“ECB President Draghi says expects vigorous pick-up in underlying inflation.”
-MSM
Per non-late-cycle-forecasting-news by linear establishment econs, the word vigorous means “strong, healthy, and full of energy.” But that’s according to Google… and not everyone believes everything they say or do anymore either.
Interestingly, but not surprisingly, Draghi’s vigorously hawkish comment gave the Euro a bit of a bid yesterday. The Italians suggesting they won’t blow-out their budget deficit has kept the EUR/USD up towards the top-end of the @Hedgeye Risk Range ($1.15-1.18) this morning too.
But should you believe any of this? How hawkish can the ECB (and the Fed) get on headline inflation after #PeakCycle has already been reported? MSM Econs are almost always too hawkish too late in the cycle, don’t forget.
Back to the Global Macro Grind…
The “full of energy” part of defining vigorous can definitely be seen in Energy prices; especially when you look at them on a year-over-year basis. From a forecasting (into the future as opposed to the rear-view) perspective, these base effects matter more than anything else.
Once you have your Hedgeye Base Effect Models in plain view (which are historical facts as opposed to economic opinions), what you really need to do is be a humble taker of incoming rate of change data. In the last month of Q3, that data can be defined as Quad 2.
What Quad 2 is NOT to our #process:
A) An electronic amplifier
B) A student dorm in New Jersey
C) Where the Dollar goes up and Rates go down
Google only had the A and B definitions. So you can believe that 10 years into building out this independent research platform that A) I continue to make things up that are B) not part of the mainstream (MSM) and/or Wall Street consensus.
DEFINITION: Quad 2 is when both GROWTH and INFLATION are #accelerating at the same time (on a 2nd derivative basis).
Yes, I know that you probably know that we’re going to be making the Quad 4 in Q4 call on this Thursday’s Q4 Macro Themes Call (ping for access). But don’t forget that A) it’s not Q4 yet and B) you won’t see Quad 4 data until Q4.
Also don’t forget that the only established econ with real accuracy in timing market expectations shifting from one Quad to another is Mr. Market himself. He’s always front-running all of us. Don’t forget that either.
That said, most of our power-users understand our data-dependent rate of change model, so they’re always trying to jump ahead to the parts of our Quad Map where the Quads change. That makes sense. But it doesn’t always make their timing right.
Back to timing the Quads in Europe vs. Draghi’s late-cycle prediction of yesterday’s news:
- We’ve always had headline Eurozone Inflation peaking in Q3 of 2018
- We’re now-casting #slowing headline Eurozone Inflation to +1.80% in Q4 of 2018
- We’re now-casting #slowing headline Eurozone Inflation to +1.38% in Q1 of 2019
As you can see in today’s Chart of The Day (slide 61 of the Q3 Macro Themes deck), our European Slower-For-Longer Inflation outlook (combined with the same view we have for Japan) is the Sword of Damocles over long-term Global Interest Rates.
But who wants to talk about the long-term? For real? When most Macro Tourists are jumping from headline-to-headline instead of from intermediate-to-long-term economic time-series to time-series of data that has been highly predictive for the past decade?
On the meaning of the Sword of Damocles, both Google and Wikipedia can agree. It’s “an illusion to the imminent and ever-present peril faced by those in positions of power.” That would include the almighty central market planners at places like the ECB and not me.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.92-3.12% (neutral)
SPX 2 (bullish)
NASDAQ 7 (bullish)
DAX 115 (bearish)
VIX 11.08-14.68 (bullish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 67.95-72.66 (bullish)
Nat Gas 2.75-3.08 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
