“Inflation is taxation without legislation.”
-Milton Friedman

Oh, good one Milton… but in Q4 of 2019 we have plenty of tweets and inflationary legislation. Did you see Friday’s US Deficit report? No worries, it’s all good as long as “Phase 1” of the #BeanDeal turns out to be what consensus is hoping for.

Consensus is NOT long of inflation expectations #accelerating. Ex-Soybeans, which have the biggest net LONG position (CFTC futures & options contracts) in macro with a 1yr z-score of +2.4x, the Old Wall remains quite bearish on Commodities (post getting #Quad4’d).

What the Street is long of, in size, is complacency & capitulation. The net SHORT position in US Equity Volatility (VIX) just came in at -171,236 contracts – to put that in context, the biggest net SHORT position of The Cycle was -180,359 contracts.

#InflationAccelerating - Inflation T Rex 09.02.2014

Back to the Global Macro Grind…

Welcome to Macro Monday @Hedgeye! For those of you who are new to subscribing to our #process, on the 1st day of every week we measure and map macro markets within the context both The Quads and our multi-duration TRADE/TREND/TAIL signals.

As usual, let’s start with the Global Currency market:

  1. US Dollar Index bounced off @Hedgeye TREND support with a +0.6% gain last week
  2. EUR/USD failed @Hedgeye TREND resistance with a -0.8% decline last week
  3. Yen was -0.2% vs. USD last week and remains Neutral TREND @Hedgeye 
  4. GBP/USD corrected -1.2% last week and remains a new Bullish TREND @Hedgeye  
  5. Canadian Dollar was +0.5% vs. USD last week and remains a new Bullish TREND @Hedgeye
  6. Argentine Peso was -2.9% vs. USD last week, crashing to -38.6% year-over-year and remains Bearish TREND @Hedgeye  

Don’t cry for me “Macri’s Argentina is different this time” macro people. Our Quad Maps crushed whatever people thought Argentina’s economy could/should be coming out of the 2017 top in Emerging Markets. We’ll let you know if/when that changes.

That’s the tough part about breaking the back of the US Dollar Index and/or getting the Trade Weighted US Dollar (see Chart of The Day) off a 20-year high. We still have major emerging market countries (like China) #slowing, and their currencies are weak in kind.

That said, despite the Dollar Up week, Commodities reflated at a faster rate last week:

  1. CRB Commodities Index reflated +1.5% last week moving back to Bullish @Hedgeye TREND for the 1st time in a long time
  2. Oil (WTI) ramped +5.2% last week and it too moved from Bearish to Neutral and now Bullish @Hedgeye TREND
  3. Live Cattle reflated another +2.2% last week and remains a relatively new Bullish @Hedgeye TREND  

Long Energy, Cattle, Pigs, Lumber, Cocoa? I am. That’s not new either. These are all part of the #InflationAccelerating call we made during our Q4 Macro Themes presentation at the beginning of October (where we opted to stay long of REITS and Housing (ITB) too).

While being long “stahks” got a lot of Cramer/CNBC air-time with SPY testing all-time highs again last week, SPY was up peanuts compared to what consensus doesn’t own (reminder, that’s Energy Stocks):

A) Energy Stocks (XLE) led Sector Style gainers with a +4.4% week, moving XLE back to a Bullish @Hedgeye TREND signal  
B) Consumer Discretionary (XLY) “stocks” were DOWN -0.9% last week and not where you want to be during #Quad3

Oh, but “I bought AMZN when it was down a lot Friday morning” and it closed off the lows. Join the club, consensus has been long both Amazon (AMZN) and Consumer Discretionary stocks since they put in their cycle peaks in July.

That’s right. Consensus is long “Secular Growers” like AMZN, NFLX, and Software Cloud Bubble Formations. The Street is not long of Exxon (XOM), Chevron (CVX) and Cattle.

From last week’s reflated closing prices, the biggest risk to our call on #InflationAccelerating is that the Fed reads that as hawkish (instead of stagflationary) and isn’t Dovish Enough at this week’s FOMC meeting.

In Bond Yield terms, the market partly agrees with that – UST Yields were up, across the curve, last week:

A) UST 2yr Yield was up +4 basis points to -123 basis points year-over-year
B) UST 10yr Yield was up +4 basis points to -132 basis points year-over-year

INFLATION, however, is only one big part of the bond yield story. If US corporate profits continue to #slow to NEGATIVE year-over-year, next up for the Fed is a ROC (rate of change) breakout in US jobless claims. That’s when the Fed has to go all-in dovish.

But they don’t have to do that this week…

Remember that the real catalyst for the Fed to go dovish and cut rates more aggressively is the market forcing them to do so. Drop the beloved SPY sugar high -10.9% from here (that’s what the Russell 2000 is still down since Q3 of 2018, but don’t tell anyone)…

And widen High Yield OAS Spreads +100 basis points from Friday’s ultra-complacent +360 basis point spread… and then you’ll get the real inflation move embedded in a stagflationary (real consumption slowing) #Quad3.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:

UST 10yr Yield 1.64-1.85% (bearish)
UST 2yr Yield 1.49-1.68% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
REITS (VNQ) 92.62-95.99 (bullish)
Energy (XLE) 56.46-60.23 (bullish)
VIX 12.31-16.97 (neutral)
USD 96.75-98.21 (bullish)
EUR/USD 1.10-1.12 (bearish)
GBP/USD 1.25-1.30 (bullish)
Oil (WTI) 51.99-57.26 (bullish)
AMZN 1 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

#InflationAccelerating - Chart of the Day