Inflation #Accelerating

“Do you know how easy this is for me?”
-Matt Damon 

“American culture, in particular, loves the story of the prodigy. Matt Damon’s character famously cried in the movie Good Will Hunting as he made quick work of proofs that stymied the world’s top mathematicians.” 

Professional life (for most of us at least) doesn’t work that way. As Cal Newport goes on to explain in Deep Work, it’s “deliberate practice” that differentiates. “To master a cognitively demanding task requires this specific form of practice – there are few exceptions made for natural talent.” 

What’s deliberate practice? “Its core components are usually 1. Your attention is focused tightly on a specific skill you’re trying to improve and 2. You receive feedback so you can correct your approach.” (pg 35) If that’s not your #process, I humbly submit it should be. 

Back to the Global Macro Grind… 

It’s that time of the week again. That’s right data-driven #process fans, it’s Macro Monday! Today is the day we review last week’s macro moves (in rate of change terms) and contextualize them within our multi-duration (TRADE, TREND, and TAIL) framework. 

First up, it was Dollar Up and #InflationAccelerating last week: 

1. US DOLLAR Index was up another +1.2% last week and up for the 3^rd week in a row confirming the new Bullish TREND @Hedgeye
2. EURO (vs. USD) continues to break-down on slowing economic data, down another -1.4% last week = Bearish TREND @Hedgeye
3. Pound (vs. USD) dropped another -1.8% last week and remains a new Bearish TREND @Hedgeye since early Q218
4. CRB Commodities Index was up another +0.9% last week to fresh YTD highs of +4.8% YTD = Bullish TREND @Hedgeye
5. Oil (WTI) inflated another +2.5% last week to +16.2% YTD perpetuating the breakout in inflation expectations
6. Corn inflatted another +1.9% last week to +10.6% YTD as Ag continues to perpetuate a Bullish @Hedgeye TREND in inflation too
7. Lumber prices were up another +3.3% last week to +37% YTD = Bullish TREND @Hedgeye
8. Orange Juice ramped +5.2% in price last week to +15.9% YTD = Bullish TREND @Hedgeye 

In other words, whether it’s Energy or Food, most things in our proprietary Commodity Price Sample Basket are #accelerating on a TRENDING basis in price against EASING BASE EFFECTS (year-over-year comparisions) for headline inflation. 

Oil ramping another +1.0% this morning > $70/barrel for the 1^st time in 2018 is only going to make this more glaring. In other news, the SF Fed’s Williams is saying inflation “may modestly overshoot the 2% target.” #Wrong. It may actually overshoot 3% on headline come this summer. 

Another playbook #process TREND that continues to play out on a strengthening US Dollar is a weakening of both EM Currency and EM Equity markets (EM = Emerging Markets): 

1. Argentine Pesos devalued another -6.0% last week to -14.7% YTD
2. Turkish Liras devalued another -4.3% last week to -10.0% YTD
3. EM (MSCI Index) Equities underperformed DM, big time, down -1.6% on the week to -1.8% YTD
4. Indonesian Stocks dropped another -2.1% last week to -8.9% YTD
5. Phillippines saw their stock market deflate another -2.3% to -11.8% YTD 

In sharp contrast to EM, most DM (Developed Market) European (and UK) Equity exposures enjoyed their weakening currencies: 

1. EuroStoxx 600 was up +0.6% last week to -0.6% YTD
2. Germany’s DAX led gainers +1.9% last week to -0.8% YTD
3. FTSE was +0.9% to -1.6% YTD 

Obviously being long “European Equities” since this time last year was a losers hand relatitive to both US Growth and Emerging Market Equity asset allocations. From here though, I’m not interested in shorting European stocks like I am EM ones. 

I’ll stay long Commodities (broadening the idea to Long Natural Gas) as our favorite asset class right now and late-cycle US Equity Sectors like Energy, Consumer Discretionary, and Tech, in that order as of this morning. 

US Tech (XLK) has dropped from 1^st to 3^rd favorite on our Top 3 US Equity Sector Style longs. I’m keeping the order the same on the short side with US Industrials (XLI) at #1 followed by Consumer Staples (XLP) and Materials (XLB).

Here’s how those Sector Styles did last week: 

1. Energy (XLE) was -0.1% on the week to +2.0% YTD
2. Consumer Discretionary (XLY) was -0.2% on the week to +5.2% YTD
3. Tech (XLK) led gainers +2.5% on the week to +5.6% YTD 

1. Industrials (XLI) were down another -1.4% on the week to -4.7% YTD
2. Consumer Staples (XLP) were down another -2.2% on the week to -12.7% YTD
3. Basic Materials (XLB) were flat on the week at -4.6% YTD 

I’m still short long-term US Treasuries (consensus is too) as I think this late-cycle #InflationAccelerating gets the UST 10yr to re-test its YTD high in yield terms. Catalysts for that deliberately studied position are the US Producer Price and CPI Headline inflation reports later this week. 

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

UST 10yr Yield 2.91-3.04% (bullish)
SPX 2 (bearish)
Energy (XLE) 72.63-74.62 (bullish)
Industrials (XLI) 70.22-74.02 (bearish)
DAX 126 (bullish)
VIX 14.11-19.22 (bullish)
USD 90.30-92.99 (bullish)
EUR/USD 1.18-1.21 (bearish)
GBP/USD 1.34-1.37 (bearish)
Oil (WTI) 66.99-70.61 (bullish)
Nat Gas 2.68--2.87 (bullish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer