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.

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.

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.

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 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.

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.

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.

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.

The regime just flipped. And not in a good way.

Four weeks ago, we launched with Reflation. Growth positive, inflation sticky, policy restrictive. Last week, we flagged Late Cycle concerns as liquidity deteriorated. This week? The dashboard is flashing Stagflation. The one regime nobody wants to see.

Current Regime: Stagflation

Weighted Score: 1.219 (down from 1.92) | Momentum: Weakening | Triggered Signposts: 3

How the Score Works:

Each pillar receives a raw score (-1/0/+1) based on indicator thresholds, then gets weighted: Growth 30%, Inflation 25%, Policy 20%, Liquidity 10%, Risk Appetite 15%. This week: Growth (-1 × 30% = -0.30) + Inflation (+1 × 25% = +0.25) + Policy (+1 × 20% = +0.20) + Liquidity (-1 × 10% = -0.10) + Risk Appetite (0.46 × 15% = +0.07) = 0.12 raw, which scales to 1.219 on the composite. The regime matrix plots Growth vs Inflation to determine quadrant; Policy, Liquidity, and Risk Appetite act as modifiers.

Recession Signposts Triggered Simultaneously

Here’s the thing: multiple signposts have triggered simultaneously.

Yield Curve Uninversion (2s10s at +67bps)

The 2s10s curve has uninverted to +67 basis points, historically a recession confirmation signal.

Source: https://fred.stlouisfed.org/series/T10Y2Y# (Recession Shading)

What curve uninversion means: The curve inverted in 2022-2023, signalling recession risk. Now it’s uninverted and pretty sharply too. The uninversion signal has preceded recessions in 7 of the last 8 cycles. Lag ranges from 2 months (2001) to 22 months (2007). We’re in that window, but timing precision is low.

Overnight RRP Exhausted ($0)

The overnight reverse repo facility has been completely drained.

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

Why this matters: RRP was the system’s shock absorber. Excess cash parked at the Fed provided a liquidity buffer. That buffer is now gone. Future funding stress will hit bank reserves directly. Relevance is conditional: matters if stress materializes.

VIX Below 15 (Complacency Signal)

The VIX is sitting below 15, pricing in a world where none of this matters.

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

The tension: VIX below 15 isn’t inherently wrong. Post-2010 average is ~17 with extended calm periods. But VIX below 15 while leading indicators flash warnings creates elevated spike risk. The last three instances of VIX <15 saw volatility double within 6 months. Low VIX means protection is cheap. That’s information worth noting.

Copper Gold Ratio at 0.0012: Fear Signal Explained

The copper/gold ratio (HG ÷ GC futures) hovering around 0.0012 is flashing fear and is currently sitting at its lowest level since November 1993.

What the ratio tells you: Copper = Industrial metal, growth-sensitive. Gold = Safe haven, fear trade, real rate play. Low ratio = Gold outperforming copper = Markets pricing fear over growth.

When copper/gold is this depressed, it’s telling you global growth expectations are weak. The ratio often leads equity weakness by 2-3 months historically.

Growth Pillar Breakdown: Why It Flipped Negative

The growth pillar just flipped negative. First time since we launched. This one matters.

ISM Manufacturing: 48.2 for the tenth consecutive month below 50. New orders minus inventories at 48.9 is the one bright spot, suggesting the contraction may be bottoming.

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

Initial Claims: Stable at 217,000 on the four-week average, historically low, but moving wrong direction from 208,300.

Source: https://fred.stlouisfed.org/series/IC4WSA#

Retail Sales: Decelerated to 3.3% year-over-year from 3.9% in September. The consumer isn’t cracking, but definitely slowing.

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

ISM Services: 52.6 is the saving grace. Services represent ~70% of the economy and are still expanding, but barely.

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

Atlanta Fed GDPNow: 3.5% seems to contradict the growth downgrade. But GDPNow is backward-looking. The regime framework weights leading indicators to identify where we’re heading.

Growth Score: -1 (Contractionary) | This is the most significant regime shift since we started publishing.

Core PCE vs Core CPI: Limited Visibility

Not much new to work with here. The government shutdown wiped out key data, and the prints we do have are stale. Core PCE sits around 2.8%, Core CPI around 3.3% - both unchanged from prior readings in any meaningful way.

The divergence between the two measures persists, but without fresh data it’s hard to know whether that gap is narrowing or widening. The Fed watches PCE; markets watch CPI. Right now, neither is telling us anything we didn’t already know.

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

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

Cross-Asset Implications for Stagflation Regime

Stagflation changes everything. Growth negative, inflation positive, liquidity tight, this is the toughest configuration historically.

Cross-Asset Implications for Stagflation Regime

Stagflation changes everything. Growth negative, inflation positive, liquidity tight, this is the toughest configuration historically.

Gold

Gold is the classic Stagflation beneficiary historically. Inflation elevated, real rates potentially falling as Fed is forced to ease, uncertainty rising. GLD inflows were positive this week while most everything else saw outflows. The structural case: central bank buying, reserve diversification. The tactical observation: regime uncertainty.

Cyclical Assets

Stagflation is historically the worst regime for equities. Growth slowing while input costs remain elevated compresses margins. Small caps and cyclicals historically face the toughest backdrop when liquidity is tightening and growth is negative.

Defensives

Utilities and staples historically provide relative stability in Stagflation. Companies with pricing power, stable cash flows, and dividend support tend to hold up better.

Dollar

Stagflation is historically dollar-positive. When global growth weakens and uncertainty rises, capital tends to flow to the reserve currency.

Regime Signposts: What Would Change the View

Growth stabilizes: ISM Manufacturing above 50 or ISM Services above 54 flips growth back to neutral. Moves from Stagflation toward Reflation.

Inflation breaks lower: Core PCE at 2.5% or below shifts inflation to neutral. Stagflation becomes Disinflation, historically constructive.

Credit cracks: HY spreads above 400bps confirms recession signal. Currently 290bps.

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

VIX spikes above 25: Complacency signpost clears. Paradoxically, that historically makes setups more interesting as elevated fear tends to precede better opportunities.

VIX spikes above 25: Complacency signpost clears. Paradoxically, that historically makes setups more interesting—elevated fear tends to precede better opportunities.

The Bottom Line

Current Regime: Stagflation | Growth negative, inflation elevated, multiple signposts triggered.

The regime historically favors defensives and gold over cyclicals. Risk reduction makes sense when signposts trigger simultaneously.

VIX below 15 creates elevated spike risk. Protection is cheap.

Frameworks have limitations. The bull case, services are holding, CPI improving, AI/fiscal tailwinds, credit calm, is legitimate. Markets could be right and indicators wrong.

What’s to Come in 2026

While I’m away from screens, the framework isn’t standing still. Honestly, I’m more excited about this than the holidays. Here’s what’s cooking:

Dashboard Overhaul. The current regime dashboard has served us well, but it’s version 1.0—held together with duct tape and good intentions. Over the holidays, I’m rebuilding it from the ground up. Additional data points across all five pillars, refined indicator selection, cleaner automation. The goal is simple: more signal, less noise.

Lead/Lag Weightings. Here’s the thing: not all indicators are created equal. Some lead the cycle by months, others just confirm what’s already happened. The upgraded framework will weight leading indicators more heavily in the composite scores, helping us spot regime transitions before they show up in the lagging data. The LEI triggering this week is exactly the kind of signal that should carry more weight than coincident indicators showing strength.

Refined Regime Scoring. The current system works, but it can be sharper. I’m implementing buffer zones to prevent whipsaw signals (nothing worse than flipping regimes twice in a week), momentum tracking to assess whether trends are strengthening or weakening, and transition probability calculations. The aim is catching the move from Goldilocks to Stagflation before it’s obvious—not a week after everyone else has noticed.

The Debrief Launches. Starting in January, we’re adding a fourth content stream: The Debrief. Monthly review of what worked, what didn’t, standout ideas and themes, and any dashboard iterations for performance improvement. It’s accountability in public—tracking positioning ideas, acknowledging mistakes, refining the framework to reduce false signals. If I’m going to ask you to trust the regime framework, you deserve to see the receipts.

The first Debrief drops early February, covering December and January’s journey from Goldilocks optimism to Stagflation warning. Should make for interesting reading, there’s plenty to review already.

Happy holidays. I’ll see you January 5th with a refreshed dashboard and a new year of regimes to navigate. Can’t wait.

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 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 or decisions.

The cracks are showing.

Two weeks ago, we were in Goldilocks territory with a supportive liquidity backdrop. Last week, the Fed cut as expected but signaled only one more cut for 2026, far fewer than markets had priced. This week? The plumbing is under stress, and the Fed has noticed.

Liquidity has flipped from tailwind to headwind. The Treasury General Account has swelled by $129 billion, sucking reserves out of the system. SOFR-repo spreads have widened to 35 basis points - stressed territory. Bank reserves are down $50 billion.

Here’s the thing: the economy is fine, the plumbing isn’t. The good news? The Fed knows it.

Current Regime: Late Cycle / Reflation Aggregate Score: +2 (Weighted: 1.92)

This is Late Cycle territory. The expansion continues, but the supports are eroding.

Treasury General Account Drain: How TGA Swelling Tightens Liquidity

This is the story of the week. And the Fed noticed.

The culprit is the Treasury General Account. The TGA has swelled from $677 billion in September to $806 billion - a $129 billion increase. When Treasury builds cash at the Fed, it drains reserves from the banking system. That’s liquidity tightening, regardless of what the Fed is doing.

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

How the TGA drain mechanism works: 1. Treasury issues bills/bonds 2. Investors pay Treasury 3. Cash moves from bank reserves to the TGA at the Fed 4. Bank reserves fall → funding conditions tighten.

The Fed moved quickly precisely because liquidity conditions have deteriorated. The $40 billion T-bill buying program announced December 12th is the response.

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

SOFR-Repo Spread at 35bps: Stressed Territory Explained

The stress is showing up in money markets.

SOFR-repo spreads have widened to 35 basis points, up from well-behaved levels. That’s stressed territory. Here’s what it means:

• SOFR = Secured Overnight Financing Rate (benchmark for repo).

• Repo spread = Difference between repo rates and risk-free rate.

• 35bps spread = Banks paying premium for overnight funding.

When spreads widen, it signals: - Reserves are becoming scarce - Banks are competing for funding - Plumbing stress is building.

Key threshold: Spreads above 50bps would signal disorderly funding conditions requiring Fed intervention.

Core PCE vs Core CPI Divergence: Why They’re Moving Apart

This is the first genuinely encouraging inflation print in months.

Core PCE is still at 2.80% - still above target. PPI plunged from 3.30% to 2.70%, suggesting pipeline pressures are easing.

Core CPI is still at 3.02%: This is the first release since May 2025 which the direction may have changed course.

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

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

Why any divergence matters: - PCE and CPI weight components differently - Housing is weighted more heavily in CPI - The Fed watches PCE, not CPI - If CPI is leading and PCE follows, we’re in better shape than headlines suggest.

Market-based measures remain well-behaved. The 5y5y breakeven sits at 2.33%. The Cleveland Fed Inflation Nowcast is tracking 2.40% - right at target.

Inflation Score: +1 (Rising) | Trend: ↑ | Key Level: December 20th Core PCE release is critical.

2s10s Curve Steepening: Basis Point Move Explained

The dot plot showing only one cut for 2026 was a hawkish surprise, the market had priced three to four. The curve has steepened dramatically in response.

The 2s10s spread has jumped from +52 basis points to +67 - a 15 basis point move.

Source: https://fred.stlouisfed.org/series/T10Y2Y#

What curve steepening means: - Front end: Anchored by Fed cuts already delivered - Long end: Repricing for sticky inflation + fiscal deficits + fewer future cuts - Result: Yield curve steepens.

The curve steepening dynamic discussed in Issue #001 has played out. The question now is whether it continues or consolidates.

Fed T-Bill Buying Program: $40 Billion Response to Liquidity Stress

The Fed’s response shows they’re monitoring funding conditions closely.

Program details: - $40 billion in T-bill purchases announced December 12th - Purchases will “remain elevated for a few months” - Then “significantly reduced”

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

Why it matters: - Adds reserves back to the system - Offsets TGA drain - Shows Fed will act preemptively on plumbing stress - They learned from September 2019

The program is live but not keeping pace with the $129 billion TGA build. Net effect: reserves are shrinking, not growing.

Cross-Asset Implications for Late Cycle With Liquidity Stress

The liquidity deterioration changes the analysis. Two weeks ago, the backdrop was supportive. This week, caution is warranted.

Duration Dynamics

Duration becoming more interesting. With yields moving higher on the hawkish dot plot, and inflation finally showing progress, the setup for duration is shifting. The hawkish Fed dots are now priced; the inflation improvement isn’t fully reflected.

Source: https://fred.stlouisfed.org/series/DGS10#

Rate-Sensitive Assets

Small caps historically struggle with funding stress. They tend to be more sensitive to liquidity conditions given higher leverage and floating-rate debt exposure. The breadth improvement noted in Issue #002 faces a headwind.

Financials

Financials historically benefit from steeper curves. If the move in 2s10s is the beginning of a trend, it improves net interest margin dynamics. Banks are lenders, not borrowers, so funding stress affects them differently than other sectors.

Semiconductors

SMH down 4.52% is notable. The group led the rally; it’s leading the correction. Worth watching whether this is rotation or something more fundamental.

Defensives

Utilities and staples historically provide ballast in funding stress scenarios. The regime deterioration shifts the analysis toward defensive sectors.

Regime Signposts: What Would Change the View

Liquidity stress intensifies: SOFR-repo spreads above 50bps or disorderly year-end funding.

TGA drain reverses: Treasury spending down TGA balance. Watch for drawdowns below $700 billion as a constructive signal.

Core PCE confirms trend: December 20th print at 2.6% or below rebuilds disinflation narrative.

Credit stress emerges: HY spreads above 400bps signals funding stress spreading. Currently 291bps.

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

The Bottom Line

Current Regime: Late Cycle | Growth positive, inflation improving, but liquidity deteriorating sharply.

The economy is fine. GDPNow at 3.6%. Claims at historic lows. Retail sales accelerating.

The plumbing needs work. TGA up $129 billion. SOFR-repo at 35bps. Reserves draining. But the Fed’s $40 billion T-bill program shows they’re on it.

That divergence is the story.

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 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 or decisions.

Regime Scorecard: Goldilocks With Every Pillar Trending Down

The regime holds, but just barely.

Last week we opened with Reflation: growth positive, inflation sticky, policy restrictive. This week the picture has shifted. Policy and liquidity have turned more supportive as QT ended and the Fed signals another cut Tuesday. But the interesting part isn’t what’s improved, it’s what hasn’t.

Every single pillar is trending down. Growth fading. Inflation stable but not cooling. Risk appetite neutral despite equities grinding to all-time highs. The scores say Goldilocks. The trends say watch your back.

Current Regime: Goldilocks Aggregate Score: +2

This is Goldilocks with an expiration date. The regime is constructive, but the margin for error has narrowed.

ISM Services Deceleration: Growth Momentum Fading

The economy is still expanding - but the pace is moderating. The ISM Services deceleration from 56.0 to 52.6 is the story.

ISM Services printed 52.6 in November - in line with October. That’s still expansion, but it’s flattening. New orders softened. Employment held. The services economy isn’t rolling over, but it’s no longer driving.

ISM Manufacturing remains stuck at 48.2 - the ninth consecutive month below 50. New orders at 47.1 aren’t screaming recovery. The two-speed economy thesis still holds: services carrying, manufacturing dragging.

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

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

The labor market tells a similar story. Payrolls showed 119,000 jobs added - below expectations but not disastrous. Unemployment ticked up to 4.4%. Weekly claims at 191,000 are near three-year lows. This is cooling, not cracking.

Source: https://fred.stlouisfed.org/series/IC4WSA#

The distinction matters: Orderly deceleration from above-trend growth is textbook soft landing. The question is whether it stays orderly.

Growth Score: +1 (Expansionary) | Trend: ↓ | Key Level: ISM Services below 50 shifts to Stagflation risk.

Core PCE Stuck at 2.8%: Disinflation Stalled

Core PCE landed at 2.8% year-over-year—unchanged from August. Stuck in the 2.7-3.0% range that’s defined most of 2025. The disinflation trend that dominated 2024 has clearly stalled.

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

The composition is shifting in ways worth watching: - Goods prices: Rose 0.5% month-over-month, likely early tariff pass-through - Services inflation: 0.2%, sticky but not accelerating - ISM Services prices paid: 65.4, down from 70 but still elevated

This isn’t runaway inflation. But it’s not the smooth glide to 2% that markets had priced. The Fed finds itself in an awkward spot: inflation sticky enough to complicate the cutting cycle, but not hot enough to reverse course.

Inflation Score: 0 (Stable) | Trend: ↓ | Key Level: Core PCE above 3.0% shifts narrative.

Fed Dot Plot Interpretation: Tuesday’s Decision and 2025 Path

The Fed cut 25bps in October, bringing the target range to 3.75-4.00%. QT officially ended December 1. Markets are pricing 87% odds of another 25bp cut Tuesday.

But the Fed is making this decision with unusually poor visibility. The government shutdown wiped out October’s CPI entirely. BLS estimates suggest this creates a 0.2-0.3% estimation error in their inflation models. Powell has acknowledged the data gaps.

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

The FOMC was already divided. October’s decision saw two dissents - one wanting 50bp, another preferring to hold. The committee isn’t unified on the path forward.

Why the Fed dot plot matters more than the cut: Markets expect four cuts in 2025. If the median dot shows three, or worse, two - that’s a hawkish surprise into year-end. The cut Tuesday is priced; the path isn’t.

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

Policy Score: 0 (Neutral) | Trend: ↑ | Key Level: Dot plot showing only two 2025 cuts triggers repricing.

QT Ending Impact on Liquidity: Headwind Becomes Tailwind

With quantitative tightening concluded December 1, the liquidity backdrop has shifted from headwind to tailwind.

• Reserve balances: Remain ample.

• Standing repo facility: Tapped occasionally ($13.5B overnight) but without urgency.

• Cross-currency basis swaps: No dollar funding stress.

• SOFR-repo spreads: Well-behaved.

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

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

The plumbing is functioning. That matters for risk assets.

Liquidity Score: +1 (Supportive) | Trend: ↑ | Key Level: SOFR-repo spreads above 30bps signals stress.

S&P 500 Valuation at 22x Forward P/E: Risk Appetite Assessment

Equities have ground higher for eight consecutive sessions. The S&P 500 is pushing all-time highs near 6,850. The VIX has collapsed to 15.75.

Cross-Asset Valuation Snapshot:

Source: TradingView - VIX w/ SP500 Overlay

The technicals look healthy. Breadth is improving - 60%+ of S&P constituents trade above their 200-day moving average. Small caps (IWM) are finally participating.

But valuations are stretched. Forward P/E on the S&P sits above 22x. At these multiples, a 10% EPS miss implies roughly 15% drawdown to restore fair value.

Risk Appetite Score: 0 (Neutral) | Trend: ↓ | Key Level: VIX sustained above 25 signals regime shift.

Duration Dynamics: How the Regime Change Affects Rates

This is where the regime change matters most for rates analysis.

Duration dynamics have shifted. In Issue #001, I noted duration faced headwinds with policy restrictive and QT running. Now? QT is done. The Fed is cutting. Real rates are coming down. The calculus has changed.

Source: https://fred.stlouisfed.org/series/DGS10#

The 10-year at 4.2% reflects the current regime. If the FOMC dots disappoint (showing only two 2026 cuts), expect a selloff that would push yields higher. The curve steepening thesis from Issue #001 continues to make sense, the Fed eases the front end while the long end reprices for sticky inflation and fiscal deficits.

Source: https://fred.stlouisfed.org/series/T10Y2Y#

EUR/USD Fed ECB Divergence Analysis

The policy divergence creates interesting dynamics in EUR/USD.

Factors supporting euro: The Fed is cutting - QT has ended - The ECB is on hold, creating a rate differential that favors the euro

Constraints on the thesis: - The ECB’s hands are tied by growth, not inflation - German manufacturing remains in recession - French political instability has rattled confidence - The eurozone composite PMI is barely above 50

Any risk-off event would see the dollar bid return quickly.

Small Caps Rate Sensitivity Analysis

Small caps present a more interesting setup than in Issue #001. The risk hasn’t disappeared, but the backdrop has improved.

Why small caps historically benefit from this regime: Breadth is finally broadening, IWM is participating after months of underperformance. Higher floating-rate debt exposure means rate cuts directly reduce interest expense. Liquidity supportive with QT ended. Soft landing scenarios historically favor rate-sensitive assets

The setup requires the data to cooperate—soft landing has to hold.

Soft Landing Probability Assessment: 60% Base Case

Our models put soft landing probability at around 60% - down from 70% a month ago as the data has softened, but still the base case.

Probability distribution: 60% Soft landing (growth holds, inflation stabilizes). 25% Hard landing (growth cracks before inflation cooperates). 15% No landing (inflation reaccelerates, Fed forced to pause).

What soft landing historically looks like across assets: Small caps benefit from rate sensitivity working in reverse. Financials benefit from steeper curves and healthy credit. Duration works as growth softens just enough to validate the cutting cycle. EUR/USD grinds higher as Fed-ECB divergence widens.

Regime Signposts: What Would Change the View

Inflation reaccelerates: November CPI Core above 3.2% or December Core PCE above 3.0% complicates Fed’s path.

Growth cracks: November payrolls below 100k or unemployment above 4.5% accelerates growth downgrade. ISM Services below 50 collapses two-speed economy thesis.

Fed hawkish surprise: Tuesday’s dot plot showing only two 2026 cuts, or Powell pushing back on easing expectations.

Bull case: ISM Services holds above 52, payrolls above 150k, Core PCE trends toward 2.5%. That’s Goldilocks proper.

The Bottom Line

Current Regime: Goldilocks | Growth positive, inflation stable, policy and liquidity supportive.

The universal downward trend matters. Every pillar is fading. The scores say constructive; the momentum says watch your back. Tuesday’s FOMC is the week’s defining event, the cut is priced, the dot plot isn’t.

See you next Sunday.

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 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 or decisions.

Welcome to the first edition of The Setup.

The macro regime framework is built on five pillars: Growth, Inflation, Policy, Liquidity, and Risk Appetite. This week’s assessment shows classic late-cycle Reflation - ISM Services strength carrying the economy while Core PCE remains sticky above target and real Fed Funds stay restrictive despite 50bps of cuts.

Current Regime: Reflation / Goldilocks Aggregate Score: +1

The tension is real: can the economy sustain expansion with Core PCE still above 2.5% and real Fed Funds rates positive? History says this configuration doesn’t last. Either growth cracks, inflation cools, or the Fed blinks.

ISM Services vs Manufacturing: The Two-Speed Economy Explained

Growth is expanding, but the ISM Services vs Manufacturing divergence tells the real story.

ISM Services printed 56.0 in October - up from 54.9 in September. That’s not just expansion, that’s acceleration. The highest reading since July 2024 signals genuine momentum in the dominant part of the economy.

ISM Manufacturing printed 46.5 - the seventh consecutive month below 50. New orders are soft, production is contracting, factory employment is shrinking.

Here’s the thing: manufacturing is only 11% of GDP. Services, the other 89% are carrying the economy. This ISM services manufacturing divergence creates a two-speed economy: goods weak, services strong.

At some point, manufacturing weakness could bleed into hiring and investment. But right now, services momentum is overwhelming that risk. Atlanta Fed GDPNow tracking 2.5% for Q4 confirms the growth picture remains solid.

Growth Score: +1 (Expansionary) | Trend: → | Key Level: ISM Services below 50 would collapse this thesis.

Core PCE vs Core CPI: Inflation Is Rising, Not Falling

Core PCE sits at 2.8%, up 0.1 percentage points from prior month. Core CPI is at 3.3%. Both readings are well above the Fed’s 2% target, and the trend is pointing higher.

This is the problem nobody wants to talk about.

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

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

The market narrative has been “inflation is coming down, the Fed can ease.” The data says otherwise. The ISM Services prices paid component hit 70 in October - the highest since October 2022. Businesses are flagging cost pressures that extend beyond tariffs.

Market-based inflation expectations remain anchored. The 5-year 5-year forward breakeven sits at 2.17%, suggesting long-term expectations haven’t really changed but realized Core PCE is moving the wrong way.

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

Inflation Score: +1 (Rising) | Trend: ↑ | Key Level: Core PCE above 3.0% becomes the dominant macro story.

Real Fed Funds Rate Calculation: Policy Is Still Restrictive

The Fed cut 25bps in September and another 25bps in November, bringing the target range to 4.50-4.75%. They announced the end of quantitative tightening effective December 1. Sounds dovish.

But the real Fed Funds rate tells a different story.

Real Fed Funds = Nominal Fed Funds minus Core PCE

At 4.50-4.75% nominal minus 2.8% Core PCE, real Fed Funds sit around +1.7% to +1.9%. That’s positive real rates. That’s restrictive territory.

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

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

The Fed has eased 50bps total from the peak, moving from “very restrictive” to “moderately restrictive.” They haven’t shifted to accommodative. Markets pricing 75-85% odds of another December cut may be underestimating how sticky Core PCE inflation complicates that path.

Policy Score: -1 (Restrictive) | Trend: → | Key Level: Real Fed Funds approaching zero would signal accommodative shift.

QT Ending and Liquidity Conditions: The Tide Is Turning

With quantitative tightening ending December 1, the liquidity backdrop is shifting from headwind to tailwind.

Central bank balance sheets globally have stabilized. China and ECB are expanding again. Funding markets remain calm:

• SOFR-repo spreads: Well-behaved, no stress signals

• Cross-currency basis swaps: Not flashing dollar funding stress

• Reserve balances: Remain ample

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

There’s no evidence of the plumbing stress that preceded previous market dislocations. The liquidity picture is improving.

Liquidity Score: 0 (Neutral) | Trend: ↑ | Key Level: SOFR-repo spreads above 30bps would signal stress.

VIX and High Yield Spreads: Risk Appetite Neutral, Not Euphoric

The VIX at 16-17 is low but not complacent. High yield OAS spreads at 300-350bps are near historically tight level but not screaming. S&P 500 at 6,850 sits near all-time highs after a strong November.

This isn’t risk-off. But it’s not euphoric either.

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

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

ETF flow analysis shows a -0.33 net signal - a slight defensive tilt. Risk-on ETFs (SPY, QQQ, financials, energy) saw solid November flows, but defensive ETFs (TLT, GLD, utilities) are also getting bid. The market is maintaining insurance even as it participates in upside.

High yield spreads at 300-350bps are telling you “no recession.” Credit investors are usually early to see stress. HY OAS above 400bps would be a regime-shift signal worth watching.

Risk Appetite Score: 0 (Neutral) | Trend: → | Key Level: HY OAS above 400bps or VIX sustained above 25.

Cross-Asset Implications for a Reflation Regime

Given Reflation with restrictive policy still in place, here’s how the regime framework historically translates across asset classes.

Equities

The Reflation regime historically favors equities over bonds, but selectivity matters at stretched valuations. At 22.2x forward P/E, the margin for error is thin.

Large-cap quality with pricing power tends to handle this environment well historically. Companies that can pass through cost inflation while maintaining margins have outperformed in past Reflation regimes.

Small caps historically benefit from rate cuts given their floating-rate debt exposure, but they also tend to under-perform first if growth rolls over.

Sector rotation patterns in Reflation historically show value outperforming growth at the margin. Financials, industrials, and energy have outperformed in past Reflation regimes when real rates stay positive and commodity prices hold.

Rates

With Core PCE at 2.8% and the Fed still restrictive, the historical pattern doesn’t favor duration.

Source: https://fred.stlouisfed.org/series/DGS10#

Curve steepening is the textbook Reflation dynamic. As the Fed eases the front end while the long end reprices inflation risk and fiscal deficits, the curve steepens. This pattern has played out consistently in past Reflation environments.

Source: https://fred.stlouisfed.org/series/T10Y2Y#

Duration historically faces headwinds in Reflation until something breaks on the growth side.

Credit

Spreads at 300-350bps mean compensation for credit risk is historically thin.

Investment grade historically offers better risk-adjusted returns than high yield at these spread levels, less volatility while still capturing benefit from Fed easing.

The 400bps level on HY OAS has historically marked regime shifts. Credit is telling you “no recession” at current spreads, but credit has been late to see stress in past cycles.

FX and Commodities

Dollar dynamics depend on the inflation path. If inflation stays elevated, the Fed stays cautious, and real rates stay positive - that’s historically dollar-supportive.

Gold looks tactically extended after a massive run, even though the structural case (central bank buying, real rate normalization) remains intact.

Energy historically benefits in Reflation when global growth stabilizes and commodity demand holds.

Regime Signposts: What Would Change the View

Inflation breaks 3.0%: Core PCE above 3.0% or hot CPI print would complicate the Fed’s easing path. Rates would likely reprice higher, creating headwinds for equities.

Growth rolls over: ISM Manufacturing below 45 or ISM Services below 50 collapses the two-speed economy thesis. Shifts regime toward Stagflation.

Credit stress emerges: HY spreads widening above 400bps or SOFR-repo spread spike signals risk appetite turning.

VIX sustains above 25: Market repricing risk structurally, not just hedging an event.

Bull case: ISM Manufacturing crosses back above 50 AND Core PCE trends toward 2.5%. That’s the shift from Reflation to Goldilocks - historically the sweet spot.

The Bottom Line

Current Regime: Reflation | Growth expanding, inflation rising, policy restrictive.

The regime historically favors equities over bonds, cyclicals over defensives at the margin, and curve steepening over outright duration. But at 22.2x forward P/E, the margin for error is thin.

• Valuations stretched: S&P 500 at 22.2x forward P/E

• Inflation not cooperating: Core PCE 2.8%, Core CPI 3.3%, both rising

• Policy still restrictive: Real Fed Funds above +1.7%

The soft landing is possible. But it requires growth resilience, inflation stabilization, and Fed cooperation simultaneously.

See you next Sunday.

The Setup is published every Sunday evening. For deeper dives on specific sectors and themes, check out The Breakdown (monthly). If something material shifts mid-week, you’ll hear from me via The Pulse.

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

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