"In life and in sport, we paddle hard - young or old, rain or shine, in the heat or the cold - to the finish line, because we are, all of us, in the same boat."
In what seems like a different life at this point, I owned a human performance and nutrition consultation company.
Being immersed in ‘the scene’ as a trainer to competitive bodybuilders and high-level athletes, I was on the receiving end of all manner of interesting inquiries and discussion.
Here’s a quick top of mind trifecta:
- How many birth control pills should I (male bodybuilder) take? The rationale here is that by taking birth control pills, one could temporarily disrupt their hormone profile enough to get a doctor to prescribe hormone therapy (aka testosterone …. aka legal (potentially free) steroids for life).
- What’s the prevailing state of drug technology innovation overseas? The larger context around this one is great ….. letters and postcards are subject to more lenient U.S. Custom’s restrictions than regular packages. If (clandestine) drug manufacturing technology overseas is such that it can concentrate and manufacture pills at a small enough size, then they can be sent through the mail in a package dimension that qualifies as a postcard and the probability that it gets audited and/or seized by Custom’s falls to almost zero.
- The general sense of tacit acceptance by the IOC of increasing drug use among Olympic athletes in the service of promoting more Olympic/World records and higher public interest.
Interesting … but the anecdote I actually wanted to convey is one involving a successful Division 1 athlete who came to see me to begin a regimented strength training program. He was early to the session and I was busy, so I told him to go jump on the rowing machine to warm-up.
When I got over to the cardio equipment ~20 minutes later, he was nowhere to be found. I ended up walking around the gym and ultimately found him at the seated rowing machine in the weight training area dripping with sweat & dog tired.
Instead of going over to the cardio rowing machine and warming up, this guy went over the weighted back rowing machine and did heavy weighted rows for 20 minutes straight.
He was so shot at that point that he just left.
It turns out that while he was a successful athlete, he had, somewhat inexplicably, almost no formal strength training experience despite having been involved in legitimate high school and collegiate programs.
The transferable life lesson here? Don’t take anything for granted. Even (ostensibly) experienced and successful participants sometimes need obvious coaching and/or re-reminders.
Back to the Global Macro Grind …….
One ostensibly simple concept we have to occasionally re-remind otherwise experienced and successful investors of is that Macro is about rates, spreads and delta’s and that during periods of synchronized slowdown, Macro increasingly becomes a game of relatives.
That’s a rather pedestrian analytical construct, but forecasting and front-running the spread in growth between the U.S. vs ROW (Rest of World) to effectively position for Global Divergences/Convergences has been central to Macro alpha, particularly over the past 3 years.
To kind of set the table on this, here’s what I wrote back at the beginning of March in discussing how we’d be mapping the evolution of global macro conditions within our baseline expectation for a transition to Quad 3 domestically.
“Global Divergences (U.S. ↑, ROW ↓) was great, now it’s over …. Now, if everyone is slowing but the U.S. is slowing less fast, then dollar weakness is not a reasonable baseline expectation ….And if significant and/or protracted dollar weakness is unlikely, it carries implications for how long the reflation rally can persist and constrains the outlook for EM assets, commodity prices, etc. While growth will decelerate over 2019, what’s less certain is the path of inflation … the dollar will remain a fulcrum factor in defining the path of inflation and the global growth path (and the path of the EU and China relative to the U.S.) will remain a defining factor for the dollar. To the extent global Quad 4 persists through most of 1H19, dollar strength/stability would continue to weigh on import prices, commodity prices and goods prices more broadly …. A dynamic that could pull the Quad 3 forecast closer to the Quad 3/Quad 4 line and push out the timeline on a more conspicuous traversal into domestic stagflationary conditions."
Not bad as far as sweeping macro prognostications go. It also segues us to yesterday’s developments … and their implications for the growth outlook and, by extension, the outlook for the dollar, and by further extension the outlook for inflation, policy and EM/ROW assets.
Into yesterday’s ISM release and Fed decision, the Fed Regional Surveys were tipping further weakness in the manufacturing sector in April as still soft global demand, an ongoing (trade policy related) inventory overhang and harder comps all continued to conspire against domestic industrial activity.
Indeed, those realities manifest conspicuously in the April ISM which printed a 30-month low alongside steep -5.7pts and -5.1pts declines across New Orders and Employment, respectively.
The sharp decline in April Auto sales served to further underscore the trending deceleration in manufacturing, while casting some uncertainty around the apparent resurgence in domestic consumerism evident in the Retail Sales/PCE data to close 1Q.
All of that contrasts with the sanguinity that accompanied Headline growth in 1Q GDP, the rebound in March Household Spending, a buoyant April ADP payroll print and ongoing cyclicals outperformance, all of which would politely contend that domestic and global industrial activity represent a lagged reflection of grievous, beginning of year conditions.
Layer on the good is bad evolution in the China data - where the stabilization in growth implies less policy accommodation which manifests as a headwind to equites and, in circular fashion, calls into question the sustainability of that stabilization (which also kind of makes the prospect of future stimulus inevitable, but with uncertain timing) – and the contention by team Trump that we simultaneously have the strongest economy ever but also need immediate rate cuts, incremental QE and crisis era policy initiatives and you have a healthy tension between market opinions along with some added intrigue headed into the Fed announcement.
As for the Fed decision, investors seemed inclined to accept the lower inflation forecast and continue riding the “patient” narrative to its reflationary end. That ride got derailed during the press conference, however, when investors seized on the “Transitory” disinflation commentary and knee-jerked the dollar higher and pancaked the curve (more balanced risk for rate cuts vs. hikes supports the short end while the prospect for less accommodation = less room for inflation to run = less support for the long end).
Whether it was intentional (i.e. a pushback against political pressure and too-rampant asset price inflation) or not, it served to undermine the current market stasis.
The Fed’s epochal pivot, the subsequent, globally coordinated policy easing parade and the prospect of a new, symmetric inflation targeting policy framework served to ease financial conditions and cultivate the cyclical reflation narrative whereby “patience” was taken to mean the Fed was back in the volatility suppression business, things would be allowed to run hot and the market was clear to reengage in all the low-vol, long carry strategies that predominated pre-QT.
Suggesting that the disinflationary trend is probably “transitory” implies that “patience” has a variable sell-by date and the next policy move may, in fact, be higher.
That’s not an overly remarkable comment in and of itself, but it is at odds with a market pricing in rate cuts in the not so distant future and a YTD rally predicated largely on the opposite expectation.
All of this ultimately feeds back to yields and the dollar, the direction of which, carry discrete ROW implications.
I’m way over my word allocation and I’m supposed to touch on employment ahead of NFP tomorrow so, quickly, here’s the simple update on NFP accounting:
We need +199K on Headline NFP to get a sequential acceleration in payroll growth. Maybe we get that, maybe we don’t. From a Trending perspective payroll growth will invariably continue to slow and the onus will increasingly fall on wage growth to support aggregate income growth …. and consumption growth by extension – both of which face progressively harder comps as we move through mid-year.
To the extent ongoing payroll solidity and further late-cycle wage inflation manifest in the coming month(s), it will serve to compound the “conditional patience” messaging from Powell, adding headwinds to a reflation trade that is already beginning to ROW upstream.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.46-2.60% (bearish)
UST 2yr Yield 2.23-2.42% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.83-58.90 (bullish)
REITS (VNQ) 84.34-87.49 (bullish)
Energy (XLE) 64.29-69.00 (bullish)
Financials (XLF) 27.01-28.16 (bearish)
Shanghai Comp 3030-3195 (bullish)
Nikkei 219 (bullish)
DAX 112 (bullish)
VIX 11.49-15.56 (bearish)
USD 96.40-98.19 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 111.02-112.26 (bullish)
GBP/USD 1.28-1.31 (bearish)
Oil (WTI) 62.33-66.76 (bullish)
Nat Gas 2.45-2.64 (bearish)
Gold 1 (bullish)
Copper 2.76-2.91 (bearish)
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst