Groundhog Day for Markets?
If Punxsutawney Phil was a Macro Hedge Fund Manager, we believe he would be shorting risk-off and going long risk on – Groundhog day is almost here and the Shadow of December 2018 is not frightening this dice rolling rodent.
The jobs market surged in December, wages are now improving at a healthy rate, the labor participation rate continues to rise, and the manufacturing sector as measured by ISM is making a strong rebound despite fears of a China-US trade conflict. Consumer confidence, as measured by today’s Michigan survey is beating expectations. Earnings have been good, valuations are reasonable, and the Fed is on pause – we don’t expect to see a risk shadow anytime soon.
Several important forward-looking market indicators are confirming the continued upward move in stocks, and we believe are offering investors clues about what to do next:
1. The US Dollar will likely decline in the weeks ahead. If the dollar cannot stage a rally after today’s numbers, it tells you that a USD roll-over is unfolding – even if it’s in slow motion. Interestingly, the safe haven Yen is down today (the worst performing G-10 currency) and the commodity and growth oriented Canadian dollar is up (the best performing G-10 currency). We believe it’s likely a good time to buy commodity currencies like AUD, CAD, NZD against the dollar.
2. We are watching the 2s-30s curve very carefully. As the first chart below shows, the trend to a flatter curve ended in August 2018 and the curve slope has been in about a 20 basis point trading range since that time. If the curve slope steepens convincingly beyond 55 basis points, it could be a good time to move Treasury curve exposure from a barbell to a bullet.
3. We believe the Fed pause is pro-growth and will support higher inflation expectations – we have watched the technicals on TIPS break-evens closely and the downtrend in place since the fall has now been broken. We believe buying break-evens at these levels presents an opportunity. Chart 2 highlights this development.
4. It’s interesting that Gold rallied when the market moved risk-off in the fall of last year, and continues to rally as the market goes risk-on. Gold often rallies when the dollar falls, contributing to domestic inflation. Gold broke its downtrend in October as risk fears surged, and it has continued to rally despite the end of bear market fears. The last chart highlights this development.
This Groundhog is not afraid of bears.
2/30 YEAR TREASURY SLOPE
Source: Bloomberg, accessed 2/1/2019
10 YEAR TIPS BREAKEVENS
Source: Bloomberg, accessed 2/1/2019
GOLD
Source: Bloomberg, accessed 2/1/2019
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