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Long bonds, short communications?
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: Last week, markets decidedly pivoted towards pricing higher inflation. Our systems were well-positioned going into these moves, with our commodity exposures up smartly, alongside gains in bonds. Our short silver exposure fared poorly, but our portfolio signals have pivoted away from the direction for the time being. On Thursday, our systems favored a shorting of the Communications sector; however, this now looks less favorable due to the cumulative size of moves over last week. Price action this week is likely to be decisive in determining a potential regime shift. The primary risk to manage in the current environment is downside equity beta; therefore, assets with low correlations to equity beta and equity shorts are the most value accretive. To summarize our systems' current assessment: Our Market Regime Signal has decidedly moved towards pricing (+) G (+) I, i.e., rising growth and inflation, market regime. Furthermore, (-) G (+) I continued to build support last week, with the 1-month probability rising – markets are confirming high inflation. Consequently, our expected return and risk analysis tell us that the best opportunities are Long: Bonds, Cotton, Lean Hogs, Cattle, Sugar, and Short: Communications. After our Market Regime Signal transition to (+) G (+) I after pricing in (+) G (-) I, the menu of options from a return-on-risk perspective has gotten significantly wider. Both on the long and short sides, emerging opportunities could be value additive. However, our Risk Management Monitors indicate that we can ADD to LONG: Bonds. While the menu of options for the current regime is indeed wide, our risk-management overlay led us to book profits in all exposures except Bonds.
Macro: Markets will receive a comprehensive set of economic data this week—Consumer Confidence, Home Sales, Oil Inventories, Durable Goods Orders, Initial Claims, and Personal Income & Consumption. We will assess the nature of these data to confirm/or deny the deceleration in our systems projections for economic growth. Additionally, we have the FOMC meeting this week, which is likely to be a market-moving event, with markets trying to estimate the timing and size of potential interest rate increases. To summarize our systems' current assessment: The latest economic data that feed our GDP near-casting estimates US GDP growth at approximately 3.2%, a deceleration from the earlier estimate of 3.4%. Our systematic forecasts for our Growth and Inflation Indices point to a turning point in March. Our Liquidity Monitor shows our private and public liquidity measures have declined throughout 2021 due to the leading nature of liquidity; we expect these moves to show in macro and markets in H1 2021.
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.
Click here to enter The Observatory.