Week Ahead. ‘auribus teneo lupum’.



“Next week will start off with some important political news from Europe with the Italian election results coming in early in the morning Monday and the news Germany’s Angela Merkel solidified her coalition paving the way for her fourth term. The Italy vote could rattle some markets while the Merkel news is a countering stabilizing factor.  Keep an eye on Libor this week too.

This week will also have the Trump trade war fallout continue and comments from other countries could cause some volatility within some sectors.  I expect some trade push back with some US tech companies notably semiconductors at risk.   Earnings will be very light with some retail names finishing up Q4.  There will be a handful of Brokerage conferences through out the week including but not limited to the Deutsche Bank Media, Telecom, Citi Global Property, Royal Bank of Canada Financial Institutions, and Raymond James Institutional Investor conference among others.

The Economic calendar will be busy with the calendar more back end weighted for the week. We will kick off the week with Euro-zone PMI and U.S. ISM and PMI on Monday and then On Wednesday we will see the most action with US trade balance, ADP employment data, Non-farm productivity numbers, Consumer credit as well as Euro-zone GDP for Q4, and Chinese FX reserves. Thursday morning China will release trade numbers, ECB policy decision, Germany factory orders, capped off on Friday with BoJ policy meeting U.S. Jobs reports, German Industrial production and trade balance and Chinese CPI/PPI. Last week had a 5% range with the S&P and finished the week bouncing into the close.

This short term bounce could continue especially considering Asia and Europe ending the week short term oversold on several markets and should bounce too.  My view is unchanged with further weakness and volatility ahead in the coming weeks and months but a move, perhaps up to 2725 would be no surprise.  Bullish sentiment is at 30%, while under the midpoint of 50% still is vulnerable to further downside shocks.  As usual, I’ll be all over it this week with the Daily Note.  If you have any questions, comments, and chart requests, please email me.  Have a great week.”

– Mr. Thomas Thornton

New 52-Week Highs 



AGEN – Agenus Inc.


APEI – American Public Education Inc.


APTI – Apptio, Inc.


ARNA – Arena Pharmaceuticals


ASMB – Assembly Biosciences, Inc.


ASNA – Ascena Retail Group, Inc.


ASND – Ascendis Pharma A/S


ATAX – America First Tax Exempt Investors, L.P.


AVXS – AveXis, Inc.


AYX – Alteryx, Inc


BL – BlackLine, Inc.


BPMC – Blueprint Medicines Corp.


BR – Broadridge Financial Solutions, LLC


BYBK – Bay Bancorp, Inc.


CCXI – ChemoCentryx, Inc.


CDXS – Codexis Inc.


CHGG – Chegg, Inc.


CHOC – iPath Pure Beta Cocoa ETN


CNCR – Loncar Cancer Immunotherapy ETF


COUP – Coupa Software Inc.


CSOD – Cornerstone OnDemand, Inc.


CTMX – CytomX Therapeutics, Inc.


CVEO – Civeo Corp.


DDS – Dillards Inc


DFRG – Del Frisco’s Restaurant Group, Inc.


DIN – Dine Brands Global, Inc.


DNB – Dun & Bradstreet Corp.


EGHT – 8×8, Inc.


EMMS – Emmis Communications Corp.


EQBK – Equity Bancshares, Inc.


FATE – Fate Therapeutics, Inc.


FRPT – Freshpet Inc.


FSFG – First Savings Financial Group, Inc.


FXY – CurrencyShares Japanese Yen Trust


HBIO – Harvard Bioscience, Inc.


HLG – Hailiang Education Group Inc.


HUBS – HubSpot Inc.


ICUI – ICU Medical, Inc.


JJGB – iPathA Series B Bloomberg Grains Subindex Total Return ETN


JOBS – 51job Inc.


JUNO – Juno Therapeutics, Inc.


JXSB – Jacksonville Bancorp Inc (IL)


KANG – iKang Healthcare Group, Inc


KEYS – Keysight Technologies Inc.


LGCY – Legacy Reserves LP


LOXO – Loxo Oncology, Inc.


LPSN – LivePerson, Inc.


MDB – MongoDB, Inc.


MGNX – MacroGenics Inc.


MIME – Mimecast Ltd.


MSCC – Microsemi Corp.


MULE – MuleSoft, Inc.


NATI – National Instruments Corp.


NEWR – New Relic, Inc.


NFLX – Netflix, Inc.


NIB – iPath Bloomberg Cocoa Subindex Total Return ETN


NKTR – Nektar Therapeutics


NOW – ServiceNow, Inc.


NSP – Insperity, Inc.


NTNX – Nutanix, Inc.


OLLI – Ollie’s Bargain Outlet Holdings Inc.


PAYC – Paycom Software, Inc.


PFPT – Proofpoint, Inc.


PGTI – PGT, Inc.


PRFT – Perficient, Inc.


PRGX – PRGX Global Inc.


PRPH – ProPhase Labs, Inc.


QLYS – Qualys, Inc.


REPH – Recro Pharma Inc.


RYAM – Rayonier Advanced Materials Inc.


SFLY – Shutterfly Inc.


SPLK – Splunk Inc.


TDOC – Teladoc, Inc.


TEAM – Atlassian Corp.


THC – Tenet Healthcare Corp.


TLND – Talend S.A.


TSG – The Stars Group Inc.


TWLO – Twilio Inc.


ULTI – The Ultimate Software Group, Inc.


VEC – Vectrus, Inc.


VEEV – Veeva Systems Inc.


WDAY – Workday, Inc.


XITK – SPDR FactSet Innovative Technology ETF


YCL – ProShares Ultra Yen


ZEN – Zendesk, Inc.


Monday 05-Mar:

Earnings Whisper.jpg



·        Post-close: ASNA

Brokerage Conferences:

·        Deutsche Bank Media, Telecom and Business Services

·        Raymond James Institutional Investors

·        Citi Global Property CEO

·        Analyst Meeting: TGT

·        PDUFA: BMY


·        US: Markit services PMI (Feb), Non-manufacturing ISM (Feb),

·        Europe: Euro-zone services PMI (Feb); retail sales (Jan), Germany Markit PMI (Feb), UK BRC retail sales (Feb)

·        Asia: China Caixin PMI (Feb)

Tuesday 06-Mar:



·        Pre-open: AFI, CIEN, DCI, GMS, TGT

·        Post-close: ABM, ADSK, AVAV, BOJA, CVNA, FOGO, GWRE, ROST, URBN

Brokerage Conferences:

·        Raymond James Institutional Investors

·        Deutsche Bank Media, Telecom and Business Services

·        Royal Bank of Canada Financial Institutions

·        Citi Global Property CEO

·        Canaccord Genuity Musculoskeletal

·        Analyst Meeting: PSTG, CVX, PBI, KEYS, LKSD, VMI, LRCX, SABR, MTDR, TGT, RWT


·        US: Factory orders (Jan), Durable Cap Goods (Jan), Fed speakers Dudley, Kaplan, Brainard

·        Europe: Germany Construction PMI

Wednesday 07-Mar:



·        Pre-open: ANF, BF.B, DLTR, GOLF, PLCE

·        Post-close: COST, FMI, OKTA, REVG, THO

Brokerage Conferences:

·        Citi Global Property CEO

·        UBS Global Consumer and Retail

·        Raymond James Institutional Investors

·        Deutsche Bank Media, Telecom and Business Services

·        BMO Capital Markets Canadian Wealth Management

·        CIBC Industrials

·        Royal Bank of Canada Financial Institutions

·        Analyst Meeting: XOM, HUBB,CERN, PH, XOM, AXP

·        IPO: BTAI


·        US: ADP jobs report (Feb), Nonfarm productivity (Q4), US trade balance (Jan), Unit Labor Costs (Q4), Consumer Credit Jan Fed speaker Dudley, Bostic

·        Europe: Euro-zone GDP Q4 final

·        Asia: China FX reserves (Feb),

Thursday 08-Mar:



·        Pre-open: AEO, CBK, DFRG, FMSA, IGT, KR, MTN, NAV, PRTY, TECD

·        Post-close: AREX, CHUY, COO, FNSR, LOCO, MRVL, PAY, UNFI

Brokerage Conferences:

·        UBS Global Consumer and Retail

·        J.P. Morgan Gaming Lodging Restaurant & Leisure Management Access

·        Analyst Meeting: BK, FFIV, AXTA, CBG, FLOW, USG


·        US: Jobless claims (Feb)

·        Europe: ECB policy decision, Germany factory orders (Jan)

·        Asia: Japan GDP (Q4 final), current account (Jan), Bank lending (Feb), China trade data (Feb)

Friday 09-Mar:


Brokerage Conferences:

·        J.P. Morgan Gaming Lodging Restaurant & Leisure Management

·        Analyst Meeting: CAPR


·        US: Jobs report (Feb), Wholesale trade sales (Jan), Fed speakers Evans

·        Europe: Germany imports / exports for (Jan), Industrial production

·        Asia: Japan BOJ rate decision; China CPI/PPI (Feb)

Select Market

Sentiment Data Provided By Daily Sentiment Index

Cira  Hedge Fund Telemetry  

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CoT Report via Hedgopia




Following futures positions of non-commercials are as of February 27, 2018.

10-year note: Currently net short 342.9k, up 128.4k.



10-year note: Currently net short -295,359 (Options & Futs).

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On February 5 when Jerome Powell took over as Fed chair the S&P 500 large cap index dropped 4.1 percent, and 10-year Treasury yields fell six basis points to 2.79 percent.  In all probability, the rout in stocks in that session was a mere coincidence.


Jerome Powell testifies on his nomination to become chairman of the U.S. Federal Reserve in Washington

On Tuesday this week, Mr. Powell delivered his Humphrey Hawkins testimony to the Congress.  The S&P 500 dropped again, down 1.3 percent, but 10-year yields this time around jumped five basis points to 2.91 percent.  This probably was not a coincidence.

Markets took “My personal outlook for the economy has strengthened since December” to mean that he was leaning more hawkish than expected, suggesting four 25-basis-point hikes in the fed funds rate this year.  Thursday, he tried to walk it back saying “there is no evidence the economy is currently overheating” but investor nerves were not soothed.

A four-hike scenario would represent an acceleration in the pace of tightening.

Since December 2015 when the Fed began raising rates, there have only been five hikes.  As of last December, the FOMC dot plot expected three hikes this year.  The members will update their forecast in the March 20-21 meeting.


Further, the Fed is also reducing its mammoth $4.4-trillion balance sheet, which got off the ground with $10 billion a month in October-December last year, then accelerating the pace every three months.  By this October, this could rise to $50 billion a month.  In due course, this can begin to bite, more so if short rates rise faster.  Hence the nervous markets.  They will be on pins and needles until at least the March meeting.

In the meantime, non-commercials continue to bet on higher 10-year yields.

30-year bond: Currently net long 27.5k, up 10.1k.


30-year bond: Currently net long 23,624 (Options & Futs).

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Major economic releases next week are as follows.

February’s ISM non-manufacturing index will be published Monday.  Services activity expanded 3.9 points month-over-month in January to record 59.9 (data only goes back to January 2008.)

January’s revised and more detailed estimates of durable goods data are due out Tuesday.  Preliminarily, orders for non-defense capital goods ex-aircraft – proxy for business capex plans – rose 6.3 percent year-over-year to a seasonally adjusted annual rate of $66.7 billion – slower than 9.9-percent growth last October.  Orders peaked at $70.3 billion in September 2014 and bottomed at $59.9 billion in May 2016.

Wednesday brings revised productivity data for 4Q17.  The preliminary estimate showed non-farm output per hour rose 1.06 percent y/y in 4Q17.  This was the slowest pace in four quarters.  Productivity remains anemic.

Employment numbers for February will be reported Friday.  Average hourly earnings of private-sector employees rose 2.89 percent y/y in January – the highest growth rate since May 2009.  The last time earnings grew with a three handle was in April that year.


Crude oil: Currently net long 787.1k, up 13.5k.


Crude oil: Currently net long 91,667 (Options & Futs).

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Resistance at $63-$64 on the cash ($61.25/barrel) proved tough to conquer.  After Monday’s rejection, West Texas Intermediate crude proceeded to lose the 50-day moving average Wednesday.  There is decent support at $58-59/barrel, which was defended in the selloff last month.

The EIA report for the week ended February 23 offered no help to the bulls.

U.S. crude production rose another 13,000 barrels per day to 10.3 million b/d.  Ditto with crude imports, which increased 261,000 b/d to 7.3 mb/d.  As did crude and gasoline stocks, up three million barrels and 2.5 million barrels to 423.5 million barrels and 251.8 million barrels, respectively.  Gasoline stocks are at a one-year high.

Refinery utilization dropped three-tenths of a percentage point to 87.8 percent.  Utilization has been under pressure since peaking at 96.7 percent late December last year.

Distillate stocks, on the other hand, fell 960,000 barrels to 138 million barrels.


E-mini S&P 500: Currently net long 96.3k, down 17k.


E-mini S&P 500: Currently net long 95,714 (Options & Futs).

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On the monthly chart, after January’s solid start to the year, February produced a hanging man on the cash (2691.25).  This is potentially bearish medium term, and could form as an opportunity for the bears.  Let us see how far they can take it.  (All major U.S. indices carved out a monthly hanging man in February.)

During the week, the S&P 500 index retreated after hitting 2789.15 intraday Tuesday – a lower high versus the all-time high of 2872.87 on January 26.  The 50-day (2736), which was lost Wednesday, attracted more sellers Thursday.  The 200-day, which was defended in the selloff last month, lies at 2561.

At least until Wednesday, the weakness elicited inflows.  In the week ended that session, SPY (SPDR S&P 500 ETF) took in $6.2 billion:


IVV (iShares core S&P 500 ETF) $1.3 billion:


VOO (Vanguard S&P 500 ETF) $483 million (courtesy of ETF.com).


In the same week, U.S.-based equity funds (including ETFs) took in $13.3 billion (courtesy of Lipper).


Euro: Currently net long 138k, up 11.9k.


Euro: Currently net long 139,850 (Options & Futs).

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A falling trend line from the all-time high of $160.20 in April 2008 lies at/near $125 on the cash ($123.17).  This level also represents measured-move-target resistance of a 10-point range breakout last July.

There were several unsuccessful attempts at that resistance over three weeks in January and February.  The subsequent selloff stopped this Thursday after attracting bids at the daily lower Bollinger band.  The 50-day was lost intraday Thursday, but recaptured by close.

The daily chart is getting oversold.  Resistance lies at $123.60, and after that $125.


Gold: Currently net long 178.7k, down 12.2k.


Gold: Currently net long 183,522 (Options & Futs). 

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In the week ended Wednesday, GLD (SPDR gold ETF) and IAU (iShares gold trust) saw inflows to the tune of $191 million ($139 million and $52 million, in that order).


This followed inflows of $262 million in the prior week (courtesy of ETF.com).

This did not help the cash ($1,323.40/ounce) much.  Gold retreated after hitting $1,364.40 on February 16.  A slightly falling trend line from August 2013 lies there.  This level also approximates the neckline of a reverse-head-and-shoulders formation.  Then there is Fibonacci resistance.  The metal peaked in September 2011 at $1,923.70, then bottoming at $1,045.40 in December 2015.  A 38.2-percent retracement of this decline lies at $1,380.91.


From gold bugs’ perspective, the good news is that they once again successfully defended support at $1,300 (low of $1,303.60 Thursday).  The daily chart is itching to move higher.


Nasdaq 100 index (mini): Currently net long 2.8k, up 11.1k.


Nasdaq 100 index (mini): Currently net long 3,519 (Options & Futs). 

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The selloff in the first seven sessions last month was brutal.  The recovery since the February 9th low has been no less impressive.  The cash (6811.04) this Tuesday came within 20 points of the all-time high of 7022.97 on January 26.

QQQ (PowerShares QQQ ETF) attracted $2.7 billion in the week through Wednesday (courtesy of ETF.com).


Thursday, the bulls defended the 50-day.  An intraday breach of that average Friday was bought hand over fist.

That said, internals are not healthy.  At the highs this week, Nasdaq new highs were 117 (closed at 64), versus 437 six weeks ago.  Only the generals are leading, the soldiers are falling behind.


Russell 2000 mini-index: Currently net short 4.5k, down 3.8k.


Russell 2000 mini-index: Currently net short -4,120 (Options & Futs).

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Since losing the 50-day (1550) a month ago, the cash (1533.17) managed to close above the average just once.  That was this Monday.  The 200-day (1471) lies underneath.  Until either one of the two gives way, the Russell 2000 is trapped between these averages.

Relative to large-caps, small-caps have underperformed for a while now.

In the week to Wednesday, IJR (iShares core S&P small-cap ETF) lost $28 million, while $190 million moved into IWM (iShares Russell 2000 ETF).



Although year-to-date, flows remain tentative.  Through Wednesday this year, IJR gained $126 million, but IWM lost $2.9 billion (courtesy of ETF.com).


US Dollar Index: Currently net short 2.1k, down 51.


US Dollar Index: Currently net short -2,006 (Options & Futs).

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The cash (89.91) arguably continues to form a base.  Although this scenario is yet to be embraced by non-commercials.

This week, it rallied past short-term resistance at 90.50 but struggled to stay above.  Thursday’s high of 90.89 came within 0.10 of the low of 90.99 on September 8 last year, before ending the session with an outside day.  It also faced resistance at the 50-day (90.50).

Near term, the US dollar index likely heads lower.  Short-term support lies at 89.40.  Not to mention must-save support at 88-89.


VIX: Currently net long 34.4k, down 25.2k.


VIX: Currently net long 34,282 (Options & Futs). 

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Volatility bulls did step up to the plate in defense of support at 15-16 on the cash.  Wednesday’s intraday low of 15.29 also successfully tested the 50-day, which is now slightly rising.  Friday produced a little spike reversal, though, with VIX rising all the way to 26.22 intraday only to close at 19.59.


Back on February 6, VIX peaked at an intraday high of 50.30.  Several times in the past, spike reversals subsequently resulted in drops all the way to the sub-10 or low-double-digit region.  This time around – thus far – that has not been the case.






“Iron and Rye”



Fishing Boat 1871 Jean-François Millet (French, 1814–1875), Oil on Canvas



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In European Equity Markets stocks finished Friday’s session sharply lower after President Donald Trump announced upcoming tariffs on steel and aluminum, raising fears of a potential trade war. The pan-European STOXX 600 extended losses throughout the session, closing down 2.06 percent. On the week, the STOXX 600 fell 3.68 percent. All sectors closed sharply lower with many finishing the session down over 2 percent, including basic resources, banks, autos and industrials.


In Currency Markets the Japanese yen jumped to a 16-month high against the dollar as investors sold the greenback as prospects of a trade war gripped currency markets after U.S. President Donald Trump announced hefty new tariffs on steel and aluminum imports.


Bank of Japan governor Haruhiko Kuroda also surprised currency markets by saying the central bank would consider an exit from its ultra-easy monetary policy if it met its inflation target in the year ending in March 2020, helping the yen higher against the euro and sterling. The greenback was nearly 0.5 percent lower at 105.75 yen after touching 105.70 earlier, its lowest since Feb. 16. Against the euro and sterling, the yen was 0.3 and 0.5 percent higher respectively.
In Commodities Markets oil prices were set to post their first weekly fall in three weeks on Friday after news of U.S. plans to impose tariffs on steel and aluminum hit global equity markets and as U.S. crude inventories climbed. President Donald Trump said he would impose hefty tariffs to protect U.S. producers, risking retaliation from major trade partners such as China, Europe and Canada. Brent crude fell by 32 cents to $63.51 a barrel, while U.S. crude was down 30 cents at $60.69. Both contracts are set for weekly declines. Adding to pressure, U.S. crude stocks rose faster than expected last week, increasing by 3 million barrels compared with predictions for a gain of 2.1 million barrels.




In US Equity Markets the Dow fell more than 1 percent for a fourth straight day on Friday on mounting fears of a global trade war following President Donald Trump’s promise to impose import tariffs on steel and aluminum. All but eight of the 70 members of the broader S&P industrial index were lower, reflecting fears that the costs of their raw materials will rise along with barriers to their trade outside of the United States. The S&P 500 fell 0.63 percent to 2,660.9 and the Nasdaq Composite declined 0.49 percent to 7,145.05.
J.C. Penney Co Inc shares fell 8.7 percent after the department store chain missed same store sales estimates.


S&P 500


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In Bond Markets Germany’s 10-year government bond yield hit a five-week low on Friday, as an Italian election and a milestone in German coalition politics this Sunday together with worries about a global trade war boosted demand for safe-haven debt. Most euro zone bond yields were down 0-2 basis points. Germany’s benchmark 10-year Bund yield fell to as low as 0.606 percent, its lowest level since late January, before inching up to 0.639 percent. It has fallen almost 20 bps from more than two-year highs hit last month and is set for a fourth straight week of falls. Italy’s 10-year bond yield fell three bps to as low as 1.983 percent, its lowest level in 3 weeks.


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  • United States Michigan Consumer Sentiment Final was reported at 99.7 in Feb from 95.7 in the previous period. It was expected at 99.5. 
  • United States Michigan 5-Year Inflation-Expectations reported in February unchanged at 2.5% from the previous period 2.5%.
  • United States Michigan Inflation Expectations reported in February 2.7% vs. previous period 2.7% 
  • United States Michigan Current Conditions was reported at 114.9 in February vs. 115.1 in the previous period.
  • US Baker Hughes Rig Count Mar-2: 981 (prev 978) – Rotary Gas Rigs Mar-2: 181 (prev 179) – Rotary Oil Rigs Mar-2: 800 (prev 799)


REFLATION EXPOSURES – We’re in a global equity volatility patch right now, but let’s unpack the consensus view on reflation exposures. Energy sector equities have been a dog (XLE underperformed SPY by ~720bps in February). However, the top-down theme remains that #reflation’s rollover is non-consensus. From a volatility expectations standpoint, the set-up currently is exactly the opposite of 2017: The tickers where longer-term implied volatility registers the lowest percentile readings are commodity-linked, and the upside divergences in long-term implied volatility are filled with equity-tickers.


INFLATION – At 2.80% this morning, 10YR yields are now -15bps off of recent highs and flirting with a break below the low-end of the @Hedgeye risk range. Breakevens (i.e. inflation expectations) are flashing lower highs as well as core PCE inflation continues to underwhelm domestically and price growth in the Eurozone is beginning to flag – Eurozone PPI decelerated a full -70bps in January, marking the slowest pace of wholesale price growth in over a year. As a reminder, U.S. CPI will face its hardest reflationary comp in February.

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ISM – The manufacturing steamroll continued in February with ISM hitting a new 165-month high and most of the internals flashing similar strength.  With New Orders and Capex Plans also holding at cycle highs, near-term production activity should remain strong.












Federal Reserve

  • Daily Effective Fed Funds Rate: 1.42%, Volume: $115B

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Mar 02, 2018: New York Fed Staff Nowcast
  • The New York Fed Staff Nowcast for 2018:Q1 stands at 3.0%.
  • News from this week’s data releases decreased the nowcast by 0.1 percentage point.
  • Negative surprises from new home sales and personal consumption expenditures were partially offset by positive surprises from the ISM manufacturing survey.

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Federal Reserve Bank of New York 

-R.W.N. II

Trade Policy Debate

Brig “Antelope” in Boston Harbor Fitz Henry Lane (American, 1804–1865)

The idea that international trade competition between the U.S and others countries has to have a defined winner and loser is false. The argument for globalization is that competition among global participants is only a factor in determining countries comparative advantage. That is when a country can produce a good or service at a lower opportunity cost than another country. I believe, proponents of isolationism or protectionism regarding international trade aren’t fully differentiating a country’s absolute advantage, when a country can produce more of particularly good or service most efficiently,  with that of its comparative advantage.

For instance, the irrational fears that Japan would surpass the U.S. economically in the 1980s by businessmen and politicians, became evident of a cold-war, militaristic ideology, solely perpetuated by Washington. The economics would suggest that moving industrial jobs overseas allowed labors domestically to develop more progressive service related inputs into the global economy.

To highlight this point further, take the Video-Cassette Recordings “VCR” business. The major companies involved with producing VCR’s were RCA, JVC, APEX, Matsushita Electronic (Panasonic), Sony, and Toshiba. By the early 1980s, the Japanese VCR companies, Matsushita Electronic (Panasonic), JVC, and Sony, had a significant comparative advantage in producing technically superior and user-friendly product compared to other industry competitors. The Japanese VCR’s spurred a mass-market appeal for video recordings and derivatively, more demand for U.S. film production; where the U.S. has maintained control over a competitive advantage dating back to the end of WWII and the fall of the German film industry.


One example of when trade tariffs had a sharply adverse effect on the economy and global diplomatic relations was the passing of the Smoot Hawley Tariff by President Hoover in 1930.The proponents of the Smoot-Hawley Tariff argued that it would mitigate unemployment and help revive the economy out of the Great Depression. Finding out, of course, it did not but instead exasperated the impacts of a contracting economy.

What Smoot and Hawley failed to realize was countries would retaliate against the U.S. Which meant U.S. exports declined, and at a higher rate than U.S Imports, albeit imports fell sharply as well.

Foreign countries resented the fact that the worlds largest economy, a creditor country, was trying to police the world by encouraging others to repay their own debts and yet we’re stopping them, regarding repaying those debts, by earning the dollars they need to repay their debts.

In a article by the Economist, entitled “The battle of Smoot-Hawley“, it begins by an account by Thomas Lamont, a partner at J.P. Morgan, where he describes his reaction toward the Tariff, “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff,” he recalled. “That Act intensified nationalism all over the world.”


Moreover, the CATO institute claims that one-thousand economists wrote to President Herbert Hoover asking him to veto or not to sign the Smoot Hawley legislation. They were cast aside despite their pleas for a rational economic prescription for what would happen to the economy if tariffs were imposed. Trade will collapse, trade frictions between counties would increase, countries will respond and retaliate against U.S. exports.

Smoot-Hawley was just the beginning of a protectionist movement that was sweeping through the U.S. Congress during the Great Depression. Trying to protect domestic farmers, who are export-oriented, selling most of their grains overseas rather than face import competition. Once Congress passed its first legislative Tariff on agricultural goods, which didn’t end up helping farmers very much, they continued into industrial products as well. Since then, Presidents have not looked at one particular section of the country regarding their trade interest are but instead trying to ascertain what is the national interest regarding trade. Supporting trade liberalization, helping other nations to lower their trade barriers as we reduce ours, through the general agreement on tariffs and trade.

Digressing further into an explanative argument against a protectionist economic view with a statement. “Once we adopt a policy of placing tariffs and sanctions against our global trade partners, we move in a direction where the only outcome is a waste of our national resources through the centralized direction of our activities.” -Milton Friedman

Furthermore, President Trump’s most recent tariffs on steel and aluminum and the tax reform bill that is estimated to repatriate an estimated sum of 200 billion dollars back to the U.S. align very closely to events in Germany’s, which led to the “iron and rye” tariff of 1879.

Following the 1870-1871 Franco Prussian War, the French had to pay an indemnity of 5 billion francs to cover the costs of the German occupation. This was a significant capital inflow, which equated to a substantial monetary and fiscal stimulus and the consequent increase in aggregate demand which increased output growth and price inflation for the German economy.

Now, where will the U.S. find a similar capital in-flow with the Federal Reserve winding down there balance sheet? Ah, yes, the  H.R.1 Tax Cuts and Jobs Act. 

However, when the indemnity inflows stopped, depressing aggregate demand, the boom turned to bust. With low rates of growth and high exchange rates for the Deutsche Mark led to an increased demand for protection from a coalition of producers of tradable goods, called the Junkers.

“Increased demand for protection was matched by increased supply.” Here I am applying the common distinction between demand and supply forces in the adoption of tariffs, purposed by Dani Rodrik, “Political Economy Of Trade Policy.”

“On the demand side there are private sector interest that ask for tariff protection; on the supply side there is government that decides on the magnitude and coverage of tariff protection.”


Ever since the establishment of the Second German Reich in 1871 Bismarck, its Chancellor was interested in making the German federal government independent concerning tax revenues. Bismarck was more willing to support tariffs in the second part of the 1870s because the slowdown in growth increased the dependence of the German government on the member states for tax revenues. This matching of demand and supply forces ultimately led to the adoption of the “iron and rye” tariff in 1879. The “iron and rye” tariff was the first in a series of European tariffs against the effects of increasing integration in the international economy. It is an early example of a backlash against globalization.

The consequences against Germany between global participants wasn’t as rapid as those experienced by the U.S. in the 1930s. However, I would argue that the protectionist stance toward economic globalization lead to the conflicts between European countries, most notably France, which ultimately lead to World War I and World War II.


The Trump administration has already frayed diplomatic communication between the United States and its global allies. Case in point was the most recent three-day meetings of NATO and G7 countries where global leaders tried to convince Trump, unsuccessfully I will add, to stay in the Paris Climate Accord. Also, Trump deleted from his speech Article IV of the NATO agreement where all NATO countries agree to assist one another if attacked. After this erratic behavior, German Chancellor, Angela Merkel, said this at a campaign speech just after the meetings:

“The times when we could completely rely on others are, to an extent, over.”

I do not necessarily blame her for those comments; nonetheless, I’m not so sure I want Germany, given their past transgressions, to be the sole leader of Europe. Nor am I excited for China to be chief policy dictator of Asian affairs. A brave new world I suppose.



Linked above with in-text citation.


Lezdam Amicis Meis Epularer.



Claude Monet (French, Paris 1840–1926 Giverny), 1869, oil on canvas. 


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1:30 pm 

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              3:30 pm 

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               4:00 pm -ish

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In European Equity Markets 
The pan-European STOXX 600 fell 1.26 percent by the close, with every sector posting sharp losses. During the course of the session, European stocks hit a two-week low, as the volatility seen during February showed signs of seeping into March.


The German DAX fell 1.97 percent by the close, while France’s CAC 40 slipped 1.09 percent and the U.K.’s FTSE 100 declined 0.78 percent.



Media stocks were some of the top losers, off over 2 percent as a sector following earnings news. Shares of WPP fell as much as 14 percent in trade before closing down 8.2 percent. This comes after the advertising giant announced lower net sales in 2018 and a cautious outlook for 2018. Other sectors to post sharp losses included basic resources, chemicals, and technology.
In Currency Markets 
The US dollar rose to a six-week high on Thursday after a set of solid U.S. economic data further stoked expectations that the Federal Reserve could raise interest rates as many as four times this year. The greenback has gained momentum this week following the first public testimony of Federal Reserve Chairman Jerome Powell, who struck an upbeat note on the U.S. economy. A U.S. manufacturing index for February was also stronger than expected. The index was last up 0.3 percent at 90.899. It is still down 1.5 percent this year. In the eurozone, data showing the currency bloc’s manufacturing boom slowed last month added to the downbeat mood, helping send the euro as low as $1.2153, its weakest since Jan. 12.





In Commodities Markets
Oil fell more than 1 percent on Thursday, hitting two-week lows on pressure from a strong dollar and worries that surging U.S. crude output might thwart OPEC’s efforts to drain global supply. Rebounding stock prices on Wall Street helped crude futures bounce off the day’s lows, as stocks and oil futures have been more highly correlated in recent weeks. Brent crude and U.S. West Texas Intermediate (WTI) crude fell by more than $1 a barrel. Brent, the global benchmark, lost $1.22, or 1.9 percent, to $63.52 a barrel, after sliding as low as $63.19. U.S. crude was down $1, or 1.6 percent, to $60.66 a barrel, after touching a low of $60.18. The session lows for both benchmarks were the lowest prices in two weeks.



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In US Equity Markets 
Main indexes swung between gains and losses on Thursday after Federal Reserve chair Jerome Powell said the central bank does not see strong evidence of wage inflation. The S&P 500 was up 0.17 percent at 2,718.53 and the Nasdaq Composite rose marginally 0.16 percent at 7,284.88. Boeing and Caterpillar were among the biggest decliners on the Dow on fears that import tariffs could hit profits. Steel and aluminum stocks gave back some of their earlier gains Thursday after the Trump administration said President Donald Trump would likely not be issuing an announcement on tariffs, as was previously expected. Shares of U.S. Steel traded up 2.1 percent while AK Steel jumped nearly 4.3 percent. Century Aluminum and Steel Dynamics rose 3.8 percent and 1.6 percent, respectively.

S&P 500 


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In Bond Markets the spread between U.S. shorter- and longer-dated Treasury yields widened on Thursday after Federal Reserve Chairman Jerome Powell said there is no evidence the U.S. economy is currently overheating. The difference between five-year and 30-year Treasury yields was more than 1 basis point wider at 49.8 basis points.


The U.S. bond market’s gauges of inflation expectations remained near session lows on Thursday after data showed U.S. core consumer prices rose 0.3 percent in January, their steepest monthly increase in 12 months.


The 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was 2.11 percent, down 1.5 basis points from late Wednesday.

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This paper, “Fertility Is a Leading Economic Indicator” is novel in that it postulates that fertility may actually be a leading indicator of a recession.
“Many papers show that aggregate fertility is pro-cyclical over the business cycle. In this paper we do something else: using data on more than 100 million births and focusing on within-year changes in fertility, we show that for recent recessions in the United States, the growth rate for conceptions begins to fall several quarters prior to economic decline.”
This analysis is shown in the middle graphic, which has been extracted from their paper, and as the chart shows:
“The almost prescient decline in fertility at the onset of the last three recessions is evidence that people react rapidly to changing economic conditions in even their most personal choices, such as whether or not to conceive a child.”
The implication is that family planning decisions may actually be much more sensitive to more coincident economic indicators such as consumer confidence and durable orders. This flies somewhat in the face of the commonly held view that the long “production time” of creating babies makes their production less responsive to shorter-term economic fluctuations.  (Yes, that’s a very geeky way to talk about having a family!)



Federal Reserve 

Daily Overnight Funding Rate: 1.35%, Volume: $204B

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Mr. Clardia’s most recent paper Twhich highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. -NBER 
The Global Factor in Neutral Policy Rates: Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination
  • United States Initial Jobless Claims was reported at 210K in 24/Feb from 220K in the previous period. It was expected at 226K. 
  • United States Continuing Jobless Claims was reported at 1931K in 17/Feb from 1874K in the previous period. It was expected at 1930K.
  • United States Central Bank Balance Sheet was reported at 4,385,073 USD Million in 2018-02-19 from 4,379,459 in the previous period.
  • United States Markit Manufacturing PMI Final was reported at 55.3 in Feb from 55.5 in the previous period. It was expected at 55.9.
  • United States ISM Manufacturing Prices was reported at 74.2 in Feb from 72.7 in the previous period. It was expected at 70.5. 
Headline = +1.7 pts, back north of 60 and = 165-months highs
New Orders = 64.2 = 10 consecutive months >60 and having its strongest 3/6/10 month stretch in 14 years.
Employment = +5.5 pts and back to flirting with the 60-level
Export Orders = breaching 60 to the upside and logging a new 82-month high
Backlogs = +3.6pts to 59.8, also good for a new 165-month high.
Prices Paid = +1.5 pts and holding at a blistering 74.2 = 81-month highs as the reflationary mojo continues to manifest.



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ISM Euphoria Hard to Square With Just OK Hard Data
By any reckoning, today’s ISM print of 60.8 for February offers support to the notion that manufacturing is on an upward trajectory. It is hard to reconcile that with consecutive months of soft orders and production data.

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Highest Print in More than a Decade
The headline print of 60.8 in the ISM index is the highest since 2004 and the latest affirmation of broadening business confidence. Aside from a slight slowing in the orders and production components (which are both still above 60 and thus signaling continued expansion), all other components moved farther into expansion territory.
“Everybody is out of what I need”
The slight dip in customer inventories (which does not roll into the headline) can be seen as a positive for the manufacturing outlook in-as-much as it indicates supply-chain constraints. This is affirmed in some of the selected comments like this one from a representative of the computer and electronics products category: “Availability of electronic components, long lead times, allocations and constraints continue to wreak havoc in the purchasing cycle, with no end in sight at this time.” Another comment from the fabricated metals sector illustrates the point even more succinctly: “Steel market is doing rather well. Everybody is out of what I need.”

The biggest move in the components and perhaps the largest takeaway from 100 today’s report is that employment jumped 5.5 notches to 59.7.

The prices index climbed another 1.5 points to hit 74.2—that is the highest reading more than six years and the 24th consecutive month in which this category has signaled higher raw material prices. In an economic cycle that has been characterized by sub-2 percent CPI inflation, there are clues in this report that, after accounting for a lag, the manufacturing sector could be adding to inflation pressures later this year.

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Not all of that price pressure is from domestic sources either. The imports component climbed 2.1points to 60.5, the highest reading here since 2007. One manufacturer linked some of the pricing pressure to the increased demand from overseas along with changes in the value of the U.S. dollar, saying the “weakening in the U.S. dollar in relationship to the yuan is starting to impact importing cost. We are starting to see more supplier price increases.”
Hard to Reconcile with Hard Data
In short, today’s ISM report is the latest signal that positive sentiment is giving way to euphoria in the manufacturing sector, yet this comes amid a run of admittedly lousy hard data. Core capital goods orders have been in retreat for the past two months and, similarly, manufacturing production has flat-lined for two straight months. As we said in the durable goods write-up earlier this week, in times of such pronounced survey strength, the gap between hard and soft data is usually narrowed by business surveys getting reined in, rather than the hard orders data experiencing a marked acceleration.

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  • United States Construction Spending MoM was reported at 0% in Jan from 0.8% in the previous period. It was expected at 0.3%.
  • United States EIA Natural Gas Stocks Change was reported at -78Bcf in 23/Feb from -124Bcf in the previous period. It was expected at -77Bcf.



A modest deceleration in aggregate income growth and modestly underwhelming consumption growth to kickstart 2018.
In short, the savings rate ticked up off of cycle lows and with income growth largely flat and facing progressively harder comps there was a flow-through drag to reported consumption growth (-0.1% M/M and small deceleration to +2.7% Y/Y on a real basis)
“The trend in income growth will become increasingly important to consumption as the tailwind from a declining savings rate diminishes and payroll growth continues its late-cycle deceleration.  Remember, simply, how this works …. If your income is the same but you save less, consumption is higher.  The Savings Rate printed a 2-handle (2.9%) for the 1st time this cycle in November/December and the decline in the savings rate over the past year has been a notable support to consumption growth alongside flattish aggregate income growth.  The Savings Rate has been falling ~80-100 bps year-over-year and unless we continue to plumb new lows, the tailwind to consumption growth will progressively recede.”
These dynamics manifest in January and will persist over the nearer-term although wage inflation and tax reform related increases in disposable income should help support consumption capacity.


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Strong Income Growth Saved the Day in January
Spending was weak, up +0.2% in nomial terms and down -0.1 in real terms. However, income was strong, up +0.4%, while disposable personal income surged +0.9% in nominal terms, +0.6 in real terms.
Tax Reform and Social Secuirty Helped Disposable Income 
Personal income increased a strong 0.4% in January, up +$64.7billion. However, disposable personal income surged +$134.8 billion durning the month, or 0.9%, as Americans paid $70.1 billion less in taxes due to the effects of the tax reform, while social secuirty payments increased by +$23.8 billin compared to only $4.2billion n December 2017. This meant that real disposable personal income increased a strong 0.6% durning the first month of the year, which will help to close the gap between the growth in real personal consumption expenditures and real disposable personal income. This was the strongest growth in real dispoable personal income since April 2015.

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