Rates Up, Dollar Up.

“The essence of strategy is choosing what not to do.”
-Michael Porter

Essentially, Porter nails that part of Global Macro risk management. Nailing it is better than getting nailed. On Rates Up, Dollar Up, plenty of macro exposures start to get nailed. 

In our rate of change driven GIP (Growth, Inflation, Policy) model, there are 2 quadrants (Quads 2 and 3) where the INFLATION component is #accelerating. Last week, Mr. Market continued to price in being long of inflation expectations. 

If you have friends who are long of US Treasury Bonds and/or their US Equity “Bond Proxies”, they got nailed last week. Once the data starts to track into Quad 4 (when both growth and inflation are slowing), they’ll start nailing it again. 

Back to the Global Macro Grind… 

It’s Macro Monday! A warm welcome to all of our new subscribers who are joining us this morning. 

Mondays are a big #process day for us here @Hedgeye. That’s when we measure and map weekly macro moves within the context of intermediate-term @Hedgeye TRENDs and long-term TAILs. 

What up with inflation expectations up? It’s just math. Headline inflation’s components were rising against easing base effects last week: 

1. CRB Commodities Index (19 commodities) inflated another +1.1% last week to +4.2% YTD = Bullish TREND @Hedgeye
2. Oil (WTI) ramped another +1.6% last week to +13.9% YTD and remains Bullish TREND @Hedgeye
3. Copper bounced +2.1% to a lower-high last week and remains Bearish TREND @Hedgeye
4. Aluminum ripped +8.5% last week to +9.2% YTD and is back to Bullish TREND @Hedgeye
5. Cocoa (yes!) continues to rocket highs, +5.9% last week to +43.6% YTD and remains Bullish TREND @Hedgeye
6. Lumber inflated another +4.1% last week to +26.4% YTD and remains Bullish TREND @Hedgeye 

US Treasury Bond Yields got all hawked up on that Quad 2 action: 

A) UST 2-year Yield was up +10 basis points to +2.46% = +57bps YTD and remains Bullish TREND @Hedgeye
B) UST 10-year Yield was up +13 basis points to 2.96% = +55bps YTD and remains Bullish TREND @Hedgeye 

In other words, US bond yields continue to track our projected rate of change #acceleration in US headline inflation which is set to peak (in rate of change terms) during Q2/Q3 of 2018.

As Mr. Market continues to remind us, US rates don’t look like European or Chinese rates. The Chinese 10-year Yield dropped -17 basis points last week to +3.55%. That’s down -35bps YTD and remains Bearish TREND @Hedgeye.

The other Bearish @Hedgeye TREND that is married to the Chinese rate story is the Chinese stock market. In sharp contrast to the rest of the world’s equity bounce to lower-highs last week, Chinese stocks made lower YTD lows, -2.8% on the week. 

Here’s how the rest of the world looked last week (in Equity terms); 

1. SP500 +0.5% on the week but broke back below @Hedgeye TREND support of 2703 on Friday
2. EuroStoxx600 bounced +0.7% last week to -1.9% YTD and remains Bearish TREND @Hedgeye
3. Germany’s DAX bounced +0.8% to a lower-highs of -2.9% YTD and remains Bearish TREND @Hedgeye
4. London’s FTSE popped +1.4% on a Down Pound move, but is still -4.2% YTD and Bearish TREND @Hedgeye
5. Denmark’s stock market lost another -0.4% last week to -5.9% YTD and remains Bearish TREND @Hedgeye
6. Emerging Markets (MSCI) fell -0.2% on Dollar Up week to +0.8% YTD and = neutral TREND @Hedgeye
7. Russian stocks bounced back +3.7% last week to -0.7% YTD and are a new Bearish TREND @Hedgeye
8. Philippines’ stock market lost another -2.2% last week to -9.7% YTD and remains Bearish TREND @Hedgeye 

The Rates Up part makes knowing what not to do in terms of your asset allocation and sub-sector exposures straightforward. How about the Dollar Up part? 

Well, with Dollar Up + #ChinaSlowing… Mr. Market says don’t be long EM Asia (Philippines)! While we’re well aware that the newest of our Top 3 Macro Themes (US Dollar Bottoming?) is new… 

Much like our calls on both #EuropeSlowing and #GlobalDivergences… when we introduced those themes 6 and 3 months ago, respectively, we were “early” on proactively preparing you for those risks too. 

As the US Dollar has made 3 consecutive higher-lows since FEB, EM Equities have made lower-highs. We moved to “Underweight EM” in Q1 of 2018 as well. 

Back to US Equities, breaking them down by Sector Style last week, you can see what NOT to do was critical: 

1. Energy Stocks (XLE) led the charge at +2.6% last week to +1.4% YTD and remain Bullish TREND @Hedgeye
2. Consumer Discretionary (XLY) beat the market again +1.7% last week to +4.3% YTD = Bullish TREND @Hedgeye
3. Consumer Staples (XLP) got smoked for a -4.0% loss to -11.2% YTD and remains Bearish TREND @Hedgeye 

Even though we’re late-cycle and have had plenty of pushback on why Consumer Discretionary (XLY) remains our favorite US Sector exposure, it’s crushing what we don’t like in Consumer Staples (XLP). 

If you want to see a company get nailed, look for #accelerating late cycle inflation in their cost structure with no pricing power. That’s what many of these slow-growth staples companies have, don’t forget. 

If you’ve been nailing those 2016-2017 bubble multiple stocks on the short side for the last year, well done. When in Quad 1 or 2 (i.e. where we’ve had the US economy for the past 7 quarters) what NOT to do is be long of those. 

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

UST 10yr Yield 2.75-2.99% (bullish)
SPX 2 (bearish)
NASDAQ 7004-7325 (neutral)
Energy (XLE) 69.72-74.60 (bullish)
REITS (RMZ) 1025-1060 (bearish)
Industrials (XLI) 72.32-76.75 (bearish)
DAX 128 (bearish)
VIX 14.30-21.55 (bullish)
USD 89.00-90.30 (neutral)
GBP/USD 1.39-1.42 (bullish)
Oil (WTI) 65.01-69.27 (bullish)
Copper 3.00-3.19 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer