“It’s because of a phenomenon known as repetition suppression.”
-David Eagleman
After the 3rd US interest rate hike in 2018 and the Federal Reserve raising rates for almost 3 years now, why is consensus worried about a “breakout in interest rates” AFTER they’ve been breaking out for the last 2 years?
Why did interest rates drop on yesterday’s rate hike “news”?
As Anthony Brandt and neuroscientist, David Eagleman, go on to ask in The Runaway Species: “Why do humans adapt to everything around us (including real-time information) so quickly?”
A: Repetition Suppression
“When your brain gets used to something it displays less and less of a response each time it sees it.” (pg 17)
Back to the Global Macro Grind…
And so we enter the next US rate cycle…
Yep, I know. That sounds all creative and crazy vs. the Old Wall’s consensus this morning. But longer-term investors should be preparing for both growth and headline inflation slowing, not accelerating. They should be set up for rates falling, not rising.
Since we made the Quad 2 breakout in interest rates call back in Q4 of 2016, I hope we have some credibility with you on this.
And if we don’t, we’re going to earn it the good ole fashioned way. God willing I’ll have two feet on the floor at the top of the Global Macro Risk Management morning every step along the way. If #TheCycle’s data surprises us, we’ll let you know.
But, for now, I think the Q4 US growth and inflation data is about to surprise consensus to the downside instead.
How is that going to happen? Let’s start with the Fed’s latest forecast for US growth to #accelerate (after it already did for a record 9 straight quarters on a year-over-year basis) to +3.1% in 2018 vs. their prior upwardly revised forecast of +2.8%:
- We’re at +2.95% year-over-year GDP growth for Q318
- We’re at +2.64% year-over-year GDP growth for Q418
- The +2.64% y/y imputes a headline US GDP print of +1.1% q/q SAAR for Q418
That last one is the one Macro Tourists stare at. That’s the “sequential” quarterly US government measurement of US GDP. At the end of the year, they take all 4 quarters of GDP, add them up, then divide by 4 for the year-over-year number.
“So”… as they like to say on Wall Street…
Headline GDP of +4.2% in Q2 of 2018 (i.e. the number Trump always trumpets) was really +2.90% year-over-year growth in Q218… and I’ll go out on a limb and predict that if our +1.1% q/q now-cast is right, Trump haters are going to pounce on that Q4 print.
Regardless, this isn’t about him. It’s about the math. AFTER growth, inflation, and US corporate profits #accelerated to their respective cycle peaks, everything was actually awesome – and Trump sounds like he’s lying about the truth to UN dudes who don’t do calculus.
In other real-time economic and market news:
Of the 98 US companies that have already issued guidance on Q3 of 2018, 76% of them guided down and not up. Huh? Yep. The Russell 2000 is down -2.8% from its all-time closing high from the end of Q2 Earnings Season too.
While US growth and inflation data #accelerated modestly in Q3 vs. Q2 (we call that peak Quad 2), some companies apparently did not. That’s new and we’re going to contextualize the US Profit Cycle #Slowing on our Q4 Macro Themes Call at 11AM EST today.
With the UST 10yr Yield having gone from its all-time low of 1.4% in Q3 of 2016 to +3.10% in both Q2 and Q3 of 2018 (it just re-tested the May 2018 cycle high and failed there), are we about to enter the next rate cycle and why?
Tune in and I’ll use cycle math to convince you why repetition suppression on rates rising has lulled consensus to sleep.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.93-3.13% (neutral)
SPX 2 (bullish)
RUT 1 (neutral)
NASDAQ 7 (bullish)
Shanghai Comp 2 (bearish)
VIX 11.13-14.61 (bullish)
USD 93.20-95.11 (bullish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 68.13-72.96 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
