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“I had a great meeting with President Xi of China yesterday, far better than expected.”
-@realDonaldTrump 

What did he expect? Better yet, what did you expect? 

Was there anything to expect other than a temporary reprieve from further escalation in the US-China trade war so that both sides can go back to their respective countries with a “win”? 

I’ll tell you what – if Trump and Xi are as cunning as their most ardent supporters claim them to be – and I don’t doubt for one second that they are – they need to keep the trade war alive and well. All the glory in being a firefighter comes from putting out fires, not avoiding them in the first place. 

If they’re really smart, they should announce an end to the trade war in early December, right when comparative base effects for US Exports and Factory Orders to fall off a cliff, and just in time for comps in China’s Secondary Industries to really start making hay to the downside in 1Q20E. Anything much sooner than that and they risk the data slowing further after any such grand proclamation. 

Far Worse Than Expected? - z 06.25.2019 Godot China trade deal cartoon

Unlike last year, when so many of our competitors were pushing the frequentist folly of a “Santa Claus Rally”, that would be a behavioral catalyst the boys @Hedgeye would happily buy into.

Back to the Global Macro Grind… 

Welcome to another fine Macro Monday @Hedgeye! On the first day of the week we review what happened in macro markets in the week prior and contextualize those moves within our multi-duration TRADE, TREND, TAIL model. 

Starting with the global currency market: 

  1. US Dollar Index lost another -0.1% to close at 0.0% for the YTD and remains Neutral TREND @Hedgeye
  2. EUR was flat on the week, but up +1.9% MoM and remains Neutral TREND
  3. JPY posted a counter-TREND decline of -0.5% WoW, but remains Bullish TREND
  4. CHF was flat on the week to cool its +3.2% MoM advance and remains Bullish TREND
  5. The Brazilian Real declined -0.7% WoW and remains Bearish TREND
  6. The Mexican Peso continued to lag other LatAm currencies, down -0.5% WoW and -0.1% MoM (vs. a +2.9% MoM advance for the JPM LatAm Currency Index) and remains Bearish TREND
  7. The Indian Rupee popped a full +0.9% WoW to Neutral TREND
  8. Bitcoin continues to signal a ringing endorsement of the Fed’s ability to reflate, up +22.9% last week to close 1H19 up +232% YTD and remains Bullish TREND
  9. Joining the reflation speculation were the counter-TREND bounces in the Aussie dollar, Kiwi, and Loonie – up +1.4%, +2.0%, and +1.0%, respectively, last week

While the triangle-shaped tug-of-war between ECB President Mario Draghi’s last hurrah, BOJ Governor Haruhiko Kuroda’s policy impotence, and the ongoing politicization of “PE Powell” continues to dominate the major crosses, underneath the hood, we saw some evidence that our #PeakUSD thesis has commenced. That is especially true when you layer on the near broad-based commodity reflation we saw last week: 

  1. CRB Index (basket of 19 commodities) bounced +1.4% last week to down -9.0% YoY, but remains Bearish TREND @Hedgeye
  2. WTI Crude Oil posted another counter-TREND bounce of +1.8% WoW to down -9.7% YoY
  3. Even Natural Gas (-14.7% YoY) and Copper (-10.9% YoY) drank the counter-TREND bounce Kool-Aid to close last week up +6.4% and +0.4%, respectively
  4. Gold rallied another +1.0% to up +8.7% YTD and remains Bullish TREND
  5. The +8.7% counter-TREND bounce in Coffee last week failed to stem an equally counter-TREND decline of -1.5% in the CRB Foodstuffs Index 

Thankfully, I can still afford my $10 cup of joe from SBUX in the morning. Whether or not I can still afford to drive there is debatable. I sure felt the pinch of rising Gasoline prices (+4.4% WoW) on my drive to Maine yesterday. What a beautiful part of the country from which to spend the week celebrating America’s birthday! 

From what I can glean having lived on this side of the country for 14 years now, Maine is like the Alaska of the East Coast – as peaceful as it is picturesque. So much so that you kind of forget that it’s up there until you’re bonding over a game of Family Feud in a quaint cabin with your girlfriend and six of her family members. 

Small Caps had a “welcome to Maine” moment last week with the Russell 2000 closing up +1.1% amid a sea of red across the other benchmark US equity indices: 

  1. S&P 500 fell -0.3% WoW to up +17.3% YTD – good for the best first half performance since 1997 – and remains Bullish TREND
  2. NASDAQ also lost -0.3% last week to close 1H19 up +20.7% YTD and is Neutral TREND @Hedgeye
  3. The DOW lost -119 points 

Oh, you don’t like quoting the DOW in points, bro? Does the lack of context from either a Rate of Change or Full-Cycle Investing perspective bother you? Good. It bothers me too whenever one of the talking heads on @CNBC leans back in their chair and qualifies their largely unqualified opinion on Macro matters with “I don’t know, but…”. 

I don’t know, but last week’s move in bond proxies relative to the counter-TREND bounces in reflation-oriented sectors looks like investors may have gotten out over their respective ski tips by pricing in more than one -25bps cut at the end of this month into the Fed Funds futures curve: 

  1. Utes sold off -2.2% last week to +12.7% YTD, but remain Bullish TREND @Hedgeye
  2. REITS got tagged for a -3.1% loss to up +17.2% YTD, but remain Bullish TREND
  3. On the heels of good news from a CCAR perspective, the Financials rallied +1.4% WoW to close 1H19 up +15.9% YTD, but remain Bearish TREND
  4. Energy and Industrials posted counter-TREND bounces of +0.2% and +0.4%, respectively, but both remain Bearish TREND
  5. Up +1.44%, Materials were the best performer on the week, but remain Bearish TREND 

The counter-TREND performance of US equities extended into the land of style factors as well: 

  1. HIGH Debt +0.4% WoW to up +16.7% YTD vs. LOW debt -0.1% WoW to up +19.8% YTD
  2. BOTTOM Market Cap +0.7% WoW to up +11.0% YTD vs. TOP Market Cap -0.1% to +17.9% YTD
  3. BOTTOM Sales Growers +0.4% WoW to +11.6% YTD vs. TOP Sales Growers flat WoW to +21.6% YTD 

*Mean performance of the top/bottom quartile of S&P 500 constituents 

Is now the time in the The Cycle to chase a fledgling rotation out of quality, large-cap growth and into levered small caps that don’t have “secular” growth curves to get excited about in Wally World price-to-sales multiple turns? 

We don’t think so. If anything, this morning’s global economic data should serve as a stark reminder that the global industrial cycle continues to deteriorate at a “worse than expected” pace amid a broadening earnings recession here in the US: 

  1. China Manufacturing PMI flat at 49.4 in JUN
  2. Japan Manufacturing PMI ticked down to 49.3 in JUN from 49.5 in MAY
  3. Eurozone Manufacturing PMI ticked down to 47.6 in JUN from 47.7 in MAY
  4. Australia Manufacturing PMI ticked down to 49.4 in JUN from 52.7 in MAY
  5. Russia Manufacturing PMI ticked down to 48.6 in JUN from 49.8 in MAY
  6. Indonesia Manufacturing PMI ticked down to 50.6 in JUN from 51.6 in MAY
  7. Taiwan Manufacturing PMI ticked down to 45.5 in JUN from 48.4 in MAY
  8. South Korea Manufacturing PMI ticked down to 47.5 in JUN from 48.4 in MAY
  9. South Korean Exports decelerated to -13.5% YoY in JUN from -9.5% in MAY
  10. 18 of 497 S&P 500 constituents have reported Q2 earnings thus far with EPS growth tracking down -18.3% YoY on an aggregated basis and every sector in the red 

While some investors might prefer to wait for President Trump to put out the next fire he has yet to start, we prefer to take our cues from The Cycle

As such, let me be the first (and only) strategist to welcome to #Quad4 in Q3 this morning! You know what to do with that info (read: SELL the SPY, which has nearly -3% immediate-term downside from the last price on the spoos, which has levitated to the top end of our 2 @Hedgeye Risk Range). 

And to the extent you do not, refer to the worst May since 1973 and the worst December EVER for more details.  

Our immediate-term Global Macro Risk Ranges are now: 

UST 10yr Yield 1.97-2.09% (bearish)
SPX 2 (bullish)
USD 94.96-97.03 (neutral)
Oil (WTI) 51.50-61.17 (bearish)
Gold 1 (bullish) 

Keep your head on a swivel, 

DD

Darius Dale
Managing Director

Far Worse Than Expected? - dd Chart of the Day