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We visualize the simulated return path for the program below:

To today’s note. Our observations are as follows:

• Macro assets have experienced a geopolitical shock in the form of the war in Iran, resulting in a shift in macro price trends to a decidedly inflationary cross-asset trend environment.

• The business cycle remains in an expansion, pressures on monetary policy to tighten have risen, and capacity utilization remains strong.

• Our forward-looking macroeconomic regime probabilities indicate a predominance of rising inflation outcomes.

• A procyclical allocation looks attractive, but with inflationary tilts.

Let’s begin sharing the data that drives our current assessment of the macro regime and our subsequent risk management and positions.

Macro Trend Monitors

Asset prices in aggregate reflect changes in conditions relative to expectations. As such, carefully monitoring macro market trends is an integral part of evaluating conditions in the macroeconomy. To do this, we use our macro trend monitors, which we share here. We begin with stocks:

Equity trends are maximally negative now. Next, we turn to bond market trends:

Bond market trends are also maximally negative. We now move on to broad commodity aggregates:

Commodity trends remain extremely strong amid geopolitical tensions. Next, we examine our macro trend signals for Gold:

Gold trends are mixed, but positive. Finally, we examine our trend signals for Bitcoin:

Bitcoin remains in a material downtrend.

Trend following is a good solution for many investors, as it is intuitive and provides solid risk control. However, the signals used in trend following are fairly basic, so we don’t think there should be a high barrier to entry for basic trend-following strategies. As such, we will provide access to a Basic Trend Program at zero cost to users for a portfolio of Stocks, Gold, Bitcoin, and Bonds. The program uses three layers of portfolio construction: a risk-parity base, a two-speed trend overlay, and a 15% maximum volatility cap. These layers are applied versus a benchmark beta of 60% Stocks, 15% Bonds, 15% Gold, and 10% Bitcoin. We will release a methodology note soon, but in the meantime, we share the summary statistics and current positioning below:

This program currently has a 0% max long position in Stocks, a 0% max long position in Bonds, a 50% max long position in Gold, and a 50% max long position in Bitcoin.

In risk-parity terms, this translates to Stocks: 0%, Bonds: 0%, Gold: 7%, Bitcoin: 5%, and Cash: 89%. This reflects an expected volatility target of 4%.

Please note that these positions do not directly reflect the Prometheus trend measures, which are relevant to our proprietary and paid programs. The positions in our Basic Trend Program use an equal split between 1-month and 6-month trends.

While basic trend following is a strong solution for many investors, there is a world of signals and strategies beyond it. We begin to address these in the following sections.

Macro Cycle Monitor

Our systems aggregate a wide range of fundamental economic data to produce timely, proprietary estimates of the current stages of the macro cycle. We share some of these gauges, starting with our signals for business cycle conditions:

Our latest readings continue to indicate an expanding business cycle. Next, we turn to monetary policy pressures. Our monetary policy gauge measures the pressures on the Federal Reserve to move monetary policy based on the trade-off between growth and inflation data. The higher our readings, the more pressure there is to hike policy rates. The lower the gauge, the more pressure there is to cut policy rates.

Pressures on monetary policy to tighten have further increased due to the energy price shock.

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We visualize the simulated performance of the systems that drive this strategy below:

This strategy has performed well through the most recent market volatility, avoiding the volatility of the 60/40 portfolio. We visualize the inception-to-date returns of the program and the accompanying drawdown:

Our observations are as follows:

• The economy remains expanding, with inflation moderating, and liquidity ample.

• Macro market volatility has declined; however, expected market returns remain compressed.

• While economic conditions would indicate positive asset exposures, market pricing remains unattractive across assets. Despite the significant recovery of equity markets, caution remains warranted for asset allocators.

Reflecting these dynamics, we share the latest positions from our Prometheus Asset Allocation Program:

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We visualize the simulated performance of the systems that drive this strategy below:

This strategy has performed well through the most recent market volatility, avoiding the volatility of the 60/40 portfolio. We visualize the inception-to-date returns of the program and the accompanying drawdown:

Our observations are as follows:

• Market volatility remains elevated across markets, reducing risk-adjusted return opportunities for asset allocators.

• Assets are broadly offering little by way of expected returns given this cross-asset volatility.

• While market volatility remains elevated, the economy remains strong domestically, with strong business cycle conditions. However, tariff prospects continue to weigh on forward-looking measures of growth.

Reflecting these dynamics, we share the latest positions from our Prometheus Asset Allocation Program:

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Our observations are as follows:

• The latest CPI data disappointed consensus expectations and drove a deceleration in the three-month inflation trend. This print was dominated by energy and transportation.

• Energy category, especially motor fuel, was the primary drag. Transportation inflation decreased with falling used vehicle prices. Furthermore, housing inflation continued to slow, consistent with declining nominal activity in the sector.

• Zooming out, nominal spending remains elevated relative to debt service costs. However, weak industrial production complemented by a modestly looser labor market continues to dampen inflation pressure.

• Overall, the Fed will only cut rates based on a durable downward trend in inflation. While this is a positive beginning, we are still a ways off from the Fed’s policy target.

• In the context of markets, neutral inflationary pressures are a headwind for bonds. This is reflected in our Prometheus Asset Allocation Strategy.

In March, headline CPI came in at -0.05 %, disappointing consensus expectations of 0.1%. Core CPI contributed 0.05% to this print, with food & energy contributing the remaining -0.1%. This print drove a deceleration in the three-month trend. Below, we display the sequential evolution of the data:

The primary drivers of CPI inflation are food, energy, transport, and shelter. These components have contributed 0.06% (Food), -0.14% (Energy), -0.1% (Transport), and 0.08% (Shelter), respectively. We display these contributions to the -0.05% change in CPI below:

For further perspective, we show how these areas have accounted for the majority of variation in inflation both economically and statistically. Over the last year, food, energy, transport, and housing have contributed 0.4% (Food), -0.22% (Energy), 0.23% (Transport), and 1.43% (Shelter), respectively, to the change in inflation. We display these principal drivers of inflation over time below:

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This strategy has performed well through the most recent market volatility, most of the 60-40 portfolio drawdowns. We visualize the simulated performance of the systems that drive this strategy below:

Our observations are as follows:

• Our Asset Allocation program saw gains of 1.45% over the last month on the back of commodity exposures, side-stepping the significant drawdown in stocks and outperforming bonds.

• The economy remains expanding, and inflationary pressures are likely to persist, with the Fed unlikely to ease monetary policy.

• Macro market trends have moved to favor an inflationary backdrop with stocks trending lower, bonds mixed, and commodities resilient.

• Across macro markets, we see compressed expected returns relative to cash, making active macro investing an integral component of navigating today’s backdrop.

Find attached our latest video update:

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This strategy has performed well through the most recent market volatility, avoiding the volatility of the 60/40 portfolio:

We visualize the simulated performance of the systems that drive this strategy below:

Our observations are as follows:

• Our Asset Allocation program saw gains of 1.45% over the last month on the back of commodity exposures, side-stepping the significant drawdown in stocks and outperforming bonds.

• The economy remains expanding, and inflationary pressures are likely to persist, with the Fed unlikely to ease monetary policy.

• Macro market trends have moved to favor an inflationary backdrop with stocks trending lower, bonds mixed, and commodities resilient.

• Across macro markets, we see compressed expected returns relative to cash, making active macro investing an integral component of navigating today’s backdrop.

Our outlook remains one of an expanding economy with elevated uncertainty. Consistent with our systematic outlook, the Prometheus Asset Allocation Strategy is currently positioned as follows

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Our observations are as follows:

• Timely readings of GDP growth have declined significantly in recent months, but trade data distortions are driving this weakness. After adjusting for these distortions, we continue to find GDP growth expanding at a modest pace.

• Looking across economic data, our systems see favorable domestic conditions, an expanding business cycle, and positive earnings expectations pressures.

• The combination of these dynamics supports stocks and commodities over bonds.

• Our Asset Allocation Program avoided losses in equities and bonds this month as the program recognized the weak expected return profiles in both assets. The current constellation of growth conditions makes our systems more inclined to add back equity exposure than otherwise.

Let us dive into the data driving this assessment.

The latest timely reads of economic data have placed GDP in contractionary territory. In particular, trade data has shown significant volatility and negatively, dragging down GDP estimates. Below, we show how real GDP, unadjusted for the technical nuances of the recent data, has pushed our estimates into contraction:

While this number may look alarming at the surface level, almost all the weakness came from increased import activity. Excluding trade, GDP growth is at a healthy 1.7% versus the one-year prior.

All of the drag to the headline GDP numbers is coming from volatile trade inputs. In January, U.S. imports of nonmonetary gold surged from $13.2 billion in December to $32.6 billion. This accounted for nearly 60% of the widening goods trade deficit, which resulted in the downward pressures on implied GDP growth. However, it's important to note that the Bureau of Economic Analysis (BEA) typically excludes gold from GDP calculations because gold functions primarily as a financial asset rather than a consumable good or service. We visualize how good imports were overstated mainly due to these outsized gold import numbers:

As such, while the goods trade balance may indicate weakness in GDP, it is unlikely to enter the official statistics. This outcome is consistent with intuition; financial asset flows are not economic output.

Adjusting our GDP estimates to strip out the effect of gold imports, we find that picture to be more positive:

After accounting for these trade-based anomalies, our systems have placed Real GDP growth at 0.65% compared to the previous year. We dive into the composition driving this print.

In February, GDP came in at -0.34% versus the prior month. Below, we show the weighted contributions to the most recent one-month change in real GDP, along with the recent history of month-on-month GDP. Addtionally, we show the contribution by sector to monthly GDP in the table below:

In February, real consumption spending increased by 0.14%. Over the last year, consumption has added 2.01% to GDP growth of 0.65%.

In February, real gross investment increased by 0.12%. Over the last year, investment has added 0.12% to GDP growth of 0.65%.

In February, real government expenditures increased by 0.01%. Over the last year, government spending has added 0.23% to GDP growth of 0.65%.

In February, real export revenues decreased by -0.17%. Over the last year, exports have subtracted -0.24% from GDP growth of 0.65%.

In February, real import expenditures decreased by -0.44%. Over the last year, imports have subtracted -1.47% from GDP growth of 0.65%.

Additionally, we show the composition of monthly estimates of nominal GDP, broken into real GDP growth and inflation. Our latest estimates place nominal GDP at 3.39% versus one year prior, with real GDP growth of 0.65% and inflation of 2.74%:

For further insight into whether GDP conditions are consistent with recessionary pressures, we aggregate macroeconomic indicators, consistent with the NBER methodology of recession classification, into a recession probability monitor. This gauge gives us a real-time understanding of developing recessionary pressures. Currently, recession probabilities are at 13%:

Finally, we zoom out to offer what the mosaic of economic data say about the pervasiveness of GDP growth for the breadth of the latest data available through January. Our GDP Nowcast economic data across 75 measures of real growth conditions to understand the economic conditions in a timely manner. We share both the current level of the nowcast in blue, along with a diffusion index of the underlying components in red. Currently, 66% of subcomponents are rising, consistent with an expansion:

Below, we visualize the prospective paths of real GDP growth over the next twelve months using our data trajectory monitor. We share two processes. First, we extrapolate the current trend in the data to visualize the prospective trajectory of GDP based on the current trend. Additionally, we share our forward-looking estimates for real GDP growth based on our proprietary process:

As we can see above, our forward-looking estimates are looking through the recent weakness in economic activity and projecting a rebound in output.

This positive outlook is corroborated by the latest readings from our Business Cycle Monitor. The business cycle is the cyclical variation of economic growth over time, driven by changes in business investment. These changes in business investment are a function of current and expected income, which determine output and employment. Extremes in business cycle conditions create serial correlations in the economy and markets. Extremely strong business cycle conditions result in inflation, while extreme weakness in business cycles results in recession. These extreme environments are highly influential on market trends. As such, we think a consistent, comprehensive, and timely assessment of these dynamics is key to navigating market cycles. Combining the data on business investment, capital-intensive output, labor conditions, and their underlying trends, we can create a forward-looking estimate for GDP growth. The purpose of this estimate is not to be extremely precise on future GDP growth but rather to give us early indications of when we may enter into a business cycle downturn while still offering some forward-looking insight into its prospective GDP impact. We visualize this below:

Our Business Cycle Model continues to show positive readings. We can use these insights to get a better understanding of current earnings expectations for the equity market as well.

Equity prices over time are determined by changes in earnings expectations. As such, carefully monitoring changes in the drivers of earnings expectations can give us insights into the price pressures at play in equity markets. Earnings expectations are driven by a combination of financial conditions and fundamental macro forces. Combining these measures, we create a timely gauge of earnings expectations. We visualize this below:

As we can see, our gauges have offered a timely and leading insight into cyclical changes in earnings expectations. Today, S&P 500 earnings expectations are minimally above our estimates.

Thus, while measures of equity trends have deteriorated meaningfully, our systems continue to suggest that equities and commodities will be supported by a positive nominal and real growth backdrop. Whether or not our systems choose to reallocate to equities remains to be seen. The move to avoid both stocks and bonds in March proved to be an additive one. As always, we will provide new Asset Allocation positions at the beginning of the coming month.

Until next time.

Our primary takeaways are as follows:

• The latest CPI data disappointed consensus expectations and drove a deceleration in the three-month inflation trend. This print was dominated by shelter and transportation.

• The primary drag was the public transportation category, particularly airline fares. New vehicles inflation also came in lower, but used vehicle inflation continues to rise. Additionally, housing inflation continued to slow, consistent with the declining nominal activity in the sector.

• Zooming out, nominal spending potential remains elevated due to low monetary policy pass-through effect. However, weak industrial production complemented with a modestly looser labor market reduces pressure on inflation.

• In the context of markets, neutral inflationary pressures are a headwind for bonds. This is reflected in our Prometheus Asset Allocation Strategy.

In February, headline CPI came in at 0.22%, disappointing consensus expectations of 0.3%. Core CPI contributed 0.18% to this print, with food & energy contributing the remaining 0.03%. This print drove a deceleration in the three-month trend. Below, we display the sequential evolution of the data:

The primary drivers of CPI inflation are food, energy, transport, and shelter. These components have contributed 0.02% (Food), 0.02% (Energy), -0.04% (Transport), and 0.1% (Shelter), respectively. We display these contributions to the 0.22% change in CPI below:

For further perspective, we show how these areas have accounted for the majority of variation in inflation both economically and statistically. Over the last year, food, energy, transport, and housing have contributed 0.34% (Food), -0.04% (Energy), 0.41% (Transport), and 1.52% (Shelter), respectively, to the change in inflation. We display these principal drivers of inflation over time below:

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Macro Mechanics

What Is Liquidity?

Prometheus Research

14 October 2024

The best information we can ever provide investors is the mechanics of how we think about macro conditions over time rather than what we think about them at any particular time.

Read full story

Turning to today’s note.

Our primary takeaways are as follows:

• Liquidity conditions remain neutral.

• Policy liquidity remains under pressure, driven by declining reserve balances. However, private sector liquidity is starting to see initial signs of recovery, with repo activity remaining stable and corporate issuance improving.

• In the context of markets, neutral liquidity conditions are a support for risk assets. Consequently, our Asset Allocation strategy remains long commodities.

Liquidity is the flow of cash and cash-like assets that potentiate spending in the economy. Liquidity is determined by nominal dollar values and the relative risk profile of the various sources of liquidity. We begin our tracking of liquidity conditions by sharing the weighted growth rate of the major sources of liquidity: reserves, treasury bills, commercial paper, & repurchase agreements.

As we can see above, the current liquidity dynamics are primarily driven by repo conditions after being dominated by treasury bill issuance. Furthermore, conditions have been trending downwards and remain at the verge of a contraction.

We zoom on each of these components, starting with reserve balances. Reserve balances held by financial institutions at the Fed are a function of the gross liquidity supplied by the Fed through the asset side of their balance sheet relative to the gross liquidity absorbed by inflows into the liability side of their balance sheet. We visualize the asset side below:

The Fed continues to roll off its assets.

Additionally, we examine the changes in major liabilities of the Fed, i.e., the liquidity drain on the financial sector:

Nonetheless, while the treasury general account has decelerated, reverse repo has remained stable. This is additive for reserves, which is positive on liquidity.

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We’ve made the fundamental section of the video free to watch. You can find the full video available for purchase below as well.

Our primary takeaways are as follows:

• Our Asset Allocation program saw gains of 0.89% over the last month based on treasury exposure.

• Our macro gauges show that we are fundamentally in an environment of slowing growth, neutral inflation, and stable liquidity.

• Stocks, bonds, and commodities all offer little value in the form of carry today. Nonetheless, commodities and equities have more fundamental support than bonds.

• Given these factors, the Prometheus Asset Allocation Strategy is currently positioned as follows:

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Our primary takeaways are as follows:

• Our Asset Allocation program saw gains of 0.89% over the last month on the back of treasury exposure.

• Our macro gauges show that we are fundamentally in an environment of slowing growth, neutral inflation, and stable liquidity.

• Stocks, bonds, and commodities all offer little value in the form of carry today. Nonetheless, commodities and equities have more fundamental support than bonds.

• Given these factors, the Prometheus Asset Allocation Strategy is currently positioned as follows:

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Our primary takeaways are as follows:

• Our systems place real GDP growth at 1.15% versus one year prior and remain in a sequential downtrend.

• While investment remains in a downtrend, we have begun to see some green shoots. Particularly, industrial equipment, motor vehicles, and intellectual property have all inflected upwards. It remains early in these moves, but if continued, they could be meaningful for the outlook.

• Overall recession probabilities remain muted, broad-based measures of growth remain stable, and our forecast for future real growth has accelerated. In the context of markets, this is a support for stocks and commodities, but a headwind for bonds, as reflected in our Asset Allocation strategy.

Before, we delve deeper in to the note, you can access our latest asset class views below:

For the latest data through January, our systems place Real GDP growth at 1.15% versus one year prior. Below, we show our monthly estimates of Real GDP relative to the official data:

In January, GDP came in at -0.49% versus the prior month. Below, we show the weighted contributions to the most recent one-month change in real GDP, along with the recent history of month-on-month GDP. Additionally, we show the contribution by sector to monthly GDP in the table below:

In January, real consumption spending decreased by -0.12%. Over the last year, consumption has added 2.18% to GDP growth of 1.15%.

In January, real gross investment increased by 0.17%. Over the last year, investment has added 0.26% to GDP growth of 1.15%.

However, upon looking at the underlying components, we see a sequential acceleration in intellectual property and industrial equipment investment. This is a support for nominal growth conditions. Below we show the contribution of IP investment to NGDP growth on a yearly basis:

Next, we show the contribution of industrial equipment to NGDP:

Lastly, we analyze the contribution of motor vehicles. Transportation spending is a key barometer of business cycle conditions. Currently, transportation spending has begun to improve, showing signs of cyclical expansion in the broader economy.

In January, real government expenditures increased by 0.01%. Over the last year, government spending has added 0.24% to GDP growth of 1.15%.

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• The latest CPI data surprised consensus expectations and drove an acceleration in the three-month inflation trend. This print was dominated by shelter and transportation.

• Elevated nominal spending relative to interest expense remains a significant upside pressure for inflation.

• The constellation of these factors pose significant challenge to the Fed’s ability to ease policy further.

• In the context of markets, neutral inflationary pressures are a headwind for bonds. This is reflected in our Prometheus Asset Allocation Strategy.

In January, headline CPI came in at 0.47%, surprising consensus expectations of 0.3%. Core CPI contributed 0.36% to this print, with food & energy contributing the remaining 0.11%. This print drove an acceleration in the three-month trend. Below, we display the sequential evolution of the data:

The primary drivers of CPI inflation are food, energy, transport, and shelter. These components have contributed 0.05% (Food), 0.07% (Energy), 0.17% (Transport), and 0.13% (Shelter), respectively. We display these contributions to the 0.47% change in CPI below:

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Macro Mechanics

What Is Liquidity?

Prometheus Research

14 October 2024

The best information we can ever provide investors is the mechanics of how we think about macro conditions over time rather than what we think about them at any particular time.

Read full story

Turning to today’s note.

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Our primary takeaways are as follows:

• Liquidity conditions have tightened sequentially.

• Policy liquidity has begun to decline, driven by declining reserve balances. Further, private sector liquidity is also starting to see initial signs of stress, with repo activity and commercial paper issuance decelerating

• While declining liquidity broadly pressures assets, the confluence of macro conditions is likely to weigh on all assets.

Liquidity is the flow of cash and cash-like assets that potentiate spending in the economy. Liquidity is determined by nominal dollar values and the relative risk profile of the various sources of liquidity. We begin our tracking of liquidity conditions by sharing the weighted growth rate of the major sources of liquidity: reserves, treasury bills, commercial paper, & repurchase agreements.

As we can see above, the current liquidity dynamics are primarily driven by repo conditions after being dominated by treasury bill issuance, and are starting to show stark signs of contraction.

We zoom on each of these components, starting with reserve balances. Reserve balances held by financial institutions at the Fed are a function of the gross liquidity supplied by the Fed through the asset side of their balance sheet, relative to the gross liquidity absorbed by inflows into the liability side of their balance sheet. We visualize the asset side below:

The Fed continues to roll off its assets.

Additionally, we examine the changes in major liabilities of the Fed, i.e,. the liquidity drain on the financial sector:

While the treasury general account has begun to see stabilization, reverse repo has begun to decelerate sequentially. This is a drain on reserves, which is a drain on liquidity.

We combine these perspectives to show the drivers of changes in reserve balances over time.

We remain in the highest period of treasury bill supply since the early 2000s.

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Our primary takeaways are as follows:

• Our Asset Allocation program saw gains of 1.65% over the last month on the back of equity exposure.

• Our macro gauges show that we are fundamentally in an environment of slowing growth, neutral inflation, and falling liquidity.

• Relative to macro fundamentals, equity markets are rich, bond markets are neutral, and commodity markets are neutral.

• Our market regime monitors show a dominance of liquidity in driving cross-asset trends.

• There is a limited risk of a recession, a modest risk of a hiking cycle, and a modest risk of a disinflationary downturn. As such, the Prometheus Asset Allocation Strategy is currently positioned

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Our primary takeaways are as follows:

• Our Asset Allocation program saw gains of 1.65% over the last month on the back of equity exposure.

• Our macro gauges show that we are fundamentally in an environment of slowing growth, neutral inflation, and falling liquidity.

• Relative to macro fundamentals, equity markets are rich, bond markets are neutral, and commodity markets are neutral.

• Our market regime monitors show a dominance of liquidity in driving cross-asset trends.

• There is a limited risk of a recession, a modest risk of a hiking cycle, and a modest risk of a disinflationary downturn. As such, the Prometheus Asset Allocation Strategy is currently positioned

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• Our systems place real GDP growth at 0.93% versus one year prior. On a monthly basis, this sequential deceleration was primarily driven by neutral consumption and negative trade dynamics. However, it is worth noting that the trade data is extremely volatile and may over-emphasize the underlying pressures.

• Nonetheless, zooming into cyclical components of the economy, such as real estate and industrial manufacturing, we continue to see ongoing weakness. While nominal sales remain subdued, wages continue to remain high.

• The constellation of these factors suggest significant headwinds for future growth conditions. In the context of markets, our Alpha Strategies remains short stocks and commodities.

For the latest data through December, our systems place Real GDP growth at 0.93% versus one year prior. Below, we show our monthly estimates of Real GDP relative to the official data:

In December, nominal GDP increased by 0.2%, with real GDP growth of -0.13% and inflation of 0.34%. Below, we show the weighted contributions to the most recent one-month change in real GDP, along with the recent history of month-on-month GDP. Additionally, we show the contribution by sector to monthly GDP in the table below:

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• The latest CPI data surprised consensus expectations and drove an acceleration in the three-month inflation trend. This print was dominated by energy inflation, particularly motor fuel and gas prices.

• Macro pressures continue to show potential for inflation in aggregate nominal spending; however, labor markets and production have begun to see significantly lower inflationary pressures.

• While the constellation of these factors points to neutral inflation, current headline dynamics pose significant pressures to the Fed’s policy to ease monetary policy conditions.

• In the context of markets, neutral inflationary pressures are a significant headwind bonds. This is reflected in our Prometheus Asset Allocation Strategy.

In December, headline CPI came in at 0.39%, disappointing consensus expectations of 0.4%. Core CPI contributed 0.18% to this print, with food & energy contributing the remaining 0.21%. This print drove an acceleration in the three-month trend. Below, we display the sequential evolution of the data:

The primary drivers of CPI inflation are food, energy, transport, and shelter. These components have contributed 0.04% (Food), 0.17% (Energy), 0.07% (Transport), and 0.09% (Shelter), respectively. We display these contributions to the 0.39% change in CPI below:

For further perspective, we show how these areas have accounted for the majority of variation in inflation both economically and statistically. Over the last year, food, energy, transport, and housing have contributed 0.33% (Food), -0.03% (Energy), 0.39% (Transport), and 1.66% (Shelter), respectively, to the change in inflation. We display these principal drivers of inflation over time below:

We now zoom back into the most recent print. Inflation was somewhat mixed with Motor fuel contributing most positively, and Recreation Goods contributing most to weakness. We display the largest movers to the upside and downside below:

We now zoom into our major categories of food, energy, transport, and shelter. We begin with food. The most recent data showed that food inflation was largely positive, with cereals and bakery products showing the most relative strength and nonalcoholic beverages and beverage materials showing the most weakness.

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If you’re unfamiliar with our approach to macro, we have a series of notes that offer our mechanical understanding of macro conditions. You can find these Macro Mechanics notes below:

• Growth

• Inflation

• Liquidity

• Integrating Growth, Inflation, & Liquidity

• What is Beta?

• What is Alpha?

• Where Do Recessions Come From?

• What’s Priced In? The Bridge Between Beta & Alpha

• What Drives Bond Markets?

• What Drives Stock Markets?

• Whats Drives Commodities

We highly recommend using these resources to understand our macro-investing approach. They will make the content below much more digestible. Let’s dive in.

Prometheus Asset Allocation: Positioning

Prometheus Asset Allocation is currently positioned as follows: SPY (56%), TYA (0%), DBC (0%), and Cash (44%). This allocation is consistent with a long-term expected volatility of 10%. A 5% loss across all positions would lead to a -2.78% loss for the portfolio. Positions visualized below:

Our asset allocation program continues to see stocks as the best asset among stocks, bonds, and commodities. However, across our systematic strategies, we see signs of prospectively weaker equity markets than in the recent past. The Prometheus Asset Allocation program is designed to have a constant 10% volatility exposure to risk assets, so our systems maintain a relatively larger exposure than our other programs. This program seeks to be long assets, and equities look most attractive at the current junction. We dive into the data driving these allocations in the next section.

Macro Gauges: Growth, Inflation, & Liquidity

Our macro-monitors are how we comprehensively track conditions across growth, inflation, and liquidity across hundreds of variables. We center our analysis around these variables because they are the principal drivers of assets over a six-to-eighteen-month period. Our approach is to track economic and financial market conditions to get the best probabilistic understanding of how macro conditions will evolve.

We start with growth. Our Growth Gauge aggregates data across hundreds of economic growth variables to create a timely read of forward-looking macro pressures on GDP growth. We show this below:

Pressures on GDP growth remain for GDP to slow, which we expect to flow through to popular nowcast measures over the next few months.

Turning to inflation. Our Inflation Gauge, which, much like our Growth Gauge, aggregates data across hundreds of economic growth variables to create a timely read of forward-looking macro pressures on future inflation.

Inflationary pressures are now neutral, suggesting that inflation can continue at its current pace.

Turning to liquidity, our liquidity gauge aggregates measures of liquidity across the public and private sectors, representing trillions of dollars of liquid assets. It allows us to estimate the potential for risk-taking in the financial system in real-time.

Today, liquidity conditions have begun to show a modest slowing, consistent with the recent volatility in repo markets.

In summary, growth will likely continue slowing, inflation will be neutral, and liquidity will fade. In the next section, we will take a deeper look at the underlying GDP conditions driving these changes.

GDP Monitor: Nowcast, Recession Risk & Forecast

Our GDP forecasts economic data across 75 measures of real growth conditions to understand the economic conditions in a timely manner. We show the composition of monthly nominal GDP estimates, broken into real GDP growth and inflation.

Our latest estimates place nominal GDP at 4.19% versus one year prior, with real GDP growth of 1.67% and inflation of 2.52%.

We show the contributions to the monthly nowcast numbers below, which compound into the yearly real GDP numbers:

As we can see above, investment data has begun to slow over the last quarter, dragging on our estimates of GDP growth. We now zoom out to understand the broader context by major GDP category.

We state with consumption. Consumption is the dominant driver of economic growth over time. We visualize the ongoing pace of consumption growth and the diffusion of the underlying sectors:

Consumer spending growth is expanding across almost all major sectors. This dynamic is almost entirely inconsistent with a recession.

Turning to investment. The dominant driver of business cycle conditions is gross investment. This investment comes in the form of construction, equipment, and inventory purchases.

Currently, construction spending has begun to slow, alongside equipment spending. Intellectual property investment remains resilient. Inventory accumulation has begun to slow as well. This is a significant weight on overall economic growth.

Next, we turn to government spending. Government spending can be an important part of economic growth but is largely secondary to private-sector spending.

Government spending is currently on the rise and has been elevated relative to its recent history and to current business cycle conditions—nonetheless, government spending accounts for a small portion of GDP.

We move to export data next. Export activity is largely driven by goods output and is a function of domestic production. While exports flow to business topline, their impact on GDP is limited by the drag that comes from imports.

Export activity indicates weak goods output conditions, with weak industrial supplies exports and modestly stronger capital goods exports.

Finally, we turn to the imports. Like exports, imports are dominated by conditions in the goods economy as a function of domestic consumption and production conditions. However, unlike exports, imports drag GDP despite being indicative of economic conditions.

Currently, imports have begun to slow as business investment slows.

In summary, investment activity has weakened, but consumption and government spending are keeping economic growth going strong.

Given the breadth of data our Nowcast covers, we can look across all of the underlying components to better understand the composition of growth. We share both the current level of the nowcast in blue, along with a diffusion index of the underlying components in red:

GDP breadth has begun to weaken, largely driven by weakness in investment-related items.

These changes modestly increase recession risk. For a timely insight into recessionary pressures, we aggregate macroeconomic indicators, consistent with the NBER methodology of recession classification, into a recession probability monitor. This gauge gives us a real-time understanding of developing recessionary pressures.

Recession probabilities are still muted but have risen to 26%.

Finally, we can put together all these measures to map the various potential paths for GDP growth. Our data trajectory monitor allows us to visualize the range of outcomes for economic trends over the next year. We share two prospective paths. First, we extrapolate the current trend in the data to visualize the prospective trajectory of GDP based on the current trend. Additionally, we share our forward-looking estimates for real GDP growth based on our proprietary process:

Thus, while GDP has begun to deteriorate, our systems expect slightly better growth than recent weakness implies. Our systems expect real GDP growth of 1.4% over the next year, which is still a material slowing.

What’s Priced In: Discounting

We’ve outlined our broad economic views here. The value of these views is relative to what’s discounted in asset prices. If the views are priced in, there are no significant investment opportunities. We share some lenses we use to evaluate what’s priced in.

We start with equities. Earnings expectations drive equity markets. Earnings expectations are largely a function of the ongoing macroeconomic impulse experienced by businesses. As such, earnings expectations largely align with realized profits, though they can lag occasionally, creating opportunities.

Earnings expectations remain rich to our fundamental macro estimates. Our systems expect the economy to slow, but earnings expectations continue to rise. The mispricing is growing.

Moving to commodities. What’s priced into commodities is reflected in the commodity term structure. The commodity term structure is a function of demand and supply forces for commodities, shaped by the ongoing inflationary trend in markets. While commodity term structure is related to the ongoing pace of commodity inflation, it can diverge meaningfully based on cyclical circumstances.

Commodity markets continue to price a more inflationary backdrop than warranted by macro pressures. This dynamic will continue to weigh on commodities.

Finally, we turn to treasury bonds. Expectations of monetary policy drive treasuries. Policy expectations are a function of how fundamental growth and inflation data evolve relative to the Fed’s objectives of full employment, price stability, and financial stability. The more divergence between the realized outcomes and the Fed’s objectives, the more policy pressure to move interest rates.

Employment, price stability, and financial stability are now consistent with a modest easing of monetary policy, which is largely reflected in treasury markets.

Overall, equities and commodities continue to look rich. Bonds are now looking closer to neutral.

What’s Priced In: Regime Probabilities

Markets are continuously pricing future probabilities, and using our understanding of cross-asset pricing; we can infer the probability that markets pricing is in rising or falling growth, inflation, or liquidity conditions. This process of regime recognition allows us to understand the probability of a macroeconomic environment as evidenced by cross-asset movements— which allows us to identify the dominant and durable trend in markets. This feature is critical as it allows us to visualize if market probabilities are moving to confirm our expected outlook for the macro-economy on the margin, thus creating opportunities to potentially buy assets as they rise and short them as they fall.

Let's start with market-implied probabilities of rising growth:

The odds of a rising growth regime remain flat, though still comfortably above the 50% threshold. This modest support for risk assets.

Turning to market-implied probabilities of rising inflation:

Inflationary odds remain neutral, consistent with the underlying macro fundamentals.

Turning to market-implied probabilities of rising liquidity.

Liquidity conditions continue to power ahead, weighing on bonds but benefitting equities and credit. The situation remains at odds with fundamental dynamics, but there is no trend to fight.

Overall, our market regime probabilities show a dominance of rising liquidity conditions, which is generally favorable for stocks and commodities relative to bonds. However, fundamentals do not support this regime, suggesting a potential lack of regime persistence.

Asset Class Signals: Stocks, Bonds & Commodities

We’ve shared our assessment of current fundamentals, forecasts for the future, evaluation of market discounting, and quantification of cross-asset pricing. Our systems combine these dimensions to create asset class signals for stocks, bonds, and commodities. These signals have largely been good predictors of future returns. We visualize the expected one-day returns based on our signal strength, which was simulated back until 1965:

Please note that these signals are from our ETF Portfolio program (weekly)and are much more high-frequency than those applied to the Asset Allocation program (monthly). However, they offer important informational value and can often front-run the asset allocation program.

Starting with stocks.

Equity markets are experiencing mixed signals. Macro fundamentals are modestly negative, while market regime dynamics are somewhat positive. Overall, high-frequency signal strength is modestly positive.

Turning to bonds.

Bond markets are experiencing mixed signals. Macro fundamentals are supportive, while market regime dynamics are somewhat negative. Overall, high-frequency signal strength is modestly positive.

Closing with commodities.

Commodity markets are experiencing consistent signals. Macro fundamentals are modestly negative, and market regime dynamics are somewhat negative. Overall, high-frequency signal strength is modestly positive.

Conclusions: Asset Allocation Staying Long Stocks

The confluence of macro pressures doesn’t look great for stocks, bonds, or commodities. The economy will likely continue to expand but stay in a slowdown with neutral inflationary pressures and a repricing of liquidity conditions. Stocks remain the best asset in the cross-section.

You can find the data deck attached below as well.

Asset Allocation: 1.6.2025

1.1MB ∙ PDF file

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Until next time.

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If you’re unfamiliar with our mechanical understanding of evaluating inflationary pressures, we highly recommend reading our Macro Mechanics. This provides the principles that guide the construction of our systematic investment strategies & our research process:

In today’s note, we dive deep into our inflation views. Our primary takeaways are as follows:

• The latest CPI data surprised consensus expectations and drove an acceleration in the three-month inflation trend.

• This print was dominated by food and energy inflation, particularly motor fuel and gas prices.

• Macro pressures continue to show potential for inflation in aggregate nominal spending; however, labor markets and production have begun to see significantly lower inflationary pressures.

• In the context of markets, deteriorating inflationary pressures continue to remain supportive of stocks and bonds. This is reflected in our Prometheus Asset Allocation Strategy.

We begin with our proprietary inflation index, which offers us a daily real-time insight into the pressures on future CPI. This measure continues to show downward pressures on inflation, though these pressures have been sequentially increasing over the last month.

Our inflation measures suggest modestly negative but sequentially increasing inflationary forces are likely to make their way into PPI, CPI, PCE, and the GDP Deflator. Given the centrality of CPI to both the construction of PCE and its importance for markets, we focus on today’s CPI release in this report before zooming out to the big-picture dynamic.

In November, headline CPI came in at 0.31%, surprising consensus expectations of 0.3%. Core CPI contributed 0.25% to this print, with food & energy contributing the remaining 0.07%. This print drove an acceleration in the three-month trend. Below, we display the sequential evolution of the data:

The primary drivers of CPI inflation are food, energy, transport, and shelter. These components have contributed 0.05% (Food), 0.01% (Energy), 0.05% (Transport), and 0.12% (Shelter), respectively. We display these contributions to the 0.31% change in CPI below:

As we can see above, shelter was the primary driver of inflation this month. This dynamic is line with historical contributions.

For further perspective, we show how these areas have accounted for the majority of variation in inflation both economically and statistically. Over the last year, food, energy, transport, and housing have contributed 0.32% (Food), -0.21% (Energy), 0.34% (Transport), and 1.71% (Shelter), respectively, to the change in inflation. We display these principal drivers of inflation over time below:

We now zoom back into the most recent print. Inflation was somewhat mixed with Shelter contributing most positively, and Education & Comms Services contributing most to weakness. We display the largest movers to the upside and downside below:

We now zoom into our major categories of food, energy, transport, and shelter. We begin with food. The most recent data showed food inflation was largely positive, with Meats, Poultry, Fish, and Eggs showing the most relative strength and Cereals and Bakery Products showing the most weakness.

For further perspective, we also show the evolution of food inflation over the last year with the strongest contributors in shades of blue (Limited Service Meals & Snacks, Full Service Meals & Snacks, Meats, Poultry, Fish and Eggs) and the weakest in shades of red (Cereals and Bakery Products, Food From Vending Machines & Mobile Vendors, Other food at home):

Next, we turn to energy. The most recent data showed that energy inflation was somewhat mixed, with motor fuel showing the most relative strength and electricity showing the most weakness.

We also show the contributions of these items to total energy inflation over the last year with historical context:

We now turn to transportation. The most recent data showed transport inflation was somewhat mixed, with Used Vehicles showing the most relative strength and Vehicle Fees showing the most weakness.

For further perspective, we also show the evolution of transportation inflation over the last year with the strongest contributors in shades of blue (Vehicle Insurance, Vehicle Maintenance & Repair, Public Transportation) and the weakest in shades of red (Used Vehicles, New Vehicles, Vehicle Rental):

Finally, we examine shelter, which is the largest driver of consumer inflation in the economy. The most recent data showed shelter inflation was largely positive with Owners Equivalent Rent showing the most relative strength and Housing Insurance showing the most weakness.

We also show the contributions of these items to total shelter inflation over the last year with historical context:

We now zoom out to the broader macroeconomic picture, which drives large moves in inflationary pressures. We begin by examining nominal spending growth relative to interest expense as a barometer of inflationary potential.

Spending growth less interest remains moderately aligned with inflation. However, any further divergence will be a headwind for inflation.

Next, in our macroeconomic assessment, we turn to production relative to existing capacity constraints, which determine the tightness of output conditions. The more tightness, the more the inflationary pressure:

As we can see above, capacity utilization remains in the contractionary zone i.e., a headwind for inflationary pressures.

Completing our macro assessment, we examine the growth of employment relative to labor force growth as a measure of tightness in the labor market. The higher this measure, the more upward pressure on service employment:

Finally, we turn to our systematic projections for CPI based on the constellation of current CPI prints, and macro conditions. Our current programmatic estimates point to a monthly average annualized CPI rate of 2.55% over the next twelve months. This is a substantial increase from last month’s estimates, primarily driven by energy and food inflation. We visualise this below:

Overall, the latest CPI data surprised consensus expectations and drove an acceleration in the three-month inflation trend. This print was dominated by food and energy inflation, particularly motor fuel and gas prices. Looking under the hood, we find that idiosyncratic geo-political risks were a primary driver of this upward pressure. Macro pressures continue to show potential for inflation in aggregate nominal spending; however, labor markets and production have begun to see significantly lower inflationary pressures. In the context of markets, deteriorating inflationary pressures continue to support stocks and bonds. This is reflected in our Prometheus Asset Allocation Strategy.