“Always remember, Frodo, the Ring is trying to get back to its master. It wants to be found.”
-Gandalf, Lord of the Rings
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“ …. But they were all of them deceived, for another ring bell was made: in the land of Mordor, in the fires of Mount Doom, the Fed forged, in secret, a master bell to control all others. And into this bell, it poured its hubris, its pretension, and its will to subvert economic gravity and exert dominion over all assets. One #Cowbell to Rule Them All. One by one the free Markets of Middle Earth fell to the power of the Bell …...” |
The longer you do this the more you covet entertainment value and the fabrication of useful, overdramatic metaphors to keep you both engaged and sane.
Remember – and to mix medieval fantasy memes - “there’s nothing in the world more powerful than a good story” (Tyrion Lannister).
Anyway, Back to the Global Macro Grind …..
Here’s a fun Friday list, in no particular order. See if you can find the common thread:
- Long-term Inflation Expectations (Univ. of Michigan)
- U.S. Treasury Term Premium
- German 10Y Bund Yields
- Australia 10Y Yields
- New Zealand 10Y Yields
- French 10Y Yield
- Spain 10Y Yield
- Portugal Sovereign Yields
- Negative Yielding Sovereign Debt
- Negative yielding IG corporate debt
- Empire Manufacturing Index, M/M chg
The Fellowship of the Fed and the ‘precious’ masterstroke of coordinated policy rhetoric designed to engineer the “lowest ever” (or largest ever in the case of the last 3) across those metrics are easy answers.
The high-frequency data docket was light yesterday domestically but we did get the Philly Fed.
Not too many people know this but our entire model and outlook, surprisingly, does not anchor singularly on the Philly Fed Survey …… but it is a useful input into the macro mosaic mapping process, particularly when it underscores an increasingly congruous trend.
In the present instance, the potent dose of deceleration out of the Philly Fed is serving to chase Monday’s stiff shot of largest-sequential-decline ever out of the Empire Survey, making us 0 for 2 on the Regional Surveys for June thus far and signaling further softening in the ISM.
The survey collection periods corresponded, at least in part, with the peak in the Mexico tariff angst so the negatively may have been amplified/overstated but that is largely beside the point as it relates to June Industrial activity. The ISM is in Trend retreat and already flirting with contraction while contending with the collective impacts of a stronger dollar, slowing export demand and a domestic inventory overhang – all of which are unlikely to ebb nearer-term.
It also doesn’t change the larger global Quad 4 backdrop in which global trade/manufacturing/export demand continues to backslide or the domestic backdrop where comps continue to steepen the next couple quarters. Again (and again) Trade policy matters but it remains primarily an amplifier to an underlying cycle with had already inflected negatively.
Further prospective downside in the domestic manufacturing activity conveniently segues us to our next fun Friday list.
Here’s the data-dependence, catalyst calendar ahead of the next FOMC meeting. Of course, it remains tragically ironic that the Fed is forced to contend with an acute campaign to politicize monetary policy …. into Independence Day:
- Earnings Season: “one does not simply print accelerating earnings growth with growth slowing and against peak profit cycle comps”. 2Q/3Q earnings season is not likely to cultivate resurgent growth optimism.
- 2Q19 GDP: Analysts will debate the complexion of the print (i.e. inventories and net exports will be replaced by consumption as a primary support) but year-over-year GDP growth will decelerate … and will continue to decelerate.
- CPI: Inflation comps steepen through July/August and slowing growth and falling input prices (see prices paid/received in the manufacturing survey’s) aren’t helping. In other words, base effects alone will continue to pressure the rate-of-change in price growth lower over the next few months.
- June NFP: Is it likely we rebound off of the May cratering? Probably. But, by the numbers, we’d need to print +266K on the Headline to avoid a further deceleration in payroll growth … which means we need a solid acceleration in earnings growth just to maintain the current pace of aggregate income growth …. which, unless we continue to get a drawdown in the savings rate (into rising economic/geopolitical uncertainty), doesn’t augur much upside in consumption growth.
- June Retail Sales/PCE: The May data was redemptive, at least to the extent it signaled the domestic consumption economy is not set for an acute cratering. Again, with Payroll and Aggregate Income growth decelerating into (extra) steep comps over the June-Aug period, the prospect for a convincing or otherwise durable acceleration in domestic consumerism is not particularly high probability. Remember, also, the call isn’t for imminent recession, it’s for ongoing deceleration.
Since we’re doing lists here this morning, here’s a topical macro medley:
$USD: yesterday’s Down Dollar, Up Oil, Up Energy/Tech move was vintage #Quad3 but today USD Index is signaling immediate-term TRADE #oversold within its Bullish @Hedgeye TREND and Oil/Energy/Tech (all Quad 3 LONGS) are signaling immediate-term TRADE #overbought within their Bearish @Hedgeye TRENDs.
In terms of sequencing and defining the evolution of dollar dynamics, the setup distills to some version of the following: Fiscal policy drove an economic divergence which cultivated a monetary policy divergence (& $USD demand) relative to the balance of DM economies and global growth more broadly → As we annualize the fiscal policy stimulus we get economic/growth re-convergence and an associated monetary policy re-convergence (which by extension is removal of $USD support) → and b/c nothing in macro occurs in a vacuum there is a shifting in multiple channels as a weaker $USD = looser financial conditions and dollar liquidity globally along with the capacity for easier policy, across EM in particular → so dollars flow towards those assets which further propagates the dollar move, etc.
That’s the medium-term potentiality although we’ve seen that play out conspicuously the last couple days. As Keith highlighted this morning, – the Fed is going to have ring #cowbells all summer long to turn the US economy into a Quad 3 TREND (instead of a day trade).
Volume: Yesterday’s move came on a 2nd day of accelerating volume. This is a positive, but it’s also unsurprising. Recall, funds have been relentlessly flowing out of equities and into money market and fixed income funds YTD and hedge fund beta exposure is low so there’s definitely some FOMO momo action at play. Our model was also signaling, for the first time, a higher high in the SPX.
CAPE’d Crusade: Here’s one for the Tourists and valuation-ista’s. Real Earnings troughed in March-June 2009. Given that the CAPE Ratio uses a 10Y look back in calculating the Cyclically Adjusted P/E multiple, those trough earnings are, right now, rolling out of the calculation. In other words, multiples will see a 1+ turn lower just from this dynamic exclusively. Viola, together with lower rates you have instant valuation upside. Or not.
Counter-Argument: This risk scenario seems relatively obvious if you’ve been following along but let’s just hash it out anyway:
With consensus again fully onboard with the QE trade – equity ATH’s, spreads tightening, and falling/negative yields again incenting chasing assets out the yield curve and down the quality ladder with the implicit belief that central banks can engineer a soft landing and synchronized deceleration doesn’t reflexively spiral to outright recession, the risk is that the data comes in stable-to-better Trade Truce optimism gets rekindled and the combination of a lower dollar/geopolitical risk/supply disruptions cultivate a breakout in oil and a resurgence in inflation expectation… all of which, collectively, drive the market to price rate cuts out.
Powell: “I wish the bell had never come to me. I wish none of this had happened. “
Gandalf: “So do all who live to see such times, but that is not for them to decide. All we have to decide is what to do with the market that is given to us.”
As always, play the game you’re in, not the one you think you should be in.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.98-2.16% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (neutral)
Utilities (XLU) 59.20-61.61 (bullish)
REITS (VNQ) 88.68-91.86 (bullish)
Financials (XLF) 26.70-27.59 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 200 (bearish)
DAX 114 (bullish)
VIX 14.19-18.49 (neutral)
USD 95.99-97.05 (bullish)
Oil (WTI) 50.03-58.05 (bearish)
Nat Gas 2.15-2.35 (bearish)
Gold 1 (bullish)
Copper 2.61-2.74 (bearish)
Have a great weekend,
Christian B. Drake
Macro Analyst
