Politics Trumps Economics

Politics Trumps Economics - Macro Snapshot

(Sep 2)

• Our Macro Risk Indicator remains "risk-on". Growth, policy and liquidity overcome an inflation component that has now turned "risk-off".
• US nominal growth is in line with IG yields. Watch for IG yields above projected nominal growth as a warning sign.
• The inflation scare is driven by energy and food, not underlying core trends. The Dallas Fed trimmed mean PCE is still trending down. Watch for 2s5s10s to turn positive as a warning sign that equities are vulnerable to a drawdown.
• Politics remains the dominant variable in fixed income and FX. Fed-Treasury coordination is capping the long end. USD weaponization fuels the bid for gold.

Cyclical Asset Allocation: Macro Risk Indicator remains "risk-on", overcoming inflation headwinds

Inflation (1): Core inflation trends remain moderate, trimmed mean PCE still falling…

Inflation (2): …but Iran conflict + El Niño tail risks keep markets on edge

Fed-Treasury Coordination: Politics caps the long end, but stock-bond correlations to remain positive

AI Bubble Watch: Equity breadth still good, watching Cisco/Sycamore/Juniper analogs

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Equity: Earnings momentum persists, expectations remain very optimistic

Sector Allocation: OW: Semis, Energy, Financials, Comm. Serv. UW: Consumer, Software

Fixed Income: Watch 2s5s10s for signs the Fed is offside, real term premium rise is normalization

FX: Politics trumps economics as the trend towards USD weaponization continues

Commodities: Cyclical macro regime moderately weaker, but structural gold bid is unchanged

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