Macro Market Indicators (June 2023)
Using Macro to determine market direction.
We focus on Macro indicators that go beyond forecasting GDP growth. You want indicators that say something about the direction of markets and the relative attractiveness of different asset classes.
Get ready for an extensive piece on the Macro Market Indicators that are part of our investment framework!
ISM Manufacturing
Regime volatility
The ISM Manufacturing Index changed regime again as it dropped in May compared to the previous month. Historically, the S&P 500 Index realized a return of just 0.3% in the next three months when the ISM Manufacturing Index was below 50 and falling.
Cross-Asset Return Estimates
Currently, we apply a symmetric ISM scenario analysis to determine the up- and downside across asset classes. Our bull case is for the ISM to return to 50 in the next three months. Our bear case is for the ISM to rejoin the downward trend taking it to 44.0 in the coming months.
Key takeaways:
Upside for US and Developed Market Equities is absent in all three scenarios!
If the ISM Manufacturing Index falls to 44.0, equities will face steep declines of up to 24%.
Should the ISM remain at its current level in the coming months, it signals at least 8% downside widening to as much as 17% (MSCI World in USD.)
The implied return on US Treasuries is ‘sizeable’ in each of the three scenarios.
The ISM Manufacturing Index scenarios call for a long US Treasuries, short (US) Equities strategy in each scenario.
Financial Conditions
The table below shows the implied returns for different asset classes linked to three scenarios for financial conditions. A higher level of the Goldman Sachs US Financial Conditions Index means tighter conditions and vice versa.
Key takeaways:
Financial conditions paint a rosier picture for equities than the ISM Manufacturing, yet downside prevails. Should financial conditions improve, which is not our base case, upside emerges.
Equities face substantial downside if financial conditions worsen significantly (Goldman Sachs US Financial Conditions Index rises to 101).
Comparable to the ISM analysis, all scenarios point to upside for US Treasuries.
Credit Impulse
China’s latest Credit Impulse has remained weak throughout the shallow reopening. And as a result, it has not functioned as a catapult for equities and other risky assets. The wait for additional stimulus continues.
Developed Market Equities
Developed Market Equities are up 14% year-on-year. Hence, equities are way ahead of themselves unless we missed the stellar uptick in the China credit impulse.
Developed Market Treasuries have nearly rejoined the China Credit Impulse.
Commodity performance is undershooting China’s Credit Impulse.
Surprise Indices
Despite the uptick in US Macro surprises, global economic surprises are dropping. And after the recent rally, a massive gap has opened up between the MSCI World Index performance and macro surprises. There’s clear downside for equities from this angle.
Contrary, the 3-month change in global yields is roughly in line with macro surprises.
Central Bank Liquidity
Global Central Bank Liquidity, gauged by the G4 Central Bank Balance Sheet, has slipped slightly as regional banking anxieties have faded. However, given where markets are, there is currently no clear signal of direction.
Turning to Fed Liquidity Measures, the aggregate has consistently declined but not to pre-Silicon Valley Bank levels. This is due to the new Bank Term Funding Program, which comes with relatively favorable conditions, for instance, compared to the Federal Home Loan Bank advances. Hence, banks might be toggling between these two discount windows.
Discussing Federal Reserve Net Liquidity – with the Treasury General Account and the Fed’s Reverse Repo facility in mind – all attention is on the Treasury General Account. It will require restocking via the issuance of new debt. As a result, the TGA will drain liquidity unless the absorption of the new debt aligns with a decline in the Reverse Repo. This means banks and money market funds must pull money from the Reverse Repo to acquire bonds from the Treasury.
There are two potential issues here:
First, the yield curve is extremely inverted, making buying longer-duration bonds with higher interest-rate risk and lower yields less enticing.
Second, if further Fed rate hikes instigate another departure from bank deposits moving toward money market funds, the Reverse Repo will likely also be on the receiving end of new money from these funds.