Trades: Update moving into PCE

The next move for macro and positioning

I want to start with a very simple idea: I have never seen so many moves in capital flows that are so easy to misinterpret.

For example, the yield curve is on the verge of uninverting here and SPX is down marginally from the highs. Is this “the end”?

Bears are coming out of the woodwork and say that this is the final event they have been predicting for decades (what an accomplishment):

However, this is NOT the case. The preponderance of evidence indicates that we are seeing a positioning unwind and not the beginning of a recessionary impulse in markets. I laid this out extensively in this report:

We have seen a positioning unwind and then we saw significant buying today during the US cash equity session:

Implied correlation is now overextended and likely at an unsustainable level:

Implied correlation is significantly elevated above realized correlation:

If you want to dig into this more, check out this paper: https://cdn.cboe.com/resources/indices/documents/Implied_Correlation-WhitePaper.pdfhttps://cdn.cboe.com/resources/indices/documents/Implied_Correlation-WhitePaper.pdf

On top of this, we are seeing the Russell rally and outperform other indices.

Here is the deal, the steepening of the curve due to a recession would imply that the Russell would be UNDERPERFORMING ES. Instead, the Russell is OUTPERFORMING. The implication of this relative performance is that the steepening of the yield curve is repricing duration risk, NOT credit risk.

So you think the Russell is outperforming as we move into a recession? No.

This brings us to where we are today, I laid out the flow dynamics in equities here:

The main update is that we saw a significant reversal at lows today. This will be a critical level to monitor into the PCE print tomorrow:

This brings us to the trades I have been running.

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Trades: