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PMI's & Employment Weaken, Staying Short Equities
Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of both the economy and financial markets in real-time. We are currently on the road with client meetings; hence, this week's coverage may be slightly less comprehensive than usual. Nonetheless, our Week Ahead this weekend will resume regular coverage. Here are the top developments that stand out to us:
i. PMI data are beginning to show contraction. Philadelphia Fed Business Outlook Survey officially came in with a contractionary reading of -3. Our PMI Composite now hovers just above contractionary territory, and our systems expect them to make their way into negative territory over the next few months.
ii. Unemployment increased, with jobless claims coming in higher than expected. Mississippi showed the most significant increase in unemployment claims, while Kentucky showed the greatest decrease. Nonetheless, Initial & Continuing Claims are below their long-term trend.
This dynamic of elevated employment continues to hold up incomes; however, the low level of unemployment itself constrains future employment gains. Said differently, tight labor markets create the conditions for loose labor markets. We expect employment to be the last shoe to drop, but its deceleration is a meaningful sign.
iii. Tightening liquidity has taken hold of markets alongside stagflationary nominal growth. We measure trend strength in asset markets across all durations from 1-week to 1-year, and below, we show how this measure of multi-duration momentum tells us that inflation assets (commodities & gold) continue to have strong momentum relative to disinflation assets (stocks & treasuries):
Our systems continue to tell us that such dynamics bode poorly for equities. Resultantly, we have been vocally short US equities & credit. With changing regime dynamics, our systems algorithmic analysis of analogous periods in history tells us that equities can go down massively in this environment (as they have), and the dollar can be a haven:
Resultantly, our ETF Strategy has been long the dollar and short equities and credit and continues to protect and grow capital through these challenging times: