SUMMARY: Global rate hikes seem to be weighing on futures again this morning (BOE hiked 50bp, SNB raised and signaled more tightening, Norges Bank hiked 50bp) but are having a limited impact on the USD and US rates (to be fair, the USD is down 2% since June 1st). Stronger growth and inflation, and the higher interest rates needed to offset them, is the reason Deep Cyclicals (Energy, Materials, Industrials) outperformed Early Cyclicals (Tech, Discretionary, Communications) yesterday. Stocks that benefit from fading destocking headwinds (Retail and Transports… see the list HERE) outperformed too. We expect this trend to continue over the coming weeks and all things equal, it should be a bit of a headwind for the overall market as Tech, or the big 7, consolidate. ADDITIONAL negative news from China and very weak labor market data is a risk to our Deep Cyclical/Destocking reversal TRADES.
Long EM: Emerging markets have underperformed developed ones consistently since early 2021. One of the reasons: a hawkish Fed. Per a Fed research paper (HERE), U.S. monetary tightening’s driven by a hawkish policy stance cause a substantial slowdown in activity in all EMs.
Fed fund futures suggest the Fed is near the end of its tightening cycle, but not necessarily because of an imminent deep recession. Per our GMM macro regime classifier, the economic backdrop has moved closer to ‘Normal’ (more HERE). Global central banks likely have similar knock-on effects, and markets have priced in a more hawkish ECB and BOE over the past week. However, futures are pricing in another extra hike or two, not another percentage point. Hiking cycles appear to be winding down globally while deep recession risk has been pushed out.
Some significant headwinds remain, like volatile food prices and geopolitical risk. But the same tailwinds to Deep Cyclicals, the average stock, and Destocking losers that we have been discussing over the past few weeks – a recession may not be needed to cool inflation, a higher r*, stable FCI – are also good for EM.
John Roque, 22V’s technical analyst, hosted a webinar yesterday (replay link HERE). He likes EEM here, target 50. Please see chart annotations for further details
We also have some cheeky commentary about market signals from single variable, magic macro indicators like liquidity, and the yield curve completely breaking down. Macro is hard. Don’t rely on Twitter charts (yes, we are biased).
Full report below…
MARKET VIEWS: More hawkish global central banks are weighing on futures again this morning (BOE hiked 50bp, SNB raised and signaled more tightening, Norges Bank hiked rates higher than expected) but the moves are having a limited impact on the USD and US rates. The same narrative was provided for equities falling yesterday, but the internals indicated a stronger economy. Deep Cyclicals (Energy, Materials, Industrials) outperformed Early Cyclicals (Tech, Discretionary, Communications) yesterday. Stocks that benefit from fading destocking headwinds (Retail and Transports… see the list HERE) outperformed too. Expect those trends to continue over the coming weeks and, all things equal, that should be a bit of a headwind for the overall market as Tech, or the big 7, consolidate. ADDITIONAL negative news from China and very weak labor market data would be a risk for our Deep Cyclical/Destocking reversal TRADES.
Long EM: Emerging markets have underperformed developed markets consistently since the start of 2021. One of the reasons: a hawkish Fed. Per a Fed research paper (HERE), U.S. monetary tightening driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs.
Fed fund futures suggest the Fed is near the end of its tightening cycle, but not necessarily because of an imminent deep recession (which would certainly not be good for emerging markets). Per our multivariable macro regime model, the economic backdrop has moved closer to ‘Normal’ (more HERE). Global central banks likely have similar knock-on effects, and markets have priced in a more hawkish ECB and BOE over the last week. However, the rate moves are for an extra hike or two, not another percentage point. Hiking cycles look to be ending globally while deep recession risk has been pushed out.
Some significant headwinds remain, like volatile food prices and geopolitical risk. But the same tailwinds to Deep Cyclicals, the average stock, and destocking losers we have been discussing the past couple weeks (it’s less obvious the Fed needs a recession to cool inflation, mean reversion, higher r*, stable FCI) are also good for EM.
John Roque, 22V’s technical analyst, hosted a webinar yesterday (replay link HERE). He likes EEM here, target 50. Please see chart annotations for further details.
Macro is Hard: Liquidity is not a magic macro indicator. It worked when global central banks were aggressively easing to save the economy and then aggressively tightening to fight back inflation. Now the macro backdrop is normalizing, so the relationship is breaking down. Liquidity readings alone are not going to indicate the level or direction of equities.
Source: Federal Reserve, ECB, BOJ, PBoC, Bloomberg, 22V Research
You also can’t just look at the yield curve. The market price and multiple bottomed within a couple of weeks of the yield curve’s first inversion in late-’22. Inversion was supposed to be the harbinger of an imminent recession. Go figure. Macro is hard. Don’t look at one variable.
