“If everyone is easing, no one is easing” … or so the euphemistic macro mantra goes.
If the Fed isn’t dovish enough, fast enough currently prevailing dynamics are likely to simply propagate further. A relatively hawkish (or under-dovish) Fed will perpetuate a stronger dollar which will further perpetuate global and local disinflationary conditions, further tighten financial conditions, further exacerbate already acute dollar liquidity dynamic and further hamstring the capacity of other Central Banks (China) to initiate more meaningful stimulus measures.
It will also continue to drag on earnings via both Fx translation and directly via lower external demand – a condition set that will feedback negatively on the domestic economy as businesses further curtail investment and hiring – all of which serve to undercut confidence and risk catalyzing a negative, self-reinforcing spiral.
If that sounds familiar, it’s because we wrote it last year …. in what was but one summary contextualization within a serial, broken record accounting of the evolution of the #GlobalDivergences narrative we authored two years ago and in which the $USD has played the role of lead protagonist.
Back to the Global Macro Grind…
Consider KM’s Top 3 things from north of the border this morning:
- DATA – Japanese pre virus GDP (i.e. Q4) tanked to -6.3% q/q (not a typo) and both the Nikkei (-1.4%) and KOSPI (-1.5%) broke @Hedgeye TREND support again overnight; JGB 10yr Yield down -3bps and German Bund Yield on 10s breaking bad alongside EUR/USD as the German ZEW (post virus) reports slowed, big time, to 8.7 from 26.7 in FEB
- DOLLAR – what we do know is that both the FX and Global Rates markets know its probably #Quad4 in both the USA and China in Q2 (USD goes up in #Quad4, deflating Commodities and Oil prices, which you’re seeing again this morning with WTI -1.7% - short Energy, XLE)
- CURVE – officially re-inverts son 5yr UST (1.37%) vs. 2yr at 1.39% - if the Fed wants to ignore that, it really doesn’t matter to me as I’ll keep getting paid being long US Dollars, Treasuries, Gold, Utes, REITS, etc… until the Fed acts on what the Global Macro market makes the Fed do
In other words, Japan continues to be Japan, Europe continues to do its best Japan imitation and the dollar remains both the nexus of and transmission mechanism for global macro cross-currents.
What we have, in effect, is another game of relatives as the same dynamics that characterized “American Exceptionalism’ and defined cross-asset dynamics globally are resurfacing as the prospective L-shaped European ‘recovery’ can’t get out of its own way and China and broader, China-levered Asia deal more tangibly with the virus fallout.
Relativity plays out in spread space and while the COVID-19 related downgrade parade has officially begun with Apple lowering revenue expectations and Walmart issuing disappointing guidance (which embeds no explicit virus drag) - further calling into question the consensus narrative that earnings growth will hockey stick through 2020 – the U.S. is (arguably) relatively insulated from first order effects.
Relative insulation effectively equates to a relative divergence in growth, which is a siren song for capital flows to both the $USD and domestic assets. Those flows further propagate the dynamic flow highlighted above and further curtail the Fed’s capacity to meet its inflation target.
To the extent the Fed remains recalcitrant and refuses to ease in magnitudes sufficient to cultivate more meaningful/protracted dollar weakness, it means persistent disinflationary pressure, more curve flattening and tighter global liquidity. This factor cocktail is capable of fomenting global Quad 4 conditions with discrete price consequences as we re-import that disinflation via demand destruction and Fx appreciation in a confounding circulatory for CB inflation targets.
In other words, it will cultivate a condition set that is likely to force the Fed to ultimately acquiesce and cut anyway …. Some version of which the extant equity-bond divergence is attempting to discount.
But you … and bonds .. and inflation expectations …. and gold … and Utes/REITs already knew that as the discounting of derivative virus impacts only pulls forward and amplifies the underlying growth/inflation trajectory that was already in place.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.50-1.66% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
Utilities (XLU) 68.10-70.81 (bullish)
REITS (VNQ) 95.37-100.55 (bullish)
Consumer Staples (XLP) 63.56-65.15 (bullish)
Tech (XLK) 97.70-102.57 (bullish)
Oil (WTI) 48.94-52.45 (bearish)
Gold 1 (bullish)
Best of luck out there this week,
Christian Drake
U.S. Macro analyst
