“Any fool can have a baby, but only a real man can raise his children”
-Furious Styles, Boyz n the Hood
A central activity of the global macro grind is effectively curating the increasing deluge of daily data in an attempt to distill out marginal changes of consequence and the attendant cross-asset implications.
In other words, it remains an evolving exercise in simplifying the (increasingly noisy) complex.
But if you can arrive at consequential investment conclusion by simplifying the not-particularly-complex, even better!
And besides, it’s Friday, the Powell has spoken, the rates have risen, the dots have moved, the Draghi has doved, the $Dollars have appreciated, the domestic growth has accelerated, the China and the EM has slowed, the Trump has tariffed, and the Sox remain entrenched atop the AL East.
All remains well in the macro thematic land of #Divergences.
Back to the Global Macro Grind …..
So, I basically just want to take the lower-highs theme Keith’s been highlighting in recent days and provide an expanded contextualization.
With U.S. Retail Sales accelerating, China eco missing across the board, Draghi tacitly acknowledging a Quad 3 outlook for the Eurozone and EM charts still in EM-ergency mode, yesterday offers a nice opportunity to detail evolving market dynamics within the context of our running macro themes
As Keith detailed on Wednesday and reiterated yesterday – The SPX, 10Y Yields and Oil were all signaling lower highs.
That is new. And it matters.
Recall, inflation dynamics played a central role in the prevailing macro narrative over the last ~9 months as cross-asset performance coalesced around a relatively discrete factor flow:
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Accelerating inflation and rising oil prices were driving inflation and (hawkish) policy expectations higher at the same time that Global Divergences were beginning to manifest more conspicuously --> all of which served to support flows to domestic-centric growth assets and drive nominal/real yields higher --> resulting in widening rate differentials and rising $USD demand at a time when consensus was positioned for some version of the opposite (spec net long positioning in the EUR at an all-time high). |
Those were our GlobalDivergences and DollarBottoming Themes. And they continue to play out but, around the edges, the dynamics are evolving.
For example, if lower-highs in Oil and 10Y yields - despite the hawkish trifecta of FOMC and accelerating CPI/PPI - implies that inflation expectations are now priced in, it also implies that the: rising Oil/reported Inflation --> rising inflation expectations + policy expectations --> rising nominal yields flow has peaked.
Does that matter in the context of our outlook given that that inflation chain was a defining feature driving consensus’ slow acceptance of our Divergence and Dollar themes?
Yes and No.
And, here, it’s not so much about simplifying some great complexity as it is just going through the motions of hashing out what’s changing on the margin.
Let’s now think about what hasn’t changed (nearer-term):
Growth Divergences
The favorable relative growth outlook for the U.S. looks set to persist for a little while longer.
Consider yesterday’s Retail Sales data for May which saw Headline Sales, Control Group Sales and all the Subaggregates accelerate meaningfully against upwardly revised April estimates. That comes on the back of solid April consumption data and May NFP data that were signaling a further acceleration in aggregate income growth, suggesting continued strength in household spending and a rebound in consumption growth in 2Q.
Wage inflation, lower-highs in oil, still favorable Retail Sales/Consumption comps, and unprecedented, late-cycle stimulus layered atop an already taut economy (think: Consumers = higher After-tax income, Businesses = Capex (at the margin), Assets = record(?) buybacks) should continue to shape the U.S. centric growth narrative nearer-term.
That the Nasdaq, Russell 2K and domestic, consumer-centric growth exposures are not signaling lower-highs comports with the above.
How about Policy Divergence?
This one gets trickier from here.
We realized a discrete widening in monetary policy divergence this week alongside the combination of a hawkish FOMC and a dovish ECB/PBOC …. A reality reflected in FX yesterday with the Dollar having its best day against the Euro since Brexit.
Moreover, 4 hikes are now largely priced in …. and 5 hikes in 2018 or a materially steeper trajectory for 2019 isn’t a high probability, particularly with both inflation and growth set to crest and roll domestically and spec short positioning in treasuries at all-time highs.
If, given our outlook, incremental fed hawkishness isn’t the driver of further policy divergence, it shifts to a game of relative negatives. In other words, does the domestic data and outlook worsen more/faster than it does OUS.
Probably not, at least over the next couple months.
With growth divergences likely to persist a bit longer and reported inflation to continue accelerating over the next couple months, policy divergence (as opposed to convergence) probably remains the accepted reality – albeit less of a factor than it’s been in recent months.
To summarily Hedgeye ‘splain all of the above: Growth Divergences remains Bullish Trend while Policy Divergences hit the top end of the risk range.
Translating that to positioning, here's what we did in RTA yesterday:
- Sold long $USD = Booked some gains alongside the massive move in FX. No change to our longer-term #StrongDollar view.
- Long RRR = bought some pure play US domestic small and mid-cap exposure.
I’ll close it there ahead of the weekend and refer you back to our headline quote at the top of the note.
Life is a collection of moments … try to have a few worth collecting this weekend.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.87-3.00% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Industrials (XLI) 74.75-76.91 (bearish)
Oil (WTI) 64.41-67.78 (bullish)
Christian B. Drake
U.S. Macro Analyst
