US STRATEGY - INFLATION REFLATION

The S&P 500 is signaling another push higher is underway after a short but sweet consolidation.  The MACRO tailwind came from the focus on the March employment report released last Friday.  In addition, the above consensus ISM non-manufacturing and housing sector data helped to underpin the RECOVERY trade.

The ISM non-manufacturing index improved to 55.4 in March from 53 in February, ahead of the 54 consensus. The components of the report were fairly upbeat, as new orders jumped to 62.3 from 55.5, business activity increased to 60 from 54.8 and order backlogs spiked to 55.5 from 46. In addition, the employment component continued its push towards expansionary territory, increasing to a new cycle high of 49.8 from 48.6. 

March’s ISM Non-Manufacturing Report on Business confirms just what we have been seeing on the inflation front: more acceleration to the upside.  Similar to last week’s ISM manufacturing report, this release is hawkish. Even the service industry, whose costs aren’t necessarily married to the price of commodities like their manufacturing counterparts, is expecting inflation to accelerate meaningfully in the near-to-intermediate future.

Other signs of inflation are evident too.  The REFLATION trade is back with a vengeance with the dollar down yesterday and commodities along with commodity-oriented equities outperforming for the second day in a row.  The Dollar index closed at 81.094, down 0.1% on the day.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.68) and sell TRADE (82.26).

The CRB index has risen four of the last five days and is up 2.3% in the last two.  Crude oil has risen five of the last five days and is up 8.2% since the start of last week.  Energy (XLE) and Materials (XLB) have been the best two performing sectors for the last two days.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.87) and Sell TRADE (87.21). 

For the second day is a row Consumer Discretionary (XLY) outperformed Consumer Staples (XLP) on the back of the strength in Retail and Homebuilders.  Housing-leveraged stocks were among the best performers today, with the XHB +1.9%.  The group was underpinned by an 8.2% m/m increase in February pending home sales, which followed a downwardly revised 7.8% decline in January. The market was expecting a flat reading in February.  The XLP was dragged down by food and beverage names.

The other two sectors to outperform yesterday were Technology (XLK) and Financials (XLF).  The XLK seemed to benefit from the outsized coverage of the this weekend's iPad launch, while semis provided the bulk of the upside leadership with the SOX +3%; its biggest one-day gain since March 1st.

With the positive momentum in the RISK/RECOVERY trade the VIX continues to be broken on all three durations.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.37) and sell TRADE (17.88).  We are currently long the VXX.

In early trading, with the dollar trading slightly higher, gold is giving up some of its recent gains.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,115) and Sell TRADE (1,136).

Copper is trading at its highest level since August 2008.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.50) and Sell TRADE (3.70).

In early trading, Equity futures are trading modestly below fair value ahead of the latest FOMC minutes and the auction of $40B in 3yr notes.  As we look at today’s set up the range for the S&P 500 is 20 points or 1.3% (1,172) downside and 0.4% (1,192) upside. 

Today's MACRO highlights are:

  • FOMC Minutes from March 16th meeting
  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney

Managing Director

US STRATEGY - INFLATION REFLATION - S P

 

US STRATEGY - INFLATION REFLATION - DOLLAR

 

US STRATEGY - INFLATION REFLATION - VIX

 

US STRATEGY - INFLATION REFLATION - OIL

 

US STRATEGY - INFLATION REFLATION - GOLD

 

US STRATEGY - INFLATION REFLATION - COPPER