Something is happening in the macro regime right now that most market participants are either ignoring or misreading. I spent today’s livestream walking through five interconnected themes that I think are getting underpriced. Below are the main talking points with all the charts and models. Scroll past those for what I am covering tomorrow and what is coming for paid subscribers tonight.

LIVESTREAM RECORDING FROM TODAY: LINK

Today’s Livestream: Main Talking Points (3 min read)

1. Crude implied vol is not telling the same story as spot. The spot price of WTI is back near highs, but call skew is not spiking the way it did on the first two moves up. Vol is elevated but the premium structure has changed. That matters because the positioning behavior around crude right now is connected to hedging activity. Large allocators who are long-duration or running inflation-sensitive portfolios are using crude calls to hedge geopolitical risk rather than expressing directional conviction on the barrel. That is a different signal than outright bullish crude positioning.

2. The WTI-Brent spread is now at its widest since 2008. This is not just a number. The spread between these two contracts maps physical market dislocations in real time. A spread this wide reflects a real supply and demand imbalance in how crude is priced across geographies. Traders watching this spread are watching something the spot price does not tell you.

3. CPI this week is a clearing event, and core is the variable that matters. Headline CPI is expected to come in at 3.4% year over year. Core is expected to accelerate from 2.5% to 2.7%. The question that will actually move markets is not whether headline comes in hot. Everyone already knows headline is going to be hot because of energy. The real question is how much of the crude price impulse is transmitting into core. That transmission rate determines how much optionality the Fed has for the rest of the year. If core comes in below expectations, a significant amount of hedging activity unwinds very fast.

4. Long-term inflation expectations are not rising. That is the key difference from 2022. In 2022, when the Fed was forced to hike aggressively, you had long-term inflation swaps moving up alongside short-term. That reflected a demand-driven inflationary impulse. Right now, one-year swaps have moved up with crude but five and ten-year swaps have barely moved. That is the structural reason why the Fed is not hiking this year even though the forward curve briefly priced a 25bps hike last week. The market corrected that quickly. Watch the Z6 contract. If it spikes back up toward that level this week, that is a fade.

5. Treasury vol is spiking but the setup is for a positioning unwind, not a continuation. 10Y futures vol has surged. That is not a breakout signal. It is a reflection of hedging pressure in the rates market ahead of CPI and whatever happens with the Iran situation tonight. The covariance between stocks, rates, and the dollar has been weakening over the last week. That weakening is the signal that the macro impulse is losing momentum. Mean reversion becomes the higher probability setup from here, not continuation of the regime.

6. EURUSD is pricing a lot of bad news that may not materialize. The Euro has sold off hard because Europe is a net energy importer. When crude spikes, Europe faces an inflation shock that the US does not face in the same way because the US is a net exporter. Put skew in EURUSD has blown out to extremes. If tonight does not produce further escalation and CPI does not come in catastrophically hot on core, the unwind in EURUSD positioning could be sharp. The pair is already showing signs of stabilization at these levels.

7. Real interest rates are the actual macro liquidity signal. One-year real rates have been falling. That is the single most important thing happening in the plumbing of the system right now because falling real rates inject liquidity even without a Fed cut. Five and ten-year real rates are still elevated but the short end is loosening. If this continues into a cleaner macro environment post-CPI, it creates the setup for a significant equity bid, particularly in rate-sensitive segments of the market.

8. The pair trade that makes sense here is long stocks, short bonds. The regime where stocks are down, rates are up, and the dollar is up only occurs about 10% of the time historically. We are in it now and the correlation structure is weakening. The long stocks short bonds trade captures the asymmetry in how these unwind. Gold long, bonds short is the other expression. Russell has been outperforming the S&P this week for a reason. The DAX is also worth watching for a long entry on any intraday dump into macro clearing events.

[SLIDE DECK]

Capital Flows Deck

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Tomorrow: Capital Flows | Equity Dispersion and the Rotation - Mag7, Oracle, and OpenAI

Livestream: Daily at 11:30am EST - We are in such a critical time in the macro and AI endgame that I will be doing a livestream every day of the week at 11:30am EST.

The equity selloff is being read as recession risk-off. That is the wrong frame. Tomorrow I am walking through why this is a rotation and microstructure story, where the crowded positioning was coming into this move, and where the opportunity sits for the next 30 to 60 days.

TOMORROW’S LIVESTREAM: LINK

For Paid Subscribers: The Positioning Report

About an hour after I ended the livestream today, news came across the tape that unwound A TON of the geopolitical premium in the market.

This is exactly in line with the flows I have been laying out for paid subscribers, as well as my comments in the livestream today.

Last week, I made a very clear note that positioning was way too aggressive for the geopolitical risk premia in markets. I noted that the Russell was the best way to express this (link):

The Russell is now outperforming ES and NQ on the news. Understanding these flows are one of THE main things I will be covering in the livestream tomorrow:

As crude as fallen, gold and silver have bid in lockstep with the views I have been laying out in the subscriber chat:

Gold and silver are now bidding on geopolitical risk decreasing. Doesn’t make any sense? People said metals are supposed to bid on geopolitical risk? This is a very narrow view of the drivers of gold as well as the positioning premiums around it. This is going to be THE dynamic I explain below.

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Markets are pricing geopolitical risk as a short-term inflation accelerant, which is pushing rate cut expectations lower and raising the specter of stagflation. Dollar strength reflects this dynamic precisely: short-end inflation expectations (1y and 2y swaps) are rising while real rates climb on the long end (10y and 30y), a combination that has been mechanical support for the currency.

We are approaching a critical inflection. FOMC this week creates a binary setup. If geopolitical risk fades and crude sells off, or if the Fed signals less concern about inflation on the grounds that the current move is supply-driven rather than demand-driven, the market’s hawkish repricing could unwind quickly. Either catalyst would likely produce equity buying and dollar selling. That reversal would carry extra force right now, given how elevated implied volatility is, which tells you hedging premiums are stretched and any shift in sentiment gets amplified as those positions unwind.

I explained the mechanics of the dashboard above, along with an extensive breakdown of the macro regime in the livestream earlier today. You can find the full recording here:

Positioning is one-sided:

The chart crystallizes the positioning argument. Crude call skew (white) has surged to levels not seen in years, reflecting aggressive demand for upside protection in oil as markets price a geopolitical supply shock into the inflation narrative. Crude implied volatility premium(yellow) has followed, confirming that the entire options surface in energy has repriced higher, not just the directional skew. Simultaneously, SPX put skew (green) has reached comparable extremes, as equity investors have rushed to protect against a growth shock. EURUSD put skew (magenta) completes the picture, with the market heavily positioned for continued dollar strength against the euro.

What makes this moment genuinely unusual is that all four measures have spiked in unison, suggesting the positioning is cross-collateralized across asset classes rather than idiosyncratic to any single market. Traders are hedging the same macro thesis simultaneously in crude, equities, and FX, which means the trade is crowded from multiple directions at once. This is the setup heading into FOMC. The pause itself is not in question, with the forward curve pricing it as a certainty, but the December 2026 contract has been repriced down to roughly 17 basis points, essentially less than a single cut. The real question Powell faces is whether to push back on that repricing and restore some easing optionality for 2026, and if he does, the unwind of this correlated hedge stack could be sharp precisely because so many positions are leaning the same way at the same time.

The Z6 SOFR contract (showing the markets expectations for how many cuts this year) is sitting at 17bps as the terminal rate is pricing a total of 35bps of cuts for this cycle.

The problem with this pricing is that, as I laid out in the livestream (link), the growth side of the equation is at more risk since the labor market is near the zero bounds of growth. 3-month change in NFP (bottom panel) is functionally a coin flip, and the most recent MoM NFP print (blue) was negative just as the inflation impulse in markets accelerated (visualized by the orange bars in the background).

The FOMC meeting this week carries a genuine double tension. Inflation is accelerating at the same time growth is under threat, but the inflation impulse is supply-driven rather than a reflection of excess nominal demand, which complicates how aggressively the Fed can respond. Layered on top of that is a deeper uncertainty: markets do not know how to weight Powell’s forward guidance when he is likely months away from being replaced, which leaves positioning one-sided with no clear anchor. The smallest shift from Trump on trade or geopolitics could be enough to trigger an aggressive unwind of the cross-asset hedge stack that has been built up across crude, equities, and FX simultaneously.

Tomorrow’s Livestream

What I have laid out here is the map, but the map is not the territory. The cross-asset positioning picture is clear enough. What is not clear is the sequencing, because the order in which these catalysts arrive changes everything about how the unwind plays out and which instruments express it most cleanly.

There is a specific problem with trading around a crowded hedge stack: everyone sees the same positioning data, which means the consensus trade on the unwind is also getting crowded before the catalyst even arrives. Tomorrow I want to work through how to think about that second-order problem, where the real opportunity is not in predicting Powell but in understanding what the market is already pricing as its escape route and whether that consensus unwind trade is itself mispriced.

We will go deep on the rates structure, what the Z6 contract is actually telling us about the market’s implicit Fed reaction function, and how I am thinking about expressing this across the curve rather than in a single instrument. If you have been following the inflation swap divergence between the short and long end that I walked through above, tomorrow is where that framework gets applied to actual positioning decisions.

Noon EST at this link:

Thanks

The information on this website/Substack is for information purposes only. It is believed to be reliable, but Capital Flows does not warrant its completeness or accuracy. The information on the website/Substack is not intended as an offer or solicitation for the purchase of stock or any financial instrument. The information and materials contained in these pages and the terms, conditions and descriptions that appear, are subject to change without notice. Unauthorized use of Capital Flows websites and systems including but not limited to data scraping, unauthorized entry into Capital Flows systems, misuse of passwords, or misuse of any information posted on a site is strictly prohibited. Your eligibility for particular services is subject to final determination by Capital Flows and/or its affiliates. Investment services are not bank deposits or insured by the FDIC or other entity and are subject to investment risks, including possible loss of principal amount invested. Your use of any information which is proprietary to Capital Flows or a third-party information provider shall only be used on individual devices without any right to redistribute, upload, export, copy, or otherwise transfer the information to any centralized interdepartmental or shared device, directory, database or other repository nor to otherwise make it available to any other entity/person/third party, without the prior written consent of Capital Flows.

At the beginning of last week BEFORE we had the pullback in US equities, I made a very simple and clear point (link): ES was entering a short period of time where a pullback could occur, and IF it did, 6820 would be an excellent place to get long as we moved into the London session after any type of cash equity sell-off.

This happened almost perfectly as AMZN earnings came out Thursday and sold off after hours (see original report here: LINK):

It doesn’t matter if you caught the low last week or not; what matters is WHY it happened because that will determine HOW you should think about the drivers of markets this week.

MACRO DRIVERS:

There are three major drivers you need to understand to frame the risk-reward in markets this week. None of them exists in isolation. Each one is interacting with the other two, either amplifying or muffling the moves you are seeing across equities, rates, and global flows. If you understand these three drivers and how they connect, you will have a much clearer picture of what the market is actually pricing and where the asymmetry sits.

1. The AI Rotation Is Still the Primary Driver of U.S. Equity Price Action

The software-to-hardware rotation I laid out last week (Software: The Trade That’s Fooling Everyone) is still developing. The market is not in a risk-off environment. It is repricing who captures the economics of AI, and that repricing is mechanically dragging the S&P 500 because of tech’s outsized index weighting. We are roughly one-third of the way through S&P 500 earnings season, and many of the highest-impact reports are behind us, but the single most important catalyst for this rotation sits at the end of the month: Nvidia reports on February 26th. Until the market gets that print, the tension between hardware strength and software weakness will continue to define the trading range. Every earnings report between now and then is either going to confirm or challenge the dispersion framework. (see video where I explained this below)

2. AI Investment Is Keeping Long-End Rates Elevated

The AI theme is not just an equity story. It is an investment story, and investment requires capital. The historic CapEx cycle being driven by hyperscalers and AI infrastructure buildout is sustaining real economic activity, and that is showing up in the bond market. Long-end interest rates remain elevated, not because inflation expectations are running hot. Inflation swaps are actually lower than they were six months ago.

Rates are elevated because the economy is still absorbing a massive wave of capital investment, and the market is pricing the duration risk of that investment cycle rather than an inflation resurgence. This distinction matters for how you frame the software selloff. The rate environment is directly linked to investment, which is why long-end rates have moved in lockstep with the recent acceleration in industrial production and durable goods orders.

AI investment is accelerating a rebalancing of the labor market: workers displaced from sectors facing AI disruption are being absorbed into the sectors benefiting from the AI buildout itself.

3. The Japan Election Sweep Is a Positive Liquidity Impulse for Global Markets

This is the driver most people are ignoring, and it may be the most consequential for near-term price action. Japan’s snap election delivered a historic supermajority for PM Takaichi’s LDP, with the party securing 316 of 465 Lower House seats, the largest single-party result since the LDP’s founding in 1955. This is the outcome I have been laying out as the highest-probability scenario in my recent videos on Japan (link) (link), and the market reaction was immediate.

Cash-settled USD-denominated Nikkei futures on the CME rallied on Friday while Japanese cash markets were closed, front-running the result. The Nikkei opened Monday up 5% to a new record high.

This matters for U.S. equities because the liquidity impulse out of Japan has been seeping into global risk assets for months. Takaichi’s mandate is built on proactive fiscal policy: record government spending, consumption tax cuts, and a multi-year investment framework that abandons the old single-year primary balance constraint. That is a sustained liquidity injection into the world’s fourth-largest economy, and it is running in parallel with a weakening yen that pushes Japanese capital outward into dollar-denominated assets. The Friday rally in U.S. equities did not happen in a vacuum. The combination of the Japan liquidity bid and the tech rebound helped set a near-term floor under U.S. indices at exactly the point where the software rotation had dragged the S&P 500 to the lower end of its mean reversion range.

If you are trying to understand the dynamics of the Yen, see the two videos I published here:

I would also encourage you to read everything by on Japan. He is following and trading the situation there better than anyone else.

Across The Spread

Japan Snap Election: The Takaichi Mandate (Part 1)

This is Part 1 of 2 - pre-result article covering the last 6 months of political turmoil dramatic pathway of Japan blowing up its political system, which is critically necessary to understand market behavior over the last, and next half-year and beyond. Part 2 (after election results): what the “rate check” story is really telling you, and what the mark…

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2 months ago · 35 likes · 2 comments · Weston Nakamura

Interest Rate Strategy: SOFR and Bonds

Each of these drivers directly link to and influence one another in a reflexive feedback loop. If you understand the framework I laid out above, then the interest rate analysis below will begin to set up how you should think about correlations, pricing of the SOFR curve, and bonds as we move into this week.

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This week’s note is a two‑part deep dive on the Yen into FOMC.

In Part 1 (below), I walk through the core risks: where we are in the cycle, what’s priced into rates, and the key pressure points for JPY if the Fed’s path shifts from here.

In Part 2, for paid subscribers, I go a level deeper into positioning and implementation: how I’m thinking about expression, where the asymmetry is, and the scenarios that would get me to change my stance.

If you find the first part useful, and want to see exactly how I’m translating it into scenario analysis and strategy implication. Part 2 is just below the paywall for paid subscribers.

Positioning and Strategy Implications:

Part 2:

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Over the last two weeks, I recorded three short videos walking through how I see the macro regime evolving and what that means for rates, FX, and equities. Those videos went out in real time, but they’re the right starting point for understanding the week ahead, so I’ve pulled them together for you here in front of the paywall.

Think of them as the “pre‑game”: how policy, liquidity, and the cycle have been shifting, why that matters for risk assets, and the key levels and dynamics I’m watching.

Below the paywall is the full written Week Ahead report:

• how I’m updating the macro map based on the latest data,

• where I see the balance of risk across rates, credit, and equities now,

• and the specific positioning implications for the coming week.

If you just want the big picture, the three videos will get you there. If you want the full playbook I’m using to make allocation decisions this week, it’s in the report that follows.

Macro Flows For Week Ahead:

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Most investors still think of “yen risk” as an FX sideshow. It isn’t. When a core funding currency of the system moves, it reshapes the entire global risk curve: who can lever, what counts as safe collateral, and how quickly liquidity vanishes when everyone scrambles for the exit. In this video, I walk through why the yen is set up for a potential devaluation and how that kind of shift transmits into your portfolio even if you never trade a single FX pair.

If you want to go deeper into the bigger‑picture macro forces behind this, I’ve added the full recording of yesterday’s livestream plus the slide deck. That session walks through the broader regime, credit cycle dynamics, and global liquidity backdrop that sit behind the yen story and link it to the rest of your portfolio.

Acfrog~3

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If you’re an active risk taker and want the full mechanics rather than the 30,000‑foot story, read the previous macro report I wrote on this setup. It walks through the plumbing: how funding, balance sheets, and the credit cycle interact with a potential yen devaluation, and what that implies for sizing, hedging, and where you sit on the global risk curve. If you’re putting real capital at risk, that’s the piece you should study.

The information on this website/Substack is for information purposes only. It is believed to be reliable, but Capital Flows does not warrant its completeness or accuracy. The information on the website/Substack is not intended as an offer or solicitation for the purchase of stock or any financial instrument. The information and materials contained in these pages and the terms, conditions and descriptions that appear, are subject to change without notice. Unauthorized use of Capital Flows websites and systems including but not limited to data scraping, unauthorized entry into Capital Flows systems, misuse of passwords, or misuse of any information posted on a site is strictly prohibited. Your eligibility for particular services is subject to final determination by Capital Flows and/or its affiliates. Investment services are not bank deposits or insured by the FDIC or other entity and are subject to investment risks, including possible loss of principal amount invested. Your use of any information which is proprietary to Capital Flows or a third-party information provider shall only be used on individual devices without any right to redistribute, upload, export, copy, or otherwise transfer the information to any centralized interdepartmental or shared device, directory, database or other repository nor to otherwise make it available to any other entity/person/third party, without the prior written consent of Capital Flows.

If you are actively trading FX, rates, or equities, I would strongly encourage you to review the video and the connected report on the dollar: LINK

I explained the drivers and risk-reward of the dollar in the previous report, and now I want to cover what I believe to be one of the biggest opportunities in the global interest rate complex.

Main Strategy/Risk Reward Ideas:

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The dollar’s weakness has not been driven by headlines or sentiment, but by a clear set of macro forces operating beneath the surface. Compressed rate differentials, crowded carry trades, and falling FX volatility have shaped price action far more than narratives.

Understanding these drivers matters more than reacting to price. FX moves as capital responds to incentives and risk being repriced across time.

Below is a short video walking through the key charts that define the current dollar regime.

The tangible implementation of this video can be found in the report below for paid subscribers.

Macro Drivers and Directional Risk Reward: (For paid community members)

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Here is the video breakdown for how to think about macro liquidity post FOMC:

If you want to understand the practical implementation of this and how it impacts the directionality in assets as well as allocations for a portfolio, you can see the research below for the Capital Flows Community.

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If you want to review the recent video on the credit cycle and the connected slide deck, this is a very good time to do it:

Credit Cycle Deck

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Terminal Rate and Inflation Risk:

Main Ideas:

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The most important question to be asking right now is WHAT is driving the current sell off in equities and Bitcoin? On top of this, what are the additional macro volatility risks that exist as we move into this time of higher volatility?

I am going to answer both of these questions in this report for paid subscribers.

If you want to review my big picture macro views, they are in the most recent interview on Blockworks for free subscribers:

Macro Driver:

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I have laid out my macro framework for WHERE we are here:

Trade Implication:

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Here is the video breakdown for how to think about macro:

Key Idea: The dynamics around inflation swaps and Fed cuts will be critical to monitor because they are the drivers in equity dispersion right now: (Chart from video)

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Inflation Risk Vs Recession Risk:

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