• GB Davis

Market Insight (4/5/19): It's a Macro World Baby

Most weeks for the past couple of years we have provided our clients with a rather colloquial email brief flying at 30,000 ft sans detailed explanation on the global macro state and other insights (see our blog post on our track record of incredibly prescient and accurate calls) relevant to global interest rate markets (our forte). We're becoming a bit more formal, in moving towards a weekly newsletter model; while our 'Market Insight' postings will provide a preview into the newsletter. So let's begin, on 4/5/19:

On the Global Macro front (the most important world that drives interest rates that drives asset valuations), of note:

(1) Economic Business Cycle Research Institute (#ECRI) #WLIW U.S. Weekly Leading Index (release of 4/5, data as of 3/29)(which multi-variate dynamic regression model has a moderate lead over cyclical turns in U.S. economic activity). Trailing 4-weeks: Mar 29 '19 147.2 -0.7 Mar 22 '19 146.7 -1.5 Mar 15 '19 145.8 -2.2 Mar 08 '19 145.3 -2.8 - continues to improve, and appears to be bottoming.

(2) New York Federal Reserve Nowcast (#Fed #Nowcast) US #GDP 2Q19e: for the week of April 5, 2019, "had a sizable positive impact, increasing the nowcast by 0.3 percentage point, [from 1.62% to 1.92%] Positive surprises from the ISM manufacturing survey accounted for most of the action. [(0.25%)]"

Taken together, risk is being bid today in U.S. domestic markets - and - vis-a-vis global growth rates (e.g. slowing Europe) - as we indicated previously on the blog it would, with $UUP as our $USD proxy, the dollar continues to bid against most currencies. Further, Volatility (VIX, as but one measure) is now sub-13. We feel pretty good when VIX is in the 11-14 range, start looking around at other risk when it picks up to 14-16 and starting looking at re-allocating / re-balancing theory in the 18+ range.

As we have maintained since November 2018 in writ, we see NO Fed Hikes in 2019. We also, at present see no cuts. We believe March 2020 would be the earliest cut at this point (25bps) - but if employment gains continue, and the EU and other countries stimulate, candidly, the U.S. could hold rates in 1Q20, or perhaps even evaluate another hike (25bps) - it is too early to tell (we are less concerned about the yield curve inversion than the talking heads, while we are usually one of the first to bring it forth for discussion). Kashkari (Minn. Fed) on the tape this week commenting on employment - without going into detail - this is the outlier - that could propel this business cycle even longer. Wages have begun to accelerate - in the end, this is what is needed for 'escape velocity' and a self-propelling expansion (that has been materially lacking during this cycle while domestic corporates have been issuing lower coupon debt and utilizing a substantial portion to buy back stock, generalizing)

Goldman, Sachs is on the tape this week calling for an interest rate cut from New Zealand's Central Bank. We have no view, here nor there, but it may likely occur prior to the Australia CB (RBA), which we presently see as one 25bps cut in July/August 2019. These pairs (NZD/AUD) are already under pressure against the USD - while we have no view into fair value, directionaly, we see no reason against the macro backdrop that should change.


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