Macro Update: A multi-duration view of the evolving macro picture

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In our previous update, we dove into our continued bullish case for risk assets, based on the view that positive fiscal and monetary policy and liquidity dynamics would persist.

 

Since then, we have witnessed a significant shift in key data, which has altered our short-term expectations toward a more cautious outlook. We still maintain a relatively bullish medium-term stance.

 

That said, the distribution of probable outcomes remains very wide in the current regime, so the key to navigating this environment is to consume as much data as possible while observing what markets are and are not reacting to.

Growth

Many of the key business cycle growth indicators have been demonstrating relative weakness for much of 2025. Much of this is likely due to a slow and overly tight Fed, along with elevated policy uncertainty resulting from global trade tensions.

Both the ISM manufacturing and services PMIs have been painting a picture of continuing struggles for the business cycle.

Financial conditions and credit growth have been showing signs of strength for much of 2025; however, the Chicago Fed Financial Conditions Index has flattened out in Q3.

The labor market continues to weaken as the Fed is moving too slow with monetary policy – nothing out of the usual.

Inflation

Inflation is still sticky around 3% on a year-over-year basis, with 3-month and 6-month annualized readings trending higher, back above 3.6% and 3% respectively.

 

This suggests that inflation is likely to drift moderately upward over the medium term, which would be a headwind for the economy and markets, especially considering the increased hawkishness from the Fed.

On the other hand, TIPS yields appear to be pricing in further disinflation, signaling a significant disconnect between market expectations and the Fed’s expectations.

 

Because the Fed often operates on lagging data, while markets tend to be more forward-looking, it is more likely that the Fed is being slow to catch up to the reality that bottom-up economic weakness is a bigger risk than higher inflation.

Liquidity

Crypto and small equities are the highest-risk assets and thus have been the first to sniff out significant liquidity deficiencies in recent months.

US Net Liquidity has been the first to roll over; however, global liquidity appears to be following, which is a headwind for markets over the short to medium term.

The PBoC’s policy still looks very stimulative, judging by their recent liquidity injections; however, it doesn’t seem to be doing much for markets or global liquidity conditions.

On both a year-over-year and a 3-month annualized basis, US Net Liquidity is currently experiencing its quickest decline since 2022 and one of its larger declines on record.

 

This dynamic is mostly due to the government shutdown, as the Treasury General Account balance has been rising from tax receipts and bond issuance, while at the same time none of that capital is being spent back into the economy via government expenditures.

 

All of this has resulted in a drain on domestic liquidity conditions, which more sensitive assets like Bitcoin have been sniffing out for a month now.

Japanese yields have also been screaming higher, while simultaneously the dollar index has been breaking out, both of which are putting further negative pressure on global liquidity conditions.

Positioning

Positioning is at historically elevated levels. This is an important factor to take into account because the more overextended positioning becomes, the more reflexive the market becomes.

 

This essentially means that the more sellers there are, and the fewer buyers there are in a downward move, the more accelerated the move can be.

 

The NAAIM Exposure Index tracks managed equity exposure among active investment managers. Currently, the index is near 100%; however, it has made a modest move off its local highs in recent weeks.

The AAII Asset Allocation Survey currently has stocks above 70%, which is historically a very elevated level.

The S&P 500 PE ratio is near 30, which is relatively elevated compared to its historical mean.

Technicals

The spread between Bitcoin and the S&P 500 has historically been a relatively reliable leading indicator for significant trend shifts in stocks and broader risk assets, and it has been giving a bearish signal for over a month now.

The S&P 500 has made two lower highs and two lower lows in recent weeks, which is signaling that markets may be starting to price in the more bearish macro picture that has been rearing its head in the data.

Potentially the most important chart as of now is the probability of a Fed rate cut at the December 10th meeting. This chart plots the implied probability of a 0.25% cut according to Polymarket (blue) on the S&P 500 daily close price (black).

 

Ever since the October 29th Fed meeting, both series have been very highly correlated, which suggests that the majority of the returns in the S&P are likely being driven by rate cut expectations.

Outlook

The 1–3 month picture is currently leaning negative for risk assets.

 

  1. The shutdown drained US Net Liquidity.

  2. Global liquidity dynamics are negative, a couple of examples being the accelerated uptrend in Japanese yields and the bullish breakout in the dollar.

  3. The Fed has been moving too slow due to its reliance on extremely lagging indicators, along with the government shutdown and data blackout.

  4. Inflation is currently a headwind, with CPI trending higher on a 3- and 6-month annualized basis.

  5. Investor positioning has gotten very lopsidedly bullish in recent months, with credit spreads, earnings multiples, AAII stock allocations, and the NAAIM Index all at relatively elevated levels.

The 6–12 month outlook is still currently bullish.

 

  1. The current administration will likely pull as many levers as possible to run the economy hot, including deregulation and continued fiscal largesse, especially into the 2026 mid-term elections.

  2. The end of the government shutdown will likely stop the current bleeding of US Net Liquidity, which would have a positive impact on asset markets over a 3–6 month time horizon.

  3. There’s a high likelihood that we get a much more dovish and forward-looking Fed regime following the end of Powell’s term as chair.

  4. As a result of the above dynamics and factors such as continued growth in AI Capex, growth is likely to trend higher over a 3–6 month time horizon.