Macro Forecast (2Q22)

Updated as of 5/4/2022

Current Notes

•Fed raised interest rate +50bps, said TWO more +50bp raises on the horizon (day late and a dollar short).

•Yield Curve (10s-2s) stands at +16bps, while the 1Y OIS Forward 10s/2s spread is as deeply inverted as it's ever been.

•NASDAQ had worst month in April since 2008.

•Market is now expecting 10.37 rate hikes by the end of the year.

•Likelihood of Global Quad 4 is rising significantly, with the ECB planning to tighten into 3 straight European Quad 4s (3Q22-1Q23) and the Federal Reserve tightening into Quad 4 now with inflation to decelerate over the next 4 quarters.

•Labor market data still “hot,” but higher frequency inputs of that data are showing signs of slowing… this is the main data point that could cause the Fed to reverse course.

•CFTC data shows a large net LONG position on SPX (+132,044 contracts), which is +82% than the 1Y average, meaning there are potentially more sellers than buyers right now.

Charts

Large caps down big for the year.

Small Caps down even more.

Inflation running high (Oil) while the US Dollar is running too. Despite rampant inflation in US, it is still the place to be compared to the rest of the world.

US Projections

There's no way to sugarcoat it, there is a lot more economic pain ahead, and it is mostly going to be the fault of the Federal Reserve, as they will continue to raise interest rates into an already slowing economy when peak inflation has already passed. You do NOT raise rates into a Quad 4. Last time they did that? 4Q18, when the S&P 500 crashed 20% in short order to finish off the year. That's exactly what we're heading towards as the Fed is backward looking and views the lagging indicators from the labor market as a green light to tighten. However, I expect that we'll start to see signs of the labor market faltering soon, and when that happens, hopefully the Fed will reverse course. If not, expect much more pain across risk assets. They have said they're looking to blow up asset prices to decrease the wealth effect (and thus, decrease spending), and so far they're succeeding.

Quad Projection Map (Hedgeye).

Fed Funds rate vs. SPX return. 4Q18 highlighted (Hedgeye).

Implied rate hikes before the end of the year. They CANNOT do this without blowing up the economy.

Positioning

Last major point: positioning on the SPX and NASDAQ are both still positive, and very positive compared to the past 3 years of data. There are potentially many more sellers than there are buyers, so expect more capitulation especially with earnings set to slow.