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

Read more

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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Will we get a durable peace and ceasefire in the ME, or will the conflict once again rage?

Although the highest-level talks are underway between Iran and the US (incredible that no one from Israel is attending the talks), the gap between the demands of both sides is monumental.

Furthermore, there is no consensus on the Strait of Hormuz (SOH), which has been a bone of contention.

Everybody should watch the video below to understand the situation on the ground!

As per the IRGC:

All ships intending to transit the Strait of Hormuz are hereby notified that in order to comply with the principles of maritime safety and to be protected from possible collisions with sea mines...they should take alternative routes for traffic in the Strait of Hormuz.

Note that the circle in the chart represents the mined area shared by both Oman and Iran.

The routes represented by arrows are in Iranian waters and are small waterways of “a few kms”, effectively giving Iran control of global energy flows.

If you believe that Iran will give up its only leverage, and if you believe the Gulf states and the US will allow the “IRGC” to control 20% of the global energy flows, then my friend, you are highly mistaken.

Undoubtedly, there is much more to come before this war ends, and we will discuss the path forward in detail in the Geopolitics section (extensive analysis).

We are up 3.2% YTD compared to 1.56% YTD returns by the benchmark.

The next few days are crucial, and we may significantly underperform/outperform the benchmark due to the directional bets in our portfolio.

Let us begin today’s newsletter, where we will discuss in detail the oil market, macro data and cross-asset moves.

US/Geopolitics!

Since the war began on 28th February, we have received the first CPI report, which “partly” reflected the rise in oil prices.

The headline CPI came in at 3.3%, meeting expectations, while the Core CPI came in at 2.6% v/s expected 2.7%.

While energy prices were up 12.59% YoY, used car prices are exerting disinflationary pressure, with the measure down 3.18% YoY.

PS: We expect used car prices to reverse course and trend higher in the coming months, as evidenced by wholesale auction prices.

We have been articulating for the past few weeks that higher energy prices percolate into the CPI with a 2-3-quarter lag (higher goods inflation), as the CPI is a lagging indicator.

As of now, Core Goods inflation is benign at 0.021% MoM, and Core Services came in at 0.137% MoM.

JayPo’s popularised inflation measure, the Supercore (Services Ex-Shelter), came in at 3.14% YoY, with most of the increase driven by Transportation Services and medical care services.

ISM Services came in at 54.0 v/s expected 54.9.

However, as usual, the devil lies in the details.

ISM Services Prices Paid came in scorching hot at 70.7, indicating that the CPI is going vertical in the next few months.

Furthermore, while Prices Paid came in at the highest level since 2022, the Employment PMI came in at 45.2, the lowest since 2023, indicating early stagflationary signals.

On the contrary, Services activity seems robust, with New Orders jumping to 60.6.

Nevertheless, the income data have been horrendous.

Excluding current transfers, the Real Personal Disposable Income (adjusted for inflation) is now flat since liberation day last year.

Note that this is before the oil shock hit the US economy.

Furthermore, the real PCE is significantly higher than real personal income, as Americans have been drawing down their savings (also partly due to higher asset prices, which fuel the positive wealth effect).

If the “real” incomes fail to grow, we expect an imminent slowdown in consumption in the coming months.

We reiterate that consumer health was totally different when the oil shock of 2022 hit the global economy, compared with today, when consumers are fragile amid a soft, low-hire, low-fire labour market.

Geopolitics!

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The Dated Brent (physical) traded at $142 yesterday, its highest levels since the 2008 oil price spike.

As a result, the spread between Dated Brent/Frontline Brent Futures reached an all-time high of $24.

There is absolute panic in the oil markets, with a mad scramble by refiners to purchase every available physical barrel.

For those who aren’t aware of the supply-and-demand scenario in the oil markets, pre-war, supply, including all sanctioned oil, was around 109 mbpd, while demand was 103/4 mbpd, indicating a surplus of 5 mbpd. However, with the production shut-ins of around 10 mbpd post-war, we are in a deficit, with demand far outstripping supply.

Thus, unless demand destruction transpires or the Strait of Hormuz (SOH) reopens, expect the physical market tightness to persist.

On the other hand, we got a shocker in the private credit space as redemptions reached a mind boggling 22% of one of Blue Owl’s funds, demonstrating that the “music might have stopped playing”.

As we navigate turbulent times in the financial markets, we continue to outperform our benchmark, with a YTD return of 1.32% versus -1.15%.

Today, we examine the probable timeline of the Middle East conflict and delve into the macro universe to understand the cross-asset implications.

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

We received a whole host of macro data this week.

We begin with retail sales, one of the most crucial metrics for tracking household spending amid multi-year high gas prices.

Note that we got February retail sales data, and since the war began on 28th February, we won’t know the effect of higher gas prices yet.

It was an all-around beat:

• Headline Retail sales at 0.6% v/s Exp. 0.5%.

• Retail sales ex auto at 0.5% v/s Exp. 0.3%.

• Control Group at 0.5% v/s Exp. 0.3%.

Some of the categories (sporting goods, clothing), including online, saw a massive YoY surge in sales.

Note that these are also the categories in which prices were significantly higher due to tariffs (and thus nominal retail sales were higher for these categories).

Note that over the six months ending in February, control retail sales and food services are up just 2.1% on an annualised basis.

With inflation running at 3%, the real retail sales (adjusted for inflation) have been subdued.

ISM Manufacturing came in at 52.4 v/s expected 51.5.

However, the surprise was the blowout Prices Paid, which came in at 78.3, the highest since June 2022.

Note that although the employment PMI has risen from its lows, it remains below 50, indicating contraction.

Our favourite indicator, New Orders Less Inventories, moved slightly lower from the highs. However, there are no danger signs yet.

Now let’s turn our attention to the labour market:

• JOLTS-1: JOLTS job openings came in at 6.946MM v/s expected 6.750MM. However, the devil lies in the details. JayPo’s favourite labour market indicator, Vacancies/Unemployed, fell again below 1 to 0.91, indicating weakness in the labour market. Furthermore, the quits rate fell to a cycle low of 1.9%.

  

• JOLTS-2: While Quit Rates fell to the cycle lows, the Hires Rate plunged to 3.1%, the lowest in six years. Furthermore, the layoff rate jumped again to 1.1%, though it remains below the cycle highs. The low-hire, low-fire environment may turn into low-hire, high-fire in the coming months if the energy crisis is prolonged and the tech layoffs rise.

  

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Nobody could have modelled the “pandemic”, the 2022 Russian invasion of Ukriane, “the tariff saga” of 2025 and the most largest disruption in the energy markets in history due to the Iran-Israel/US war of 2026.

Let’s examine 15 charts to analyse the global macro and the 2026 energy shock!

1. Led by a nearly 60% rise in crude oil prices in a single month, DBC is the top YTD performer.

   Thanks to the commodities outperformance, LATAM markets continued their winning streak with the benchmark ETF: ILF up 17% YTD.

   Gold lost its sheen after a stellar rally in January and is now up 8.6%.

   The US continues to underperform both its DM and EM peers. While the Emerging Market ETF EEM is up 3.8% YTD, the MSCI European ETF IEV is down 1% compared to the 4.4% loss for SPY and the 6% loss for the QQQ.

   Surprisingly, long-term bonds provided some cushion and outperformed the US equities.

   

2. It’s not only the tech sector that has been a laggard; rising private credit concerns have also led to a massive sell-off in financials, with XLF the worst performer YTD.

   Energy (XLE) has broken all records and seen the biggest outperformance relative to the S&P 500 since the 1990s.

   

3. The Leveraged Long/Short ETF Volumes indicator helps predict bottoms. However, during the 2022 bear market, the indicator slumped and stayed low.

   This is the one metric you should absolutely track.

   

4. The tech investors will have to endure extreme pain over the next few months (maybe years) as Mr Market resets valuations. Once known for hoarding cash and buybacks, the big tech companies are now turning net cash negative as FCF plummets due to trillions of dollars of capex.

   As a result, the S&P Tech forward PE valuation premium over the S&P 500 has compressed to 2019 levels.

   

5. While oil prices are hovering around $100/b, product prices are off the roof and well above 2022 levels.

   The biggest rise is seen in jet fuel prices, which have surpassed $250 in Singapore. We will see bankruptcies among airlines if prices persist for more than a quarter, and travellers will likely prefer short-haul destinations for vacations due to soaring airfares (inflation?).

   

6. It’s not only the fuel prices, but the transportation costs have also skyrocketed.

   The Baltic Dirty and Clean Tanker indices are now approaching record highs. Also note that the insurance premiums have also seen insane increases, leading to elevated freight costs.

   

7. Interestingly, energy’s share of consumer spending has fallen over the past few decades and is now less than 5%.

   However, the lowest 20% (bottom quintile) of consumers are the most affected by higher energy prices.

   Unsurprisingly, Trump’s approval rating has plummeted to record lows.

   

   

8. Consider it a coincidence, every US recession from the 1970s up to the Global Financial Crisis coincided with a doubling of oil prices.

   The oil spike during the 2022 Russia–Ukraine conflict did not trigger a recession due to the fiscal impulse and pandemic savings; however, as you remember, economists also called for a recession in 2022.

   Will we be second time lucky?

   

9. Thanks to the rise in energy prices, bond vigilantes wreaked havoc in the bond markets as Mr Market prices in a “RATE HIKE”.

   The moves have been extremely aggressive, with markets pricing in more than an 80 bps hike by the ECB due to energy-induced inflation.

   

10. The war’s macroeconomic aftereffects were visible in Germany, with the latest ZEW Survey shocking the street. ZEW Economic Sentiment collapsed to the negative territory (-0.5) from 58.3 reported in February.

    When we look at the internals, the manufacturing sector was responsible for the negative readings.

    Furthermore, chemicals will be the worst hit in the coming months as supply chain disruptions lead to force majeure and production cuts.

    

11. One of the biggest differences between the energy shocks of 2022 and 2026 is consumer health. Consumers were flush with excess savings accumulated during COVID-19 when the 2022 energy shock hit Europe.

    However, the UK’s labour market is extremely weak today, and consumer health has deteriorated significantly.

    Although markets are currently focused on the inflation shock, they have yet to fully price the potential growth shock.

    

    ---

12. One of the data points we place a lot of weight on for China is Total Social Financing (TSF).

    China’s banks extended 900 billion yuan ($130 billion) in new yuan loans in February, down from 4.71 trillion yuan in January and missing estimates.

    PS: Total social financing growth typically shows seasonal increases at quarter-end.

    

13. Two of the largest manufacturing giants in Asia, which depend on the Middle East for 80% of their needs, are Japan and South Korea.

    Furthermore, Japan receives the majority of its oil imports via the Strait of Hormuz, but if it utilises its SPR (which it has announced), it can manage its oil needs for more than six months.

    

14. While Oil in $$$ (Brent) is still miles away from its 2008 ATH ($150), oil prices in local currency have surpassed their ATHs.

    Ironically, except for the Taiwan Dollar ("heavily managed float"), among major non-China Asian economies, Brent crude has never been this expensive.

    

15. BONUS CHART: US software has witnessed a bloodbath as concerns rise post the release of Anthropic’s new models. As a result, US software v/s tech is now the cheapest on record.

    Some of the companies are trading at valuations last witnessed in the GFC or Covid. Time for bargain hunting?

    

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

The AI story is on the cusp of a meltdown as MSFT enters into a long-term bear market.

The Oracle 5Y CDS is now at its highest level since the GFC, as market participants panic and seek avenues to hedge their tech exposure.

The tech investors will have to endure extreme pain over the next few months (maybe years) as Mr Market resets valuations, as companies' FCF plummets and the Mag7, once known for hoarding cash and buybacks, are now turning net cash negative.

For the first time since the war began, we have also begun writing about the “post-war” analysis, in which we discuss the macro outcome based on probable scenarios.

Some of the outcomes are now certain, given the geopolitical situation and the further escalation over the last 24 hours from both sides (and post the entry of the Houthis).

Paid subscribers can directly jump to the geopolitical section for the analysis.

Since the beginning of the year, we have, for the first time, reported a negative YTD return, and the PF is down 7 bps, compared with a 356 bps drawdown for the benchmark.

It is also our largest drawdown from the highs since inception, as we were of the view that the war would be short.

However, as we became certain of weak technicals and a protracted war, we reduced duration and initiated short positions, which have helped us limit our drawdowns.

Let’s dig deeper into the world of macro, geopolitics and cross-asset relationships.

Macro!

The first signs of the Middle East conflict taking a toll on consumers were visible in Germany’s GfK Consumer Confidence.

Note that last week we saw the first signs of worsening business sentiment as Germany faces significant headwinds from higher energy prices.

The GfK consumer sentiment index dropped by 3.2 points to -28.0, the weakest reading since 2024.

Furthermore, Income expectations have fallen back into negative territory, while economic expectations have declined to their lowest level since Dec 2022.

If there is no respite in energy prices in the coming weeks, expect a “recessionary” reading across both soft and hard data.

In the UK, headline CPI came in line with expectations.

The February Consumer Prices Index, including owner-occupiers’ housing costs (CPIH), rose by 3.2%.

Service price inflation was hotter than expected, and core prices rose to 3.2%, up from 3.1%.

However, the good news was that the CPI all-services index rose by 4.3% YoY, down from 4.4% in January.

The rate is the lowest since March 2022, when it was 4.0%.

Clothing made the largest upward contribution, while Alcohol and tobacco put downward pressure on the CPI.

Note that these readings were before oil prices surged. BOE has already raised the CPI target.

Furthermore, there are unintended second-order effects of a spike in energy prices, and we expect CPI to surprise higher if the war is prolonged.

In the land of the rising sun, the headline CPI fell to 1.3% YoY, its lowest level since March 2022.

The disinflationary impulse stemmed from government fuel subsidies and the fall in rice prices (base effect).

The Core CPI, which includes oil products but excludes fresh food prices, rose by 1.6% YoY, missing economists’ median estimate for a 1.7% annual gain.

Core-Core inflation, which excludes food and energy, came in at 2.5%.

Since the Japanese government has vowed to keep fuel prices low (subsidies), we can expect the CPI to remain below 3% despite higher gas/oil prices.

However, a prolonged disruption could lead to higher prices across the board.

Equities!

In equities, we will stick with our allocation and thesis that

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In a stunning development this week, Iran attacked Qatar’s largest gas field in retaliation, and as a result, 17% of Qatar’s LNG capacity was wiped out for the next five years with an estimated $20 billion loss in annual revenues at current gas prices.

While Asia will be the worst hit, Europe is also facing rising pressure, having decided to phase out Russian gas and now facing a dilemma after Qatar announced force majeure on long-term LNG contracts for up to five years for supplies bound for Italy, Belgium, South Korea, and China.

While the 2022 energy shock following the Russia-Ukraine war was driven by “fear” of disruption, we are witnessing actual supply disruptions as the Strait of Hormuz (SOH) remains closed.

Furthermore, production shutdowns (now totalling 7 mbpd+ across the GCC) will ensure that, even when SOH opens, the situation will take months to normalise, ensuring higher-for-longer oil prices.

As physical tightness deepens, this week saw record prices in Oman and Dubai as Asian refiners scrambled for physical barrels.

While the Trump administration was successful in curbing the WTI Prices (can’t remain decoupled for long, though), Brent has consistently traded above $100, with futures trading as high as $119 during the week.

The disruption is now spreading across commodities as the Middle East accounts for a lion’s share in critical petroleum products, helium and fertilisers.

If SOH closure is prolonged, supply chains will be disrupted, triggering an inflationary wave similar to that during COVID. We will discuss in detail later.

Last week, we wrote the 4th edition of Explosive Setup, and these were the targets we mentioned:

• Gold: $4200/4300

• Silver: $62

• Oil: $120

• 10Y: 4.35/4.5%

• DXY: 102

• S&P500: 6200/6300

• DAX: 22k

• CAC40: 7500

• FTSE: 9700

Except for the DXY, we saw our targets nearly achieved across assets as the contagion, which began mid-week, spread after markets realised that the war is not getting over anytime soon, with boots on the ground now a high probability event (we discuss later in the geopolitics section).

In fact, there was no safe haven and thus no place to hide. Ironically, the only asset that has weathered the storm has been BTC.

We had multiple central bank meetings this week, and everyone was hawkish amid the recent rise in energy prices.

We reduced duration earlier in the week and, as a result, were able to limit the drawdown with the PF still outperforming the benchmark by about 250 bps.

Let’s begin today’s newsletter and comprehend the extremely elevated cross-asset moves!

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

We got a really hot PPI print this week.

Headline PPI: +0.7% MoM vs. +0.3% est.
Core PPI (ex. food & energy): +0.5% MoM vs. +0.3% est.

We saw higher prices across the basket.

The costs of processed goods for intermediate demand rose 1.6%, the largest increase since August 2023.

Whereas farm products were up 0.43% MoM, with fresh & dry vegetables alone up nearly 49%.

Note that Energy was up 2.3% MoM, before the war broke out and gas prices surged by more than 33% MoM.

When we got the FOMC decision, markets were still pricing in a rate cut for 2026.

Furthermore, the Fed's dot plots also predicted one more rate cut this year.

However, by the end of the week, the rate cut was reversed into a rate hike as yields surged and markets feared prolonged disruption.

Digging deeper, once again, the surprise was further moved up in the longer run rate, aka the neutral rate, to 3.1% from 3%.

We have been demonstrating how the Fed has been quietly moving up the long-run rate since the last two years suggesting that we are never returning to the 2% inflation again (structural rise in inflation).

The Core PCE projections were raised by 20 bps to 2.7%, likely factoring in higher energy prices.

Last week, we mentioned that JayPo will be concerned by the inflation expectations. He commented:

“Near-term measures of inflation expectations have risen in recent weeks, likely reflecting the substantial rise in oil prices caused by supply disruptions in the Middle East.”

Unsurprisingly, JayPo has been watching Mr Market, which has been ruthless in raising the 1Y Inflation expectations to more than 5%.

Interestingly, he also mentioned that the rollout of AI is “inflationary”, leading to a higher neutral rate (came as a surprise to us, given the narrative that AI will lead to productivity gains that are deflationary).

“So, remember, in the short-term what’s happening is we’re building data centers everywhere.

And that’s actually putting pressure on all kinds of goods and services that go into building these things.

So that’s actually probably pushing inflation up at the margin. In addition, it probably raises the neutral rate.”

The rationale behind one rate cut in the projections was explained:

“We also think it’s important though to keep policy either mildly restrictive, or close to that. But not too restrictive because of the weakness in -- the downside risk in the labor market.”

In the last few months, JayPo has been discussing a new inflation measure, “Core PCE Ex-Tariffs,” as the Fed believes tariff-led goods inflation is “transitory”.

Note that last week we highlighted the segments (recreational goods, apparel, etc.) affected by tariffs, leading to a surge in prices.

This week, we further got insights from JayPo:

“Total core inflation, it’s about 3 %, and some big chunk of that, between a half and three-quarters is actually tariffs, so we’re looking for progress on that.”

While we believe most of the pass-through is complete, skyrocketing oil prices will further stoke inflation, albeit with a 2-3 quarter lag.

Last week, we also mentioned that we can’t comment on the macro outlook until we are sure about how long the war will last and how much supply disruption we will face across sectors.

We had JayPo mentioning the same this week.

“If we have a long period of much higher gas prices, that’s going to weigh on consumption, that will weigh on disposable personal income, and it’ll weigh on consumption. But we don’t know if that’s going to happen, it -- something quite different from that, we might have much lower than expected pass-through”.

It’s just, we don’t know what the effects of this will be, and really, no one does.

It’ll come down to how long the current situation lasts, and then what are the effects on prices and then how do consumers react and that kind of thing.

Note that gasoline and diesel prices have skyrocketed by more than 35%, which will squeeze households, especially lower-income households.

Nevertheless, if the disruption is short-lived, we might see a few months of lower consumption (also keep in mind that higher tax refunds might cushion some of the hit).

PLEASE READ CAREFULLY:

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We might be in the middle of a “man-made” black swan event as Iran throttles the Strait of Hormuz and has choked the supply chain of a whole host of commodities, fertilisers, chemicals and other raw materials.

It has been nearly two weeks since the Strait of Hormuz was closed, and we are already witnessing enormous shortages across Asia (80% of all the flows from the Strait of Hormuz go to Asia).

While the paper market is trading around $100, there is absolute panic in the physical market, with the Dubai Physical Swaps trading at a mind-boggling $140/b.

The last six years have been extremely challenging for the global economy, as we have been bombarded by various exogenous shocks: COVID-19, the Russia-Ukraine War, the Trade War, and the US-Israel-Iran War.

Note that these shocks have upended the global financial markets and the geopolitical setup.

As a result, we have seen multiple 6-7 sigma moves across financial markets over the past few years.

Therefore, there is a need to develop a robust risk management system as wild, volatile moves become more common and tail risks become harder to predict.

While there is uncertainty about how the war will progress, we have always believed that the charts don’t lie and the price action is supreme.

The cross-asset charts indicate that the market is poised for significant moves, and thus, we may be ready for an “Explosive Setup”.

We are up 1.64% YTD against the benchmark performance of -1.24%, thus outperforming the benchmark by 288 bps.

Let us now take a deep dive into the macro and geopolitical landscape and understand the explosive setup we foresee across markets.

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

The macro universe was dominated by the CPI data this week in the US.

The Headline CPI (all items) came in at 2.4% YoY/+0.27% MoM, and the core CPI came in at 2.5% YoY/+0.22% MoM, meeting market expectations.

When we dig deeper, while used cars and trucks reported deflation, categories such as Apparel and energy reported positive increases, MoM.

Note that the rise in energy was before the war broke out, and oil crossed $100.

Furthermore, when we zoom out, the segments affected by tariffs (Apparel, household supplies, and other recreational goods) continue to see price increases, putting upward pressure on the CPI.

The disinflationary pressures are seen in Used Cars and Prescription Drugs (thanks to POTUS measures on prescription drugs).

JayPo popularised the Supercore CPI (Services Ex-Shelter), which is still stubborn.

Supercore CPI came in at YoY 2.75%/ MoM +0.35% .

JayPo’s favourite inflation indicator is PCE.

PCE came in at 2.8% YoY v/s Exp. 2.9% and the Core PCE came in at 3.1% YoY v/s Exp. 3.1%.

When we decompose the core PCE, the Acyclical Core PCE (financials, healthcare, clothing, etc) has been rising and seems to have bottomed out.

If energy prices remain elevated for extended periods, expect higher prices to percolate through the economy, potentially causing inflation across all sectors.

The Atlanta Fed published detailed CPI/PCE data, and although inflation has cooled since last year, it’s still well above the Fed’s 2% mandate.

We also got the GDP data for Q4, which was revised lower to 0.7% (estimate of 1.4%).

The culprit has been Core Cyclical GDP, which has decelerated significantly.

The war in Iran will have grave consequences for the economy, and we will assess the implications once it is over.

However, near-term impact will be a spike in inflation even if the war ends in March.

We have historical data to prove it.

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We saw an unprecedented price action in oil this week.

Producers rushing to hedge (hedging demand), a historic short squeeze, and speculative frenzy (USO witnessed the biggest day of retail net buying yesterday) led to a historic week, with Crude futures posting the biggest weekly jump since 1985, rising 34%.

Whenever the Iran-US/Israel war was discussed in the past, the worst-case scenario involved the closure of the Strait of Hormuz.

For those who are unaware of the significance of the Strait of Hormuz, let us explain to you:

More than 20 mbpd of crude flows through the Strait of Hormuz, roughly 20% of total world oil consumption (per day).

Furthermore, 84% of the crude from the Strait goes to only three countries: China, India and South Korea.

In the last week, Hormuz traffic has come to a complete halt.

This implies that we just witnessed one of the biggest disruptions in history.

Today, we will discuss the consequences of the disruption and model different scenarios and the likely cross-asset movements. (Paid subscribers can directly jump to the geopolitical section for war/oil analysis.)

Despite an extremely volatile environment, we continue to outperform the benchmark by more than 250 bps.

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

Our favourite indicator of the cyclical economy has been the ISM Manufacturing Index.

Note that since 2022, ISM Manufacturing has been in a contraction zone as “manufacturing” and housing were in a recession.

However, since the last two months, there has been a notable recovery in the ISM Manufacturing.

We are now in an expansionary zone (greater than 50) with all the sub-components reporting satisfactory growth (except Employment, which is still below 50: contraction, but has been trending up).

However, when we dig deeper, the worrying signal is the ISM Manufacturing Prices Paid, which came in scorching hot at 70.5.

With oil prices on a tear, we don’t expect it to fall anytime soon, which will lead to higher prices for manufactured products in the coming months.

Our leading indicator for ISM Manufacturing is New Orders Less Inventories, which is buoyant and suggests that the manufacturing recovery will continue unabated.

ISM Services also came in higher than expected (the highest since 2022), with most subcomponents reporting robust growth.

The encouraging part was also the ISM Services Prices Paid, which fell MoM, and the trend seems to be lower (might change with elevated oil prices).

We discussed last month that with ISM Services Prices peaking, we might have seen a peak in the CPI due to the tight correlation between the two series.

Retail Sales came in slightly better than estimates.

Headline Retail Sales -0.2%, Exp. -0.3%
Retail Sales ex auto 0.0%, Exp. 0.0%
Retail Sales Control Group 0.3%, Exp. 0.3%

However, the housing-related components are still weak.

We expect retail sales to moderate further if oil prices remain above $80-90 for a prolonged period, as this will squeeze American households, given that real incomes have been declining for more than a year now.

Now let’s jump to the macro shocker of the week:

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