"Being a Unicorn Isn't About Being Real: It's About Being Real Awesome"
- Magic Dust
[Cut to scene]: Child’s room. Toys & clothes strewn about. Incredulous father implores precocious 7 year old girl to clean up mess. Child sassily raises palm, puts an angle on her hip, replies “rainbow hair don’t care” and struts out. [fade out; cue Lizzo, Demi Lavoto girl power mashup]
If you have a daughter who’s 7 going on 15, you know that the fundamental molecular elements powering the cosmos are, indisputably, unicorns, rainbows, princesses and happiness … and, occasionally, ice cream & mermaids.
If you’ve been immersed in mining and mapping macro for more than a few years, you know that identifying market metaphors, analogs and parallels in real-life eventually becomes subconscious and 2nd nature.
Industrial recession, capex recession, all-time high valuation, negative business investment growth, compressing margins, multiple quarters of negative profit growth, acute pandemic risk. No catalyst for durable acceleration? No problem.
“Central bank liquidity hair don’t care!”
Back to the Global Macro Grind ….
Below is a quick redux of our contextualization around yesterday’s ISM Services print.
I think it’s worth a (partial) re-highlight as it reasonably captures the prevailing tension between equities (all-time highs), yields (just off the recession-scare lows), factor and cross-asset performance (slowflation resurgence) and policy.
A kind of short-term, non-stable 4 way Mexican standoff amidst an opaque near-term outlook. And because this is the year I finally commit to fulfilling my new year’s resolution of meaningfully increasing ‘chartreuse’ references …..
Chartreuse is a color between green and yellow, named for the centuries old French liqueur of similar shading. Not quite ‘spring rebirth’ green, not quite ‘warning sign’ yellow. Green and yellow, both and neither … the color mascot of equivocal inflections and L-shaped macro trajectories.
In the wake of broadly positive global Services PMI’s overnight and an ADP report suggesting ongoing resilience in the domestic labor and consumption economies in the face of all manner of serial global macro and geopolitical externalities, this morning’s ISM Services data for January adds another “chartreuse shoot” to the tenuous L-shaped, global recovery narrative.
In totality, the data sits as a decent microcosm for the yin-yang ‘contours’ of the preponderance of high frequency data:
- On the one hand, the headline was ‘good’ on an absolute basis and marginally better sequentially. On the other hand, breadth across the subseries was negative, the larger Trend remains one of slowdown and, to the extent Current Production (+3.9 pts) was boosted by a drawdown in Order Backlogs (-2.0 pts), the strength there (and the primary support to the headline) is transient and unsustainable.
- Similar dichotomies characterize the domestic and global macro data: The December numbers were poor … but some of that owes to calendar distortions. The January numbers are decent …. but that was before the coronavirus and may also simply represent a reversal of the December distortions. The global CB put is back and the fundamental data, in aggregate, has flirted with “less bad” … but there’s a discrete dearth of catalysts for driving a sustainable progression from “Less Bad” → “Good”, particularly with both the U.S. and China staring down a Quad 4 outlook over the nearer-term.
Chartreuse isn’t red … and the lack (or removal) of a negative catalyst can be a pseudo-positive catalyst of sorts. The half-life of those catalysts, however rational and justifiable, are short as the slope of The Cycle again reemerges to define the macro and market regime.
So, we got the reflexive draw-down and the obligatory partial re-trace (see a chart of copper for the markets net conclusion) and, to quote KM from yesterday, ‘now what?’, in Cycle terms?
Since tomorrow is Jobs day, let’s narrow the scope and contextualize the prevailing yin-yang tension within the domestic labor market specifically.
- Jobless Claims: After rising +5.3% Y/Y in December and flirting with a negative inflection, Initial Jobless Claims are back down -3.9% in January. In other words, peak improvement in initial claims remains rearview but one of the most consistent lead indicators of the cycle is not signaling an imminent, terminal spiral in the domestic consumption (and consumer credit) cycle, yet.
- Continuing Claims: Year-over-year growth in Continuing Jobless Claims has now been positive in each of the last 4 months – a phenomenon that has, historically, been a negative cycle harbinger and a one-way street higher to the extent it occurs late-cycle.
- Hiring: Payroll gains remain good on an absolute basis and above the level needed to absorb new entrants to the labor force, suggesting slack should continue to tighten nearer-term.
- Job Openings & Hiring Plans: Both Job Openings and Hiring Plans are down Y/Y, a function of there being less people to hire and firms being more reluctant to hire in the face of slowing growth, rising labor costs and a multi-quarter run of decelerating and negative earnings growth. Job Openings being down y/y may be even more of a signal in the current instance given technology changes and the fact that it’s now effectively costless to post a Job Opening ad.
- AHE: The acceleration in both hourly wage growth and total compensation (ECI) remains ongoing, however trudging.
- Avg Weekly Hours: Growth in avg. weekly hours is trending negative Y/Y. Making modestly more per hour while working less hours is not a boon to household consumption capacity.
- The Chart of the Day below plots the Y/Y Change in Continuing Claims against the Y/Y Change in Job Openings. The intuition is that, as growth slows and firms become increasingly reluctant to hire (increasingly expensive labor) or invest, at the margin, it becomes slowly but increasingly difficult to find a new job, particularly as competition for qualified labor intensifies in a tight market. Historically, this progression has characterized and perpetuated late-cycle labor dynamics.
I could extend the juxtaposition further but, clearly, incongruity is building across indicators and late-cycle risk is developing in the labor market.
Now, macro awareness is anchored on understanding the shifting cross-currents above but, generally, there is some non-subjective, simplifying gravity embedded in the fundamental, RoC math. January is not an exception.
We need +316K on the NFP Headline to avoid further deceleration in payroll growth. Maybe … but, in probability terms, that’s the equivalent of swinging at a high, outside pitch.
Assuming static growth in avg weekly hours implies further deceleration in aggregate hours growth → which, absent notable acceleration in AHE, implies a flat-to-slowing trend in aggregate income growth → which implies a flat-to-slowing Trend in household consumption capacity and, by extension, aggregate spending growth.
None of that is an opinion, it’s just the output associated with the asymmetry embedded in the likeliest path of the data.
Collectively, the latest data leave us with the same, non-sensational but highest probability conclusion: The consumption cycle will continue its plodding deceleration (not crashing but slowing, slowly) and headline growth will continue to slow … and the slope of that growth line will continue to define our exposure mix.
As always, if it’s not measured in rates, spreads and delta’s and contextualized within a #FullCycleInvesting framework ... @Hedgeye GIP Risk Management hair don’t care!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.48-1.72% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
Utilities (XLU) 67.76-69.55 (bullish)
REITS (VNQ) 93.87-96.11 (bullish)
Shanghai Comp 2 (bearish)
VIX 13.75-19.44 (bullish)
USD 97.25-98.40 (bullish)
Gold 1 (bullish)
Copper 2.45-2.66 (bearish)
Oil (WTI) 48.87-55.09 (bearish)
TSLA 661-882 (bullish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
