1. NOVEMBER PMI DATA INCREMENTALLY CONFIRMING OF THE ONGOING DETERIORATION IN GLOBAL GROWTH
The recent price action is eerily reminiscent of the previous lower high in U.S. equities, which came on an equally Macro Touristy headline (midterm elections). You could’ve taken the other side of the Hedgeye view then and bought all of the #Quad4 short exposures you wanted to and, not only would you have drawn down significantly through the late-November lows, you’d still be underwater in most of those sectors and style factors. Only Industrials (XLI) were (briefly) trading higher versus that newsy lower-high; Tech (XLK), Energy (XLE), Momentum (MTUM), High Beta (SPHB), and Growth (IWO) are all trading lower than where they printed on that catalyst.
It is likely that these exposures have failed to fully recover even those low-expectations highs because economic growth continues to slow both domestically and internationally – as further evidenced by this week’s November Manufacturing PMI data, which saw 72% of the 32 economies we track decelerating from a trending perspective (vs. 75% in OCT).
Ticking higher month-over-month were: Brazil, Canada, India, Russia, Spain, South Africa, Turkey, the U.K., and the U.S. Of those economies, only Brazil, India, Japan, Russia, and the U.S. are tracking higher from a quarter-over-quarter perspective.
All told, with the advent of this week’s PMI data, our GIP Model still sees 50% of the world’s 20 largest economies in #Quad4 here in 4Q18E, as well as another 10% in #Quad3. Even if you’re of the view that Mr. Market may start to look ahead to better days in 1Q19E, then why not buy Europe (specifically, Germany and Spain) and Emerging Markets (specifically, Mexico, Philippines, South Africa, and Taiwan) on that, as opposed to trying to justify being long of the wrong exposures for where we are in the domestic growth, inflation, and corporate profits cycles?
2. THE FED WILL LIKELY CONTINUE TIGHTENING INTO A MULTI-QUARTER SLOWDOWN
With the advent of the Trump/Xi trade truce and this week’s strong ISM Manufacturing PMI data, it is increasingly likely that the FOMC will be “all systems go” to hike rates for a fourth time this year when they meet on the 18th and 19th of this month – a view confirmed by Fed Funds futures.
With respect to the data, the Headline ISM Index ticked up +1.6pts to 59.3, buttressed by strong internals: Employment +1.6pts to 58.4 and New Orders +4.7pts to 62.1. The net result of these data – as well as the dour Construction Spending data (discussed below) – was slight positive revision of +1bps/+3bps to our nowcast for U.S. Real GDP growth to 2.81% YoY/1.37% QoQ SAAR, rendering our forecast for the U.S. economy still solidly tracking in #Quad4 and still well below economist consensus.
3. LONG HOUSING = LONG COGNITIVE DISSONANCE
Construction Spending continues to be on its own, interest rate-sensitive cycle. The growth rate of Residential Construction hit a new cycle-low of 1.7% year-over-year in October, while Nonresidential Construction growth continued to roll off its August 2018 cycle-high, slowing a full -100bps to 7.3% YoY.
Our Housing Team, led by Josh Steiner and Christian Drake, offered their latest thoughts on how to contextualize the dour nature of the latest data while remaining long of the Homebuilders (ITB) in their 11/29 note titled, PHS | Breaking Bad-er-er:
|“Given the significant steepening in base effects, no tangible upside catalysts for volume and the need to absorb the step higher in rates in September, our baseline expectation was for existing market volume to throw up another rate-of-change brick, but it’s still remarkable to actually see the print. At -6.7% Y/Y, October marked the fastest pace of decline since the throes of the QM catalyst volume cratering in mid-2014 and did little to ease concerns around the negative 2nd derivative onslaught across industry fundamental data in recent months… As we’ve highlighted recurrently over the last month, reported fundamentals will remain a lagged reflection of the dual 2018 rate shocks and are unlikely to inflect positively over the nearer-term with a flagging in underlying demand conspiring with harder comp dynamics to pressure HPI and volume trends lower. However, to the extent Quad 4 (growth and inflation both slowing) data continues to drive yields lower from here, we expect the equities to remain more sensitive to rate changes than reported fundamentals.”|