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Risks of (-) G (+) I Rising
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: Yesterday, markets chose to favor (+) G exposures, i.e., commodities and equities, and US Treasuries continued to suffer, in aggregate adding up the further strengthening of the (+) G (+) I trend in markets. Our Sugar position benefitted from these moves, but our short position in Communications suffered. Over the last few trading days, equities have recouped a significant amount of momentum, and empirically, this has implied upside from here. However, our alpha generation strategies continue to tell us that the risk-reward setup favors shorting the Communications sector, both from a regime perspective and the risk-return structure. It is also important to note that our Risk Management signals on Sugar are close to flipping, i.e., any further gains will induce signals to reduce positions. To summarize our systems’ current assessment: Our Momentum Monitors show that Equities have recouped a significant amount of trend support, with a current Momentum Score of 79%, the one-week forward returns at this score average 0.38%. Our upgraded Market Regime Monitors show a further strengthening of (+) G (+) I. 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: Yesterday’s ISM manufacturing data came in roughly with consensus expectations and continued its sequential deceleration, adding fuel to the narrative of a “growing but slowing” US economy. The prices paid component of the ISM report showed a slight bounce, suggesting resilience in inflation, which is confirmed by our Inflation Nowcast. The growing threat to the outlook is a period of (-) G (+) I, as inflation shows resilience while growth weakens. To summarize our systems’ current assessment: Yesterday’s economic data left Economic Momentum roughly unchanged, but the sequential slowdown in yesterday’s ISM manufacturing data edged our GDP Nowcast lower to 3%. Recent data has led our CPI Nowcast to decelerate; however, inflation levels continue to remain elevated, suggesting a persistent underlying trend in inflation. 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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