Alpha Report: CPI Hedging and Factor Rotation

How inflation is impacting risk flows and interest rates

All of the macro research falls under these three categories on the main page (link). If you are a new subscriber, I would encourage you to review all recent pieces so that you are aware of WHERE we are in the macro regime and WHY the specific trades are being run. You can also review the “About” section explaining each of these categories here: Link

If you go through these recent reports, they will provide you with a clear picture of the macro regime:

• Macro Podcast: Interest Rate Are Going DOWN

• Alpha Report: Macro Liquidity and It's Impact On EVERYTHING

• Alpha Report: Flattening In The Curve

• Alpha Report: Melt Up or Melt Down In Equities?

• Trade: Update

The most recent comprehensive macro report was published and it breaks down the current skew in both interest rates and equities:

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Big Picture

We remain in a regime where normalization and dispersion of economic components continue to be the dominant tension to manage. In other words, we aren’t having a cyclical extreme like 2020, 2021, or 2022. Within this context, growth remains positive with a low level of delinquencies. The 2 year is highly likely to remain below Fed Funds:

The CPI print was released yesterday and came in line with expectations:

This matters because the inflation swap curve is positive right now (green and red line) indicating a marginal degree of inflation risk. This is WHY real rates (blue) have repriced higher:

This higher level in real rates is critical to understand because growth is much lower compared to 2023. This means on net, we are highly likely to have lower rates than 2023 where the Fed held the “higher for longer stance.”

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A Closer Look:

These tensions in growth, inflation, and interest rates are setting the stage for the next move in risk assets. If you aren’t a paid subscriber of the Substack yet, I encourage you to do a free trial (link). There is zero downside and you will be able to watch the video podcast I publish later today on all of these macro components along with the analysis below. If you are a free Subscriber, be on the lookout because an economic model will be sent out as a Christmas gift to everyone for FREE.