We’ve covered the core of the regime matrix, Growth and Inflation. Those two pillars give you the fundamental picture. Growth up, inflation down: Goldilocks. Growth down, inflation up: Stagflation. The combinations drive the playbook.

The fundamental picture alone doesn’t tell you enough. Two identical Growth x Inflation readings can produce completely different outcomes depending on what policy is doing. Growth positive and inflation stable sounds great until you realise policy is restrictive and tightening further. Then your “Goldilocks” is actually Late Cycle, and the clock is ticking.

Policy is the first of three modifier pillars (alongside Liquidity and Risk Appetite) that shape how the fundamental regime expresses across asset classes. If Growth and Inflation tell you what the economy is doing, Policy tells you what the authorities are doing about it. What the authorities do determines how long the current regime persists, how violently it transitions and which assets benefit or suffer along the way.

This is a tough pillar to get right, not because the data is hard to find, it’s actually the most transparent of all five pillars. Central banks publish their decisions, their projections, their minutes. Fiscal data is publicly available. The information is everywhere. The difficulty is knowing what to focus on, what to ignore, and how the different pieces interact.

Let me walk you through how I think about it now.

Why Policy Matters More Than You Think

I used to treat policy as background noise. The Fed cuts, the Fed hikes, markets react for a day and then fundamentals take over.

Policy doesn’t just respond to the economy. It shapes it and it shapes asset prices through channels that are far more powerful than the headline rate decision.

Think about it mechanically. When the Fed sets the overnight rate, it anchors the entire short end of the yield curve. That rate ripples into mortgages, corporate borrowing costs, auto loans, credit cards, every form of debt in the economy. When those costs change, so does behaviour. Businesses invest more or less. Consumers spend or save. Housing booms or busts. The transmission mechanism from a 25 basis point change in Fed Funds to actual economic activity is slow, messy, and uncertain but very real.

Then there’s the balance sheet. When the Fed buys Treasuries and MBS, it pushes investors out the risk curve. Yields compress, asset prices rise, financial conditions loosen. When it sells, or lets holdings roll off, the reverse happens. This is the plumbing that connects monetary policy to markets and it operates independently of the rate decision itself.

And fiscal policy, which most macro frameworks underweight or ignore entirely, puts money directly into the economy. Not through the banking system, not through credit channels, but directly: government spending, transfer payments, tax cuts. When the deficit widens, the government is adding demand. When it narrows, it’s withdrawing demand. This is arguably the most powerful short-term driver of growth and yet I see frameworks that track fourteen different Fed indicators and nothing on fiscal.

The reason I weight Policy at 20% of the regime composite (behind Growth at 30% and Inflation at 25% but ahead of Liquidity and Risk Appetite) is that it’s the bridge between fundamentals and market outcomes. It tells you whether the authorities are reinforcing the current trend or fighting it. And that distinction is the difference between a regime that persists and one that’s about to flip.

The Three-Layer Model

Just as the inflation pillar uses a pipeline (upstream, midstream, downstream), the policy pillar works in layers. Each one captures a different mechanism through which policy affects the economy and markets. Get comfortable with this structure, because it’s the architecture that makes everything else work.

Layer 1: Monetary Policy. The Fed’s rate decisions, forward guidance and balance sheet operations. This is what everyone watches, what CNBC covers on FOMC day, what moves markets in the short term. It matters, but it’s not the whole story.

Layer 2: Fiscal Policy. Government spending, taxation and the resulting deficit or surplus. This is the layer most macro analysts underweight. It’s harder to track in real-time, harder to quantify and harder to forecast. But its impact on growth is often larger and more direct than anything the Fed does.

Layer 3: Financial Conditions. The aggregate result of both monetary and fiscal policy, filtered through markets. Are conditions loose or tight? Is credit flowing or constrained? Are asset prices inflated or depressed? Financial conditions indices capture the net effect of everything the authorities are doing and everything the market is doing in response.

The power of this model is in the combinations. Monetary loose and fiscal tight is a completely different animal from monetary tight and fiscal loose. Each combination has distinct implications for growth, inflation, and asset prices. I’ll walk you through the specifics, but first let me explain each layer in detail.

Layer 1: Monetary Policy - Beyond the Headline Rate

Every six weeks, the Fed announces a rate decision. Markets move. Pundits opine and then the next day, everyone goes back to watching the same indicators they were watching before. The actual analysis of monetary policy gets lost in the noise of the event.

Here’s what I’ve learned to focus on instead.

Real Rates, Not Nominal Rates.

This is probably the single most important concept in the entire policy pillar, and it’s the one most retail investors miss completely.

The nominal Fed Funds rate (the number you see on the news) tells you almost nothing by itself. A rate of 4% is restrictive when inflation is 2% (real rate = +2%). The same 4% is accommodative when inflation is 5% (real rate = -1%). The economy doesn’t care what the nominal rate is. It cares what the rate is relative to inflation.

Real Fed Funds = Nominal Fed Funds minus Core PCE. That’s it. Simple arithmetic, but the implications are profound.

When real rates are deeply negative, say below -1%, the Fed is effectively paying people to borrow. Money is free in real terms. That’s aggressively accommodative. When real rates are significantly positive, above +1%, the Fed is making borrowing genuinely expensive. That’s restrictive. Between those thresholds, policy is roughly neutral.

The scoring in my framework reflects this directly. Real Fed Funds below -1% scores as accommodative (+1). Around zero scores as neutral (0). Above +1% with a shrinking balance sheet scores as restrictive (-1). The level matters, but the direction matters just as much, real rates falling from +2% to +1% is still restrictive, but the trajectory is easing.

Source: FRED FEDFUNDS, FRED PCEPILFE | Real Rate = Fed Funds Effective − Core PCE YoY

I used to just track the nominal rate and the dot plot. That cost me money in 2022 when the Fed was hiking aggressively but real rates were still negative because inflation was running above the funds rate. Everyone was screaming about “tight policy” but real rates told a completely different story. Policy wasn’t actually restrictive until well into the hiking cycle. If you were positioned for “tight money” too early, you got run over.

Source: FRED FEDFUNDS, FRED PCEPILFE

The Yield Curve as a Policy Signal

The yield curve is probably the most over-discussed, under-understood signal in all of macro. Everyone knows an inverted curve “predicts recession.” Few understand why it works or, more importantly, when it stops working.

The basic logic is sound. The curve shape reflects the market’s expectation for future short-term rates. When the curve is steep, long-term rates much higher than short-term, the market expects rates to rise, which usually means growth and inflation are expected to pick up. When the curve inverts, short rates above long rates, the market expects the Fed will need to cut, which usually means a downturn is coming.

The specific spread I watch most closely is the 10-year minus 3-month. It has the cleanest historical track record as a recession signal. The 2s10s gets more attention, but the 10Y-3M is more mechanically tied to Fed policy, the 3-month rate is essentially the Fed Funds rate with a small premium, so the spread captures the gap between where the Fed is and where the market thinks the economy is headed.

But here’s the nuance that most people miss: the inversion itself isn’t the recession signal. The un-inversion is. Historically, recessions don’t begin when the curve inverts, they begin when the curve steepens after a prolonged inversion. That’s when the market starts pricing in emergency cuts. That’s when the data actually breaks.

We saw this play out in late 2024 and early 2025. The 10Y-3M had been inverted for months. Then it steepened aggressively as the Fed started cutting. The curve going from -50 basis points to +50 wasn’t an “all clear” it was the market saying “the Fed is going to have to ease a lot more than you think.” That’s a very different signal, and getting it right matters for positioning.

Source: FRED T10Y3M, FRED T10Y2Y | Red shading = inversion periods

I weight the curve as a confirmation tool, not a leading signal. It tells me whether the bond market agrees with my fundamental assessment. If I’m reading growth as positive but the curve is deeply inverted, one of us is wrong and the bond market has a better track record than I do.

Forward Guidance and the Dot Plot

This is the part of monetary policy that’s changed the most over the past two decades. The Fed now communicates extensively about future intentions, through the dot plot, the Summary of Economic Projections, press conferences, and individual governor speeches. This forward guidance is arguably more important than the rate decision itself, because markets are forward-looking.

The dot plot tells you what each FOMC member expects the funds rate to be at year-end over the next few years. The median dot gets the headline. But the dispersion matters more than the median. When dots are tightly clustered, there’s consensus, the Fed is confident in its path. When dots are widely spread, there’s disagreement and disagreement means uncertainty about the reaction function.

I watch the gap between market pricing and Fed guidance closely. When futures are pricing significantly more cuts than the dots suggest, the market is betting the Fed will be forced to ease by deteriorating data. When futures are pricing fewer cuts, the market thinks the Fed is too dovish. This gap is a tension that resolves one way or another and the resolution drives rates volatility.

The December 2025 FOMC was a perfect example. The dot plot showed only one cut for 2026. The market had been pricing three to four. That gap, between what the Fed said and what the market believed, drove an 87 basis point swing in the 2s10s spread over a matter of weeks. If you were paying attention to the guidance mismatch, you were prepared. If you were just watching the headline rate, you were blindsided.

Source: Federal Reserve SEP, CME FedWatch Tool

Balance Sheet Operations

The rate is the price of money. The balance sheet is the quantity. Both matter.

When the Fed buys bonds (QE), it increases the supply of reserves in the banking system. Banks have more cash, lending conditions ease, asset prices tend to rise. When the Fed shrinks its holdings (QT), either by selling or letting bonds mature without reinvestment, reserves drain, conditions tighten, and the risk premium on financial assets tends to increase.

I track the balance sheet as a year-over-year change. Expanding balance sheet = accommodative. Shrinking = restrictive. The pace matters too. A gradual runoff is very different from active selling. The Fed learned this the hard way in 2018-19 when “autopilot” QT nearly triggered a funding crisis.

Source: FRED WALCL

For the regime framework, the balance sheet is a binary overlay. If the balance sheet is expanding year-over-year, that’s a positive signal regardless of the rate level, the Fed is actively adding liquidity. If it’s contracting, that’s a drag even if rates are low. The combination of rate stance and balance sheet direction gives you the full picture of what the Fed is actually doing, not just what it’s saying.

Layer 2: Fiscal Policy — The Elephant Nobody Watches

This is the layer I was slowest to incorporate into the framework. For years, I basically ignored fiscal policy. The Fed was the show. Fiscal was something economists argued about and politicians used as a talking point. It didn’t seem tradeable.

I was completely wrong. And the 2020-2023 period proved it.

When the US government ran 15%+ of GDP in deficit spending during COVID, it didn’t matter what the Fed was doing with rates. The fiscal fire hose overwhelmed everything. Growth surged. Inflation surged. Asset prices surged. The monetary policy signal was noise compared to the fiscal signal.

That was an extreme case, but the principle holds in normal times too. A budget deficit of 6% of GDP, which is roughly where we’ve been recently, is meaningful demand injection even when rates are at 5%. The government is still adding to spending, still employing people, still transferring money to households. That has a direct and immediate effect on growth that monetary policy can only influence indirectly through credit channels.

The Deficit Level vs The Fiscal Impulse

This distinction is to fiscal policy what the “level vs direction” lesson was to growth indicators. The deficit level tells you the current stance, how much the government is spending relative to what it takes in. The fiscal impulse tells you whether that stance is getting more or less stimulative.

The fiscal impulse is the year-over-year change in the deficit. A deficit that widens from 4% to 6% of GDP is stimulative, the government is adding more demand than last year. A deficit that narrows from 6% to 4% is contractionary, even though the government is still running a deficit, it’s adding less demand than before. The economy feels the change, not the level.

This is counterintuitive and trips up a lot of people. A 5% deficit sounds stimulative and in absolute terms, it is. But if last year the deficit was 7%, the economy is experiencing a 2-point fiscal drag. That drag matters for growth in exactly the same way that a rate hike matters, it’s removing stimulus that was previously supporting activity.

I track both. The deficit level tells me the structural stance. The fiscal impulse tells me the direction. When both are positive and rising, fiscal policy is a strong tailwind. When the deficit is large but narrowing, fiscal is shifting from tailwind to headwind regardless of the absolute number.

Source: FRED FYFSGDA188S, Treasury Monthly Statements, CBO

Why Most Frameworks Get Fiscal Wrong

Three reasons I see people consistently misread fiscal policy:

First, they confuse the political debate with the economic reality. Whether the deficit is “too big” is a political question. Whether the deficit is adding to or subtracting from demand is an economic question. I don’t care about the former for regime classification. I only care about the latter.

Second, they treat fiscal as slow-moving and therefore ignorable. It’s true that fiscal policy changes less frequently than monetary policy, there’s no fiscal FOMC meeting every six weeks. But when it does change, the impact is often larger and more direct. The fiscal cliff, sequestration, COVID stimulus, the IRA, these were all regime-level events that moved markets for months or years.

Third, they underweight the interaction between fiscal and monetary policy. This is where the Policy Mix Matrix comes in, and I’ll cover it in detail shortly. But the short version is: the same fiscal stance means very different things depending on what the Fed is doing, and vice versa.

Layer 3: Financial Conditions - The Net Effect

Financial conditions indices attempt to answer a simple question: taking everything into account, rates, credit spreads, equity prices, the dollar, volatility, how easy or hard is it for the economy to access money?

This is the layer where monetary and fiscal policy meet market reality. The Fed can cut rates, but if credit spreads widen simultaneously, conditions might actually tighten. The government can run a deficit, but if it crowds out private borrowing by pushing yields higher, the net effect could be neutral or negative.

I watch two main indices:

The Chicago Fed National Financial Conditions Index (NFCI) is the workhorse. It’s comprehensive, covering risk, credit, and leverage subcomponents. Zero means average conditions. Negative readings mean conditions are looser than average. Positive means tighter. It’s the one I weight most heavily because it captures the broadest range of inputs and has a good track record relating to economic outcomes.

The Goldman Sachs Financial Conditions Index (GS FCI) gets more attention in markets. It weights equity prices more heavily, so it tends to be more responsive to stock market moves. That’s both a feature and a bug—it captures sentiment shifts quickly, but it can overreact to equity corrections that don’t affect the real economy.

Source: FRED NFCI, S&P 500 | Negative NFCI = conditions looser than average

The key insight with financial conditions is that they’re the final arbiter of whether policy is actually working. The Fed can intend to tighten, but if markets front-run rate cuts and loosen conditions prematurely, the tightening doesn’t reach the real economy. Conversely, the Fed can cut rates, but if a credit event causes spreads to blow out, conditions tighten despite the cuts. Financial conditions capture what’s actually happening, not what policymakers want to happen.

A personal example: in early 2025, the Fed was on hold and QT was winding down. By any textbook measure, policy was restrictive. But financial conditions were loose, equity prices were elevated, credit spreads were tight, the dollar was stable. The economy was behaving as if policy was accommodative because markets had already done the easing. Watching only the Fed would have given you the wrong read. Watching financial conditions told the actual story.

The Policy Mix Matrix

This is the framework within the framework. It’s probably the single most valuable tool in the entire policy pillar, and I wish someone had explained it to me earlier in my career.

The idea is simple: plot the monetary stance against the fiscal stance as a 2×2 matrix. Four quadrants, four very different market environments.

Source: MacroAnalytix Regime Framework

Quadrant 1: Monetary Loose + Fiscal Loose. Maximum stimulus. This is the “money everywhere” environment. Growth gets a boost from both channels. Asset prices inflate. Risk appetite surges. The danger is bubbles and overheating. When both levers are pulling in the same direction, the economy can overshoot in ways that require painful correction later. We saw this in 2021, rates at zero, QE running at full speed, deficit spending at wartime levels. Everything went up. And then everything had to come back down.

Quadrant 2: Monetary Tight + Fiscal Loose. The tug-of-war. The Fed is trying to slow the economy while the government is stimulating it. This is where real rates tend to rise, the curve steepens, and the long end sells off. The growth picture stays muddled because the two forces partially offset each other. This has been roughly the configuration for much of 2024-2025: the Fed restrictive with real rates above +1%, but the deficit running at 6% of GDP providing a fiscal offset. The result? An economy that refuses to roll over despite “tight” monetary policy.

Quadrant 3: Monetary Tight + Fiscal Tight. Maximum restriction. Both levers are pulling demand out of the economy. This is the environment that produces recessions, credit events, and deep bear markets. Growth collapses, earnings fall, defaults rise. Duration works. Risk assets don’t. Historically, these periods are rare because policymakers usually react before both become restrictive simultaneously. But when they happen—think early 1980s under Volcker with concurrent fiscal tightening, the outcomes are severe.

Quadrant 4: Monetary Loose + Fiscal Tight. The healing environment. The Fed is easing while fiscal consolidation reduces demand. The net effect depends on the relative magnitudes, but typically this favours duration and quality growth, rates fall, the curve steepens, and the economy recovers gradually. Credit eases. This is roughly what you get in the early stages of a recovery when the Fed is still accommodative but the post-crisis fiscal impulse is fading.

I check the Policy Mix Matrix every week when I update the dashboard. It takes thirty seconds and tells you immediately whether the two biggest policy forces in the economy are working together or against each other. That single chart has saved me from more bad trades than any other tool in the framework.

Right now, as I write this, both monetary and fiscal policy are loose, the Fed has cut and the deficit remains elevated. The matrix flags this as “Bubble Risk.” That doesn’t mean a crash is imminent. It means the conditions exist for asset prices to overshoot fundamentals, and when both levers eventually need to tighten simultaneously, the correction could be sharp. Worth knowing. Worth sizing for.

Putting It Together: How I Score Policy

The scoring system integrates all three layers into a single pillar reading. Here’s the architecture:

Source: MacroAnalytix Regime Framework | Weights are approximate and subject to judgment

Monetary policy gets roughly half the weight. I look at real Fed Funds (primary signal), the yield curve (confirmation), forward guidance (direction), and the balance sheet (quantity). These combine into a monetary sub-score that ranges from accommodative to restrictive.

Fiscal policy gets roughly a quarter of the weight. I track the deficit level (structural stance) and the fiscal impulse (direction). A widening deficit with rising impulse scores as stimulative. A narrowing deficit with negative impulse scores as contractionary.

Financial conditions get the remaining quarter. NFCI and GS FCI together tell me whether the combined effect of monetary and fiscal policy is actually reaching the economy. Loose conditions confirm the accommodative read. Tight conditions override the headline numbers.

The composite score maps to the same -1/0/+1 framework as the other pillars:

+1 (Accommodative): Real Fed Funds below -1%, OR balance sheet expanding year-over-year, OR financial conditions meaningfully loose. The Fed is actively supporting. Growth tailwind.

0 (Neutral): Real rate around zero, financial conditions near average. Policy is neither helping nor hurting. The economy is on its own.

-1 (Restrictive): Real rate above +1% AND shrinking balance sheet. The Fed is actively restraining. Growth headwind.

As always, the trend matters as much as the level. Policy at 0 and moving toward accommodation is very different from policy at 0 and moving toward restriction. I track both the current score and the direction arrow in every weekly Setup.

Mistakes I’ve Made (So You Don’t Have To)

The policy pillar has its own set of traps. Here are the ones that caught me.

Fighting the Fed.

The oldest cliché in finance for a reason. When the Fed is actively easing, the path of least resistance for risk assets is up. When they’re actively tightening, it’s down. Simple. And yet I’ve repeatedly tried to be clever, shorting into easing cycles because valuations looked stretched, or going long into tightening cycles because growth looked strong.

The Fed moves slower than you think, but it moves more than you think. They don’t stop after one hike or one cut. The cycle continues until conditions force a change. If you fight the direction, you’re fighting the most powerful force in financial markets. I’ve learned to respect it, even when I disagree with the policy.

Watching FOMC Day Instead of the Reaction Function.

FOMC days are exciting. Markets move. Headlines fly. It feels like the most important day of the quarter. And it’s mostly noise.

What matters isn’t what the Fed did today. It’s what the Fed will do in response to the data that hasn’t come out yet. That’s the reaction function, the mapping from economic data to policy response. If you understand the reaction function, you can anticipate the Fed’s moves. If you’re just reacting to FOMC day, you’re trading yesterday’s news.

I spend far more time now thinking about what data would cause the Fed to change course than I do parsing the statement. What level of Core PCE makes them comfortable cutting? What unemployment rate triggers concern? What financial conditions reading makes them nervous? Those are the questions that matter. The statement is just a snapshot of where those answers stood six weeks ago.

Ignoring Fiscal Entirely

I already mentioned this, but it’s worth emphasising as a standalone mistake because I made it for years and it cost me real money.

In 2023, I kept expecting the economy to slow because the Fed was hiking aggressively. Real rates were high. The balance sheet was shrinking. Everything in my monetary toolkit said “restriction.” But the economy kept growing. Consumer spending held up. The labour market refused to crack.

The answer was fiscal. The deficit was running at 6%+ of GDP. The government was pumping money into the economy at a rate that partially offset everything the Fed was doing. If I’d been tracking fiscal impulse, I’d have seen the offset and adjusted my expectations. Instead, I kept waiting for the slowdown that didn’t come.

Now fiscal is a permanent part of the framework. Not as a forecasting tool—I don’t try to predict what Congress will do—but as a measurement of what’s actually happening. The deficit doesn’t lie.

Confusing Nominal and Real

I covered this in the real rates section, but it bears repeating as a mistake. I’ve watched otherwise smart analysts call policy “tight” during periods when real rates were negative, or “loose” when real rates were actually restrictive. The nominal rate is meaningless without the inflation context.

The fix is simple: always think in real terms. Always. When someone says “rates are at 5%,” your first thought should be “what’s inflation?” If inflation is 3%, real rates are +2%—that’s tight. If inflation is 6%, real rates are -1%—that’s loose. The absolute level of rates tells you nothing about the stance of policy.

Overreacting to Fed Language

The Fed communicates in code. “Patient” means something. “Flexible” means something different. “Data dependent” is the ultimate hedge. The cottage industry of Fed statement parsing is a real thing, and I got sucked into it for years.

Here’s what I’ve learned: the words matter less than the numbers. Real rates, the balance sheet, financial conditions, these are the data. The statement is the narrative the Fed wraps around the data. When the narrative and the data agree, fine. When they disagree, trust the data.

Powell can talk about being hawkish all day long. If real rates are falling and financial conditions are loosening, policy is accommodative regardless of what he says. The markets know this, which is why the reaction to statements is often counterintuitive. Don’t parse words. Track numbers.

From Policy Reading to Actual Positions

Here’s roughly how the policy pillar translates into cross-asset positioning:

When policy is accommodative (+1): Duration is less attractive because rates are low and likely to rise eventually. Risk assets benefit from cheap money and easy credit. Equities and credit outperform. The dollar tends to weaken as real rates fall. Commodities benefit from the demand support. Curve steepens as the front end stays anchored and the back end reprices for growth and inflation. This is the environment where you lean into risk, but watch for the Policy Mix Matrix. If fiscal is also loose, you’re in bubble risk territory.

When policy is neutral (0): The most ambiguous environment. Policy isn’t helping or hurting. Asset returns depend more on the Growth and Inflation readings. Position based on the fundamental regime, not the policy modifier. Maintain balanced positioning and don’t overweight any directional bet based on the policy stance alone.

When policy is restrictive (-1): Duration becomes increasingly attractive as the market prices in eventual easing. Risk assets face headwinds from tighter credit and higher borrowing costs. Quality over speculative beta. Cash becomes competitive, you’re getting paid to wait. Credit spreads tend to widen. The curve flattens or inverts as the front end gets pulled up by the Fed while the back end falls on growth fears. This is the environment for patience and defensiveness.

But always, always, overlay the Policy Mix Matrix. Restrictive monetary plus loose fiscal is a very different trade from restrictive monetary plus restrictive fiscal. The matrix tells you which combination you’re actually dealing with, and the cross-asset implications are distinct for each quadrant.

Building Your Own Policy Framework

Same principle as the previous two pillars. The architecture matters more than the exact indicators. Here’s how I’d build it from scratch:

Start with the three layers. Separate monetary, fiscal, and financial conditions. This is the structure that prevents you from overweighting any single policy dimension and ensures you capture the interactions.

For monetary policy, choose indicators that reflect the actual stance, not just the headline. You need something that measures the real rate (nominal rate minus inflation). You need a curve spread that captures the market’s forward view. You need a measure of balance sheet direction. And you should track market expectations versus Fed guidance to spot the tension that drives rates vol.

For fiscal policy, track the deficit level and the impulse. The level is easy, CBO publishes it regularly, and Treasury monthly statements give you near-real-time data. The impulse requires a simple year-over-year calculation that tells you whether fiscal is becoming more or less stimulative.

For financial conditions, pick at least one broad index. NFCI is my primary. Some people prefer the GS FCI or Bloomberg’s index. The specific choice matters less than consistently tracking the same measure over time so you develop intuition for what “tight” and “loose” actually look like in real-time.

Build the Policy Mix Matrix. Plot monetary versus fiscal on a 2×2. Update it weekly. It takes thirty seconds and is genuinely the most underrated tool in the entire framework.

Set your thresholds. What real rate level constitutes “restrictive” versus “accommodative”? What deficit level is stimulative? What NFCI reading counts as loose? Write them down before you need them. Same lesson as Growth and Inflation—explicit thresholds prevent you from moving the goalposts when the data is inconvenient.

Connect to the regime matrix. Policy alone doesn’t tell you the playbook. It’s a modifier that shapes how the Growth × Inflation picture expresses across assets. The same Growth/Inflation regime with accommodative policy is a completely different animal from the same regime with restrictive policy. That interaction is where the framework generates its best signals.

The Bottom Line

Policy is the bridge between the economy and markets. Growth and Inflation tell you what’s happening. Policy tells you what the authorities are doing about it and whether that help or hindrance is reinforcing the current regime or setting up the next transition.

The three-layer model, monetary, fiscal, financial conditions, gives you a complete picture. Real rates matter more than nominal rates. The yield curve confirms but doesn’t lead. Fiscal impulse is the most underrated variable in macro. Financial conditions capture the net effect of everything. And the Policy Mix Matrix tells you whether the two biggest forces in the economy are working together or against each other.

Right now, my Policy reading is 0 (Neutral), trend flat. The Fed is on hold, watching the data. Real rates are modestly positive. Fiscal remains stimulative through deficit spending, but the impulse has stabilised rather than accelerated. Financial conditions are loose. The Policy Mix Matrix flags both levers as accommodative, bubble risk territory in the classification, worth monitoring but not yet actionable.

Next time, we’ll cover Liquidity, the fourth pillar. The plumbing of the financial system. Central bank balance sheets, reserve dynamics, funding market stress and the indicators that tell you whether the system has enough grease to keep running. If Policy is what the authorities intend, Liquidity is what actually flows through the pipes. That distinction matters more than most people realise.

Until then, start building your own policy framework. What would you track for real rates? How would you measure fiscal impulse? Which financial conditions index would you choose? Map out the Policy Mix Matrix for the last five years and see which quadrant produced which market outcomes. The exercise is worth it.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer: All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

But none of that is what this issue is about. Last week happened. What matters now is what happens next and this coming week contains the single most important data release the framework will see in all of 2026 so far.

Wednesday’s CPI is the inflation baseline before the oil shock fully transmits. Friday’s Michigan Consumer Sentiment is the Fed’s leash, if 5-year inflation expectations break higher, the policy trap becomes explicit. And every morning, Brent and tanker traffic data will tell you more about the regime than any official statistic.

Regime Check: Stagflation

The dashboard scores where we’ve been. The week ahead tells us where we’re going.

For weeks the framework scored Neutral/Chop while the signposts accumulated. That regime is now behind us. The pillar moves are directionally clear even if the data catching up to real-world conditions takes a few more weeks.

On the Limits of This Week’s Formal Scores

The ISM surveys, NFP and CPI pipeline data all reflect the pre-shock economy, collected before February 28. The formal pillar scores below represent the starting position as the oil shock begins to transmit. They are a floor, not a ceiling. Expect the scores to move further and faster as March data arrives.

Current Regime: Stagflation | Aggregate Score: -3 | Modifier: Confirmed | Conviction: Elevated

The regime has moved to Stagflation. Growth is deeply negative (-2), Inflation elevated (+1), Policy trapped (+1), Liquidity tightening (-1), Risk Appetite deteriorating (-1). Aggregate score: -3. The Tearsheet scores this unambiguously, the combination of an oil supply shock arriving into an economy already showing deteriorating employment and sticky inflation has crossed the threshold. This is not a border call. Growth expectations have moved sufficiently negative and the inflation pipeline is sufficiently loaded, to lock the Stagflation quadrant.

The December scare was transient: year-end plumbing stress, a single hot PCE print, quickly reversed. This is structurally different. A supply-side energy shock has arrived into an economy where ISM Prices Paid was already at 70.5, its highest since June 2022, seventeenth consecutive month of rising input costs, collected entirely pre-strike. The inflation pressure was building before the oil shock. The oil shock is acceleration.

The Week Ahead: Why This Is the Most Important Setup of 2026

Three releases this week will materially define the regime trajectory for the coming month. They arrive in a specific sequence, and the sequence matters. Here is how to think about each one before it lands.

Wednesday: February CPI - The Most Important Print of the Year

January CPI: +0.2% MoM, +2.4% YoY. Core: +0.3% MoM, +2.5% YoY. That is the starting point.

February CPI will be released Wednesday morning. This print has a unique analytical significance that goes beyond the usual monthly data point: it is the last clean CPI read before the oil shock begins to flow through consumer prices. Whatever it shows is the base from which the inflation repricing begins.

The January read looked constructive on the surface. But the sub-components told a more complicated story. Shelter running above 4% annually. Services inflation sticky. Core PCE at 2.9% with a 0.4% monthly print, the inflation pipeline was refilling. The disinflation narrative that defined the second half of 2025 had already lost conviction before a barrel of oil moved.

Three scenarios, each with a different regime implication:

Scenario A: Hot (+0.4%+ MoM, Core +0.3%+)

The scenario the framework leans toward, given sticky shelter, Services Prices Index at 63.0, and a 0.4% January core read. A hot February print (before oil has transmitted) pushes the Inflation pillar toward +2 and tips the regime from Late Cycle toward the Stagflation border in a single print. Watch the 2Y yield: a move above 4.5% signals the market fully repricing the cut timeline.

Scenario B: In Line (+0.2-0.3% MoM)

Not reassuring in the current context, it simply confirms the starting position is where we thought it was, and the oil shock adds to that from here. The regime call is unchanged. Attention shifts immediately to Friday’s Michigan expectations.

Scenario C: Soft (+0.1% or below)

The least likely outcome. Any undershoot provides brief relief but interpret it carefully: February’s energy CPI was captured with Brent at $70-73. March CPI (released mid-April) captures $85-93+ oil. This week’s print is the baseline, not the peak.

The CPI Framework Watch

The number itself matters less than the trajectory it implies. With Brent at $92.69, ISM Prices Paid at 70.5%, and core PCE already at 2.9%, the direction of travel is not in question. The February CPI tells us the starting altitude before we begin climbing.

Thursday: Initial Claims - The First Post-Shock Labour Read

NFP shed 92,000 jobs in February, confirmed Friday. The consensus had expected a small gain. That print was the third job loss in five months and reflected a labour market that was already softening before the strikes.

Thursday’s initial jobless claims will be the first data point capturing the week of March 2, the first full trading week under the oil shock. This is the earliest hard signal of whether the energy disruption is producing layoffs.

The four-week moving average of claims has been running in the 220-230K range. Here is what to watch for:

• Below 230K - labour market holding. The shock is not yet visible in hiring/firing decisions. This is the most likely outcome given the one-week lag in claims data.

• 230-260K - early stress signal. Some industries (airlines, logistics, consumer-facing services) beginning to react. Not alarm, but the direction is confirmed.

• Above 260K - early deterioration. Growth pillar pressure intensifies. The argument that services expansion (ISM 56.1%) buffers the shock starts to erode.

Context: the healthcare strike that distorted February NFP (28,000 jobs lost) ended February 23. That effect should normalise in claims data from here. Any jump above 240K that cannot be attributed to a specific sector event is a genuine deterioration signal.

Friday: Michigan Sentiment - The Fed’s Leash

The most underrated release of the week. The number the FOMC watches most closely when deciding whether they can move.

University of Michigan Consumer Sentiment for March (preliminary) releases Friday morning. In most weeks it is a second-tier data point. This Friday it may be the most consequential single number of the entire week.

Here is why: the Federal Reserve has been explicit that it is monitoring longer-run inflation expectations to determine whether the public’s trust in the 2% target is holding. So long as 5-year expectations remain anchored below 3%, the Fed can frame an oil shock as a transient supply disruption and stay on hold without formally changing its guidance. The moment 5-year expectations break materially above 3%, the calculus shifts and the Fed must choose between growth and inflation in a way it has not had to since 2022.

January and February Michigan 5-year expectations were already running at 3.1-3.3%. Gas prices rose nearly 27 cents in the week following the strikes, the fastest weekly jump since March 2022. Consumer inflation expectations tend to be heavily anchored to petrol prices at the pump. The March preliminary Michigan survey captures respondents filling their tanks at $3.25+ national average gas.

This is the mechanism through which the oil shock constrains the Fed, regardless of what core CPI prints. If Michigan expectations re-accelerate above 3.3%, every Fed speaker who has been maintaining a “wait and see” posture faces discomfort.

Below 3.3%: Fed can maintain hold posture, frame oil as transient. Above 3.3%: expectations de-anchoring narrative gains traction, cuts formally delayed through year-end. Above 3.5%: the 2022 playbook resurfaces and rate hikes re-enter market pricing.

The Daily Variables: Oil and Tanker Traffic

Whatever the official data prints, Brent and tanker traffic will be giving you a live read on the regime all week. Here is how to use them.

Brent: The Regime Barometer

Issue #013’s signpost was $85. Brent closed Friday at $92.69 and are currently tracking $100+. The question for this week is not whether the shock is real, it is and it is deepening, but whether it is beginning to resolve or continuing to escalate. These are the levels that carry regime meaning from here:

• Below $95 mid-week: De-escalation signal being priced. A move back below the Friday close from the Monday open gap would indicate the market is pricing a diplomatic resolution faster than the physical disruption suggests. Treat with scepticism until tanker traffic confirms.

• $95-105 range: Holding pattern. Shock priced in, no resolution visible. Path B persists. CPI and claims data become the dominant regime variable.

• Above $110 sustained: Escalation pricing accelerating. Gulf storage constraints becoming production constraints. JPMorgan’s 4mb/d production cut scenario begins to materialise. Stagflation deepens - Growth pillar risks moving to -3.

Tanker Traffic: The Physical Reality Check

Brent prices reflect market expectations. Tanker traffic through Hormuz reflects physical reality. Vortexa and Lloyd’s List data have been the most reliable leading indicator of whether the disruption is easing or deepening.

Pre-shock baseline was 24 vessels per day. At the lowest point this week it was effectively zero, three vessels, all Iran-flagged. The $20 billion US insurance program and naval escort offer have not restored commercial traffic. Watch this number daily. Any sustained recovery toward 10+ vessels would be the first concrete de-escalation signal that the market, and the framework, would need to price.

Cross-Asset Positioning: How Each Asset Class Reads the Week

Path B is the operating framework. Here is how each asset class is positioned heading into the week’s data and what changes the thesis.

Equities — VIX above 30, Rotation Underway

S&P at 6,670, down from 6,879 pre-shock. Russell 2000 underperforming at 2,484, consistent with a Stagflation move where tight-margin domestic names feel the squeeze first as input costs rise and growth expectations fall. VIX above 30 is elevated but not yet at stress levels; the 2022 peak saw 36+. The index-level decline is modest relative to the severity of the shock, which means either the market is pricing a quick resolution or the rotation pain is concentrated in sectors rather than visible at the headline level. Both can be true simultaneously.

A hot Wednesday CPI print will test the index level materially. Elevated VIX + rising inflation expectations + no Fed backstop is a combination equities have handled poorly historically.

Gold - Tactical Flush, Structural Bid Intact

Gold at $5,100 is below its pre-shock $5,200+ level. De-risking events typically produce short-term gold selling as investors raise cash across positions, this is mechanical. The structural thesis (central bank buying, real rate compression, dollar weakness, policy uncertainty) is not only intact but strengthened by the supply shock. Watch for gold to recover the pre-shock level once the mechanical selling clears. Stagflation is historically the strongest macro environment for gold.

Bonds - Competing Forces, Watch 2s10s

The 10Y at approximately 4.18% is caught between flight-to-safety demand (lower) and inflation repricing (higher). These forces are roughly balanced at current levels. Wednesday’s CPI breaks the tie. A hot print pushes the 10Y higher; a soft print allows the safety bid to dominate temporarily. The more strategically significant spread is 2s10s: steepening confirms the Stagflation read (growth deteriorating, inflation sticky, Fed frozen). Watch for that spread to break materially wider through the week, sustained steepening is how the bond market prices a regime that is simultaneously recessionary and inflationary.

Global Spillover - EM and Asia Carry the Largest Exposure

The 20% of global oil that moves through Hormuz is not evenly distributed. China, India, Japan and South Korea collectively account for roughly three-quarters of the flows behind the strait. Japan sources 70% of its Middle Eastern crude through Hormuz; Japanese refiners have already asked their government to release strategic reserves. India has approximately two months of import coverage; Thailand has moved to ban fuel exports. These are not tail scenarios, they are current policy responses to a physical supply shock that is landing hardest in Asia.

For the regime framework, the EM/Asia dimension adds two risks that are not fully visible in the US data: currency stress (oil-importing EM currencies under pressure as dollar demand rises and import bills surge) and a demand destruction feedback loop if the shock is severe enough to materially slow Asian growth. Neither is this week’s primary variable, but both belong in the cross-asset picture for any reader with international exposure.

FX - Dollar Finds the Bid It Lacked

DXY has recovered to 99+, finding safe-haven demand after months of structural weakness below 100. This is a regime-consistent response: geopolitical shocks bid dollars in the near term. The structural weakness thesis (DXY as a signpost) is being tested but not broken. USD/JPY, the persistent carry risk signpost since Issue #001 — becomes more dangerous as Japanese investors repatriate assets in a risk-reduction environment. The carry unwind risk that sat unresolved for fourteen weeks is now in a higher-stress context. Watch USD/JPY, a break lower means the carry unwind could be in motion.

The Bottom Line

The regime has moved to Stagflation. The data (even the backwards-looking data from February) was already building that case before Brent hit $100. ISM Prices Paid at 70.5. NFP -92,000. Core PCE at 2.9%. Unemployment rising. These were the numbers before a barrel of Hormuz disruption reached a consumer. The Tearsheet has scored this unambiguously: Growth deeply negative, Inflation elevated, Policy trapped. Stagflation is the confirmed call.

This week, the framework gets its first genuine forward-looking data under the new conditions. Wednesday’s CPI tells us the floor. Thursday’s claims tell us whether hiring decisions have changed. Friday’s Michigan expectations tell us whether the Fed can maintain its holding pattern or whether the policy trap becomes unavoidable.

The most important thing to understand about this week: the data will still be largely backwards-looking but the market is pricing forward. That gap between what the official statistics show and what the oil market is already pricing is where the regime analysis has to operate. The framework is designed for exactly this: to read the leading signals (Brent, tanker traffic, expectations) before they show up in the lagged statistics.

Watch oil. Watch the Michigan expectations number. Know what each one means for the regime before it prints. The week that follows will be a lot clearer if the framework is set up before Tuesday’s open.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication constitutes financial advice, investment recommendations, or solicitation to buy or sell any securities. The regime framework and cross-asset analysis represent the author’s interpretation of publicly available data and should not be relied upon as the sole basis for investment decisions. Past performance of the framework or any referenced positioning ideas does not guarantee future results. Always consult a qualified financial advisor before making investment decisions. MacroAnalytix and TMS Capital are complementary but distinct entities.

It’s Thursday. The market has given us half an answer and the half it hasn’t given is the one that matters most.

The Signpost Check

Brent opened Monday at $77, spiked to $82, and is now consolidating in the $80–85 range. That’s not Path A. Path A was below $80 by Wednesday - a clean spike-and-fade. Brent hasn’t faded. It’s sitting in the transition zone we mapped on Sunday, pressing the upper boundary.

It’s not Path B either. Path B required sustained above $85 and climbing. We’re not there. But Hormuz is still closed, the US has offered to escort tankers rather than announce reopening, and every day that strait stays shut compounds the supply math.

VIX opened at 24.5—just below the 25 threshold—and closed Wednesday at 21.15. That’s a textbook geopolitical fade. The fear premium drained in three sessions. Path A behaviour.

Gold is at $5,165. Below where it was before the strikes ($5,200+). No flight-to-safety surge. No institutional panic bid. Path A behaviour.

S&P futures gapped to 6,820 on Monday’s open (down from 6,875 Friday), recovered to 6,860, and hit 6,901 after Wednesday’s close. The V-shape is forming. Path A behaviour.

DXY briefly spiked to 99.3, now consolidating between 98.75–99. No sustained safe-haven dollar bid. Path A behaviour.

Here’s the thing.

Risk assets are pricing Path A. Every single one. VIX fading, equities recovering, gold flat, dollar calm.

But the inflation pipeline is telling a completely different story.

The Two-Speed Split

The data this week told a cleaner story than the oil market did.

ISM Manufacturing: 52.4 (above 50, above the 51.7 consensus). ISM Services: 56.1 (well above the 53.5 consensus, up from 53.8). Both in expansion. Both beating. The economy entered this shock with genuine resilience, not just a buffer, but acceleration. The two-speed engine is firing on both cylinders for the first time in months.

That’s the good news. Here’s the complication.

Manufacturing Prices Paid printed 70.5, expected 60.6, previous 59. The largest single-month jump in the ISM Prices Paid sub-index in over a year. Services Prices Paid went the other direction: 63, down from 66.6.

Two-speed inflation to match the two-speed economy. The goods pipeline is on fire. The services pipeline is easing. And the oil shock hasn’t hit either one yet, the ISM survey period likely captured pre-strike sentiment.

Here’s why that Manufacturing number still matters: energy costs flow through goods first. Every barrel of oil feeds fertiliser, shipping, plastics, chemicals, industrial inputs. The goods pipeline, already at 70.5 before the shock, is the channel through which $80–85 Brent transmits into the real economy. Services will lag by weeks.

The bond market sees it. The 10-year has risen from 3.98% to 4.12% since Monday. That’s not a safety bid. In a clean geopolitical shock, yields fall as capital flees to Treasuries. Yields are rising because the bond market is repricing inflation expectations. Equities are buying the growth resilience. Bonds are pricing the inflation risk.

One of them will be wrong.

Updated Regime Read

The dashboard stays at Neutral/Chop. I’m not formally changing pillar scores mid-week on four days of data but the composition has shifted.

Growth: 0, solidifying toward +1. Both ISMs above 50 and beating consensus. Services at 56.1 is the strongest print in months. This economy can absorb a $10–15 oil shock at this pace.

Inflation: 0/+1, holding. Manufacturing Prices Paid at 70.5 is a genuine warning but Services at 63 (declining) provides an offset. The pillar doesn’t move to +1 yet. The question is whether the oil shock tips the balance as energy costs flow through the goods channel over the coming weeks.

Policy: 0, frozen. The Fed can’t react to any of this. Rate cuts pushed further out.

Liquidity: 0. No plumbing stress. Repo, SOFR, cross-currency basis all behaving.

Risk Appetite: 0/-1, stabilising. VIX at 21.15 and fading. S&P recovering. The fear bid didn’t last.

What I’m Watching Into Friday and Beyond

Brent by Friday close. If it fades below $80, Path A wins outright and this Pulse becomes a footnote. If it holds $80–85 into next week, the inflation transmission has time to embed. Above $85 at any point and the regime call accelerates.

NFP tomorrow. Strong payrolls = economy can absorb the shock. Weak payrolls + hot goods inflation = the stagflationary setup gets materially closer. The combination of ISM strength and NFP will tell us whether the pre-shock economy was genuinely accelerating or running on fumes.

Hormuz. Every additional day closed compounds the supply disruption. The US escort offer suggests this isn’t reopening cleanly. Watch shipping insurance rates and container surcharges as leading indicators of how long the disruption lasts.

The 10-year. If yields keep rising while equities recover, the bond market is telling you the inflation risk is real and the equity market hasn’t priced it. When those two disagree, the bond market is usually right.

The Bottom Line

Risk assets are trading this as a nothing burger. The goods inflation pipeline is trading it as a regime shift. One of them is wrong.

If you held through Monday’s gap - good. The framework said don’t sell the open, and the V-shape is rewarding that discipline. But Manufacturing Prices Paid at 70.5 is a flashing amber signal that the goods inflation pipeline was already deteriorating before this shock. And Brent consolidating at $80–85 with Hormuz closed is not the same as Brent fading below $80 with Hormuz reopened.

The signposts haven’t cleanly confirmed either path. That’s honest. What they have confirmed is that the inflation risk was underpriced before Saturday, and it’s more underpriced now.

Sunday’s Setup #014 will have formal dashboard scores and a full cross-asset update. For now: watch oil, watch tomorrow’s NFP, and respect the fact that the bond market and the equity market are telling you two different things.

When that happens, the bond market is usually right.

On Saturday, the US and Israel launched joint strikes against Iran. Iran’s supreme leader has been confirmed killed. Iran has retaliated with strikes across the region. The Strait of Hormuz (through which roughly 20% of the world’s daily oil supply passes) has been effectively closed to shipping. Markets were already closed for the weekend.

That’s the headline. This publication isn’t going to become geopolitical commentary, you can get that everywhere else. What we’re going to do is what we always do: run it through the framework, assess both paths and let the pillars tell us what the regime is becoming.

The single variable that matters for the regime framework is oil. Not the politics, not the military outcomes, not the diplomacy. Oil is the transmission mechanism through which this event reaches Growth, Inflation, Policy, Liquidity and Risk Appetite. Everything else is downstream.

And the question is simple: how long?

Where We Were Coming In

Before this weekend, the dashboard was already giving us a complicated read. Here’s the backdrop:

Growth: 0, uncertain. ISM Manufacturing surprised at 52.6 in January, the first expansion in 12 months. But Q4 GDP came in at just 1.4%, well below consensus. The two-speed economy (manufacturing recovering, GDP weak) was unresolved. Monday’s ISM Manufacturing for February was already the most important print of the week.

Inflation: 0/+1, trending up. Core PCE at 2.9% with a hot 0.4% monthly print. The inflation pipeline was no longer clearing, it was arguably refilling. The disinflation narrative was losing conviction.

Policy: 0, maximum uncertainty. The SCOTUS IEEPA ruling invalidated ~60% of the tariff architecture. Trump pivoted to Section 122 with a 15% global tariff. The Fed remained on hold with first cuts not priced until July. Policy was frozen.

Liquidity: 0, neutral. No material plumbing stress but financial conditions tightening via uncertainty.

Risk Appetite: 0/-1, deteriorating. VIX at 19.86. Gold futures above $5,200. BTC falling to $66,400. The one pillar that had been positive for months was rolling over.

Regime: Neutral/Chop for the twelfth consecutive week. We flagged in Issue #012 that the path to Late Cycle was shorter than the path to Goldilocks, but neither had enough momentum. We were waiting for a catalyst.

Two Paths: Framework Implications

Geopolitical shocks are binary for markets. They either resolve quickly and become a footnote or they persist and rewire the macro landscape. The June 2025 12-day conflict is the relevant precedent, oil spiked, then retraced. The Strait of Hormuz stayed open. Markets absorbed the shock within weeks.

This time could follow the same pattern. It could also be structurally different. The framework doesn’t require us to know, it requires us to map both paths and let the data tell us which one is unfolding.

Path A: Resolves Quickly

The scenario: Strikes conclude within days. Hormuz reopens. Oil spikes to $80-85 then retraces toward $70-75 within two weeks. The conflict follows the June 2025 pattern, intense but brief with limited lasting economic impact.

Regime outcome: Back to Neutral/Chop within 2-3 weeks. The data (ISM, NFP, CPI) reasserts dominance over the narrative. The week’s economic releases become the more important story. The regime question reverts to: can manufacturing sustain expansion while inflation stays sticky?

Path B: Prolonged Disruption

The scenario: Conflict extends beyond this week. Hormuz stays disrupted for days or weeks. Oil sustains above $85, potentially moving toward $100. Energy cost pass-through begins flowing into the real economy.

Regime outcome: Stagflation. Growth flat-to-negative. Inflation sharply positive. Policy frozen. The same regime we identified during the Issue #004 scare, except that time the catalyst was data-driven and self-correcting. An oil supply shock is self-reinforcing: higher energy costs weaken growth and push inflation higher simultaneously. That’s the textbook definition of a stagflationary impulse.

What Tells Us Which Path We’re On

We don’t need to predict the geopolitical outcome. The market will tell us. Here are the signposts:

The hierarchy is clear: watch oil first, then VIX, then credit. If Brent is below $80 by Wednesday and the VIX is fading, this is Path A and the economic data reclaims the narrative. If Brent is above $85 and climbing, the data is secondary. The oil shock is the story and the regime is shifting.

The Week Ahead: Data Still Matters

Regardless of which path unfolds, this week’s economic data was already critical. These releases now serve a dual purpose: they tell us the pre-shock state of the economy, which determines how much resilience exists to absorb an oil hit.

Note: the ISM survey period likely captured pre-strike sentiment since the conflict began on Saturday. It won’t directly reflect the geopolitical shock, which makes it a cleaner read of underlying economic trajectory.

Cross-Asset Positioning Framework

I’m not going to prescribe trades into a gap. What I will do is map the framework’s logic for each path so you know where each asset class sits before the open.

Oil & Energy

WTI closed at $67. Brent at $73. Both will gap higher at the open. The magnitude tells you which path the market is pricing. Path A: spike to $80-85, then retrace. Energy names gap up, give some back. Path B: sustained above $85-100. Energy becomes the only sector with a structural bid.

Gold

Already above $5,200 before this weekend. Every structural driver (central bank buying, dollar weakness, reserve diversification) was already in place. A geopolitical shock adds flight-to-safety demand on top. Gold works in both paths. Path A: consolidates at elevated levels. Path B: breaks higher toward $5,500+. The only scenario where gold falls meaningfully is a clean, immediate resolution, the lowest probability outcome.

Equities

S&P at 6,889 will gap lower. Path A: classic buy-the-dip, geopolitical shocks that resolve quickly have historically been poor selling opportunities. Path B: sector rotation is violent. Defence and energy outperform. Consumer discretionary, airlines, travel underperform. Small caps (RTY at 2,632) most vulnerable given tight margins and domestic demand sensitivity.

Bonds & Rates

10Y at 3.97% faces competing forces: flight-to-safety (lower) vs inflation expectations (higher). Path A: initial safety bid, yields drift back toward pre-shock levels. Path B: the 2-year is the key indicator. Watch 2s10s, steepening confirms Late Cycle/Stagflation.

FX & Dollar

DXY at 97.6, already below the 100 signpost. Path A: brief safe-haven dollar bid, then resumes drift lower. Path B: USD/JPY is the detonator. If yen strengthens violently (below 150), carry positions unwind globally, a liquidity event layered on a geopolitical event.

Crypto

BTC at $66,400 was already sliding. Path A: stabilises once risk premium fades, doesn’t lead the recovery. Path B: further downside. The “digital gold” narrative doesn’t survive contact with an actual geopolitical crisis, real gold does that job.

The Bottom Line

Weeks of Neutral/Chop. The signposts were accumulating, but nothing had enough momentum to break the regime.

Now there’s a catalyst. Whether it matters depends entirely on duration.

If this resolves in days: it’s a spike-and-fade. The data this week reclaims the narrative. Neutral/Chop persists with elevated volatility.

If oil spikes and holds past midweek: the inflation transmission mechanism activates. Cost-push inflation layers on top of already-sticky Core PCE. The Fed can’t cut. Growth deteriorates. That’s Stagflation, the regime the framework has flagged as the shortest path since Issue #005.

Practical framework for the week:

1. Watch oil, not headlines. Brent is the single best real-time indicator of which path is unfolding. Spike and fade by Wednesday = Path A. Higher and climbing = Path B.

2. Don’t sell the gap. The worst prices in a geopolitical shock are usually the opening prices. If you didn’t reduce exposure before, selling Monday’s open gives the market the worst of you.

3. Gold is the hedge that works both ways. It consolidates in Path A, breaks higher in Path B.

4. ISM Manufacturing is still the most important number tomorrow. It tells us the pre-shock state of the economy. A strong print means resilience. A weak print means we were already fragile.

5. Define your levels before the open. Know what level changes your view. Know what level triggers your risk reduction. Know what you own and why you own it if this is Stagflation.

The framework exists for exactly this moment, to provide structure when the world feels structureless. It’s not telling us to panic. It’s telling us: oil is the variable, duration is the question and the answer comes from the market, not from us.

I’ll publish a Pulse mid-week once markets have generated real prices and the dashboard can produce confirmed scores. If something material shifts before then, you’ll hear from me sooner.

Questions or feedback? Drop me a line at macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication constitutes financial advice, investment recommendations, or solicitation to buy or sell any securities. The regime framework and cross-asset analysis represent the author’s interpretation of publicly available data and should not be relied upon as the sole basis for investment decisions. Past performance of the framework or any referenced positioning ideas does not guarantee future results. Always consult a qualified financial advisor before making investment decisions.

This changes the macro regime read. Here’s how.

A note before we start: this situation is developing rapidly and the picture will look different in 24 hours. I’m not a geopolitical commentator, I’ll leave the foreign policy analysis to the professionals who do it for a living. But the situation, however grave, doesn’t change a trader’s job. Our job is to make money. That means running every shock through the framework, sizing for uncertainty and letting the regime tell us where the opportunities and the landmines sit. That’s what this piece does.

From Tail Risk to Base Case

The military buildup had been telegraphed for weeks: carrier strike groups, aircraft redeployed and additional US personnel across the theatre. Markets had been pricing some risk premium into oil. Brent edged toward $72, CL above $66, but equities remained largely complacent. The VIX closed Friday at 19.71, elevated but nowhere near crisis territory.

That complacency is about to be repriced. The initial phase of strikes is reportedly planned to last four days. Iran has vowed retaliation against US bases across the region and has threatened to strike Israel. Iraq has closed its airspace. The US Embassy in Qatar has ordered shelter-in-place. Gold was already at $5,245 on Friday’s close, expect a significant gap higher when markets reopen.

Five-Pillar Impact

Inflation (25%): This is the pillar under most immediate pressure. A supply-driven oil shock feeds directly into the upstream stage of the inflation pipeline. Commodities first, then expectations, then sticky services. If Strait of Hormuz transit is disrupted, even temporarily, the energy price spike could be severe. The pipeline model that cleared in recent months starts refilling from the top.

Growth (30%): Energy price shocks act as a tax on consumers and compress corporate margins. The growth deceleration we’ve been tracking doesn’t need this additional headwind. If oil sustains above $80–85, the consumer spending drag becomes material. The path from Neutral/Chop to Late Cycle just got shorter.

Policy (20%): The Fed is now trapped in a familiar bind: supply-side inflation meets demand-side weakness. Cutting rates risks stoking the inflation impulse. Holding risks choking a decelerating economy. This is the textbook definition of a stagflationary policy paralysis and it’s exactly what makes this scenario so dangerous for multi-asset portfolios.

Liquidity (10%): Flight-to-safety flows tighten financial conditions for risk assets while compressing Treasury yields. Dollar strengthens on haven demand. Funding markets could stress if the conflict escalates beyond the initial strike window, particularly if counterparty risk perceptions shift.

Risk Appetite (15%): The only pillar that was positive in last week’s scorecard is now under direct assault. Expect VIX to gap above 25. Credit spreads to widen. Equity futures to open significantly lower. Gold, Treasuries and the dollar absorb the safe haven bid. The risk-on modifier that was carrying the regime read evaporates.

Regime Trajectory

The net effect across pillars points clearly toward one outcome: the probability of a Stagflation regime has increased materially. A supply-driven inflation shock meeting a decelerating growth backdrop with a paralysed central bank, that’s the regime definition. We aren’t declaring a full regime shift yet. The duration and scale of military operations matters enormously. A contained, multi-day strike that ends with de-escalation looks very different from a sustained campaign with Iranian retaliation across the theatre.

Signposts to Watch

Strait of Hormuz: Does Iran attempt to close or mine the strait? Roughly 20% of global oil supply transits through it. Any disruption here changes the oil calculus from a risk premium to a supply crisis.

Iranian retaliation scope: Targeted missile strikes on Gulf bases (as in June 2025) vs. broader regional escalation involving Hezbollah remnants or Houthi forces. The breadth of response determines whether this stays a bilateral conflict or becomes a regional war.

Oil price levels: Brent below $80 suggests markets view this as contained. Brent above $90 signals supply disruption fears. Above $100 means we’re in regime-shift territory for Inflation.

Fed communication: Watch for emergency statements or forward guidance shifts. Any hint that the Fed is weighing the growth drag over the inflation impulse tells you which way Policy tilts.

The Bottom Line

This is the exogenous shock the framework is built to parse. The regime hasn’t shifted yet—but the probability distribution has moved dramatically. Stagflation risk is elevated. Position sizing should reflect maximum uncertainty. If you followed the signpost discipline from The Setup, you know the playbook: gold exposure benefits from haven flows, duration gets a bid from growth fears but faces inflation headwinds, and cyclical equity exposure—the regime’s prior favourite—faces the most risk from here.

Sunday’s Setup will provide a full regime reassessment once we have 24–48 hours of market reaction and clearer visibility on the scope of operations. Until then: size for uncertainty, watch the signposts, and let the framework do the work.

If you’ve spent five minutes on FinTwit today, you already know: NVIDIA either saves civilization after the close tonight or we’re all bartering canned goods by Friday. The S&P is either going to 10,000 or the economy ceases to exist. There is, apparently, no middle ground.

Back in reality: NVIDIA reports fourth-quarter earnings after the bell. The Street expects $65.7 billion in revenue and $1.52 in earnings per share, both records. But this isn’t about whether they beat. They’ve beaten in sixteen of the last eighteen quarters. The real event is what they say about the next twelve months and whether the AI capex supercycle that’s been propping up growth, risk appetite and index-level returns still has legs.

The Regime Implications

Forget the stock for a moment. Think about what NVIDIA’s numbers actually tell us about the regime.

Growth pillar: Hyperscaler capex has been one of the few bright spots keeping business investment alive while housing stagnates and manufacturing grinds. Combined Big Five capex guidance for 2026 has ballooned to roughly $750 billion, up from ~$443 billion in 2025, a 69% year-over-year increase and the third consecutive year of 60%+ growth. If NVIDIA’s guidance signals that spending is accelerating, the growth pillar gets a tailwind that offsets weakness elsewhere. If it signals deceleration, the one engine that’s been working starts to sputter.

The catalyst behind the spending: Blackwell. NVIDIA’s next-generation platform is sold out through the back half of 2026 with billions already booked in its first quarter of availability. The Meta partnership announced this month included millions of Blackwell and Rubin GPUs under a multi-year deal and underscores the demand visibility. If tonight’s call confirms that the Blackwell ramp is on track with no yield or supply issues, it validates the capex cycle. If there are production hiccups, it gives the efficiency bears something to point at.

Risk Appetite pillar: NVIDIA is roughly 7% of the S&P 500. When a single stock commands that kind of index weight, its earnings become a risk appetite event. The concentration problem cuts both ways. A strong print keeps the mag-7 engine running and flattens any breadth concerns. A disappointing guide exposes just how narrow the rally has been. The stock’s been sideways for three to six months, which suggests expectations aren’t euphoric. That’s actually constructive and leaves room for a positive surprise to matter.

The So What

For the regime framework, there are two scenarios that matter and one that doesn’t:

Scenario A: Guidance accelerates. Q1 FY2027 guide comes in above the $65 billion whisper number. Gross margins hold mid-70s. Blackwell demand visibility extends through calendar 2027. This reinforces the AI capex supercycle narrative and keeps the Growth and Risk Appetite pillars supported. The regime stays Neutral/Chop with upward pressure. It’s not a regime shift, but it removes a downside catalyst and gives Sunday’s Setup a more constructive tone.

Scenario B: Guidance disappoints. Revenue guide below $60 billion or margin compression below 70%. This is the DeepSeek thesis playing out. Efficiency gains reducing the brute-force compute demand that NVIDIA has monetised. It would pressure Risk Appetite directly through index impact and raise questions about the sustainability of the capex cycle that’s been supporting Growth. That’s regime-relevant. If this happens, expect a Regime Alert before Sunday.

Scenario C: In-line beat, vague guidance. This is the most likely outcome and the least interesting. Revenue beats by a billion or two, guidance roughly matches, stock moves a few percent either way and settles. The regime doesn’t change. Sunday’s Setup addresses it in the Risk Appetite section and moves on.

The Signpost

Skip the headline revenue number, everyone will have that within seconds. Here’s what to listen for:

Data centre revenue composition. Last quarter it was $51.2 billion with networking more than doubling. If networking revenue growth decelerates sharply, the infrastructure buildout may be further along than bulls think. If it re-accelerates, the capex cycle has another leg.

Gross margin trajectory. Mid-70s is the line. Jensen guided 75% non-GAAP last quarter. If that slips below 72%, it signals competition or pricing pressure from the efficiency argument. Margins tell you more about NVIDIA’s moat than revenue does.

The China commentary. Revenue from China was essentially zero last quarter after export restrictions killed H20 demand. Any change in tone here matters for geopolitical risk pricing and for the broader tech cold war narrative that feeds into Policy.

Results drop at 5pm Eastern. If they’re regime-material, you’ll hear from me before Sunday. If they’re not, we’ll fold it into The Setup and keep moving.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

It’s easy to get lost in the week-to-week.

Every Sunday for twelve weeks, I’ve sat down with the dashboard, scored the pillars, tracked the signposts and tried to separate signal from noise. Some weeks the story was obvious. Most weeks it wasn’t. Somewhere between the ISM prints and the NFP revisions and the carry unwind warnings, I realised something: the weekly cadence, while essential, can obscure the bigger picture.

So this week we’re doing something different. Instead of zooming into the latest data point, we’re zooming out. Mapping the trajectory. Where has the economy actually been, where is it now and based on twelve weeks of regime data where is it likely heading?

The headline hasn’t changed. We’re still in Neutral/Chop with a Tailwind modifier and minimal conviction. Aggregate score sits at +1. All four validation checks pass. Same three signposts triggered. If you’ve been reading since January, that probably sounds familiar.

But the trajectory underneath tells a story the weekly snapshots can miss.

Current Regime: Neutral/Chop | Aggregate Score: +1 | Modifier: Tailwind | Conviction: Minimal

Sources: MacroAnalytix Dashboard | TradingView: https://www.tradingview.com | BLS: https://www.bls.gov

The 12-Week Journey: A Regime in Three Acts

Here’s the full arc mapped in one place:

Three acts emerge from the data.

Each tells us something different about where we’re heading.

Act I: The Optimistic Launch (Issues #001 - 003)

We launched in December with services booming, growth expanding, and the post-election reflation trade in full swing. ISM Services surged to 54.4 in December 2025, the highest reading of the year. GDP was tracking above trend. The dashboard scored it Reflation/Goldilocks, the best environment for risk assets.

The aggregate peaked at +2 in Issue #003 as growth hit its highest score and the framework briefly classified the regime as Recovery/Disinflationary Boom. That was the high-water mark. Looking back, the optimism was warranted by the data but the conditions were already more fragile than they appeared. Liquidity had quietly flipped negative. The plumbing stress that would define the December selloff was already building beneath the surface.

Lesson learned: peak regime scores often coincide with peak fragility. When everything looks good, that’s precisely when the framework should be watched most closely for deterioration.

Act II: The Stagflation Scare and Reset (Issues #004 - 005)

Issue #004 was the moment the framework proved its worth. The aggregate collapsed from +2 to -2 in a single week. Growth turned negative. Liquidity went deeply negative. Four signposts triggered simultaneously. The dashboard classified it Stagflation (the worst quadrant) right as markets were pricing peak optimism.

Was it real? Partially. Year-end funding stress, PCE overshooting expectations and ISM Manufacturing hitting its lowest since October 2025 were genuine deteriorations. But the framework was also reacting to seasonal plumbing stress and a binary PCE print that looked worse in isolation than in context.

The holiday rebuild Dashboard v2 was born from this experience. Buffer zones to prevent whipsaws. Leading versus coincident indicator weighting. The inflation pipeline model. Every improvement was a direct response to watching the framework react too aggressively to what turned out to be largely transient stress.

Lesson learned: frameworks need buffers. Binary scoring without zones produces dramatic headlines but noisy signals. The v2 upgrade has been validated by every subsequent issue, the regime hasn’t whipsawed since.

Act III: The Neutral Grind (Issues #006 - 012)

Seven consecutive weeks in Neutral/Chop. That’s not a coincidence, it’s the regime telling us something. The economy isn’t breaking. It isn’t booming. It’s grinding.

Within that grind, the modifiers have told a volatile story. Risk Appetite surged to +1, collapsed to -1 and surged back to +1. Policy went from accommodative to restrictive and back to neutral. The core pillars (Growth, Inflation, Liquidity) sat at zero the entire time. The engine never changed. Only the road conditions did.

The NFP saga captures the narrative perfectly. The 3-month average collapsed from 59k to -22k in Issue #009, what looked like a hiring freeze, then recovered to 78k in Issue #011 after the January print came in at 130k (well above the 70k consensus). But 2025’s total payroll growth was revised down by nearly 900,000 jobs. The labor market isn’t what anyone thought it was six months ago.

Lesson learned: when the core holds at zero while modifiers swing wildly, the correct read is usually that the core is right. Modifier tantrums create volatility. Core transitions create trends. Know which you’re trading.

Key Question: Where Is the Trajectory Pointing?

This is the question the zoom-out is designed to answer. Not “what happened this week” but “what does twelve weeks of data tell us about direction?”

Three data points from this week sharpen the picture:

Flash PMI missed across the board. S&P Global’s February preliminary readings came in soft. Manufacturing at 51.2 (versus 52.6 expected), Services at 52.3 (versus 53.0 expected). The services reading is the weakest in ten months. Both are still above 50 (expansion territory) but the direction is wrong. Coming just weeks after ISM Manufacturing’s surge to 52.6 (its first expansion in twelve months), this creates another of those divergences we’ve been tracking since Issue #006. ISM says accelerating. S&P Global says decelerating. One of them is lagging. If the February ISM confirms the flash PMI’s deceleration signal, the Growth pillar faces its first serious test since the Stagflation scare, and the soft landing probability drops accordingly.

The Fed is deeply divided. Wednesday’s FOMC minutes from the January meeting revealed a committee split three ways: some want to cut, some want to hold, and several raised the possibility of hikes. That’s not a central bank with a clear direction. The minutes showed most participants worried about inflation remaining above target for longer than expected, even as they acknowledged the labor market was stabilizing. With Powell’s term ending in May and Warsh (widely seen as hawkish) nominated as successor, the policy trajectory is genuinely uncertain for the first time since we started publishing.

Walmart told us the consumer is adapting. Thursday’s Q4 results beat on both revenue ($190.7B) and earnings ($0.74 EPS). E-commerce grew 24% globally. Upper-income households are driving market share gains, trading down to value rather than cutting back. Walmart’s CFO said they’ve “largely absorbed the brunt of tariff impact” as an industry, with US inflation running just above 1% in Q4. The consumer isn’t cracking. They’re shifting and that distinction matters for the regime read.

Put the twelve weeks together and here’s what the trajectory shows:

Why is Goldilocks the highest probability? Because the direction of the data favors it. ISM Manufacturing expanded for the first time in a year. NFP recovered from near-zero to 130k. CPI dropped to 2.4% from 2.7%. The inflation pipeline is clearing from upstream through downstream. Financial conditions remain loose. Real income hasn’t turned negative.

Why isn’t it higher than 40%? Because Friday’s flash PMI miss, the Fed’s three-way split and those three stubborn signposts all argue against certainty. The soft landing has been the base case for a year and a half. It keeps almost arriving and never quite getting there.

The Five Pillars: Trajectory View

Instead of the usual deep-dive into each pillar’s weekly data, here’s what the 12-week arc tells us about direction.

Growth: Resilient but unresolved. The divergence between ISM surveys and labor data has been the recurring tension since Issue #006. Services expansion has held above 53 consistently. Manufacturing just crossed back above 50. But NFP took a round trip from positive to negative to positive and the 2025 benchmark revision (-898k jobs) means the starting point was weaker than anyone knew. Friday’s flash PMI miss adds a new wrinkle, if the February ISM confirms deceleration, the growth pillar comes under pressure for the first time since the Stagflation scare. If it holds, the soft landing narrative strengthens materially.

Inflation: The most encouraging trajectory. Of all five pillars, inflation has the cleanest directional story. CPI dropped to 2.4%. Core PCE at 2.7-2.8% and drifting lower. Supercore decelerating from 3.6% to 3.4-3.5%. The pipeline model has been flashing “Disinflation: Pipeline Clearing” for eight consecutive weeks. Upstream commodities rolling over. Midstream expectations anchored at 2.1-2.2%. If this continues, Inflation could flip to -1 (falling) in the coming weeks and that would be unambiguously constructive for both bonds and equities. The tariff wild card remains but Walmart’s commentary suggests the retail sector has largely absorbed the initial shock.

Policy: Increasingly uncertain. The Policy pillar has been the most volatile modifier, swinging from +1 to -1 and back to 0 over twelve weeks. But the trajectory is shifting from “which way does the Fed lean?” to “who is the Fed?” Powell’s term ends in May. Warsh’s confirmation hearings will set the tone. A three-way split on the committee -cut, hold, or hike - is unusual and creates a wider distribution of outcomes than markets have priced since 2022. Financial conditions remain loose (NFCI at -0.56), but the Fed’s own uncertainty about its path forward is itself a headwind.

Liquidity: Structurally thin, tactically stable. The RRP buffer’s journey from $106B to near-zero has been one of the consistent themes. It’s done. Exhausted. Any future funding stress hits reserves directly. But week-to-week, net liquidity has stabilised, two consecutive weeks of modest injections. SOFR-repo spreads at zero. No plumbing stress. The December dislocation didn’t repeat. The structural concern (no buffer) persists, but the acute risk hasn’t materialised.

Risk Appetite: The swing factor. This pillar has been the regime’s protagonist, the only one to deviate from zero, and the one carrying the entire aggregate score. Its V-shaped recovery from -1 to +1 over three weeks validated the “modifier tantrum, not regime shift” thesis from Issue #010. But the Greed Ratio continues to deteriorate (1.298 and falling) even as validation checks pass. When institutional money rotates defensive while breadth holds, it’s usually accumulation, but it can also be early distribution. The next few weeks will tell which.

Cross-Asset Read: What the Trajectory Favours

The trajectory (not the weekly snapshot) suggests a regime that’s stabilising at a lower equilibrium than the Goldilocks peak of December. Growth positive but not accelerating. Inflation clearing but not cleared. Policy uncertain but not restrictive. That configuration has specific cross-asset implications.

Equities: Quality over beta remains the trajectory call. Twelve weeks of Neutral/Chop hasn’t rewarded aggressive cyclical bets. What it has rewarded is staying invested in quality, breadth above 58%, validation checks passing, HY spreads below 300. The flash PMI miss on Friday argues against chasing the recent dip aggressively. Wait for ISM confirmation. If Manufacturing holds above 50 and Services holds above 53, the dip is buyable. If they don’t, positioning should get more defensive.

Gold: The structural winner of 2026 so far. From $4,500 at the signpost trigger in Issue #005 to above $5,081 today. Central bank buying (863 tonnes in 2025), dollar weakness (DXY below 98), real rate compression, and Fed transition uncertainty all support the thesis. The trajectory says stay long structurally, manage tactically. Gold doesn’t need a recession uncertainty will do and uncertainty is the one thing we have in abundance.

Rates: The inflation trajectory is the clearest bullish signal for duration. If the pipeline continues clearing and the Fed eventually cuts, the long end benefits. But the FOMC’s three-way split and Warsh’s hawkish reputation create a ceiling on how much duration benefit you can capture near-term. The 10Y at 4.09% is fair value in a world where the Fed is genuinely uncertain. A break below 4% would signal the market pricing the soft landing path more aggressively.

FX: Same three signposts, twelve weeks running. USD/JPY, DXY, Gold. The carry unwind risk hasn’t materialised but hasn’t cleared either. The trajectory here is the most persistent warning the dashboard has produced. One day it will resolve, either quietly (yen stabilises, signposts clear) or violently (BoJ intervention, carry cascade). The longer it persists without resolution, the larger the eventual move.

Sources: MacroAnalytix Dashboard | FRED: https://fred.stlouisfed.org | ISM: https://www.ismworld.org | BLS: https://www.bls.gov | S&P Global: https://www.spglobal.com

What Would Change the View

Soft landing confirms: March ISM Manufacturing holds above 50. February NFP above 100k. CPI continues lower. Fed signals June cut. Growth pillar flips to +1. Goldilocks probability rises above 50%.

Flash PMI miss deepens: March ISM rolls over below 50. Services decelerate toward 52. NFP disappoints. Growth pillar goes negative for the first time since the Stagflation scare. Late Cycle probability rises sharply.

Fed clarity emerges: Warsh confirmation signals dovish or hawkish direction. The three-way split resolves. Policy pillar moves off zero for the first time in weeks.

Signposts clear or cascade: USD/JPY below 152 removes the carry risk that’s been flashing for twelve weeks. BoJ intervention triggers the cascade. Either way, the most persistent warning in the framework resolves.

Credit cracks: HY spreads above 350 would be the first real stress signal.

The Bottom Line

Twelve weeks of regime data tell a clearer story than any single week can.

The economy launched in Goldilocks territory, hit a Stagflation scare driven by transient stress and has spent the last seven weeks grinding through Neutral/Chop while the underlying data slowly improves. Growth is resilient. Inflation is clearing. Liquidity is stable. The core has held at zero through every modifier tantrum the market has thrown at it.

The trajectory points toward soft landing but softly. Not with the conviction of December’s peak optimism but with the quiet accumulation of evidence. Manufacturing crossed back above 50 for the first time in a year. NFP recovered. CPI dropped. The pipeline is clearing. These aren’t dramatic moves. They’re the kind of slow, grinding improvement that doesn’t make headlines but does change regimes.

The risks are real. Friday’s flash PMI miss. The Fed’s unprecedented three-way split. Twelve weeks of unresolved signposts. A Fed Chair transition that could reshape the policy trajectory. A tariff regime that hasn’t fully passed through. Any one of these could tip the balance.

But here’s what twelve weeks has taught me: trust the core pillars, not the modifier noise. The core has been remarkably stable through two modifier collapses, a Stagflation scare, and three signpost clusters. When the core moves, the regime is actually changing. When the modifiers move, the regime is being tested. Know the difference.

The trajectory says we’re grinding toward Goldilocks at 40% probability, with a meaningful 25% chance of Late Cycle if the data deteriorates. The next month of data(nMarch ISM, February NFP, the Warsh confirmation) will tell us which path we’re on. Until then, stay patient. The direction is slowly becoming visible through the fog.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions.

We’re witnessing the collision of two supercycles and it’s creating an inflationary floor that Jerome Powell can’t cut through no matter how many times he says “data dependent” at a press conference.

The Convergence:

The AI infrastructure buildout has ignited the most synchronized commodity squeeze since the 1970s. Copper prices hit $13,310/ton in January (an all-time high) while gold simultaneously breached $5,000/oz. That shouldn’t happen. These metals typically move in opposition like divorced parents at a graduation ceremony. When both rally together, it signals something structural and I think we’re at a crossroads in the regime change.

The New “Stagflation” Floor:

The Fed cut rates 175 basis points since September 2024, bringing the fed funds rate to 3.50-3.75%. Yet inflation remains sticky at 2.4% CPI (January 2026, down only marginally from 2.7% in December) and the Committee held at the January FOMC meeting with a 10-2 vote. Why? Because the inflation they’re fighting is supply-constrained. You can’t print copper mines. You can’t jawbone kilowatt-hours into existence. Every dollar of AI capex is pulling forward resource demand that the physical world simply cannot supply in 2026.

Regime Scorecard Impact:

This resource bottleneck is shifting our Growth and Inflation pillars toward a “Reflation” or “Late Cycle” bias:

The macro setup for Q1 2026: We have an economy running at 2.3% projected GDP growth, but the inputs required to sustain it are increasingly scarce and expensive. This isn’t 2023’s “transitory” inflation. This is a structural repricing of the physical economy and nobody building an AI model bothered to check if we had enough copper first.

The AI Revolution: Infinite Compute vs. A Finite Grid

The AI revolution has an inconvenient truth that Sam Altman forgot to mention during his congressional testimony: you can’t run inference on hope, vibes, and Series C funding. You need electrons and lots of them, around the clock, without fail.

Data Center Power Surge

The numbers are staggering. According to the IEA’s April 2025 “Energy and AI” report, global data center electricity consumption will more than double to 945 TWh by 2030. This is the equivalent of Japan’s entire current electricity demand. The US is ground zero:

• US data center demand hit 183 TWh in 2024 (over 4% of total US electricity consumption).

• Projected to grow 133% to 426 TWh by 2030.

• Data centers will drive almost half of US electricity demand growth through 2030.

• By 2030, the US economy will consume more electricity processing data than manufacturing all energy-intensive goods combined (aluminum, steel, cement, chemicals).

Read that last bullet again. We’re going to use more power asking ChatGPT to write emails than we use making actual physical things. The future is now and it’s extremely energy intensive.

S&P Global projects US data center grid-power demand reaching 75.8 GW in 2026, expanding to 134.4 GW by 2030 which is a near tripling from current levels. Nothing says “AI supremacy” like running trillion-parameter models on infrastructure your grandparents built.

The Primary Bottleneck Has Shifted

For the past three years, the constraint on AI deployment was semiconductor availability, specifically, Nvidia GPUs. Jensen Huang’s leather jacket was the most important garment in global finance. That’s no longer the binding constraint. The new bottleneck is energy.

Consider the math: A modern AI data center requires up to 3x more copper than a traditional server farm for power distribution and cooling. Training runs for frontier models consume megawatts continuously for months. Inference demand scales exponentially with adoption. The physical infrastructure simply cannot keep pace with the code.

Goldman Sachs estimates that AI will drive a 165% increase in data center power demand by 2030. Occupancy rates are projected to peak above 95% in late 2026 before new facilities come online. That’s a chokepoint and chokepoints get repriced.

The “Sustainable Digital Infrastructure” Asset Class

This constraint is spawning an entirely new investment category. Big Tech has committed over $10 billion to nuclear power deals in the past year alone:

• Microsoft: 20-year, $16B PPA with Constellation Energy to restart Three Mile Island (835 MW, targeting 2028).

• Google: First corporate SMR fleet deal with Kairos Power (500 MW pipeline, first reactor by 2030).

• Amazon: $20B+ converting Susquehanna nuclear site into an AI data center campus, plus 1,920 MW supply agreement with Talen Energy through 2042.

• Meta: Issued RFP for 1-4 GW of new nuclear generation; signed 20-year deals for 2.1+ GW from Vistra’s Ohio reactors.

The pattern is unmistakable: hyperscalers are integrating into energy production because they cannot rely on the grid. When Mark Zuckerberg is buying nuclear reactors, we’ve entered a different era of capitalism.

Deloitte projects nuclear could meet up to 10% of data center electricity demand by 2035 but these projects won’t connect to the grid until the 2030s. The 2026-2029 period will be served by natural gas “bridge” solutions which is inflationary and creates the very carbon emissions these companies claim to be avoiding in their glossy sustainability reports.

The irony writes itself. “We’re carbon neutral*” (*if you don’t count the natural gas plants we’re running 24/7 to train GPT-6).

Copper: The “Red Gold” of the AI Era

If gold is the metal of fear, copper is the metal of ambition. And right now the world is long both, which tells you everything about the current macro regime.

The 2026 Deficit

The International Copper Study Group (ICSG) marked a structural turning point in October 2025, after years of modest surpluses, the refined copper market is swinging to a 150,000-ton deficit in 2026. J.P. Morgan is more aggressive, projecting a ~330,000-ton refined copper deficit. ING sees 600,000 tons.

The variance matters less than the direction. The analysts can argue about how short we are; the point is we’re short.

What’s driving the squeeze:

• Mine supply growth collapsing: ICSG expects just 1.4% mine growth in 2025, down from earlier 2.3% estimates. 2026 refined output growth slows to 0.9%

• Serial disruptions: Grasberg (Indonesia) force majeure, Kamoa-Kakula (DRC) flooding, El Teniente (Chile) accidents. It’s almost like mining is hard and dangerous work that takes decades to develop, who knew?

• Concentrate bottleneck: 2026 benchmark TC/RCs hit $0 in some agreements, smelters are literally paying just to secure feedstock. Zero. The number is zero.

• Structural underinvestment: Fewer than 10 significant copper discoveries in the past decade. Average lead time from discovery to production: 17 years.

The January 2026 S&P Global study put it bluntly: the emerging supply deficit constitutes a “systemic risk for global industries, technological advancement and economic growth.” They project a 10 million metric ton shortfall by 2040. 25% below demand.

Daniel Yergin co-chaired the report: “Here, in short, is the quandary: copper is the great enabler of electrification, but the accelerating pace of electrification is an increasing challenge for copper.”

Translation: The green transition needs copper. AI needs copper. EVs need copper. The grid needs copper. We do not have enough copper.

Strategic Stockpiling & Tariffs: America Discovers Resource Nationalism

The US government has decided copper is a national security issue. On August 1, 2025, President Trump imposed 50% tariffs on semi-finished copper products and copper-intensive derivatives. The free market is apparently only free until we need the stuff.

Key provisions:

• 50% tariff on copper pipes, wires, rods, sheets, tubes (effective August 2025).

• Refined copper (cathodes) currently exempt but a June 30, 2026 review could impose 15% tariffs starting January 2027, rising to 30% in 2028.

• 25% domestic sales requirement for copper input materials starting 2027, increasing to 40% by 2029.

The result: a two-tier market that would make an emerging market currency trader feel right at home. COMEX inventories have soared to over 492,000 metric tons (an all-time high) as traders front-run potential tariffs. Meanwhile, LME stocks fell to ~147,000 tons, down from ~256,000 a year ago.

When America says “critical mineral,” other countries hear “good luck with your energy transition.”

Price Outlook: LME copper hit an all-time high of $13,310/ton in January 2026. J.P. Morgan sees $12,500/ton in H1 2026, potentially higher. Citi’s aggressive target: $13,000+/ton, with a path to $15,000 if supply shortages persist.

The Macro Framework: Tracking the Convergence

The traditional playbook says copper rallies in expansion and gold rallies in contraction. Econ 101 stuff. What happens when both rally simultaneously? We’re finding out in real-time.

The Copper-Gold Ratio: The Signal Is Broken (Or Is It?)

The copper-to-gold ratio (copper price ÷ gold price) is one of the most reliable barometers of industrial confidence vs. safe-haven demand. When the ratio rises, the world believes in growth. When it falls, fear dominates.

Current reading: The ratio has collapsed to historic lows, levels not seen since 1990. Gold has surged 65%+ in 2025 to over $4,600/oz, with J.P. Morgan forecasting $5,055/oz by Q4 2026. Meanwhile, copper is also at record highs.

The explanation: Both metals are responding to the same structural force, monetary debasement and resource scarcity, rather than opposite forces (growth optimism vs. recessionary fear). They’re not disagreeing about the economy.

The “K-Shaped” Productivity Gap

AI-driven productivity gains exist, but they’re concentrated. The tech sector is seeing measurable efficiency improvements from large language models. But these gains accrue disproportionately to high-income, knowledge-work sectors, the people least likely to struggle with 3% inflation in the first place.

Meanwhile, the industries buckling under commodity inflation are labor-intensive, physical-world businesses: construction, transportation, manufacturing. They can’t substitute away from copper wire, diesel fuel or steel beams. No amount of ChatGPT is going to reduce the copper content in a transformer.

The result is a “K-shaped” productivity divergence:

• Upper branch: AI adopters seeing margin expansion, labor efficiency, competitive moats.

• Lower branch: Traditional industries facing input cost inflation without offsetting productivity gains.

The average is fine but the median is not.

The Global Dimension: This Is Not Just an American Problem

China accounts for 58% of global refined copper consumption and its post-Lunar New Year restocking cycle will be the first real demand test of 2026. Early signals suggest fabricators are buying dips, state-backed industry groups have urged Beijing to increase strategic copper reserves. Meanwhile, Europe faces its own grid constraints: the EU’s Carbon Border Adjustment Mechanism enters full implementation in 2026, adding cost pressure to carbon-intensive metal imports. Germany’s data center electricity consumption alone is forecast to reach 31 TWh. The bottleneck is global. Who is going to pay for it first.

Cross-Asset Implications & Scenario Updates

Equities: Rotation to “Physical Enablers”

The 2025 trade was “Pure Play” AI, Nvidia, Microsoft, the hyperscalers, AI software names. That trade worked spectacularly. Anyone who bought NVDA in January 2025 can afford to read this newsletter from a yacht. But 2026 favors a rotation toward “Physical Enablers”, during the gold rush, sell shovels could ring true again.

Sector preferences:

• Copper miners: Freeport-McMoRan, Southern Copper, Ivanhoe Mines - direct exposure to structural deficit.

• Nuclear operators: Constellation Energy, Talen Energy, Dominion Energy - 20-year PPA visibility.

• Grid infrastructure: Quanta Services, MasTec, AECOM - transmission buildout beneficiaries.

• Uranium: Cameco, Kazatomprom - nuclear fuel chain as hyperscalers commit to 10+ GW.

The risk: These are cyclical names trading at cyclical multiples. If a recession materializes (which would kill AI capex), they’d fall hard.

Rates: Higher-for-Longer Until Something Breaks

The Fed held at 3.50-3.75% in January with two dissents calling for cuts. Chair Powell noted rates are “not significantly restrictive right now.” J.P. Morgan expects the Fed to remain on hold through 2026.

The constraint: “Energy-driven” inflation creates a floor under rates. The Fed cannot cut aggressively while commodity prices are at records and tariffs are creating input cost pressures. Their December 2025 SEP projected core PCE at 2.5% by year-end 2026, above target.

Powell can’t say “we’re stuck” out loud, but 2.5% core PCE with rates at 3.5% is the definition of stuck.

Commodities: The Bid Is Structural, Not Speculative

• Copper: $11,000-$13,000/ton trading range, with upside to $15,000 if tariff reviews tighten supply further

• Gold: Already at all-time highs above $4,600/oz. J.P. Morgan sees $5,055 by Q4 2026

• Silver: The sleeper. Touched ~$113/oz in January’s speculative blow-off (from ~$40 in late 2024). Currently trading ~$78-82/oz after the correction. Goldman targets $85-$100 average in 2026; Citi sees $110 in H2 if industrial demand holds

The overall commodity thesis: This is not a speculative bubble driven by easy money and leverage. It’s a structural repricing driven by supply constraints meeting electrification demand. The demand is not discretionary, you cannot deploy AI without copper, without grid capacity, without energy.

The trade isn’t “commodities are cheap.” The trade is “commodities are necessary, and we don’t have enough of them.”

Conclusion: Sizing for the Physical Tail Risk

We’re positioned for a world where “compute demand exceeds supply”—not just semiconductor supply, but energy supply, copper supply, grid capacity. This creates an inflationary floor that the Fed cannot cut through without engineering a recession that destroys the AI buildout itself.

The policy trilemma is real: The US wants AI supremacy, price stability and cheap money. Pick two.

The March FOMC Preview

The March 17-18 FOMC meeting is the next major catalyst. The question for the Fed: Will they acknowledge the structural inflation risks from the infrastructure buildout? Or will they continue modeling AI capex as “normal” business investment?

The Fed’s framework assumes rate hikes cool demand, which cools inflation. It’s a demand-side model for a supply-side problem. When inflation is supply-constrained, when the bottleneck is copper mines in Chile, uranium enrichment capacity or grid interconnection queues, rate hikes just destroy the demand side without addressing supply. They can engineer a recession but they cannot engineer a copper mine.

Either way, the resource trap is real. Silicon Valley built the future without checking if we had the raw materials to ship it. Now the invoice is arriving.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

Risk Appetite surged from 0 to +1, a 1.5-point improvement that tips the aggregate score positive and flips the modifier from Neutral to Tailwind. The catalyst? Post-revision NFP 3-month average recovered and doubled to 78k. The hiring freeze narrative from Issues #008-009 looks increasingly like a statistical artifact.

The core pillars remain unchanged: Growth, Inflation, Policy, and Liquidity all score 0. The improvement is entirely in the modifier space. And the same three currency signposts that have been flashing warnings since Issue #005 remain triggered.

Current Regime: Neutral / Chop | Aggregate Score: +1 | Modifier: Tailwind | Conviction: Minimal

Pillar Deep-Dive

Growth (0, trend ↑): Post-revision NFP 3-month average recovered to 78k from 33k, the data point that drove the narrative shift. ISM New Orders minus Inventories at +5.5 positive spread. Real M1 at +8.6bn adds soft landing fuel. Copper/gold ratio remains a negative at 0.00115, still flashing fear. GDPNow at 3.7% well above trend. The divergence check shows Soft Landing Risk.

Inflation (0, trend ↓): Pipeline clearing continues. CRB Commodity Index at 385.9 rolling over. 5Y5Y forward inflation at 2.12% anchored. Supercore PCE at 3.5% (down from 3.6%), the metric Powell watches most. Tariff pass-through remains Contained. Momentum alert shows Deceleration (3M < YoY).

Policy (0, trend →): Fed on hold at 3.5-3.75% range. Chicago Fed NFCI at -0.563 firmly “Very Loose.” 10Y-3M spread narrowed to 36bps (not recession signal). Real Fed Funds at 0.85%, neutral. Fiscal impulse flipped positive (+4.3 YoY). Powell’s term ends May; Warsh is the frontrunner to replace.

Liquidity (0, trend ↑): Net liquidity received $12.2B injection, second consecutive week. Fed Balance Sheet at $6,622B (+$16B). RRP at $0.38B essentially exhausted. SOFR-Repo spread near 0, no plumbing stress. MOVE Index at 70.1 (elevated but normal). BTC smoke alarm aligned with net liquidity.

Source: https://fred.stlouisfed.org/series/WALCL#

Signpost Status: Same Three, Slightly Less Scary

USD/JPY improved to 153.19 from 157.09, a 4-yen pullback that reduces BoJ intervention risk. Still triggered. These signposts have been active for ten weeks, background noise until they’re not.

Transition Probabilities

Velocity at +1.5 shows momentum toward risk-on regimes. Distribution normalising so no longer coin flip odds.

Key Question of the Week: Is the Market Wrong or the Dashboard?

SPY fell 1.28% this week. The Greed Ratio deteriorated further. VIX jumped from 17.76 to 20.6 and yet Risk Appetite scored its biggest weekly improvement since we started publishing. Why?

The dashboard doesn’t score price, it scores the quality of the environment in which prices move. Prices can fall in a healthy environment (dip to buy) or rise in an unhealthy one (trap to sell). The validation system distinguishes between them.

What the dashboard sees: Credit isn’t cracking, HY spreads widened 5bps to 292, far from the 400 trigger. Breadth holding - participation at 58.7%, net highs showing potential signs of thrust. Vol normal - VIX at 20.6 elevated but term structure in healthy contango. NFP recovered, the data point that drove Risk Appetite to -1 is reversed.

What could make it wrong: Greed Ratio still deteriorating at 1.298, institutional money rotating defensive even as validation checks pass. If this continues and credit starts widening, validation fails fast. Signposts haven’t cleared, ten weeks of warnings the checks aren’t capturing. One pillar carrying the regime is fragile, we’ve seen this movie before in Issue #005, which resolved with the modifier collapse in Issues #008-009.

The dashboard is probably right about environment quality. But the Greed Ratio deterioration is a warning. If defensive rotation accelerates and credit confirms, the regime read changes fast.

Cross-Asset Read

Equities: HIGH QUALITY verdict creates buy-the-dip setup. SPY below 50-day but above 100-day. IWM at 3.5 ribbon (smalls leading). Greed Ratio deterioration suggests quality over beta.

Bonds: TLT showing STRONG UP with fresh death cross, an unusual combo. 10Y-3M spread narrowed to 36bps (not recession signal). Duration in limbo.

FX: USD/JPY improved but still in carry territory. DXY death cross fresh. Dollar weakness supports EM and commodities.

Commodities: Gold at $462.62, the structural bid continues. Copper/gold ratio still flashing fear at 0.00115, reflation lacks confirmation.

Crypto: BTC at $69,056 falling but aligned with net liquidity. Risk Appetite +1 is neutral-to-supportive, better than headwind but not a tailwind.

What’s Ahead This Week

NYSE closed Monday for Presidents’ Day. Here’s what matters for the regime.

FOMC Minutes (Wednesday): The January meeting saw two dissents, Miran and Wallen, in favor of cutting. The minutes will reveal how close the rest of the committee was to joining them and whether the “loosely neutral” language Powell used reflects broader consensus. With Powell’s term ending in May and Warsh the frontrunner to replace him, any hints about the transition or the Fed’s thinking on tariff pass-through will move rates. Currently 93.6% probability of a June cut priced in.

Walmart Earnings (Thursday pre-market): The world’s largest retailer reports Q4 FY26. Walmart has been a consistent outperformer as value-seeking consumers across income levels trade down. Watch for: tariff pass-through commentary (about a third of what Walmart sells comes from imports), SNAP benefit impacts from the shutdown and whether the general merchandise recovery continues. Target’s struggles contrast sharply with Walmart’s momentum, the spread tells you where the consumer is.

S&P Global PMI Flash (Friday): February preliminary readings will be the first real-time gauge on whether the soft CPI print and jobs recovery translate into activity. Manufacturing has been weak; services holding up. A miss here would feed the “growth scare” narrative and potentially shift the Growth pillar.

Software Stabilisation Watch: IGV is 31% below highs and deeply oversold. JPMorgan and Goldman both called the selloff overdone. If software bounces, it could unwind the defensive rotation visible in the Greed Ratio and strengthen the Risk Appetite reading. If it continues lower, watch for credit contagion—the validation checks are passing now, but that can change fast.

What Would Change the View

Growth turns positive: ISM Services >55, NFP 3M avg >100k → Goldilocks.

Risk Appetite collapses: Greed Ratio FAIL, HY >350, VIX >25 sustained.

Signposts clear/cascade: USD/JPY <152 removes risk; BoJ intervention resolves painfully.

Credit cracks: HY >400bps triggers validation failure.

The Bottom Line

We’re in positive territory for the first time since mid-January. Risk Appetite broke out. NFP recovered. Modifier flipped to Tailwind. All four validation checks pass. Aggregate at +1.

But the structure is fragile. One pillar carrying the regime. Same three signposts triggered for ten weeks. Greed Ratio still deteriorating. Equity prices falling while the environment improves.

The 58% Stay Current probability is the highest since launch. Validation says the dip is buyable. Signposts say structural risks persist. Both true simultaneously.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

Last week, the dashboard flashed its first Strong Headwind warning since we rebuilt the framework. Policy collapsed to -1. Risk Appetite collapsed to -1. The aggregate score hit -2.

This week, Policy recovered from -1 to 0. Risk Appetite recovered from -1 to 0. The aggregate score is back to flat. The Strong Headwind classification cleared to Neutral. All four validation checks pass.

We’re not back to where we were before the collapse. We’re back to zero, directionless, minimal conviction, no clear regime. The same three currency signposts remain triggered. The NFP 3-month average is still near zero. The inflation pipeline is still clearing but hasn’t reached target.

Think of it this way: last week the road was icy. This week the ice melted. But we’re still driving through fog with no visibility. The conditions improved. The destination remains unclear.

Current Regime: Neutral / Chop | Aggregate Score: 0 | Modifier: Neutral | Conviction: Minimal

The weighted composite recovered from -2 to 0, a two-point improvement in a single week, the sharpest recovery since we started publishing. But zero isn’t bullish. Stay Current probability improved to 50%, up from 40%. Coin flip odds of staying here versus transitioning somewhere else.

Growth: Still the Anchor

Growth remains unchanged at 0. The anchor that held through last week’s modifier mess continues to hold now.

Leading indicators (70% weight) improved slightly. ISM New Orders minus Inventories ticked up to 5.5 from 2.5, a positive spread that historically precedes manufacturing stabilization. The copper/gold ratio remains deeply negative, still flashing the fear signal we’ve tracked for weeks. AUD/JPY at 110.22 scores positive, risk currencies haven’t cracked.

Source: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/january/

Coincident indicators (30% weight) tell a more cautious story. Real income ex-transfers at 0.46% year-over-year is positive but borderline, the cushion is thin. Industrial production at 1.99% is healthy. NFP 3-month average is at 33k, neither growing nor shrinking. ISM Services at 53.8 is down slightly from 54.4 but still comfortably in expansion.

The divergence check shows a Soft Landing Risk flag with a Soft Landing implication. Leading (0.3) and coincident (-0.3) scores gap at 0.6, wide enough to warrant attention but not alarm. Leading indicators slightly more optimistic than coincident data. That’s typically what you see in early recovery.

We score Growth at 0 (Neutral), trend ↑. The trend arrow flipped from flat to up, a subtle but meaningful change. The ISM spread improvement is the driver. If it holds, the growth pillar could turn positive. If it reverses, we’re back to watching services carry the load alone.

Inflation: Pipeline Clearing Continues

The inflation story is unchanged. The pipeline model continues to flash Disinflation: Pipeline Clearing.

Upstream (20% weight): CRB Commodity Index at 389.4 is down from 402.4, commodities rolling over. ISM Mfg Prices Paid at 59 is rising but from a low base. Baltic Dry collapsed to 1,923 from 2,148, shipping costs normalizing aggressively. Upstream scores 0.

Midstream (25% weight): 5Y5Y forward inflation at 2.18% is down slightly from 2.19%. 10Y breakevens at 2.25% are stable. Market-based inflation expectations remain well-anchored. Midstream scores 0.

Downstream (55% weight): This is where progress shows. Supercore PCE (services ex-housing) is at 3.4%. Atlanta Fed Wage Tracker at 3.7% is falling. Core PCE at 2.79%. Downstream scores 0, but the trend is right.

Source: https://fred.stlouisfed.org/series/PCEPILFE#

Source: https://fred.stlouisfed.org/series/T5YIFR#

Source: https://fred.stlouisfed.org/series/T10YIE#

Source: https://www.investing.com/indices/thomson-reuters-core-cmdty-crb-chart

Regime flags: Stagflation Risk: No. Reflation Signal: No. Disinflation Signal: YES - Pipeline Clearing. Tariff pressure flag remains active, upstream commodity movements consistent with tariff-driven input costsnbut pass-through to consumers hasn’t materialized. The Q2 risk window remains.

We score Inflation at 0 (Stable), trend ↓. Unchanged. The pipeline is clearing from upstream through downstream. If Supercore declines, this pillar could flip to -1 (falling) which would be unambiguously constructive.

Policy: The Headwind Eases

This is the recovery story of the week. Policy bounced from -1 to 0, reversing last week’s collapse entirely.

Financial conditions remain loose. Chicago Fed NFCI at -0.557 is firmly in “Very Loose” territory. The 2Y yield at 3.47% is down 25 basis points. The front-end repricing that drove last week’s policy headwind partially reversed.

Source: https://fred.stlouisfed.org/series/NFCI#

Source: https://fred.stlouisfed.org/series/DGS2#

Policy Mix Matrix: Fed Stance Loose, Fiscal Stance Neutral, Signal Mixed. More balanced than last week’s “Monetary Tight / Fiscal Loose” conflict. The 10Y-3M spread at 54bps is flat, no recession signal from the curve. Real Fed Funds at 0.93% remain neutral.

The Fed hasn’t moved. The market’s interpretation simply calmed down. Last week the market tightened conditions by repricing the Fed’s path hawkishly. This week it walked some of that back.

We score Policy at 0 (Neutral), trend ↓. Up from -1 last week. The headwind has eased, but the trend remains down—the dashboard sees policy drifting toward tighter, not looser. This recovery could be temporary if the market resumes hawkish repricing.

Liquidity: The Drain Reverses

Net liquidity flipped. After weeks of steady draining, the system received a $31.4 billion injection this week, a 0.55% increase to $5,694 billion.

The components tell the story. Fed Balance Sheet at $6,606 billion is up $18.5 billion. Treasury General Account at $908.7 billion is down $14.3 billion, when TGA falls, reserves flow back into the system. RRP at $3.1 billion is up slightly.

Source: https://fred.stlouisfed.org/series/WALCL#

Source: https://fred.stlouisfed.org/series/WTREGEN#

Source: https://fred.stlouisfed.org/series/RRPONTSYD#

Plumbing metrics are clean. SOFR-Repo spread is minimal, no stress. MOVE Index at 63.62 is normal. BTC Smoke Alarm shows BTC falling but aligned with net liquidity, no divergence warning.

We score Liquidity at 0 (Neutral), trend ↑. One week of injection doesn’t change the structural picture but the immediate pressure eased.

Risk Appetite: Greed Ratio Recovers

Risk Appetite recovered from -1 to 0—the other half of the modifier normalization.

The key driver: the Greed Ratio (XLY/XLP) stabilised at 1.34, still showing a Defensive signal but no longer triggering a FAIL on the validation dashboard. Last week’s sharp deterioration (staples crushing discretionary) has paused but the defensive rotation hasn’t reversed.

HY credit spreads at 297bps widened 17bps from 280, the direction is still wrong, but the level remains far from the 400bps trigger. VIX at 17.76 is essentially unchanged from 17.44. Vol term structure at 17.76 is normal, no inversion, no fear premium.

Source: https://fred.stlouisfed.org/series/BAMLH0A0HYM2#

Source: TradingView - VIX CBOE

Source: TradingView - XLY/XLP

Signal validation now reads 4 of 4 PASS, up from 3 of 4 last week. Credit Check: PASS. Internals Check: PASS. Global Check: PASS. Vol Check: PASS. Rally verdict: HIGH QUALITY.

Breadth confirmation adds context. Participation at 62.1% is adequate,above the 50% trouble threshold. Net new highs minus lows at 878 is strong and rising. Zweig Breadth Thrust at 0.564, in the monitoring zone but not triggered (needs >0.615). A/D line is confirming, rising, fresh.

We score Risk Appetite at 0 (Neutral), trend ↑. Up from -1 last week. Recovery is real but fragile. HY spreads still widening. Greed Ratio still defensive. Validation checks pass, but the underlying tone is cautious rather than confident.

Signpost Status: Same Three, Still Triggered

The same three currency signposts remain active. The modifier recovery didn’t clear them.

The pattern persists: dollar weakness combined with a safety bid and carry unwind risk. The modifier recovery doesn't change the structural picture these signposts are flagging. If anything, USD/JPY moving higher increases the probability of a disorderly reversal when it comes.

Transition Probabilities

The probability distribution normalized. Stay Current at 50% is up from 40%. Combined bear case (Late Cycle + Stagflation + Deflation) dropped to 13% from 35%. Combined bull case (Goldilocks + Reflation) remains at 18%. The asymmetry that tilted bearish last week has flattened.

Key Question: Was the Modifier Collapse a False Alarm?

Last week I asked what happens when modifiers collapse but the core holds. This week we have an answer: the modifiers snap back. Policy went from -1 to 0. Risk Appetite went from -1 to 0. The Strong Headwind cleared. The aggregate score recovered.

Does that mean last week’s warning was wrong? Not necessarily.

The modifiers told us something real. Financial conditions had tightened, markets were repricing the Fed’s path hawkishly, the Greed Ratio was deteriorating, institutional money was rotating defensively. That was happening. The question was whether it would persist and feed through to the core pillars or whether it would reverse.

It reversed. But the reversal doesn’t invalidate the signal it just means the market changed its mind before the damage was done. The transmission mechanism from modifier headwinds to growth deterioration takes 2-4 quarters. We saw one week of stress. That’s not enough time for feed-through to materialized.

Here’s what the recovery tells us:

The system is more resilient than the dashboard feared. When Policy and Risk Appetite both collapsed simultaneously, the historical pattern suggested elevated transition risk. Instead, both recovered within a week. Either the initial collapse was noise, or the underlying fundamentals are strong enough to absorb the stress. Both interpretations argue for cautious optimism.

Validation checks matter. Last week, 3 of 4 passed with the Greed Ratio failing. This week, 4 of 4 pass. The framework’s own quality filter is saying the current environment is tradeable. That’s a meaningful signal.

But the structural concerns haven’t resolved. The same three signposts remain triggered.

My read: The tantrum ended, but the fog remains. We’re back to Neutral/Chop with no clear direction. The validation checks say the rally is high quality. The signposts say structural risks persist. Both can be true simultaneously. The 50% Stay Current probability captures it perfectly, coin flip odds of staying here versus transitioning somewhere else.

Cross-Asset Read

The regime is Neutral/Chop with Neutral modifiers and 4/4 validation checks passing. Here’s how that configuration typically expresses across asset classes.

Equities: The validation dashboard’s HIGH QUALITY verdict and improving breadth (62.1% participation, strong net highs, A/D confirming) create a supportive backdrop. The Greed Ratio remains defensive but has stopped deteriorating. Historically, Neutral/Chop with passing validation checks favors holding existing exposure over aggressive additions. IWM shows risk-on with smalls leading; QQQ/SPY shows growth leading. Both consistent with a functional, if directionless, market.

Bonds: The 2Y yield dropping 25 basis points drove policy recovery. The 10Y-3M spread at 54bps is flat. Duration in limbo, inflation pipeline clearing is structurally supportive, but the Fed hasn’t pivoted. TLT sits below key moving averages with a neutral ribbon score. The regime offers no strong directional view on rates.

FX: USD/JPY at 157.09 is the standout. Deeper into intervention territory than last week. Carry unwind risk remains. DXY below 100 and gold above $455 continue to flag dollar weakness and safety demand. Any BoJ hawkishness could trigger the cascade the equity market hasn’t priced.

Commodities: Gold benefits from structural bid, dollar weakness, real rate expectations, central bank buying. GLD ribbon at 3.5 (Strong Up) with fresh golden cross confirms trend. Oil (USO) above moving averages. Copper remains the tell: still depressed versus gold, still skeptical of China narrative. Until copper/gold recovers, industrials lack conviction.

Crypto: BTC at $69,272 down $7,615, falling aligned with net liquidity (BTC leads by ~2 weeks). Risk appetite recovery to 0 is neutral for speculative assets. Neutral/Chop historically offers no edge in crypto.

What Would Change the View

Growth turns positive: ISM spread holding above 5, Services above 54 would shift pillar to +1 moving us toward Goldilocks or Reflation.

Modifiers collapse again: If hawkish repricing resumes, Policy flips to -1. If Greed Ratio deteriorates, Risk Appetite follows. Strong Headwind could return as quickly as it cleared.

Signposts clear or cascade: USD/JPY stabilising below 152 removes carry risk. BoJ intervention triggering violent yen reversal resolves through cascade painfully.

Credit cracks: HY spreads above 400bps signals validation failure. Currently distant at 297, but trend is wrong.

NFP confirms or recovers: February release either confirms hiring freeze or shows it was statistical artifact. Strong print removes overhang. Weak print pressures growth pillar.

The Bottom Line

We’re back to flat. Policy recovered. Risk Appetite recovered. Aggregate improved from -2 to 0. Strong Headwind cleared. All four validation checks pass.

But flat isn’t bullish. Same three signposts triggered. USD/JPY actually worsened to 157. NFP still near zero. HY still widening. Copper/gold still flashing fear. The structural concerns that existed before the tantrum still exist after it.

50% Stay Current captures it perfectly. Coin flip odds. No clear direction. Validation says market is functioning and rally is real. Signposts say structural risks persist. Both true simultaneously.

Last week I said let the core pillars tell you when the regime is actually changing not when the modifiers are throwing a tantrum. The core didn’t change. The tantrum ended. That’s the good news. The fog remains. That’s the reality.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

Two weeks ago, I wrote that the heat was coming off. Policy and Risk Appetite had both cooled from +1 to neutral. The aggregate score drifted to zero. The message was clear: momentum was fading, but the foundation was intact. Sometimes the best trade is the one you don’t force.

This week, the foundation cracked. Policy has dropped from 0 to -1. Risk Appetite has dropped from 0 to -1. Both modifier pillars collapsed simultaneously, a two-pillar, two-point deterioration that pushes the aggregate score to -2 and triggers the dashboard’s Strong Headwind classification for the first time since we rebuilt the framework over the holidays.

Growth didn’t move. Inflation didn’t move. Liquidity didn’t move. The core regime (the Growth × Inflation matrix that determines which quadrant we’re in) is unchanged. We’re still in Neutral/Chop territory, position 5 of 9 on the regime grid. The engine is the same. But the modifiers, the Policy, Liquidity and Risk Appetite pillars that shape how the regime expresses across assets has turned.

Think of it this way: Growth and Inflation are the car. The modifiers are the road conditions. The car hasn’t broken down. But the road just iced over.

Current Regime: Neutral/Chop | Aggregate Score: -2 | Modifier: Strong Headwind | Conviction: Minimal

The weighted composite has dropped from 0 (Issue #008) to -2. That’s the lowest reading since the Stagflation scare in Issue #004 last December. The regime matrix still places us in the center of the grid, Neutral/Chop, because the core Growth × Inflation inputs haven’t shifted. But the modifier score of -2 means the headwinds are real.

The Stay Current probability has dropped to 40% (down from 50% in Issue #007 and 55% in Issue #005). The dashboard sees a 60% chance we’re transitioning somewhere else. The question is where.

Growth: The Anchor Holds

Growth is the quiet hero of this week’s read. While the modifiers collapsed around it, the growth pillar held steady at 0. Neutral, stable, doing exactly what it’s supposed to do in a soft landing environment.

ISM Services remains at 54.4, the strongest services reading we’ve seen this cycle outside the Issue #006 surge. GDPNow’s final Q4 2025 estimate sits at 4.2%, well above trend and inconsistent with the deterioration showing up in the modifier pillars.

But here’s what demands attention: the NFP 3-month average is at -22k. Net negative. Massive downward revisions to October payrolls (-173k, revised down 68k from initial) are driving the collapse. The labor market isn’t just slowing, it’s shrinking, quietly, without the headline drama.

The divergence check still shows Aligned with a Soft Landing implication. The saving graces: ISM Services at 54.4, Q4 GDPNow at 4.2% and real income ex-transfers hasn’t turned negative. The household health check that historically precedes recessions with ~80% accuracy when it flips.

We score Growth at 0 (Neutral), trend →. The NFP deterioration is the variable to monitor, if the 3-month average stays below 50k through February, the growth pillar comes under serious pressure. For now, the anchor holds. But the chain is getting shorter.

Inflation: Pipeline Clearing Continues

The genuinely good news holds. The pipeline model keeps flashing the same signal: Disinflation. Pipeline Clearing.

Core PCE remains at 2.7%, still above the Fed’s 2% target, but the trend is right. Supercore PCE (services ex-housing) continues its descent from the 4%+ readings that kept the Fed cautious through late 2025. Upstream commodities: stable. Midstream expectations: anchored. Downstream services: decelerating. The composition is healthy.

The tariff pressure flag is active but hasn’t flowed through to consumer-facing metrics. The pipeline model’s 3-6 month pass-through timeline puts the risk window in Q2.

We score Inflation at 0 (Stable), trend ↓. If downstream metrics confirm next month, this pillar could flip to -1 (falling) and that would be unambiguously constructive.

Policy: The Headwind Bites

Policy: The Headwind Bites

Policy has dropped from 0 to -1 (Restrictive), the first negative policy reading since Issue #001 last December, when the Fed was at 4.50-4.75% and QT was still running.

The mechanics are different now. Fed Funds are lower, QT has ended, cuts have been delivered. But the market’s repricing of the policy path has effectively tightened conditions regardless of where the nominal rate sits. Rate expectations have compressed. The front end has repriced higher. Financial conditions have tightened enough to flip the score negative.

Source: https://fred.stlouisfed.org/series/fedfunds#

Source: https://fred.stlouisfed.org/series/NFCI#

Source: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

The fiscal side remains stimulative with budget deficits near 6% of GDP. But monetary tightening through market expectations is dominating. The Policy Mix Matrix reads: Monetary Tight / Fiscal Loose which is a conflicted configuration that typically produces elevated volatility rather than a clean directional move.

We score Policy at -1 (Restrictive), trend ↓. The Fed hasn’t changed its stance—the market has changed its interpretation.

Liquidity: The Quiet Drain

Liquidity holds at 0, but the trend is deteriorating. Net liquidity has dropped $57.6 billion, a 1.01% decline to $5,654.9 billion. The RRP has recovered slightly to $9.6 billion from near-zero, but any funding stress hits reserves directly.

The plumbing metrics remain functional, SOFR-repo spreads are well-behaved, no funding market stress signals. This is a slow structural drain, not a dislocation. But slow drains lower the system’s resilience to shocks.

We score Liquidity at 0 (Neutral), trend ↓. The quiet drain continues.

Risk Appetite: The Other Shoe Drops

Risk Appetite has collapsed from 0 to -1 (Risk-Off), the first negative reading since we launched.

The VIX has risen to 17.44, up meaningfully from sub-15 complacency readings in Issues #004-005. HY credit spreads have widened 9 basis points to 277, still historically tight, but the direction is wrong.

The real tell is the Greed Ratio. The XLY/XLP ratio has dropped to 1.45, triggering a FAIL signal on the validation dashboard. When staples outperform discretionary, institutional money is rotating from offence to defence.

Source: https://fred.stlouisfed.org/series/BAMLH0A0HYM2/#

Signal validation reads 3 of 4 PASS. Credit, internals, and global checks pass. Greed Ratio fails. Breadth at 61.5% offers a counterpoint, healthy and above the 50% trouble threshold.

We score Risk Appetite at -1 (Risk-Off), trend ↓. The defensive rotation is real. The Greed Ratio FAIL is new.

China: Quiet Improvement

China Score at +1 with zero risk flags. FXI holding above key levels, yuan stabilised, Caixin PMI above 50. The copper/gold ratio remains the tell, until it recovers, the improvement narrative is still hopeful at best.

Signpost Status: Same Three, Deeper

The same three currency signposts from Issue #005 remain active.

With Policy and Risk Appetite both at -1, the signpost cluster is no longer isolated—it’s consistent with the broader modifier deterioration. That alignment increases the probability the signal is real.

Transition Probabilities

The dashboard’s transition probability matrix has shifted materially from Issue #007:

The probability distribution has shifted bearish. Late Cycle is now 20%, up from 15%. The combined bear case (Late Cycle + Stagflation + Deflation) sits at 35%, up from 27%. The combined bull case (Goldilocks + Reflation) remains at 18%. The asymmetry tilts to the downside.

Key Question of the Week: What Happens When Modifiers Collapse but the Core Holds?

This is the analytical puzzle the framework hasn’t encountered before. In every previous regime shift, the core pillars moved first. This week is different, the core is stable and the modifiers are crumbling.

The NFP collapse may be a lagging confirmation of something the modifiers are seeing first. If hiring has effectively stalled, the services expansion at 54.4 could be running on fumes, companies still busy with existing demand but no longer adding capacity.

The Greed Ratio FAIL has a track record. When staples outperform discretionary, it’s institutional money de-risking before the headlines catch up.

Policy headwinds feed into growth with a lag. Today’s tighter financial conditions become tomorrow’s weaker lending standards and investment decisions over 2-4 quarters.

Here’s the bull case:

Modifiers can recover as fast as they deteriorate. Policy went from -1 to +1 in three weeks back in December. Breadth at 61.5% is healthy, when breadth holds while sentiment weakens, it’s often a setup for recovery.

The inflation pipeline clearing gives the Fed an out. If disinflation continues, the one-cut guidance becomes stale and the policy headwind reverses.

My read: The modifier deterioration is real but potentially temporary. The core regime is doing exactly what it should in a soft landing. The headwinds are coming from market repricing. That makes this a volatility event rather than a regime event, at least until the growth pillar confirms what the modifiers suggest. The 20% Late Cycle probability isn’t trivial.

Cross-Asset Read

The regime is Neutral/Chop with Strong Headwind modifiers. Here’s how that configuration typically expresses across asset classes.

Equities: The Greed Ratio FAIL is the clearest signal, defensive sectors outperforming cyclicals. Historically, Neutral/Chop regimes with negative modifiers favor quality and stability over beta and speculation. Breadth at 61.5% suggests the broader market isn’t breaking down, but the internal rotation toward defensives is real and consistent with late-cycle dynamics.

Bonds: The tension between restrictive policy repricing and improving inflation creates a mixed regime for duration. The curve dynamics remain interesting, if growth eventually follows the modifiers lower, front-end repricing accelerates while the long end stays anchored on fiscal concerns. The inflation pipeline clearing is structurally supportive for bonds, but the policy headwind argues against aggressive duration positioning until there’s confirmation.

FX: All three triggered signposts point to dollar weakness and carry risk. DXY below 100, USD/JPY in intervention territory and gold’s structural rally tell a consistent story. The modifier collapse adds a layer of US-specific concern. The BoJ remains the wildcard, any hawkish language at these USD/JPY levels could trigger the carry unwind cascade we’ve monitored since Issue #005.

Commodities: Gold continues to benefit from the regime configuration, dollar weakness, falling real rate expectations, persistent central bank buying and rising uncertainty. The structural bid remains intact. Industrial metals and energy lack a catalyst, the copper/gold ratio is depressed, China’s improvement hasn’t translated to demand and OPEC+ dynamics are unclear. The regime offers no edge in cyclical commodities.

Crypto: BTC tends to correlate with net liquidity. Net liquidity is draining, down $57.6 billion, and the modifier collapse adds headwinds for speculative assets. The dashboard’s risk appetite score at -1 is historically unfavorable for crypto, which sits at the extreme end of the risk spectrum. The structural bull narrative (halving cycle, institutional adoption) doesn’t change, but the regime backdrop has deteriorated.

What Would Change the View

The current regime is Neutral/Chop with Strong Headwind modifiers. Here’s what would shift the assessment:

Growth pillar flips negative. ISM Services below 50 collapses the soft landing thesis. NFP 3-month average staying below 50k through February confirms the hiring freeze. Real income ex-transfers turning negative would be the household health check failing.

Modifiers recover. One dovish Fed signal could flip Policy back to 0. A strong NFP print could snap Risk Appetite to neutral. These pillars are volatile, the Strong Headwind could be temporary.

Credit cracks. HY spreads above 400bps would signal validation checks failing. Currently 277, distant, but the Greed Ratio FAIL is often leading indicator number one. Credit widening would be number two.

Carry unwind materializes. USD/JPY reversing on BoJ intervention would resolve the three signpost cluster painfully.

Inflation pipeline reverses. Core PCE above 3.0% or tariff pass-through in downstream CPI would kill the disinflation signal. Currently the lowest-probability risk.

The Bottom Line

We’re in Neutral/Chop with the worst modifier reading since we launched. The core regime hasn’t moved. Growth and Inflation are doing exactly what they should in a soft landing but Policy and Risk Appetite have both collapsed to -1, and the dashboard is flashing Strong Headwind for the first time.

The tension is between the stable engine and the icy road. ISM Services at 54.4 and Q4 GDPNow at 4.2% say the economy was fine through year-end. The Greed Ratio FAIL and NFP collapse to -22k say something is shifting beneath the surface. The inflation pipeline clearing says the constraint is loosening. The signpost cluster says dollar weakness and carry risk haven’t gone away.

The 40% Stay Current probability is the lowest we’ve seen. The asymmetry tilts bearish, 35% combined bear case versus 18% bull case. The dashboard can’t tell you whether the modifiers are leading or lagging, only time will answer that. What it can tell you is that when the headwinds are this strong, the framework says pay attention.

Let the core pillars tell you when the regime is actually changing, not when the modifiers are throwing a tantrum. And watch NFP because if the 3-month average doesn’t recover in February, the tantrum becomes a trend.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

Last time we covered Growth, the engine of regime classification. This time we’re tackling Inflation, the second axis of the regime matrix. Get these two right and you’ve got the fundamental picture. Growth up + inflation down = Goldilocks. Growth down + inflation up = Stagflation. Obviously liquidity and policy play a part but you get the picture.

But here’s the thing I wish someone had told me years ago: by the time inflation shows up in the CPI print, the trade is already stale. You’re seeing where prices were, not where they’re going. Everyone’s watching the same number, reacting to the same headlines, trading the same information. There’s no edge in that.

The edge (if there is one) comes from understanding inflation as a process, not a number. A pipeline with stages. Pressures that build upstream, flow through expectations and eventually show up in the sticky prices the Fed actually targets. If you can read the pipeline, you can see the regime shift before CPI day confirms it.

This took me longer to figure out than the growth framework and I’m still learning, but let me walk you through how I think about it now.

Why Inflation Is Different From Growth

Growth has a relatively clean relationship with asset returns. Economy expands, earnings grow, risk assets do well. Economy contracts, earnings fall, defensive assets win. Cause and effect.

Inflation is messier. The relationship with returns depends entirely on why inflation is doing what it’s doing and what else is happening at the same time.

Rising inflation with strong growth? That’s Reflation, commodities rip, value beats growth, duration suffers, but equities can still work. Rising inflation with weak growth? That’s Stagflation, pretty much everything hurts except gold and maybe energy. Same inflation direction, completely different playbooks.

Falling inflation with strong growth? Goldilocks, the best environment for risk assets. Falling inflation with weak growth? Could be Deflation risk, duration wins big, but you’re also worried about credit and equity exposure.

This is why the regime framework plots Growth against Inflation as a 2x2 matrix. Neither dimension alone tells you enough. You need both to know which playbook to run.

But it also means inflation analysis has to work differently than growth analysis. You’re not just asking “is inflation going up or down?” You’re asking “where are the pressures, how persistent are they, and what’s the interaction with the growth picture?” That requires understanding the mechanics in a way that pure growth analysis doesn’t.

The Mental Model That Changed How I Think About This

For years I tracked CPI and PCE like everyone else. Month comes out, number goes up or down, I update my view.

The breakthrough and I really do mean breakthrough, this was a genuine level-up in how I think, came when I started conceptualizing inflation as a pipeline with three stages.

Stage 1: Upstream. Input costs, commodity prices, shipping rates. This is where inflationary pressure enters the system. Raw materials, energy, transportation. The stuff that flows into everything else. When upstream is building pressure, it’s going to show up downstream eventually.

Stage 2: Midstream. Expectations. What bond markets, businesses and consumers believe inflation will be. This matters because expectations influence behavior. Wage demands, pricing decisions, spending patterns. If expectations de-anchor, transitory inflation can become permanent.

Stage 3: Downstream. The sticky prices consumers actually pay. Services, wages, rent. This is what the Fed targets and what CPI/PCE measure. By the time pressure shows up here, it’s already flowed through the first two stages. That’s why downstream is coincident or lagging, it confirms where you are, not where you’re going.

The power of this model is pattern recognition. Different combinations tell you different stories:

All three stages falling? Pipeline clearing - disinflation is coming, duration looks attractive.

Upstream rising but downstream stable? Pressure building - prepare to reduce duration before the CPI prints confirm it.

Upstream falling but downstream sticky? Normal lag - be patient, don’t overreact to current levels, the clearing is coming.

All three rising? Full pipeline pressure - Stagflation risk is real, get defensive.

Midstream de-anchoring while upstream is stable? That’s a credibility problem, the Fed has to act regardless of current inflation levels.

The framework gives you a bigger picture than any single number and it gives you lead time, which is the whole point.

Upstream: Where Inflation Begins

Inflationary pressures almost always start upstream. Commodity price spikes, shipping cost surges, supply chain disruptions, these are the first dominoes. By the time they show up in consumer prices, you’ve had months of warning if you were paying attention.

The 2021-22 inflation surge is the perfect example. The Baltic Dry Index, which measures shipping costs for bulk cargo went from around 1,000 in early 2020 to over 5,600 by late 2021. A 460% increase. ISM Prices Paid hit 92.1 in June 2021, the highest reading in decades. Anyone watching upstream saw the wave coming.

Source: https://fred.stlouisfed.org/series/PPIFIS/#

Source: https://fred.stlouisfed.org/series/CPIAUCSL#

Core CPI didn't peak until August 2022, a full 12 months later. The pipeline told the story first. If you waited for CPI confirmation, you were late.

Source: https://fred.stlouisfed.org/series/CPILFESL/#

Types of Upstream Indicators

Commodity indices: Broad baskets tracking energy, grains, metals, and softs. When commodity indices are accelerating, input costs are rising across the board. The level matters less than the trend and acceleration.

Shipping and logistics costs: Indices measuring freight rates for bulk cargo, container shipping and air freight. These can’t be stored or speculated on easily, they reflect real-time supply/demand for global trade. A collapsing shipping index tells you goods inflation is softening at the source. A surging one tells you pressure is building.

Business input cost surveys: What businesses are actually paying for inputs. Manufacturing surveys often include a ‘prices paid’ component that captures the pass-through from commodity markets to business costs. Readings above historical averages signal pressure; readings below signal relief.

I weight upstream at about 20% of the inflation pillar. It’s leading, so it gets less weight than the stuff the Fed actually targets. But it’s the early warning system.

One thing worth noting: upstream isn’t just a US story. Global commodity markets and shipping routes mean that China’s slowdown, European energy dynamics and emerging market demand all feed into the same pipeline. Shipping indices don’t care where the cargo is headed, they measure global trade flows. When China’s property sector struggles and construction demand falls, that shows up in copper and iron ore prices that eventually hit US input costs. When European natural gas spikes, it ripples through global energy markets. The upstream indicators are inherently international, which is part of what makes them useful as early warning signals.

Midstream: The Credibility Meter

This is the probably the toughest one to get right because the expectations are self-fulling. If businesses expect higher inflation, they raise prices preemptively. If workers expect higher inflation, they demand higher wages. If consumers expect higher prices, they pull forward spending, increasing demand. The expectation creates the reality.

This is why the Fed talks about expectations so obsessively. They can tolerate above-target inflation if expectations stay anchored, it’s seen as temporary, a blip that will pass. But once expectations change so does the math. Transitory becomes permanent. The Fed has to break and that usually means inflicting economic pain.

Types of Midstream Indicators

Long-term market expectations: Bond market measures of what inflation will average over the next 5-10 years. These are slow-moving but powerful. When long-term expectations stay near 2%, the Fed has credibility. When they drift materially above or below that anchor, something has shifted.

Breakeven inflation rates: The difference between nominal and inflation-protected bond yields. More volatile than long-term forwards but more responsive to near-term outlook changes. Useful for gauging how the market is pricing inflation risk over the next 5-10 years.

Consumer and business surveys: What households and firms expect inflation to be over the next 1-5 years. The Fed watches these because expectations can become self-fulfilling through wage demands and pricing decisions. Short-term measures (1-year ahead) are volatile and noisy; longer-term measures (3-5 years) are more stable and more useful. Right now there’s often a divergence worth noting: 1-year expectations tend to run higher, reflecting recent price memory, while 5-year expectations sit lower suggesting people believe the Fed will ultimately get inflation under control. That gap is actually healthy. It’s when longer-term expectations start drifting toward the short-term read that the Fed gets nervous.

Source: https://www.newyorkfed.org/microeconomics/sce#/inflexp-3 - 3y Expectations

Source: https://www.newyorkfed.org/microeconomics/sce#/inflexp-4 - 5y Expectations

I weight midstream at about 25% of the inflation pillar. It's the credibility check more than anything, as long as expectations stay anchored, the Fed has room to maneuver.

Source: https://fred.stlouisfed.org/series/EXPINF10YR

Downstream: What Actually Matters to the Fed

This is ultimately the end point. The sticky prices consumers pay. The stuff that doesn’t go away on its own. I weight downstream at 55% of the inflation pillar, more than upstream and midstream combined because this is what drives monetary policy. The Fed doesn’t target commodity prices or breakevens directly. They target PCE inflation.

Types of Downstream Indicators

Services inflation ex-shelter: This is arguably the indicator central bankers watch most closely. Strip out volatile goods and housing, which has its own dynamics. What’s left is the most persistent inflation. The stuff that requires actual demand destruction to bring down. When this is falling, the Fed can be patient but when it’s rising, they’re behind the curve.

Core PCE: The Fed’s official target measure. Strips out food and energy to reduce volatility. The gap between current readings and the 2% target tells you how much work remains. The trend tells you whether you’re getting there.

Wage growth trackers: Wages are the ultimate sticky price. Once they go up they only grow more slowly. Look for measures that track median wage growth for continuously employed workers, removing the composition effects that distort averages. Wage growth decelerating is one of the clearest signs that the inflation cycle is turning.

Source: https://fred.stlouisfed.org/series/CUUR0000SASL2RS#

Source: https://www.atlantafed.org/chcs/wage-growth-tracker

Why PCE, Not CPI?

CPI gets all the headlines. Why does the Fed target PCE instead?

Three reasons:

Substitution effect. PCE updates its weights as spending patterns change. If beef gets expensive and people buy chicken instead, PCE adjusts. CPI uses fixed weights, so it overstates inflation when people substitute away from expensive items.

Broader coverage. PCE includes spending on your behalf, employer-paid healthcare, Medicare, Medicaid. CPI only captures out-of-pocket. Since healthcare is a huge and fast-growing spending category, PCE gives a more complete picture.

Housing treatment. Both use “owners’ equivalent rent” to measure housing costs, but they weight it differently. Housing is about 33% of CPI and 15% of PCE. When shelter inflation diverges from other components (like it has recently) this creates meaningful gaps between the two measures.

The practical implication: PCE historically runs 0.3-0.5% below CPI. So when you see a “hot” CPI print, check whether PCE confirms before freaking out. Recently we’ve seen Core CPI at 2.6% while Core PCE sits at 2.7% and the divergence is housing-driven. The Fed watches PCE.

Source: https://fred.stlouisfed.org/series/PCEPILFE#

Source: https://fred.stlouisfed.org/series/CPILFESL#

Mistakes I’ve Made

The growth pillar cost me money through bad timing. Here are five more lessons I learned the hard way. You might recognise at least one from your own trading.

Reacting to CPI Day

This was my biggest inflation mistake for years. Number comes out, market moves, I’d chase and I was usually wrong by the time I’d executed.

The problem is that CPI day is already priced. The professionals trading inflation have been watching the upstream data, the regional Fed surveys, the components that print earlier in the month. By the time the headline drops, the move is often exhausted or the opposite direction from what the number “should” imply because positioning was wrong-footed.

Now I use CPI for confirmation, not initiation. If my pipeline read says disinflation and CPI confirms, I get more confident in the thesis. If CPI contradicts the pipeline read, I figure out why before changing anything.

Ignoring Services

For a long time I focused too much on goods inflation because that’s what moves around. Used cars, electronics, apparel, these components can spike 20% and then collapse. They get headlines. They feel important. Goods are roughly a quarter to a third of the basket. Services are the rest and services inflation is sticky. Wages drive services inflation, and wages don’t fall. They just grow more slowly.

During 2022-23 goods inflation collapsed as supply chains normalized. Used car prices fell 10%+. I thought inflation was solved. But services kept grinding higher. The Fed kept hiking. My trades suffered.

Now services inflation ex-housing is my single most important downstream indicator type. It’s what takes the longest to move. And it’s what tells you whether the inflation problem is actually solved or just masked by volatile components.

Confusing Level With Trend

“Core PCE at 2.7% is too high. Stay defensive.”

I was so focused on the level being above target that I missed the trend, which was clearly down. The Fed saw the trend too.

The regime framework cares about direction as much as level. Core PCE at 2.7% and falling is completely different from Core PCE at 2.7% and rising. The first is progress toward target. The second is re-acceleration. Same number, opposite implications.

Now I always ask: which way is this moving? That single question has improved my inflation reads dramatically.

Forgetting the Lags

Inflation has momentum. Upstream leads downstream by 6-12 months. Policy affects inflation with “long and variable lags” the Fed’s own words. But I’d see commodity prices fall and expect CPI to follow immediately. It doesn’t work that way.

In 2022 shipping costs collapsed. Commodity prices peaked mid-2022. But core inflation didn’t peak until much later, and services kept rising into 2023. The pipeline takes time to clear.

Patience is required. If upstream is falling and downstream is still elevated, that’s not a contradiction. The clearing is coming. Don’t panic out of positions because the headline hasn’t moved yet.

Over-Reacting to Single Prints

One hot CPI doesn’t make Stagflation. One soft print doesn’t mean Goldilocks. Economic data is noisy. Seasonal adjustments are imperfect. There’s genuine randomness in any single reading.

I used to flip my view every month based on whether the number beat or missed. The framework uses 3-month trends for a reason. If your model changes regime on every data release, it’s just a glorified newsfeed.

The short version: Use CPI for confirmation, not initiation. Focus on services, not goods. Track trends, not just levels. Respect the lags. And don’t flip your view on every print.

Applying the Framework

The power of the pipeline model is pattern recognition. Let me walk through how it works in practice, not to tell you what I’m watching specifically, but to show how the framework generates signals.

When the pipeline is clearing: Upstream stable or falling, midstream anchored, downstream decelerating. This is the pattern that precedes disinflationary environments.

When pressure is building: Upstream rising, midstream starting to drift higher, downstream not yet responding. The lead times tell you the downstream move is coming.

When there’s a credibility problem: Midstream de-anchoring even while upstream is stable. This is the Fed’s nightmare, expectations becoming disengaged from fundamentals.

When you need patience: Upstream falling but downstream still sticky. This is normal lag. The clearing is coming, don’t panic out of positions because the headline hasn’t moved yet.

The specific numbers matter less than the pattern. Once you internalise the pipeline structure, you start seeing these combinations everywhere and you start recognising regime shifts before the consensus catches on.

Building Your Own Inflation Framework

Same principle as the growth framework: I’m not going to hand you the exact recipe. The structure matters more than the specific ingredients. Here’s how I’d approach it if I were starting over:

Build the pipeline structure. Separate upstream (leading), midstream (expectations), and downstream (sticky/target). This is the architecture that makes everything else work.

Choose indicators for each stage. You need at least one commodity measure, one shipping/supply chain measure, one market-based expectation measure, one survey-based expectation measure, and two or three downstream measures including something that captures sticky services inflation and wage dynamics.

Weight toward downstream. That’s what the Fed targets and what drives policy. Upstream and midstream get less weight but provide the lead time. I use roughly 20/25/55 but you can adjust based on what works for your style.

Track levels AND trends. For each indicator, you want to know both where it is and which direction it’s moving. A simple 3-month vs 12-month moving average comparison works. Above and rising = accelerating. Below and falling = decelerating.

Set your signposts. What thresholds would trigger a reassessment? Core inflation above a certain level? Long-term expectations drifting higher? Services inflation breaking below target? Write them down before you need them so you’re not moving goalposts when the data gets inconvenient.

Connect to the regime matrix. Inflation alone doesn’t tell you the playbook. You need to combine it with your growth read. Same inflation number means different things depending on whether growth is positive, neutral or negative.

The Bottom Line

Inflation analysis isn’t about predicting the next CPI print. It’s about understanding where pressures are in the system and whether they’re building or clearing.

The pipeline model gives you that edge. Upstream tells you what’s coming. Midstream tells you whether expectations are anchored. Downstream tells you where you actually are. Together, they give you a complete picture and lead time over the reactive approach of just watching the headline number.

Right now, the pipeline is clearing. That’s the framework doing its job and identifying the regime shift before the headlines confirmed it. The Stagflation call from a few weeks ago was real, but the data improved. The inflation pillar moved from +1 to 0. The regime matrix shifted accordingly.

Next time we’ll cover Policy, the third pillar. How to read the Fed beyond the headlines, what real rates actually tell you, why the curve shape matters more than the level, and the distinction between monetary and fiscal that most people miss. Until then, start building your inflation pipeline.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer:

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

Last week the modifiers held while the core stayed flat. I wrote that the system was coasting, not driving, and asked whether we were seeing healthy normalization or the early stages of something less pleasant.

This week we got an answer. Sort of.

The regime hasn’t changed. We’re still Neutral/Chop, still stuck in the center of the matrix with minimal conviction. Policy and Risk Appetite are both holding at +1, providing the tailwind. But underneath the surface, something interesting is happening. Net liquidity drained $86 billion in a single week. The TGA swelled by $90 billion. BTC is tracking lower, aligned with the drain. And the divergence tracker (the one that flags when stocks and liquidity stop agreeing) is flashing BEARISH SHORT SIGNAL.

Yet the signal validation system says the rally is high quality. Four checks pass. Credit is calm. Vol structure is healthy. Breadth is adequate.

One of these is lying. The question is which one.

Current Regime: Neutral/Chop | Aggregate Score: +2 | Conviction: Minimal

The modifier pillars are holding. Policy and Risk Appetite both stable at +1, that’s providing the tailwind that keeps us in the constructive part of Neutral/Chop rather than sliding toward Late Cycle. Growth and Inflation at zero, Liquidity at zero. The core regime is directionless, but the modifiers are doing their job.

The dashboard says 50% probability we stay here. That leaves 50% we don’t. And given what the liquidity numbers are doing, I’m watching closely whether those modifier scores can hold.

Growth: Holding

Growth holds at 0.

Not new news but something worth flagging; ISM Services New Orders minus Inventories is sitting at +3.7. That’s the Services spread (New Orders 57.9 − Inventories 54.2). When new orders outpace inventories in services, it signals strengthening demand and building backlogs. That’s forward revenue.

Source: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/december/

Everything else? Largely unchanged from Issue #007:

• ISM Services: 54.4 (unchanged)

• NFP 3-month average: 52k (down from 59k—softening continues)

• GDPNow: 5.4% (was 5.3%)

• Divergence check: Aligned — Soft Landing (unchanged)

The services-labor tension from Issue #006 persists. Services strong, labor soft. That divergence hasn’t resolved but the New Orders suggests it might resolve to the upside rather than down.

Growth Score: 0 (Neutral) | Trend: ↑ | Divergence: Aligned (Soft Landing)

Inflation: Pipeline Still Clearing - But Watch Upstream

The downstream narrative from Issue #007 holds. But upstream is heating up.

Pipeline update:

CRB commodities +3.4%. Baltic Dry +12.4%. That’s upstream pressure building. Tariffs showing up in input costs. The question is whether it transmits downstream.

So far, it hasn’t. Tariff pass-through monitor: Upstream +8.24% → Midstream +3.30% → Downstream -0.41%. Core CPI still falling YoY. But if upstream keeps rising while midstream expectations stay anchored, something has to give eventually.

The “Pipeline Clearing” flag remains active because downstream is still decelerating. But the upstream acceleration is worth flagging, this is the early warning of where tariff pressure shows up first.

Inflation Score: 0 (Stable) | Trend: ↓ | Pipeline: Clearing (upstream heating)

Policy: Modifiers Recovered

Policy still at +1. Last week’s cooling reversed.

The framework logic from Issue #007 still applies: Fed on hold, fiscal stimulative, financial conditions loose. What changed is the composite score recovered. The “deceleration” I flagged last week didn’t persist.

Key readings:

Source: https://www.chicagofed.org/research/data/nfci/current-data

Financial conditions at -0.59 are the loosest we’ve seen. The “Both Loose = Bubble Risk” flag from last week remains active. Nothing new there, just confirming the setup exists.

Policy Score: 1 (Neutral) | Trend: ↑ | Mix: Both Loose

Liquidity: The Drain Accelerates

This is the story of the week. Net liquidity drained $86 billion in seven days.

Source: Federal Reserve H.4.1 Release (federalreserve.gov/releases/h41)

Source: https://fred.stlouisfed.org/series/WTREGEN#

Last week I wrote that net liquidity was rising (+$27B) while the RRP buffer was nearly exhausted. This week, the TGA swelled by $90B (Treasury building cash) and that drained reserves from the system. The RRP, already at $3.3B, dropped to $2.1B. Effectively zero cushion.

For context on why the RRP exhaustion matters, see Issue #007. Short version: any funding squeeze now hits bank reserves directly.

The divergence that matters: BTC at $89,578, down from $93,636. Bitcoin tends to lead net liquidity by ~2 weeks. When BTC falls while SPX holds flat, something has to give.

The divergence tracker says it plainly: SPX vs Net Liq = BEARISH SHORT SIGNAL.

Good news: plumbing normalized. SOFR-repo collapsed from 10 bps to 2 bps. MOVE index down to 56 from 67. The acute stress isn’t there, but the structural drain continues.

Liquidity Score: 0 (Neutral) | Trend: ↓ | Divergence: BEARISH SHORT SIGNAL

Risk Appetite: Validation Holds, Breadth Weakens

Risk Appetite back to +1. Signal validation unchanged from Issue #007: 4/4 PASS, HIGH QUALITY.

Credit tighter. Vol calm. The validation system says this rally is real.

The tension: Breadth is weakening underneath. S&P >50 DMA dropped to 66.2%. NYSE >200 DMA fell to 64.1%. A/D line diverging from SPX continues. Prices holding while participation fades, that’s the same pattern the liquidity divergence is showing.

Copper/gold at 0.00119, still flashing fear (was 0.00127). That divergence from Issue #006 hasn’t resolved.

Risk Appetite Score: 1 (Risk-On) | Trend: ↑ | Rally Quality: HIGH (4/4) | Breadth: Weakening

China: Flags Cleared

China improved. Score back to +2 from +1. All three global risk flags now clear.

The slowdown flag that was active in Issue #007? Cleared. FXI rising. Copper showing expansion signal. Caixin back above 50.

Global Risk Flags: 0 of 3 Active

Signposts: Same Three, Still Triggered

USD/JPY improved, down from 159 after the BoJ held rates and struck a neutral tone Friday. Still deep in intervention territory, but the immediate pressure eased. No hawkish surprise, no intervention. For now.

Carry unwind mechanics and intervention risk covered in Issue #007.

Alert Status: 🔴 MULTIPLE TRIGGERS — Full Regime Review.

Key Question: Which Signal Is Lying?

The divergence tracker says SHORT. The signal validation says SIZE UP. Both can’t be right.

Here’s the tension laid out plainly:

The bear case (divergence tracker): Net liquidity drained $86B in one week and BTC is falling, aligned with the drain. SPX is holding flat while the liquidity tide goes out. Historical pattern: when SPX diverges from net liq, SPX ends up catching up. (Q4 2018, Feb 2020, Late 2021, divergences resolved to the downside).

The bull case (signal validation): Credit isn’t worried (HY at 264 bps, tightening). Vol structure healthy (contango, VIX at 16). Trends strong (SPY, QQQ, IWM all 3.5 ribbon scores). China improving (+2 score). ISM Services New Orders - Inventories positive (+3.7, first time in months).

The caution: Breadth is weakening underneath the strong trends. Participation down 5-7 points WoW. The momentum overlay confirms what the liquidity tracker is saying: surface calm, undercurrents shifting.

I don’t have a clean answer yet. The data is genuinely contradictory. Liquidity says risk-off. Credit says risk-on. Growth indicators improving. Policy and Risk Appetite modifiers holding at +1.

My best read: the divergence is real, but timing is uncertain. Net liq divergences have historically taken time to resolve. We’re early in the process. The signal validation passing suggests this isn’t imminent, but it’s also not nothing.

What I’m watching:

• TGA trajectory: If Treasury keeps building cash, the drain continues. Watch for drawdowns below $800B as a potential relief valve.

• BTC: If it breaks below $85k while SPX holds, the divergence intensifies. If BTC stabilizes, maybe the drain is priced.

• Credit spreads: HY at 264 is the truth serum. If this starts widening toward 300+, the divergence is resolving to the downside. Currently: calm.

Cross-Asset Read

Regime: Neutral/Chop. Aggregate: +2. Conviction: Minimal.

Framework logic by asset class covered in Issue #007. Quick updates on what’s changed:

Equities

Large Caps: Trends strong but breadth weakening underneath with participation down. The divergence between price strength and internal weakness is the tension to watch.

Small Caps: Rate sensitivity typically a tailwind in this environment. If breadth keeps fading, small caps tend to feel it first.

Fixed Income

Duration: Pipeline clearing is duration-positive. Growth stable limits the rally case, but momentum is turning. Worth watching.

Credit: HY at 264, tighter. Truth serum passing. If you believe signal validation, credit is fine. If you believe the divergence, credit is next to crack.

Commodities

Gold: Signpost triggered. Central bank bid intact. Extended but trending.

Copper: Expansion signal from China, but copper/gold still flashing fear. The ratio and price are disagreeing, historically, the ratio tends to lead.

FX

DXY: 97.46, below the 100 signpost trigger. Dollar weakness persists, down from 99.38 last week. Rate differential compression (Fed cut, others held) continues to weigh.

USD/JPY: 155.71. Tail risk persists. BoJ held and struck neutral tone, but intervention risk remains at these levels.

What Would Change the View

Growth confirms boom: ISM Services > 55, NFP > 100k, copper/gold ratio turns. → Reflation.

Growth cracks: ISM Services < 50, NFP < 50k, Real Income negative. → Late Cycle.

Inflation reaccelerates: Core PCE 3M > 3.5%, Supercore reverses upward. → Stagflation risk.

USD/JPY reverses: BoJ intervention, moves < 152. → Carry unwind cascades.

Credit cracks: HY > 400 bps. Currently 264, along way off, but that’s the line.

Divergence resolves: Either SPX catches up with net liq (bearish), or net liq stabilizes and BTC recovers (bullish). One of these happens in the next 2-8 weeks.

The Bottom Line

Regime: Neutral/Chop | Aggregate Score: +2 | Conviction: Minimal

The modifier pillars are holding. Policy and Risk Appetite both stable at +1, that’s keeping us in constructive territory. Growth and Inflation at zero, Liquidity at zero. The core regime is directionless, but the modifiers are doing their job.

That’s the framework output.

The divergence is the story. Net liquidity drained $86B in a week. BTC is tracking lower. SPX is holding flat. Breadth is weakening and participation is down 5-7 points. The divergence tracker says SHORT. But the signal validation says the rally is HIGH QUALITY; credit calm, vol healthy, trends intact.

Both signals have good track records. Both can’t be right. My read: the divergence is real but not imminent. Timing divergences is notoriously difficult. Q4 2018 took weeks to resolve. Feb 2020 was more swift.

The signposts remain triggered. USD/JPY at 155.71 (eased post-BoJ), DXY below 100, Gold above $300. The carry unwind risk hasn’t gone away, it’s just been patient.

TGA swelling. The plumbing is functioning, but the structural drain continues.

The framework points to patience. The modifiers are holding, the divergence is building, but nothing has broken yet. The divergence will resolve, one way or another.

The data will tell us. It always does.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer:

All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions.

The Bank of Japan meets today and tomorrow (January 22-23). Markets expect a hold at 0.75%. That’s not the story. The story is what Governor Ueda says about the yen and what it means for the carry trade that’s been building pressure since August.

The Setup

USD/JPY trading around 158.4. That’s deep in intervention territory. Japanese authorities intervened at 151.94 in October 2022 and 160.17 in April 2024. We’re sitting between those levels, in the zone where Finance Minister Katayama has repeatedly warned that “some episodes of yen depreciation do not reflect fundamental factors.”

This isn’t new. I’ve flagged this signpost in every issue since The Setup #005. What’s new: we’re about to hear directly from the BoJ with the yen at these levels.

What markets are pricing: Near-zero probability of a hike this week. Next hike expected July 2026 after spring wage negotiations confirm. But here’s the wrinkle, Citi just flagged risk of three rate hikes in 2026 if yen weakness persists. Multiple analysts note the next hike “could be brought forward depending on yen depreciation.”

That’s the tail risk. A hawkish signal that the yen’s weakness is accelerating the BoJ’s timeline.

What to Watch

Ueda’s tone on the yen. Dovish or neutral = yen weakness continues, carry trades stay comfortable, USD/JPY grinds toward 160. Any explicit linkage between yen weakness and inflation management = warning shot.

The Outlook Report. The BoJ is expected to raise its fiscal 2026 growth projection above last October’s 0.7% estimate. Look for any changes to inflation forecasts, upgraded inflation expectations would support a faster hiking path.

Neutral rate guidance. This is the sleeper. If the BoJ signals a neutral rate of 1.5-2% (versus current 0.75%), that implies multiple hikes ahead. That’s the scenario where carry trades unwind fast.

The Carry Unwind Risk

August 2024 gave us the preview. When the yen reversed, EEM dropped 8% in three sessions. High-yielding EM currencies; MXN, BRL, ZAR, all got crushed as funding costs spiked. Leveraged funds running carry trades were forced to liquidate risk assets to cover yen shorts.

Right now, leveraged funds are the most bearish on yen since July 2024. That’s a crowded short. Crowded shorts can reverse violently when the catalyst arrives.

The catalyst could be hawkish BoJ guidance. Or intervention headlines. Or simply a statement that the Bank is “watching the yen closely”. Standard verbal intervention that can move the pair 200 pips in a session.

Regime Implications

The framework shows three signposts still triggered: USD/JPY above 152, DXY below 100, Gold above $300. All three point the same direction, dollar weakness combined with a safety bid.

If the BoJ triggers a yen reversal: USD/JPY drops toward 150 initially, potentially testing 145-140 on a sustained unwind. Risk assets gap lower as carry trades liquidate. EM FX particularly vulnerable. Gold likely catches a bid as safe-haven flows accelerate.

The regime stays Neutral/Chop regardless. But the path through that regime gets a lot choppier.

The Political Wildcard

PM Takaichi dissolved parliament on Friday (Jan 20). Snap election February 8. She’s proposed a two-year halt to the 8% consumption tax on food, fiscally expansionary, yen-negative. Political uncertainty typically strengthens the yen short-term (domestic hedging), but her policy platform is structurally bearish JPY.

The BoJ will navigate this meeting knowing election uncertainty is high. That argues for a neutral tone but Ueda has also signaled he won’t let political considerations dictate monetary policy.

The Bottom Line

Hold expected. Watch the tone.

This week’s data, gold above $4,900, Russell 2000 hitting its record high all tells one story. The yen at 158 tells another. The divergence between risk assets rallying and the safety signpost screaming hasn’t resolved.

The BoJ meeting is the next opportunity for resolution. Either Ueda stays neutral and USD/JPY grinds higher toward 160, or he tips hawkish and we get the unwind the signpost has been warning about.

I can’t tell you which one happens. I can tell you the asymmetry is unfavorable at these levels. Carry trades look attractive until they don’t. And when they don’t, they don’t give you time to react.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

Last week felt different.

ISM Services surging to 54.4. GDPNow tracking north of 5%. The divergence check flashing “Boom / Reflation” for the first time in weeks. There was heat building real momentum in the system. I wrote about services accelerating while labor cracked, trying to make sense of data that refused to reconcile.

This week? Different story entirely. The heat’s coming off.

Policy decelerated. Risk Appetite decelerated. The aggregate score dropped from +1 to 0; sounds modest, but it shifts the entire complexion of the read. More importantly, that divergence implication reversed. Back to “Soft Landing” from “Boom / Reflation.” And Reflation probability? Cut nearly in half. From 15% down to 8%.

Same regime classification on paper. Completely different mood underneath.

Now, to be clear: nothing has collapsed. ISM Services still printing 54.4. New orders positive. Financial conditions loose. The underlying foundation hasn’t crumbled. What’s changed is the momentum, the system that was accelerating is now coasting. Maybe consolidating. Maybe rolling over. Too early to know which.

I’ve learned to pay attention when the framework cools after a hot reading. Usually means the signal overshot, not that conditions fundamentally changed. The question, and it’s an honest one, is whether this pause is consolidation before another leg higher, or the early stages of something less pleasant.

Three signposts still triggered. USD/JPY above 152. DXY below 100. Gold above $300. That currency cluster hasn’t budged. If anything, with USD/JPY pushing even higher 158, we are deeper into intervention territory.

Current Regime: Neutral/Chop | Aggregate Score: 2 | Conviction: Minimal

What’s the story here? Normalization. Last week’s reflationary signals probably overshot. The framework is finding a more sustainable equilibrium which isn’t necessarily bad news. But it does mean the easy directional call many were hoping for hasn’t materialized.

Growth: Stable Foundation, Divergence Resolved

Growth holds at 0. Neutral. Trend stable.

Remember last week’s puzzle? ISM Services surging while NFP cracked? That divergence dominated the narrative. Well, it hasn’t resolved through new data, the numbers are basically unchanged. What shifted is how the framework interprets them.

The divergence check now reads “Aligned” with a “Soft Landing” implication. Last week: “Boom / Reflation.” That’s a meaningful reframe of the same underlying signals.

Let me walk through what actually moved:

ISM Services: 54.4. Unchanged. Still solidly in expansion.

NFP 3-month average: 52k. Unchanged. Still concerning.

ISM New Orders minus Inventories: +2.5. Sustained positive and this one matters more than people realize.

GDPNow: 5.3%, up from 5.1%. Still tracking hot (Q4 2025).

Source: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/december/

Leading indicators score 0.3. Coincident indicators score 0. Both stable, both aligned. The “Soft Landing” implication suggests the framework now sees controlled deceleration rather than an accelerating boom. Subtle shift, but it changes the positioning calculus.

GDPNow at 5.3% seems inconsistent with “soft landing,” I know. Here’s the thing though, GDPNow tracks current quarter GDP from high-frequency data. Tells you where we are. The regime framework tries to identify where we’re headed. Those are different questions. The leading indicators feeding the divergence check are softer than that headline growth number suggests.

When current data and leading data disagree? I lean toward the leading side. Not always right, but that’s the bet.

Source: https://www.atlantafed.org/cqer/research/gdpnow

For the deeper analysis on services-labor tension, see Issue #006. That framework still holds.

Growth Score: 0 (Neutral) | Trend: ↑ | Divergence Implication: Soft Landing

Inflation: Pipeline Clearing Returns

Genuinely good news here.

Last week, all the regime flags read “No.” No stagflation risk. No reflation signal. No disinflation signal. Momentum mixed. Felt like inflation progress had stalled entirely.

This week: “YES - Pipeline Clearing.”

What changed? The pipeline analysis shows clearer progression through the three stages. Worth walking through:

Upstream (20% weight): CRB commodities at 379.22, accelerating modestly. But Baltic Dry collapsed further—1,567 from 1,688. Shipping costs still falling hard. Global trade pricing pressure remains muted. Score: 0.

Source: TradingView - BDI

Midstream (25% weight): Expectations anchored. 5Y5Y forward at 2.27%. 10Y breakevens at 2.25%. Both stable. Both inside the Fed's comfort zone. Bond traders aren't worried about inflation—and bond traders are rarely wrong for long. Score: 0.

Source: https://www.clevelandfed.org/indicators-and-data/inflation-expectations - Inflation Expectation Term Structure.

Source: https://www.clevelandfed.org/indicators-and-data/inflation-expectations - 10Y Inflation Expectation

Downstream (55% weight): This is where it matters most. Supercore PCE, services ex-housing, the stickiest component, the metric Powell watches closest at 3.8% and decelerating. Atlanta Fed Wage Tracker at 4.2%, falling. Core PCE at 2.83% with the 3-month annualized running 3.2%, still hot near-term, but trend pointing right. Score: 0.

Source: https://www.atlantafed.org/chcs/wage-growth-tracker

The “Pipeline Clearing” flag triggers when upstream and midstream aren’t building pressure while downstream decelerates. That’s exactly what we’re seeing. No stagflation risk. No reflation signal. Just gradual normalization toward target.

Boring is good here.

One caveat on tariffs: pass-through remains contained for now. Upstream commodities up 2.66% YoY. Midstream PPI up 3.3%. Downstream Core CPI barely positive at 0.03% YoY change. Pipeline isn’t transmitting cost pressures to consumers yet. I remain skeptical this holds through Q2 if tariff rhetoric becomes tariff action but that’s a future problem.

Inflation Score: 0 (Stable) | Trend: ↓ | Pipeline Status: Clearing

Policy: Accommodative but Decelerating

Policy score is stable.

The raw composite is still positive, sitting at 1 but momentum has stalled. That’s the story this week. Not the level. The deceleration. Fed on hold. Markets have digested the “one cut for 2026” guidance. Now everyone’s waiting.

Waiting for what, exactly? Good question.

Fed Funds effective at 3.72%. Real Fed Funds at 0.89%, still positive, technically restrictive relative to neutral, but less so than last year’s peaks. The easing that’s already happened is in the rear-view. Question now is whether more is coming.

Financial conditions? Still loose. Very loose, actually:

Chicago Fed NFCI at -0.57. Even easier than last week’s -0.55.

GS FCI shows loosening conditions.

10Y-3M spread at 57 bps. No recession signal there.

Source: https://www.chicagofed.org/research/data/nfci/current-data

Here’s something worth flagging: fiscal is stimulative. Impulse running at +2.3% YoY. Government adding demand quietly, while everyone focuses on the Fed.

So now we have monetary policy already accommodative. Fiscal running hot. Both levers pulling the same direction. Policy Mix Matrix flags this as “Both Loose = Bubble Risk.” That’s not a warning to ignore. When both policy channels run accommodative simultaneously, asset prices can decouple from fundamentals. S&P at 22x forward earnings with a 6% deficit and 3.7% Fed Funds? The conditions for multiple expansion on liquidity rather than earnings are present.

Not there yet. But the setup exists. Worth watching.

The deceleration itself comes from the monetary score cooling as markets fully digest the hawkish hold message. One cut for 2026. That’s priced. The question mark: will they need to do more if growth softens? Or hold firm if inflation proves stickier than the pipeline suggests?

Policy Score: 1 (Neutral) | Trend: ↑ | Policy Mix: Both Loose

Liquidity: Buffer Gone but Net Rising

I’ve been banging on about this for weeks.

I tracked this drain since December. From $106 billion. To $3 billion. To now $1.2 billion. That buffer absorbed funding stress in 2022-2023. Prevented repo spikes from cascading. Gave the Fed time to react to plumbing problems.

Gone.

Any future funding squeeze hits bank reserves directly. No cushion. No margin for error.

Source: https://www.newyorkfed.org/markets/desk-operations/reverse-repo

But net liquidity actually rose. Current reading: $5,801.78 billion, up $27 billion from last week. Fed balance sheet ticked to $6,582 billion. TGA fell to $779 billion, releasing reserves into the system.

Simple math: Fed BS ($6,582B) minus TGA ($779B) minus RRP ($1.2B) = Net Liquidity ($5,801.78B)

BTC at $95,290, up from $90,667, tracking net liquidity as usual. Say what you will about crypto but it’s a useful real-time liquidity barometer. When BTC diverges from net liquidity, something’s usually brewing.

Source: TradingView - Net Liquidity vs. Bitcoin

Plumbing stress? Normal for now:

SOFR-Repo at 10 bps. Up from 8. Nowhere near December’s 35 bps stress.

MOVE index at 66.9. Rates vol subdued.

The concern isn’t today but watch the plumbing checks. They’ll show trouble before headlines do.

Liquidity Score: 0 (Neutral) | Trend: ↑ | RRP Buffer: Exhausted

Risk Appetite: Quality Holds, Greed Fades

Another stable pillar.

Like Policy, this is deceleration more than deterioration. Market isn’t panicking. Just less enthusiastic than seven days ago.

Validation system still passes all four checks:

Credit Check: PASS. HY spreads at 271.

Internals Check: PASS.

Global Check: PASS. AUD/CHF at 0.537, neutral.

Vol Check: PASS. VIX at 15.86, term structure in contango.

Rally Verdict: HIGH QUALITY - Size Up

Four passes means the framework considers this rally real. Not a bear market bounce. Not low-quality speculation. That hasn’t changed.

What has changed? The mood.

Greed Ratio (XLY/XLP) at 1.49. Down from 1.57. Defensive rotation underway, when cyclicals start losing to staples, someone’s getting cautious. SPY down 0.35%, trend now “Falling.” VIX at 15.86, up from 14.49. Not alarming. But complacency is fading.

Source: TradingView: Consumer Discretionary vs. Consumer Staples Ratio (XLY/XLP)

Now here’s where it gets interesting. Breadth tells a different story:

S&P 500 % > 200 DMA: 67.1%. Up from 64%.

S&P 500 % > 50 DMA: 71.1%. Up from 70%.

NYSE % > 200 DMA: 71.3%. Up sharply.

Net Highs minus Lows: 181. Rising. Strong.

Breadth verdict technically reads “WEAK” due to A/D line divergence, 45 days or so since high. But look at those participation metrics. Improving underneath the price weakness. That’s an important tell.

When prices fall while breadth improves, it often signals accumulation rather than distribution. Institutions buying while retail gets nervous. Doesn’t guarantee anything. But it’s the constructive interpretation.

Copper/gold at 0.00127 still flashing fear though. That divergence from equity markets hasn’t resolved. See Issue #006 for why this matters.

Risk Appetite Score: 1 (Neutral) | Trend: ↑ | Rally Quality: High

China: Slowdown Flag Persists

China Score dropped to +1 from +2.

That slowdown flag from last week? Still active. FXI at 39.3, down slightly from 39.37. Deterioration continues, slow, steady, persistent.

Mixed signals across the board:

KWEB: 35.71, down 0.12.

Copper: 35.94, down 0.21.

USD/CNH: 6.9725 - yuan slightly stronger, small positive.

Caixin PMI: 50.1, barely expansion but holding

Caixin at 50.1 is the bull case. Manufacturing holding above the expansion threshold. But FXI declining while PMI holds? That divergence suggests equity investors see something the survey doesn’t capture. Maybe margins compressing. Maybe credit stress beneath the surface. Maybe just years of disappointment breeding skepticism about policy effectiveness.

I’ve learned to respect what equity markets say about China versus what official data claims.

Global risk flags: 1 of 3 active. China Slowdown: ACTIVE. Yuan Stress: Clear. EM Contagion: Clear.

Spillover implications covered in Issue #006.

Signposts: Same Three, Deeper Risk

Same three signposts triggered. But one has pushed into more dangerous territory.

USD/JPY at 158. Up from 157.92.

Even deeper into intervention territory now. BoJ intervened at similar levels in 2022 and 2024. Risk of sudden yen reversal and the carry unwind that would follow has increased, not decreased.

When the yen reverses, it reverses hard. Global macro funds running carry trades get forced to unwind, sell risk assets to cover yen shorts. The cascade hits everything. August 2024 was the preview.

It can happen fast.

Alert Status: MULTIPLE TRIGGERS - Full Regime Review.

Transition Probabilities: Reflation Fades

This is the headline shift. Look at the Reflation row:

15% → 8%. Reflation odds nearly halved in one week.

That “Boom / Reflation” divergence implication driving last week’s probability spike? Reversed. Framework no longer sees accelerating conditions. The heat that seemed so convincing seven days ago has dissipated.

Stay Current down to 50%. Coin flip on whether we exit this regime over the next four weeks. Half the probability mass sits elsewhere. The uncertainty is real, I’m not going to pretend otherwise.

Aggregate velocity: 0. No momentum either direction.

The system is coasting. Not driving.

Key Question: What Does Cooling Mean?

Last week I asked whether services growth could survive weak labor. That question remains unanswered, the data hasn’t resolved it.

This week the question shifts. What does the cooling tell us?

Two interpretations. Both defensible.

First: healthy normalization. The ISM Services surge and GDPNow heat were overshoots. Markets and data often overshoot before finding equilibrium, it’s the nature of complex systems. Policy and Risk Appetite returning to neutral is the framework recognizing that acceleration wasn’t sustainable. Soft landing proceeds. Framework correctly filtered noise from last week’s hotter readings.

Second: momentum loss before rollover. The cooling represents early stages of deceleration that eventually tips into Late Cycle. NFP weakness at 52k was the leading signal. Services strength was the lagging one. Greed Ratio shifting defensive is smart money positioning ahead of trouble.

We’ve seen that movie before. Breadth holds up until it doesn’t.

Data doesn’t clearly favor either interpretation. That’s why conviction is minimal. That’s why Stay Current probability is only 50%. I’m not going to manufacture certainty that doesn’t exist.

What I’m watching:

Next ISM Services print. Does 54.4 hold, improve, or rollover? Services confirming boom versus fading toward 50, that’s the fork.

NFP trend. 52k was concerning. Below 50k would be alarming. Recovery above 100k validates soft landing.

Breadth confirmation. Participation improving while price falls is potentially constructive. But A/D divergence needs to resolve. 45 days since high is extended.

USD/JPY at 158, testing intervention risk limits. BoJ has tools and has used them. Sudden reversal could cascade through carry trades quickly.

Cross-Asset Read

Regime: Neutral/Chop. Aggregate score: 0. Conviction: minimal.

Has anything materially changed from Issue #006? Not really. The framework’s asset class readings remain largely unchanged. What shifted is the probability weighting. Reflation fading, Soft Landing reasserting not the underlying cross-asset logic.

Quick methodology recap on how the regime translates to asset classes:

Small Caps

Framework logic: Rate-sensitive, leverage-heavy, domestic-focused. In a soft landing with Fed easing, small caps typically catch a bid as floating-rate debt costs decline and risk appetite expands. In late cycle or recession, they underperform due to credit sensitivity and weaker balance sheets.

Current read: Breadth improving underneath suggests participation broadening. But NFP weakness and the services-labor divergence from Issue #006 remain unresolved. Framework sees setup without catalyst.

Gold

Framework logic: Responds to real rates, dollar direction, and tail-risk hedging demand. Signpost triggered (GLD >$300) reflects structural central bank accumulation and dollar weakness, not just speculation. In Neutral/Chop regimes, gold typically consolidates rather than trends.

Current read: Three currency signposts all point the same direction, dollar weak, safety bid present.

Rates

Framework logic: Duration benefits when growth weakens or inflation falls; suffers when both run hot. The pipeline model’s “Disinflation - Pipeline Clearing” signal is marginally duration-positive. But growth stable at 0 provides no clear catalyst either direction.

Current read: 10-year at 4.166%, curve at 57 bps. No regime signal. Framework neutral on duration in Neutral/Chop is historically a range-trading environment for bonds.

Credit

Framework logic: Credit spreads are the “truth serum” they widen before equities crack in genuine risk-off episodes. HY at 271 bps says no stress. The validation system’s Credit Check passes. Copper/gold divergence (fearful) vs. credit (calm) remains the unresolved tension flagged in Issue #006.

Current read: Spreads tighter week-over-week. No deterioration visible. Framework reads credit as confirming the “no imminent crisis” base case—but notes the divergence with industrial metals.

For detailed positioning logic and the services-labor tension analysis, see Issue #6. The framework interpretation there remains current.

What Would Change the View

Growth confirms boom: ISM Services above 55, NFP above 100k, copper/gold turns higher. Reflation path reopens.

Growth cracks: ISM Services below 50, NFP below 50k, Real Income turns negative. Late Cycle.

Inflation reaccelerates: Core PCE 3M annualized above 3.5%, Supercore reverses, 5Y5Y above 2.5%. Stagflation risk returns.

USD/JPY reverses: BoJ intervention or hawkish guidance. Moves below 152 trigger carry unwind.

Credit cracks: HY spreads above 400 bps. Currently 271, a long way off, but that’s the confirmation level.

China deepens: FXI keeps falling, Caixin below 50. Global growth narrative weakens.

The Bottom Line

Regime: Neutral/Chop | Aggregate Score: 0 | Conviction: Minimal

Heat came off. Policy and Risk Appetite decelerated. The divergence that screamed “Boom / Reflation” last week now whispers “Soft Landing.” Reflation probability got cut nearly in half.

Framework cooled. I think that’s probably the right read.

This isn’t bad news. It’s normalization. System overheated on last week’s ISM surge, now finding equilibrium. Underlying foundation remains: services expanding, financial conditions loose, disinflation progressing, credit calm.

Nothing has broken.

But margin for error has narrowed. Stay Current at 50% is a coin flip. Same three signposts triggered, USD/JPY pushing deeper into danger. China still wobbling. RRP buffer gone.

Cushions that would absorb a shock? Thinner than I’d like.

When the edge isn’t clear, the disciplined move is to wait for clarity rather than manufacture conviction. Data will tell us which interpretation is right. Probably within the next few weeks.

Sometimes the best trade is the one you don’t force.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer:

All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions.

I’ve been thinking about how to do this series for a while.

The Setup gives you my weekly regime call. The Breakdown goes deep on themes. The Pulse catches stuff that can’t wait until Sunday. But none of that explains how I actually think about this stuff. the mental models, the frameworks, the hard-won lessons from getting it wrong more times than I’d like to admit.

That’s what The Mastermind is for. Less “here’s the answer,” more “here’s how I think about the question.”

I’m not going to hand you a recipe. Partly because the specific indicators I use aren’t magic, they’re just the ones I’ve found work for me. Partly because if you just copy someone else’s framework without understanding why it works, you’ll abandon it the first time it gives you a signal you don’t like. And partly because, honestly, I think you’ll build something better if you understand the principles and adapt them to your own style.

We’re starting with Growth. It’s the pillar I weight most heavily, and it took me the longest to get right. Let me tell you why.

Why I Obsess Over Growth

Here’s something that took me years to internalize: most of what matters in macro comes down to two questions. Is growth going up or down? Is inflation going up or down? That’s it. Everything else; policy, liquidity, sentiment, is just context for how those two forces play out.

I used to make this way more complicated than it needed to be. I’d track dozens of indicators, build elaborate models, convince myself that some obscure data series held the key to everything. And you know what? Most of it was noise.

The reason is pretty intuitive once you stop and think about it. Corporate earnings are basically a derivative of economic growth. When the economy expands, companies sell more stuff, margins improve, earnings grow. When the economy contracts, the whole thing reverses. And since asset prices ultimately reflect earnings - present and expected - growth is what drives returns.

Same logic works across asset classes. Credit spreads? They’re pricing default risk, which is a function of whether companies can generate enough cash to service their debt. Rates? Growth expectations drive term premium and curve shape. FX? Capital flows to where growth is. Commodities? Demand growth drives prices. It all comes back to the same thing.

I’m not saying you can ignore everything else. But if you get growth right, you’re playing with the wind at your back. Get it wrong, and no amount of cleverness in the other pillars will save you.

The Third Question Nobody Talks About

Okay, so growth up or down, inflation up or down. That’s the fundamental picture. But here’s the thing that separates okay macro analysis from actually making money: you also need to know who’s positioned wrong.

Because markets don’t just move on fundamentals. They move on the unwind of wrong-footed positions. The violence of a move - how fast, how far, how much it overshoots, depends almost entirely on who’s offside and has to capitulate.

Think about it this way. If growth is about to roll over and everyone already expects it - they’re positioned defensively, hedges are in place, cash is high, then when the data confirms, the move might be a yawn. The bad news was priced. But if growth is about to roll over and everyone’s levered long, chasing the last bit of upside, convinced the expansion has years to run? That’s when you get the face-ripping moves. The forced selling. The “how did it drop this much on that data?” moments.

I’ve learned to always ask: who gets fucked if I’m right?

If growth surprises to the upside, who’s short and will be forced to cover? If it surprises to the downside, who’s levered long and will need to liquidate? The answer tells you not just direction but magnitude. It tells you whether you’re trading with the forced flows or against them.

This is why consensus matters, not because the consensus is usually wrong, but because when it is wrong, the move is amplified by everyone scrambling for the same exit. The pain trade isn’t just about being right. It’s about being right when being wrong would hurt the most people.

Some practical things I look at: fund positioning surveys, futures commitment of traders data, ETF flows, option skew. None of these are perfect, but together they paint a picture of where the crowding is. When my fundamental view aligns with a crowded position on the other side, that’s when I get more aggressive. When my view would require fighting entrenched positioning, I stay smaller and more patient.

S&P500 Commitment of Traders Report Jan 6, 2026. https://www.cftc.gov/dea/options/deacmelof.htm

The regime framework gives you the fundamental read. But the money is made and lost in understanding who’s positioned for a different outcome.

The Distinction That Changed Everything

Okay, here’s the thing nobody told me when I started: not all growth data is created equal. There’s a fundamental difference between indicators that tell you where growth is going and indicators that tell you where growth is now. Mixing them up will cost you money. I know because it cost me money.

Leading indicators are forward-looking. They reflect decisions being made today that will show up in economic activity months from now. Orders placed, permits filed, credit extended. These are commitments - bets on the future that become reality with a lag.

Coincident indicators tell you what’s happening right now. Employment, production, income, spending. These confirm the current state of the economy, not where it’s headed.

The mistake I used to make and I see this constantly, is treating these as interchangeable. You see a strong jobs report and think “economy’s great!” But employment is actually a lagging indicator. It often peaks after the economy has already turned. By the time the labor market cracks, you’re already deep into the downturn.

Or you see a weak survey and panic. But surveys can give false signals for months. They measure what people say they’re experiencing, not what they’re actually doing. Sometimes sentiment gets ahead of reality, or behind it.

The solution is to track both categories separately and watch for agreement or divergence. When leading and coincident indicators tell the same story, you can act with conviction. When they disagree, something’s about to change. The leading indicators are usually right about direction; the coincident data helps you calibrate timing.

What Actually Makes a Good Leading Indicator

I’ve wasted a lot of time on indicators that looked good on paper but didn’t actually work. Here’s what I’ve learned to look for:

It has to reflect real commitments, not just intentions. This is huge. Survey data asking firms about their “expectations” is way less reliable than data showing what they’ve actually ordered or contracted for. Talk is cheap. Money on the table is signal. When someone places an order or files a permit, they’re making a commitment that will turn into economic activity. When they tell a poll they’re “optimistic,” that could mean anything.

You need to be able to explain why it leads. If you can’t articulate the transmission mechanism, be suspicious. New orders lead production because firms produce to fill orders, that’s a clear chain. But some indicators have correlations that don’t make logical sense. Those tend to break down exactly when you need them most.

It should have worked across multiple cycles. Anyone can find an indicator that “predicted” the last recession if they torture the data enough. What you want is something with a track record across different environments. And even then, every indicator has given false signals at some point. The goal isn’t perfection, it’s a useful edge.

Take the Conference Board’s Leading Economic Index as an example. It’s one of the most-watched composites, with a track record going back decades. But look at how it’s actually performed:

Three false positives in the last decade alone. That’s not a knock on the LEI, it’s a reminder that no indicator is infallible. The 2016 and 2019 episodes both featured manufacturing weakness that didn’t spread to the broader economy. The 2022-23 signal was the longest false positive on record, confounded by post-COVID services strength. These patterns repeat which is why diversifying across indicator types matters more than finding the “perfect” single measure.

It needs to be timely enough to act on. An indicator that comes out quarterly with a two-month lag isn’t much use for real-time positioning. Monthly data with a short reporting delay is the sweet spot for most purposes.

The specific indicators you choose matter less than whether they meet these criteria. I’ve seen good frameworks built on completely different data. The principle is what matters.

And Coincident Indicators?

Coincident indicators serve a different purpose. They’re not for prediction, they’re for confirmation. You want to know whether the economy is actually doing what the leading indicators suggested it would do.

A few things I look for:

Measure actual activity, not proxies. GDP is the ultimate coincident indicator, but it comes out quarterly with big lags. You want higher-frequency data that moves closely with GDP - actual production volumes, actual employment, actual spending.

Source: https://fred.stlouisfed.org/series/GDPC1#

Source: https://fred.stlouisfed.org/series/USPHCI#

Cover a meaningful share of the economy. This is where a lot of people go wrong. Manufacturing data gets tons of attention but manufacturing is only about 11% of the US economy. Services are closer to 70%. If you’re over-weighting manufacturing, you’re getting a skewed picture. I’ve seen people get bearish because manufacturing was contracting while the overall economy was fine because services held up.

Source: https://www.bea.gov/data/gdp/gdp-industry

Hard to manipulate or distort. The more an indicator relies on actual counts of real things; units produced, people employed, dollars spent, the more I trust it. Some data series have seasonal adjustment quirks or model-based estimates that can introduce noise. The simpler and more direct, the better.

When coincident data confirms what the leading indicators suggested, I act with more conviction. When it contradicts, I get cautious and start looking for what I might be missing.

The Divergence Framework

This is probably the most useful thing I can share with you.

The real value of tracking leading and coincident separately isn’t either score in isolation, it’s the relationship between them. When they agree, you have a clear signal. When they diverge, you have an early warning that the current state is about to change.

Let me show you how this worked in real time over the past couple months:

December 2025: My leading indicators had turned negative. Forward-looking surveys were weak, market-based signals were depressed, the composite measures were flashing warnings. But coincident indicators were still positive. Services expanding, jobs being added, consumer spending holding up. Classic divergence pattern: “caution, slowdown ahead.” That’s exactly what drove my Stagflation call in Issue #004. The leading data was telling me something the headlines weren’t.

January 2026: The leading indicators stabilized. Coincident data held positive. Now both categories were aligned, telling the same story: deceleration without collapse. That’s why the regime shifted from Stagflation to Neutral/Chop. The divergence had resolved.

This framework won’t tell you exactly what’s going to happen. Nothing will. But it tells you how much confidence to have in your current read and what to watch for next. Honestly, that’s often more valuable than a point estimate.

Mistakes I’ve Made (So You Don’t Have To)

I’ve made every mistake you can make with growth data. Here are the ones that cost me the most:

Getting Obsessed With One Number

Early in my career, I’d anchor on whatever indicator had worked recently. ISM was my thing for a while. Then I got burned when ISM was weak but the economy kept trucking along because services were fine.

No single indicator tells the whole story. Ever. The economy is too complex. You need multiple measures, ideally ones that capture different aspects of activity. When they agree, great. When they disagree, that’s information too.

Confusing Level With Direction

This one still trips me up sometimes. A reading of 52 on a diffusion index means “expansion.” Good, right? Well, it depends. If it was 48 last month, then 52 is great: things are improving. If it was 56 last month, then 52 is concerning, things are deteriorating, even though the level is still positive.

Direction often matters more than level, especially at turning points. I try to track both now, but it took me too long to learn this.

Fighting The Trend

This is the one that’s cost me the most money. Growth indicators have momentum. When things are weakening, they tend to keep weakening. When things are strengthening, they tend to keep strengthening. Mean reversion happens eventually, but timing it is brutally hard.

I used to see a weak reading and think “okay, it’s got to bounce from here.” Spoiler: it usually didn’t. Now I try to respect the trend until there’s genuine evidence of a turn, usually from the divergence framework, from extreme readings that historically don’t persist, or from policy changes that alter the trajectory.

Ignoring Positioning

I talked about this earlier, but it’s worth repeating as a mistake I made repeatedly: being right on the fundamentals but wrong on timing because I ignored who was positioned the other way.

I’d see growth weakening, get short, and then watch the market grind higher for weeks because everyone else saw the same thing and was already positioned for it. The trade was crowded. There was no one left to sell. It took the data actually confirming signals repeatedly before the move happened.

Now I try to think about not just whether I’m right, but whether being right will actually move prices. If everyone already agrees with me, the move might already be done.

Over-weighting What Gets Attention

Financial media loves a headline. ISM day, factory orders, industrial production. But manufacturing is 11% of GDP. Services are 70%.

The “two-speed economy” thing we’ve been tracking recently - manufacturing in recession while services hold up - isn’t unusual. It’s happened multiple times in the past decade. If you weight by economic significance rather than media attention, you’d have gotten much better reads.

Treating Surveys Like Hard Data

Surveys measure what people say. Hard data measures what they actually do. These diverge more often than you’d expect.

I remember a period where business sentiment surveys were extremely weak, firms were telling polls they were worried about the economy, planning to cut back, etc. But actual spending, hiring and investment data stayed resilient. If you’d traded the surveys, you’d have gotten killed. The hard data was right.

Surveys are still useful, they’re timely and sometimes genuinely predictive. But when surveys say one thing and hard data says another, I’ve learned to trust the hard data until proven otherwise.

From Growth Reading to Actual Positions

Okay, so you’ve got a growth read. Now what? Here’s roughly how I think about it:

When growth is clearly positive: Lean into risk. Equities over bonds, cyclicals over defensives, small over large (usually), tight credit, commodity demand. Corporate earnings are growing, default risk is low, the wind is at your back. Duration is less attractive because yields tend to rise with growth.

When growth is neutral: Welcome to the chop zone. This is honestly the hardest environment because nothing has a clear edge. I focus on quality over speculation, carry strategies if vol stays low, and being more selective about what I own.

When growth is clearly negative: Get defensive. Bonds over equities, defensives over cyclicals, large over small, expect credit to widen. Duration tends to work as yields fall on growth fears. Cash becomes competitive. Default risk is rising, so credit quality matters a lot.

But remember, always overlay the positioning question. If growth is negative but everyone’s already hiding in bonds and defensives, the pain trade might actually be up. If growth is positive but everyone’s already levered long, the risk is a pullback on the slightest disappointment. The fundamental read tells you the direction; the positioning read tells you the path.

Building Your Own Framework

I’m not going to tell you exactly which indicators to use. Partly because I don’t want to give away every detail of my process. But mostly because I think you’ll build something better if you figure it out yourself.

Here’s how I’d approach it:

Start with the structure. The architecture matters more than the contents. Separate leading from coincident indicators. Define what “positive,” “neutral,” and “negative” mean for each bucket. Build a divergence check between the two categories

Choose indicators that make sense to you. Diversify across data types. Leading: forward commitments where you can explain the causal mechanism. Coincident: actual activity across meaningful parts of the economy. Avoid: Over-weighting any single sector.

Add a positioning overlay. Know who’s on what side of the trade. Surveys, COT data, flows, option markets, pick your poison. The fundamental read without positioning context is incomplete.

Set thresholds explicitly. Write them down before you need them. What constitutes expansion vs contraction? What counts as a meaningful change? Clear thresholds prevent moving the goalposts when data is inconvenient.

Backtest but don’t overfit. Simpler is usually better. Your framework should relate to historical outcomes. Twenty perfectly-tuned indicators will probably fail on the next cycle.

Iterate as you go. No framework is perfect out of the box. Track what works and what doesn’t. When wrong, figure out why; when right, ask if it was skill or luck.

The Bottom Line

Growth is the engine of regime classification because it has the strongest and most consistent relationship with cross-asset returns. But knowing the fundamental direction is only half the battle. You also need to know who’s positioned wrong because that determines whether your correct call makes you money or just makes you early.

The methodology; separating leading from coincident, watching for divergences, overlaying positioning, avoiding the mistakes I’ve walked through here matters more than any specific indicator choice.

Right now, my Growth reading is 0 (Neutral), with leading and coincident aligned in a soft landing configuration. That’s better than December’s -1, when the divergence was flashing warnings. But it’s not an all-clear. The leading indicators stabilized rather than improved, and the margin of safety is thin.

Next time, we’ll cover Inflation. The second axis of the regime matrix and the pillar that determines whether you’re in Goldilocks or Stagflation, Reflation or Deflation. I’ll walk through how I think about the inflation pipeline, why different inflation measures diverge, and how to spot pressure building before it shows up in the headlines.

Until then, start thinking about how you’d structure your own growth framework. What would you track as leading? What as coincident? How would you gauge positioning? Sometimes the exercise of thinking it through is more valuable than any specific answer I could give you.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer

All content published by MacroAnalytix is for research and educational purposes only. Nothing on this site or in our publications should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions. Please conduct your own due diligence and consult with a licensed financial professional before making any investment decisions.

The regime hasn’t moved. The narrative has.

We’re still in Neutral/Chop - aggregate score +1, minimal conviction, 55% probability of staying put. Pillar scores look similar to last week. But the data underneath tells a story that doesn’t quite hold together.

ISM Services jumped to 54.4 from 52.6. That’s acceleration. GDPNow is tracking 5.1% for the current quarter - not soft landing territory, that’s boom. Yet NFP 3-month average slid to 52k. Labor is cracking while output accelerates. Those two things don’t usually happen at the same time.

Meanwhile, China just triggered the slowdown flag, FXI declining even as Caixin PMI holds above 50.

Last week the divergence check showed “Soft Landing.” Now it reads “Boom / Reflation.” That’s a meaningful shift in what the framework thinks is coming, even with the headline score unchanged. Transition probability for Reflation nearly doubled - from 8% to 15%.

Current Regime: Neutral/Chop | Aggregate Score: +1 | Conviction: Minimal

Growth: The Divergence That Doesn’t Make Sense

This is the story of the week. Growth stays at 0 (Neutral), but what’s happening underneath matters more than the score itself.

ISM Services hit 54.4, up from 52.6. A 1.8 point jump putting services firmly in expansion. For an economy that’s 70% services, that carries weight.

ISM New Orders minus Inventories flipped from -1.5 to +2.5. A 4-point swing historically associated with manufacturing finding a floor. This ratio has been negative for months, first positive reading since the contraction began.

GDPNow is tracking 5.1% for the current quarter. Five percent. Atlanta Fed’s nowcast says the economy is running hot.

And then there’s the labor market, NFP 3-month average dropped to 52k.

That’s below the roughly 100k needed to keep pace with population growth. The weakness isn’t broad-based. Manufacturing shed 13k jobs in December. Retail lost 9k heading into Christmas, which is unusual. Temp staffing - the classic leading indicator - dropped for the eighth straight month. These are the sectors that crack first when companies pull back on hiring.

Unemployment ticked up to around 4.2–4.4% depending on the survey. Labor force participation held steady at 62.5% - no exodus from the workforce, just fewer jobs being created. The household survey, which sometimes diverges from payrolls, showed employment actually declining by 47k. When payrolls and household data disagree, pay attention.

How does 5.1% GDP happen with payrolls that can’t match demographics?

The divergence check reads “Aligned” with a “Boom / Reflation” implication - up from “Soft Landing” last week. Framework sees reflationary signals, not recessionary ones. But NFP weakness is the piece that doesn’t fit the puzzle.

Leading indicators (70% weight) score 0.3. Coincident indicators (30% weight) score 0.3. They’re aligned. But aligned on what? Output says boom. Labor says trouble.

Source: www.atlantafed.org/cqer/research/gdpnow)

Growth Score: 0 (Neutral) | Trend: → (Stable) | Divergence Implication: Boom / Reflation

Inflation: Pipeline Progress Stalls

Last week the inflation pipeline showed “Disinflation Signal: YES – Pipeline Clearing.” This week all regime flags read “No.” No stagflation risk, no reflation signal, no disinflation signal. Momentum: Mixed.

Disinflation hasn’t reversed. It’s paused.

Upstream (20% weight, score 0.3): CRB Commodity Index accelerated to 378.22, scoring +1 on momentum. ISM Manufacturing Prices Paid flat at 58.5. Baltic Dry dropped to 1,688 from 1,882, shipping costs still falling. Mixed signals at the input level.

Midstream (25% weight, score 0): Expectations anchored. 5Y5Y forward at 2.24%, 10Y breakevens at 2.25%. Both stable, both in the Fed’s comfort zone. Bond market isn’t pricing inflation concerns.

Downstream (55% weight, score 0): Supercore PCE at 3.8%, the metric Powell watches closest, still moving the right direction. Atlanta Fed Wage Tracker at 4.2% falling. But Core PCE at 2.82% has a wrinkle: 3-month annualized running 3.2%, above the year-over-year rate. Near-term acceleration underneath the benign annual number.

Source: FRED PCEPILFE (https://fred.stlouisfed.org/series/PCEPILFE)

Tariff pass-through monitor shows containment for now. Upstream commodities (DBC) up 5.72% YoY. Midstream PPI at 2.9%. Downstream Core CPI falling 0.41%. Pipeline not transmitting cost pressures to consumers yet.

Inflation Score: 0 (Stable) | Trend: ↓ | Pipeline Status: Paused

Policy: Both Levers Loose

Policy scores +1 (Accommodative) with an accelerating trend. Multiple tailwinds converging.

Financial conditions are loose. Chicago Fed NFCI at -0.55, well into accommodative territory. GS FCI at 98.5 and loosening. 10Y-3M spread at 56 basis points - no recession signal.

Fiscal remains stimulative. Budget deficit at 5.9% of GDP is neutral, but fiscal impulse running 2.3% YoY. Government still adding demand.

Policy Mix Matrix flags what happens when both levers push the same way: “Both Loose = Bubble Risk.” When monetary and fiscal align, asset prices respond - sometimes faster than fundamentals warrant.

Source: FRED NFCI (https://fred.stlouisfed.org/series/NFCI)

Policy Score: +1 (Accommodative) | Trend: ↑ (Accelerating)

Liquidity: Buffer Gone Again - What Happens Next

Last week I noted the RRP buffer had recovered to $106 billion. This week: $3.28 billion.

Not a typo. The overnight reverse repo, the system’s shock absorber - drained again. $106B to $3B in a week. The buffer I said was back is essentially gone.

Why this matters: When RRP is flush, money market funds park excess cash there, keeping it out of the banking system. When it drains, that cash has to go somewhere - typically into T-bills or bank reserves. The problem is we’re running low on both cushions simultaneously. Bank reserves at $3.05T are adequate but not abundant. The RRP buffer that absorbed volatility in 2022-2023 is exhausted.

If funding stress emerges - say, around quarter-end or a Treasury settlement surge - there’s less slack in the system to absorb it. SOFR could spike. Repo rates could gap. The Fed’s reaction function in that scenario: expand the Standing Repo Facility, potentially accelerate T-bill purchases, or in extremis, pause balance sheet runoff. They have tools. But they’d be reacting, not preventing.

Source: FRED RRPONTSYD (https://fred.stlouisfed.org/series/RRPONTSYD)

Broader picture: Fed balance sheet dropped $66 billion to $6,574B. TGA fell to $796 billion from $837B, a $41B decline is reserve-additive. Net liquidity at $5,774.72B, down $20.72B on the week.

Good news: plumbing stress remains normal for now. SOFR-repo at 10 bps, up from 8 but nowhere near December’s 35 bps stress levels. MOVE index at 66.9 - rates vol subdued. The strain hasn’t shown up in prices yet. But the buffer that would prevent strain from becoming stress is gone.

Dollar mixed. DXY recovered to 99.14 from 98.43—near 100 but still below. BTC at $90,667, falling in line with net liquidity.

Liquidity Score: 0 (Neutral) | Trend: ↓ | RRP Buffer: Nearly Exhausted

Risk Appetite: Rally Quality Holds

Risk Appetite stays at +1 (Risk-On), trend stable. Validation system green across all four checks.

SPY up 1.60%, rising trend. HY spreads tightened to 276 from 283 - credit calm. VIX at 14.49, complacent. Vol term structure in contango - no fear premium.

Greed Ratio (XLY/XLP) at 1.57 - cyclicals over defensives. IWM/SPY has smalls leading. QQQ/SPY has growth leading. Breadth metrics pointing the same direction.

But copper/gold at 0.0013 keeps flashing fear. This ratio has a decent track record as a growth signal, when copper (industrial demand) leads gold (safety demand), risk assets tend to follow. When gold leads copper, trouble usually follows. The last time copper/gold diverged this sharply from equity markets was Q4 2018 and early 2020. Both preceded meaningful drawdowns. Not a perfect indicator, but when equities and industrial metals disagree this hard, one of them tends to be wrong.

Rally Verdict: HIGH QUALITY. All four checks pass. System says this rally is real. But the copper/gold divergence is the asterisk.

Risk Appetite Score: +1 (Risk-On) | Trend: ↑ (Stable) | Rally Quality: High

China: Slowdown Flag Triggered - Global Spillovers

Last week China looked like a bright spot. FXI rising. Caixin PMI above 50. “Good Rise” pattern - yields up, FXI up - suggested stimulus gaining traction.

This week the slowdown flag triggered.

FXI dropped 0.47 to 39.35, now showing -1.18% trend that hit the slowdown condition. China Score still +2 on a -5 to +5 scale, but direction shifted.

Other China indicators mixed. KWEB up 0.2 to 35.83. Copper rose 1.17 to 36.15, triggering “Expansion.” Caixin PMI at 50.1 still above water. USD/CNH at 6.9767, yuan stress clear.

Copper says expansion, FXI says slowdown, PMI says barely holding. Something has to give.

Why it matters beyond China: If this slowdown deepens, the spillovers hit in predictable places. Commodity exporters - Australia, Brazil, Chile - get squeezed on volumes and prices. Industrial metals face demand headwinds just as copper was starting to stabilize. EM currencies with China trade exposure (KRW, TWD, MYR) would feel pressure. The Baltic Dry already dropped 11% - shipping demand softening is often the first signal.

For US assets, China weakness historically cuts both ways. It’s disinflationary (lower commodity prices, cheaper imports), which helps the Fed. But it’s also a growth headwind for multinationals with China revenue exposure - think industrials, materials, luxury goods. And if China’s slowdown triggers EM stress, risk-off flows could hit US equities even without direct China exposure.

Global risk flags: 1 of 3 active. China Slowdown: ACTIVE. Yuan Stress: Clear. EM Contagion: Clear—for now.

Signposts: Same Three Triggered

Same three from last week:

USD/JPY at 157.92 (trigger: above 152) - TRIGGERED. Carry unwind risk elevated. Yen weakening toward multi-decade extremes. BoJ intervention risk remains.

DXY at 99.14 (trigger: below 100) - TRIGGERED. Dollar weakness persists despite bounce from 98.43.

Gold (GLD) at $414.47 (trigger: above $300) - TRIGGERED. Safety bid and dollar concerns. Central bank buying structural.

All three pointing the same direction: dollar weakness plus safety bid. That combination doesn’t usually happen together. Something structural may be shifting. Dashboard flags “REVIEW REGIME NOW” until they clear.

Transition Probabilities: Reflation Odds Jump

Notable shift in the probability matrix:

55% Stay Current (Neutral/Chop) – unchanged

15% Reflation – up from 8%

10% Goldilocks – unchanged

8% Late Cycle – unchanged

3% Stagflation – unchanged

2% Deflation/Crisis – unchanged

Reflation nearly doubled. Divergence implication shifted to “Boom / Reflation.” ISM Services surging. GDPNow at 5.1%. New Orders minus Inventories flipping positive. Framework reading hot economy signals.

Aggregate velocity +1, driven by Policy acceleration. Other pillars stable. That asymmetry creates the reflation tilt.

Key Question: Can Services Growth Survive Weak Labor?

This is the tension at the heart of the data. ISM Services at 54.4 says services accelerating. GDPNow at 5.1% says output booming. NFP at 52k says employment cracking.

How do you get boom-level growth without job creation?

Three possibilities:

1. Productivity surge. AI and automation driving output without corresponding labor input. Would be genuinely bullish - higher growth, less inflation pressure, margin expansion. The 90s tech boom showed this can happen.

2. Data resolves to reality. GDPNow tracks current quarter from high-frequency data. Labor tells you the recent past. If services growth is real, employment should catch up. If labor is the true signal, ISM rolls over.

3. Measurement error. One series is wrong. BLS has acknowledged survey response issues. GDPNow could be overfitting volatile components. When data conflicts this sharply, humility about precision is warranted.

What concerns me is labor usually runs coincident-to-lagging. When it weakens, the economy is typically already in trouble. NFP at 52k alongside 5.1% GDP is unusual. Either we’re in a new regime where this relationship breaks, or one signal is about to reverse.

Real Income ex-Transfers at 1.8% is the household check. Positive, cushion exists. But if labor weakness persists and income slows, spending follows. Services need consumers with jobs.

The bull case: policy accommodative, conditions loose. If labor softness reflects caution rather than collapsing demand, easier conditions could unlock hiring. ISM surge suggests demand is present.

New Orders minus Inventories flipping positive matters. That indicator led the 2023 manufacturing recovery by about 4 months. If signaling now, employment should follow with a lag.

Base case: Divergence resolves in 4-6 weeks. Either services stays strong and labor catches up (Goldilocks path), or labor weakness drags services down (Late Cycle path). Current state is unstable.

Cross-Asset Read

Regime says Neutral/Chop, minimal conviction. Asset allocation lookup: Equities Quality Only, Bonds Neutral, Commodities Neutral, FX Neutral, Vol Neutral.

But the Reflation probability jump (8% → 15%) and “Boom / Reflation” implication point to where edge might develop.

Small Caps (RTY/IWM)

Issue #005 thesis intact, strengthening. IWM/SPY showing smalls leading. Policy accommodative, rate-sensitive names benefit. ISM surge supports domestic-focused companies. “Boom / Reflation” historically favors small over large.

Counter: NFP at 52k means labor weakening, and small caps are more labor-intensive. If employment crack is real, smalls get hit harder.

Gold (GC/GLD)

Still triggered above $300. Structural case holds: dollar weakness, central bank buying. GLD at $414.47. Same note from Issue #005 - extended above moving averages, pullbacks offer better entries than chasing.

Rates (ZN/TLT)

10-year at 4.176% in no-man’s land. Not cheap enough to buy, not rich enough to short. 10Y-3M at 56 bps flat - no signal either direction. If Boom/Reflation plays out, duration loses. If labor weakness wins, duration rallies. Framework says Neutral.

Copper (HG)

Copper/gold at 0.0013 flashing fear. But copper itself rose 1.17 to 36.15, triggering “Expansion” in China monitor. Ratio says fear, move says growth. Until ratio turns, growth trade lacks confirmation.

What Would Change the View

Growth cracks: ISM Services below 50, Real Income negative, NFP below 50k. Late Cycle.

Growth confirms boom: NFP recovers above 100k, ISM stays above 54, copper/gold turns higher. Reflation.

Inflation reaccelerates: Core PCE 3M annualized above 3.2%, Supercore reverses, 5Y5Y above 2.5%. Stagflation risk.

USD/JPY reverses: BoJ intervention or hawkish guidance. Watch moves below 152.

Credit cracks: HY above 400bps. Currently 276 - long way off.

China deepens: FXI keeps falling, Caixin below 50, yuan stress triggers. Slowdown flag just fired—if it persists, global growth weakens.

The Bottom Line

Regime: Neutral/Chop | Policy accommodative, risk appetite positive, growth diverging, inflation paused, liquidity draining.

Score didn’t move. Data underneath moved a lot.

The divergence is the story. ISM Services 54.4 and GDPNow 5.1% say boom. NFP 52k says crack. They don’t reconcile. Either one is wrong, or output and employment are decoupling in ways we haven’t seen before. Next 4-6 weeks will tell.

Reflation odds nearly doubled to 15%. Framework adjusting to hot output data. But 55% on Neutral/Chop means no decisive catalyst yet.

Three signposts still triggered. USD/JPY, DXY, gold. Currency cluster hasn’t cleared.

China slowdown flag active. FXI declining. Spillovers to commodities and EM worth watching.

RRP buffer gone again. $106B to $3.28B. Shock absorber drained. Plumbing stress normal, but cushion is gone - next funding squeeze hits reserves directly.

Conviction is minimal. When data diverges this sharply, the honest read is: I don’t know which way this resolves. The next few weeks should tell us.

See you next Sunday.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer: All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions.

The Regime Transition

Six weeks ago, MacroAnalytix launched with a dashboard flashing Reflation. Four weeks later, we were staring at Stagflation - four signposts triggered simultaneously, the worst regime in the framework. Two weeks after that, we’re somewhere entirely different: the center of the matrix, directionless, with minimal conviction and a completely different set of warning signals.

The journey from The Setup Issue #001 to Issue #005 tells the story of why regime-based thinking matters. If you traded the Stagflation headlines, you got whipsawed. If you followed the dashboard’s systematic approach, you navigated the volatility without major damage.

This issue maps where we are now, why we got here, and most importantly, what Q1 2026 is likely to bring. Not predictions with false precision, but probability-weighted scenarios built from the same framework that caught the regime transitions in real time.

Where We Stand: The Current Regime

The dashboard reads directionless - aggregate score of +1, minimal conviction. Four of five pillars score at zero. Only Risk Appetite is positive, and it’s carrying the entire regime read. That’s a fragile structure.

Current Regime: Neutral/Chop | Aggregate Score: +1 | Conviction: Minimal

The “Minimal” conviction flag isn’t uncertainty about the data, it’s a statement that the data itself is directionless. Growth has stabilized but isn’t accelerating. Inflation is clearing the pipeline but hasn’t reached target. Policy is loose but not easing further. Liquidity is normalized but not supportive. When every pillar sits at zero, the regime matrix places you in the center: no clear winning theme, no clear losing theme.

That sounds like good news after the Stagflation scare. It isn’t necessarily. This regime is an unstable equilibrium. Small changes in any pillar can tip the balance in either direction. The 55% probability of staying current means 45% odds we don’t.

The Signpost Story: What Cleared, What Triggered

The signpost system is designed to flag regime-relevant extremes and conditions that historically precede transitions or dislocations. Two weeks ago, four warning signposts had triggered simultaneously. Today, three have cleared and three new ones have emerged. Understanding why tells you something important about where we’re headed.

What Cleared (And Why It Matters)

2s10s Uninversion: The yield curve had steepened to +68 basis points from its inverted lows, triggering the historical “recession confirmation” signal. The aggressive steepening has moderated. The curve isn’t screaming anything right now.

Source: https://fred.stlouisfed.org/series/T10Y2Y#

RRP Buffer Exhausted: The overnight reverse repo facility had been completely drained to zero, removing the system’s shock absorber. It’s recovered from zero to $106 billion and back down again. Pre-2022 levels were in the trillions. The anticipated year-end squeeze didn’t materialize. The Fed’s T-bill buying program worked.

Source: https://fred.stlouisfed.org/series/RRPONTSYD#

What Triggered (And Why It Matters)

USD/JPY Above 152 (Current: 154.2): This is the carry trade warning. At these levels, the yen is near its weakest point against the dollar in decades. The Bank of Japan intervened in 2022 and 2024 when USD/JPY reached similar extremes. When the yen reverses, it reverses violently and global macro funds running carry trades get forced to unwind, the cascade hits risk assets regardless of fundamentals.

August 2024 gave us the preview: EEM dropped 8% in three sessions, with high-yielding EM currencies (MXN, BRL, ZAR) hit hardest as funding costs spiked. The signpost doesn’t say “sell everything” - it says “be aware of the tail risk.”

Source - TradingView - USD JPY with BoJ intervention points

DXY Below 100 (Current: 98.4): The dollar has broken below the psychological 100 level on the DXY index. Part of this is mechanical: the Fed has cut while the ECB holds, compressing rate differentials that had supported dollar strength. But the move goes beyond rate spreads.

Dollar weakness is typically risk-on, it eases global financial conditions, supports EM and commodities, reflects capital flowing out of safe-haven assets. Combined with the gold signpost, it tells a different story: not “risk-on” but “dollar devaluation concerns.” The BIS 2024 Triennial Survey noted a 3 percentage point decline in dollar share of FX reserves since 2020, gradual, but directionally significant.

GLD Above $300 (Current: $398): Gold continues its structural rally, now trading well above traditional fair value models. The old relationship with real rates has broken, or rather, it’s been overwhelmed by central bank reserve reallocation.

China added 225 tonnes in 2024, with Poland, Turkey, and India each adding 50-100 tonnes. The pace has continued into 2025 and preliminary data suggests another 150+ tonnes of net CB purchases in H2 alone. That’s not speculative positioning more reserve diversification.

The Pattern: The cleared signposts were about recession risk. The triggered signposts are about currency and carry risk. We’ve moved from “is the economy about to crack?” to “are currency relationships about to reset?” Different risk, different implications.

Q1 2026: The Probability-Weighted Scenarios

The dashboard’s transition probability matrix generates systematic estimates for where the regime is heading. These aren’t predictions, they’re probability-weighted scenarios based on score velocity, historical patterns, and current catalyst positioning.

Base Case: Neutral/Chop Persists (55%)

Why only 55% when three recession signposts just cleared? Because clearing signals isn’t the same as confirming strength. The LEI flipped positive, but at +0.3%, barely. The curve uninverted, but that’s historically a lagging confirmation, not an all-clear. The RRP recovered, but is now down from $106B to $3B again, not the trillions that provided cushion pre-2022. Meanwhile, three new currency signposts triggered, and the growth pillar sits at zero. The recession risk receded; the expansion case didn’t strengthen. That’s why the base case is ‘muddle through,’ not ‘breakout.’

The most likely outcome is that nothing decisive happens. Growth stabilizes around current levels. Inflation continues its slow grind toward target. The Fed stays on hold. Liquidity conditions remain adequate. Markets chop sideways with occasional volatility spikes.

Bull Case: Soft Landing Confirmed (18%)

Path to Goldilocks (10%): Requires both growth and inflation to move in the right direction simultaneously. Growth stabilizes or improves while inflation continues declining toward 2%. The Fed validates with dovish guidance. Credit stays tight. Equities break to new highs on fundamental rather than liquidity grounds.

Path to Reflation (8%): Requires growth to accelerate while inflation stays contained. China is the swing factor here. The stimulus announced in late 2024, rate cuts, property support, local government debt swaps have started showing up in the data: Caixin PMI crossed back above 50, FXI is up 15% off the lows, and the Yuan has stabilized. But ‘showing up’ isn’t the same as ‘working.’ Property sales remain weak, consumer confidence is still depressed, and the demographic headwinds are structural.

The question is whether this is 2016 (stimulus gains traction, global growth recovers) or 2023 (stimulus disappoints, copper rolls over). The copper/gold ratio will tell you before the headlines do.

Bear Case: Late Cycle or Worse (27%)

Path to Late Cycle (15%): Runs through the labor market. The NFP 3-month average at 59k is already soft. If January and February confirm that weakness - payrolls below 100k, unemployment ticking above 4.3% - the growth pillar flips negative and we’re back in familiar territory. Services rolling over (ISM below 50) would accelerate the transition.

Path to Stagflation (10%): Requires both growth deterioration and inflation reacceleration. Tariffs are the obvious catalyst, but they’re not the only one. Energy transition costs are structural; grid upgrades, permitting delays, and intermittency premiums add persistent price pressure that doesn’t respond to Fed policy. AI-driven productivity gains could eventually be disinflationary, but the near-term capex surge is inflationary - $200B+ in data center buildouts competing for the same electricians, copper, and power capacity.

The tariff pass-through timeline matters: Consumer goods (electronics, apparel, furniture): Hit retail prices within 3-6 months, that’s the Q2 CPI risk. Industrial intermediates (steel, aluminum, components): Take 6-12 months to flow through, showing up in capital goods and construction costs by H2.

If both layers land simultaneously, the pipeline model would show upstream pressure rebuilding while downstream persistent services inflation stays elevated. That’s the toxic combination.

Path to Deflation/Bust (2%): Requires a credit event or systemic shock. HY spreads breaking above 400 bps. A funding market dislocation that the Fed doesn’t contain quickly enough. The carry unwind cascading beyond FX into broader risk assets.

Two underappreciated catalysts: AI capex disappointment: if the $200B+ buildout fails to generate returns, the Mag 7 names that have carried the market could gap lower, taking passive flows with them. Debt ceiling: with midterms approaching and neither party wanting to blink, a messy resolution in Q1-Q2 could spike Treasury yields and stress funding markets simultaneously.

The Q1 Catalyst Calendar

Regimes don’t shift in a vacuum. They shift when data confirms or contradicts the current consensus. Here are the dates that matter for Q1 and what each event could mean for the regime.

The Three Weeks That Matter Most

January 9-13: The Data Gauntlet

December NFP (Jan 9) followed by December CPI (Jan 13). This window will either confirm the soft landing narrative or challenge it.

• Strong jobs + cooling inflation = Goldilocks path opens

• Weak jobs + persistent inflation = Late Cycle path opens

January 22-23: The BoJ Wildcard

The Bank of Japan meets with USD/JPY at multi-decade extremes. If they signal rate hikes or intervene in the currency market, the carry unwind risk materializes. August 2024 showed how quickly this can cascade, the yen strengthened 12% in three weeks, forcing global position liquidation. Watch for any hawkish language around exchange rate concerns.

March 18-19: The Fed Check-In

The March FOMC brings the Summary of Economic Projections update. By then, we’ll have more data and hopefully more clarity. The dot plot revision will tell us whether the Fed sees the same economy we’re seeing,or something different.

• Dovish shift (more cuts projected) validates Late Cycle concerns

• Holding steady (one cut) validates the current directionless regime

• Hawkish shift (no cuts or rate hikes mentioned) would be a significant surprise

Cross-Asset Implications by Scenario

If the Current Regime Holds (55%)

If Soft Landing Confirms (18%)

If Late Cycle/Stagflation Materializes (27%)

Cross-Asset Quick Reference

The Honest Assessment

I’ll close with what I actually think, not what the probabilities say, but my subjective read on the situation.

The Stagflation scare was real but premature. The signposts that triggered were legitimately concerning. The curve had uninverted. The RRP buffer was exhausted. But the coincident data, services, labor, retail sales never confirmed the warnings. The leading indicators gave a false positive, or at best, an early signal that hasn’t played out yet.

The new signpost cluster worries me differently. USD/JPY, DXY, and Gold all pointing to dollar weakness and carry risk isn’t a recession warning, it’s a currency regime warning. When the safety trade (gold) and the risk trade (weak dollar) align, it’s usually telling you something structural is shifting. I don’t know exactly what that shift is.

The path to Late Cycle is shorter than the path to Goldilocks. With the Fed on pause, tariff policy uncertain, and leading indicators still soft, it’s easier to construct a scenario where things deteriorate than one where things improve. That asymmetry shapes how I’m sizing positions.

But I’ve been wrong before by underweighting the bull case. AI capex is running at $200B+ annually and accelerating, that’s real investment, real jobs, real productivity potential. The 1990s showed that productivity booms can extend cycles far longer than leading indicators suggest. Services employment remains resilient at 70% of the economy. And the Fed has room to cut aggressively if needed, they’re not trapped at zero like 2020. The soft landing probability isn’t 55% because nothing is working; it’s 55% because enough is working to keep the expansion alive. Don’t mistake caution for conviction.

Q1 will provide clarity. The data gauntlet (NFP + CPI) in mid-January, the BoJ meeting in late January, the February NFP confirmation, the March FOMC, by the end of Q1 we’ll know whether the soft landing held, whether tariffs bit, whether the labor market cracked, whether the carry trade unwound. The fog will lift. The question is what we’ll see when it does.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer: All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions.

Before we dive into the regime read, a note on methodology. Over the holidays, I rebuilt the MacroAnalytix dashboard from v1 to v2. It fundamentally changes how we assess the macro environment.

The old dashboard had a problem: it was too binary. Growth at 0.1 scored the same as Growth at 0.9. Inflation ticking from 2.7% to 2.8% could flip the entire regime classification.

V2 introduces three structural improvements:

1. Buffer Zones Prevent Whipsaws

The regime matrix now uses ±0.5 buffer zones to classify Growth and Inflation states. A raw score between -0.5 and +0.5 is now classified as Stable, not forced into Rising or Falling.

Why this matters: In Issue #004, Growth scored -1 and Inflation scored +1 = Stagflation. Today, both score 0 = Neutral/Chop. The buffer zones ensure we don’t flip regimes on marginal moves.

2. Leading vs Coincident Weighting

The old Growth pillar weighted indicators with fixed percentages without distinguishing predictive value.

V2 splits Growth into: Leading indicators (70% weight): ISM New Orders - Inventories, building permits, copper/gold. Coincident indicators (30% weight): Real income, industrial production, services PMI

When leading and coincident agree, you have high conviction. When they diverge, something has to give. Right now, the divergence check shows Aligned with a Soft Landing implication.

3. Inflation Pipeline Model: Upstream → Midstream → Downstream

The old Inflation pillar tracked indicators with simple weights, no distinction between where pressures originate and where they show up.

V2 implements a three-stage pipeline: - Upstream (20%): Commodities, shipping costs (CRB Index, Baltic Dry) - Midstream (25%): Market expectations (5Y5Y breakevens, 10Y breakevens) - Downstream (55%): Sticky services (Supercore PCE, wage growth, Core PCE)

Current read: Upstream stable, midstream anchored, downstream decelerating. Regime flag: Disinflation Signal: YES — Pipeline Clearing.

Regime Check

The storm shows signs of passing but it’s leaving a fog.

Two weeks ago, the dashboard was flashing Stagflation. Four signposts had triggered. This week: all four of those signposts have cleared. The regime has flipped from Stagflation to Neutral/Chop.

But three new signposts have triggered: USD/JPY above 152, DXY below 100, and GLD above $300. All three point to dollar weakness and carry unwind risk.

Current Regime: Neutral/Chop Aggregate Score: +1 | Conviction: Minimal

USD/JPY Carry Unwind Risk at 157: Why It Matters

USD/JPY above 152 (current: 156.80) triggers our carry unwind signpost.

What carry unwind risk means: The yen is weakening to multi-decade extremes. Leveraged positions in higher-yielding currencies build up. When yen reverses, these positions unwind violently, the Bank of Japan has intervened at similar levels before.

August 2024 precedent: EEM dropped 8% in three sessions. EM FX volatility spiked from 8 to 14. MXN, BRL, ZAR particularly exposed given carry characteristics.

Trigger to watch: USD/JPY breaking below 152 with momentum, or BoJ intervention headlines.

DXY Below 100: Dollar Weakness Signal

DXY at 98.43 has broken below the psychological 100 level, triggering our second signpost.

Implications of dollar weakness: Typically commodities-positive, EM-positive (dollar-denominated debt becomes easier to service). Signals global liquidity conditions easing in dollar terms but also means dollar assets relatively less attractive.

The tension: Dollar weakness is typically risk-on. But combined with gold strength and carry unwind risk, it suggests something more structural, either reserve currency revaluation or positioning for correlation breakdown.

Copper Gold Ratio at 0.0015: Still Flashing Fear

The copper/gold ratio (HG/GC) at 0.0015 remains at it’s lowest level since Nov 1993.

What it’s telling us: Gold says fear and safety, Copper says no growth bid. When they diverge this hard, something has to give.

China improving but copper not confirming: FXI rising, Caixin PMI above 50, but copper/gold skeptical. Until the ratio turns, growth-sensitive analysis lacks confirmation.

SOFR-Repo Spread Normalized: Plumbing Fixed

SOFR-repo spreads collapsed from 35bps to 4.8bps, a 30 basis point normalization in weeks. The year-end funding stress didn’t materialize.

What fixed it: Fed’s T-bill buying program worked, year-end funding pressures absorbed, money markets functioning normally.

What it didn’t fix: Overnight RRP buffer still low (recovered to $106B currently at $5.6B). TGA still elevated at $500B, Fed balance sheet still contracting at -12% YoY - Net liquidity still draining.

Source: https://fred.stlouisfed.org/series/RRPONTSYD#

Source: https://fred.stlouisfed.org/series/WTREGEN#

Liquidity Score: 0 (Neutral) | The acute stress passed. Structural drain continues.

Transition Probability Matrix: Where We’re Heading

V2 now calculates where we’re likely heading based on score velocity, acceleration, and historical patterns.

Current transition probabilities

• 55% Neutral/Chop (stay current)

• 10% Goldilocks

• 8% Reflation

• 8% Late Cycle

• 3% Stagflation

• 2% Deflation

What 55% probability means: Not a vote of confidence, it’s acknowledgment that the framework doesn’t see a clear directional catalyst. The remaining 45% isn’t symmetric to the upside.

Cross-Asset Implications for Neutral/Chop Regime

The regime says Neutral/Chop with minimal conviction. The signal validation shows HIGH QUALITY rally conditions (4/4 checks pass), but the regime itself is directionless.

Small Caps

Why small caps are worth watching in this regime: IWM above all moving averages, ribbon score 3.5 (Strong Up). IWM/SPY ratio signaling risk-on with smalls leading. Growth divergence check shows ‘Aligned’ with ‘Soft Landing’ implication. Rate sensitivity works in favor when Fed has room to ease.

What would challenge the thesis: ISM Services below 50, growth divergence flipping to ‘Diverging’, breadth deterioration.

Gold

The structural case: Dollar weakness (DXY below 100). Falling real rates as Fed pauses. Central bank buying persistent. Geopolitical hedging structural.

The tactical observation: Extended above moving averages. Pullbacks historically offer better setups than chasing extended moves.

EUR/USD

The thesis from Issue #003 targeted 1.19-1.20. At 1.17, that thesis is playing out as expected.

The methodology point: When a thesis completes, recognize it. Analysis differs from hope.

Where the Framework Shows No Clear Direction

Rates: 10-year fairly valued, neither cheap nor expensive by historical standards.

Source: https://fred.stlouisfed.org/series/DGS10#

Copper: The copper/gold ratio isn’t confirming growth. Until it turns, analysis lacks confirmation.

Crude: No signposts triggered either direction. When the framework is silent, that’s information.

Inflation Pipeline Analysis

The v8.1 inflation pipeline model shows genuine progress:

Upstream (20% weight)

• CRB Commodity Index at 374.51 - accelerating but manageable.

• Baltic Dry Index collapsed to 1,877 - shipping costs normalizing.

Midstream (25% weight)

• 5Y5Y Forward Inflation at 2.3% - anchored

• 10Y Breakevens at 2.25% - stable.

Downstream (55% weight)

• Supercore PCE at 3.8% - decelerating (down from 4%)

• Atlanta Fed Wage Tracker at 4.2% - falling

• Core PCE at 2.8% - stable

Regime flag: Disinflation Signal: YES — Pipeline Clearing.

Regime Signposts: What Would Change the View

Growth deteriorates: ISM Services below 50, Real Income ex-Transfers negative, NFP 3-month average softening further. Shifts toward Late Cycle.

Inflation reaccelerates: Core PCE above 3.0% or Supercore reversing downtrend. Back toward Stagflation risk.

USD/JPY reverses violently: BoJ intervention triggering carry unwind. Cascades through risk assets regardless of fundamentals.

Credit cracks: HY spreads above 400bps. Currently 283bps.

Source: https://fred.stlouisfed.org/series/BAMLH0A0HYM2#

China confirms upturn: FXI rising, Caixin above 50, copper/gold recovering. Supports transition to Goldilocks.

The Bottom Line

Current Regime: Neutral/Chop | Growth neutral, inflation stable, policy neutral, liquidity normalized. Only risk appetite positive.

The Stagflation scare from two weeks ago? Over. But don’t get comfortable. Neutral/Chop is an unstable equilibrium. The path to Late Cycle is shorter than the path to Goldilocks.

Conviction is minimal. Signal strength is zero. The framework doesn’t see a clear directional catalyst.

Three signposts triggered: USD/JPY, DXY, Gold all point to dollar weakness and carry unwind risk. These will tell us which way the fog clears before headlines do.

The framework is getting sharper, but sharper doesn’t mean infallible.

Questions or feedback? macroanalytix.research@gmail.com

Disclaimer: All content published by MacroAnalytix is for research and educational purposes only. Nothing in this publication should be interpreted as financial advice, investment recommendations, or a solicitation to buy or sell securities. You are solely responsible for your own financial decisions.

Some questions deserve more space. That’s what The Breakdown is for, stepping back from the week-to-week noise to examine the bigger picture.

For this inaugural issue, we’re going back to the foundation of everything. Where are we in the economic cycle, how did we get here and what comes next? The timing couldn’t be more appropriate, the dashboard just flipped to Stagflation, multiple signposts have triggered simultaneously and markets are pricing a world where none of it matters.

Understanding your position in the cycle is the single most important input to positioning. More than any individual data point. More than any earnings report or Fed meeting. The regime dictates what works and what doesn’t across asset classes. Get it right, and the rest follows. Get it wrong and you’re fighting the tape.

The post-pandemic cycle has been unlike anything in modern market history. Unprecedented fiscal and monetary stimulus. The fastest inflation spike in forty years. The most aggressive hiking cycle since Volcker. And now, an easing cycle beginning with inflation still sticky and growth still positive. It’s a lot to make sense of.

Where We Are

The Current Regime

The regime just flipped. And not in a good way.

As of this week’s assessment, the dashboard is flashing Stagflation, the one regime nobody wants to see. Growth has turned and shows signs of contracting. Not slowing, contracting. ISM Manufacturing stuck at 48.2 for the tenth consecutive month. Initial claims ticking higher. The Conference Board Leading Index down 2.1% over six months. The composite growth score has flipped negative for the first time since we started publishing.

Meanwhile, inflation is sending unwanted signals. Core PCE is sat at 2.80%.- not great with the addition of Core CPI at 3%. The dashboard scores inflation as elevated, but the trend may be turning.

The tension is real. We’re ending 2025 with the dashboard flashing Stagflation while equity markets sit near all-time highs, credit spreads are historically tight, and volatility trades like everything is fine. AI optimism, fiscal support, and resilient services employment are legitimate bull arguments. The signposts could be early or they could be wrong.

Weighted Score: 1.219 (down from 1.92 last week). The composition has shifted dramatically: Growth flipping negative while inflation stays elevated puts us in the Stagflation quadrant of the regime matrix. But the CPI improvement, stable services, and accommodative policy are genuine offsets. This isn’t a screaming sell signal, it’s a caution flag.

The Five Pillars Today

Growth (-1, trending down)

The growth pillar just flipped negative, first time since we launched. ISM Manufacturing remains stuck at 48.2, the tenth consecutive month below 50. Initial claims have ticked up to 217,500 on the four-week average - still historically low, but moving in the wrong direction from 208,300. Retail sales decelerated to 3.5% year-over-year from 4.3%.

ISM Services at 52.6 is the saving grace, services represent roughly 70% of the economy and they’re still expanding, barely. But the margin of safety has narrowed.

This is the most significant regime shift since we started publishing.

Inflation (+1, trending down)

The inflation picture is genuinely mixed. Core CPI hovering around 3%. Core PCE tells a similar story, ticking to 2.80%. Any divergence matters because the Fed watches PCE, not CPI. But market-based measures are behaving well: the 5Y5Y breakeven has drifted down to 2.18%, the lowest reading this year.

The honest assessment: inflation is no longer the clear headwind it was. Future CPI prints could give the Fed more room to manoeuvre if growth deteriorates.

Policy (+1, trending down)

The Fed cut 25 basis points this month, bringing the target range to 3.50-3.75%. The dot plot showed only one additional cut projected for 2026, far fewer than markets expected. Three dissenting votes - the most since 2019 - signal a committee that doesn’t know where it’s going.

But here’s what matters now: if growth deteriorates further, the Fed has room to cut. The improving CPI gives them cover. Policy is accommodative and could become more so if the signposts are right about recession risk.

Liquidity (-1, trending down)

The overnight RRP has been completely drained - the liquidity buffer is gone. SOFR-repo spreads have normalized from their December stress, but the structural concerns remain. The TGA continues to drain reserves. The Fed’s $40 billion T-bill buying program helped navigate year-end, but the plumbing requires ongoing attention.

The acute stress didn’t materialize, but the cushion is thinner than it was.

Risk Appetite (+1, trending up)

And here’s the disconnect that defines this moment. The VIX sits below 15 pricing a world where none of the warning signals matter. Credit spreads remain historically tight at 285-290 basis points. Equities are near all-time highs.

Markets are pricing confidence while the leading indicators flash caution. Either the signposts are early, or markets are complacent. We’ll find out which.

The Valuation Problem

Here’s what makes this moment so uncomfortable: the dashboard says Stagflation, but valuations say everything is fine.

The S&P 500 at 22x forward earnings isn’t just expensive, it’s priced for perfection in an environment where four recession signposts have triggered. At these multiples, a 10% earnings miss implies roughly 15% drawdown to restore fair value. The Shiller P/E sits at the 99th percentile historically. High-yield spreads at 285-290 basis points are near historically tight levels only reached in May 2007 and briefly in 2021. Credit investors aren’t being paid for risk.

Source: Shiller CAPE Ratio

This is the core tension: either the signposts are wrong and markets are correctly pricing resilience, or markets are complacent and the signposts are early. History suggests the signposts deserve respect - they’ve preceded every modern recession. But they’ve also given false positives. The disconnect has to resolve, one way or another.

How We Got Here

The current regime is the product of a policy sequence that started in March 2020. You can’t understand where we are without understanding the path that brought us here.

The Pandemic Response (2020-2021)

When COVID hit, policymakers reached for every tool in the box and invented some new ones.

The Fed cut rates to zero in two emergency moves totaling 150 basis points. Then came QE at a scale that made the post-GFC programs look modest: nearly $5 trillion in asset purchases over two years. The Fed’s balance sheet ballooned from $4.2 trillion to over $9 trillion. Fiscal policy was even more aggressive - over $5 trillion in direct support through stimulus checks, enhanced unemployment benefits, and PPP loans.

Source: FRED Series WALCL (https://fred.stlouisfed.org/series/WALCL)

The combination was unprecedented. Simultaneous fiscal and monetary stimulus at emergency scale, delivered into an economy where supply chains were breaking and demand patterns were shifting dramatically. The result was a recovery unlike any in history. Real GDP recovered to pre-pandemic levels by Q1 2021, far faster than the six years it took after the Global Financial Crisis.

But the seeds of inflation were planted. Trillions in stimulus chasing constrained supply. Supply chains that couldn’t deliver. Labor markets that couldn’t fill positions. The question wasn’t whether inflation would arrive. The question was how bad it would get.

The Inflation Surge (2021-2022)

By mid-2021, inflation was running hot. CPI broke above 5% in May. The Fed called it “transitory.”

The bet was that supply chain normalization would resolve price pressures without policy tightening. Base effects would fade. Demand would moderate. The economy would find equilibrium.

The bet was wrong.

Inflation kept climbing. Supply chains remained tangled. Russia’s invasion of Ukraine in February 2022 sent energy prices soaring. By June 2022, headline CPI hit 9.1% - the highest reading since November 1981. Core PCE peaked at 5.6%. The “transitory” narrative collapsed.

Source: https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPILFESL

The Fed’s delayed response became one of the most significant policy errors in recent memory. By the time they acknowledged the problem, inflation had become embedded in expectations, wage negotiations and pricing behavior. The easy path back to 2% had closed.

The Hiking Cycle (2022-2023)

What followed was the fastest tightening cycle in forty years.

From March 2022 to August 2023, the Fed raised rates 525 basis points - from near zero to 5.25-5.50%. That’s eleven rate hikes in eighteen months, including four consecutive 75 basis point moves. The pace was aggressive by design. Having been late to respond, the Fed overcompensated with front-loaded tightening.

Source: FRED Series FEDFUNDS (https://fred.stlouisfed.org/series/FEDFUNDS).

Simultaneously, quantitative tightening began draining liquidity from the system. The Fed’s balance sheet shrank by over $1 trillion as maturing securities rolled off without reinvestment. The combination of higher rates and reduced liquidity created a double headwind for risk assets.

The impact was immediate. The 60/40 portfolio suffered its worst year since 1937 as both stocks and bonds declined together - the diversification that investors relied on failed spectacularly. Regional banks cracked in March 2023 as duration losses on bond portfolios combined with deposit flight. Silicon Valley Bank, Signature Bank, and First Republic collapsed in quick succession.

And yet, the recession that everyone predicted never arrived. The economy absorbed 525 basis points of tightening without rolling over. Employment stayed strong. Consumer spending held. The soft landing - which seemed impossible through most of 2022—remained on the table.

The Plateau (2024-2025)

From August 2023 through August 2024, rates sat at 5.25-5.50%—the “higher for longer” plateau.

This was the Fed’s attempt to finish the job without triggering the recession they’d narrowly avoided. Inflation was falling but still above target. Growth was slowing but still positive. The soft landing required threading a needle: rates high enough to complete disinflation, but not so high as to break the economy.

By September 2024, the Fed judged the balance of risks had shifted. Core PCE had fallen from 5.6% to under 3%. The labor market was cooling. They began cutting—50 basis points in September, 25 in November, 25 in December. The easing cycle had begun.

But here’s the problem: inflation stopped cooperating. Core PCE has been stuck in the 2.7-3.0% range for most of 2025. The last mile to 2% isn’t materializing. And this latest dot plot made the Fed’s uncertainty explicit: only one cut projected for 2026. The easing cycle that markets assumed would continue has effectively paused.

That’s how we got here: pandemic stimulus, inflation surge, aggressive tightening, near-miss recession, plateau, cautious easing, and now... uncertainty.

The Fed is cutting into an economy that isn’t obviously weak, with inflation that isn’t obviously falling. That’s unusual. And it leaves the path forward genuinely unclear.

What Comes Next

The regime framework doesn’t predict the future. It maps the possible paths and identifies what would trigger each. Here are the three scenarios for 2026—with probabilities, triggers, and cross-asset implications.

Scenario 1: Soft Landing (45-50% probability)

The thesis: Growth stabilizes before cracking. The leading indicators prove early rather than prescient. Inflation continues its recent improvement. The Fed delivers 2-3 cuts in 2026 as the data cooperates. Services hold the line while manufacturing finds a floor. The economy achieves the elusive soft landing - just later and messier than hoped.

What would confirm it: ISM Manufacturing crossing back above 50. ISM Services holding above 52 and ideally accelerating toward 54. Payrolls staying positive at 100-200k per month. Unemployment stabilizing around 4.3-4.5%. Core PCE trending toward 2.5% by mid-2026, confirming the CPI improvement. Credit spreads remaining well-behaved. The LEI stabilizing rather than deteriorating further.

Cross-asset implications: Small caps outperform as rate sensitivity works in reverse. The Russell could see a decent upside. Financials continue working - steeper curves, healthy credit, valuation discount closes. Duration rallies modestly as 10-year yields fall 30-40 basis points. Credit carries without incident. Dollar drifts lower, EUR/USD reaches 1.19-1.20. Commodities are mixed - gold consolidates, energy tracks growth.

Scenario 2: Hard Landing (30-35% probability)

The thesis: The signposts are right. The LEI’s recession warning proves accurate, as it has before every modern recession. The lagged effects of 525 basis points of tightening finally bite. Services follow manufacturing below 50. We get the recession that everyone expected in 2023 - delayed by two years, arriving just as markets stopped looking for it.

Why the probability rose: This scenario was 20-25% a month ago. Four simultaneous signpost triggers - LEI negative, curve uninversion, RRP exhaustion, VIX complacency - pushed it to 30-35%. The LEI’s track record matters here: readings of -2.1% have preceded every modern recession, typically by 6-12 months. False positives exist (2016, 2019), but dismissing the signal entirely would not be advised.

What would trigger it: ISM Services breaking below 50—that’s the key domino. Payrolls turning negative. Unemployment spiking above 5%. Credit spreads widening above 400 basis points. Consumer spending rolling over as the labor market softens. A credit event in commercial real estate or leveraged lending. The current LEI reading of -2.1% suggests 6-12 month lead time if the historical pattern holds.

Cross-asset implications: Equities down 20-30% as earnings expectations collapse. Small caps and cyclicals get destroyed. Duration rallies hard - 10-year yields could fall to 3.0-3.5% as the Fed pivots aggressively. Credit spreads blow out to 600+ basis points. Dollar strength returns as risk-off bid kicks in. Gold rallies on safe-haven demand. Commodities crash on demand destruction.

Scenario 3: No Landing (15-20% probability)

The thesis: The growth weakness proves temporary. The leading indicators give another false positive, as they did in 2016 and 2019. But inflation reaccelerates -perhaps driven by tariffs, perhaps by resilient demand that the manufacturing data is missing. The Fed is forced to pause or even reverse the cutting cycle. We’re back to “higher for longer,” but this time with less credibility and more uncertainty.

What would trigger it: Core PCE breaking above 3.0%. CPI surprising persistently hot. Wage growth reaccelerating above 4.5%. ISM prices paid surging. Tariff pass-through adding 1-1.5% to inflation. Long-term inflation expectations becoming unanchored—5y5y breakevens breaking above 2.5%.

Cross-asset implications: Equities struggle as the multiple compresses - the Fed put evaporates. Growth stocks under-perform sharply. Duration gets crushed as long-end yields reprice higher - 10-year could push toward 5.0%. Steepeners work overtime. Real assets outperform: commodities, TIPS, real estate. Dollar strengthens on higher real rates. Gold sells off initially as real rates rise, then potentially rallies on inflation fears.

The Wildcards

These three scenarios assume the macro environment evolves organically. But there are factors that could override the base case:

Tariffs: The administration has signaled aggressive trade policy and the specifics matter. The proposed framework includes a 10-20% universal tariff on all imports plus a 60% tariff on Chinese goods. If fully implemented, estimates suggest this could add 1.0-1.5% directly to PCE inflation, with second-round effects potentially pushing that higher. The average effective tariff rate is already at 11-16% - the highest since 1943 - and these proposals would roughly double it. For context, the 2018-2019 tariffs added approximately 0.3% to core inflation. This is a different magnitude entirely. If tariffs escalate as proposed, the “no landing” scenario becomes significantly more likely. This is the variable the framework doesn’t fully capture and it’s potentially the dominant 2026 wildcard.

Fed Independence: Governor Miran - the sole Trump appointee on the committee - has now dissented for larger cuts at three consecutive meetings. Powell’s term ends in May 2026. The questions around Fed independence haven’t mattered for markets since the early 1970s. They might matter again.

Geopolitics: Taiwan, Ukraine, Middle East. Any escalation could trigger supply shocks, safe-haven flows, and regime shifts that override the cyclical analysis. These are low-probability events with outsized impact. They’re hard to position for but important to acknowledge.

The Signposts

Multiple signposts have already triggered. Rather than predicting which scenario unfolds, watch for confirmation or contradiction:

Source: FRED Series BAMLH0A0HYM2 — ICE BofA US High Yield OAS (https://fred.stlouisfed.org/series/BAMLH0A0HYM2). IG: FRED BAMLC0A0CM (https://fred.stlouisfed.org/series/BAMLC0A0CM).

Already triggered: 2s10s curve uninverted to +67bp (historically confirms recession, timing varies). Overnight RRP drained to zero (liquidity buffer exhausted). VIX below 15 (complacency amid warning signals).

Growth signposts to watch:

• ISM Services is the key - above 52 keeps soft landing alive, below 50 confirms hard landing.

• ISM Manufacturing crossing back above 50 would be genuinely bullish. Initial claims breaking above 275k would be concerning.

• The current uptick to 217,500 demands attention, though the four-week moving average remains historically low and has shown week-to-week volatility - direction matters more than any single print.

Inflation signposts to watch:

• Core PCE dropping to 2.5% confirms the CPI improvement and softens the Stagflation classification. Breaking above 3.0% signals no landing.

• The CPI/PCE divergence should resolvem watch which one is leading.

Risk signposts to watch:

• HY spreads above 400 basis points would confirm recession signal, currently at 285-290bp, a long way from stress.

• VIX sustained above 25 means the complacency has cleared and markets are pricing risk appropriately. Paradoxically, that would make the setup more investable.

The Bottom Line

We’re ending 2025 with the dashboard in Stagflation territory - growth negative, inflation mixed but still elevated on PCE, three signposts triggered. That’s the framework output.

But frameworks have limitations. The bull case - services holding at 52.6, CPI improving sharply, AI and fiscal tailwinds, credit calm, accommodative policy - is legitimate. The signposts have given false positives before. Markets could be right and the indicators wrong. The VIX below 15 might be reading something the others are missing.

The soft landing probability has come down from 55-60% to 45-50% - still the base case, but no longer a comfortable edge. The hard landing probability has risen to 30-35%. Four triggered signposts demand respect, even if they don’t demand panic.

Here’s how I’m thinking about it:

The cycle has taken us from pandemic panic to inflation crisis to tightening regime to soft landing hopes to… this. Stagflation on the dashboard, complacency in the markets. We’ve navigated every chapter so far. But the story isn’t over. The next chapter—whether the signposts prove prescient or premature—will be written by the data in the months ahead.

The framework is ready. The signposts are flashing. Now we watch.

See you January 4th for The Setup.

The Breakdown is published monthly. For the weekly regime framework and cross-asset positioning, The Setup publishes every Sunday evening. If something material shifts mid-week, you’ll hear from me via The Pulse.

Coming in January: The Debrief. Monthly accountability, tracking what worked, what didn’t, and how the framework is evolving. If I’m asking you to trust the regime signals, you deserve to see the receipts. First issue drops end of January, covering the journey so far from Goldilocks to Stagflation.

Questions or feedback? Drop me a line at macroanalytix.research@gmail.com

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