Macro Monitor

Currently, the dashboard shows 6 green, 3 yellow, and 2 red lights. The overall message is that, while there are areas of concern, a recession is unlikely to be imminent (within the next twelve months).

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With the Fed still on a tightening path, caution is still recommended. Among fixed income, we remain neutral on TIPS but have turned favorable toward EM bonds.

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The U.S. 10/2-year curve just fell below the key threshold of 50 bps. Over the last 25 years, the yield curve proceeded to invert after this “Rubicon” was crossed. That doesn’t mean imminent trouble. The lead time of a yield-curve signal is lengthy, but it—and real yields—definitely warrant close monitoring.

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Despite continued weakness in equities and a higher reading in our Risk Aversion Index (RAI), it generated a “Lower-Risk” signal.

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The market has started to price in a much faster pace of the Fed’s tightening this year. We have found more similarities than differences between recent market action and the historical patterns around the first rate hike.

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Lofty valuations amid shrinking liquidity conditions make all risky assets vulnerable.

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Market revelations were certainly not in short supply in 2021. We believe some of those surprises will continue to have a huge impact on markets in 2022. We have updated our time-cycle composites to provide an idea of what a “typical” 2022 could look like.

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The impact of Omicron is already fading and the global-tightening cycle is far more important going forward. Elevated valuations amid a broadening global-tightening cycle is our key concern.

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There has been a torrent of new policies coming out of China recently. The goal of this report is to disentangle these seemingly random or even nonsensical policy moves and present a clearer roadmap of what China is thinking and doing.

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With the market getting less sensitive to each iteration of new variant, we believe the impact of Omicron is unlikely to be as significant as the global-tightening cycle.

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We believe concerns about central-bank policy error are mostly a foreign issue, because they have moved much more aggressively than the Fed. The market has shown no indication of a Fed-policy mistake and we are still on board with the reflation trade.

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With seasonality once again turning positive and inflation breakeven rates bumping above the recent range, we continue to favor the reflation trade.

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The Citi Economic Surprise Index fell to a negative extreme, while the Citi Inflation Surprise Index made all-time highs—a “stagflation” gap. Overall, if history repeats itself, the extreme ESI-ISI gap is apt to resolve itself, and the effect on asset markets will likely be limited. The global tightening trend will be a far more persuasive driver.

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Elevated valuations and a global tightening cycle are usually not a favorable context for risky assets. Within fixed income, we remain positive toward TIPS and cautious on credit.

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We take a look at how the market rewards different uses for cash and what drives management decisions about the use of cash over time. The focus here is on the three main cash applications: investment (Capex and R&D), return of cash (via buybacks and dividends), and M&A spending.

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The reflation trade stayed in a holding pattern with breakeven rates remaining range bound. Within fixed income, we are favorable toward TIPS and cautious on credit.

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What matters is whether an inflationary period is driven more by “demand pull” or “cost push.” Demand pull inflationary periods seem far more favorable than cost push periods, which, more often than not, occur in a “stagflation” macro context.

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Our Risk Aversion Index moved higher and generated a new “Higher Risk” signal. Within fixed income, we are favorable toward TIPS and cautious on credit.

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The Fed surprised the market with a hawkish projection of two rate hikes in 2023. Real yields did not move up as they typically do with such an episode. Overall, the damage was limited to the reflation trade, and the risk-rally is intact.

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With the looming Fed taper and valuations stretched on almost all risky assets, volatility is likely to increase in the near term. Among fixed income, we are favorable toward TIPS and cautious on credit.

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