Fear was mongered, psychological (yuan) sand-lines were crossed, Trade Tits were Tatted, weak hands were shaken, dips were bought.
In the end, the slope of the cycle and Quad 4’s dominion over global macro conditions remains unchanged.
Back to the Global Macro Grind…
It’s not clear if a formal definition for dead cat bounce has ever been truly solidified but I’d humbly submit the U.S. 10Y for consideration here this morning.
Afterall, 1.71% (yesterday’s close) is higher than 1.70% (Tuesday’s close) because, you know, numbers ….. but if the larger Tasseographic goal is to divine a phase transition from bad to less bad to good, it’s difficult to take a convicted view of a +1bp bounce following the slowly-then-all-at-once -40 bps freefall over the prior week.
And with the 10Y leaking lower again alongside 10Y bunds, copper, global breakevens and the preponderance of APAC and EU equity benchmarks, it’s a veritable global palooza in posthumous feline bouncing to close the week.
Moreover, with Singapore Retail Sales falling -8.9% Y/Y, Netherlands Industrial Sales growth cratering to -10.2% Y/Y, French Manufacturing Production sinking to -0.6% Y/Y and negative sequential growth in German Exports headlining today’s high-frequency data, there’s little on the fundamental front to cultivate conviction around a near-term inflection out of Quad 4.
It’s also not clear that wholesale price deflation out of China (PPI: -0.3% Y/Y) is what the market needs as synchronized deceleration continues to characterize global macro conditions and the specter of Quantitative Failure casts an increasingly longer shadow over the medium-term outlook.
PPI deflation out of China generally flows through to impact wholesale price growth domestically, particularly with strong dollar disinflationary effects still dragging on import prices.
Recall, in addition to the disinflationary impulse stemming from slowing growth and a stronger $USD, July represents the hardest comp of the cycle for both PPI (this morning) and CPI (next Tuesday) domestically.
In other words, expect Quad 4 inflationary prints and lower RoC lows in wholesale and consumer price growth to remain the reported reality over the next month+, at least.
Stagflation angst will begin to percolate more discretely as well as the tariff list broadens out to a larger swath of consumer products beginning next month.
As a quick visual reminder (Chart of the Day below), washing machines – where tariffs were implemented in January of 2018 - remain the poster-child analog for the prospective impact:
- Tariffs definitely (empirically) get passed through to consumer prices. Washing machine (and dryers) prices were up +15% Y/Y following tariff implementation.
- The effects emerge on a short lag. As can be seen, the tariffs went into effect in January but you didn’t see the price effects really hit the reported data until ~April.
More broadly, inflation dynamics remain a primary factor shaping the contours of the global macro-scape and, by extension, the path for policy path, by extension – a reality embodied in the proliferation of the “Japanification” macro meme.
The Japanification narrative has been ubiquitous in recent months, particularly as it relates to a Eurozone economy mired in acute deceleration as secular growth and disinflationary forces have again moved in-phase with cyclical slowdown to force a re-pivot out of the ECB.
The thing is, however, Japanification isn’t some static historical reference analog … it’s an evolving eco experiment that continues to play out, real-time.
It’s also a ticking barometer for Currency War and Quantitative Failure risk.
Remember the dynamics at play in competitive devaluation. The hope is that financial conditions ease along the race to the bottom and no one wins in the end … but you can lose if you don’t follow suit.
If you are Japan, you arguably have no meaningful QE ammo left and your currency also happens to be a haven asset and you can’t/don’t ease in-step with the global central bank accommodation parade, you remain at risk of a deflation shock due to Fx appreciation at a time when both growth and inflation are woefully under target.
A related risk also extends to the U.S. as active easing increases globally. No action or under-dovishness from the Fed effectively becomes a policy divergence that serves to support or strengthen the dollar (at a time when dollar liquidity is already tight) – thus risking a re-cultivation of conditions (dollar strength) that helped catalyze the growth deceleration in the first place.
..… which then sees other central banks ease to combat the slowing growth, which then sparks the ire of the White House, which then threatens more tariffs, which then weighs further on the growth outlook, which then further propagates Quad 4 conditions, which then drives further dollar appreciation and around and around we go.
Anyway, I digress …. And my wife is literally in labor (and staring at me) as I write this so I’m going to non-sequitur this bad boy into closure and roll to the hospital as I wait on my second son and third child.
We’ve already had a cycle so nice it’s hit its prime twice. Whether the latest developments are labor pains that birth a recession or 3rd re-acceleration is not a call we have to make (we’re not making that call, yet).
The slope of the (growth/inflation) lines dictate the Quads, the Quads dictate the allocation playbook and cycle risk is managed both implicitly and explicitly.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.58-1.88% (bearish)
UST 2yr Yield 1.47-1.74% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 59.11-60.96 (bullish)
REITS (VNQ) 87.43-91.26 (bullish)
Financials (XLF) 26.19-27.69 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 20142-21009 (bearish)
DAX 110 (bearish)
VIX 15.01-25.32 (bullish)
USD 97.00-98.48 (bullish)
Oil (WTI) 50.17-55.02 (bearish)
Gold 1 (bullish)
Copper 2.51-2.63 (bearish)
Have a great weekend,
Christian B. Drake
