The Observatory
Cotton, Cattle & Sugar
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, we noted the weakness in equity markets momentum; however, we highlighted that equity markets empirically have mean-reversion characteristics over short periods. Our systems consider these factors and did not suggest that equity shorts were optimal. This systematic judgment was valuable yesterday, as up until the FOMC meeting, equities indeed rallied, contrary to the recent trend. Following the FOMC, markets moved to resounding price (+) G (+) I, with Treasuries selling-off alongside equities. Additionally, commodities rallied; however, there was a fair amount of dispersion, i.e., some commodities rallied, and some didn’t. These moves create opportunities for our systems to exploit, which triggered opportunities to add exposure. To summarize our systems’ current assessment: Our Market Regime signal now shows a dominance of (+) G (+) I, i.e., rising growth and inflation, market regime. Over the past year, markets have spent approximately 89% of their time in this regime. Further, our Momentum Monitors show falling inflation assets, i.e., stocks and bonds, with diving Momentum Scores (44% and 0%), which rising inflation assets, i.e., commodities and gold, show strong Momentum Scores (100% and 62%). 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, Cotton, Live Cattle, & Sugar. Our systems continue to wait on opportune times to enter our other regime-supported positions.
Macro: Yesterday’s FOMC meeting showed the Fed move decisively towards a tighter path for monetary policy. It currently seems likely that the Federal Reserve will embark on interest rate tightening while still tapering its asset purchases. This overlap in itself will cause some cross-currents for markets because QE, even though tapered, is liquidity provision, while interest rate hikes are liquidity draining. The second significant outcome worth noting is that most QT will happen via roll-off/maturity of the existing balance sheet rather than outright sales. This roll-off means that there will be reduced selling pressure on the long-end of the Treasury curve coming from QT and that the MBS market won’t see increased sales, as most MBS won’t mature during the taper process. To summarize our systems’ current assessment: Economic data continues to put pressure on risk assets. The latest economic data that feed our GDP Nowcast showed further decelerations. The effect weakened our GDP Nowcast to 3.1% from 3.2%, and Economic Momentum now sits at 43.6%, marginally higher than yesterday.
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.