“Gravity wins over all other known forces.”
-Andrea Ghez
Some central market planners at the Federal Reserve will quibble with that. They think they can bend and smooth economic gravity. Sometimes the market believes them for a period of time. Other times, the market realizes that The Cycle slowing trumps anything they may or may not do.
“But you can’t fight the Fed…”
Sometimes you can. Sometimes you can’t. But you can often front-run the Fed’s proactively predictable behavior. If you have a process that stays ahead of rate of change turns, accelerations, and decelerations in major economic factors like GROWTH and INFLATION, that is…
Back to the Global Macro Grind…
It’s Macro Monday @Hedgeye! Welcome to a new week. For those of you are new to our measuring and mapping #process, at the start of every market week we review what happened in macro in the prior week within the context of the @Hedgeye Process.
Let’s start with the Global Currency market:
- US Dollar Index was down for the 3rd week in a row, down -0.5%, moving to Bearish TRADE, but holding TREND support
- EUR/USD was +0.6% on the week to 0.0% YTD and remains Bearish @Hedgeye TREND
- YEN was flat 0.0% on the week vs. USD to +1.0% YTD and remains Bullish @Hedgeye TREND
- GBP/USD was +0.9% on the week to +0.9% YTD but remains Bearish @Hedgeye TREND
- Indian Rupee was down another -1.2% vs. USD on the week to -1.1% YTD and remains Bearish @Hedgeye TREND
- Turkish Lira was down another -2.4% vs. USD on the week to -3.1% YTD and remains Bearish @Hedgeye TREND
Yes, it’s true that as the Fed realizes @Hedgeye’s nowcast for both US GROWTH and INFLATION slowing, you should set up for a USD topping process and some asset price reflation. But it’s also true that that’s not a perpetuity. The rest of the world is in a competitive currency devaluation war too.
Dollar Down, Rates Down is essentially our call on Quad 4 Then Quad 3 (see our recent Q1 Macro Themes presentation for details) and while the market starts to price the beginning of that Fed transition to no more hikes in, it also realizes that real growth is still slowing!
In contrast to what you’ll see on your screens this morning (Dollar Up, Rates Down), here’s what US yields and credit did last week:
A) UST 2yr Yield was up +3 basis points on the week to 2.54% but remains Bearish TREND @Hedgeye
B) UST 10yr Yield was up +4 basis points on the week to 2.70% but remains Bearish TREND @Hedgeye
C) High Yield OAS spread compressed -53 basis points to 4.45% but remains Bullish TREND @Hedgeye
We’ll see how “credit trades” this morning, but it’s a lot easier to be Long Treasuries this morning (across the curve) than it is to guess and/or hope that The Cycle scare in High Yield credit is over. We review that in the Q1 Macro Deck too.
In US Equity space it was also a Counter @Hedgeye TREND bounce week with mostly the worst places to be during Quad 4 in Q4 bouncing the most. From a Factor Exposure perspective, here’s how that looked:
- LOW (div) YIELD stocks bounced +5.0% last week but remain Bearish @Hedgeye TREND
- HIGH BETA stocks bounced +4.8% last week but remain Bearish @Hedgeye TREND
- HIGH SHORT INTEREST stocks bounced +4.6% last week but remain Bearish @Hedgeye TREND
*Mean performance of Top Quartile vs. Bottom Quartile, SP500 Companies
Interestingly, from a US Sector Style perspective, one of our favorite Sectors to be SHORT led on the upside alongside one of the Sectors we want to be long:
A) Industrials (XLI) were +4.2% on the week but remain Bearish @Hedgeye TREND (short)
B) REITS (VNQ) were +4.6% on the week and remain Bullish @Hedgeye TREND (long)
We also like rate sensitive exposures like Housing (ITB) stocks and Gold (GLD). I expect their relative and absolute performance to continue to be strong if the economy is in either Quad 4 or Quad 3 even though Gold was only +0.3% last week.
Other buying opportunities with Real Yields Falling came in the commodity sector last week:
A) Silver corrected -0.9% last week to +0.6% YTD and remains Bullish TREND @Hedgeye
B) Platinum corrected -1.6% last week to +1.7% YTD and remains Bullish TREND @Hedgeye
Yep, there’s always a bull market developing somewhere. And that’s currently NOT in anything Europe other than certain long-term European Sovereign bonds. They do well when European GROWTH and INFLATION are slowing too.
The ECB doesn’t want a strong Euro. With European economic data being downright recessionary last week, you can proactively predict (front-run) Mario Draghi’s behavior inasmuch as you should have known what Powell had written on his dovish piece of paper.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.56-2.80% (bearish)
UST 2yr Yield 2.39-2.62% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
REITS (VNQ) 72.02-78.91 (bullish)
Industrials (XLI) 62.05-69.64 (bearish)
Housing (ITB) 29.06-34.49 (bullish)
VIX 17.15-30.48 (bullish)
USD 94.50-96.42 (neutral)
EUR/USD 1.13-1.15 (bearish)
USD/YEN 107.05-110.80 (bearish)
GBP/USD 1.25-1.28 (bearish)
Oil (WTI) 44.04-54.01 (bearish)
Gold 1 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
