- Our call since the beginning of the year has been for reflation/inflation expectations to peak and roll into the end of 1Q18 and for “harmonized” global growth to transition increasingly and conspicuously towards #GlobalDivergences
- The accumulation of flows and positioning associated with multiple quarters/years of improving growth and low volatility is significant. The unwind – partial or otherwise – as those dynamics shift represent a cactus garden of risk.
- To keep it simple …. if growth is slowing, price pressures will generally be ebbing, all else equal. And if price growth is already decelerating when the growth inflection is manifesting, a negative revision to inflation expectations and downward pressure on nominal yields should not come as a real surprise.
- The probability for a rhetorical shift out of the ECB also rises which should be reflected in the currency.
- The Eurozone PMI’s were certainly softer across the board yesterday, but underwhelming growth data has been the prevailing reality for over a month, European economic surprise indices are in full backslide, nominal yields continue to retreat alongside downward revisions to the inflation outlook and the euro has transitioned from bullish to neutral trend.
- European Bond Yields continue to get smoked by #EuropeSlowing expectations (German and French 10yr yields down to 0.51% and 0.75%, respectively this am)
- We’ve been calling out the risk to China for months now as #OldChina continues to slow and the growth data comps against the largest concentrated stimulus ever.
- China remains bearish Trend with the Shanghai Comp down another -3.4% to close the week (-11.5% since JAN).
- The major Equity Benchmarks have been signaling lower highs
- Bond proxies have been signaling higher lows
- Nominal yields were signaling overbought
- Speculative net short positioning in bonds remains extended
- Inflation expectations have been in steady retreat
- We are below the street on 1Q18 GDP …. the first such instance since growth inflected back in 3Q16.
- Corporate Profits: Base effects get increasingly more difficult beginning in 1Q. This is particularly true for the Tech sector … increased scrutiny and the prospect for tighter regulation (i.e. higher costs, lower margins, lower mojo) would only amplify the comp dynamics.
the peak in inflation expectations was very likely rearview
- Comps: Domestic fundamental comps – particularly across the industrial economy – get progressively harder as we move through the year. As base effects steepen the probability for a rate-of-change deceleration rises – its just simple gravity embedded in simple rate-of-change math.
- $USD: The idea that the dollar may be in position for some durable/investible strength is decidedly non-consensus and the implications are significant. Inverse correlations to the dollar (across equities and commodities) remain strong and pervasive, global portfolio positioning with implicit short dollar exposure has risen over the past year+ and EM flows on the back of dollar weakness have not been immaterial. Dollar-denominated EM bond spreads are already rising alongside dollar stabilization. In a scenario where the dollar appreciates and EM growth slows, that spread widening has some upside along with the more obvious implications for equities.
Copper bullish sentiment is at 26% down from the 90% peak level.
Copper daily is at my downside target of ~300.
Friday’s Commitment of Traders report indicated managed money managers added to their short positions by 5,234 contracts. However, they are still net long 18,675 contracts.
More to the point, Copper has been breaking down alongside Global Bond Yields for months now. Additionally, U.S. inflation expectations ( positioning) peaked in January and February and now assets highly correlated to a China slowdown (e.g., Copper) are making fresh YTD lows -9.5% YTD.