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.
Quad 4, Then Quad 3 (introduced 9/27/18 under the title, “#Quad4”)
- 12/25: Global Growth: Welcome to New Lows: The latest data confirms our view that domestic economic growth continues to retreat from its 3Q18 cycle-peak. Specifically, the sequential slowing of both Real PCE growth and the growth rate of New Orders for Durable Goods, as well as the positive surprise in the growth rate of New Orders for Core Capital Goods (each during the month of NOV), drove our nowcast for US Real GDP growth up +1bps/+19bps to 2.82% YoY/1.57% QoQ SAAR. The latter figure compares to 2.60% and 2.71% for Bloomberg Consensus and the Atlanta Fed, respectively. It’s unclear to me what is driving the delta between their models and ours this late into reporting season. As I wrote in the EL last Thursday, however (attached), the amount of anxiety I experience when our forecasts are materially divergent from economist consensus continues to make all-time lows after watching that community collectively fail to proactively identify the four biggest Macro Themes of 2018 (i.e. #GlobalDivergences, #ShortEM, #StrongDollar, and #Quad4). I don’t even care to know what it is that they do at this point; I’m much more interested in continuing to learn via being challenged by your always-thoughtful questions.
- 1/7: More Quad 4 Data Out of the US: The past few meaningful economic releases have rendered the U.S. economy right where our models left it per the NOV data – i.e. in Quad 4. The biggest shock to the model was indeed the New Orders-led plunge in the ISM Manufacturing PMI (↓ -11pts and ↓ -5.2pts to 51.1 and 54.1, respectively, in DEC). The ISM Services PMI was similarly weak (↓ -3.1pts to 57.6 in DEC), as were Auto Sales (↓ -146bps to -1.46% YoY in DEC). Friday’s Jobs Report was gangbusters, headlines by accelerations in Total Nonfarm Employment (↑ +9bps to 1.79% YoY in DEC), Average Hourly Earnings (↑ +10bps to 3.2% YoY in DEC), and Average Weekly Hours (↑ +30bps to 0.0% YoY in DEC). The confluence of the data rendered our nowcast for 4Q18E down -1bps and -5bps to 2.81% YoY/1.54% QoQ SAAR, respectively. The latter figure compares to both Bloomberg Consensus and the Atlanta Fed at ~2.6% apiece; both forecasts imply the US economy was in Quad 1 in 4Q18E. LOL! All told, our comparative base effects model continues to suggest the most probable path forward for domestic economic growth is lower in rate-of-change terms.
Earnings vs. Credit Cycle (introduced 9/27/18 under the title, “#CyclicalPeaks”)
- 12/17: More #Quad4 Confirmation Domestically: The advent of the NOV Headline Retail Sales data (↓ -60bps to 4.2% YoY), NOV Retail Sales Control Group data (↓ -10bps to 4.4% YoY), NOV Industrial Production data (“↑” +10bps to 3.89% after OCT was downwardly revised by -32bps to 3.79%), the DEC Markit Composite PMI data (↓ -1.1pts to 53.6), and the DEC NAHB Housing Market Index (↓ -4pts to a 3.5yr-low of 56) were each confirming of our #Quad4 forecast for the US economy here in 4Q18E. The net result of these figures rendered our nowcast for Real GDP at 2.81% YoY/1.38% QoQ SAAR – the latter of which remains well below the 2.6% and 3.0% currently indicated by Bloomberg Consensus and the Atlanta Fed, respectively. Amid a growing consortium of late-2019/2020 recession calls, investor consensus remains too bullish on growth in the near-term to expect anything other than a continuation of recent trending cross-asset performance. That being said, however, our models can’t get to a US recession within our NTM forecast horizon at the current juncture; this is especially true with the likelihood domestic consumer spending hangs in amid favorable income dynamics (e.g. assumed YoY growth in tax refunds). On the flip side, domestic manufacturing growth is likely to be increasingly challenged from here. But as we’ve said all along, you don’t need a recession for stocks to go down; developing fears of a contraction in corporate profits is more than enough to spook the equity and credit markets amid four consecutive quarters of Quads 4 and 3. Refer to slides 20-24 of our #CreditCycle presentation for more details.
Long Ideas: Housing, Gold, etc. (introduced 9/27/18, under the title, “#LongHousing”)
- 12/31: Disinflation Is Not Just A Strong Dollar Phenomenon: The view that the weak currencies would continue to inflate European and Asian inflation statistics from their respective Q3/Q4 cycle-peaks has given way to obvious disinflation born out of cycle-peak comparative base effects: Spain EU Harmonized Headline CPI ↓ -50bps to 1.2% YoY in DEC; Germany EU Harmonized Headline CPI ↓ -50bps to 1.7% YoY in DEC; South Korea Headline CPI ↓ -70bps to 1.3% YoY in DEC; and South Korea Core CPI ↓ -10bps to 1.3% YoY in DEC. Each of those countries should see inflation slow through at least 3Q19E (ES, DE, SK) – a material anchor on global bond yields for 2019. We reiterate our bullish bias on duration across non-credit-oriented global sovereign debt markets, including the one that has the greatest amount of investors positioned offsides for further tightening (of yields) – i.e. US Treasuries.
#StrongDollar (introduced 4/3/18 under the title, “#DollarBottoming?”)
- 12/17: Remember Tariffs?: Allegedly US Import Prices do not: ↓ -260bps to a 26-month low of 0.7% YoY in NOV. As we forecasted at the outset of presenting our then non-consensus dovish view on US inflation, the annualized strength of the US dollar is having a disinflationary impact on domestic imports.
- 1/7: More Quad 4 Data Out of Europe: The Eurozone economy literally can’t get out of its own way. If Federal Reserve policymakers are effectively “walking around a dark room feeling for objects”, then the Eurozone economy is trapped in a pitch black hypersonic echo chamber with Legos scattered about the floor (I’m sure the parents among you reading this know the pain of stepping on those all too well). December was the worst month in both levels and rate-of-change terms with respect to pan-regional degradation in PMI readings. The Sentix Investor Confidence Index ticked down another -1.18pts in DEC to reach a new cycle-low of -1.5. Investors have been [wrongfully] egging us on to close out our bearish biases on core European equity, credit, and currency risk for multiple quarters now and we were keen to refuse to do so at every interval. In fact, the weakness of the data at the end of the prior forecast period implies the handoff in growth to 1Q19E might be so weak that the Eurozone economy fails to comp the sequentially easier comp in the current quarter, so we’re happy to continue waiting until either the data or market signal tells us to back off of the short side here. If you’re dying to be long something in European asset markets, duration in the Bund, OTA, Gilt, SPGB markets, as both France and Italy just joined Germany, Spain, and the UK in what is now obvious trending deceleration in regional Headline CPI readings. Moreover, our comparative base effects model is suggestive of further material downside from here over the next few quarters.
#ShortEM (introduced 1/4/18 under the title, “#UnderweightEM”)
- 12/17: Brazil Bucks the Trend In EM: The latest batch of data continues to support our #Quad2 forecast for the Brazilian economy here in 4Q18E: OCT Real Retail Sales (↑ +180bps to 1.9% YoY), OCT Services Sector Volume (↑ +100bps to 1.5% YoY), and OCT Economic Activity Index (↑ +208bps to 2.99% YoY). Juxtapose this with crashing Turkish Industrial Production growth (↓ -1210bps to 5.7% YoY in OCT), slowing Russian Industrial Production growth (↓ -130bps to 2.4% YoY in NOV), and the sharp slide in Indonesian Export growth (↓ -749bps to -3.28% YoY in NOV) and it’s clear to see that the data does not yet support a broad-based “all clear” signal on the long side of EM – especially with the dollar poised for a likely upside capitulation in 1Q19E.
- 12/25: Global Growth: Welcome to New Lows:
- Turkish Real GDP growth continues to track negative on a YoY basis according to our nowcast for 4Q18E, as most recently confirmed the slowing DEC Consumer Confidence data (58.2 = the 2nd lowest print of the past decade). Turkish stocks continue to trend lower, down -7.8% over the past three months. Supported by +1600bps of policy rate tightening throughout the YTD, the Turkish lira’s +30% recovery off its 8/13 YTD low is supportive of our view that flows are likely to rotate into select emerging markets on the other side of the Fed’s eventual dovish pivot and any subsequent Chinese stimulus – the both of which are at least a month away. Moreover, it remains a generous assumption to assume the latter event will actually occur in the context of the international political climate.
- Retail Sales growth decelerated -90bps to 3.1% YoY in OCT, incrementally confirming the growth aspect of our nowcast for Mexican Real GDP growth here in 4Q18E. Our comparative base effect model has the Mexican economy straddling the knife’s edge between Quads 1 & 4 over the next 1-2 quarters, before contributing to a more pronounced recovery by the middle of 2019E. The S&P/BMV IPC Index has cratered -16.7% over the past three months alongside another -4.5% decline in the Mexican peso. Investors would do well to use those returns as an example of why not to front-run the forecasted changes in our GIP Model signals. There’s a reason we haven’t turned bullish on Mexico yet (or Germany, or Japan, for that matter) – neither the latest data nor Mr. Market are signaling a near-term recovery.
- 12/31: Chinese Growth Hits New Lows In December: The juxtaposition of Trump’s recent tweets regarding US/China trade negotiations with leading economic data or forward-looking financial markets is rather head-scratching to say the least. Over the weekend, we received China’s official PMI data for the month of DEC that showed Manufacturing output slowing -0.6pts to a contractionary 49.4, which was the lowest reading since the nadir recorded in FEB ’16. Non-Manufacturing output ticked up marginally, rendering the Composite Index at the lowest level on record. We probably sound like a broken record on this topic, but it bears repeating that investors should not anticipate a bottom in Chinese economic growth until after the economy cycles up against peak comparative base effects in 1Q19E. This is primarily because we’ve been correct in view that Chinese policymakers’ options to ease fiscal and monetary policy remains contained in a rising US dollar environment. Recall that Chinese nonfinancial corporates are the EM world’s largest single issuer of dollar-denominated debt. If these companies start to fear the PBoC will let the yuan trade well past the vaunted 7-handle due to excessive easing amid ongoing tightening by US monetary authorities, they will start to prepay debt and increasingly retain earnings overseas, leading to a further strain on M1 growth that would hamper Chinese banks’ ability to grow their loan books on the mainland. To that tune, we’ve actually seen capital outflows accelerate in recent months amid new cycle-highs in the Trade-Weighted US Dollar Index. This has led to a further constrain on credit growth across the maturity transformation spectrum: M0 unchanged at 2.8% YoY in NOV; M1 ↓ -120bps to 1.5% YoY in NOV; Bank Loans Outstanding ↓ -2bps to 13.1% YoY in NOV.
- 12/31: Energy Deflation Weighing On Russian Growth: Russian economic data is increasingly looking like a chart of crude oil of late (Brent -35% QTD), with the DEC PMI data becoming the latest figures responsible for incrementally confirming our #Quad3 forecast for the Russian economy here in 4Q18E. Specifically, the Manufacturing PMI ticked down -0.9pts to 51.7, the Services PMI ticked down -1.2pts to 54.4, and the Composite PMI ticked down -1.1pts to 53.9. Our GIP Model is calling for two more quarters of #Quad3 through 2Q19E; as such, we’re keen to reiterate our bearish bias on Russian equity, credit, and/or currency risk from here.
- 1/7: Argentina, Turkey Confirm Investors Should Be Patient With EM: If you share our view that the persistent economic descent into Quads 3 and 4 that began back in 1Q18 were causal to the cross-asset selloffs within the EM universe, then more Quads 3 and 4 data is not what you want to see as it relates to timing an eventual bottom. Specifically, the sequential slowing of Argentine Industrial Production (↓ -650bps to -13.3% YoY in NOV) and Turkey’s Manufacturing PMI (↓ -0.5pts to 44.2 in DEC) were confirming of our respective Quad 3 nowcasts for each economy in 4Q18E. Further, our comparative base effects model suggests Quad 4 is the most likely outcome for each economy here in 1Q19E. The sharp rollover in Turkish Headline CPI (↓ -132bps to 20.3% YoY in DEC), Core CPI (↓ -119bps to 19.53% YoY in DEC), and Headline PPI (↓ -490bps to 33.64% YoY in DEC), is suggestive that the worst is behind us on the inflation front, which could provide some interesting real interest rate support for TRY denominated assets in/around an eventual bearish-to-bullish TREND reversal. We just don’t see that as a near-term event, however.
#GlobalDivergences (introduced 1/4/18)
- 12/17: More #Quad4 Confirmation Internationally: What can we say about the global economy that Mr. Market hasn’t been reminding investors of at every meaningful interval since the “globally synchronized recovery” started to unravel in late-January (at least in mark-to-market terms; not so much in economist consensus speak). Specifically, the latest key high-frequency growth data out of Europe and China have definitely driven up the probability of a global recession commencing in early-2019: China NOV Retail Sales (↓ -50bps to a 15yr-low of 8.1% YoY), China NOV Industrial Production (↓ -50bps to a 10yr-low of 5.4% YoY), Germany DEC Composite PMI (↓ -0.1pts to a cycle-low of 52.2), France DEC Composite PMI (↓ -4.9pts to a cycle-low of 49.3), Eurozone DEC Composite PMI (↓ -1.4pts to a cycle-low of 51.3). I don’t want to join the sell-side carnival that is providing investors with a precise estimate of that probability, but I do know that it’s definitely higher on WoW basis after seeing global financial markets react to these data. If you recall our note from a few weeks back, we don’t use the “r” word lightly @Hedgeye in an attempt to make headlines and capture mindshare. We’re just telling you what our fundamental models and quantitative risk management signals have been suggesting for months: global growth is unlikely to bottom until Europe and China both cycle their cycle-peak comparative base effects, which are in 4Q18E and 1Q19E, respectively. And even from there, comps don’t ease substantially enough to anticipate anything beyond a rather muted rebound in global growth in growth absent some meaningful degree of stimulus out of Beijing – which we’re decidedly not seeing at the current juncture. How will now-dovish inflation dynamics in Germany, France, Spain, and across the Eurozone in aggregate impact the EUR/USD from here, however? Investors are anticipating a dovish Fed pivot to weigh heavily upon the dollar, but what if Draghi blinks more forcefully than Powell’s eventual pivot?
- 12/25: Global Growth: Welcome to New Lows:
- While the German economy is tracking solidly in #Quad2 from a Real GDP growth perspective here in 4Q18, the DEC Ifo Survey data implies downward revisions to our nowcast – which is still digesting OCT/NOV hard data – are on the come. Also supportive of that view is the DAX having corrected -13.9% over the past three months alone. Regarding the Ifo Survey data specifically, the Headline, Current Conditions, and Expectations indices each declined sequentially (the latter to new cycle-lows) and fortified their existing downtrends.
- The Japanese economy is mirroring the German economy from the perspective economic growth – i.e. recovering from an artificial slowdown in 3Q18, but tracking slower than it otherwise would have had neither incident occurred. The NOV Export data is incrementally confirming of as much, slowing to its 2nd slowest growth rate of 2018. This reality has certainly contributed to the Nikkei 225 Index’s -15.5% selloff over the past three months.
- French Business Confidence slowing in DEC to the lowest level since mid-2016 and Household Consumption growth printing the 2nd slowest print since the European Sovereign Debt Crisis (down -2.0% YoY) were each confirming of the Real GDP growth component of our #Quad4 forecast for the French economy here in 4Q18E. Mr. Market agrees with the CAC 40 Index having plunged -15.6% over the past three months. The latest European Commission Eurozone Consumer Confidence data for the month of DEC is confirming of a similar [dour] setup for economic growth across the region at large here in 4Q.
- Italian Business Confidence slowed to the lowest level since early-2017 in DEC, while Consumer Confidence reached new lows not seen since 2H17. Both figures were incrementally confirming of the growth aspect of our #Quad4 nowcast for the Italian economy here in 4Q18E. Comparative base effects for Italian Real GDP growth don’t materially ease until 3Q19E, so our forecasts for a recovery in Italian economic growth over the intermediate time horizon are similarly (and uninvestably) muted. As such, investors would be remiss to read too far into the green “1’s” in our Global Macro Risk Monitor table – at least until we see signs of [bullish] confirmation from the FTSE MIB Index, which plunged -15.1% in the past three months alone.
- Brexit concerns continue to weigh on UK economic growth, with the CBI Retail Sales Volume Index ticking down in DEC to the lowest reading since 2H17. This weakness mirrored the ongoing slowdown seen in the Lloyds Business Barometer Index (DEC = lowest reading since 2H17), as well as the Gfk Consumer Confidence Index (DEC = lowest reading since 2H13) and is incrementally confirming of our #Quad4 nowcast for the UK economy here in 4Q18E. Comparative base effects for Real GDP growth ease ever-so-slightly next quarter, but investors would be remiss to anticipate anything other than trending deceleration in the ensuing four quarters post the 3Q18 secular lower-high in UK economic growth.
- Canadian Retail Sales growth plunged in OCT to the slowest growth rate since early-2015, incrementally confirming the growth component of our #Quad4 nowcast for the Canadian economy here in 4Q18E. Much like Italy, our comparative base effect model for Canada implies a depressingly muted rebound in growth off current levels of economic activity – a “rebound” the S&P/TSX Composite Index is not at all confirming according to its -14.7% melt-down since late-September.
- 12/25: Global Policy: Choking Off Growth Worldwide
- Did you know that throughout 4Q18-to-date, global central banks have tightened benchmark monetary policy rates by a cumulative +325bps, adding to +2100bps of hikes already seen in the YTD through 3Q18.
- If you assume there’s a lagged impact to meaningful shifts in monetary policy (we do – if only because central banks only tighten at high “levels” of Nominal GDP growth, which, by definition, create difficult comparisons in out-quarters), then the aforementioned “Globally Coordinated Tightening” represents a material and underappreciated drag on global growth heading into 2019 – yet one more reason for investors to avoid trying to pick bottoms in and across crashing equity markets worldwide at the current juncture.
- Recall that a reversal of the multi-year easing cycle across EM was among the primary reasons we anticipated both a reversal in what had been trending EM equity and FX outperformance, as well as a general slowdown in global economic activity throughout 2018 at the start of the year.
- And, though we’ve seen that view come to fruition in both reported data and market price terms, the negative impact of all the aforementioned tightening doesn’t simply fail to exist. Said differently, what is the recorded bull case for global economic growth? We know precisely what the bear case its – i.e. tough comps, tightening financial conditions, waning consumer/business/investor confidence, etc.
- Brazil remains the only major economy in the world that has eased monetary policy on a trending basis, which is why its growth dynamics – and markets; Bovespa +9.9% T3M – continue to stand apart from the rest of the world.
- 1/7: Global Growth Ends 2018 on the Lows: The JPM Global Composite PMI ended 2018 at 52.7 – its lowest level since SEP ’16, which is not good considering the onslaught of increasingly difficult comparisons for global growth here in the first three quarters of 2019. The weakness in PMI readings was broad based, both in terms of components and economies. Highlights include:
- Manufacturing: 74% of the 31 economies we track were trending lower as of DEC, unchanged from 74% in NOV
- Accelerated MoM: Indonesia, Italy, Japan, South Korea, UK
- Decelerated MoM: Australia, Brazil, Canada, China, Emerging Markets, Eurozone, France, Germany, India, Spain, Turkey, US, World
- Services: 71% of the 17 economies we track were trending lower as of DEC, up massively from only 53% in NOV
- Accelerated MoM: Brazil, Italy, UK
- Decelerated MoM: Australia, China, Emerging Markets, Eurozone, France, Germany, India, Japan, US, World
- Composite: 71% of the 38 economies we track were trending lower as of DEC, unchanged from 71% in NOV
Best of luck out there managing these evolving macro risks! As always, please feel free to reach out anytime to the extent we can be of any assistance in that process.
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