Macro Regime Tracker: Disbelief In The Rally
Macro regime and risk assets qualified clearly
The Macro Regime Tracker offers a daily lens on how shifts in growth, inflation, and liquidity affect short-term risk and reward. Leveraging machine learning, AI, and cross-asset data, it identifies macro changes and their impact on market positioning.
Macro Regime Tracker Index:
Macro Regime Context
Macro Tear Sheets: Equities, Fixed Income, FX, Crypto, and Commodities
Macro Regime Dashboard: Excel spreadsheet for economic data and interest rates
Growth, Inflation, Fixed Income, Credit, and Equities Regime Tracker
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Macro Regime Context:
I want to start this report by explaining how I think about the current equity rally we are seeing. We have retraced the entire drawdown and have made an all time high:
As you know, I have been laying out the bullish equity view for a considerable period of time now (link). The geopolitical risk and tariff risk are decreasing as growth accelerates. When Powell doesn’t intentionally put rhetoric out there that causes the forward curve to reprice, he is functionally taking a dovish stance. I don’t care what the specific words Powell says are; what is important is how he is intentionally allowing the forward curve to price a specific path for their actions.
Notice that Powell spoke TWICE this past week, and both times he knew what the forward curve was pricing moving into it. His inaction to push back on the forward curve is a signal. He is cloaking this in “path dependent” language but in reality, he is creating a higher probability of inflation accelerating.
Everyone is so excessively focused on Powell needing to do rate cuts because of the political pressure, but in reality, the Fed always has constraints. Even if Trump puts a Fed chair in there that cuts rates to zero, longer end interest rates will blow out if a Fed chair cuts rates to zero into accelerating inflation.
Now obviously, my example above is the extreme cause but understanding this mechanism frames HOW the probabilities are going to develop over the next FOMC meeting.
As all of this is taking place, equities are rallying aggressively and we are beginning to approach the stage where everyone is sitting in disbelief that equities have actually hit an all time highs.
We are almost back to the highs in the Goldman Most Shorted Index, which illustrates how much positioning was offside moving into this rally.
We are beginning to see the Nikkei melt up as well with green days almost every single day:
And the DAX continues to show incredible resilience and positive momentum:
Bitcoin sits right below all time highs and is likely to push up further as we progress into the July FOMC meeting.
Could we see marginal pullbacks in this environment? Yeah sure but the macro constraints around growth and liquidity will continue to push capital into equities and move out the risk curve.
This is why I am watching sectors like KRE 0.00%↑ right now because if we have an even more aggressive rally in regional banks and small cap stocks, then the FOMO of managers will begin to move into a 2021 like environment where IPOs, SPACs, and VC deals get extremely out of hand.
The CRCL IPO is a direct reflection of this as it rallies from $100 to $300. While it has pulled back a little, we are still seeing it remain elevated above the IPO price:
All of these incremental signals are building into a bigger picture around the fact that growth remains strong and we are NOT seeing the signals of an imminent recession. We are seeing YoY NFP running at 1.10% as the breadth of the Russell is accelerating from its lows. What do you think happens if the breadth in the Russell moves back to its 2023 levels? How high do you think rates go? How much higher do they go if the Fed is cutting the short end to it?
Now I have laid out the logic for rates here but I will be expanding on this further for paid subscribers in the next macro report.
What I want people to take away is that there are A TON of bullish signals right now. There will be a moment in the future where the lights turn from green to yellow and we need to be careful but until the data changes, I remain long.
If you want to hear more of my thoughts about HOW I think about trading and the current macro environment, you can check out the chat I had with
here:Main Developments In Macro
Tariffs & Trade Policy
Trump:
Canada: “Ending all trade talks,” tariff level to be set within 7 days.
China: "Was considering dropping sanctions, but not anymore."
India: “Think we’ll reach a deal soon.”
General: 4–5 trade deals made; July 9 deadline for tariffs “can be extended or shortened.”
Bessent (Treasury Secretary):
U.S. is “very close” to a SALT tax deal.
After 10–12 initial trade deals, "20 more important ones" will follow.
“My sense is China wants to be a responsible partner.”
Tariffs currently: U.S. at 30% on China; China at 10%.
Fentanyl tariffs on China (20%) remain in place.
De-escalation signs with China; rare earth magnet supply to normalize.
“We don’t want to decouple.”
Japan-U.S.:
Trade talks ongoing; Akazawa and Lutnick reconfirm tariff positions.
EU–U.S.:
Confident on reaching a tariff deal by July.
G7 to issue joint statement on U.S. tax exemption.
Federal Reserve & Inflation Outlook
Trump on Fed: “The problem is ‘Fed guy’.” (No comments on next Chair nominee.)
University of Michigan (June):
1-year inflation expectations fell to 5.0%
5–10 year inflation expectations dropped to 4.0%
Sentiment Index rose to 60.7 (vs. 60.5 est)
Core PCE – May:
+0.2% MoM (vs. 0.1% est)
+2.7% YoY (vs. 2.6% est)
Personal Income/Spending – May:
Income: –0.4% MoM (vs. +0.3% est)
Spending: –0.1% MoM (vs. +0.1% est)
Fed’s Kashkari:
Sees two cuts in 2025, but outcome “highly sensitive to tariffs.”
U.S. Fiscal Policy & Legislative Front
SALT Cap Reform:
Tentative deal includes $40K cap and 5-year phaseout.
Allows $500K income loophole for business owners.
Bessent met with “SALT Republicans” to finalize language.
Markets & Energy
Crypto:
Trump: “Bitcoin takes pressure off the dollar,” praises crypto jobs and U.S. dominance in digital asset innovation.
AI & Energy:
U.S. readying executive orders to boost domestic energy supply for AI expansion.
Macro Tear Sheets: Equities, Stock/Bond Correlation, Fixed Income, FX, Crypto, and Commodities
Macro Regime Dashboard: Excel spreadsheet for economic data, interest rates, and real estate.
Momentum and Mean Reversion Models: Equities, Commodities, Fixed Income, and Currencies
You can find the educational primer and video explanation of these models here: LINK
Here is a summary of all models and their directional strengths:
Growth, Inflation, Fixed Income, Credit, and Equities Regime Tracker
The Macro Regime Model offers a real-time view of growth, inflation, and yield curve dynamics, integrating these with credit market shifts, equity risk premiums, and positioning data. It connects upcoming catalysts to statistical drivers of asset prices, creating a unified framework that quantifies skew and clarifies risk-reward across asset classes.
Key Points To Set The Context:
Here’s the updated S&P 500 Sector Wrap using the latest sector contribution and performance data, contextualized within Powell’s testimony, ongoing tariff uncertainty, and growing market fatigue near record highs:
S&P 500 Gains 0.26% as Risk Sentiment Holds, Communication and Discretionary Lead Rotation
The S&P 500 rose 0.26% Friday, extending its record-setting run amid signs of easing trade tensions and restrained inflationary pressure. While the index’s advance was more modest than prior sessions, participation broadened across cyclicals, with Communication Services and Consumer Discretionary setting the pace. Defensive sectors generally lagged, while Powell’s cautious tone and a still-mixed macro backdrop continue to anchor September cut expectations.
Sector Contribution Breakdown (Weighted Return to Index)
Communication Services (+0.11 pp) – Top contributor for the day, led by strength in advertising platforms, social media, and telcos.
Consumer Discretionary (+0.12 pp) – Boosted by gains in travel, autos, and consumer tech; sentiment supported by easing macro concerns.
Industrials (+0.07 pp) – Benefited from a soft landing narrative and pickup in transport names.
Financials (+0.04 pp) – Modest gain as curve stability kept credit markets calm.
Consumer Staples (+0.03 pp) – Slight lift from multinational names on trade thaw hopes.
Real Estate (+0.01 pp) – Mild outperformance from REITs despite rate volatility.
Utilities / Materials (0.00 pp) – Flat on the session; rotation away from bond proxies offset marginal strength in metals.
Health Care (–0.02 pp) – Weakness in biotech and managed care names on sector-specific news.
Information Technology (–0.07 pp) – Profit-taking in semis and software dragged on index despite strong prior gains.
Energy (–0.01 pp) – Lower oil prices weighed, but the sector remains range-bound.
Sector Performance Breakdown (Unweighted Index Returns)
Consumer Discretionary (+1.16%) – Outperformed on broad gains in retail, media, and travel names.
Communication Services (+1.09%) – Continued strength from platform plays and telecoms.
Industrials (+0.77%), Consumer Staples (+0.56%) – Solid cyclical rotation supported both sectors.
Utilities (+0.02%), Materials (+0.04%) – Quiet session, no clear macro catalyst.
Financials (+0.28%), Real Estate (+0.25%) – Moderate moves higher; REITs steadied after recent underperformance.
Energy (–0.35%) – Tracked WTI pullback; geopolitical calm and weak demand tone kept crude capped.
Information Technology (–0.22%) – Weighed down by chip stocks and a fade in recent AI enthusiasm.
Health Care (–0.26%) – Underperformed, with ongoing weakness in services and biotech.
Macro Overlay: Market Climbs Wall of Worry as Powell Treads Carefully
1. Powell Stays Patient, Market Keeps September in Focus
Chair Powell reiterated his message of “watchful patience,” reinforcing that July remains unlikely while September is a live possibility. Tariff-related pass-through and wage-driven inflation still pose risks, but recent PCE and employment data have not derailed easing expectations.
2. US-China Trade: From Truce to Execution
Commerce Secretary Lutnick confirmed the rare earths deal with China has been signed, and broader negotiations with 10+ countries are now advancing. Markets view this as a structural de-risking of the trade narrative. Trump emphasized flexibility on the July 9 deadline, signaling reduced tail risk from abrupt tariff reinstatements.
3. Macro Data Check: Soft Consumption, Muted Inflation
May Core PCE: +0.2% m/m (vs. +0.1% est.), 2.7% y/y
Personal Spending: –0.1% m/m (vs. +0.1% est.)
Personal Income: –0.4% m/m (vs. +0.3% est.)
UMich Sentiment: 60.7 vs. 60.5 prelim; 1Y inflation expectations ticked down
Data reflect a cooling demand backdrop with inflation still manageable — supporting the “cuts later, not never” view from Powell & co.
Final Word: Rally Still Intact, But Higher Bar Ahead
The S&P 500 remains near all-time highs. Sector rotation and mixed breadth suggest the next leg up may require fresh confirmation from earnings or further macro improvement.
US IG Credit Wrap — Spreads Hold at 51.99 bp as Consumer Weakness, Tariff Drift Reinforce Caution
Current Spread: 51.99 bp
5-Year Average: 62.89 bp
Investment-grade (IG) credit spreads were little changed on Friday, sitting just shy of post-COVID lows as soft macro data and policy ambiguity tempered bullish enthusiasm. While the S&P 500 closed at fresh record highs, credit markets remained anchored by Powell’s wait-and-see stance, weakening consumer fundamentals, and a lack of clarity around the evolving trade framework.
Credit Context
< 60 bp: Stable, duration-friendly range supporting insurance and liability-driven investment (LDI) strategies.
60–70 bp: Neutral-to-cautious positioning recommended amid tariff uncertainties and macroeconomic volatility.
> 90 bp: Significant market distress—currently unlikely without a major escalation in geopolitical or macroeconomic shocks.
Macro Overlay: Rate Cuts Loom, But Not Yet
1. Consumer Spending Falters, Sentiment Still Fragile
May’s real personal consumption fell 0.3%, the sharpest drop of 2025, while personal income declined 0.4%, and the savings rate slipped to 4.5%. These declines highlight a deceleration in household demand, particularly in services and discretionary goods.
→ With Q1 GDP already revised to –0.5%, the May spending drop casts doubt on the resilience of the US growth story — and explains why the credit market isn’t chasing equity highs.
2. Powell Holds the Line, Fed Split Widens
Chair Powell reaffirmed the Fed is "well-positioned to wait," but did not close the door on cuts later in the year. July is off the table for most officials, but September remains the base case, with two cuts still priced for 2025. The tone was cautious, and consistent:
“If inflation picks up due to tariffs, we’ll assess it — but we’re not going to overreact to noise.”
Doves (Waller, Bowman) have opened July as a risk case, but the broader FOMC consensus prefers confirmation through data. The IG market reads this as low volatility, low urgency.
3. Trade Noise Remains a Sideshow for Credit
Commerce Secretary Lutnick confirmed the US-China rare earths deal is signed, and that 10 more trade agreements are expected ahead of the July 9 tariff deadline. However, the deals are narrowly scoped and enforcement mechanisms remain unclear.
→ The credit market is not yet pricing meaningful trade optimism — instead, it’s viewing the headlines as tactical relief rather than strategic pivot.
4. Inflation Edges Up, But Remains Contained
Core PCE (May): +0.2% m/m, +2.7% y/y
UMich 1Y Inflation Expectations: Fell to 5.0%
UMich 5–10Y Expectations: Fell to 4.0%
Inflation expectations improved even as the PCE print ticked slightly above consensus. Services inflation was soft, and durable goods deflation continued. From the IG perspective, the pricing backdrop remains benign — not hot enough to trigger repricing, not cold enough to panic.
Final Word: Credit is Grounded in Macro Reality
Spreads at 51.99 bp reflect a market that’s cautiously optimistic — not euphoric. Unlike equities, which have surged on trade headlines and AI exuberance, IG credit remains anchored by fundamentals: weaker consumption, measured Fed rhetoric, and summer illiquidity.
Mag7 Model:
See the intro published for how to use the Mag7 models here: Link
Short-End Rates Wrap — Market Eyes Fed Pivot with –131.4 bp in Cuts Priced Through Dec 2026; Powell Offers Optionality, Not Urgency
Markets are holding firm in their dovish stance, with the OIS curve now pricing in –131.4 basis points of cumulative Fed rate cuts through December 2026 — a fresh cycle low for implied policy rates. While Chair Powell stayed in character with a cautious, data-dependent tone, a softening macro backdrop, weakening consumption, and tariff-driven ambiguity continue to support market conviction around a September easing liftoff.
OIS-Implied Easing Path
Front-End Expectations
28-Jun-25: 4.330% → No live risk
30-Jul-25: 4.283% (–4.7 bp) → ~19% probability of a cut → July risk still latent
17-Sep-25: 4.053% (–12.0 bp) → ~92% probability → First cut fully priced
2025 Year-End Outlook
10-Dec-25: 3.688% → –64.2 bp total → Market implies ~2.5 cuts, staggered quarterly
Cumulative Cut View
09-Dec-26: 3.016% → –131.4 bp → Full easing cycle priced, consistent with lower-for-longer trajectory
Macro Backdrop: Cautious Policy Meets Cracking Demand
1. Powell’s Testimony Reinforces “Patient Optionality”
Powell acknowledged “tariffs could lift inflation, but the impact is hard to calibrate.” His message: the Fed won’t move prematurely — but it’s open to doing so once enough clarity emerges. The July meeting remains in play but lacks urgency. September is now the consensus pivot point.
“If inflation remains contained, rate cuts are still on the table... but we are in no rush.”
2. Tariff Risk Eases, But Doesn’t Vanish
While Commerce Secretary Lutnick confirmed that the US-China rare earths trade agreement has been signed, broader bilateral deals remain under negotiation ahead of the July 9 deadline. Markets expect headline volatility, but Powell reiterated tariffs are “difficult to model” — meaning no reason to hike, but not yet a trigger to cut.
3. Consumer and Growth Data Signal Structural Fatigue
May real personal consumption: –0.3% m/m → worst print YTD
Personal income: –0.4% m/m → sharpest decline since 2021
Q1 GDP: Revised down to –0.5% annualized → driven by weak services
UMich Confidence (June): 60.7 → still below 2-year trend
Savings rate: Fell to 4.5% → household buffers thinning
Even with wages rising 0.4%, the data paint a picture of a consumer losing momentum. The Fed can afford patience, but cracks in demand and sentiment offer increasing justification for preemptive easing.
Final Word: Fed Isn’t Rushing — But the Market’s Already Moving
September cut remains base case (~92% priced)
July optionality alive, but fading with each data beat
–131.4 bp of cuts now priced through Dec 2026 — most dovish path this cycle
The Fed’s posture is one of risk management, not reaction. Powell won’t commit to cuts, but he’s also not leaning hawkish — and that’s all the market needs to stay the course.
Tactical Portfolio
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