral)
EUR/USD 1.22-1.24 (neutral)
YEN 105.40-106.90 (bullish)
GBP/USD 1.38-1.41 (bullish)
Oil (WTI) 59.69-65.27 (bullish)
Nat Gas 2.59-2.83 (bearish)
Gold 1 (neutral)
Copper 3.01-3.13 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
