Production Bucks The Slowdown Trend

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of both the economy and financial markets in real-time. Here are the top developments that stand out to us:

i. Industrial New Orders for Durable Goods bucked the slowdown trend. New Orders for Industrial Durable Goods came in at 12.2%, a sequential acceleration from the last print. This print disappointed expectations with a monthly change of 0.4% versus expectations of 0.6%. Transportation Equipment has been the largest contributor to these moves, with a weighted year-over-year growth of 8.9%. Over the last year, Durable Goods New Orders have been in a downtrend though the latest print breaks this trend. We show the composition of growth below:

ii. Tightening liquidity has already taken effect, and Quantitative Tightening (QT) hasn’t even begun. Our market regime signals continue to confirm tightening liquidity. However, this isn’t just market discounting of future conditions. The shortage of Treasury bills and the Treasuries elevated cash balance have resulted in a drain on private sector liquidity. Particularly, reserve balances for commercial banks have been depleted. Our forecasting shows that while this pressure may temporarily abate, it will resume in earnest once QT begins. Not a promising outlook for pro-growth assets.

iii. Stagflation is the dominant market risk to manage. While mean reversion in inflation has been a handy tool for most forecasters over the last two decades, our inflation measures tell us there is a strong likelihood that we could be in a different environment. With the Shelter component (a typically sticky inflation rate) of CPI being the most significant contributor to current CPI, the potential for positive nominal growth, with mildly positive real growth and high inflation, is elevated. Markets are discounting a reversion to the mean; however, the question is, how will markets react if the new norm is between 3.5% and 4.5%? Our systematic strategies are primarily tilted towards inflation beneficiaries which we think is prudent in the environment.

This approach has served well thus far this year, with our ETF Strategy showing strong risk-adjusted returns relative to most markets:

Finally, we show our position monitor across all asset classes, showing our current in each asset. Note that position may vary from our ETF strategy due to the larger universe of securities used and the more extended history of signals:

Here is how our systems are positioned at the asset class level:

Looking for how to deploy these strategies in an ETF format? Click here to check out our Week Ahead note, where we lay out our exposure by ETF for this week. Stay nimble!