The latest weekly podcast from Renaissance Macro Research to me has some good takeaways.
- Their resident head of economic research Neil Dutta has a good commentary about what he see in the market.
- The head of technical research Jeff deGraaf explain why the recent 10% correction is more sentiment driven then something that will lead to a technical bear market.
- Jeff then explains roughly higher probable way of identifying a cyclical top.
This is my personal notes.
You might find them interesting.
Neil: Egg Prices down 30%! There Should be More Rate Cuts then Less This Year
If you aren’t aware, there was a deadly outbreak of bird flu in the US. To stop the spread, farms have to cull their flocks to prevent disease spread.
The team discussed that prices of eggs are 30% lower. The surprising thing to me was that this will affect 1/10 of the upcoming monthly headline CPI inflation.
RenMac also observe corn, diesel prices coming down, rental prices as well.
At this moment, making any changes and attracting attention is the furthest thing on the FED’s mind.
Economy is currently cooling. Government spending will come down. Growth effects are more dominant than inflation effects.
Market is pricing in a first rate cut in June. The consensus number of cuts are two in a year. The market is pricing in 2-3 cuts based on weighted probabilities. Markets are pricing in 66% probably of the cut in May and the other to cut in the upcoming meeting. Neal thinks we will see more rate cuts. By waiting until June to cut, the Fed is saying they can tolerate more weakness in the economy.
- Labor markets continue to cool.
- The number of work weeks is very low.
- Total income growth is moderating.
- A lot of cyclical areas of the economy, particularly construction is getting worse.
- Last year real consumption growth was 3% (very strong) but real income growth was 1.5%. Net-net, there was a reduction of savings rate (consumption net of income has to come from somewhere). With weakening crypto, tradefi, property markets, most participants will not be lowering their savings rates.
All this will put us in an environment where unemployment will tick higher.
Going into the period where homes are being sold (spring), the home builders are getting more nervous.
Based on what he is reviewing, Neil doesn’t think that the economy is going to get going unless the Fed cuts interest rates. Some non-linear shock to the economy will just spike up the unemployment rate.
These weaker numbers will put the Federal Reserve behind the curve by June.
The US Federal Bank of San Francisco slabbed together a scrape about what people are hearing about the news and it generally lines up pretty well with other sentiment indicators. This index peaked in November 2024. Neal thinks most expect with Trump, you will get tax cuts, de-regulations and tariffs but more in that order. Apparently, they didn’t get it in that order.
The risk is this sentiment will ultimately weigh on consumer spending.
Signs of a Start of a Cyclical Bear?
The investor intelligence is a survey service created in 1963. The survey is design to find out if a subscriber is bullish, bearish, overly bullish, overly bearish. Currently, bears outnumber bulls. This does not happen often and only happens 6% of the time.
This tends to be bullish.
The implicit assumption here is that people have digested the news, probably acted upon the news, and here we are. If this is not a big bear market, it usually make sense to treat this as a buying opportunity.
Jeff would usually advise their clients to “think more optimistically” instead of “think more pessimistically” in similar situations because this survey shows the shift in sentiments currently. Recall that we came into the year where most are giving higher end of the year targets and we have a good equity run and now we have a 180 degrees shift.
Jeff goes on to explain why he doesn’t see a big bear market on the horizon.
RenMac is pretty data focused but they not just look at the data independently. They view the data in the context of a relationship with other critical data. For example, one of the relationship is between equity performance and credit (I seem to hear this one a lot!). If a big bear is around the corner a 5% decline in equity should come with a X% decline in credit. In this regard, the 10% decline in equity we currently observe is far, far, far less than what RenMac is expecting in credit decline. In other words, the credit market is not confirming the equity drawdown. We can conclude what we see right now is more sentiment driven than policy driven.
The naysayers will dispute that usually the credit will deteriorate eventually but from what they observe, RenMac disagrees with this. Usually credit, at worst, is coincidental and hopefully credit tends to lead equity decline. Usually, the people operating in credit only care about getting paid back. The credit people tend to be the pessimistic people as opposed to the equity people.
The financials are also not confirming a big bear market currently. The financials are currently weak but they are not as weak given the overall decline we observe in the markets.
The greatest momentum is generated during the early phase of a bull market making breath thrusts the best way to confirm cyclical events. What are some of the best ways to confirm a new cyclical decline?
It is true that the greatest momentum is generated early in a bull market. That is why breadth trusts [how many stocks are advancing versus declining] is a good way to confirm a cycle advance.
The recent stock market movement in Hong Kong and China are examples of that.
One of the biggest mistakes in this business is if an indicator works at the bottom or at the top, people default the indicator will work in other situations. If something works at the bottom, people think the exact opposite will work at the top.
RenMac’s datawork tells them that a lot of indicators are asymmetrical. They worked well at the bottom, they won’t work in the same or exactly opposite fashion at the top.
RenMac look at things as a sequencing of events.
An overbought situation would not represent a new cyclical decline. What we are looking for is that deterioration, the lack of momentum causing the markets to feel like it is “at a standstill”. RenMac’s Market Cycle Clock helps them to juxtapose inflation and growth, then they will look at whether breadth diverges. Then they look at what is happening to the factors (value, profitability, creddit) and betas. Finding tops are tougher than finding bottoms. Jeff thinks that finding bottoms are much easier.
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