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The Observatory is how we systematically track the evolution of financial markets and the US economy in real-time. Due to the strong demand for the product, we will start sharing the beta version of The Observatory (click to download) as we finalize its designs. This will offer a high-frequency resource to those using our systematic macro approach, allowing them to “Observe” the macroeconomy through our quantitative lenses. We will soon be launching the product officially, i.e., with explainer materials and a standardized format. And don’t worry, it’s all still free! Also, make sure to follow us on Twitter for timely updates:
Without further ado, let’s dive into what our systems are telling us:
Markets: Yesterdays' session added significantly to the dominance of (+) G (+) I, with commodities continuing their bull run alongside equities that saw significant support. Our exposure to sugar was a good one; however, our communications short on the equity side suffered. Today, our systems recognize yesterday's strength as an opportunity to reallocate both on the short and long sides. The resilience of the (+) G (+) I regime continues to offer a broad menu of opportunities to exploit, especially with dispersion within asset classes. The elevated level of market-implied pricing of (-) L remains concerning and is a risk we must closely monitor over the next week. To summarize our systems' current assessment: Our upgraded Market Regime Monitors continue to confirm the dominance of (+) G (+) I. After yesterday's market pricing, (+) G (+) I is again priced firmly; however, the looming threat of (-)L remains. Equities (-6%), commodities (-18%), and gold (-16%) all fall during (-) L on an annualized basis. Our Momentum Scores show that momentum Equities has again bounced and remains elevated, alongside Commodities and Gold. Treasuries, however, continue to have poor momentum support. Consequently, our expected return and risk analysis tell us that the best opportunities are Long: Bonds, Cotton, Lean Hogs, Cattle, Sugar, and Short: Communications. However, our Risk Management Monitors indicate that we can ADD to LONG: Sugar and SHORT: Communications. We can REDUCE our LONG: Cotton, Lean Hogs, and Cattle. Our Expected Return Strategy has exited these positions and remains LONG: Sugar & SHORT: Communications.
Macro: Today, we will receive data from Markit PMIs, Construction Spending, Job Openings, and ISM survey data. In particular, ISM survey data tends to be equity market moving due to its close correlation with equity earnings. Currently, our systems are flagging the resilience of inflationary measures, which were projected to begin their descent over the next two months. While indeed, a deceleration has occurred in our Inflation Nowcast, strength in industrial, metals, food, and oil prices all continue to keep our inflation estimates elevated. This resilience in the underlying inflation trend suggests that we could move toward an environment where growth decelerates before inflation, i.e., a (-) G (+) I regime. To summarize our systems' current assessment: Economic Momentum still sits in an uncomfortable zone. Yesterday's PMI data contributed to modestly higher momentum. The deceleration in growth is extremely close on the forecast horizon; our systems expect that growth will begin its descent in earnest in March. Our Inflation Nowcasts shows resilience in inflation levels, potentially pushing its deceleration to April.
The future is dynamic, and our systems adjust as new information is available. Our bias is to allocate for the existing regime while trying to peek around the corner to what the future may hold. Finally, we optimize these views to minimize portfolio risk, resulting in our trading signals. We show all this in the document below.
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