Below is a detailed summary of our active Macro Themes. The analysis below is largely sourced from our Global Macro Risk Monitor notes. Please email if you aren’t yet receiving that work and would like to be added to the distribution list. Please note, however, that access is expressly reserved for key client relationships.
#Quad4, Then 3:
- 7/11: US Inflation Can’t Comp the Comps; #Quad4 Next:
- This morning’s JUN CPI report out of the US contained a little something for everyone:
- For bond bulls, Headline Inflation decelerated -20bps to 1.6% YoY against an easier 1yr comp than the upcoming JUL ’18 cycle-peak rate. The AUG ’18 1yr comp is no slouch either in terms of its potential to perpetuate incremental disinflation.
- For bond bears, the +10bps acceleration in Core Inflation to 2.1% YoY confirmed our view that core inflationary pressures continue to mount in the US economy – hence our hawkish inflation outlook starting in SEP and our bearish view on corporate profits.
- Most importantly, for the Fed, the persistency of weak Core Goods Inflation – which accelerated modestly to 0.2% YoY and hasn’t been above even 1% (half the Fed’s +2% target) since JUL ‘12 – giving the academics on the FOMC air cover to support bailing out US risk assets and, ultimately, the US government when the time comes for them to take on an increasing role in financing burgeoning US deficits amid waning international demand for Treasuries.
- All told, with the advent of these figures, our Headline CPI forecast for 3Q19E dipped lower by -3bps to 1.64% YoY – which is now a full -17bps slower than the quarterly average rate recorded in Q2. The wider delta helps insulate our #Quad4 forecast domestically for the current quarter.
- 7/11: Bullard/Clarida/Powell Engineer Reflation… Will It Last?:
- While the broad market itself (SPX) is edging higher on the week at up +0.3% WTD, the performance of US equities has a decidedly #Quad3 flavor to it when you compare the relative performance of sectors and style factors that do well in #Quad3 (e.g. Energy, Tech, REITS, Utes, Low Beta/Min. Vol., and Growth) vs. those that do not (e.g. Financials, Materials, High Beta, Value).
- You can actually make a compelling case that the market has been trading like #Quad1 since St. Louis Fed President James Bullard broke open the door on an insurance rate cut(s) back on June 3rd:
- Every sector positive has a positive absolute return since then ✓
- Every major style factor has a positive absolute return ✓
- Credit spreads have tightened ✓
- Bond yields are essentially flat ✓
- Dollar down ✓
- Broad reflation across commodity markets ✓
- As our careful sequencing of prior Fed rate cut cycles continues to suggest, broad based equity and credit reflation into and through the first rate cut is consistent with market history. What would be incrementally consistent is if relative performance reversed on the rate cut, whereby the stock market is led higher from there by defensive/low beta exposures and fixed income markets are paced by Treasuries, rather than risker credits. Both the dollar and commodities tend to decline after the prospective hope of that initial cut fades. This is especially true of initial rate cuts that are coincident or precede #Quad4 regimes.
- 7/26: EARLY LOOK: What If Fed Cuts = #Quad4? (Keith):
- Maybe it’s easier to show you what a Quad 4 sensitive US Equity portfolio looked like yesterday:
- Energy Stocks (XOP), which are core Quad 4 Shorts, led SECTOR STYLE losers at -3.0% on the day
- HIGH BETA, as a Factor Exposure, was down -1.7% on the day (we shorted SPHB on FOMO day, fortunately)
- Biotech (IBB) and US Retailers (XRT) deflated -1.4% and -1.1% on the day, respectively
- Consumer Staples (XLP), which are core Quad 4 Longs, were +0.1% in a sea of red US Equity Beta
- Housing Stocks (ITB), which are one of our fav LONGS for Quad 4 in Q3, were up a big +2.0% on the day
- That’s not a relative performance # for Housing (ITB). That’s an absolute return day of +2.0%. If you were short HIGH BETA Energy and Biotech names against it, you made lots of money when the crowd was losing theirs. Unlike a FOMO chart like Semis that some people were forced to chase higher in the session prior, Energy (XOP), Biotech (IBB), and Retailers (XRT) have been absolute and relative dogs since US “stocks” bounced off their May lows. Remember, it’s what you don’t own that matters most. Get The Quads right, you get your Sector Exposures right.
- “So”… what if the Fed cuts rates next week and both the US economy and her stock market remain in Quad 4 throughout the rest of Q3? We haven’t even finished 1/3 of the quarter and lots of people want to believe it’s already “priced in.” Uh, what if FOMO is already “priced in” and so are Dovish Fed expectations?
- 7/26: 2Q GDP: Mr. Market Had It Right All Along:
- GDP Stabilization: The meaningful revisions to the 2017-18 GDP cycle – including a now-appropriately deep plunge into #Quad4 in Q4 – created a dramatic flattening out of the NTM slope of the 2yr comparative base effects curve. Recall that the prior slope was up-and-to-the-right through at least 1Q20E. The net result of the aforementioned flattening means that the most probable path forward for the YoY rate of change of Real GDP growth is similarly sideways. We are divergent from economist consensus with respect to that view, as the Street is calling for a persistent deceleration in domestic economic growth over the NTM. The delta lies in the difference in modeling approaches – theirs (deterministic); ours (stochastic). All told, we are more or less in line with consensus for 2H19E, but investors should brace for a slight upward revision cycle in growth expectations throughout 1H20E to the extent economist consensus has to come our way on growth then.
- GIP Destabilization: Ironically (or not-so-ironically if you’re a data sycophant like myself), the likely stabilization of US Real GDP growth beyond the current quarter means the dots on our US GIP Model are hugging the line throughout and the associated accelerations/decelerations will undoubtedly create consternation surrounding each subsequent Quad outcome in real-time. It’s the time series equivalent of going from smooth sailing in rate of change terms to experiencing minor turbulence. Fortunately, we’ll have our nowcast model guiding us throughout and when you analyze the probable path forward for several of the key high-frequency indicators that are featured in that framework, the bottom up data are likely to confirm what the top-down comparative base effects imply – i.e. #Quad4 in 3Q19E and #Quad2 in 4Q19E. Our #Quad3 forecast for 1Q20E remains intact and today’s advance 2Q19 data gives us visibility on #Quad1 in 2Q20E from a comparative base effects perspective. We’re highly skeptical of that #Quad3 forecast because when you look at the probable path forward for the top-10 drivers of our dynamically re-weighting, 30-factor predictive tracking algorithm for US Real GDP growth pretty much everything is likely to bottom out in the fall of 2019 and grind higher from there through the middle of next year. As such, fixed income investors would do well to brace for Mr. Market starting to price in what could materialize as two consecutive quarters of #Quad2 at some point over the next couple of months. Recall that #Quad2 is the most hawkish environment for interest rates. 2020 rate cut expectations will have to be revised lower (i.e. less monetary easing) to the extent that outlook proves prescient.
- No Rest for the Weary: If you thought figuring out the market throughout 2019 was hard, the sequence of 4-2-3-1 will be even more difficult for investors to risk manage given that each subsequent Quad in the sequence is the polar opposite of the prior regime. This means that instead of making wholesale shifts in asset allocation/portfolio construction terms, investors would do well to stick with/overweight assets that work well in the then-current and pending Quadrant and out of/underweight those that tend to do poorly. There’s a lot of PnL to be lost getting too cute making wholesale changes in an untimely fashion.
- 7/12: Singapore’s Q2 GDP Is Suggestive Of Global Economic Weakness Spilling Over Into 2H19E:
- What’s a global manufacturing recession without a cool canary in the coal mine to speak to? Well you’ve got it this morning with the advent of Singapore’s Q2 Real GDP data, which slowed -100bps to -0.1% YoY – the slowest pace since 2Q09. Yes folks – that is even worse than the global manufacturing recession we saw in late-2015/early-2016.
- As alluded to prior, the pace of slowing for global growth is quickening at the margins; Singapore’s -3.4% QoQ SAAR growth rate in 2Q19 represents its slowest pace of growth (or fastest rate of contraction) since 3Q12.
- Recall that the Singapore economy is an especially important leading indicator for the global manufacturing cycle given its exposure to global trade:
- Singapore is home to the 2nd busiest container port in the world behind Shanghai at 30.9 million TEUs (latest data = 2016);
- At 326%, the Singaporean economy boasts the 3rd largest share of exports as a % of GDP behind Luxembourg (416%) and Hong Kong (376%); and
- Singapore has among the most diverse trading relationships in the world; no single trading partner accounts for a share greater than 15% of its total exports.
- 7/30: EARLY LOOK: Is It All Priced In? (Keith):
- Moves I #timestamped yesterday in Real-Time Alerts were:
- Sell-some gross exposure to REITS (XLU) and Utes (XLU)
- After covering lower, I re-shorted High Yield (HYG) and added to Junk (JNK) shorts
- I booked a big win on the short side of NSP and re-shorted NFLX
- “But stocks aren’t going down on bad news…” Huh? NSP (Insperity) is a Best SHORT Idea @Hedgeye and it was down -25% on the day yesterday. Netflix (NFLX) obviously got crushed on missing for the 1st time in a long time, so shorting more on the bounce was the opportunity there.
- Then there’s a broad basket of things from cyclicals (that had already been guiding down for, in some cases, almost a year now) to growth stocks that are getting hammered this morning:
- McDermott (MDR) crashing -32% after bouncing off the May lows
- Mohawk (MHK) -18% crashing (again) after bouncing off its December lows
- Beyond Meat (BYND) -14% this morning from its bubbled up highs
- SS&C Technology (SSNC) -22% this morning after being up a ton “year-to-date”
- Rambus (RMBS) -10% this am post the v-bottom in Semis from their December lows
- I know, I know. I admit cherry picking on Rambus. It’s an oldie from what was “priced in” as The Cycle was peaking in the year 2000 and plenty were forced to chase, cover, and capitulate on Semis… Almost every Tech analyst at the hedge fund I was at was fired by 2001.
- “So”… what’s really priced in? I didn’t mention classic cyclicals like Terex (TEX) indicated down -15% this morning or something boring like Cooper Tire (CTB) down -10% on earnings yesterday… because… evidently the bad news wasn’t priced in.
- Bottom line: get The Cycle, The Quads, and your Single Stock Picks right… and you’ll beat a lot of people making sweeping “feel” based assumptions on what’s “priced into” a cycle that most people they read didn’t call at the turn to begin with.
- 7/19: The “China Stabilization” Narrative Is Remarkably Unstable:
- Without a doubt, the most important economic data released this week were China’s Q2 national account statistics, as well as the JUN high-frequency activity data on the mainland. While signs of stabilization dominated the consensus interpretation of the latter batch of data, the development that caught my eye most was the stabilization in the growth rate of Nominal GDP in China’s Secondary Industries, which slowed a mere -1bps from Q1 to 6.78% YoY.
- While that figure technically represents China’s slowest pace of growth since 3Q16, the aforementioned stabilization is suggestive of a bottom given that 2Q19 represented the first quarter in which comparative base effects eased on a 2yr basis since the Chinese economy peaked, in rate of change terms, in 1Q17. That in and of itself is an important callout because the 2yr stack backtests far better than the 3yr stack – which continues to steepen – in terms of predicting the direction and slope of Chinese growth.
- We, more than anyone, should welcome signals of stabilization given our sanguine outlook for the Chinese economy over the next three quarters, but, alas, we do not. What makes this entire situation remarkably unstable is the fact that you simply do not see any evidence of Chinese economic stabilization pretty much anywhere else in the global economy:
- World Manufacturing PMI: -0.4pts to a new cycle-low of 49.4 in JUN
- South Korean Exports: -400bps to -13.5% YoY in JUN; sharpest contraction since JAN ‘16
- Brazilian Exports: -2127bps to -10.79% YoY in JUN; sharpest contraction since OCT ‘16
- Japanese Machine Tool Orders: -1070bps to -38.0% YoY in JUN; sharpest contraction since OCT ‘09
- Singapore Real GDP: -720bps to -3.4% YoY in Q2; sharpest contraction since 3Q12
- Did Beijing doctor these prints to bolster their negotiating leverage in the US-Sino trade dispute? I have no idea and neither does China’s credit impulse. But what I do know is that the global economy is teetering closer the edge of recession, per the most relevant metrics, as of the same time period in which China’s so-called stabilization occurred. Moreover, the German ZEW Index re-testing its cycle-low in JULY at -24.5 is also suggestive of a wider divergence between the global economy and Chinese economic statistics.
- All told, we simply need to see more data; either the global data has to catch up or Chinese data will catch down – even if implicitly via financial markets – to reality. Stay tuned for what should become the biggest story in global macro over the next month or so.
- 7/25: Global #Quad4 Is Not Good For EM Carry Trades:
- Every global strategist’s favorite idea not named “US cyclicals” likes emerging markets right now, but our still cautious tone on EM continues to be rewarded by Mr. Market. Isolating the near end of our intermediate-term TREND duration and US equities as a proxy for global risk appetite, investors should note that the EEM is underperforming the SPY by a full 520bps (-2.5% vs. +2.7%) over the past 3-months. It should be further noted that this underperformance is fairly broad-based, as 11 of the 21 EM equity ETFs we track are registering negative absolute performance over that duration and another three countries have negative relative performance as well.
- Why are EM assets continuing to languish despite consensus FOMO surrounding the “globally coordinated easing” theme we authored a few months back? That’s simple – because investors who are neither inclined nor incentivized to chase the SPY’s “YTD” return know very well the undue risk associated with increasing one’s exposure to carry trades into a deepening global slowdown. The risk of the consensus market narrative shifting to from “easing to extend the cycle” to “too little; too late” continues to rise.
- All told, with the US economy tracking in #Quad4 and the global economy at large threatening #Quad4 here in 3Q19E, we continue to suggest that investors would do wait for our “all clear” signal to go overweight EM assets. We should have some credibility in this discussion after having authored the bear call on EM at the start of last year (EEM down -18% from its JAN ’18 peak). Whether you look at this from the perspective of our US GIP Model backtests OR from the perspective of our country-specific EM GIP Model backtests, one fact is clear – #Quad4 is not kind to EM asset returns. Much like with Energy and Tech here in the US, we think you’ll get an opportunity to back up the truck on the long side of EM equity, credit, and currency risk at more attractive prices at some point over the next 2-3 months.
- 7/25: Draghi Gives the Market What It Wanted and It’s Not Enough:
- Today’s far-worse-than-expected market response across the pond all but ensures that Mario Draghi will strap on the QE bazooka at the ECB’s September 12th meeting. Another driver is the rancid Eurozone economy itself, which continues to pervasively deteriorate per this week’s leading survey data.
- Today’s forward guidance out of the ECB means the ducks are officially lined up for ‘Mr. Whatever It Takes’ to out-dove ‘PE Powell’ this fall. We are, however, inclined to treat that catalyst as a “sell the news” event with respect the bullish biases we’ve had on pan-European rates for over a year now, insomuch that we’re inclined to treat it as a “buy the news” event for the EUR/USD cross with respect to the bearish bias we’ve had on the euro since then.
- Why? The answer is simple: we continue see developing risk of a “QE Tantrum” emerging across European FICC markets in Q4. Markets are forward-looking and the ECB is notoriously late to the party, twice hiking at the onset of crises in mid-2008 and mid-2011. The commencement of ECB QE came in March 2015 – just ahead of the European economy shifting into #Quad2 in 2Q15.
- Recall that QE + #Quad2 is arguably the most hawkish thing that can happen to the long end of any sovereign debt yield curve and that’s precisely what occurred:
- The 10yr German Bund Yield backed up +101bps to an intra-day high of 1.06% from 4/17/15 to 6/10/15
- The Bloomberg Barclays Unhedged EUR Agg Index declined -5.1% from 4/15/15 to 6/10/15
- The EUR/USD cross rallied +8.4% to a closing high of 1.1451 from 3/16/15 to 5/15/15
- All told, while the 2015 market analog affords us a convenient narrative to discuss with clients, we’d be doing that anyway ahead of #Quad2 in the two quarters ended 1Q20E for the Eurozone economy. Stay in it to win it on the long side of European rates until then, however.
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