“Two words: Quad Four … that is basically all you needed to know to beat not only the market but your competition in 2018. Importantly, you had to know when 1 of the 2 words changed. That’s when we went from Quad Two to Quad Four (in Q4).” -Keith McCullough, yesterday
We’ve spared no digital ink in detailing the dynamics surrounding domestic growth accelerating over the past year and a half.
Organic (& globally harmonized) acceleration combined with trough industrial/profit recession comps conspired to drive perhaps the finest protracted stretch of growth and risk adjusted returns of the cycle.
But macro, of course, remains an exercise in successfully front-running Better/Worse and, from a slope-of-the-growth-line perspective, organic improvement and base effects aren’t mutually exclusive.
To be clear, our near-term outlook remains growth and asset price positive, but marked accelerations and all-time highs eventually become the comp and as good as those cycle highs look against recessionary compares can be as challenging as they become after those trough comps are fully annualized.
The objective of this note is simple:
Below we’re simply cataloguing the recent and forward comp dynamics across a selection of high frequency domestic fundamentals.
Green Line in the Chart = TTM/2017 Comps
Red Line in the Chart = the NTM/2018 comp setup.
There’s nothing conceptually groundbreaking in visually cataloguing reported reality, but degree of difficulty doesn’t (necessarily) count and simply identifying gravity doesn’t indemnify one from its effects if you’re not also proactively prepared for it.
After all, the post-crisis market reality remains one where everything is obvious and nothing is what it seems ....
Back to the Global Macro Grind …..
I wrote the above on January 23rd, 2018 (11 months ago) as a kind of forward looking fundamental prospecting piece.
I went on to visually catalogue the comp dynamics across a broad range of high frequency domestic macro series on the way to stressing a point around duration sensitivity – namely that the near-term outlook and the associated quad 1 &2 allocation playbook remained in force but that as we move through 3Q18 and into 4Q, fundamental gravity would invariably and increasingly assert itself.
In other words, this was one of the most slow moving and proactively predictable phase transitions in growth imaginable – fully baked and inclusive of unprecedented late-cycle stimulus, recurrent geopolitical potholes, rampant Trade and Tariff covfefe, rhetorical shifting’s in Monetary Policy, unending politically shaded punditry and all manner of reflexive price action and volatility clustering across global markets.
Again, it’s not that policy, politics and topical headlines don’t matter and can’t feed into and shape the market narrative, it’s that they are almost never the defining factor driving the underlying Trend in a developed market economy….they’re almost exclusively supporting actors, serving as amplifier or dampening agent to financial market prices within the prevailing growth regime.
And that remains the simple, and liberating, point.
You could have sidestepped all the psycho-emotional trappings of Macro Tourism - ignored all the tweets, all the headline jumping, all the daily myopia & fabricated import - in favor of simply measuring and mapping the data within the baseline expectation for how the cycle would evolve over the NTM.
Ironically, not only is that approach objectively more effective, it’s way easier and way less emotionally taxing.
Anyway, clearly our Quad 4 in 4Q call has been exceptional … pretty much every allocation we highlighted back on September 27th has worked, conspicuously, and they started working like 5 hours after we made the call to pivot out of the pro-growth Quad 1&2 allocations we’d been loading up on over the prior 18-months.
By definition, exceptional means ‘unusually rare or extraordinary’. In other words, future calls are unlikely to unfold so dramatically or be as neatly timed as this one.
Now, with that expectation calibration out of the way, lets grind on the marginal developments within the Trend view, with a focus on the labor market given Jobs Day:
Initial Jobless Claims: We highlighted this in an institutional note alongside the latest weekly data yesterday but it’s worth reduxing here.
Peak improvement in initial claims has been one of most consistent lead indicators of the cycle with peak improvement in rolling 3Mo. claims preceding the peak in the economic cycle by an average of 7 months over the past 7 cycles.
So long as initial claims continue to make lower lows, the separations side of net employment remains supportive of further labor market tightening and the expansionary party can persist without acute risk of large-scale dislocations (consumer credit or otherwise), particularly in a consumer-centric domestic macroeconomy.
What’s notable is that peak improvement in rolling Initial claims now appears to be rearview with the inflection coming off the cycle low registered in October. The peri-holiday period can be noisy and subject to distortions but with claims progressively increasing over the last couple months and the global and domestic economy now traversing the backside of the growth curve, a retrace back to multi-decade lows is increasingly less probable.
Is it a harbinger of imminent recession? No, but like the implications of yield curve inversion, it does mean the cautionary drone of the late-cycle expansion clock starts to tick a little louder.
NFP: All the Quad 4 talk probably has you all bear’d up, but it’s not all fire and brimstone. By the numbers, we need +221K on the headline to get a sequential acceleration in year-over-year payroll growth. Do we get something roughly 200K+/-? Probably. And the probable range for AHE is 2.9%-3.1% Y/Y.
The market obviously does not need a rogue inflation print to stiff-arm the Fed’s newly revised, coordinated communication strategy but assuming the numbers come in roughly in-line, the primary implication remains to income growth, and by extension, consumption growth.
The product of flattish payroll and wage growth will be stable growth in aggregate income. And with income growth comps easing modestly the next few months and the specter of wage inflation casting an increasingly longer shadow, the baseline expectation should be for income growth to remain relatively strong which, by extension, should cultivate a stable nearer-term read through for consumption growth – something like 3% +/- Y/Y with further declines in the savings rate available to buttress any deceleration in aggregate income growth should that emerge. In other words … domestic growth will move past peak but Consumption is unlikely to manifest as an outsized negative drag, at least through the balance of the year.
Market Prices & Expectations: The WSJ’s Fed piece helped stick save equities yesterday (which were signaling oversold intraday) but with Reits, Utes, Staples, Low Beta and High Yield all outperforming, the complexion of sector/style factor performance was more of the same. Moreover, and more notably, the recent re-rating lower of growth, inflation and policy expectations has been ubiquitous, particularly over the last week+:
- Inflation Expectations have collapsed: 10Y Breakevens sunk further below 2% and are -15bps in the last month, the unwind of the large speculative short position in Treasury’s is in motion, the TIPS curve remains inverted and the ongoing collapse in oil/energy prices and lagged effects of strong $USD effectively ensures reported headline inflation will continue to decelerate.
- Policy Expectations: Fed Fund futures are now pricing in barely one rate increase in 2019 and the Eurodollar curve is collapsing (recall, the Eurodollar curve represent the markets view on the pace/magnitude of policy tightening). Indeed, the Eurodollar market is only pricing in 14bps of increase in 2019 (down from expectations for almost 3 full hikes at the beginning of October) with expectations having fully shifted towards policy easing in 2020.
Again, all that is just a textbook manifestation of Quad 4 and the markets renewed acknowledgment that when Powell peer’s into his policy ball he sees last month’s data.
If we’re right on Quad 4 extending through 1Q19, the new “wait & see” policy initiative should get a lot of reps over the next few months.
In the meantime, shot of egg nog for every manic “yield curve inversion” reference and useless year-end 2019 price target …….
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.84-3.04% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 54.01-56.61 (bullish)
Consumer Staples (XLP) 53.67-56.88 (bullish)
REITS (VNQ) 79.30-83.51 (bullish)
Industrials (XLI) 68.07-73.35 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 215 (bearish)
DAX 108 (bearish)
VIX 16.17-24.32 (bullish)
USD 96.10-97.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 112.16-114.10 (bearish)
GBP/USD 1.26-1.28 (bearish)
Oil (WTI) 49.45-53.96 (bearish)
Nat Gas 4.08-4.77 (bullish)
Gold 1 (bullish)
Copper 2.66-2.83 (bearish)
Christian B. Drake
U.S. Macro Analyst
