Neil Dutta

• Neil is skeptical of the analysts arguing expectations are becoming unanchored to the upside. Here’s why:
  • Rise in inflation expectations for the year ahead surged to 4.3%. This is driven by close to 25% of respondents seeing inflation going up by 10% or more next year. This is absurd, even if Trump enacts all his tariff policies, inflation would not reach 10%. UMich historically sees wild swings post-election. See below for a chart of uMich 1yr inflation expectations overlaid with Business Inflation Expectations. They typically move in lockstep, but this time uMich skyrocketed while Business expectations ticked slightly up… we’re fading this shift.
  • Businesses are far better at predicting inflation – their expectations remain low at 2.3% according to Atlanta Fed.
  • If inflation expectations were rising, Neil would expect to see workers bidding up their wages which seems unlikely with quits rates at lows and more people being laid off. Additionally, there is no evidence consumers are pulling forward demand to beat higher prices. Rather we’re seeing weaker sentiment and pushing up precautionary saving rather than precautionary spending.
• Neil found this little ditty from the Conference Board’s Consumer Confidence Index… respondents planning a vacation by plane within six months sank to 21.9% - lowest since Dec 2022. Last week we mentioned fading US Aero & Defense, stick with that.
• Interesting Dallas Fed article… some of Neil’s findings…
  • While January inflation often exceeds that of other months, there are instances where it is significantly lower... usually right before or after recessions.
  • Regression analysis (excl. 2020 and 2021) reveals Q1 inflation shows stronger persistence and sensitivity to changes in labor market slack compared to other quarters. Elevated inflation in the preceding year is more likely to persist in Q1. The model predicts 2.7% annualized for Q1, followed by near 2% rest of the year. On Friday, we saw PCE come in at 2.5% for Feb after 2.6% for Jan.
• Initial jobless claims popped this week, but the biggest gainers were Massachusetts, Rhode Island, Illinois, Wisconsin, and Iowa, not DC – though federal workers are counted differently. Claims up 12.6% YoY nationwide, and continuing claims up 3.8% YoY. We’ve seen continuing claims rising at a faster rate than population for some time now, so Neil expects additional upside to unemployment.
• Recall from last week, Neil pointed out weak housing. Now we got pending home sales falling 4.6% following 4.1% drop in December. At 70.6, level of pending home sales index is at all-time low. Neil expects some pricing concessions heading into critical spring selling season.
• ICYMI here is Neil’s report from Monday. Here is a quick summary…
  • Neil’s “no-landing” call for 2023 came based on 4 factors. Rising real incomes, strong housing, high government spending, consensus all in-line with each other on strong growth. Here’s where we are on these 4 today:
    • Slowing real incomes – growth in consumption came from lower personal savings rate
    • Housing market deteriorating
    • State and local governments pulling back on spending
    • Consensus sees no slowdown in sight with median GDP forecast of roughly 2.5%. A couple weeks ago Neil said he is not ruling out a 1 handle on there.

Jeff DeGraaf

• Called for internal weakness on S&P on Monday Morning call… 2.5% drop this week. We are in a non-momentum market where you can be a price seeker, not a price taker. Make sure you are tuning in for the replay to get important nuggets like this.  We think this current correction is more of a beta correction than momentum correction.
• Industrials now in negative trend. First negative trend since mid-2022. Concerned here due to excess SERM – historically been a good indicator on Russell 1000 Industrials. Utilities look fairly strong with a bullish response to recent sellers frenzy, strong trends and momentum and is now our top ranked sector. A bit overbought, but stay overweight. Large Cap > Small Cap. Seasonality also a factor as historically we begin to see strength as we inch towards Q2.
• Discretionary’s bullish relative uptrend remains intact but with minimal momentum. Be selective and stick with areas of strength given the diversity within the sector and mixed macro backdrop.
• Cyclicals suffering versus defensives now. Defensives tend to outperform from now through to October.
• Weak crypto spilling to NDX. In Tuesday’s Weekly Survival Guide, DeGraaf said he thinks we’re headed towards 79-80k on BTC-USD. It went down to just above 78k. He mentioned correction in an uptrend. We think this correction is more about beta than momentum as beta in R1K was at 99^th percentile reading for several months, but now at just 7^th percentile. Many blame a coming recession, but we want to be careful of misinterpreting the reversion of extreme factors for an economic message. If a recession were looming, we would not expect credit to be as stable as it is. We think this reversion is in its final innings as beta usually overshoots to the downside. We are positioning for a bounce in all 3 of S&P, Nasdaq, and Bitcoin.
• Europe and China have not been affected by the recent weakness in S&P 500 and we would continue to increase exposure in both geographies. China has formed a base vs SPX and is now breaking out, while Europe is starting to poke above resistance vs SPX.
• Interestingly, Orange Juice seeing excess negative sentiment. Historically, when we make a bull call in OJ it has gone up every time (28 times).
• DeGraaf was calling for 10-yr to go down to 4.15%, consistent with Neil and Howard’s bullish calls on rates.