Special edition: Macrobond customers share their charts

The trade of the decade: owning macro volatility

{{nofollow}}Michael LoGalbo, CFA, Global Market Strategist, Macro & Multi-asset, New York Life Investments

In the 2010s, investors enjoyed a "peace dividend" from low geopolitical tensions. But this decade has seen a sharp rise in such risks, driven by US-China trade disputes, Russia's invasion of Ukraine and instability in the Middle East. These dynamics, exacerbated by climate change, energy security concerns, are reshaping market landscapes amid a global economic slowdown, underscoring the growing importance of geopolitical factors. 

As a result, owning macro volatility might emerge as the strategic move of the decade. Our suggested macro volatility portfolio, which includes gold, oil and bitcoin, aims to mitigate geopolitical risks through two primary channels: adverse supply shocks and deflation. 

Oil typically gains from supply disruptions while gold acts as a 'currency of last resort' during high-risk periods, dampening economic activity and heightening uncertainty. Bitcoin is included as a proxy for greater liquidity and risk-taking in a market flush with post-pandemic capital. Despite indicators of a slowing economy, liquidity continues to underpin investor risk-taking.

Federal Reserve takes a more balanced strategy

By {{nofollow}}Gareth Nicholson, Chief Investment Officer and Head of Managed Investments, Nomura International Wealth Management 

Investor confidence in the Federal Reserve has decreased over the last six months, with terms like "policy error" and "Fed mistake" gaining traction. This skepticism raises questions about the Fed's ability to manage monetary policy effectively.

However, central banks have learned from past mistakes, especially those from the turbulent 1970s when inconsistent policies led to high inflation and unemployment. Since then, the Fed has adopted a more structured approach, creating buffers between policy rates and inflation.

In the current cycle, its rate hikes have brought inflation to manageable levels while keeping unemployment steady, signaling a more balanced strategy.

Inflationary pressures persist amid geopolitical tensions

By {{nofollow}}Jieyun Wu, Global Economist at Taikang Asset Management

Despite disinflation, inflation risks persist across developed countries due to high services inflation and ongoing geopolitical conflicts. This heatmap provides a global view of inflation trends in developed and emerging markets (DMs and EMs). Reflecting the past 12 months, it shows generally softer inflation globally. However, in DMs, the US and the Netherlands are seeing a marginal resurgence in inflation. Among EMs, Turkey and Russia face high inflationary pressures, while China’s inflation has recovered somewhat from deflationary levels.

Is the Eurozone inflation under control?

By {{nofollow}}Turnleaf Analytics

Eurozone inflation has touched a new record low since July 2021 coming at 2.4% as of end of April. But does the trajectory going forward look well within the 2% target of the ECB? This is a relevant question as the answer to it might help anticipate the next policy response by the ECB. By crunching hundreds of relevant macro and alternative data variables from Macrobond, Turnleaf Analytics's model projects a more volatile picture over the next year with inflation staying possibly above the 2% target most of the time (red line). Inflation markets paint a similar albeit more optimistic picture (green). Compared to the recent inflation prints from the US, the situation in the Eurozone seems more under control, although not fully so yet.

US manufacturing and services indices point to economic growth

By {{nofollow}}Frans van den Bogaerde, CFA, Economist, IFM Investors

This chart shows a detailed breakdown of the ISM manufacturing and services indices, key survey-based indicators of US economic activity. The latest data (for March 2024) show a softening in US private sector services growth, to 51.4 from 52.6 the previous month, though overall services output continues to expand (any reading above 50 as shown by the green boxes is an expansion). 

Manufacturing activity, by contrast, substantially improved, rising 2.5 percentage points to 50.3 (the first expansion since September 2022). 

As services account for a much higher proportion of US economic activity, it is a better indicator of growth. On a historical basis, however, the rate of growth suggested by both services and manufacturing is subdued – with both measures coming in at around their 20th percentiles relative to the last 20 years.

Analyzing fund flows in money markets

By {{nofollow}}Nik Bhatia, CFA, CMT, Founder, The Bitcoin Layer 

This graph displays the dynamics within the money markets as funds are allocated across various instruments. The four metrics tracked here are: total money market fund (MMF) assets under management, outstanding Treasury bills, the Fed's reverse repo facility (RRP), and daily Secured Overnight Financing Rate (SOFR) volumes in the repo market. Tradeoffs between money market instruments are visible as investors (MMF AUM) transition between accessible investments: T-bills, private market repo (SOFR), and the Fed's interest rate floor for non-banks (RRP).

Currently, SOFR volumes are rising as primary dealers experience increased inventory due to Treasury issuance, while elevated T-bill supply is raising rates to divert funds from the Fed's RRP facility.

CPI surge challenges potential rate cuts

By {{nofollow}}Byron Gangnes, Professor Emeritus, University of Hawaii

US Inflation measured by the Consumer Price Index has picked up recently, putting interest rate cuts at risk. The CPI rose 0.4% in February and March, more than 5% on an annualized basis. These strong monthly changes have raised year-over-year inflation to 3.5%, the highest since September. This is far above the Federal Reserve’s long-run 2% target. 

Part of the renewed inflation is coming from higher gasoline prices. But the Fed is unlikely to be concerned about this transitory component. Shelter inflation remains high but will ease as cheaper new leases are signed. 

That leaves other non-energy services as the main concern. Measured on a three-month moving average basis—which highlights the most recent changes—these prices have risen above a 6% annual pace. This broad category includes many services, but the two most important recent contributors have been auto insurance and medical care.

The trailing three-month numbers provide striking evidence that CPI disinflation has been stalled for eighteen months. The Fed will hold off on rate cuts for a while longer. 

Gold exports reveal diversification in Gulf energy surpluses

By {{nofollow}}Luke Gromen, CEO and Founder, FFTT LLC

This chart shows Swiss gold exports by destination, highlighting not only the well-recognized strong demand from Asia, but also the increasing exports to Persian Gulf countries. This is interesting because it implies a noteworthy shift: a growing portion of Gulf energy export surpluses, traditionally dominated by USD transactions, is being converted into gold, de facto.