MACRO PLAYBOOK DARIUS DALE: MACRO TEAM

Transcription

1 MACRO PLAYBOOK DARIUS DALE: MACRO TEAM JUNE 17, 2015 UPDATE

2 LEGAL DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice to individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at HEDGEYE 2

3 THEMATIC INVESTMENT CONCLUSIONS NOTE: The exposure percentage change is the performance of a hypothetical long or short position in the particular exposure from the close of the date it was added specifically via our Quarterly Macro Themes Conference Call or a Macro Playbook update through today s date or the date said hypothetical position was closed. The benchmark percentage change is the performance of going long or short the benchmark concomitantly. The relative performance is the spread between the two returns, whereby a positive reading denotes alpha generation. Risk Management Considerations: While we remain bullish on the U.S. dollar from a long-term TAIL perspective, we expect the EUR and JPY to strengthen vs. the USD over next 3-6 months as expectations for Fed policy shift dovish, at the margins. That should continue to perpetuate higher-lows in commodity prices crude oil and gold in particular. From there, we think growth will slow in the Eurozone and disinflation will permeate throughout the Japanese economy in 2H15 ultimately forcing the ECB and BoJ s hand. We expect the ECB to expand its QE program and the BoJ to expand its QQE program sometime in the 4Q15-1Q16 timeframe. HEDGEYE 3

4 WE VE BEEN RIGHT ON THE DOTS THE IMPLIED PROBABILITY OF FED FUNDS RATE LIFTOFF IN 2015 HAS DECLINED AN AVERAGE OF -828 BASIS POINTS PER MEETING SINCE THE START OF APRIL JUST PRIOR TO THIS LATEST BOUT OF GLOBAL FIXED INCOME VOLATILITY. 70% Fed Funds Futures Implied Probability of Liftoff: 3/31/15 Fed Funds Futures Implied Probability of Liftoff: Latest Readings 60% 60% 56% 50% 40% 35% 42% 33% 30% 26% 20% 10% 0% 15% 8% 3% 0% June 17th July 29th September 17th October 28th December 16th HEDGEYE 4

5 AN UNSUSTAINABLE DECOUPLING? U.S. INTEREST RATES HAVE BECOME COMPLETELY UNGLUED FROM DOMESTIC MONETARY POLICY EXPECTATIONS, IMPLYING THAT A) RECENT VOLATILITY IS A TECHNICALLY DRIVEN PHENOMENON PERPETUATED BY EUROPEAN RATE VOLATILITY AND B) TREASURY BONDS ARE MISPRICED RELATIVE TO THEIR UNDERLYING FUNDAMENTALS. AS SUCH, WE VIEW RECENT WEAKNESS AS A BUYING OPPORTUNITY. 1.4% Fed Funds Rate Future 30 Day, One Year Out (JUN '16) U.S. 10YR Treasury Bond Yield 2.8% 1.3% 2.6% 1.2% 1.1% Correlation from 4/1/14-3/31/15: % 1.0% 2.2% 0.9% 2.0% 0.8% 0.7% Correlation since 3/31/15: % 0.6% 1.6% HEDGEYE 5

6 FUNDAMENTAL BACKDROP

7 G.I.P. MODEL FORECAST: #QUAD3 150bps 100bps 2Q14 50bps 1Q15 3Q14 0bps 4Q15E -150bps -100bps -50bps 0bps 50bps 100bps 150bps 4Q14 2Q15E -50bps 3Q15E -100bps 1Q14-150bps x-axis: sequential bps change in YoY CPI y-axis: sequential bps change in YoY Real GDP HEDGEYE 7

8 THE SELL-SIDE [IMPLICITLY] AGREES JUST LIKE EVERY YEAR IN THE POST-CRISIS ERA, 2015 HAS SEEN A DOWNWARD REVISION BIAS TO BLOOMBERG CONSENSUS REAL GDP FORECASTS. SIMPLY PUT, THE STREET CONTINUES TO OVERESTIMATE THE STRUCTURAL GROWTH POTENTIAL OF THE U.S. ECONOMY. 3.3% Bloomberg Consensus U.S Real GDP Growth Estimate (Percentile of Latest Reading = 0th) Poly. (Bloomberg Consensus U.S Real GDP Growth Estimate (Percentile of Latest Reading = 0th)) 3.20% 3.1% 2.9% 2.7% 2.5% 2.3% 2.20% 2.1% HEDGEYE 8

9 AS DOES THE BUY-SIDE 2.6% 2.4% 2.2% MARKET BASED INFLATION EXPECTATIONS CONTINUE TO MAKE A SERIES OF HIGHER-LOWS AND HIGHER-HIGHS IN THE YTD. WHILE DEMOGRAPHIC HEADWINDS SHOULD CAP UPSIDE ON REPORTED CPI READINGS, THE RECENT TREND OF DISINFLATION WAS INDEED TRANSITORY. Fed 5YR Forward Breakeven Rate (Percentile of Latest Reading = 45th) TIPS 5YR Breakeven Rate (Percentile of Latest Reading = 71st) Federal Reserve Policy Target 2.0% 2.05% 2.00% 1.8% 1.6% 1.71% 1.4% 1.2% 1.0%. PERCENTILE READINGS BASED ON TRAILING 12 MONTHS OF CLOSING PRICE OBSERVATIONS. HEDGEYE 9

10 GROWTH CONTINUES TO SLOW EMPLOYMENT AND WAGE GROWTH BOTH OF WHICH PEAK LATE-CYCLE REMAIN THE LONE HOLDOUTS FROM A TRENDING RATE-OF-CHANGE PERSPECTIVE. NO OTHER INDICATOR IS ACCELERATING ON BOTH A SEQUENTIAL AND TRENDING BASIS EXCEPT SMALL BUSINESS CONFIDENCE. HEDGEYE 10

11 CONTEXTUALIZING RETAIL SALES GROWTH WAS SOLID SEQUENTIALLY IN MAY, BUT ESSENTIALLY FLAT ON A TRENDING BASIS AND STILL SLOWING SHARPLY ON A QUARTERLY AVERAGE BASIS. FOR THE CYCLE, CONSUMPTION GROWTH LIKELY PEAKED IN JANUARY 15. Retail Sales Control Group YoY % Change 3.6 Quarterly Average 3MMA Raw Monthly Data Prior Latest (MAY). RETAIL SALES CONTROL GROUP (EX-FOOD, AUTOS, GAS AND BUILDING MATERIALS. HEDGEYE 11

12 THE #LATECYCLE SLOWDOWN ENSUES INDUSTRIAL PRODUCTION GROWTH CONTINUES TO SLOW ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Industrial Production YoY % Change Quarterly Average 3MMA Raw Monthly Data Prior Latest (MAY) HEDGEYE 12

13 THE #LATECYCLE SLOWDOWN ENSUES GROWTH IN ORDERS FOR DURABLE GOODS CONTINUES TO SLOW ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Durable Goods New Orders NSA YoY % Change 1.0 Quarterly Average 3MMA Raw Monthly Data Prior Latest (APR) HEDGEYE 13

14 THE #LATECYCLE SLOWDOWN ENSUES GROWTH IN FACTORY ORDERS CONTINUES TO SLOW ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Factory Orders SA YoY % Change Quarterly Average 3MMA Raw Monthly Data Prior Latest (APR) HEDGEYE 14

15 THE #LATECYCLE SLOWDOWN ENSUES GOLF CLAP FOR THE SEQUENTIAL AND QUARTERLY AVERAGE ACCELERATIONS AS OF APRIL, BUT CAPEX GROWTH IS STILL SLOWING AND DEEPLY NEGATIVE ON A TRENDING BASIS. CAN THE POSITIVE INFLECTION BE SUSTAINED AMID RECORD BUYBACKS AND M&A? Capital Goods New Orders Non-Defense, Ex-Aircraft & Parts NSA YoY % Change -1.5 Quarterly Average 3MMA Raw Monthly Data Prior Latest (APR) HEDGEYE 15

16 ICEBERGS AHEAD! THE CONFLUENCE OF SUBDUED MOMENTUM AND THE MOST DIFFICULT COMPARES OF THE CYCLE AUGER FOR A CONTINUED SLOWING OF DOMESTIC ECONOMIC GROWTH THROUGHOUT 2H15. COMPARATIVE BASE EFFECT FOR THE RESPECTIVE GDP REPORTING PERIOD Arithmetic Mean of 2Y Average Growth Rate and 3Y Average Growth Rate in Comparative Base Period Z-Score (trailing 3Y) of the Associated Sequential Delta 2.30% 2.15% 2.10% 2.15% 2.25% 2.10% 2.20% 2.00% 1.85% 1.95% 2.55% 2.55% x -1.4x -1.0x 0.1x -1.1x 0.3x -0.8x -1.5x 0.6x 0.9x -0.3x x Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 HEDGEYE 16

17 INFLATION HAS LIKELY BOTTOMED 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Arithmetic Mean of Hedgeye Macro YoY Commodity Price Sample (lhs) US CPI YoY (rhs) 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% The Hedgeye Macro commodity price sample includes the CRB Index, CRB Raw Industrials Index, Brent Crude Oil and the UN Food and Agriculture Price Index. YoY deltas are calculated from monthly averages. Forward estimates assume no change to current monthly averages. HEDGEYE 17

18 ADDING FUEL TO THE FIRE BASE EFFECTS SHOULD PERPETUATE A SUSTAINED PICKUP IN REPORTED INFLATION THROUGHOUT 2H15. COMPARATIVE BASE EFFECT FOR THE RESPECTIVE CPI REPORTING PERIOD Arithmetic Mean of 2Y Average Growth Rate and 3Y Average Growth Rate in Comparative Base Period % 2.55% Z-Score (trailing 3Y) of the Associated Sequential Delta 2.45% 2.40% 2.25% 1.95% 2.00% 1.85% 1.75% 1.80% 1.70% 1.35% x 0.3x 0.1x -0.4x -0.2x -0.2x -0.5x -0.8x -0.4x -0.5x -1.2x -1.6x 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 HEDGEYE 18

19 THE OPPOSITE OF A TAILWIND IS A WE KNOW THE STREET WON T BE INTELLECTUALLY HONEST ABOUT THIS, BUT RISING GAS PRICES (UP +38% FROM THEIR JANUARY 15 LOWS) ARE AS BEARISH FOR REAL CONSUMPTION GROWTH AS THEY WERE BULLISH FROM 4Q14 TO 1Q15. Real PCE YoY % Change 3.10 Quarterly Average 3MMA Raw Monthly Data Prior Latest (APR) HEDGEYE 19

20 ASSET ALLOCATION IMPLICATIONS

21 CAN RATES WORK IN #QUAD3? YES OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 21

22 WHAT ELSE WORKS IN #QUAD3? OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 22

23 WHAT ELSE WORKS IN #QUAD3? OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 23

24 WHAT ELSE WORKS IN #QUAD3? OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 24

25 WHAT DOES NOT WORK IN #QUAD3? OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 25

26 WHAT DOES NOT WORK IN #QUAD3? OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 26

27 WHAT DOES NOT WORK IN #QUAD3? OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 27

28 KEY RISK: FED POLICY MISTAKE

29 KNOW YOUR TIGHTENING CYCLES THE MEDIAN LENGTH OF TIME AND CUMULATIVE INCREASE OVER THE LAST FIVE TIGHTENING CYCLES IS 47 WEEKS AND +300 BASIS POINTS, RESPECTIVELY HEDGEYE 29

30 THE LABOR MARKET REMAINS STRONG, BUT 650k THE ROBUST TREND IN INITIAL JOBLESS CLAIMS CONTINUES TO SUGGEST THE RISK OF MOVING PAST PEAK FROM A RATE-OF-CHANGE PERSPECTIVE IS ELEVATED ESPECIALLY AS THE ECONOMY TRAVERSES DIFFICULT COMPS IN 2H15. ADDITIONALLY, THE FED HAS NEVER STARTED TIGHTENING THIS LATE INTO AN ECONOMIC CYCLE. AS SUCH, THE RISK OF A POLICY MISTAKE ENDING THE EXPANSION LOOMS LARGE. U.S. Recession Initial Jobless Claims SA, SMAVG(6MO) Indicator of Late-Cycle Labor Market Strength: 300k 600k 550k 500k 450k 400k 350k 300k 250k 18mo 19mo 20mo? 7mo HEDGEYE 30

31 IS EMPLOYMENT GROWTH PAST PEAK? NONFARM PAYROLLS REMAIN NOTORIOUSLY DIFFICULT TO FORECAST ON A SEQUENTIAL BASIS. THAT SAID, HOWEVER, THE TRENDING SLOWDOWN IN THE Y/Y RATE OF CHANGE MAY IMPLY THAT THE TREND IN M/M READINGS IS MOVING PAST PEAK AS WELL. CERTAINLY THE DOUR OUTLOOK FOR U.S. ECONOMIC GROWTH IS NOT SUPPORTIVE OF THE COUNTERARGUMENT (I.E. A SUSTAINED ACCELERATION IN SEQUENTIAL GAINS FROM HERE). 2.4% Total Employees On Nonfarm Payrolls SA - YoY % Change 2.34% 2.3% 2.27% 2.29% 2.26% 2.2% 2.18% 2.21% 2.1% 2.0% 1.95% 2.01% 1.97% 2.04% 2.04% 2.11% 1.9% 1.83% 1.8% 1.7% May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Sustainability check: February s +2.34% YoY growth rate was the fastest rate-of-change since May 2000! HEDGEYE 31

32 DON T WAIT FOR WAGE GROWTH! OUR DEMOGRAPHIC ANALYSIS SUGGESTS WAGE GROWTH SHOULD REMAIN MUTED GOING FORWARD, BUT IF THE FED WAITS FOR A MATERIAL ACCELERATION IN WAGE GROWTH TO BEGIN TIGHTENING, THAT MAY PERPETUATE AN ABRUPT END TO THE ECONOMIC EXPANSION AND A SUSTAINED INCREASE IN CROSS-ASSET VOLATILITY BECAUSE WAGE GROWTH HAS HISTORICALLY PEAKED EXTREMELY LATE IN THE CYCLE. 4.4% U.S. Recession Average Hourly Earnings of Production and Nonsupervisory Workers YoY, 3MMA 4.0% 3.6% 3.2% 2.8% 2.4% 2.0% 1.6% 1.2% HEDGEYE 32

33 THE MARKET IS #LATECYCLE TOO Within the equity market itself, three indicators scream #LateCycle: 1. The pervasive deterioration in market breadth: It s a well-known fact that market leadership thins out at the peaks of bull markets. While the current deterioration is OLD FORMAT not as = bad $800/SQUARE as recorded at the FT 10/9/07 then all-time high, it is eerily reminiscent NEW FORMAT of the July = 07 $1,300 local peak SQ just FT prior to a (9.4%) correction. 2. Record financial engineering: April 2015 was a record month for announced buybacks and the $141B sum represented a +121% YoY increase. In part due to the April s strength, announced buyback programs are on pace for a record $1.2T in The previous annual record? 2007 with $863B. Not a good reference point. 3. Record M&A: May 2015 was a record month for domestic M&A at $243B. The previous monthly record? January Also not a good reference point. JULY 19, 2007 LOCAL PEAK MAY 21, 2015 LOCAL PEAK, STREETACCOUNT, BIRINYI ASSOCIATES, DEALOGIC HEDGEYE 33

34 TRACKING THE FOMC FED-HEAD GUIDANCE (OR LACK THEREOF) HAS BEEN PAINFULLY MIXED IN RECENT MONTHS. Dovish: the data does not support a near-term and/or 2015 rate hike There are more questions at this point in 2015 than there were at this point in Daniel Tarullo (voter), June 4 [I would like to raise rates] as soon as possible, but it has to be because the economic conditions are right. The economic conditions haven t been right to date. Eric Rosengren, June 1 Favoring a 2016 rate rise, he said the hurdle is pretty high for raising rates at the moment. Charles Evans (voter), June 3 Under my current outlook, I continue to believe that it would be a mistake to raise the target range for the fed funds rate in Narayana Kocherlakota, May 28 I would like to move on the back of good news, basically, and I think it s very difficult to say that you re trying to normalize interest rates just at the moment where the economy looks a little bit weaker. James Bullard, June 3 Moderate: wholly undecided We will wait and see what happens. If the economy is moving slow we ll wait. If fast, we ll do it earlier. Stanley Fischer (voter), May 25 But while the case for liftoff may not be immediate, it is coming into clearer view. If continued labor market strengthening is confirmed and inflation readings continue to improve, liftoff could come before the end of the year. Lael Brainard (voter), June 2 If the labor market continues to improve and inflation expectations remain well-anchored, then I would expect in the absence of some dark cloud gathering over the growth outlook to support a decision to begin normalizing monetary policy later this year. William Dudley (voter), June 5 Hawkish: generally expecting to raise in 2015 I think it will be appropriate at some point this year to take the initial step to raise the federal-funds rate target and begin the process of normalizing monetary policy. Janet Yellen (voter), May 25 I m going to be data-dependent, I m going to look at the data, and go into each meeting with an assessment of the data that comes in. So I m not taking any of the meetings off the table. Loretta Mester, May 1 I haven t made up my mind yet about June I am going to wait and see what the data reveals. Jeffrey Lacker (voter), May 26 Probabilities as reflected in forward markets, or futures markets for fed funds, seem to have moved from December toward September. I think that s a reasonable alignment with what I think to be the likely policy outlook for short-term rates. Dennis Lockhart (voter), May 6 I would say sometime [in] the remainder of the year. John Williams (voter), May 28, WSJ HEDGEYE 34

35 CONSISTENTLY TOO HIGH ON GDP GROWTH 5.0% THE FOMC S INTRA-YEAR FORECASTS FOR REAL GDP GROWTH HAVE BEEN TOO OPTIMISTIC BY AN AVERAGE OF 91 BASIS POINTS OVER THE PAST FIVE YEARS. THEY HAVEN T CHANGED THEIR MODELS, SO WHY WOULD THEIR PROJECTIONS BE ANY DIFFERENT? Actual Linear (2010) Linear (2011) Linear (2012) Linear (2013) Linear (2014) 4.0% 3.0% 2.0% 2.5% 1.6% 2.3% 2.2% 2.4% 1.0% 0.0% -1.0% -2.0% HEDGEYE 35

36 BETTER AT FORECASTING INFLATION, BUT 3.0% THE FOMC IS BETTER AT FORECASTING INFLATION WITH AN AVERAGE ANNUAL INTRA-YEAR TRACKING ERROR OF ONLY 26 BASIS POINTS, BUT THEIR FORECASTS FOR 2015 AND 2016 ARE +1.4% AND +1.7%, RESPECTIVELY. THAT WOULD MARK THE 7 TH AND 8 TH CONSECUTIVE YEARS THAT CORE PCE HAS FAILED TO REACH THE FED S +2% TARGET. THERE IS SIMPLY NO NEED TO TIGHTEN MONETARY POLICY ON THAT Actual Linear (2010) Linear (2011) Linear (2012) Linear (2013) Linear (2014) 2.5% 2.0% 1.8% 1.5% 1.3% 1.5% 1.3% 1.4% 1.0% 0.5% 0.0% -0.5% -1.0% HEDGEYE 36

37 CONSISTENTLY TOO HIGH ON THE DOTS THE FED S INFAMOUS DOT PLOT IMPLIES A MATERIAL TIGHTENING OF MONETARY POLICY RELATIVE TO MARKET EXPECTATIONS BECAUSE THEIR BASELINE PROJECTIONS FOR THE FED FUNDS RATE ARE UNDERPINNED BY POLLYANNAISH LONG-RUN EXPECTATIONS FOR THE U.S. ECONOMY. 3.5% 3.0% FOMC Dot Plot - Median Projection Fed Funds Futures Implied Yield 3.125% 2.5% 2.0% 1.875% 1.830% 1.5% 1.165% 1.0% 0.625% 0.5% 0.360% 0.0% EOY '15 EOY '16 EOY '17 HEDGEYE 37

38 LINKS TO ADDITIONAL RESOURCES #LateCycle USA: The Slow March to Tautness May Employment (6/5) Nickels & Steamrollers Is the Profit Cycle Past Peak? (6/4) #DemographicYields: Counting Down to Recession? (5/29) The Hedgeye Macro Playbook (5/19) Oil s #DeflationDeck: Managing Commodity Exposure: Long For a Trade with Deflationary Risks Looming (6/9) Early Look: What Is True? (6/4) Long #Housing Tactical Asset Class Rotation Model (TACRM): CLICK HERE to download the full TACRM presentation. Key Conclusion: Is the recent bullish-to-bearish reversal in emerging market equities a signal that the counter-trend bounce in reflation assets is petering out? While too early too tell, it is the most noteworthy new signal for investors to consider in the context of what had been a devastating reflation trade for global fixed income markets. Alternatively, it could be confirmation of the recent bullish-to-bearish reversal in domestic fixed income, credit and equity income plays that may be a signal of a looming policy mistake by the Federal Reserve. All told, Global Macro markets remain choppy and directionless, which may be why The HFRX Macro/CTA index is down -4.6% since peaking in mid-march. Purchase Demand Monkey's & Momo (2014 < 2015 < 2013) (6/17) Permits Party, Starts Hangover, Trend = Solid (6/16) HEDGEYE 38

39 For more information contact: