“All the world's a differential equation, and the men and women are merely variables.”
- Ben Orlin
Macro remains, always and everywhere, about rates, spreads and delta’s - a high frequency exercise in forecasting & frontrunning better/worse, not good/bad.
For Hedgeye disciples and discerning 2nd derivative enthusiasts, it’s not about levels, it’s about rates of change ….
... unless it’s about levels, which it is, kinda.
Let’s discuss …
Back to the Global Macro Grind…
No cutesy intro this morn, just on to the daily grind of curating and contextualizing marginal change …..
Following two months of record declines, Retail Sales jumped +17.7% sequentially (still down -6.1% Y/Y), chasing Powell’s bond buying commencement & Pump’s infrastructure ambitions to complete the Sierpinksi gasket of recovery optimism.
Meanwhile, after recording the worst sequential decline in over a century, the domestic industrial data bounced like a brick.
Following last month’s -12.5% plunge, Industrial Production rose +1.39% in May – improving just 100 bps to down -15.3% Y/Y and marking a 9th consecutive month of negative annual growth.
Similarly, Capacity Utilization rose just +0.8% (-13% Y/Y) following two months of steep decline in March/April and, at 64.8 on the index, continues to represent the largest amount of excess capacity ever (to note the obvious - excess capacity is disinflationary and margin/profit negative for any company with a model hinged on operating leverage).
Moreover, U.S. Manufacturing & Trade Inventories fell -170bps to -2.2% YoY in the latest April data, marking the worst print since APR ’10 and fastest deceleration since FEB ’09
So, yesterday underscored the fairly conspicuous bifurcation in recovery kinetics while displaying the same dynamic that will pervade all of the May/June high-frequency data.
That is, as you traverse the trough in a mandated cessation in production and commerce, there will be an initial and mechanical step-function rebound in activity and even modest gains on a low base produce large percentage changes.
Expanding on the notion that ‘something’ is more than ‘nothing’ is a tautological exercise, but being trivial doesn’t preclude it from being true. And the positive headlines associated with that “truth” will continue to manifest in the reported data over the coming month+.
While the slope of initial rebound is encouraging and provides some signaling value with respect to the recovery timeline, the further, underlying truth remains largely unchanged:
- Pent-up demand and deferred consumption – further juiced by unprecedented stimulus and enhanced UI benefits - will gradually give way to the converse as rebound and stimulus-catalyzed demand fades and job loss, lower incomes and fiscal/social benefit expirations combine with some measure of consumer retrenchment to drag on aggregate consumption capacity.
- Re-hiring and worker recalls associated with large-scale reopening efforts was always a certainty. It’s the derivative effects, the scope of incurred structural damage in the labor market and the extent to which depressed demand catalyzes job loss up the white-collar hierarchy and in sector adjacent to the front-line industries that will ultimately characterize the nature of the recovery – and those impacts will invariably and only manifest on a lag.
- Recall, with a global ex-US economy mired in Quad 4 and with domestic private investment having fully faded Tax Reform (running negative in both 4Q19/1Q20), the domestic consumption economy sat as the singular support buttressing headline growth pre-virus. Inclusive of whatever the magnitude of the initial rebound, consumption will remain suppressed relative to pre-crisis levels.
- The precarious and trudging recovery in the labor and consumption economies will be occurring against a backdrop of slower credit expansion and depressed Capex and external demand. In other words, with retrenchment defining the corporate ethos, global commerce and Trade continuing to decline from already negative pre-virus growth, Sino-U.S. tensions re-percolating, defaults and bankruptcies continuing to spike on a lag and Inventory-to-Sales ratio’s at all-time highs, Investment and Net Exports will not be the foundational basis supporting a durable growth acceleration.
- The non-recovery in Industrial Production in May, the ongoing collapse in Japanese Machine Tool orders and export growth and the continued backslide in global trade activity all point in the direction of painfully plodding improvement.
- Given the temporal procession of income cliffs impending over the balance of 2H20, this is not the time for complacency or fabricated political friction to occlude the fledgling fiscal-monetary cooperation that has thus far successfully bridge financed the COVID activity void.
- So, the investable future-scape will be defined by suppressed consumption capacity and an inability for external demand, investment or the inventory cycle to shoulder the growth burden.
In short, it remains about both the level and the rate-of-change.
The risk associated with navigating a discrete flattening in the recovery curve and the associated inability to recapture Pre-COVID levels of activity domestically and globally.
With respect to timing, the positive headline parade should extend for around another 6 weeks before giving way to progressive flattening as cyclical optimism is forced to more soberly contemplate the structural fallout.
*As an aside, I’ve had many requests from those not on our institutional Housing research distribution for the updated housing outlook …. I’ll hit on that next time.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.62-0.87% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 9 (bullish)
Tech (XLK) 97.01-104.91 (bullish)
Utilities (XLU) 57.41-63.19 (bullish)
REITS (XLRE) 34.38-38.46 (bullish)
Financials (XLF) 22.14-25.15 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 219 (bearish)
VIX 29.51-41.62 (bullish)
Oil (WTI) 33.92-40.47 (bearish)
Nat Gas 1.60-1.80 (bearish)
Gold 1 (bullish)
Copper 2.48-2.67 (bullish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
