“China has total respect for Donald Trump and Donald Trump’s very, very large brain”
So, minutes after the ISM reported the weakest print in 18-months and already beleaguered benchmark indices looked set to leak lower to start November we got the “long and very good discussion” tweet from Trump regarding the state of Trade with China.
That ‘news’ was further chased by reports late last night that the administration was engaged in drafting a trade deal proposal that would serve as both symbolic ceasefire to the escalating trade war and the negotiating framework for the Trump-Xi meeting in Argentina later this month.
The subsequent punditry has been expectedly diametric.
It’s an overt political maneuver designed to engineer market strength ahead of the elections after what was developing into a harrowing slide in domestic equities amidst an increasingly unanchored rout in global assets. After which, the administration will promptly reverse course back to the US vs Them protectionist policy echochamber which, by narrative necessity, requires a perpetual “them” to rail against and, by extension, disincentivizes the realization of any actual, final resolution as it risks disengaging the base.
Or it’s a harbinger of some tangible progress.
I don’t know.
Back to the Global Macro Grind…
From a broader top-down perspective, here’s what I do know.
Stability – to the extent it was cultivated by a persistent macro regime of growth accelerating – is largely a euphemism for the cumulation of latent risk.
We’ve detailed this evolving dynamic recurrently but to recap:
The longest period of accelerating growth ever served to drive a cumulative (one-way) build in pro-growth exposures which were either explicitly or implicitly levered to growth/beta/momentum/low vol/weak $USD. As the globally synchronized recovery meme fractured amid #GlobalDivergences and morphed into a U.S. centric growth narrative, it spawned the largest US-OUS equity divergence ever, a ceaseless bid to growth/beta exposures and a ubiquitous one-way bid for small caps as the Russell Growth Index became a proxy for both risk and insulated domestic growth.
Everyone is a “secular grower” when growth is ‘long and very good’ and accelerates for a record 9 straight quarters.
It’s when the causal fundamental factors crest and inflect on a rate-of-change basis that that latent risk (i.e. “stability”) becomes not so latent.
Quickly, in the interest of breaking it up and keeping you engaged ….
Q: What do the following have in common? ISM, ISM New Orders, Durable Goods, Durable Goods (ex-Defense & Aircraft), Retail Sales, Capital Goods Orders, Case-Shiller and FHFA Home Price Growth, Existing Home Sales, Pending Home Sales, Fed Regional Survey’s, Markit PMI, Small Business Confidence
A: All were “less good” and slowing on rate-of-change basis as of the latest data. And most of the latest reported data is still Quad 1, 3Q18 data. Yesterday’s ISM print for October was the lone 4Q data point thus far and it represented a conspicuous entre of Quad 4 in Q4. “Less Good” should continue to characterize the next 6 months.
It’s the market progressively discounting the phase transition in growth that causes volatility to transition from isolated and episodic to Trending. And the fact that flows have been uni-directional for the longest period ever can only act as an amplifier to price reflexivity when the rotation occurs - some version of “stairs up, window down” becomes more of a baseline expectation than a tail probability …. and the worst mid-term-year October drumming for equities in 40 years is what you get, for example.
The simple point remains this: the Global (& now domestic) traversal from Quads 1&2 (growth accelerating) to Quads 3&4 (growth slowing) had/has nothing to do with Tweets or Trade Policy rhetoric.
To be sure, it’s not that large-scale Trade policy developments are inconsequential. It’s simply that, over shorter, investible durations, they serve as an amplifier or dampening agent to financial market prices, not the defining factor driving the underlying Trend. Absent the trade war, China would still be slowing, there would still exist both an economic and policy divergence and the Yuan would still be weaker.
Would Chinese equities and the currency be a little less weak? Perhaps, but that’s not the point.
Think about it like this.
Trump tweets are the weather. The GIP model (Quad 4, currently) defines the climate. And betting on the path of the climate is always better than guessing whether it may rain next Tuesday.
Sector and style factor performance QTD agrees, as does the consistency of backtested performance.
That said, active risk management is about helping you not get wet if it’s raining today.
This morning’s Jobs data for October should show sequential strength as we comp last month’s hurricane distortion and as weather distortions from last year provide favorable base effects for earnings growth ….. which should see an acceleration to a new cycle high, confirming the higher cycle high in ECI Salary and Wage growth for 3Q18 reported on Wednesday.
The call remains Wage Growth up, Broader Inflation down over the nearer-term. If late-cycle WageAcceleration is hawkish enough this morning, that may get yields to the top end of the 3.03-3.24% risk range and an attractive re-entry point for a quintessential Quad 4 exposure, fixed income.
Climate is what you expect, weather is what you get. The GIP model defines the former, the quantitative overlay helps you risk management the latter.
Finally, your annual reminder as we head into the end of daylight savings this weekend ….. keep Springing Forward, let the competition Fall Back!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 3.03-3.24% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 52.88-55.31 (bullish)
Consumer Staples (XLP) 53.42-55.96 (bullish)
REITS (VNQ) 76.42-79.64 (neutral)
Industrials (XLI) 66.20-73.32 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 201 (bearish)
DAX 11077-11690 (bearish)
VIX 17.22-26.91 (bullish)
USD 95.30-97.26 (bullish)
Oil (WTI) 63.08-68.99 (bearish)
Gold 1 (neutral)
Have a great weekend,
Christian B. Drake
U.S. Macro Analyst