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Jun 6 10 tweets 4 min read Twitter logo Read on Twitter
On PMIs

1. Recently, we received new PMI data, which feeds into our PMI composite, whose readings continue to show a weak environment for growth assets (stocks, commodities, & high yield credit). As of the latest available data, our PMI composite now shows a reading of -10.93. Image
2. This was a sequential deceleration from one month prior and a decline in the three-month trend. PMIs are generally strong directional indicators of where we are in the profit cycle, as PMI respondents manage inventories and orders in response to their outlook on profitability.
3. PMI indicators are typically biased toward the manufacturing sector. While this does indeed make sense since production is largely driven by the manufacturing sector, it is important to also separate these sub-indexes to understand the pervasiveness of the current trend .
4. Currently, our Manufacturing and Services composites are sow readings of -13.7 & -5.9, respectively, signaling consistency within the current trend: Image
5. Zooming out, we think it is important to note that PMIs have generally been weak, though ISM and S&P Services PMIs have remained resilient. Nonetheless, 9/11 PMIs we track are negative. We show some of the major PMI indices below: Image
6. S&P Services has been the strongest of the PMIs, while Empire State Mfg has been the weakest. While services PMIs have shown some resilience, we think it is important to note that the trend in PMI remains lower and cyclical conditions continue to weaken.
7. These conditions do not support taking on #medium-term equity risk, despite recent trends in markets. To illustrate this concept, we show a simple cyclical rotation strategy that leverages our understanding of #cyclical conditions to choose between #equities and #cash.
8. When cyclical conditions are likely to deteriorate, it switches into cash; if not, it stays long the S&P 500. Below we show the performance of the strategy: Image
9. As we can see above, this strategy has #outperformed equity markets significantly while offering much lower #drawdowns. This strategy can be applied in a #long/ #short fashion as well.
10. Overall, continue to believe that it is not an ideal time to take on equity risk unless you have the ability to change positions on a week-to-week basis. Data will likely continue to deteriorate, and this strategy remains in #cash until it improves.

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More from @prometheusmacro

Jun 5
The Weekly Recap 🧵

Missed out anything from a week full of #Macro & #Markets? Don't worry - we got you covered.

Below we share all the updates & opinions threads from last week. Make sure to follow @prometheusmacro for much more.
1. We started the week with discussing our view ahead for markets. Our systematic view is that we are headed towards a stagflationary recession.

2. Re 1, we further contextualised our view by sharing our systematic updates on inflation & growth.

Read 12 tweets
Jun 5
Market Regime Update

1. Assets rebounded this week, with stocks, bonds, and gold all up on the week. Commodities showed mixed performance, with significant losses during the start of the week weighing on performance. Image
2. Recent #treasury strength continued the recent chop in the market, i.e., moving counter to the recent one-month trend. Below, we show the composition of total treasury market returns over the last month: Image
3. As we can see above, treasuries across the curve continue to show weakness as nominal #GDP continues to show resilience. At the same time, #equity markets continue to show lopsided performance over the past month, primarily driven by valuations rising: Image
Read 6 tweets
Jun 5
On Construction Data 🧵🏚️

1. The most recent data for April show construction spending increased by 1.24%, with 0.2% and 1.04% coming from residential and nonresidential spending, respectively. Image
2. This data surprised consensus expectations of 0.2% and contributed to an acceleration in the twelve-month trend.
3. For further context, we show the composition of the most change in monthly construction spending. The strongest contributor to construction spending in April was Manufacturing, while the weakest was Religious construction spending: Image
Read 8 tweets
Jun 4
@Neuro__Invest thoughts here

1/4 When the government pays interest on its existing RRP, bills, notes, & bonds, it creates income for the private sector. When interest rates rise, these payments to the private sector rise (especially if there’s a lot of short duration assets)…
2/ This income is offset by interest expense liabilities of the private sector. Net interest is the difference between interest income & expense. When companies own a lot of short dated assets (cash, bills, MMFs) relative to long term liabilities (loans,credit, mortgages)..
3/ Interest rates hikes flow to income well before they flow to assets. Now there are nuances about relative weighting & composition- but the big picture is that the current backdrop has seen the net impact of tightening as negligible on corporate profits…..
Read 4 tweets
Jun 2
Dissecting CPI 🧵👇

1. While over 300 line items drive CPI that we have visibility into, we can condense these measures into four broad categories that account for the bulk of the variations: food, energy, transportation, and shelter. We show this composition below: Image
2. Both economically and statistically, these categories explain about 85% of the monthly variation in CPI. Therefore, we think it makes sense to approach our dissection of CPI by evaluating these areas.
3. We believe that food & energy prices can continue to contribute to a softening in CPI, but the swing factor will likely be transportation inflation. So far this cycle, transportation has been a net support to the disinflation we expected over the year. Image
Read 26 tweets
Jun 1
Disinflation requires a Recession, but we are not there yet 🧵

1. Economic #cycles generally follow cause-and-effect templates, and this cycle has followed the archetype, albeit with its unique twists.
2. As an economic expansion ages, the ability for output to accelerate begins to stall as the economy runs up on capacity constraints in the form of production and labor limitations.
3. However, if nominal growth remains strong relative to debt service burdens, credit and income can support employment and production to remain faster than population growth and production capacity.
Read 14 tweets

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