Below is a detailed summary of our active Macro Themes. The analysis below is sourced from our daily Global Macro Risk Monitor note. Please email if you aren’t yet receiving that piece and would like to be added to the distribution list. Please note, however, that access is expressly reserved for key client relationships.
Active Macro Themes:
- Global #Divergences (introduced 1/4/18): In contrast relying on financial media soundbites, idea dinners or surveys, our views on the global economy are instructed by sophisticated predictive tracking algorithms – which we run for every investable economy in the world. While investor consensus remains committed to the “globally synchronized recovery” narrative heading into 2018, our models are signaling quite the opposite and that outcome should perpetuate a number of meaningful pivots in asset allocation terms throughout the investment management landscape.
- #ShortEM (originally introduced 1/4/18 under the title “#UnderweightEM”; reiterated again on 6/28/18): The first half of 2018 saw a tremendous pickup in cross-asset volatility – albeit from at/near all-time lows – throughout the emerging market investment universe. With explanations of what caused this market event as numerous as the number of strategists who didn’t see it coming and as bountiful as those that are calling for it to end purely as a function of “attractive valuations”, we don’t believe our bearish bias on EM is fully priced in. As such, we will anchor on the findings of our proprietary, repeatable, and robust processes to detail to investors why EM assets are likely to continue to be a drag on fund performance with respect to the intermediate term.
- #StrongDollar (originally introduced 4/3/18 under the title “Dollar #Bottoming?”; reiterated on 6/28/18): A U.S. Dollar Index well off its YTD lows has already inflicted some major pain in consensus macro views that were observably long of things like commodities and emerging market financial assets heading into Q2. Moreover, our proprietary GIP-modeling process for all of the world’s major economies signals that the global trend of decelerating growth is just getting started – an outcome that is likely to increasingly drive inflows into dollar-denominated assets. We will dig into the wide-reaching implications of further USD strength that investors can’t afford to miss, from emerging market USD-denominated credit risk to corporate profit deterioration.
- USA #Peak Cycle? (introduced 4/3/18): After seven consecutive quarters of accelerating growth and bullish quantitative signaling, our model is mapping a peak and prospective negative inflection in domestic economic growth as we move into 2H18. We’ll review and contextualize the recent shift in market and macro dynamics and detail the fundamental dynamics driving our expectation for a downshift into Quads 3 and 4 in the back half of the year. We’ll specify the risks to the consensus outlook and how to optimize positioning for the chop associated with emergent phase transitions in growth and volatility.
- #HaveRatesPeaked? (introduced 6/28/18): With a peak in domestic headline inflation pending in Q3, 4 hikes out of the FOMC now priced in for 2018, DM sovereign yields retreating alongside the more discrete manifestation of #GlobalDivergences (i.e. broad slowing across Europe, China, and EM), and both 10Y Yields and Ag all signaling lower-highs, the consensus “bond bear market” thesis is likely to find itself under increasing scrutiny as we progress throughout 2H18. We’ll review prevailing conditions, detail emerging dynamics, and discuss how we’ll be risk managing rates and rate-sensitive equity exposure in the upcoming months.
U.S.A. #Peak Cycle?
The strength and broad positive revisions contained in the JUN PCE report further insulates our view that domestic economic growth momentum peaked in Q2 and is poised to rollover amid steepening comparative base effects and ebbing waning Consumer Confidence in 2H18E. Tax reform could be said to have had a positive impact on the number with Disposable Personal Income growth accelerating to the fastest rate since late-2015. The misses on both Headline and Core PCE Inflation support our view that the pending acceleration in wage growth is highly unlikely to be met with an immediate, commensurate thrust in consumer price inflation, which implies U.S. corporates are likely to face moderate-to-severe operating margin pressures over at least the next 3-4 quarters. We’ve done a tremendous amount of work on this very topic; refer to our Early Look notes titled, “Sell Peak Margins Pt. II” (7/12) and “A How-To Guide For Navigating #Quad4, Part II” (7/19), as well as our 7/12 webcast titled, “Jump Conditions In Wage Growth Are Right Around the Corner” and our U.S. #CreditCycle Analysis for more details on how to contextualize this key risk to cyclical stocks and levered credits.
U.S. Growth is Officially Past-Peak
This morning’s soft JUL Manufacturing PMI data and the mixed Consumer Confidence reports for the same month were the first confirming evidence of our view that domestic economic growth peaked in YoY rate-of-change terms in 2Q18. Specifically, our nowcasting model currently has U.S. Real GDP growth falling -5bps from the recorded 2.8% YoY growth rate last quarter. While that might seem like a negligible delta to risk manage, the interpolated 2.44% QoQ SAAR growth rate represents a near cutting-in-half of the 4.1% figure seen in 2Q18. Moreover, the new shape of the comparative base effects curve post the GDP revisions implies growth is likely to slow a further -30bps on a YoY basis in 4Q18E and get more than cut in half on a QoQ SAAR basis from 3Q18E as well. As we’ve consistently highlighted throughout the nascent phase transitions in domestic growth and inflation momentum, tops remain processes, not points. As such, expect a continued knife fight between cyclical exposures and bonds/bond proxies in alpha generation terms. Refer to our Early Look notes titled, “A How-To Guide For Navigating #Quad4” (7/18) and “Predicting the Past” (7/27) for more details on how to protect your portfolio from getting “stabbed” by the dull blade of linear extrapolation.
U.S. Inflation is Peaking
While the sequential deterioration in the Prices Paid component was a welcome indicator of peaking inflationary pressures, it could admittedly take a couple of slowing inflation prints (AUG = 9/13; SEP =10/11) to get the long end of the curve to really start to price in the pending ~100bps deceleration steepening base effects imply for Headline CPI over the next few quarters. This is especially true in the context of our forecast for “jump conditions” to occur in Private Sector Wage Inflation – an outcome that is likely to perpetuate yield curve inversion as the Fed remains hawkish throughout. That said, however, our analysis shows that marginal rates of change in Headline CPI have historically had more predictive value in determining the direction of bond yields than either Core CPI or Wages. Refer our 7/24 Early Look note titled, “Buy US Treasuries?” for more details.
Global #Divergences Intensified in July
While global cyclicals bulls will point to the sequential upticks in the JUL Manufacturing PMI readings as signs of a bottom in Brazil, South Africa, Turkey, and across the Eurozone core as evidence of a [widely desired] bottom in global growth momentum, we are leery to make such a bold claim with just one month of positive data. Instead, we are keen to highlight deterioration in places like Australia, Canada, China, India, Russia, South Korea, the U.K., the U.S., as well as the Eurozone periphery as evidence of incremental deterioration. Moreover, 88% of the 33 country/regional Manufacturing PMIs data series we track across the global economy are now slowing on a trending basis, up from 77% in JUN. In fact, Canada, Indonesia, South Africa, and Sweden are the only economies still registering trending accelerations – each barely at that. This is a far cry from the state of the global economy which peaked in rate-of-change terms in JAN ’18, when we introduced our Global #Divergences theme. Worse, comparative base effects for global growth steepen in canonical fashion to 3-year highs by 1Q19E, which implies the highest-probability outcome is for global growth to continue to decelerate into/through that time period. That is in line with our GIP Model forecast for the global economy to register a 2nd consecutive quarter of #Quad3 here in 3Q18E before transitioning to #Quad4 for the 4Q18E-1Q19E timeframe. We anticipate the U.S. dollar will break out of its consolidation range [to the upside] as we get closer/into to the latter period. Refer our EM Structural Economic Risk Model for details on which emerging market economies might be next to experiences currency crashes.
The advent of the 2Q18 GDP data confirmed our #Quad3 forecast for the Eurozone, while the combination of the JUL Headline and Core CPI and the European Commission Confidence Indices were confirming of our #Quad3 forecast for 3Q18E. The absolute level of French (2.6% YoY), German (2.1% YoY), Italian (1.9% YoY), and Spanish (2.3% YoY) Headline Inflation increases the risk that the ECB tightens into its third #Quad4 slowdown within the past decade (see: mid-2008 and mid-2011). While that might serve to perpetuate a near-term uptick in global rates volatility, we are of the view that any associated weakness DM bond markets is to be ultimately faded, as a policy error out of the ECB would only perpetuate the downside in pan-Eurozone growth, pan-Eurozone inflation, and Bund yields throughout 2H18E. Elsewhere in Europe, ongoing trending weakness across key high-frequency leading indicators for the U.K. economy imply the BoE is gearing up for an ill-advised tightening of monetary policy as well. Refer to our 7/26 Early Look note titled, “Buy The Trade Truce?” for more details.
The BoJ appropriately backed away from any real monetary tightening and lowered its inflation forecasts (albeit by far too little) – an outcome in line with our forecast for Japanese growth to continue lower here in 3Q18E, as well as our forecast for Japanese inflation to inflect lower by the mid-to-late summer. The global economy is still digesting the run-up in crude oil from the mid-2017 lows, but once that impulse has made its way through the system we fully expect the secular issues that have perpetuated lower-highs and lower-lows in reported inflation across the developed world over the past few decades to become a stronger driver of the numbers. That’s supportive of our bullish bias on duration in the U.S. rates market and the next couple of months should provide some solid buying opportunities when bond yields rise to the top end of their respective risk ranges. Refer our 7/24 Early Look note titled, “Buy US Treasuries?”, as well as our DM Structural Economic Risk Model for more details.
China, Asia Still Slowing
Q: What do you get when Chinese policymakers openly freak out about their ongoing growth slowdown? A: A largely ineffective easing of monetary and fiscal policy – for now at least. Specifically, China’s JUL PMI data showed ongoing sequential and trending deceleration across the Manufacturing, Services and Composite readings and is confirming of our view that the Chinese economic impulse is likely to remain negative throughout 2H18E. We’re seeing that negative impulse continue to weigh on Asian economic growth, with South Korean Industrial Production growth turning negative in JUN (-0.4% YoY) and its AUG Manufacturing and Non-Manufacturing Business Sentiment Indices slowing to new lows – levels last seen since the start of 2017. All told, we are keen to reiterate our view that until the #OldChina economy laps peak comparative base effects in the 3Q18E-1Q19E timeframe, it is likely to remain a drag on global growth – though perhaps a slightly less of a drag to the extent the recent spate of policy easing kicks in, at the margins. A drag is still a drag, however, and no one is long of global Industrials on that [weak] thesis. Refer to our 7/20 Early Look note titled, “China’s Easing Again!” for a detailed discussion of these changing fundamental dynamics.
All told, we are strongly of the view that differentiated research processes lead to differentiated views and that differentiated views are causal to alpha generation and AUM growth. It’s not that we are in disbelief of the impact inherently un-model-able outcomes (e.g. tariffs, “Rocket Man”, “fiscal impulse”, etc.) has on your daily PnL; we’re just in disbelief that any of the talking heads on TV has any edge on how to risk manage such catalysts. We sure don’t ex ante, which is why we prefer to sequence data rather than Macro Tourist headlines.
While following table (distributed daily) may or may not have all the Big Data you need to consistently outperform your peers, we are certain that it has enough information to help you fact-check your own [potentially faulty] premises. That’s a better-than-bad starting point in today’s era of Big Hypotheticals:
As always, please feel free to email or call with any follow-up questions or research requests – we’re delighted to be at your service.