Editor's Note: Below is a brief excerpt transcribed from a recent edition of The Macro Show hosted by Hedgeye CEO Keith McCullough. Click here to learn more about The Macro Show.

Keith McCullough on #EuropeSlowing, Bonds & Our Favorite S&P 500 Sector - keith cartoon

Keith McCullough: If you look at European economic data, everywhere it’s a sea of red.

That's one reason why Italian bond yields are rolling over. They’re down 25 basis points in the past two months.

Investors short European bonds are getting hit just like Wall Street consensus did when 10-year Treasury dropped 25 basis points recently. Wall Street was short and got run over. European bond shorts are getting run over today.

That’s another point to be made this morning. We continue to think European bond yields fall as European growth and inflation data slows. Meanwhile, we think the 10-year Treasury yield makes higher lows on hotter U.S. inflation.

The risk range in the 10-year Treasury yield continues to narrow and that’s bullish for their yields. But I still don’t think that 10-year yields are going to break out above 2.95%.

That update on bond yields brings us to point number 3 this morning, which is oil. Understand the relationship between bond yields and that oil price. Because what drives inflation expectations?

Oil.

The top end of the Oil risk range is $69 and oil volatility is breaking down. This is going to continue to drive inflation expectations higher. So, as opposed to our Reflation’s Rollover call, which has already played out, now we want you to be buying inflation exposures on a pullback which would include Energy stocks (XLE).

I’m considering getting rid of Consumer Discretionary (XLY) and going long of Energy as our top sector pick but I haven’t done it yet. Consumer Discretionary is still the number one sector in the S&P 500 that I like. We like it more than Tech (XLK) now because it works #LateCycle when wages typically head higher. That’s been a good call, up 0.5% yesterday and +5.7% for the year-to-date.

Keith McCullough on #EuropeSlowing, Bonds & Our Favorite S&P 500 Sector - sector

Keith McCullough on #EuropeSlowing, Bonds & Our Favorite S&P 500 Sector - the macro show