Is That It?

“Do not be slothful in zeal. Be fervent in spirit”

- Romans 12:11

So, the $GBP dove on Brexit shenanigans which remain on an infinite loop, the dollar was flat despite beltway shenanigans dimming the prospects for further stimulus as Lagarde failed to push back against euro strength, the Fed-bond market shenanigans loop remained in full display as the record corporate issuance got even more record-y, the pseudo-shenanigan of pulling FEMA disaster relief funds to finance enhanced unemployment benefits came to a hard stop, New Zealand joined the sovereign shenanigans club with 2Y rates moving negative, the curve flattened in the face of the ongoing issuance bonanza and mortgage rates plumbed fresh all-time lows as the latest migration data remained delightful fodder for urban exodus mongerers. 

Back to the Global Macro Grind ….

Saturday’s may or may not still be for the boys, but Friday’s are for bullets points and pithy contextualization …. 

Inflation:  With an eye towards this morning’s CPI data and the Feds new inflation targeting regime skulking in the background, I suppose the broader point again is that policy makers remain bound by the irony that their policies work at cross purposes depending on the duration considered.

That is, while the credit market backstop helped stabilize the financial system and cultivate market/macro conditions necessary for reflation in the short term, it further ossified the disinflationary overhang blanketing longer duration dynamics:

Lower rates & market intervention directly reduce borrowing costs while pushing investors out the risk curve & down the quality ladder → borrowing costs are artificially suppressed as are default rates & bankruptcies → A company that is otherwise operating unprofitably or inefficiently represents excess supply →  Excess supply represents a disinflationary force and a productivity drag ... which perpetuates slower growth … which perpetuates the low rates and accommodative policy lean which helped cultivate the problem in the first place. 

That remains the larger dynamic playing out in opposition to the cyclical push associated with the orchestrated attempt at #USD weakness.  

Housing:  The level-up then level-off at cycle highs for Purchase Activity remained in effect to jumpstart September with Purchase Application volume +2.6% W/W and +25.3% Y/Y – a respectable early encore to August where Purchase activity rose +26.5% Y/Y.  

Meanwhile, the grass remains (literally) greener for urban migrants as the latest August data showed NYC vacancies rates breaching 5% for the first time as inventory spiked +166% Y/Y.

 Looking out, all-time tight supply conditions will progressively constrain further volume increases but given favorable comp dynamics will continue to support RoC solidity. We are likely to see a slow plodding towards ‘less good’ even as absolute volumes remain near cycle highs and sanguinity characterizes reported Headline activity (i.e. PHS/EHS which are reported on a lag) over the coming month(s).   

Initial Claims | Rotation Consternation:    I contextualized the Jobless Claims data yesterday but given that the domestic labor market remains a fulcrum factor in shaping both the recovery and policy outlook, it’s worth reduxing here to a broader audience.

To wit: 

It seems there’s a rotation afoot … one more pernicious than the mythical, sasquatch’esque rotation to cyclical/value that your boss has a blurry memory of perhaps seeing once out in the wild before prices where shackled by structural factors and domesticated by serial policy interventionism. With Initial Claims rising, Continuing Claims rising, Total Claimants increasing for a 2nd week and higher-frequency labor indicators stalling/deteriorating on the margin in recent weeks, evidence of a rotation from direct & ‘temporary’ pandemic related job loss to permanent/structural job loss alongside protracted demand suppression and the expiry in jobless benefits and payroll support measures is beginning to cumulate.   Recall, some measure of scarring/hysteresis was always inevitable –  the scale and scope of which was directly tethered to the duration of impact as the capacity for first order effects to network out and propagate 2nd round layoffs and job loss in adjacent industries while metastasizing up the white collar/income hierarchy remained, primarily, a function of time.   With the labor shock in its 25th week and now spanning its 7th month, the clock tick of urgency has morphed to maddening beat for businesses operating on the edge and beholden to the Tell-tale Heart of ticking, real-time solvency risk associated with the pace of eco re-normalization.    Is That It?:  Montana and Texas both indicated that their respective funding for enhanced unemployment benefits (extra $300/wk) has (already) been exhausted.  Again, the support funds were a (very) finite $44B sourced from disaster relief funds from FEMA and meant as a kind of minimal support bridge until a larger federal stimulus was passed …. which was largely presumed to be a given at the time but whose prospects have obviously diminished alongside partisan retrenchment.   High Frequency Confirmation:  The Jobs Hard to Get series in the Conference Board Consumer Confidence Survey rose in the latest August data, the number of small business open and the number of small business employee’s working has begun to backslide in recent weeks (Womply & Homebase data), small business employment/expected employment dropped for the first time since May in the latest Alignable Survey (Sept) and those in the ranks of permanent job loss and long-term unemployment continue to swell. Duration Consternation: As we’ve highlighted, duration of unemployment greater than 15 weeks continues to step function higher and the ranks of those unemployed for >26 weeks continues to build …. With the sum of the two now north of 8M and set to breach the GFC peak in the coming month(s).  Obviously, it’s increasingly difficult to characterize that unemployed cohort as “temporary” and the flow through implications to the consumption economy increase as those numbers progressively matriculate past unemployment benefit eligibility timelines.

In short, the domestic labor market remains the poster child for the still yawning divergence between select fundamental conditions and asset market prices.  

Indeed, and fittingly, allocations to the “de-humanization’ theme continue to pay (literal) dividends as leverage to employment of carbon based labor (higher labor costs/human labor intensive = relative performance ↓) continues to underperform in equity space.

In human space, we’d like to extend a thank you to our troops, first responders and all those who serve silently and selflessly. We sincerely appreciate all that you do.

While the tethering between asset prices and economic fundamentals loosens, our capacity for empathy and chivalry needs to expand in kind.

It’s not a race thing or a class thing.  It’s a human thing.  Take a knee in humanist solidarity, then stand-up for something larger than yourself.  

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.60-0.74% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,513-11,470 (neutral)
Tech (XLK) 109.34-120.17 (neutral)
REITS (XLRE) 35.14-36.75 (bullish)
Utilities (XLU) 58.07-60.48 (bullish)
Financials (XLF) 24.30-25.63 (bearish) 
Shanghai Comp 3 (bullish)
Nikkei 225 (bullish)
DAX 123 (bullish)
VIX 26.07-35.66 (bullish)
USD 91.90-93.55 (bearish)
Oil (WTI) 35.63-40.99 (neutral)
Nat Gas 2.30-2.75 (bullish)
Gold 1 (bullish)
Silver 26.02-28.99 (bullish)
Copper 2.96-3.09 (bullish)

Have a great weekend,

Christian B. Drake
Macro Analyst