Macro Report/Insights: Inflation
What are the real risks?
A lot has taken place in markets over the past 24 hours and the context has been framed by economic data.
If you didn’t read the real estate report, I would encourage you to. Real estate impacts our lives more than we like to admit. This frames a lot of the context for things moving forward.
Real Estate Report: Homebuilders, REITs and Singlefamily Homes
One of the most important parts of the economy and financial markets is real estate because it impacts all of us. Whether you are a homeowner, renter, or investor, your wallet is directly influenced by the macroeconomic forces driving real estate. It is for this reason I have written a real estate report for you. No one can predict the future but I can …
Between the rate announcement and Powell's speech, I gave the long bond call. It is time but managing the risk for this will be key since we are in a goldilocks regime as opposed to a recessionary regime:
Trades: Pulling the Trigger / Long Bonds
Today was a significant day Why? Because there was clear confirmation that we are in goldilocks. What does that mean? It means a regime where growth is resilient, inflation is falling and cuts are on the table. Cuts are on the table because of a fall in inflation, NOT because the world is falling apart.
A key chart, to watch is how inflation swaps are functioning in connection with FX flows. Basically, as real rates have fallen, inflation expectations have risen marginally since the FOMC announcement. This is one of the main reasons the dollar fell and why I have been short the dollar since the announcement.
If you want to dig into this connection between the swaps and FX, check out the FX primer I wrote earlier this year:
The Research HUB: FX Primer, Pt 5
Hey everyone, This is Part 5 of the FX Primer! 5-Part FX Primer Breakdown: Part 1: FX - Resources, The Big Picture, Variables, Aggregating Knowledge, and Essential Tools. Part 2: FX - Synthesizing Information from Part 1: Theory, Practice, Causal Mechanics vs. Regression Analysis.
Finally, when we look at forward inflation for the USD (blue), EUR (white) and GBP (orange), we can see they have been falling for the past 3 months. This is part of the reason central banks are more comfortable shifting their tone to less hawkish.
However, if we begin to move BACK UP while real rates move down across G7 countries, that likely means goldilocks is setting the preconditions for another acceleration in inflation. What you need to understand is that IF this happens, it will take time. Macro always moves incredibly slowly. People typically assume that because they are always so forward-thinking the market has the same time horizon as them. In reality, your view must always be connected to how the market is pricing the TIMING of growth, inflation, and liquidity.
These ideas are broken down in the educational primer article:
Research Synthesis / Direction Of Capital Flows Substack
Hello everyone, There has never been a time in history when understanding the world from a global perspective and interpreting it accurately paid such a high premium. Since the very beginning of this Substack, I have talked about the nature of the time we live in and how to act intentionally in it.
As we approach the end of the year I am expecting several things:
A further steepening in the yield curve
Further weakness in the DXY
Volume and volatility slow down significantly as we enter a slower period of time.
As always, please feel free to reach out via email or Twitter DMs if you have any questions or simply want to say hi. I always appreciate interacting with you.