Hedgeye update:


Darius Dale


Sequencing the world’s economic data is a boring, arduous task that requires a lot of computing power and caffeine. In fact, I often joke in meetings that I have the “most boring job on Wall Street”. All that being said, contextualizing economic releases in the context of their own and other time series is the only way to spot developing patterns and nascent TRENDS in real-time.

I can assure you that overconsuming news regarding Macro Tourist topics like tariffs and Rocket Man from your favorite Old Wall media source is neither a reliable nor repeatable scheme for alpha generation. If it were, Joe Kernen would be a world-class portfolio manager…

With the advent of the latest batch of global Manufacturing PMI data for the month of OCT, we see that manufacturing growth continues to decelerate from a TRENDING perspective in 75% of the 32 economies we track (vs. 81% in SEP).

Highlights from the early releases:

  • Australia ↑ +0.5pts to 54.5 (TREND = ↓)
  • Brazil ↑ +0.2pts to 51.1 (TREND = ↓)
  • Canada ↓ -0.9pts to 53.9 (TREND = ↓)
  • Indonesia ↓ -0.2pts to 50.5 (TREND = ↓)
  • India ↑ +0.9pts to 53.1 (TREND = ↑)
  • Japan ↑ +0.4pts to 52.9 (TREND = ↓)
  • Mexico ↓ -1.0pt to 50.7 (TREND = ↓)
  • Russia ↑ +1.3pts to 51.3 (TREND = →)
  • South Africa ↓ -2.1pts to 42.4 (TREND = ↓)
  • South Korea ↓ -0.3pts to 51.0 (TREND = ↑)
  • Turkey ↑ +1.6pts to 44.3 (TREND = ↓)
  • K. ↓ -2.5pts to 51.1 (TREND = ↓), and
  • S. ↓ -2.1pts to 57.7 (TREND = ↑).

With countries like Italy and Spain, and aggregates like EM and the World yet to report, it’s likely that we’re in the mid-80s from a percent-of-economies-trending-lower perspective when it’s all said and done for the month. That statistic is undeniably causal to so many equity markets across the globe having made new lows in October.

Just when you thought things couldn’t get worse in the Eurozone. The latest GDP and consumer spending data were nothing shy of awful:

Layer on fresh ~18-month lows in the European Commission’s Economic Sentiment and Business Climate Indicators in OCT and you’re left with undeniable evidence that economic growth in the world’s 2nd largest economy (i.e. the Eurozone) is rapidly deteriorating.

To be clear, “rapidly deteriorating” is not the same as “When are you guys going to turn bullish on Europe?” – a question Keith and I have received from investors at least several dozen times over the past few months. We get that those among you who’ve adopted our data-driven, regime-based framework for interpreting Macro risks want to front-run our signaling of tops and bottoms and we are humbled by that. Just don’t expect us to abandon our process – which calls for us to wait for either/both the market and TRENDING economic data to confirm – merely to satisfy the outcome your portfolio prefers. On that front, we are keen to point out that after the initial batch of OCT data, each of the aforementioned European economies is now tracking in Quads 3 or 4 for 4Q18E. Can’t rush #process…

Going back to my initial statement regarding contextualizing data and spotting patterns in real-time, I can’t help but notice the cliff the global economy appears to have fallen off in the SEP/OCT timeframe. The aforementioned European consumption data, Europe’s OCT PMI data (discussed on 10/24), the Eurozone and Germany’s OCT ZEW Survey data (discussed on 10/16), Japan’s SEP Machine Tool Orders data (discussed on 10/10), Japan’s SEP Export data (discussed on 10/18), Japan’s SEP Industrial Production data (which plunged -310bps to -2.9% YoY – the slowest rate since AUG ’16), the US’s SEP Capex data (discussed 10/25), China’s OCT Manufacturing PMI data (which ticked down -0.6pts to 50.2 – the lowest since JUL ’16), China’s OCT Non-Manufacturing PMI data (which ticked down a full point to 53.9 – the lowest since AUG ’17), and South Korea’s SEP Industrial Production data (which plunged -1084bps to -8.36% YoY – the slowest rate since MAR ’09) are all in support of that observation.

Now I’m not at all saying that the aforementioned growth rates are going to continue plunging from here; indeed, it’s likely that we see some snapback from these recessionary levels of consumption and manufacturing growth in Europe and Asia next month. What I am saying, however, is the same exact thing we’ve been saying all year: comparative base effects for the “Old China” economy steepen through 1Q19E, which implies that, absent an even larger stimulus package than the “Shanghai Accord”, growth on the mainland is likely to continue to TREND lower through at least that period.

Recall that “Old China” was the key driver of the “globally synchronized recovery” that persisted from mid-2016 through early-2018. All told, we’re not trying to sound the alarm bell here – global equity markets have done plenty of that all year. We’re merely just pointing out rising risk of the global economy flirting with recessionary levels of growth in the coming months.

Remember, recessions are risk managed according to changes in their probability of occurring and not as a simplistic function of whether or not they actually occur. Macro Tourists do the all-or-nothing thing. Data Dependents prefer to focus on everything in between.



Brian Sly


Brian Sly and Company, Inc.