Chapter 3b Macro and Macro Preprocessor-Design of Macro Prepropcessor
HEDGEYE ASSET ALLOCATIONdocs.hedgeye.com.s3.amazonaws.com › HE_TMS_4.20.16.pdf · April 20, 2016...
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LEGAL
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HEDGEYE ASSET ALLOCATION
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CASH U.S.EQUITIES
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HEDGEYE ASSET ALLOCATION
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other asset classes is 33%.
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#EARNINGS
EUR/USD
#TIGHTCHINA
#EARNINGS With the busiest week of Q1 Earnings for S&P 500 companies, we’ll have some concrete evidence of pending earnings deterioration. Thus far, 66 companies have reported from 7 sectors. 4 of 7 have comped down bottom line. S&P earnings have comped down -10.8% in aggregate, with materials and financials leading decliners. The trend of late cycle reporting strength in healthcare and consumer discretionary carries on, for now. Again we would ask the question, can the market continue to trade-up with the possibility of two more quarters of poor earnings? We’ll see.
EUR/USD The ECB holds its monetary meeting in Frankfurt tomorrow. We expect no great “waves” from President Mario Draghi as he already delivered the “Drugs” in the form of both interest rate cuts and the expansion of QE (by €20 billion to €80 billion/month) in last month’s meeting. We continue to suggest trading our immediate term TRADE risk range of $1.12 - $1.14. We have a neutral outlook on the currency cross over the intermediate term TREND.
#TIGHTCHINA The Shanghai Composite Index dropped -2.3% overnight despite the PBoC injecting 250B of liquidity into the banking system, which represents the largest such injection since February 26th. Weighing on sentiment was a Xinhua report that monetary policy will likely be more prudent in 2016 than it was last year, according to sources close to the PBoC, as well as PBoC Chief Economist Ma Jun commentary about future monetary policy needing to guard against financial risks. With Chinese corporate leverage high and getting higher (166% of GDP) and property prices running up 30% YoY in first tier cities, we expect the PBoC to rein in the liquidity provision meaningfully from here now that economic stabilization is in the rear view mirror.
MACRO
DARIUS DALE
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UNITED STATES
DATA SOURCE: BLOOMBERG
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UNITED STATES CONT’D. G: Our model has domestic
economic growth decelerating sharply here in Q2 with a probable
trough by the third quarter. This forecast is corroborated by the trending tightening across all
segments of domestic rates markets, as well as the sharp breakdown of
the USD on a trade-weighted basis in recent months – which itself has
perpetuated a massive short squeeze across nearly every facet of
the global reflation trade.
I: In line with our #Quad4 expectation for Q2, reported inflation
has at least temporarily inflected from generally hawkish trends. We
are projecting a resumption of trending acceleration in 2H16, but to
lower-highs on a long-term basis.
P: Domestic and global spillover effects stemming from structural USD strength have forced the Fed’s hand
to the dovish side, which is being ardently reflected throughout the
short end of U.S. rates markets in the YTD. There is, however, limited room
for further spread compression absent outright easing.
DATA SOURCE: BLOOMBERG
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EUROZONE
DATA SOURCE: BLOOMBERG
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EUROZONE CONT’D. G: Our model has Eurozone growth
decelerating on a trending basis throughout the balance of the year. This forecast is corroborated by the fact that Eurozone economic growth continues to slow on a trending basis
across every key category of high-frequency data.
I: Our model has Eurozone inflation decelerating through the balance of
1H16 before v-bottoming and trending higher through year-end.
This forecast is corroborated by the trending breakdown in 5Y5Y EUR inflation swaps as well as the trend
higher in the EUR on both a nominal and real basis.
P: We expect the ECB to
incrementally ease monetary policy by their June meeting in order to
combat the aforementioned cyclical headwinds, as well as the trend
lower in both Eurozone equities and Eurozone inflation expectations, as
well as the trend higher in the EUR/USD.
DATA SOURCE: BLOOMBERG
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CHINA
DATA SOURCE: BLOOMBERG
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CHINA CONT’D. G: Our secular bear case on China
remains firmly intact as evidenced by the lackluster Q1 GDP report and the fact that growth rates “C” + “I” + “NX” formula continue to decelerate on a
trending basis across key high-frequency metrics.
I: Our model has Chinese inflation inflecting here in Q2 and trending lower through the balance of Q3. Corroborating this forecast is the trending deceleration in core CPI, which implies the recent trend of
global commodity reflation – something we anticipate will end
soon – has been artificially propping up headline inflation readings in
China.
P: Consistent with our bullish bias on the USD from here, we anticipate the PBoC will begin to revalue the CNY lower on a trending basis over the intermediate term. This will likely force them to keep policy rates tight(er) in order to offset capital
outflow pressures and it appears that is already being reflected on the
short end of Chinese rates markets.
DATA SOURCE: BLOOMBERG
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JAPAN
DATA SOURCE: BLOOMBERG
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JAPAN CONT’D. G: Our model is all over the map with
respect to Japanese GDP growth, forecasting a #Quad4 setup in Q1, a
#Quad1 setup in Q2, a #Quad3 setup in Q3 and a #Quad2 setup in Q4.
While there are indeed nascent signs of inflection, Japanese economic growth continues to trend lower
across every key category of high-frequency data – as do rates on the
long end of the JGB yield curve.
I: Our model has Japanese inflation trending lower throughout the
balance of 1H16. This forecast is being corroborated by trending
deceleration across headline CPI, core CPI and headline PPI, as well as the trend lower in 5Y5Y JPY inflation
swaps and the trend higher in the JPY on both a nominal and real
basis.
P: Japanese policymakers in both the Cabinet and BoJ have ratcheted
up verbal intervention in the JPY, which is up ~10% YTD vs. the USD.
We believe verbal intervention to be unsustainable and anticipate the BoJ will expand upon QQE and/or NIRP
at its April 27-28 meeting.
DATA SOURCE: BLOOMBERG
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UNITED KINGDOM
DATA SOURCE: BLOOMBERG
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UNITED KINGDOM CONT’D. G: Aside of brief respite in Q3, our
model has U.K. GDP growth decelerating on a trending basis throughout the balance of 2016. Corroborating this forecast is the
trending deceleration seen across every key category of high-frequency growth data, as well as the trending narrowing of the Gilt 10Y-2Y spread.
I: Our model has U.K. inflation
accelerating throughout the balance of 2016. This forecast is corroborated
by trending acceleration across headline CPI, core CPI and headline
PPI, as well as the trending breakdown in the GBP on both a
nominal and real basis.
P: Naturally, we’d expect the BoE to be in a box given the
aforementioned cyclical outlook for persistent #Quad3 stagflation.
Complicating policy matters is the Brexit vote which is scheduled for late-June and is effectively a coin
toss. The BoE is appropriately storing its ammo in the event that process weighs heavily upon consumer and
business confidence in the U.K.
DATA SOURCE: BLOOMBERG
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HEDGEYE MACRO PROCESS: RATE OF CHANGE
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S&P REVENUE & EARNINGS COMP
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WHAT CAN MORE JAWBONING ACCOMPLISH?