“In this world there’s two kinds of people – those with loaded guns and those who dig. You dig.”
-Clint Eastwood
Are you the type that tells markets what to do? Or are you constantly digging for new economic data and respecting what markets are actually doing? Do you worship linear (establishment) economists? Or are you more fractal (non-linear) and flexible in your risk management approach?
The aforementioned quote comes from Eastwood’s epic performance in The Good, The Bad and The Ugly. There’s lots of all of that going on in Global Macro right now! Niall Ferguson uses the Eastwood classic to introduce “A Brief History of Hierarchy” in The Square and The Tower.
“This is a modern example of an ancient truth. For most of history, life has been hierarchical. A few have enjoyed the privileges (of living in an Ivory Tower)… everyone else has dug” (pg 59). Especially when we can be on the other side of a one-way consensus, I love to keep digging.
Back to the Global Macro Grind...
So let’s dig into Part II of The Question that generated more client feedback than any other Early Look title in Q2 of 2018:
“Have Rates Peaked?” A: in the immediate-term, on the long-end of the curve in the USA, yes they have.
And, maybe not ironically, that’s happened with both:
- US GROWTH data #accelerating to its cycle highs in Q218
- US INFLATION data #accelerating to its cycle highs in Q218
But that’s too narrow a lens to consider what would cause long-term US interest rates to make immediate-term LOWER-HIGHS within the context of a longer-term SLOWER FOR LONGER growth and inflation outlook. For that we need to broaden our analysis to what’s happening globally.
What’s happening in Global Rates this morning is more of the same pattern that continues to manifest throughout 2018:
- 10yr Yields in Switzerland, Japan, and Germany are all below 0.40% and signaling Bearish TREND @Hedgeye
- 10yr Yields in Italy, Greece, and Brazil have all broken out to Bullish TREND @Hedgeye
We’ve been calling these #GlobalDivergences.
While many continue to be positioned for “Rates Rising” in the US, that’s a risk they should have started to position for when the US GROWTH and INFLATION cycle was bottoming in mid-2016. The USA has been in Quad 1 or Quad 2 for a record 8 consecutive quarters, don’t forget.
For those of you who are new to dispassionate and data-driven rate of change #process:
- Quad 1 and Quad 2 is when GROWTH (as a major factor exposure) is #accelerating
- Quad 3 and Quad 4 is when GROWTH is #decelerating
As you can see in today’s Chart of The Day (slide 68 in the Hedgeye Macro Themes deck), the #1 reason why the US Dollar has been breaking out to Bullish @Hedgeye TREND for the last 2 months, is that China, Europe, and most of EM (Emerging Markets) have moved into Quads 3 and 4.
That’s also why, in sharp contrast to what consensus Eurocrat Econs at the ECB are forecasting for the 2nd half of 2018, long-term European bond yields without obvious credit and/or political risk continue to break-down.
Not only are we now-casting headline inflation for the Eurozone to slow to sub-1% again by Q1 of 2019, we also have Japanese inflation going back to NEGATIVE (-0.4%) by Q1 of 2019. Imagine that, the early 2018 cycle high for Japan’s “inflation” is going to once again deflate!
Back to what’s happening on the very front-end of Mr. Market’s mind this morning:
- UST 10yr Yield is down another -5 basis points to 2.87% with the top-end of the @Hedgeye Risk Range dropping to 2.98%
- US Dollar is up another +0.6-0.7% vs. the Euro (which remains Bearish TREND @Hedgeye)
- Chinese stocks got smoked overnight, dropping another -3.8% and moving into #crash territory at -18% since JAN 2018
From a linear-consensus-econ perspective, what was happening in JAN 2018 is critical to contextualize. The Ivory Tower was forecasting a “Globally Synchronized Recovery”, Long EM (and Europe)… and short US Dollars.
Rather than blaming their broken forecasting methods (which have not changed since missing almost every cyclical slow-down for the almost 20 years that I have been doing this), you can bet your Madoff that they’ll blame Trump tariffs or something like that this time.
But it doesn’t change the score of the game as we head towards half-time for 2018. They might have the big titles and guns vs. we little people who are doing the digging out here at the top of every risk management morning. But they don’t have the alpha.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.85-2.98% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 73.98-77.40 (bullish)
REITS (VNQ) 78.00-80.01 (bullish)
Industrials (XLI) 74.05-75.76 (bearish)
Nikkei 229 (neutral)
DAX 120 (neutral)
VIX 11.46-15.01 (bearish)
USD 93.41-94.95 (bullish)
EUR/USD 1.14-1.17 (bearish)
GBP/USD 1.31-1.34 (bearish)
Oil (WTI) 64.39-67.29 (bullish)
Nat Gas 2.90-3.06 (bullish)
Copper 3.06-3.23 (bearish)
Corn 3.53-3.85 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
