The Observatory
CPI Deceleration Tomorrow?
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 further solidified (+) G (+) I in markets. The Commodity complex generally saw gains (though natural gas continues its tumultuous ride), and equity sectors continued to show significant variation in their returns. In aggregate, these moves benefitted our alpha and beta exposures. Further, these gains were substantial enough to trigger our systems to generate signals to reduce exposure across our preferred assets. The notable exception remains Treasuries, which continued to sell off, providing our systems with discounts to gain exposure. The threat looming over markets is the strength of the current (+) G (+) I, as inflationary pressures continue to eat away into real growth. These pressures have the potential to trigger a self-reinforcing transition from (+) G (+) I, into (-) G (+) I, and finally into (-) G (-) I. We continue to monitor this risk. To summarize our systems' current assessment: Our upgraded Market Regime Monitors show a dominance of (+) G (+) I extended. Our Momentum Monitors show rapid gains for Gold, with a Momentum Score of 83%. There is a rising possibility of markets beginning to price a (-) G (+) I, induced by extreme Commodity strength. 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: Bonds. We can REDUCE our LONG: Cotton, Lean Hogs, Live Cattle, & Sugar and SHORT: Communications. While our Market Regime Signal continues to point to (+) G (+) I; however, from a portfolio construction perspective, our systems tell us it is optimal to be regime-neutral. Divergences within asset classes are creating significantly more opportunities than asset class rotation. Resultantly, our Expected Return Strategy is LONG: Bonds & Lean Hogs.
Macro: Tomorrow, we will receive CPI data, which will be essential to assess the growth outlook and the Fed reaction function. Our Inflation Nowcast has been 92% accurate over the last 12 months in determining accelerations in US CPI and tells us that the CPI print is likely to be sequentially lower. However, we must take this with a pinch of salt; massive movements in commodities have made directional moves telegraphed, and its all-time accuracy is 58%. To summarize our systems' current assessment: Economic Momentum remains under the 50% mark, and our GDP Nowcast remains relatively unchanged this week. The latest data have confirmed a significant slowing in the US economy, placing our GDP Nowcast at 2.6%. This trend is likely to extend further. Our Inflation Nowcast continues to tell us that inflation has indeed peaked; however, since then its downturn has not picked up significant momentum.
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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