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 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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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