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Is A “Classic End-Of-Cycle Melt-Up” Imminent?
Is A “Classic End-Of-Cycle Melt-Up” Imminent?
- Potential for the data deterioration theme to pause in the next quarter
- Phase 1 US-China deal could pivot Manufacturers from inventory destocking to restocking
- Key manufacturers talking about this potential on earnings calls
- This underappreciated catalyst could cause a temp bounce in the economic data, lift stocks and curve steepeners even higher – classic end of the cycle melt up
WARNING: This note contains content more positive than the past 10 months and may not be suitable for readers who are expecting a perma bear.
I jest obviously but the theme all year has revolved around the idea of data deterioration. The question from those tired of that notion is always “what would change your view” and the answer is consistently:
1) CB’s adding liquidity
2) China-US trade war progress
3) EU fiscal stimulus
For the first time all year, all three potential catalysts emerging at the same time which risks a Q4 melt up in risk assets and (I hope you are sitting down) an improvement in some of the economic data – mainly the manufacturing sector.
Central Banks pumping liquidity once again
This has been THE driver of the cyclical “up crash” first kicked off around October 8th when Fed Chair Powell noted that the Fed will soon announce steps to add to reserves over time through the purchases of T-bills. Around the same time, as we discussed previously, many Fed officials began setting up the Oct cut which many thought was in question (Rosengren, Evans).
That powerful force of a coming Fed liquidity injection + another Fed cut to sustain the expansion caused a key reversal in the macro landscape where:
- USD topped out and depreciated lower
- Cyclical equities/commodities bottomed and started to break out higher
- Interest rates bottomed and started pricing out future Fed cuts
- Yield Curves like 2s10s, that had been dormant, began to steepen
…click on the above link to read the rest of the article…
Want To See What Stagflation Looks Like?
Want To See What Stagflation Looks Like?
Another undoubtedly firm inflation report as the tariff effect works its way through the pipeline. This means one thing; the stagflation narrative only strengthened today as the US economy slows in the face of supply side inflation.
Want to see what stagflation looks like?
- 6m Avg. NFP = green
- Non-Manufacturing PMI = black
- Leading Index (YoY) = blue
- CPI ex-food and energy = pink
In theory this puts the Fed in a quandary. In reality, you should recognize that:
1) The data today implies Core PCE (the Fed’s inflation metric which they derive policy from) at somewhere in the 1.60% to 1.65% range. Firmer than where we were in 2Q, but still below the Fed’s mandate. Therefore, today’s data does not hold the Fed back from easing.
2) The new core of the Fed has a completely new mindset when it comes to inflation where they intend to “make up” for the time core inflation remained below 2% by letting inflation run hot. For example:
- Williams: “my view is any way that keeps the average inflation rate at 2%”
- Evans: “ought to communicate comfort with 2.5% core inflation”
- Brainard: “we make some pre-commitments to making up so that inflation gets to 2% on average over time in a more sustained basis”
So the Fed will not pivot policy by any means with their preferred measure of core inflation not only below their mandate on a one-off basis, but nowhere near their new Average Inflation Targeting mindset.
3) At this stage of the cycle (very late with some recession signals), is supply side inflation positive for the economy? It could actually add to the malaise especially with wages now off the highs as seen in AHE, ECI, and even the latest real AHE which is down to 1.3% from a high of 1.9% earlier this year.
…click on the above link to read the rest of the article…
