Markets perceived yesterday’s Warsh speech as hawkish, as he explicitly stated that the Fed’s focus should be predominantly on “prices” while the labour market remains consistent with “full employment”.

Furthermore, Warsh made clear that short-term interest rates remain the primary tool to achieve the dual mandate (and not any other measures: balance sheet tightening)

“Short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.”

Nonetheless, he retained his stance on Fed communication (and the end of forward guidance), which we believe is one reason the long end refuses to move down (rise in term premia).

But, as with other legacies of crises past, I believe that the practice has overstayed its welcome.

The following functionalities have been introduced in the past two months:

• US Macro Dashboard.

• US Custom Equity Sentiment Index.

• US Equity Markets Rotation Leaderboard.

• Global Cross-Asset Vol Dashboard.

• China and Japan Macro Dashboard.

Much more is in the pipeline to make life easier for investors and traders.

We are undergoing a generational shift in how our markets operate, and a prime example was yesterday’s opening remarks by Warsh, where “hike” was deliberately used to confuse the algos.

We are witnessing historical correlation breaking in real-time and markets adjusting to new narratives at a very fast pace, with “extreme” leverage leading to “overstretched” technicals.

Thus, to survive and generate alpha, we will have to evolve accordingly.

Our prime target remains to manage risk, and as a result we have beaten the benchmark in the past almost 4 years on all measures.

Let us begin today’s newsletter!

Global Macro!

“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.”- Warsh, Jackson Hole, 2026.

The bitter truth is that the Fed has been unable to fulfil its 2% inflation mandate for the past 65 months.

While one can blame persistent supply chain disruptions from black swan events, one can’t ignore that the Fed has been behind the curve.

Fed’s preferred inflation gauge, the PCE, came in at 3.7% YoY with core PCE at 3.3%.

Services PCE has been sticky (3.7% YoY), while the headline PCE is driven by higher energy prices.

Both Acyclical and cyclical PCE are now running at 3.3%+ YoY levels, indicating that inflation is broadening out across the spectrum.

We believe that if the Fed fails to act soon, we might see inflation expectations spiral out of control, resulting in a similar mistake to what JayPo made during the 2021 transitory episode.

Despite a 6%+ fiscal deficit, the US GDP grew by 1.5% annualised in Q2.

This is a shocking outcome, and one can conclude that if the government stops spending like a drunken sailor, US growth will collapse.

Furthermore, net exports were a major drag.

Core capital goods orders rose 0.2% MoM and 12.9% YoY.

Thanks to the gigantic AI capex, core capex orders continue to print at ATH levels of $86 billion (rounded).

German IFO export expectations jumped the most since 2020 (-2.8 to 9.6 in August); however, the business climate is still under 90.

We have been indicating that a swift recovery is underway in Germany, and the soft data supports the same.

We will now wait for the hard data to validate our thesis.

In Japan, core-core is the measure that excludes both food and energy.

Tokyo CPI came in at 2% yoY in August, with Core-Core at 2% YoY as well.

Post Tokyo CPI, markets are now pricing in a rate hike by the BoJ.

Equities!

First, the custom greed and fear index:

Read more

A few weeks ago, we showed how rising widening IG spreads for hyperscalers are raising investor concerns about ballooning off-balance-sheet debt and rampant circular financing in the AI ecosystem.

After Jensen announced raising $500 billion from Wall Street giants and backstopping 25% of the chip value, NVDA’s CDS has risen sharply.

This week, we saw Broadcom seeking to raise $100 billion via an SPV.

While the short-term stock price moves are noise (especially as we head into earnings), the credit markets are unhappy.

Undoubtedly, credit markets are nervous about the scale of circular financing, and it’s inevitable that the risk will spill over to equity markets sooner rather than later.

Furthermore, a new stealth model, Ox Alpha, was released this week, which, according to experts, is beating Sol and Fable on coding.

The astounding fact is that nobody knows who built the model.

The progress open-source models are making will create significant challenges for frontier models.

We continue to hover around YTD highs. Slight underperformance is due to high cash holdings and underperformance of China & India, which we believe will fade away before the end of the year.

Let us take a deep dive into the macro universe and comprehend the cross-asset price action.

US/Equities/Bonds/Gold/BTC/Oil/Dollar!

It was a data-light week in the US.

Industrial Production grew 0.2% MoM in July (slightly below expectations) v/s 0.3% MoM in June.

When we zoom out, semis and electronic components output has nearly doubled since 2017 while the overall industrial production has grown by just 3% since 2017.

We will now do a short analysis on the bond markets.

As of yesterday, the bond markets are pricing in roughly one Fed hike before the end of 2026 (22 bps).

However, at the short end, the 2Y is 59 bps above the EFFR (Effective Fed Funds Rate).

Historically, the next policy move was a rise in 12 of the 14, with a median of three months. Twelve-month yields were higher in 8, lower in 2, and barely changed in 4.

The short end is being pulled away from the EFFR as the bond market mutiny continues, and it’s screaming that it’s time to hike rates.

PS: January 1993 wasn’t the 2-year being wrong; it was the Fed being slow: the gap stayed open 14 months, and then the Fed raised 264bp in a year.

The curve is steepening, led by the long end.

While we are at two-decade highs for the long end, the term premium is still at 90 bps.

Note that pre-2007, the term premium was constantly above 100 bps.

So, we are witnessing normalisation after two decades of excesses.

Equities!

First, the equity sentiment index:

Read more

AI-related names across the board have generated generational wealth and continue to do so in pockets where earnings have been supportive.

We firmly believe in the power of AI and recognise that our world is evolving rapidly. Just as the internet did in 2000, AI will forever transform our lives.

Nonetheless, we believe the way AI rollout has been financed has reached questionable levels.

The circle jerk has reached unprecedented levels, and with just $53 billion of equity, purchase commitments of more than $980 billion have been made.

Furthermore, off-balance-sheet borrowings have ballooned, with “trillions” of debt now sitting in obscure SPVs across hyperscalers. As a result, corporate bond markets have also begun revolting.

We have been portraying for weeks now how the rise of Chinese open-source models will lead to a price war, and closed models will have a tough time competing.

The Silicon Data LLM Token Expenditure Index is now down a whopping 49% from the peak and has given up all the gains since the launch of Agentic AI.

Despite the recent price rise by Deepseek, it still offers the best value for money, as visible in the chart below.

We believe that as we approach the IPO’s of Anthropic and OpenAI, the time has come for investors to reassess their portfolios and the AI trade, especially the entities involved in circular financing.

We will discuss more later on.

Barring March, when we saw a 3.93% drawdown, all other months have generated positive returns this year.

We are up 7.48% YTD. Our high cash exposure, along with our China and India exposure, has weighed on returns (roughly 300 bps).

We remain confident in medium-term outperformance.

PS: We are announcing a price increase for our subscription plans, driven by significant new features and upcoming updates. Starting next 24 hours, the monthly plan will increase from $ 29.99 to $ 39.99, and the annual plan will increase from $ 299.99 to $ 399.

Existing subscribers will “NOT” see any changes and will remain on their current plans.

We have introduced the following features in the past few weeks:

• US Macro Dashboard.

• China and Japan Macro Dashboard.

• Cross-Asset Volatility Monitor.

• Custom Equity Greed and Fear Index.

Stay tuned as we have much more in the pipeline.

Let us take a deep dive into the macro universe and analyse cross-asset markets!

US/ Equities/ Bonds/ Dollar/ Oil/Gold!

US Macro Dashboard is available for the last 24 hours for all subscribers at: https://dashboard.marqueefinancebysagar.com

From tomorrow, it will be available only to paid subscribers, published every Saturday.

This week was data-heavy, with CPI/PPI/Retail Sales and NFIB releases.

Headline and Core CPI came bang in line with estimates at 0.1% MoM and 0.2% MoM, respectively.

The 3M annualised rates have collapsed, with the headline printing at just 0.5%, thanks to a plunge in energy prices (which may not last, given the situation).

Although 3M Supercore also moderated, the 6M annualised rates remain sticky, with the headline at 3.8% and the core at 2.4%.

Looking at the YoY change in components, motor vehicle insurance and used cars were the negative surprises.

Shelter remains sticky at 3.2% with OER stubborn at 3% annualised growth after wild swings in the past few years.

There were two shockers of the week.

The first was PPI: headline PPI came in at 0% MoM, 20 bps below expectations. Core PPI was 0.2%, 10 bps below expectations.

Same story as CPI: rolling-over fuel prices were the biggest downside contributors MoM.

Nevertheless, the YoY change is still running above 37% for both gasoline and diesel.

Retail Sales was the second biggest shocker of the week.

Headline Retail Sales came in at -0.6% MoM v/s exp of 0.1% MoM.

Retail Sales Ex-Auto came in at -0.35% MoM v/s exp of 0.2% MoM.

Retail Sales Control Group came in at 0.4% MoM v/s exp of 0.3% MoM.

Five of thirteen categories fell, and the two biggest were motor vehicles (-1.8%) and non-store (-2.2%).

In fact, non-store retailers, or online sales, recorded the second-biggest MoM drop since 2021.

Interestingly, the culprit was the slowdown in non-discretionary spending by high-income households.

We will watch this trend, as it could snowball into a bigger slowdown.

Real retail sales have been struggling, and there is further evidence of this.

While nominal sales were up +5.0% YoY, in volume terms, it was only up +1.7%.

We also got the NFIB Small Business Survey.

The Single Most Important Problem saw a mind-boggling change.

The Quality of Labor (Single Most Important Problem) saw the third-largest on-month rise in 40 years and jumped to 26.6%, up 800 bps.

Unsurprisingly, the labour market is undergoing significant structural changes as we discussed in detail last week, and that is now visible in the data as well.

One must note that the labour market is the most lagging indicator.

The other NFIB chart that suggests tightening in the labour market (not the actual tightening, but the “quality” component/requisite skill) is “Jobs hard to fill.”

Jobs Hard to Fill jumped from 31.8% to 36.9%.

Despite the state of the labour market and high inflation, wage growth has been moderating, as visible by NFIB compensation plans.

Equities!

The Greed and Fear Index is firmly in greed with a reading of 70.

The good part for the bulls is that we are not in the “extreme greed” section.

SPX closed at a fresh weekly ATH.

Our measured target from the breakout zone was 7850.

Read more

It began with US Treasury and BOJ interventions in the FX markets, which led to a dramatic fall in USDJPY. As the extent of the intervention was revealed, the FX pair fell further on Monday.

As of 4th August 2026, the squeeze transpired in FX and Rates markets.

Then, as news of the imminent opening of the Strait of Hormuz began to circulate, sentiment turned, and we witnessed a massive short squeeze in US equity markets.

It accelerated, and we got a complete cross-asset melt-up and a massive risk-on rally that included commodities and precious metals.

Speculative activity, along with “upside” hedging demand, led to an all-time high in S&P 500 call volume.

We were on the right side of the trade; however, our high cash allocation (12.5%) is responsible for the very slight underperformance against the benchmark.

PS: We are announcing a price increase for our subscription plans, driven by significant new features and upcoming updates. Starting August 15th, the monthly plan will increase from $ 29.99 to $ 39.99, and the annual plan will increase from $ 299.99 to $ 399.

Existing subscribers will “NOT” see any changes and will remain on their current plans.

Let’s take a deep dive into the macro universe and analyse the cross-asset price action!

US/Equities/Bonds/Gold/Oil/Dollar!

It was a data-heavy week in the US.

Our favourite cyclical indicator was released early this week. ISM Manufacturing was a massive beat, as the headline indicator came in at 55.6 vs the expected 53.9.

While it was a broad-based rise across components, the most encouraging print was the Employment component.

Notably, Employment PMI was the highest since August 2022 (a 4-year high).

Long-term readers are aware that New Orders Less Inventories is the gauge we track most closely, as it leads the headline index by a few months.

Over the last few months, we have been confident in a cyclical acceleration as the spread had risen.

However, it seems the spread has now stalled, which can lead to a likely topping out of the headline ISM index.

ISM Services came in at 54.1 v/s expected 54.5.

The employment component came in softer than expected (in contraction zone), likely due to the end of the FIFA World Cup.

Furthermore, the prices paid rose again, which isn’t good news for the CPI.

The CPI is highly correlated with the ISM Prices Paid, and the trend is once again upward, suggesting CPI might rebound (with a lag).

Labor Market!

• ISM Employment Indices: Undoubtedly, led by AI Capex, the Manufacturing job market is witnessing a renaissance, and thus ISM Manufacturing Employment has been surging lately. On the contrary, the Services Employment PMI has been struggling, and we will have a clear trend as the FIFA World Cup dominated the last few months.

  

• JOLTS-1: Under JayPo, the Fed’s favourite labour market indicator was Vacancies/Unemployed. The indicator bottomed out in December last year, which was also when we predicted a cyclical recovery. The labour market has since recovered, with the V/U ratio climbing back to 1.04. The Quits Rate is stable at 2%.

  

• JOLTS-2: Labour market remains in the low-hire, low-fire mode with the layoffs rate at an abnormally low level of 1.1% and the hires rate at 3.4%. Both the hires and layoffs rates remain trendless despite the narrative of AI-led productivity gains.

  

• NFP-1: July’s payroll came in as a shocker with a negative 23k print. However, the Unemployment Rate fell to 4.1% despite a negative print and stark revisions. The reason was the Labour Force Participation Rate (LFPR), which fell to 61.9%. Digging further, prime-age participation fell for both men and women.

  

• NFP-2: When we look at the sectoral contribution, the end of the FIFA World Cup and local government education were the two biggest reasons which led to job losses across the Leisure & Hospitality and Education sectors, respectively. Construction and manufacturing continue to report job gains despite a sluggish overall job market, suggesting a cyclical acceleration.

  

• NFP-3: The revisions continue to trend lower. Yesterday’s revisions knocked off -103k jobs from both May and June combined. In a shocking stat, 19 of the last 24 releases have revised the prior two months.

  

Read more

It was an unprecedented week marked by chaos on Wall Street and a disaster at the FOMC.

Kevin Warsh, who was supposed to be “hawkish”, is turning out to be an epic failure.

The Fed had been communicating with markets in a subtle way post-GFC, and thus the element of certainty had been baked into markets despite overall uncertainty marked by trade wars, geopolitical tensions, and murky domestic politics.

Warsh has decided to do a complete overhaul, which entails broken communication, fewer Fed meetings, and “letting” the markets judge the Fed’s reaction function based on economic data.

We will discuss Fed policy in detail later.

Wall Street witnessed chaos this week as the 24-year-old Leopold Aschenbrenner’s Hedge Fund, “Situational Awareness”, blew up and all the “leveraged” positions were liquidated in a single block.

We modelled the fall of Situational Awareness. At the end of June, the hedge fund had $40 billion and ran a gross leverage of 400% in its L/S portfolio.

According to our model, on 29th July, the fund had just $8 billion left, wiping out $32 billion, led by losses of 42% in the long leg and 15% in the short leg.

Poor risk management is evident, as the fund didn’t close the positions while down 62% on 16th July, per our model.

Notably, this will be the first time in history that a big HF blew up despite calmer headline indices (SPX down just 2% from the top and VIX below 20). This indicates that the whole AI rally was running on extreme leverage.

We updated the July momentum rout, and the results are astonishing.

Only four months since 2000 were worse: Jan 2001, Nov 2002, Apr 2009, and Jan 2023 for momentum unwind; the momentum crash was the 13th-largest ever (since 1927).

Despite a -12.6% cut in MTUM, RSP was up +1.1%, and value rose 3.9%, indicating a gigantic rotation in the markets.

As promised, we are now outperforming the benchmark by 11 bps. In fact, during the semis meltdown this week, we were outperforming the benchmark by 100 bps at one point.

We closed at YTD highs yesterday with a 6.45% return compared to 6.34% for the benchmark.

Considering what happened on Wall Street this week, we have always maintained prudent risk management.

As a result, we have avoided major drawdowns in the past 3.5 years (since the inception of the PF) and have a significantly superior risk profile compared to the benchmark.

PS: We are announcing a price increase for our subscription plans, driven by significant new features and upcoming updates. Starting August 15th, the monthly plan will increase from $ 29.99 to $ 39.99, and the annual plan will increase from $ 299.99 to $ 399.

Existing subscribers will “NOT” see any changes and will remain on their current plans.

US/Equities/Bonds/Oil/Dollar/Gold!

The Fed’s preferred inflation gauge has been the PCE (which will likely change as per Warsh).

For the first time since June 2020, headline PCE deflated MoM in June. It came in at -0.1% MoM, meeting expectations, and the core PCE came in at +0.1% MoM, missing expectations by 10 bps.

Lower gasoline prices MoM were the reason for the fall.

Nonetheless, the YoY numbers were hot, with Core PCE remaining elevated at 3.29% YoY.

When we break down the PCE into components, we understand the reasons for the three dissents at this week’s FOMC.

The acyclical PCE has zoomed past the cyclical PCE to 3.45%, a rare event.

This also indicates the supply-side pressures we have been witnessing since Trump’s inauguration (tariffs, geopolitical tensions, etc.).

Furthermore, the core PCE is proving sticky.

US Q2 GDP came in at 1.5% and below expectations of 2%.

The silver lining in the print was the AI capex, which kept the GDP afloat.

On the contrary, the irregular/volatile components of the GDP (Trade, government and inventories) dragged down the print.

Furthermore, private domestic demand came in at 3.9%, the strongest since 2023.

Nevertheless, the most worrying data point was the savings rate, which plunged to 2.7%. Notably, the savings rate has been this low for only 32 of the 810 months since 1959.

Since real incomes (adjusted for inflation) haven’t been growing, consumer spending is being funded by the savings.

While the headline durable goods missed expectations (0.3% v/s expected 1.6%), the core capital goods orders surged 12.5% YoY to $85.1 billion, led as expected by the AI capex boom.

Now let us discuss the Fed policy.

FED!

Going into the policy, the market was highly uncertain, with the probability of a rate hike at 34% just one day before the FOMC decision.

Last month, we wrote that with the end of forward guidance, volatility would rise sharply in the bond markets, ultimately leading to higher cross-asset vol.

The bond markets were calm before the presser, but the presser woke up the bond vigilantes, as Warsh's whole presser was about the bond markets doing the tightening job instead of the Fed.

As per Warsh:

“The first is a very notable change since our last meeting 42 days ago: nominal and real yields are materially higher across the Treasury curve. In fact, some of the increases in market interest rates between FOMC meetings are among the most significant in the last two decades, ranking around the top decile or so.”

We verified Warsh’s claim, and the readings are for you to look at:

This window ranks in the top third for nominals (10Y at the 68th percentile) and in the top fifth for reals (5Y at the 82nd percentile) — measured to the intermeeting peak, real-yield rises reach the ~85th percentile.

Thus, in fact, it was not the top decile, but only close for the real yields.

The biggest bomb that Warsh released and which, according to us, spooked the bond markets was the following:

I’m looking at a broader set of inflation data than PCE. So, without sort of fully revealing my cards, I’m trying to understand like my colleagues, what’s the underlying generalized change in prices that are happening in the economy.

If inflation measures change and the Fed's measures align with their 2% inflation target rather than PCE (which is running significantly higher at 3%+), that would entirely change the game for the bond market.

In other words, the Fed loses the credibility it has long built.

Warsh, in strong words, emphasised that there will be no forward guidance, and thus we believe the Fed’s communication is completely broken now.

Trying to provide a lot of assurance, trying to tell people exactly what we’re going to do, offering forward guidance with clarity, as if we’re tying our own hands behind our back. Well, in crisis mode, that strikes me as a very prudent policy. But in more benign conditions, it strikes me as worth revisiting.

Market participants are learning to play the ball, not the referee—and market prices will continue to respond in the direction and magnitude they see fit.

Well, if there is nobody to assure markets and if markets react in real time, Houston, we have a problem.

“Markets are reacting in real time. In the period ahead, we’ve got important decisions to make about the policy rate. Markets in the intervening period, I think, have quite a bit of decisions to make.”

So, we’re not going to be constrained by market prices. We’re not going to be constrained or take verbatim from what the market’s doing.

While Warsh stated market prices won't limit them, we think the bond markets will penalise the Fed for this lax approach.

Equities!

Our custom greed-and-fear index dropped to 43.2 on the 29th, solidly in Fear and then rebounded sharply to 54.

If you believe our index, then it’s easy to conclude that:

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Last week, credit markets cracked as the IG market has been bombarded with hyperscaler debt issuance since the beginning of the year.

Spreads have been blowing out as debt markets push companies to slow capex.

Furthermore, the Credit Default Swaps (CDS) on the most indebted companies in the tech space, ORCL and CRWV, have reached multi-year highs.

Furthermore, in the last fortnight or so, we have seen the large hyperscalers' CDS also rising, indicating that markets are now genuinely worried about the ROICs (especially after Chinese open-source models).

We believe that last week’s Hugging Face hacking incident, and the introduction of a new AI “Kill Switch” bill, indicate that we need a “worldwide” regulatory framework for a safe and secure development of AI.

We will not be surprised if G20 countries make a joint announcement in this regard in the near future.

We are announcing a price increase for our subscription plans, driven by significant new features and upcoming updates. Starting August 15th, the monthly plan will increase from $ 29.99 to $ 39.99, and the annual plan will increase from $ 299.99 to $ 399.

Existing subscribers will “NOT” see any changes and will remain on their current plans.

Since 1st January, the trade book stats are as follows:

We took only 30 trades (18 closed, the rest open) due to extremely volatile news-driven markets.

The PF is up 5.03% YTD against 5.29% for the benchmark.

Let’s take a deep dive into the macro universe and analyse the cross-asset markets.

Macro!

We have been working hard to fine-tune the US macro dashboard, and we have been successful.

We also have real-time data factored into the dashboards; as a result, we have been witnessing some volatility, which has now been taken care of.

The recession gauge is fairly stable/low at 17%. The labour market is strong, while inflation has peaked.

We are in Quad 2, which is nothing but the “Goldilocks” scenario.

On the flip side, inflation has been falling faster than growth is fading.

Note that these figures might change after next week’s PCE and GDP reports, but the trend remains the same unless we get a further rise in crude prices.

We have been writing for the past few months that ZEW will mean-revert, as it has in previous episodes of geopolitical turmoil.

We expect the German “manufacturing” activity to pick up if there is no further escalation in the Middle East.

The UK Headline CPI came in at 2.6%, a 15-month low (10 bps lower than estimates).

While the Core CPI also came in at 2.6% YoY, Services CPI was sticky at 3.6% YoY.

There was softness in MoM numbers in Petrol, Diesel and Clothing.

However, when we look at the YoY data, Transport still leads while Clothing was subdued due to higher discounts and food was dragged down by chocolate prices.

We also got the UK’s labour market data.

After significant deterioration in the labour market last year, there are signs of stabilisation in the UK’s labour market.

The Unemployment Rate came in at 4.9%, a tad below estimates (5%) and wage growth came in at 4.3% (signs of bottoming out).

What we closely track is the real wage growth (adjusted for inflation), which is holding out but is on the verge of turning negative.

In 2022, negative wage growth didn’t create havoc because consumers were flush with the excess savings from the pandemic, but today, negative wage growth, if it transpires, will be a drag on consumption and will lead to a recession in the UK.

We also got the Claimant Count and Vacancy ratio.

Both indicators were stable after the drastic move last year.

There are no signs of concern yet, but we will keep a close track of the indicators to gauge the health of the UK’s labour market.

Our Japan Macro Dashboard is also ready.

The land of the rising sun is witnessing strong growth momentum led by the AI boom (buoyant exports) and resilient domestic consumption.

Furthermore, loose fiscal policy and negative real rates (despite BOJ hikes) are supporting the economy.

Equities!

We have built the proprietary US Greed and Fear, aka the Equity Sentiment Index.

It is a bit different from your traditional CNN Greed and Fear index and other indices, as it doesn’t switch frequently to the extreme greed and fear readings.

It takes into account 7 inputs, and as per the latest figure, we are below the median, and the reading is neutral.

We are still not in the “fear zone,” but we are now not in the greed/euphoric zone due to the momentum meltdown in the last few weeks.

While value (IVE) has been up 2.5% since 1st July, the MTUM/SPY is down 6%.

Even small-caps have outperformed the growth factor.

It has been absolute carnage out there, especially for the leveraged retail crowd.

Everybody has been long the semiconductor trade, which is now on the verge of entering a bear market.

Unsurprisingly, the current market setup is remarkably similar to 2022 when the tech bear market created opportunities in other sectors.

We are positioned to maximise this opportunity.

XLE, XLI and XLB have been the top performers (excluding XLK as it was all semis there).

Our positioning as of today is as follows:

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According to OpenRouter, the weekly token share of “cheap” Chinese models has now surpassed 50% amid an insane rise in usage of Chinese open-source models.

This has been possible due to the electricity infrastructure available in China. According to reports, China's power consumption hit a record 1.5138 terawatt-hours on July 10th.

Notably, the power load has increased by 150 gigawatts since the beginning of July (equivalent to Japan's entire load).

Furthermore, this week Moonshot released its most advanced model, Kimi K3, which stunned the whole world.

On various parameters, Kimi K3 scores higher than the most advanced models of OpenAI (GPT 5.6 Sol) and Anthropic (Fable 5).

There will be significant repercussions if Chinese models continue to advance at the current pace.

Nevertheless, we believe that higher AI adoption in the US will ultimately benefit US AI infrastructure players, especially cloud players such as AMZN, MSFT, and GOOGL.

It’s hard to predict what will transpire in the coming years, but one thing is certain: we are at an inflexion point in the history of technological advancement of the human race.

The overheated semi-space has witnessed carnage in July as the gigantic levered trade unwound, beginning in Korea where there were systematic margin calls across the retail crowd.

As a result, momentum has witnessed a historic rout.

The −11.4% momentum v/s SPX move sits at the 1.3rd percentile — 17th-worst month out of 1,193 since 1927.

We are announcing a price increase for our subscription plans, driven by significant new features and upcoming updates. Starting August 15th, the monthly plan will increase from $ 29.99 to $ 39.99, and the annual plan will increase from $ 299.99 to $ 399.

Existing subscribers will “NOT” see any changes and will remain on their current plans.s

Since early May, everything else sold off, and a parabolic rally began in the Semiconductors (global). As a result, we underperformed; however, we were confident that when the market heals, we would again outperform.

Our underperformance has now reduced to 9 bps.

PS: Benchmark is 60% MSCI ACWI and 40% BBG Global Aggregate.

Our target remains to deliver double-digit returns this year while outperforming the benchmark.

Let's take a deep dive into the macro universe and comprehend the cross-asset moves.

US/Equities/Bonds/Oil/Dollar/Gold!

We received a whole host of macro data in one of the busiest weeks of the month.

The CPI came as a pleasant surprise, with the headline CPI at -0.4% MoM v/s expected -0.1%.

On the other hand, Core CPI came in at 0% MoM v/s expected 0.2%.

The 3 Month Annualised headline CPI also collapsed to 2.78% while the Supercore CPI (which has been sticky) also moderated to 2.2%.

When we dig deeper, YoY inflation in gasoline, energy, and airfare is still in double digits.

However, softness is visible in Used Cars and Trucks (likely due to weak demand) and medical care commodities.

PPI also had a downside surprise, with the headline coming in at -0.3% MoM vs the expected 0%. The core PPI came in at 0.2% MoM v/s expected 0.3%.

The June story was all about energy as it came in at -6.4% v/s +8.42% MoM.

The starkest data in PPI was the PPI-final demand goods MoM, which crashed from a multi-year high of 2.3% in May to -1.4% in June.

The wild swings, as we know, were due to volatile energy prices.

We also got the retail sales this week.

Headline retail sales came in at 0.2% v/s expected 0.2%.

Retail Sales ex-auto came in at -0.2% v/s expected -0.1% (slightly weaker), while Retail Sales control group came in at 0.5% v/s 0.5%.

When we analyse the YoY data, the rise is entirely due to the “inflation” effect, as the nominal figure is higher, while real retail sales have been a dampener.

Real retail sales have been below the “long-run” trend since late 2023, indicating a broken US economy (K-shaped) due to persistently higher inflation since COVID-19.

We also received the NFIB data.

The headline number came in stronger than expected at 97.4 v/s expected 95.7.

Interestingly, “Inflation” came in at the top as the single most important problem, with 21.2% of businesses reporting it.

Equities!

We mentioned last Saturday that

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Furthermore, as costs in US Frontier models become unbearable, Chinese LLMs are gaining market share at an unprecedented pace.

In a stunning development, token usage among the top 20 Chinese AI models surged by 113% MoM to 98 trillion tokens in June, compared with a 43% jump in US model token usage to 53 trillion tokens.

As portrayed weeks ago, the competitive advantage of Chinese models will trigger a price war among frontier US models, which will likely be the inflection point in the AI story.

As a result, we believe we are at the forefront of major announcements from US hyperscalers in the upcoming earnings season.

We have already seen ORCL’s debt rating downgraded to BBB- (just one notch above junk status). If capex is not moderated, hyperscaler stocks will likely enter “severe” bear-market territory.

We also launched our US macro dashboard this week.

It uses more than 60 proprietary indicators across labour, housing, inflation, and growth to devise the growth/inflation regime and the recession probability.

Whenever the recession gauge rose above 50%, a recession was followed in the next 5-10 months.

Note that in all previous recessions (ex-COVID), the NBER declared a recession 3-5 quarters after the recession began.

Since our model places significant weight on the housing sector, there was a false call in 2022.

We investigated the issue and added a new variable to the model (fiscal impulse).

The calculations remain proprietary; however, one can view the fiscal score, along with the others, in the dashboard.

PS: Note that Growth tells you what the goods/activity side is doing, whereas Growth axis tells you where the overall cycle classification stands once labour gets its vote. When the two diverge sharply, watch labour — if it rolls over and converges downward, the axis follows, and the regime flips.

Link to the dashboard: https://dashboard.marqueefinancebysagar.com

We are also building European, Chinese, and Japanese dashboards to help us join the dots and create a global macro dashboard to gauge economic activity.

The US dashboard will be free for all subscribers until 15th August. After that, it will be reserved for paid subscribers only.

We are announcing a price increase for our subscription plans, driven by significant new features and upcoming updates. Starting August 15th, the monthly plan will increase from $ 29.99 to $ 39.99, and the annual plan will increase from $ 299.99 to $ 399.

Existing subscribers will “NOT” see any changes and will remain on their current plans.

We are up 5.54% YTD, and barring March, we have had all positive months this year.

Note that we hit YTD highs of 6.5% on Tuesday but gave up the gains amid a broad-based sell-off midweek.

We expect to deliver significant alpha and double-digit gains this year as well.

Let us now take a deep dive into the macro universe and analyse the cross-asset price action.

US/Equities/Bonds/Gold/Oil/Dollar/BTC!

ISM Services came in at 54, in line with expectations.

Overall, it was a strong print with several green shoots.

ISM Services Employment entered expansion territory (>50) for the first time in a long time.

We believe this was partially due to the FIFA World Cup.

Nevertheless, the trend seems to be up.

ISM Services Prices Paid have cooled significantly from its peak; however, remain elevated.

Considering the downtrend, we expect the CPI to peak in the next 2-3 months.

Consumer credit was a big miss, with a -$0.2 billion print vs an expectation of +$17.5 billion.

Revolving credit fell $5.3bn (−4.7% annualised, the biggest drop since Nov '24) while nonrevolving (auto + student) added +$5.1bn (+1.6%).

Clearly, higher credit card APRs along with higher auto/personal loan rates are hurting consumers, and thus we are witnessing tepid demand.

Furthermore, YoY growth remains below inflation, so real consumer credit has been flat or declining, leading to the conclusion that the economy is K-Shaped.

Equities!

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Although there can be periods of dislocation and broken correlations, markets in the medium- to long-term are mean-reverting (long-time readers know that we are big believers in mean reversion).

Markets have perceived Warsh as uber-hawkish since his first FOMC meeting last month. While there were sufficient reasons for the Fed to be hawkish, we now believe that certain inflationary pressures have eased.

However, because Warsh has not provided any forward guidance, there is an opportunity.

We will discuss this in detail later.

For the American friends reading the newsletter, Happy 4th of July, everyone.

As the US celebrates its 250th Independence Day, Iran is mourning the death of Ali Khomeini with a week-long holiday in Iran.

We believe there has been significant progress in the talks, as representatives from both countries met in Doha this week.

We have been optimistic that our PF would outperform the benchmark over the last month.

We are now at YTD highs, and the underperformance has been reduced to less than 70 bps (the peak underperformance was 250 bps).

Let us take a deep dive into the macro universe and comprehend the cross-asset moves.

US/Equities/Bonds/Dollar/Gold/Oil!

Our favourite indicator for tracking the cyclical economy is the ISM Manufacturing Index.

ISM Manufacturing PMI came in at 53.3 vs the expected 53.9.

Overall, it was a stable report with some green shoots.

While the prices eased off significantly (73 v/s 82.1 in May), the Employment component is finally on the verge of crossing 50 (expansionary territory) after 33 long months.

In contrast, New Orders Less Inventories, a metric we monitor closely, declined from its recent highs, indicating that the ISM Manufacturing PMI may stay near current levels in the upcoming months.

We also received a significant number of data points to gauge labour market activity.

• JOLTS-1: The Fed’s preferred measure for tracking labour market activity has been the Vacancies/Unemployed Ratio. The ratio bottomed out late last year (<1), which also marked an inflexion point in equity market internals. The ratio is now 1.04, indicating more vacancies than unemployed people.

  

• JOLTS-2: While the Quit Rate and Hire Rate have remained stable at 1.9% and 3.3%, respectively, the Layoff Rate saw a small 10 bps uptick. Nevertheless, we remain in a No-Hire, No-Fire labour market.

  

Before we proceed to the highlight of the week, we believe that the labour market is undergoing a structural change due to multiple factors:

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Before we start this week’s newsletter, our thoughts and prayers go out to the beautiful people of Venezuela. May God grant them strength to recover from the devastating disaster they experienced this week.

It has been a tumultuous H1. Undoubtedly, the volatility this year, along with the newsflow, has been treacherous and surpassed last year’s liberation day moves.

Note that the liberation day was predictable, and we entered and exited the markets at the right time last year. However, this year was way more challenging.

Nevertheless, we navigated successfully after initial hiccups.

Before we begin, we would like to highlight the multiple risks we see in the financial markets today:

• For the last few weeks, we have been raising concerns about the crumbling AI story as the token price index has fallen, and there have been no signs of the promised productivity gains, with companies burning through their annual AI budgets within months. Furthermore, the data demonstrates that the users are now shifting to “cheap” Chinese models. On OpenRouter, the share of Chinese models is now approaching more than 50%. There are also rumours that certain Chinese companies are selling the Claude tokens at a 70-80% discount.

• There have been rumours about OpenAI delaying the IPO as US markets crack post the giant liquidity-sucking SpaceX IPO. Furthermore, the US government has taken steps to prevent the release of the most advanced models. The Fable 5 fiasco and the latest news about ChatGPT create an uncertain environment and pose a risk to the AI story.

• The earlier episodes of euphoria and bubbles were characterised by an explosion in the margin debt. However, this cycle is different, as leveraged ETFs have replaced margin debt. While Levered/Inverse ETF AUM in the US has doubled since the March 26 lows, growth in Asia has been astounding, with the launch of the world’s largest single-stock levered ETF (SK HYNIX). The rebalancing of ETFs amid elevated volatility is one risk we can’t ignore.

  

• With data centres and trillions of dollars in hyperscaler capex sucking up all the available memory (DRAM/NAND) on the planet, manufacturers of computer accessories are feeling the heat. As memory prices rose by 80% within months, AAPL and MSFT raised their product prices this week. While we were of the view that inflation might peak as oil prices fell more than 40% from their highs, sustained “memory inflation” might keep prices buoyant and thus maintain the Fed's hawkish stance.

  

• The last one, overshadowed by geopolitical headlines, is the ongoing turmoil in the Private Credit sector. We got another shocker this week as Apollo capped their redemptions. If the problems compound in the illiquid private credit space, it could create ripples across assets. Nonetheless, we don’t believe there will be a systemic crisis similar to the GFC, as banks are well capitalised.

  

These were some of the risks that we believe are worth looking at and can lead to dislocation in the financial markets, as the markets (equity and debt) have been riding only on the AI theme, with the most vulnerable sector leading the equity rally in the past few months.

We narrowed the gap with the benchmark and are happy to be at 5% YTD returns, considering the turbulent H1.

The underperformance has now reduced from 250 bps to 100 bps.

Furthermore, as we have been communicating, our underperformance is due to only two reasons:

• The shallow global equity rally led by only a few semi names.

• Chinese underperformance.

While nature has been healing with respect to the first, we expect the second to heal as well over time.

Before we move ahead, as the customary tradition (at the end of H1), we would like to present the trades that we undertook since December and have closed them.

Total trades were considerably less due to elevated volatility. We undertook 14 trades (closed, many are still open), out of which 65% resulted in profits (hit ratio).

We heavily deployed cash in the last week of April and also nailed the bond rally twice (TMF trades).

Let’s do a deep dive into the macro universe and analyse the cross-asset price action.

Macro!

We began with the most important data release of the week.

The Fed’s preferred inflation gauge, the PCE, came slightly softer than expectations.

The headline PCE came in at 0.4% MoM v/s exp 0.5% MoM.

The core PCE came in line with expectations at 0.3% MoM.

We can decompose the PCE into the Cyclical Core and the Acyclical Core PCE(depending on the item’s sensitivity to the business cycle).

Both the cyclical and acyclical PCE have been trending upward.

In fact, the Acyclical core PCE (financial services, clothing, healthcare, etc.) rose to its highest level since 2022, indicating that “services” inflation is sticky.

When we dig deeper, the financial services (thanks to higher equity markets) for the second month in a row is putting significant upward pressure on the PCE.

Overall, it was a broad-based rise.

After a long time, we also want to update on the Housing Cycle in the US. As macro watchers, we are big believers in business cycles, and thus, the foundation lies in the housing cycle.

Housing is: Permits→ Starts→ Units Under Construction→ Completions.

This is roughly a 24-36-month cycle, depending on whether it's single-family or multifamily housing.

Post-COVID, we saw institutional capital flooding the multifamily housing sector, which led to an unprecedented boom in housing.

With JayPo's rise in interest rates in 2022, single-family housing was the first to suffer, as it was highly impacted.

As we can see, permits for single-family housing have yet to recover and remain below pre-COVID levels.

On the other hand, multifamily housing seems to have bottomed out, and any recovery will first be visible in higher permit activity.

With the backlog cleared and permits stagnant, Starts for Multifamily plunged to one of the lowest levels (another reason was higher costs due to the war).

The 2023/2024 period was marked by a “housing recession” as activity slowed considerably. As a result, Units under construction have collapsed by 35-40%.

While the activity has stabilised, there are no signs of any pick-up.

The Housing cycle’s most critical component after home sales is employment.

The higher the completions and the more the backlog reduces (as units under construction fall), the more layoffs there are across the housing sector.

Completions have hit a multi-year low in single-family housing, while multifamily saw a bump but remains stagnant at current levels.

The activity in the housing sector, which seemed to have bottomed out pre-war, is still sluggish.

In fact, if we compare the absolute numbers, residential fixed investment is $1.176 billion, below the 2022 peak. The mind-boggling hyperscaler capex has led to information equipment &software investment surpassing the residential fixed investment by an enormous margin.

However, we believe that if the US economy continues to fire, the housing cycle will revive. We remain optimistic about a housing recovery.

In Germany, the IFO business climate index, which plunged post the geopolitical developments in the Middle East, recovered slightly.

As commodity prices fall sharply, we expect soft data to rebound swiftly, as transpired after the 2022 crisis.

In the land of the rising sun, the Tokyo CPI accelerated to 1.7% in June.

The core CPI, which excludes volatile fresh food prices, grew 1.6% YoY, up 30 bps from the prior month. Furthermore, Core Core CPI (which excludes both food and energy) rose 1.9%, indicating that the inflationary pressures are rising.

When we dig deeper, the disinflationary impact of Fuel, Light and Water charges has reduced significantly. Note that the disinflation was due to government subsidies.

Equities!

Since the market bottomed out on 30th March, it has been a one-way ride up led by momentum and growth stocks.

MTUM and IJR relative to SPY have seen huge outperformance, while value and small caps have been crushed.

However, since 15th June, we have seen small caps outperform the SPY. As a result, IJR outperformance relative to SPY has now reached 4.5%+.

On the contrary, Momentum has faltered after a stupendous run.

Equity Allocation (as on 25th June):

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We might be on the cusp of a historic regime change at the world’s largest central bank.

If Kevin Warsh executes on what he promised at his first-ever FOMC, the way we process macro data and the way the market reacts to the Fed & the incoming macro data will undergo a sea change.

In fact, not only will the macro framework at Marquee Finance By Sagar will be tweaked, but the entire category of macro hedge funds will have to replace their macro models to fit in the new regime.

We will later discuss in detail the FOMC overhaul planned by Warsh.

As the “Treaty of Versailles” was signed by both the US and Iranian Presidents, with details emerging in bits and pieces, the event will be remembered in the history books forever.

For us, unsurprisingly, a new regional power has emerged post-war, with far-reaching consequences.

On 11th April, in “Million Dollar Question”, we mentioned the following to our paid subscribers:

Although we were wrong about the ground invasion, we got the oil below $80 correct. This was at a time when oil was oscillating above $100, and the calls were out for $200.

Since the beginning of the war, we have only twice been wrong about the direction of cross-asset markets.

• Once, at the beginning, when we thought that the war would be over within days (due to low ammunition, etc.).

• Second, when we thought the ceasefire would not hold, and we would get a ground invasion.

Note that we correctly predicted the moves in the bond markets. Even bought bonds (duration) at the bottom twice.

However, around 16th-17th April, we became confident in the upmove in the equity markets and positioned accordingly.

Nevertheless, we still underperformed.

Reason?

Check this chart we prepared using Claude (data from Koyfin)!

More than 135 stocks are up >60% in the MSCI ACWI Index since the beginning of the year, and no prizes for guessing: more than 80 of them are semis/hardware.

In fact, the list contains the top 10 stocks by return, and all are semiconductors/hardware (mostly in Korea/Japan).

The portfolio is slightly down this month; however, it is near YTD highs (the first column shows annual returns/YTD, followed by monthly returns).

The Chinese equities have been a major drag on the PF with roughly 80-90 bps of underperformance attributed to China.

However, we remain confident and are in a wait-and-watch mode on China.

PS: We are in the process of building a high-quality macro dashboard. Using AI, we are automating the framework and indicators we use for asset allocation.

MacroMicro uses a “very” simple dashboard to track the cycle.

We will further “significantly” enhance the dashboard using our indicators and, as usual, join the dots.

The “GLOBAL” Macro Dashboard will be an expensive product ($1000+ One time), and the paid subscribers will get a significant discount. It might take weeks to unveil it as a lot of work will go into it with extensive backtesting. Note that it will also use technical analysis as a supplement to recommed the asset allocation.

Let’s do a deep dive into the macro universe and comprehend the cross-asset moves.

US/Equities/Bonds/Dollar/Oil/Gold!

To begin with, even before the Warsh presser, in which he outlined the future of the “new” Fed, the markets were surprised by the modification to the FOMC statement.

The FOMC statement was only 114 words, a whopping 60% shorter than the previous statements.

There was no division (a positive surprise) as the Committee approved the statement by 12-0.

Furthermore, there is an unequivocal commitment to deliver price stability.

Warsh emphasised the 2% goal, which the Fed has failed to achieve since the COVID-led inflationary shock.

According to the dot plots, the Fed hopes to achieve the 2% goal only by 2028 (and we believe that only if there is no other black swan/geopolitical shock).

As the asset price inflation continues at an unprecedented pace, and frequent supply shocks rock the global economy, it’s challenging to achieve the 2% goal.

Interestingly, Warsh made a significant distinction about the restrictiveness of the monetary policy.

“And if I look at the housing markets as one example, Fed policy isn’t the single determinant of the state of the housing market, but broadly I would say there Fed policy appears to be somewhat restrictive.”

While he believes the policy is “somewhat” restrictive in the housing market, he takes the opposite view regarding the equity markets.

As someone who has been analysing macro data for a long time, we always watch out for trends in the data (long-time subscribers will concur with this view).

The Fed Chair mentioned the same, and according to him, the labour market is in a healthy position.

“Trends matter more than data points. What’s happening over three or six months matters more than any one data point, any one data release. And I’d say the jobs data has been moving in a good direction.”

Regime Change!

In Warsh’s own words:

What we’ve given markets is a new chapter for the central bank, some fresh thinking.

With 100% certainty, we can predict that the brain behind the Fed revamp is none other than Treasury Secretary Scott Bessent.

Bessent has openly expressed his views on the significant reforms needed at the Fed and has criticised its approach to managing inflation in recent years.

Thus, unsurprisingly, we got Warsh’s plan to revamp the Fed’s current structure.

“My Fed colleagues and I will be working in close collaboration to ask what changes might improve the conduct of monetary policy.”

Warsh has announced the formation of the following task force:

1. Fed communications.

2. Fed’s balance sheet policy.

3. Use and reliance on existing data sources

4. Productivity & jobs in an era of transformation.

5. Fed’s inflation framework.

In the last few years, JayPo used Nikkileaks to provide forward guidance, an unusual move for the Fed that, in some ways, reduced volatility and uncertainty.

However, with forward guidance now a thing of the past, markets (especially bond) will “more” violently react to macro data/ political statements (Trump).

Furthermore, the FOMC days will lead to extremely elevated volatility.

“But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it. I’d like us to create a system where those blinders come off, where markets are following data that they efficiently think is reliable.”

The “reliable” part is interesting and will lead to confusion in the early days until the task force releases the list.

Nevertheless, whenever the Fed adopts the task force recommendations, we will review the whole mechanism (market reaction, macro framework, etc.).

Since starting this newsletter, we have firmly believed that the primary problem with the Federal Reserve's monetary policy is its reliance on highly lagging data. Additionally, the transmission mechanism operates with a considerable lag, further complicating the process.

The dual mandate focuses on price stability and maximum employment, and the biggest data points, CPI and the Non-Farm Payrolls (NFP), are lagging data.

In fact, the first print of NFP is useless for half a year, with multiple monthly revisions and then annual revisions.

As a result, the Fed had been behind the curve, making historic mistakes, such as calling inflation “transitory” post-COVID.

Warsh has vowed to conduct monetary policy based on “real-time data”.

“As you know, there are normal long and variable lags in the conduct of monetary policy. What we’re really interested in is what’s happening right now. What we’re less interested in is echoes of history.”

While we appreciate the efforts, unless we receive a concrete framework for replacing the current data sources, forecasting the future is futile.

Warsh showed too much promise; however, only time will tell how much he can achieve.

Retail sales was the biggest data point of this week.

Headline Retail Sales came in at 0.9% v/s Exp. 0.6%.

The Retail Sales ex Auto came in at 0.8% v/s Exp. 0.6% and the Retail Sales Control Group came in at 0.7% v/s Exp. 0.4%.

It was an all-around beat.

The strongest growth was in Nonstore Retailers, which rose by an astounding 12.24% (driven by inflation and higher nominal growth).

Furniture was the only category which registered degrowth, likely indicating the fragile housing market.

Equities!

Before we look at the technical charts, let us show you the two mind-blowing stats:

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The focus now entirely shifts to the upcoming Anthropic and OpenAI IPOs.

As both companies prepare for their IPOs, growing cracks in the AI narrative may dent their prospects.

Yesterday, the US Government issued an export control directive suspending all access to the latest Anthropic models (Fable 5 and Mythos 5) for any foreign national.

In response, the company disabled the models for “ALL” users.

For the last few weeks, we have been mentioning that cost increases for firms due to rising token prices will lead to a substantial fall in usage.

The LLM Token Expenditure Index is now back to its January level, when the Agentic AI market exploded.

As it becomes super expensive to use AI (no productivity advantage yet), even the big tech firms are pulling back. In yesterday’s news:

META MOVES TO LIMIT EMPLOYEE AI USAGE AS COSTS REACH BILLIONS.

Note that this comes after a “Max Token” culture was widely promoted across the company.

Furthermore, we now believe that the only way to increase AI adoption is through a price war.

A potential price war between OpenAI and Anthropic will likely compress margins and slow the path to profitability, while also raising questions about the durability of current AI valuations (thus eventually delaying their IPOs).

To make matters worse, the Chinese models are now gaining traction in the US as they are significantly cheaper than US models.

For those interested in comparison, you can check this cool website to track token pricing.

While they are significantly cheaper, they are not far behind in terms of intelligence.

As concerns mount, the first casualty of the “bubble” will likely be the credit markets, with hyperscalers raising billions in debt to fund their capex.

Furthermore, the debt is held in SPVs (off-balance-sheet transactions), which raises concerns about defaults and the subsequent recovery.

According to Morgan Stanley, $236 BN in AI investment-grade debt has been issued YTD, a 357% increase YoY.

We have erased 100 bps of underperformance (we were underperforming by 250 bps at the peak of Semis mania).

We are up 4.5% YTD and remain confident we will outperform the benchmark in the coming weeks.

US/Equity/Bonds/Oil/Dollar/Gold/Silver!

The much-awaited inflation data was released this week in the US.

The headline CPI came in at 4.2% YoY v/s Exp. 4.2%, while the Core CPI (ex-food and energy) came in at 2.9% YoY vs exp. 2.9%.

The headline was significantly higher, driven by a 23% YoY rise in energy prices.

While the core CPI remains below 3%, we expect it to rise gradually in the coming months as higher energy prices filter through the economy.

Note that the CPI is a lagging indicator.

Core Services also saw a sharp jump with a 2.08% YoY rise, while Core Goods saw a small uptick.

The headline PPI soared to 6.5% YoY in May v/s exp. 6.4%, while the core PPI came in at 4.9% YoY v/s exp. 5.4%.

Again, as expected, energy was the culprit, with a mind-boggling 36% rise YoY.

Goods and Transportation also saw a double-digit rise.

Final demand goods prices surged 2.8% in May—the largest monthly increase since the series began—and drove most of the acceleration in the PPI.

Higher PPI will eventually lead to higher CPI (albeit with a considerable lag) as firms gradually raise prices.

Small businesses are the backbone of the US economy, as they employ more than half of the workforce and contribute roughly 44% of the GDP.

Thus, we closely track the NFIB Small Business Survey.

Since the tariffs were implemented, “taxes” have been NFIB's single most important problem for several months.

Inflation comes in close second, driven by higher fuel prices, which have increased firms' logistics costs.

The Soft data in NFIB has been very volatile and has been trending down, while the hard data has been resilient.

In fact, when you dig deeper, the small business earnings are trending up.

We believe that as soon as businesses are able to pass on rising costs to consumers, earnings will shoot up (no margin compression).

When we analyse small-business prices, we can infer that small businesses are facing extreme headwinds, with the highest input-cost pressures since early 2023.

Note that Net Percent (higher minus lower) has moved to 36 in May, last seen in March 2023.

Macro Outlook!

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Long-time readers know that ISM Manufacturing is our preferred indicator for tracking US cyclical activity.

The ISM Manufacturing came in at 54, indicating significant expansion. In fact, the number was the highest since May 2022.

Furthermore, New Orders Less Inventories is once again moving higher, indicating that we might see continued acceleration in the cyclical activity thanks to the enormous AI spending by hyperscalers.

The internals of the ISM Manufacturing demonstrate a broad-based expansion (>50) across sub-components.

However, the Prices PMI is running extremely hot, so expect CPI to flare up.

ISM Services came in strong at 54.5 v/s expected 53.8. While New Orders were strong at 57.3, a rise in inventories is a concern.

ISM Services Prices have a high correlation with the US CPI.

ISM Services prices continue to rise gradually, and thus, we expect the CPI will follow suit.

Note that the CPI is a lagging indicator, and a higher CPI will be visible with a 2-3-quarter lag.

Let us now analyse the labour market data:

• ISM Manufacturing and Services Employment: Although ISM Manufacturing Employment PMI is still in contractionary territory (<50), it is on the verge of moving higher to expansionary territory (>50). Note that the last time it was higher than 50 was in January 2025. ISM Services PMI remains subdued (this is due to layoffs in the financial services sector, driven by AI).

  

• JOLTS-1: Fed’s preferred gauge to track the labour market is the Vacancies/Unemployment Ratio, which bottomed out a few months ago. In fact, we are now at 1.03, well above the lows of 0.87. On the other hand, as a result of the no-hire, no-fire regime, the Quits Rate has once again plunged to the multi-year lows of 1.9%.

  

• JOLTS-2: While the Quits Rate is back at lows, the Hires Rate, which bumped up higher once again, fell to 3.2%, although still 10 bps above lows. The layoff rate also fell 10 bps to 1.10%. No hire, no fire regime prevails in the US.

• Non-Farm Payrolls: The US economy added 172k jobs, a massive beat against expectations of 87k. There were multiple tailwinds (the Memorial Day holiday effect, FIFA World Cup hiring, etc.) that led to the enormous surprise. Furthermore, the Government Sector hiring once again picked up. Note that since the last few months, we have seen subdued government hiring post mass layoffs. Leisure and hospitality saw a massive bump due to the FIFA World Cup.

• NFP Internals: While over the last two months we saw considerable improvement in the labour market, as measured by Part-Time Economic Reason and Full-Time Employment as % of Labour Force, this month there was a slight deterioration despite positive revisions and a beat on the headline number.

  

Macro Conclusion!

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In January this year, we warned our paid subscribers about irrational exuberance in precious metals as the technicals became extremely overheated and sentiment euphoric.

We are witnessing a similar phenomenon in the global chip/memory stocks.

The Philadelphia Semiconductor Index (SOX) is up by more than 85% since 30th March in a mind-boggling rally.

Furthermore, the three Asian stocks: TSMC, SK Hynix, and Samsung have led the EM indices higher, and the three chip stocks now form more than a quarter of the flagship EM ETF: EEM.

If we exclude the three giants (TSMC, Samsung & SK Hynix), the rest of the EM universe relative to MSCI US is now at levels we saw during the liberation day crash.

As a result, a diversified portfolio would have underperformed the benchmark YTD. Furthermore, even in the US, ex-Software and Semis, the last month has seen underperformance across sectors.

We are close to YTD highs with PF up 4.9%.

Indian and Chinese equities have been a major drag on the portfolio, while high cash levels have also hurt performance relative to the benchmark.

Due to last month's underperformance (266 bps), the PF has underperformed by 249 bps YTD.

We have consistently posted a superior Sharpe Ratio (>1.5) and Sorino Ratio (>2.5), but last month’s drag has led to a substantial decline.

We expect considerable improvement in the coming months as broader markets outperform and liquidity moves from AI/Semis/Memory/Chips to other parts of the market.

Let us take a deep dive into the macro universe and analyse the cross-asset price action.

Macro!

The Fed’s preferred inflation measure is the PCE.

PCE came in slightly below estimates, with the headline PCE at 0.4% MoM vs the expected 0.5% and the core PCE at 0.2% MoM v/s the expected 0.3%.

We can decompose the PCE into the Cyclical Core and the Acyclical Core PCE (depending on the item’s sensitivity to the business cycle).

Both the cyclical and acyclical PCE are in an uptrend, driven by higher commodity prices stemming from supply disruptions in the Middle East.

When we analyse the internals, there was significant upward pressure from financial services and non-durable goods.

In fact, the goods PCE came in at 4.39% YoY, which should raise some eyebrows at the Fed.

The other shocker, which portrays the sordid state of affairs for consumers, was the real personal income less transfer payments, which fell by 0.4%, the fourth decline in the last five months.

Note that these are real personal income and thus adjusted for inflation.

We believe asset owners (equities/housing/crypto/PMs) are spending thanks to the positive wealth effect; however, the bottom end of consumers (who don’t own any assets) is suffering [a K-shaped economy].

As a result, we are also witnessing one of the lowest savings rates on record as consumers dip into their savings to keep spending.

Last week, we discussed the plunge in consumer sentiment. The EZ consumer confidence, which cratered post-war, has recovered slightly this month.

However, it’s still in deep negative territory, and we expect it to gradually move up as higher inflation and likely higher rates will be significant headwinds.

In the land of the rising sun, industrial production rose by 0.8% MoM in April, defying market forecasts for a 0.9% decline.

While electronics equipment and electrical machinery saw strong growth, chemical production and auto production fell.

China’s industrial profits surged 24.7% YoY in April, led by computer and electronics equipment manufacturing.

Last week, we wrote that the rising PPI will eventually lead to higher profits, which will also be a tailwind for higher equity prices.

Profits for automobile manufacturers fell 16.8% YoY in Q1, indicating that the competitive intensity is hurting the industry.

Equities!

Since the market bottomed out on 30th March, it has been a one-way ride up led by momentum and growth stocks.

MTUM and IJR relative to SPY have seen huge outperformance, while value and small caps have been crushed, which is also one of the reasons our PF has underperformed.

Nonetheless, the outperformance of these factors is largely attributed to only a handful of chip stocks (especially this month).

In fact, except for XLK, all the other sectors have underperformed the SPY by a “huge” margin.

Equity Allocation:

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Well, folks, we have always believed that AI is a game-changer; however, we have always been wary of the trillions of dollars in capex spending by the hyperscalers, as such gargantuan amounts of spending are only “justified” if they can generate high returns (historically, these companies have generated 20%+ ROCE) on their investments.

This week, we saw what we've been warning about for months. The AI “revolution” was expected to cut costs and boost productivity, but companies using AI for automation are experiencing increased expenses.

Microsoft cancelled its internal Claude Code licenses this week after token-based billing made the cost untenable, even for a company with effectively infinite cloud resources. Uber's CTO sent an internal memo warning that the company burned through its entire 2026 AI budget in just four months. American AI software prices have jumped 20% to 37%, and GitHub (owned by Microsoft) is switching from flat-rate plans to usage-based billing across its products.

Token-based billing will make it challenging for enterprises to adopt AI at scale if AI Labs continue to raise prices.

The so-called “doomsday” scenario suggested by some prominent Substack writers cannot occur if you believe in unit economics.

Additionally, the claim that “Software is Dead” was propagated by short-sellers, and we are on the verge of seeing a strong resurgence of software as hardware gets a reality check due to the multiple constraints of a large-scale AI rollout.

Nonetheless, AI is the future, and thus, one needs to incorporate AI into their workflow. We use MacroMicro for our macro analysis, and they have also launched the MM AI Bubble, where you can chat with their AI.

Furthermore, they will be launching the first-ever “Macro Terminal” in July.

The full MM AI experience will be available only with the MM Max Annual plan. This link gives you a 14-day trial of the discounted Max Annual plan (you can change the language to English). You can also lock in the current annual pricing before the official AI launch price adjustment takes effect.

Click on the link to lock in a significant discount!

We recouped some of the underperformance this week; however, our exposure to China has weighed on the portfolio.

Nonetheless, we are pretty confident that we will once again outperform the benchmark as we head into June.

Let us take a deep dive into the macro universe and decipher the cross-asset price action!

US/Equities/Bonds/Oil/Dollar/Gold!

While it was a quiet week for US macro data, we will closely monitor consumer health in this week’s update.

By far, the biggest talking point of the week was the Michigan Consumer Sentiment Index.

We rarely talk about this because we don’t incorporate this soft data release into our process; instead, we use other data points to gauge consumer health.

Consumer Sentiment Index plunged to a record low of 44.8, current conditions to 45.8, and expectations to 44.1. The whole survey was revised lower.

The Survey can be divided into different parties, and since we have a Republican President, the Sentiment (Democrats) is abysmally low at 32.8, while the Republican Sentiment is at 84.6 (but trending lower).

Nevertheless, undoubtedly, consumer health is fragile, and lower-income households are struggling the most.

This week's Walmart earnings also indicated that stress is now building among middle-income consumers. Notably, Walmart has been targeting households with an annual income of> $100k.

One of the reasons for stress has been the high APR on the credit card debt.

When we look at the Delinquency rates, the credit card delinquency rates are nearing GFC highs.

Note that auto loan delinquency rates are already at ATHs.

Before we end the macro section, we came across an alarming chart.

Sulfuric Acid is one of the most widely used raw materials in the chemical industry and in almost every other industry, especially in the fertiliser industry.

Post-war, China halted the export of Sulfuric Acid, and its price has nearly doubled.

Thus, inflation is not going away easily.

We also received the Fed minutes this week, and, as everyone is aware, the Fed is divided due to the twin shocks (tariffs and geopolitical).

Once we start hearing from Warsh, we will know the Fed's direction (hawkish or dovish).

Equities!

It has been 32 trading days since SPX

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The US-China summit was historic, as the Chinese President raised a concern that nobody had expected him to raise publicly, even in their wildest dreams.

“It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable,” Thucydides wrote in his book, The History of the Peloponnesian War.

Xi mentioned in his speech:

“The Taiwan question is the most important issue in China-US relations. If mishandled, the two nations could collide or even come into conflict, pushing the entire China-US relationship into a highly perilous situation.”

While raising the Taiwan issue and the Thucydides Trap simultaneously, China has made it clear about its red line, and the US has no alternative (to avoid conflict) but to reduce the reliance on TSMC and other supply chains that China controls (rare-earth).

As the summit ended, the global bond markets once again imploded, led by the Japanese Government Bond (JGB) market.

The yield on the 30Y JGB has now crossed a mind-boggling 4% while it has reached nearly 6% in the UK and 5.1% for the UST 30Y.

The bond vigilantes are running wild, and there is no escape for policymakers but to control inflation via fiscal and monetary tools.

When we analyse performance across equity baskets (Data till 13th May) since the scorching rally began on 31st March, the biggest gainers are the most shorted: meme stocks, non-profitable tech, semis, and other speculative parts of the market.

The majority of market constituents have failed to outperform the index despite reporting better-than-expected earnings, as the rally has been super-narrow.

The PF underperformance, which began in the first week of May, continues due to the factors mentioned last week (shallow rally).

However, we expect to recoup the losses in the coming weeks and months.

Let’s take a deep dive into the macro universe and comprehend the cross-asset moves.

US/Equities/Bonds/Oil/Dollar/Gold!

Two of the most-watched data points this week were the inflation measures: CPI and PPI, given that the full effect of higher oil prices was visible in April.

However, we believe we may achieve a full pass-through only by the end of Q3.

The headline CPI came in at 3.8% YoY v/s expected 3.7%, while the Core CPI (ex-food and energy) came in at 2.8% v/s expected 2.7%.

As one can observe, energy contribution has been the highest since the 2022 Russia-Ukraine war.

Furthermore, while core goods have been trending higher due to tariff-led inflation, we are now seeing pressure emerging even in Core Services.

Core Services was led higher by transportation services, while tariff inflation drove Apparel prices higher.

Shelter was significantly higher due to a one-time adjustment (double-counting) made for October, when the number was not reported because of the government shutdown.

The shocker of the week was the PPI, which came in at 6%, significantly higher than the 4.8% estimate.

When we dig deeper, commodities led by fuels/power were the biggest contributor to the all-commodities basket of PPI.

Note that higher equity markets were partly responsible for the higher PPI (higher portfolio management component).

We believe CPI and PPI are headed significantly higher, as the correlation with CPI and WTI futures suggests.

If the oil prices stay above $90-95 for another 3-4 months, as market participants expect, we might see the headline CPI heading towards 5%.

The Retail Sales came in line with estimates. The headline retail sales came in at 0.5% MoM v/s expected 0.5%, while the control group came in at 0.5% v/s expected 0.3%.

Unsurprisingly, gasoline stations topped the chart with a 21% YoY gain, while the trend of degrowth in furniture (housing-related) and motor vehicles continues.

Note that while the nominal retail sales continue to be strong, inflation-adjusted numbers (real retail sales) have been subdued.

The NFIB Small Business Optimism Index fell as sentiment soured amid the war in the Middle East.

The top three single most important problems for small businesses remain Quality of Labour (thanks to a halt on illegal immigration), taxes (thanks to tariffs) and inflation (thanks to war).

It has been really tough for small businesses to navigate over the past 1.5 years due to multiple shocks, as mentioned above (immigration, tariffs, and war).

Furthermore, the expected capex outlays planned for the next three months are the lowest since the GFC (2008), indicating that the demand outlook is uncertain as they reel from multiple shocks.

Macro Outlook!

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In a mind-blowing stat, yesterday was the fourth time in “HISTORY” when the S&P 500 hit a record high while 5% of its members fell to 52-week lows.

The last three episodes transpired in:

• July 1929

• January 1973

• December 1999

Even in the coveted Mag7 (TSLA replaced by AVGO), there has been a significant disparity, with only three stocks outperforming the tech index (QQQ) since the vertical rally began on 30th March.

We were lucky to own one of the stocks as part of our exposure to the US tech ecosystem.

Thus, if you have had low exposure/underweight stance to the semis/hardware as an active investor/fund manager, you would have undoubtedly underperformed the benchmark.

Unsurprisingly, half of the S&P 500's returns since the rally began are attributable to only 5 stocks.

While today it may look like “nothing stops this mega semiconductor rally,” we believe that parabolas always end the same way (we will discuss this in detail later).

We are underperforming the benchmark by 100 bps despite allocating significant cash and being overweight US equities, given the nature of the rally we have witnessed since 31st March (and especially last week).

As discussed, even outside the US, we have seen the rally spearheaded by only a handful of chip stocks in Taiwan, Korea and Japan. Everything else has underperformed, and if you have been running a well-diversified portfolio, there is a high probability that you would have underperformed the benchmark.

Nevertheless, we remain confident of outperformance in the medium term as we believe that fundamentals (macro) will catch up sooner rather than later.

Let’s take a deep dive into the macro universe and comprehend the cross-asset moves!

US/Equities/Bonds/Oil/Dollar/Gold/Copper/BTC!

This week, the ISM Services report was released, with the headline figure at 53.6, compared with the expected 53.7.

The sub-components showed no significant surprises; however, New Orders declined markedly compared to March.

The ISM Services Prices Paid is one of the components which we track closely, as it has a tight correlation with the CPI.

Although there was no increase in the ISM Services Prices Paid (70.70) compared to last month, it remains at a multi-year high.

As a result, we expect the CPI to gradually rise above 4%.

One of the credit measures which macro analysts closely monitor is the Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices.

Past recessions have led banks to significantly tighten lending standards as they became wary of lending amid declining credit scores and rising defaults.

We saw a slight increase in % of banks tightening standards for consumer loans in Q2.

Furthermore, the % of banks reporting stronger demand for consumer loans also declined to -12.7%, indicating that credit demand (ex-CC & auto) from consumers remains weak, likely due to lower-income consumers facing hardship amid the rise in the cost of living.

In past recessions, we have seen the net % of banks reporting stronger Commercial & Industrial (C&I) loan demand plummet.

We saw a similar episode in 2023, post-SVB crisis, when banks significantly reduced lending to the private sector, and thus private credit scaled up.

We have seen a rebound since then; however, we are still away from the post covid highs.

However, we anticipate a significant increase in credit demand in the coming months, driven by higher nominal growth and higher working capital requirements among businesses.

Now, let’s move on to the most important data release of the week:

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Countries with exposure to these names (South Korea, Taiwan, Japan and the US) have outperformed since the March lows.

The bond market bulls were annihilated as benchmark yields soared, with markets pricing in higher inflation over the next few quarters and hawkish central banks.

Let’s examine 14 charts to analyse the cross-asset price action and global macro!

1. Led by a nearly 100% rise in crude oil prices YTD, DBC is the top performer this year.

   Thanks to commodities’ outperformance, LATAM markets continued their winning streak, with the benchmark ETF ILF up 19% YTD (though it has underperformed over the last two weeks).

   Gold lost its sheen after a stellar rally in January and is up less than 7%, as sentiment has turned bearish and technicals have followed suit.

   The US eroded some of its underperformance relative to both its DM and EM peers. While the Emerging Market ETF EEM is up 17% YTD, the MSCI European ETF IEV is up 4.45% compared to a 6% gain for SPY and 10% gain for the QQQ.

   China and long-term bonds have been the stark underperformers.

   

2. While indices have conquered new peaks, the Net-Bullish sentiment is far from euphoric.

   In fact, the neutral sentiment could lead to further gains in equity markets, which have been on a one-way ride without a breather.

   

3. As hyperscalers go all in to meet the humongous AI demand, tech capex as a % of S&P500 has scaled to new highs, now exceeding 50% of total S&P500 capex.

   Unsurprisingly, only a handful of stocks are responsible for this enormous capex.

   

4. Considering the $800 billion of AI capex, it’s a no-brainer that a large proportion of the incremental growth in Q1 GDP came from AI investments, which have now overtaken even New Single-Family Homes investments!

   We have now surpassed the dot-com levels, and Computer Equipment Investment as a % of Total GDP has exceeded 1.2%.

   

5. This has also led to money flowing into the old economy, with power, infrastructure, and energy accounting for a large share of AI investments.

   As a result, we are witnessing the strong performance of Cyclicals relative to defensives.

   

6. The rise in oil prices due to geopolitical conflict in the Middle East is driving prices significantly higher, as the US CPI came in at 3.3% YoY, the highest since 2024.

   If ISM Services PMI is to be believed (it has a tight correlation with CPI), we are heading toward 4% in the next few months.

   

7. We are witnessing a historic trade in the financial markets as market participants go all in on a Long Semis/Short Software trade.
   
   The relative strength of the Semis, as measured by SMH/IGV, has reached mind-boggling levels.
   
   Nobody can predict the top, but one thing is certain: parabolas "always" end the same "painful" way.

   Did we see the peak last month, and is the Hardware-to-Software rotation imminent?

   

8. Since the war began, there has been a massive rotation from Gold to BTC.

   In fact, we have seen a 30%+ delta, and it has been a rewarding trade for those who sold Gold at the top in late January and bought BTC as it hit key technical support levels in February.

   

9. Sentiment across European corporations has cratered, while inflation expectations have even surpassed levels seen after the 2022 Russia-Ukraine war.

   While the ZEW Economic sentiment has plunged to -17.2, the lowest since 2022, the inflation expectations have zoomed to 79.2, the highest since June 2021.

   Stagflation or a temporary shock?

   

10. Last week, BOE stated three likely scenarios.

    The first scenario entails a temporary spike in inflation with no second-order effects; the second scenario entails modest second-order effects; and the third scenario entails stronger second-round effects due to a prolonged energy shock.

    The response to the three scenarios is in the chart.

    

11. Retail sales were also tepid, growing 1.7% in March vs an expected ​2.3% rise.

    Auto and housing-related sales (furniture and building materials) were a drag. Note that the trend in these sectors has been down (housing recession).

    On the flip side, “communication equipment” has seen a meteoric rise and has been on a significant uptrend. Good for AAPL?

    

12. In the land of the rising sun, PPI came in higher than expected at 2.6% YoY.

    We will see further upward pressure as rising energy prices drive higher input costs for firms.

    As a result, we have also seen a wider PPI/CPI spread, which, in the medium term, bodes well for corporate profitability.

    

13. The closure of the Strait of Hormuz (SOH) has resulted in a loss of more than 14 mbpd in oil flow.

    Considering the alternative routes (UAE’s Fujairah) and the Saudi Yanbu pipeline, along with SPR releases, floating storage, and refinery cuts, we have seen a deficit of 5.1 mbpd over the last two months.

    The oil inventories have now depleted, and if we don’t get a resolution in the next few weeks, oil markets will enter a state of panic.

    

14. BONUS CHART: AI was supposed to kill software, but it turns out, at least with regards to software engineers, there appears to be a major revival.

    The hiring trends are extremely encouraging, and we might see the opposite of what market participants have been advocating over the past few months.

    

Disclaimer

This publication and its author are not licensed investment professionals. The author & any other individuals associated with this newsletter are NOT registered as Securities broker-dealers or financial investment advisors with the U.S. Securities and Exchange Commission, Commodity Futures Trading Commission, or any other securities/regulatory authority. Nothing produced under Marquee Finance by Sagar should be construed as investment advice. Do your research and consult with your certified financial planner or other dedicated professional before making any investment decisions. Investments carry risk and may lose value; Marquee Finance By Sagar LLC, Marqueefinancebysagar.substack.com or Sagar Singh Setia is not responsible for loss of value; all investment decisions you make are yours alone

While we were “cautious” (cautious≠bearish) until last week, we became more confident midweek that the markets are entering a “Buy The Rumour, Sell The News” event.

However, the rise in US equity markets was driven by a handful of AI Capex beneficiaries, while “real” economy stocks have lagged globally (since the war began).

Nevertheless, the US seems to be the least affected by the war, and, in fact, its net energy-exporter status will likely benefit the competitiveness of the US industrial base as it aims to reindustrialise.

This week, we saw major central banks reiterate their commitment to suppress inflationary pressures despite sluggish growth projections. The global hawkish tilt, as the war drags on, shouldn’t come as a surprise to seasoned macro watchers.

Due to our cautious stance, our high cash holding (26%) was a drag on our performance as the PF is up 4.2% YTD compared to the benchmark return of 4.42%.

Note that we significantly reduced cash mid-week and were lucky enough to do so promptly.

Let us take a deep dive into the macro universe and comprehend the cross-asset reactions!

US/Equities/Bonds/Oil/Dollar/Gold/Agri/BTC!

Fed’s preferred inflation measure: the PCE came in bang in line with the estimate.

The headline PCE came in at 0.4% MoM vs 0.4% MoM. Furthermore, Core PCE also came in at 0.4% MoM v/s 0.4% MoM.

The trend is undoubtedly up, as we can observe from the chart. Furthermore, the cyclical PCE is indicating signs of bottoming out.

We can also conclude that CPI is a lagging indicator, and we can predict with certainty that higher oil prices (sustained) lead to higher CPI, albeit with a lag of 2-3 Quarters.

Long-term subscribers will appreciate that we are not big fans of GDP (a backward-looking indicator prone to revisions).

While inventory changes supported growth, net exports were a drag.

One of the significant takeaways was the explosive growth in the Computer Equipment Investment (AI Capex).

We have now surpassed the dot-com levels, and Computer Equipment Investment as a % of Total GDP has exceeded 1.2%.

In fact, a large proportion of the incremental growth in Q1 came from AI investments, which have now overtaken even New Single-Family Homes investments!

ISM Manufacturing came in slightly below estimates, with the headline index at 52.7 vs 53.2 expected.

Our preferred gauge, New Orders less Inventories, also softened; however, we believe the slight blip is due to the supply chain disruptions arising from the Middle East conflict.

The biggest surprise was the ISM Manufacturing Price Paid, which came in at a whopping 84.6 and is now reaching the levels last seen in 2021.

Note that although correlation with the CPI is weak (ISM Services Prices Paid has a higher correlation), the trend (CPI) can be extrapolated.

One of our favourite metrics for tracking wages in the labour market is the ECI (Employment Cost Index), which came in higher than expected at 3.35% YoY.

However, higher ECI was driven more by “Benefits” than by wages.

Thus, real wages (adjusted for inflation) are on the verge of turning negative as inflation outpaces them. This will be a significant hit for the consumers.

There was a slight change in the Fed statement, prompting market participants to call the meeting a “hawkish” hold.

“Inflation has moved up and is elevated, in part reflecting the recent increase in global energy prices.”

Furthermore, three Governors dissented from the inclusion of “Easing bias” in the statement. While Miran, as usual, dissented in favour of a 25 bps cut.

The uncertainty arising from the situation in the Middle East is making the Fed cautious, and we don’t expect any change in the language or the decision (on hold) unless absolute clarity emerges from the State of Hormuz.

“You know, we have so much to learn and there’s so much uncertainty about the path ahead, there doesn’t need to be any rush to make that decision now because, you know, what happens in the next 30, 60 days, even by the next meeting, could really change the picture around that -- around that language.”

“And so maybe a little bit of restriction or the high end of neutral is just the right place to be. So, we can wait here and see -- and see how things work out before we act.”

If you have been wondering why the US has outperformed RoW since the war began, JayPo apparently mentioned it explicitly during the presser.

“We’re also -- you know, as I mentioned, we’re an oil exporter so we’re not feeling the same kind of pain, and we’re not likely to feel the same kind of pain that economies in Western Europe and, certainly, in Asia are feeling.”

On the labour market, the dynamics of which we have been indicating for the past few months are “Low Hire, Low Fire”, an unusual market given the wild swings we have witnessed since the pandemic.

Interestingly, JayPo calls this a “balanced” labour market, but we believe it’s a fragile market prone to sudden shocks.

So that’s a -- that’s -- you know, in a sense, the labor market is in balance, but it’s an unusual and uncomfortable kind of a balance where people who don’t have jobs will have a hard time breaking in unless somebody quits their job.

Macro Outlook!

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He refers to it as the concept "which makes us think that we understand more than we actually do".

Many market participants have offered their expert opinions on how the Strait of Hormuz (SOH) situation will end. (There is also an intriguing chapter in the book about the forecasting error rate of so-called “experts”)

We believe that nobody has a clue what will happen (a classic Platonic mindset is at play), and thus we are in the midst of a black swan event as reality slowly seeps in.

The consequences of the conflict will be far-reaching.

Nevertheless, we have seen unprecedented activity in the equity markets as global liquidity has poured into a handful of semiconductor names, leading to outperformance in the US Tech, South Korean, and Japanese equity markets, while the ROW has underperformed massively.

The GS High Beta Momentum Long Index (GSCBHMOM) is recording its second-best 18-day run on record, surpassed only by June ‘00, which followed the initial -60% crash off the March ‘00 peak.

The only other times high-beta momentum achieved a 30%+ gain over 18 days to a 52-week high were Nov. ‘99 (+34%) and Feb. ‘00 (+33%). This is therefore the largest 18-day gain into a new record high.

Furthermore, the casino is back as speculative activity hit multi-year highs.

The total net call volume has surged to a fresh 2.5-year high.

Moving on, with the failure of the Islamabad talks and a fragile ceasefire, we might be on the cusp of Round 2.0 of escalation. Note that the tensions are running high as the US utilises all the available tools for the naval blockade, while Iran has blocked all the traffic in the SOH as frequent skirmishes become the norm.

It’s really challenging to predict how this ends, as nobody knows the extent to which both sides will really go to control the Strait.

Macro has taken a back seat as geopolitics takes centre stage, and we are on the cusp of chaos in the energy markets. We are already witnessing the cancellation of tens of thousands of flights worldwide as it becomes unprofitable for airlines to operate amid an explosion in jet fuel prices.

Note that we believe this might be the beginning of a prolonged energy crisis, especially if the situation in the Middle East deteriorates further.

We raised cash two weeks ago, and as a result, the significant alpha we generated has diminished, with the PF now up 4.11% versus 3.94% for the benchmark.

Let us take a deep dive into the macro universe and decipher the cross-asset puzzle.

US/Equities/Bonds/Oil/Dollar/Gold!

We begin with retail sales data, which is the best measure of consumption in the US (65% of US GDP is consumption).

It was an all-round beat, with headline retail sales growing 1.7% vs exp. 1.4%.

Retail Sales Ex-Auto grew by 1.9% v/s exp.1.5%, and the Control Group grew by 0.7% v/s exp. 0.2%.

While non-store retailers (online sales) have been on a tear, growing in double digits YoY, Furniture (housing slowdown) has been a drag (down -0.78% YoY).

Nevertheless, real retail sales (adjusted for inflation) have disappointed and are below their peak, indicating that nominal retail sales growth has been driven by value rather than volume.

Last week, we received the NFIB Small Business Survey, which we monitor to understand small businesses’ sentiment.

The headline index plunged to 95.8 v/s exp. 97.9, indicating waning sentiment due to war-related uncertainty.

When we dig deeper, the shocker came from the earnings trends, as it was the single biggest sub-component to drag the headline index lower.

The net % of small businesses reporting positive fell 11 points to -25%.

The NFIB job report was a mixed picture.

A seasonally adjusted net 12% of owners plan to create new jobs in the next three months, unchanged from February.

PS: Note that this is at one of the lowest levels since 2018 and the measure has failed to move up.

While labour quality has declined over the past few months, reports of labour costs as the single most important problem have gradually increased.

10% of business owners reported labour costs as their single most important problem, up 1% from February.

The last time labour quality, reported as the single most important problem, was below 15% was in December 2016.

Equities!

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