Alpha Report: CPI, Inflation, and Equities

Everyone missed the signal in CPI

I run models and strategies across every major asset in global macro. All of the educational primers explaining global macro can be found here:

Fundamentally, interest rates and FX are central to any global macro view. The reason for this is that interest rates are the price of money and FX is the actual currency. These are two sides of the same coin.

There is a problem in the industry though: All of the guys in the suits have to pretend like they know everything so their clients “trust” them. As a result, marketing and asset gathering are prioritized over true alpha generation. I have witnessed this firsthand.

There is a better way to function in financial markets though: Pursuing a business-like mindset where you systematically educate yourself and develop monetizeable sources of alpha.

If this is the path you take, you have to start by saying “I don’t know everything.” You’ll make money (a lot of it) but you won’t be the popular talking head on CNBC or Bloomberg.

The Capital Flows Substack is where the full spectrum of macro flows through the economy and financial markets is broken down, leveraging the informational edge to execute home run trades across rates, FX, and risk assets that achieve exceptional returns.

If you are inspired by this quote from Good Will Hunting then you are in the right place:

“You wasted $150,000 on an education you coulda got for $1.50 in late fees at the public library.”

This brings us to the current macro set up and HOW CPI just sent a picture of the larger macro impulse.

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Alpha Report:

We have been in a regime of Goldilocks where growth is positive and inflation is falling. But the CPI print came in above expectations. How does this fit into it?

We are NOT entering a 1970s cycle where inflation starts its second wave. The inflation picture has changed from the 2010s but it won’t be like the 1970s.

The macro reports here have consistently laid out how CORE CPI is critical for the Fed’s purposes in hitting the 2% inflation target. As a result, understanding the ENTIRE CPI complex has been critical.

Notice that when we look into the specific line items of CPI, services actually decelerated in the most recent print. It was the goods line item being less negative that caused core to accelerate marginally in the headline number.

The most important line item, Shelter, actually decelerated. This is huge!

This is exactly why ZT reversed from an algo whip down. Informed traders know that this print has set the stage for the next one.

This is why I got long the Z5 SOFR contract and I added to it today.

We have just gone through a major repricing of the forward curve where 2025 isn’t pricing enough of a probability for cuts. In other words, interest rates are likely to move down marginally from these levels into the end of the year.

When you have interest rates falling into positive growth, this pushes capital OUT the risk curve and pushes equities UP. This is exactly why I shared the ES long this morning (link). Equities remain skewed to the upside.

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Moving Forward:

The amount of opportunity in financial markets is immense. Short-term momentum traders continue to compete for ticks and the industry is fraught with quarterly returns targets that don’t allow them to achieve exceptional returns. On top of this, passive vehicles continue to increase the tails in markets because there isn’t enough liquidity on the upside or downside for them to execute without moving the price.

This environment will continue to function as an opportunity for those who truly understand macro flows and monetize them properly.

We move forward together frens

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