Macro Monitor
China—See The Policy Forest Through The Tree (Diagram)
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.
Risk Aversion Index: New “Higher Risk” Signal
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.
Fed Taper—Not A Policy Error
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.
Risk Aversion Index: New “Lower Risk” Signal
With seasonality once again turning positive and inflation breakeven rates bumping above the recent range, we continue to favor the reflation trade.
“Stagflation” Gap = Limited Impact
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.
Risk Aversion Index: Stayed On “Higher Risk” Signal
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.
Rolling In Cash & Spending It In Style
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.
Risk Aversion Index: Stayed On “Higher Risk” Signal
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.
Not All Inflationary Periods Are Equal
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.
Risk Aversion Index: A New “Higher Risk” Signal
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.
Reflation Trade—Still Has The Benefit Of The Doubt
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.
Risk Aversion Index: Stayed On “Lower Risk” Signal
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.
Do You Know Your Stocks’ Duration?
Most people agree that growth stocks have longer duration than value, but few bother to back this up with numbers. Our implied equity-duration study says the conventional wisdom is right: Growth stocks do have longer duration. But... the devil is in the details.
Risk Aversion Index: Stayed On A “Lower Risk” Signal
The talk of taper has started to resurface. In this context, higher inflation might become a negative for credit. For now, we remain favorable toward TIPS but turn cautious toward credit.
To Whom This May Concern
Economic numbers were red hot in April but a funny thing happened when the awesome data rolled in—bond yields actually went lower. Expectations have trended upward, and “whisper” numbers have set the bars even higher.
Risk Aversion Index: A New “Lower Risk” Signal
The reflation trade continued with higher breakeven rates and lower real yields, a favorable make-up for risky assets.
U.S. Dollar—A 2018 Redux?
The price action in the DXY Index over the last year shows an uncanny resemblance to the 2017-18 period, both in duration and magnitude. Overall, we believe the dollar could strengthen in the near term, but the longer-term bearish trend remains intact.
Risk Aversion Index: Stayed On “Higher Risk” Signal
The reflation theme continues to be supported by the powerful policy mix and a successful vaccine rollout. Within fixed income, we are favorable toward TIPS and short-term high-yield credit.
Reflation Trade Or Real-Yield Tantrum?
The market focus has started to shift from a reflation trade to a real-yield tantrum. We compare the latest real-yield tantrum with four prior episodes where rate increases were driven by higher real yields, while breakeven rates were flat to lower: 2005, 2013, 2015, and 2018.
Risk Aversion Index: A New “Higher Risk” Signal
While mechanical signals generated from extremely low RAI levels can be noisy, extended valuations on most assets suggest we err on the side of caution.
Perception for the Professional
March 2026 Issue
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March 2026 Issue
