Macro Monitor
Three Themes To Watch—An Update
The Value/Growth dynamic seemed to indicate a return to the “lower rates are good for Growth stocks” regime. China reopening is still alive and well, despite a recent pause. The GSCI Industrial Metals/Gold ratio has broken below its recent range, which bodes ill for inflation expectations going forward.
Debt Ceiling—Risk Of An Accident Higher Than Normal
An earlier-than-expected X-date means higher market volatility and increased chance of a temporary short-term deal. Typically, the debt ceiling drama is short-lived and there’s not much impact on most assets before or after a resolution. Overall, the possibility of an accident is now above average.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
Despite the resilience in most risky assets, the recession probability has increased and the prospect of further credit tightening has only added to the downside risk.
The MOVE Is Now A Better Risk Gauge
The MOVE index, a volatility gauge for the bond market, has become a far better risk barometer—and it surged to a new cycle high in March.
Yield Curve Re-Steepening—At A Critical Crossroads
We studied market behavior around yield curve re-steepening and identified six historical cases. Of those, three were successful and preceded major recessions. The other three instances failed and reversed to new lows. The gist of the study: We are at a critical crossroads.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
Inflation concerns have been pushed aside by the upcoming curtailment of credit and lending. The possibility of a recession has no doubt increased, and risky assets are apt to face challenges.
Three Themes To Watch
The China-reopening theme is alive and well, which will likely support cyclical outperformance. The disinflation trade is at a crossroads. Value/Growth started to decouple from interest rates.
Weight Watcher Update—Still Like Value Sectors
While the valuation gap between Growth and Value sectors was compelling just a couple of years ago, it has closed drastically the last twelve months. Our analysis shows that Value sectors (Energy, Industrials) are still more favorable than Growth sectors (IT, Health Care).
Risk Aversion Index: A New “Higher-Risk” Signal
Inflation worries have rekindled expectations for additional rate hikes. Providing this dynamic is still in play, risky assets are apt to face challenges.
Soft Landing Or Recession? A Dashboard Update
The weight of evidence clearly leans more toward a recession, but the wild card is the recent dovish turn of global central banks, which can significantly boost confidence from investors, consumers, and businesses.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Seasonality is still an advantage, and financial conditions have eased. Within fixed income, we remain favorable toward both Treasuries and higher-quality investment-grade corporate bonds. We maintain a neutral stance on the yield curve.
2022 Surprises & 2023 Time Cycles
We updated our time-cycle composite for 2023. Overall, while the patterns suggest a year of smooth sailing for most markets, the actual paths forward could be much more volatile.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
While seasonality remains favorable, the risk of a severe recession looms large in the medium term. We are favorable toward high-quality corporate credit and Treasuries.
Fed Funds Rate Above The CPI—Inflection Point Likely
Stock market bulls hope for an end to the tightening cycle in the not so distant future. However, the last two rounds didn’t end until the fed funds rate was raised above the prevailing rate of CPI.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The market has responded quickly to global central-bank pivots, and favorable seasonality can carry the rally a bit further in the near term. However, the risk for a severe recession still looms in the medium term.
Six Themes Around A Full Yield-Curve Inversion
The main yield curve drivers—fiscal and monetary policies—might be suggesting a steepening move is coming soon, while bank stock performance may also be hinting at a turn in the curve. However, a durable selloff in the U.S. dollar would be needed to support a steeper yield curve, so the tightening pain could last a while longer.
Risk Aversion Index: A New “Lower-Risk” Signal
Given depressed market sentiment and favorable seasonality, near-term prospects look better for risky assets.
The Great British Pivot
The latest BoE and RBA pivots fueled the market’s hope that global central-bank hawkishness has possibly peaked. We believe the market is likely to be lured by the prospect of a Fed pivot in the near term, only to be disappointed as that hope fades away.
Recession Dashboard Update—More Deterioration
The latest ISM Manufacturing numbers resulted in a downgrade to that factor from “green” to “yellow.” Unemployment claims is the lone component with a green light on the dashboard. Overall, the various measures we track suggest the risk of a “real” recession is high—better than 50%.
Midterm Elections—Not A Typical Year
While midterm elections are not typically big market movers, there is really nothing typical about 2022.